PRE-BUDGET MEMORANDUM - 2014
DIRECT TAXES
THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA
NEW DELHI
The Institute of Chartered Accountants of India
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PRE-BUDGET MEMORANDUM - 2014
DIRECT TAXES
1.1 The Council of the Institute of Chartered Accountants of India considers it a privilege to
submit this Pre-Budget Memorandum - 2014 on Direct Taxes to the Government. The
memorandum contains suggestions for the consideration of the Government while
formulating the tax proposals for the year 2014-15.
1.2 The suggestions have been broadly categorized under the following heads:
Part I : Suggestions for improving Tax Administration and Compliance
Part II : Suggestions relating to the provisions of Income-tax Act, 1961
Part III : Suggestions relating to the provisions of Wealth-tax Act, 1956
1.3 The suggestions are given Chapter wise and are intended to serve the following purpose:
I. Improve tax collection.
II. Reduce/minimize litigations
III. Rationalization of the provisions of direct tax laws.
IV. Removal of administrative and procedural difficulties relating to Direct Taxes
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INDEX
Sr. No Suggestion Page
No.
PART I: Suggestions for improving Tax Administration and Compliance
1. Definition of the term "accountant" in the Direct Taxes Code, 2013 3
2. First Schedule Surcharge 7
3. Rates of Taxation 7
4. Foremost requirement -Respect the "Taxpayer" 12
5. Targets for collection of taxes-Not essential 13
6. Verification of all income-tax returns 13
7. TCS @1% on sale of all motor vehicles 15
8. Forms of Income tax return to incorporate details of tax payments 16
made under other legislations
9. Consolidation of multiple reports to be issued by Chartered accountants 17
in a single format
10. Generation of Form No. 15G, 15H ,60 and 61 through system 17
11. A single ITR form to replace all ITR forms 18
12. Procedure for surrender of PAN 18
13. Creation of online grievance portal 19
14. Extension of last date of Payment of tax due to Public holiday - Circular 20
No. 676 dated 14.01.1994 read with Section 10 of the General clauses
Act, 1897
15. Issues arising from applicability of Companies Act, 2013:
(a) One person Company (OPC): 20
(b) Reopening of accounts on Court's/ Tribunal order under section 130 22
of the Companies Act, 2013:
(c) Reference of Schedule VI of the Companies Act, 1956 to be 23
substituted with Schedule III of the Companies Act, 2013:
(d) Difference in the definition of "related party" in Companies Act, 2013 23
and Income tax Act,1961:
(e) Depreciation Transition Provisions-Impact on MAT 23
(f) Amalgamation 24
(g) Amalgamation and Demergers Limitation on powers for 25
assessment of cases dealing with Amalgamation and Demergers
effected under the new Companies Act, 2013.
16. Corporate Social Responsibility Costs 27
17. Differential Stamp duty charges being paid by CA's and Advocates on 27
letter of authority for representing the client
18. Gaps in electricity generations 28
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19. Allowability of Interest paid under Income tax Act, 1961 28
20. Issues regarding PAN allotment 28
21. AIR information in "My Account" facility 30
22. Applicability of SA -700 on form of audit reports 31
23. Foreign tax credit guidelines 32
24. Issues arising from Notification No 67/2013, dt 2-9-2013 amending 33
Rule 37BB of IT Rules, 1962 wrt Foreign Outward Remittances-Form
15CA & Form 15CB
25. Number of Returns and payment schedule should be curtailed 34
26. Extension of time limit for filing of TDS Return 35
27. Challan correction mechanism 35
28. (a) Difficulties in obtaining old paper refunds 36
(b) Refunds not delivered due to change in address 36
(c) Issue of Refunds in case of legal heirs 37
(d) amount to be directly paid into the bank accounts of the assessees 37
29. Audit of TDS returns 37
30. Monetary limits in the Income-tax Act, 1961 38
PART II : Suggestions relating to the provisions of Income-tax Act, 1961
CHAPTER I PRELIMINARY
31. Definition of "amalgamation" in section 2(1B) 43
32. Books of accounts in electronic mode-Section 2(12A) 44
33. a) Section 2(15)- Definition of charitable purpose 45
b) Activities of Governmental authorities be treated as activities for 47
charitable purpose
c) Mandatory application of income by charitable trusts/ institutions 48
under section 10(23C)
34. Deemed Dividend-section -2(22)(e) 50
35. Section 3-Definition of Previous year 51
CHAPTER II BASIS OF CHARGE
36. Scope of Royalty Income Section 9(1)(vi) of Income-tax Act, 1961 55
37. Carry forward of excess foreign tax credit 58
CHAPTER III INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME
38. Leave Travel Concession/Assistance Replacement of "Calendar 61
year" by "Financial year"
39. CER Sale to be treated as Capital Receipt 61
40. Section 10(10D) TDS in respect of maturity of Insurance policies which 62
are taxable under section 10(10D)
41. Definition of "Keyman Insurance Policy" Section 10(10D) 63
42. Section 10(13)- Payment from approved superannuation fund 65
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43. Annual receipts" under section 10(23C) 66
44. Tax policy for MGNREGA, SSA, NRHM 67
45. Income-tax exemption for securitization trusts, levy of distribution tax on 69
income distributed by such trusts under section 10(23DA)
46. Section 10(23FB) Tax exemption for Alternative Investment Funds 74
Venture Capital Funds
47. Section 10(26) Exemption to Scheduled Tribes in specified areas 82
time for removal
48. Income of minors to increase exemption limits under section 10(32) 82
49. Section 10B Exemption to newly established 100% EOUs should 82
be extended to STPIs registered units
CHAPTER IV COMPUTATION OF TOTAL INCOME
50. Disallowance of expenditure incurred in relation to income not 87
includible in total income under section 14A of the Act:
PART A- SALARIES
51. Deduction to salaried assesses- Payment for notice period 89
52. Deduction for Employee Stock Option Cost 90
53. Medical reimbursements for retired employees 91
PART C- INCOME FROM HOUSE PROPERTY
54. Deduction u/s 24(a) of the Income-tax Act, 1961 92
55. Deduction for ground rent other than u/s 24(a) 92
56. Interest on borrowed Capital 93
PART D PROFIT AND GAINS OF BUSINESS AND PROFESSION
57. (a) Depreciation on books used by professionals 94
(b) Section 32 -Depreciation in case of slump sale 94
(c) Incentive for installation of Solar Power generating devices 96
(d) Depreciation on "Oil Well" 97
58. Additional Depreciation u/s 32(1)(iia) 98
59. Section 35(1)(ii) and 35(1)(iii)- Removal of discrimination u/s 80GGA 101
60. Deductibility of R&D expenditure incurred by software development 101
companies under Section 35(2AB)
61. Expenditure on Specified Business under section 35AD 102
62. (a) Capital raising expenses 103
(b) Amortization of Capital expenditure 103
63. Deduction for payments under Voluntary Retirement Scheme Section 104
35DDA:
64. Due date for crediting the contribution of employees to the respective 104
fundSection 36(1)(va) read with Section 2 (24)(x)
65. NPA calculation for NBFCs 106
66. Section 40(a)(iib) - Disallowance of certain payments made by State 107
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Government Undertaking (SGU)
67. Required clarification in respect of applicability of section 40A(3) 108
68. Explanation 5 to Section 43(1) "building" to be replaced by 108
"assets"
69. Section 43A Exchange fluctuation loss due to sharp fall in Rupee 109
value
70. Provision for leave salary Section 43B(f) 112
71. Section 43CA Special provision for full value of consideration for 113
transfer of assets other than capital assets in certain cases.
72. Amendment in Section 43D and Rule 6EA with reference to Non- 115
Scheduled Co-op Banks
73. (a) Section 44AA-Monetary limits to be withdrawn 116
(b) Rule 6F-Upward revision of limit of Rs.1,50,000 117
(c) Rule 6F(2)(iv) requires to be dispensed with 118
74. Section 44AD-Presumptive Income Some Issues 119
(a) Maintenance of Books of Account 119
(b) Eligible Business 119
(c) Applicability of section 44AD 121
75. Revision in date of determination of Fair Market Value 122
76. Limited Liability Partnership (LLP)- 122
(a) Merger and Amalgamation of Limited Liability Partnership to be
Revenue Neutral.
(b) Taxability on conversion of firm into LLP Clarification required 122
(c) Consequential amendment required in section 47(xiiib) 123
77. Section 49 -Cost of acquisition with reference to certain modes of 124
acquisition
78. Forfeiture of Advance Money u/s 51 125
79. Section 54- Investment in residential house 126
80. Certification of deductions claimed under section 54, 54F, 54EC etc 126
81. Withdrawal of deposit from capital gain scheme account 127
82. Issue on capital gain arising on the transfer of land in respect of joint 128
development agreement
83. Section 54EC-Capital gain not to be charged on investment in certain 131
bonds
84. Exemption under section 54 & 54F 131
85. Capital gain on transfer of residential property to be taxed in certain 141
cases- Section 54GB
PART F INCOME FROM OTHER SOURCES
86. Definition of the term relative- Explanation to Section 56(2) (vii) 144
87. Section 56(2)(vii)(b) Immovable property received for inadequate 145
consideration
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88. Exclusion of rights shares/ fresh issue of shares from the ambit of 145
section 56(2)(viia)
89. Valuation of shares- Section 56(2)(viib) 146
CHAPTER VI AGGREGATION OF INCOME AND SET OFF OR CARRY
FORWARD OF LOSS
90. Onus of proof in respect of cash credits consisting of share application 149
money, share capital, share premium etc-Section 68
91. Rationalization of section 69C 150
92. Section 72- Carry forward and set off 150
93. Tax incentives under Section 72A in respect of Amalgamation or 150
Demerger (to be extended to all businesses):
94. Section 73A -set-off of losses of specified business against non 151
specified business
95. Review of section 78(1) 151
CHAPTER VIA DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME
PART B DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
96. Section 80CCG- Rajiv Gandhi Equity Linked Savings Scheme 155
97. Preventive health check up-Section 80D 156
98. Increase in limit of deduction u/s 80DD & 80U 157
99. Section 80EE - Deduction in respect of interest on loan taken for 157
residential house property
100. Deduction u/s 80G to liberalise the exemptions by enhancing ceilings 159
specified
101. Donations made of any sum exceeding ten thousand rupees in cash- 161
sections 80G and 80GGA
102. Limits of House Rent Allowance (HRA) & 80GG: 161
PART C DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
103. a) Section 80IA Unit-wise deduction should be allowed 163
b) Extension of sunset clause under section 80-IA 163
c) Benefit u/s 80IA shall be allowable to the resulting / amalgamated 164
company in case of demerger / amalgamation
104. Incentivizing investments in respect of agricultural infrastructure 167
105. (a) Section 80JJAA Deduction in respect of employment of new 168
workmen
(b) Section 80JJAA Deduction in respect of employment of new 169
workmen
106. Deduction in respect of royalty on books Section 80QQB 169
PART CA DEDUCTIONS IN RESPECT OF OTHER INCOME
107. Deduction in respect of interest on deposits in savings account- Section 171
80TTA.
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CHAPTER IX DOUBLE TAXATION RELIEF
108. Applicability of Education Cess and Secondary and Higher Education 175
Cess double taxation Avoidance Agreement
CHAPTER X SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX
109. a) Domestic Transfer Pricing [DTP] Sections 92, 92BA, 92C, 92CA, 179
92D & 92E
b) Guidance in respect of benchmarking of Directors remuneration 180
c) Arm's Length Price vs Ordinary Profits 180
d) Increase in the threshold limit of Rs. 5 crore 180
e) Documentation Requirements 180
CHAPTER X-A GENERAL ANTI AVOIDANCE RULES
110. GAAR 183
CHAPTER XII DETERMINATION OF TAX IN SPECIAL CASES
111. Removal of anomalies in sections 111A & 112 187
112. Sec.115- Inter Corporate Dividend Distribution Tax (DDT) 187
113. Section 115A Rate of TDS on income by way of royalty or Fees for 188
technical services
114. Anonymous donations under section 115BBC 190
CHAPTER XII-B SPECIAL PROVISIONS RELATING TO CERTAIN COMPANIES
115. Tax Credit u/s 115JAA & 115JD read with section 115JB & 115JC 195
116. Book Profit Tax (MAT) on Scientific Research Expenditure 195
117. Section 115JB Minimum Alternate tax 196
CHAPTER XII-F SPECIAL PROVISIONS RELATING TO TAX ON INCOME
RECEIVED FROM VENTURE CAPITAL COMPANIES AND
VENTURE CAPITAL FUNDS
118. Due date of furnishing statement in Form No.64 under section 115U 201
read with Rule 12C
CHAPTER XIII INCOME TAX AUTHORITIES
PART C POWERS
119. Section 132- Search and seizure 205
CHAPTER XI PROCEDURE FOR ASSESSMENT
120. (a) Due date of filing of return in section 139(1) for partners other than 211
working partners
(b) Section 139-Enlarging the scope 212
121. Revised return - Section 139(5) 213
122. Guidelines for the empanelment of auditors under section 142(2A) 213
123. Special audit - section 142(2A) 214
124. Hardship arising out of the Apex Court's decision in Goetze (India) Ltd. 216
v. CIT (2006) 284 ITR 323 (SC)
125. Mistake apparent from record 217
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126. Credit of Tax Collected at Source relating to earlier years (for which 218
Assessm ents are already over & time period mentioned in Sec 155(14)
has elapsed) demanded by the Government authorities at a later date
CHAPTER-XVII COLLECTION AND RECOVERY OF TAX
127. Different Methods of accounting followed by the deductor and deductee 223
128. Need to strengthen the validation system of FORM 26AS 225
129. Applicability of TDS on genuine provisions on estimate basis without 226
bills
130. Synchronization of Section 192 & Section 15 of Income Tax Act 228
131. TDS under Section 194AInterest payments to NBFC 228
132. Payment of hire purchase installments under an hire purchase 229
agreementapplicability of tax deduction u/s 194A or 194I
133. Section 194C-Defination of the term "work" 230
134. Section 194H-Deduction of tax at source from income in the nature of 230
commission or brokerage
135. Clarification regarding TDS on Commission to a partner under section 230
194H read with section 40(b)
136. Section 194I-TDS on rental income 231
137. Section 194IA-TDS on transfer of immovable property 232
138. Fees for professional or technical services- Section 194J 234
139. Section 194J Claim of TDS on income declared on cash basis 235
140. Section 194LC-Income by way of interest from Indian Company 236
141. TDS on interest on NRO account 237
142. Section 195-Time limit for - Issuance of "general or special order" 237
143. Validity of Certificate issued u/s 197 238
144. Section 200- Furnishing of TDS returns 238
145. Mismatch on account of punching of data 239
146. Provision for rectification and appeal of intimation under section 200A 240
147. TDS demand u/s 200A 241
148. Time limit for TDS assessments of payments made to non residents 242
149. Consequences of failure to deduct or pay TDS- section 201(1A) 242
150. Section 206AA Requirement of furnishing of PAN for deduction of tax 243
at source
PART C ADVANCE PAYMENT OF TAX
151. Section 208-Revision of Limit of advance tax 246
PART F INTEREST CHARGEABLE IN CERTAIN CASES
152. Interest u/s 234C for newly formed Firms and Companies 247
PART G LEVY OF FEE IN CERTAIN CASES
153. Fees under section 234E 248
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CHAPTER XIX-A SETTLEMENT OF CASES
154. Once in life time Settlement Commission 253
155. Section 245ASettlement Commission 253
156. Restoration of the provisions of erstwhile Section 245E 254
CHAPTER XIXB ADVANCE RULINGS
157. Introduction of Advance ruling for residents 259
CHAPTER XX APPEALS & REVISION
158. Delay by Assessing Officer in issuing Order giving effect to 263
Orders of higher Appellate authorities, and also delay in issuing
refunds arising out of such Order
CHAPTER XX-B REQUIREMENT AS TO MODE OF ACCEPTANCE, PAYMENT OR
REPAYMENT IN CERTAIN CASES TO COUNTERACT EVASION
OF TAX
159. Inclusion of payments and receipts made through the modes like 267
RTGS, NEFT, EFT and ECS as valid modes of fund transfers under
sections 269SS and 269T of the Income-tax Act, 1961
CHAPTER XXI PENALTIES IMPOSABLE
160. Initiation of penalty proceeding in every assessment order 271
161. Penalty where search has been initiated- Section 271AAB 272
162. Rationalization of Section 271D & 271E 272
163. Penalty for failure to furnish TDS/TCS statements-Section 271H 273
CHAPTER XXIII MISCELLANEOUS
164. Signing of notices under Section 282A 277
165. Omission of section 282B-Document Identification Number 277
166. Section 285BA(3) Information to be furnished in the Annual Information 278
Return
PART III SUGGESTIONS RELATING TO THE PROVISIONS OF WEALTH-
TAX ACT, 1956
167. Taxable Wealth to exempt motor cars 283
168. Increment in Cash Limit 284
169. Enhancement of the Basic Exemption limit 285
ANNEXURE I 286
ANNEXURE II 289
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PART I
SUGGESTIONS FOR IMPROVING TAX
ADMINISTRATION AND COMPLIANCE
The Institute of Chartered Accountants of India
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
1. Definition of The Institute of Chartered Difference in scope of service of
the term Accountants of India (ICAI) is a CA, CS and CWA
"accountant" statutory body established by the a) Section 2(2) of the Chartered
in the Direct Chartered Accountants Act, 1949 Accountants Act, 1949 permits a
Taxes Code, for the regulation of the profession chartered Accountant to
2013 of Chartered Accountants in India conduct a financial audit or
exclusively form to regulate in the issue certificates based on
matter of accounts on audit and its financials of an assessee.
professionals. The ICAI has b) Section 2(2) of the Cost and
achieved recognition as the Works Accountant Act,1959
premier accounting body in India restricts the domain of services
and today it is the second largest of cost accountant to services
accounting body in the world. relating to costing or auditing of
However, the proposed definition cost accounting and related
of "Accountant" under clause statements only. A Cost
320(2) of the Direct Taxes Code, Accountant is in no case eligible
2013 which includes the "Cost to conduct a financial audit.
Accountants" and "Company The argument that such
Secretaries" has been a cause of activities can be included in the
major concern to the entire residuary clause also will not
profession. Before the Code hold good since residuary
enacts into a Bill and then law of clause cannot go beyond the
the land, we would like to place on main function like a doctor
record our anguish and concern cannot be called to do the job of
not only for the profession but for an advocate.
the country as a whole since b) The Company Secretaries
issuance of audit certificates by Act, 1980 restricts the domain of
persons who have not authorized services of Company Secretary
to do so by the Acts of Parliament. to secretarial services relating
With regard to the definition of the to Companies only. A Company
Secretary is in no case eligible
term "Accountant" in the Direct
to conduct a financial audit or
Taxes Code Bill, 2010, the
issue certificates based on
Standing Committee had made the
accounts of a company or any
following observations and had
other assessee. In fact the
suggested widening of the
Income tax Act covers a wide
definition of the term "Accountant"
range of assessees other than
on the request made by ICSI and
companies also like individuals,
ICWAI: HUF, firms, Co-operative
"17.9 The Committee observed societies and so on.
that the Ministry's reasoning for
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Sr. Section Issue/Justification Suggestion
No
non-inclusion of related There is no doubt that ICAI is a
professionals in the definition of premier body formed by MCA
accountant is a very strict only to train chartered
construction of the term. In the accountants to gain expertise in
view of the Committee, the accounting and auditing ICAI.
suggested amendment may There is much more which can
provide the Small and Medium be elaborated like difference in
Enterprises (SMEs) a wider and the focus of the syllabi on the
cost effective scope for selection basis of which expertise is
of professionals and will be an tested, effective steps taken by
important initiative towards ICAI to ensure the quality of
simplified tax compliance regime. audit, guidance provided by ICAI
The Ministry may therefore re- in the field of auditing and
consider the suggestion to widen accounting and the like.
the scope of the definition of However, it is felt that the very
"accountant"." fact that the mother Act itself
Observations of the Ministry of does not allow the Cost
Finance Accountants and Company
Secretary to conduct audit is
Although, the Institute of Cost
good enough ground to
Accountants and Institute of
convince one that the definition
Company Secretaries have
of "Accountant" does not
suggested inclusion of terms "Cost
require any change.
Accountant" and "Company
Secretary" in the definition of
"accountant", the Ministry of
Finance had not accepted their
suggestion on the ground that
"an accountant for the purposes of
tax matters is required to deal with
all financial matters and audit all
financial ledgers, books, records
and statements of a company or
firm etc whereas a cost accountant
deals primarily with estimates of
cost for projects and monitoring
the project to ensure that these are
within the budget. Therefore, a
cost accountant may not have the
expertise to deal with all the
financial statements and matters.
Further, the question here is not of
giving privilege to any particular
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Sr. Section Issue/Justification Suggestion
No
profession rather the most suited
profession for dealing with the
matters relating to direct taxes has
to be assigned the work.
Accordingly, the suggestion is not
acceptable.
Under clause 304(3) (F) of the
DTC, the Board may prescribe any
person with specified educational
qualification to act as an
authorized representative. The
same procedure is followed under
the current Act. Accordingly, this
will be considered at the time of
framing of subordinate legislation."
As per the Report of the Standing
Committee on Finance on Direct
Taxes Code Bill, 2010 the Ministry
of Finance had protested this
change. We, by way of our letter
dated 16-05-2012 had appreciated
the stand taken by the Ministry of
Finance in this regard. A copy of
the same is enclosed for your
reference. Since the provisions of
the proposed Direct Taxes Code
are not in alignment with the view
of the Ministry of Finance, it is
difficult to understand the reason
of change of opinion of the Ministry
of Finance.
Recognization of all three
professionals by the Companies
Act, 2013
Audit of Financial Accounts is the
exclusive domain of chartered
accountants is a well known fact
and is even recognized by the
Companies Act, 2013(as also the
erstwhile Act of 1956). Section
141(1) clearly provides that a
person shall be eligible for
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Sr. Section Issue/Justification Suggestion
No
appointment as an auditor of a
company only if he is a chartered
accountant. While considering the
domains of other two
professionals, section 143(14) of
the said Act also provides that the
provisions of section 143 shall
mutatis mutandis apply to:
(a) the cost accountant in
practice conducting cost audit
under section 148; or
(b) the company secretary in
practice conducting secretarial
audit under section 204.
It may be noted that the Ministry of
Corporate affairs is very clear
about the domains of all the three
professionals and has, thus,
assigned the right task to the right
professional who are suppose to
carry out the assigned task in a
professional manner.
Implications of Conduct of audit
by non-chartered accountants
Conducting of tax audit by non-
chartered accountants having
limited knowledge of the principles
of accounting, auditing and tax
procedures thereof would result
into complexities not only for the
assessees as also for the
Government including but not
limited to inaccurate computation
of income, leading to leakage of
revenue. While processing the
data provided by the Income-tax
Department in respect of tax audits
conducted by chartered
accountants, it was observed that
a number of tax audit reports were
filed by the assessees by quoting
wrong membership details of the
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Sr. Section Issue/Justification Suggestion
No
Chartered Accountants. The fact of
alleged misuse of membership
details of chartered accountants
was also reported to CBDT vide
letter no. DTC/2011-12/Rep-07,
dated 16th December, 2011 and
subsequently vide Letter no.
DTC/2012-13/Rep-09, dated
15th June, 2012. As per our
knowledge, action has been taken
against those assessees who
avoided getting their accounts
audited and tried escape tax. The
Ministry may be very well aware of
the tentative figure of the involved
revenue leakage. Such cases are
a LIVE examples of the
implications of getting the tax audit
done by "Cost Accountants" and
"Company Secretaries" who do not
have expertise to do the same and
are thus as good as fake audits.
2. First The Finance Act, 2013 levied a Since the intent of the Ministry
Schedule surcharge@10% on an individual of Finance, while introducing
Surcharge with total income exceeding Rs.1 these additional surcharges,
crore and for corporate (domestic was to limit it only for the
companies), surcharge@10% only financial year 2013-14, these
if, the total income exceeded surcharges should be abolished
Rs.10 crores. While levying this from the financial year 2014-15
additional surcharge the Finance and onwards
Minister in his speech had
mentioned that the additional
surcharges will be in force for only
one year, that is Financial Year
2013-14.
3. Rates of With regard to rates of taxation for In line with the
Taxation individual and HUFs, the recommendations of the
Parliamentary Standing Committee Standing Committee on Finance
on Direct Taxes Code had on DTC and for the reasons
observed the following: mentioned therein, the following
tax slabs are suggested:
"When the present Income Tax Act
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Sr. Section Issue/Justification Suggestion
No
was enacted way back in 1961, the Slab (lakhs) Tax rate
per capita income of this country was
extremely low. During the course of 0-3 Nil
five decades of the working of the 3-10 10%
Income Tax Act, the national per
capita income has increased multifold, 10-20 20%
widening the scope for taxing various beyond 20 30%
incomes. At the same time, the
absolute number of poor has also
increased manifold, warranting much
larger government outlays. The
aspirations of the people for better
living standards and their expectation
from government to deliver the same
has also simultaneously increased. It
is therefore, necessary that these
challenges in a growing economy and
a developing society are kept in mind,
while formulating a new Direct Tax
Law.
84. A Direct Tax by definition is a levy
on the income A Direct Tax by
definition is a levy on the incomes,
profits and wealth earned and
generated by individuals and entities.
Thus, a direct tax by its very nature
and scope cannot be imposed on
everybody. It has necessarily to be a
focussed levy which should reflect
and tap the rising incomes and
prosperity in a growing economy. The
tax rates and structure should
therefore be tailored in a way that will
ensure sufficient buoyancy and
dynamism. As the economy expands
and diversifies, the tax policies cannot
remain caught in a time-warp. Ways
and means of augmenting revenue
would have to be found not merely by
broadening the base but also by
deepening the trunk to tap both
potential as well as concealed
incomes and wealth. In this regard,
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Sr. Section Issue/Justification Suggestion
No
there are three distinct categories of
income, which require to be tapped or
brought to book, namely (a)
untaxed/non-taxed income; (b)
potential income; (c) concealed
income.
85. On the whole, the Committee
would expect the tax policy and
procedures to be fair, just and
equitous, bringing fiscal stability at
least over the medium-term, obviating
the need to make changes in rates
structure etc. during every Budget.
Fiscal stability together with certainty
will no doubt go a long way in
sustaining economic growth and
development. Needless to say,
governance standards would, in the
final count, determine the efficacy and
the credibility tax policies carry with
taxpayers.
86. The Committee find from the
information made available that tax
collected in the income slab of 0-10
lakh is Rs. 21,094 crore and the total
number of taxpayers is about 2.76
crore; while the corresponding figures
for the income slab of 10-20 lakh is
Rs. 10,185 crore with only 3.35 lakh
taxpayers; the same for the more than
20 lakh income slab is Rs. 53,170
crore tax collected with a mere 1.85
lakh taxpayers. The Committee further
find that in the income slab of 0-2
lakh, the number of taxpayers is
around 2.02 crore, which decreases to
56.73 lakh in the next income slab of
2-4
lakh. With regard to the percentage of
taxpayers in different income slabs, it
is 89% (0-5 lakh), 5.5% (5-10 lakh),
4.3% (10-20 lakh) and 1.3% (above
Pre-Budget Memorandum 2014 (Direct Taxes) Page 9
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Sr. Section Issue/Justification Suggestion
No
20 lakh). On the corporate tax side,
the tax collected in the slab of 0 to
100 crore is Rs. 44,016 crore, Rs.
23,421 crore in 100-500 crore slab;
and Rs. 54,558 crore in the above 500
crore slab. The extent of revenue
foregone for the above slabs has
been found to be Rs. 23,200 crore,
Rs. 11,779 crore and Rs. 27,895 crore
respectively. The figures mentioned
above only seek to confirm the view
that the tax structure and the
prevailing tax regime is regressive
both for individual as well as
corporate tax payers. The Committee
desire that the character of the tax
regime should change and it should
be made more progressive. This
would entail greater relief for small
taxpayers both individuals and
corporate and moderately higher rates
for taxpayers in the higher bracket.
87. The Committee find it astonishing
that almost 90% comprise of
individual taxpayers in the 0-5 lakh
income slab without commensurate
tax yield; which translates into nearly
3 crore assesees. In a belated
recognition of this paradox, the
Department has exempted taxpayers
in the lower income slab (0-5 lakh)
from filing tax returns, thereby
reducing the Departments
processing burden. The Committee
find it absurd that the Department
should diffuse their energies and
spread their resources thin over
handling such a large number of
individuals with low income potential.
The argument that more taxpayers
have to be brought within the tax net
for widening the tax base can hold
water only to the extent that this
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approach brings in more taxpayers
and tax revenue from the higher
income brackets, rather than simply
adding to the numbers in the lower
segments.
88. Keeping in view the inflationary
trends in the economy and the
imperative to leave more disposable
incomes in the hands of individual tax
payers, particularly those in the lower
income bracket, the Committee would
recommend that the tax slab attracting
,,nil rate, that is, full exemption from
tax on income should be raised to
three lakhs from the proposed two
lakhs. Higher exemption limit may be
considered for women and senior
citizens. The age for senior citizens
should be relaxed from 65 years to 60
years. As reasoned earlier, higher
exemption limit would go a long way
in minimising the compliance and
transaction costs of the Income Tax
Department, which can now focus
their attention and re-orient their
resources on the higher income
groups, untaxed or concealed
incomes, and categories and sectors
that are avoidance or evasion prone.
The revenue gap, if any, could be
easily bridged by way of stringent
measures to curb and bring to book
unaccounted money and through
realisation of huge tax arrears and by
way of savings from the proposed
transition to the investment-linked
incentive / exemption regime.
89. Thus, in the light of reasons cited
above and in pursuance of the well-
recognised and widely accepted
rationale of moderate tax rates
inducing better tax compliance and
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with a view to giving some relief to the
small tax payers, the Committee
would recommend the following
revised tax slabs :
Slab (lakhs) Tax rate
0-3 Nil
3-10 10%
10-20 20%
beyond 20 30%
4. Foremost The revenue of the Government of The taxpayers should be given
requirement - India is sourced through taxation, due respect and be treated as a
Respect the be it direct taxes/indirect taxes at client. In fact there should be a
"Taxpayer" central / state level. Even though system where the taxpayer
the "taxpayer" is the only source of paying tax, beyond a certain
revenue, he is not respected by limit, is provided priority
the Department. In fact, he is services. Like the taxpayer
harassed and looked upon with contributing tax more than 25
suspicion. The shift of the Lakhs may be issued a Gold
Department from manual to card, like wise taxpayers
electronic and formation of CPC, contributing more than 1 crore
Bengluru and CPC(TDS) is may be issued a Platinum card.
remarkable, but the taxpayers are These cards may have certain
still facing issues and feel services attached to them like
harassed as they are unable to home service for preparation or
find solution to system generated renewal of AADHAR card / ration
issues. Taxpayers who share a card/ driving license/passport
part of their income with the etc and the like. For other
government as a partner in nation taxpayers, services like online
building are not getting their due grievance portal, instant posting
respect. Today the taxpayer wants of all related orders in the
to comply with legal requirements account of the assessee, proper
and wants a hassle free life. sitting arrangements in the
However, still they are viewed as Income tax offices and the like
tax evaders. In all private be provided. This attitude
organizations, the client who is the towards taxpayers, if adopted,
source of income is highly valued. would undoubtedly improve tax
In fact priority services are compliance thereby increasing
provided to members who add on the tax base.
more to the income of the
organization. The government of
India should treat the "taxpayer" as
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Sr. Section Issue/Justification Suggestion
No
its client since he is the only
source of revenue.
5. Targets for India adopts a progressive system Since a majority portion of
collection of of taxation where the tax rate direct taxes is paid to the credit
taxes-Not depends on the level of income of the Government through TDS
essential earned during a financial year. and advance tax, it is suggested
Taxes paid by the taxpayers are that no targets should be set by
utilized for the betterment of the the Department for collection of
nation as a whole. Since a majority taxes. In fact, internal
portion of direct taxes is paid to mechanism is to be developed
the credit of the Government to ensure adherence of the
through TDS and advance tax, the timelines mentioned in the
possibility of evasion of tax gets Citizens charter of the
meager in the private sector. Also, Department with regard to
today the assessee wants to performance of services and
voluntarily comply with the existing adherence to the timelines
laws to avoid any hassles. In such should be made as a part of
a scenario, it is difficult to performance appraisal of the
understand as to why targets are concerned.
set for Assessing Officers for
collection of tax. The Government
is not a profit making organization.
It is belongs to the people of India,
works for the people and is formed
by the people of India. In order to
achieve the yearly targets, all
means, fair and unfair, are being
adopted. There have been
instances which have been
reported to us as to how, in order
to complete targets the genuine
assesses are being harassed. This
creates an unhealthy environment.
One cannot enforce on collection
of taxes when there is no income
and then the taxpayer has to go
round and round to get a refund of
the extra taxes paid by him.
6. Verification of There are classes of persons who Since non verification of
all income-tax are filing income tax returns but admissibility of basic
returns are not declaring their income deductions provided in sections
properly. Either the income is 80C, 80D and 24(b) have huge
Pre-Budget Memorandum 2014 (Direct Taxes) Page 13
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suppressed or various deductions revenue impact, it is imperative
are being claimed which are not to have a certification
legally permissible. With the /verifications of all claims of
increase in the work of the deductions under section 80C,
Department it is not practicable to 80D, 24(b) and the like. In this
scrutinize each and every return. verification, not only the
Taking into consideration this arithmetical accuracy but the
aspect the person filing the return admissibility of the claim
takes a calculated risk. Further, regarding the expenditure
basic deductions provided by the incurred, income earned or
Act like section 80C (Rs.1, investment made on the basis of
00,000), section 80D (15,000), the evidence collected from
section 24(b)(Rs.1,50,000) being various sources will also be
claimed by the individuals and verified. Since this work is
HUFs, in large numbers, have voluminous, the same will also
huge revenue impact. To check on be required to be out-sourced
the admissibility of the claim for preferably to the professionals
deduction, no proof of investment understanding the law better
is called for by the assessee. and who are in a position to
Today as per e-filing website there identify the grey areas.
are 2.79 crore assessees who (SUGGESTION TO IMPROVE
have filed return for ITR-1,2,3,4 TAX COLLECTION)
and 4S online for the AY 2013-14
and are thus expected to have an
income of Rs.5,00,000 or more.
Considering the slab rate of 10%,
the minimum revenue impact is
2,70,000*10.3%*2.79 crore is
approximately Rs. 77600 crores.
In case the applicable rate of tax is
20.6%, the revenue impact is
approx. 155180 crores. In case
the applicable rate of tax is 30.9%,
the maximum revenue impact is
Rs. 232770 crores.
To address this, it is important that
all the returns filed are thoroughly
checked and cross-verified with
the information collected through
AIR and other sources by the
Department. This process is
entirely different from the scrutiny
process. In this verification, not
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Sr. Section Issue/Justification Suggestion
No
only the arithmetical accuracy but
the admissibility of the claim
regarding the expenditure
incurred, income earned or
investment made on the basis of
the evidence collected from
various sources will also be
verified. Since this work is
voluminous, the same will also be
required to be out-sourced
preferably to the professionals
understanding the law better and
who are in a position to identify the
grey areas. Although the chartered
accountants, through whom
approx 85% of the returns are
filed, ensure the correctness of the
claim, the law does not recognizes
the same. Thus, the chartered
accountant is questioned by the
assessee, when documents are
asked for. In the interest of the
revenue, it is imperative to have a
certification of claims of
deductions under section 80C,
80D, 24(b) and the like.
This process once started will
ensure better voluntary
compliance as every taxpayer
filing the return would be aware
that the return being filed would be
subject to a verification process
and he cannot afford to take the
liberty of making adjustments
which are legally impermissible.
7. TCS @1% on India was the sixth largest motor In order to prevent evasion of
sale of all vehicle/car manufacturer in the taxes, Tax @1% of ex-showroom
motor vehicles world in 2012. The sales of motor price should be allowed to be
vehicles have increased manifold collected by the seller of high
times since 2009. In fact the value cars, say, cars having
domestic motor vehicle sale that value above Rs. 10 Lakhs, from
has been recorded in the year the ultimate consumer. The
Pre-Budget Memorandum 2014 (Direct Taxes) Page 15
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
2013 is 18.10 million units in which consumer may however, be
comprise of: allowed to take credit of tax so
Passenger Vehicles: 1.81 million collected in his return of income
units, after furnishing details of
source of income in the relevant
Commercial Vehicles: 0.69 m,
ITR form. The procedure
Two-wheelers: 14.36 m, followed in respect of section
Three-wheelers: 0.50 m 206(ID) i.e. TCS on jewellery and
It may have been noticed that the bullion may be adopted.
number of motor vehicles cars (SUGGESTIONS TO INCREASE
owned are generally not THE TAX BASE)
commensurate with the income of
the person offered to tax. Further,
possibility of use of black money to
purchase high value cars also
cannot be ruled out.
In order to track information about
the source of the income of the
person seller of high value cars,
say motor vehicles of value above
10 Lakhs, may be required to
collect tax at source @1%. The
assessee may, however, be
allowed to take credit of tax so
collected in his return after
furnishing details of source of
income in the relevant ITR form.
The procedure followed in respect
of section 206(ID) i.e. TCS on
jewellery and bullion may be
adopted.
8. Forms of Income tax return forms are such It is suggested that the forms of
Income tax that they have reasons to capture income tax shall incorporate all
return to some Information about other tax the relevant details of tax
incorporate payments like service tax, VAT payments made under other
details of tax etc. The return form should be legislations like central excise,
payments made more elaborate so as to give VAT, service tax etc.
made under comprehensive information about (SUGGESTIONS TO INCREASE
other the other indirect taxes paid. THE TAX BASE)
legislations Thereafter, the said information be
shared with the relevant
Department of the Government for
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Sr. Section Issue/Justification Suggestion
No
verification. This will ensure that
the data being reported by the
assessee matches with the data
provided by him in other
Departments. In the long run, it
will improve the quality of the data
being received in the return forms
as the assessee will not take the
risk of mentioning the wrong data.
9. Consolidation As per the current provisions, an Multiple reports of audit/
of multiple assessee has to file multiple audit certificates of chartered
reports to be reports in different formats as per accountants be compiled and a
issued by the statutory requirements. For a single form of audit/ certificate
Chartered simplified tax regime, a single be prepared. The said format
accountants audit form should be introduced may have multiple annexures
in a single which will incorporate or i.e. existing formats in different
format consolidate multiple audit reports/ sections.
certificates required to be issued (SUGGESTIONS FOR
under various sections of the REMOVING ADMINISTRATIVE
Income-tax Act, 1961. AND PROCEDURAL
DIFFICULTIES RELATING TO
DIRECT TAXES)
10. Generation of Form No.15G/15H is a form of Since there is no central system
Form No. 15G, declaration that has been to locate multiple forms 60, 61,
15H ,60 and 61 prescribed for those persons who 15G and 15H, filled by a
through desire to receive certain specified particular person, it is
system income without deduction of tax at suggested that the filing of the
source. These forms can be used same be made electronic. On
only if the aggregate income of the the basis of particulars received
person making declaration does from these form No, the banks
not exceed the maximum amount should be mandated to punch
not chargeable to tax. the said particulars in the e-form
Form No.60/61 are used by which will generate a unique
persons who do not have a number. The details so
Permanent account number and furnished may be then used for
who have entered into analyzing and taking action
transactions specified under Rule against those persons who have
114B of the Income-tax given false declaration to avoid
Rule,1962. payment of taxes. This system if
put in place will ensure genuine
usage of these forms.
The purpose of existence of these
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
forms is mainly to avoid (SUGGESTION TO INCREASE
inconvenience to senior citizens THE TAX BASE)
and other persons who's income
chargeable to tax is below the
maximum amount not chargeable
to tax and those who do not have
a PAN. These forms are however
being misused, since there is no
mechanism to track and control
those persons who wrongly fill the
form to avoid deduction of tax at
source. Today, every branch of a
bank collects Form No.
60/61/15G/15H and does not
deduct tax at source on FDs
having interest below 10,000. This
gives a way to the assessee to
have FDs in multiple branches
with interest below 10000 and
escape tax deduction at source by
furnishing the relevant form.
11. A single ITR At present, we have different ITR A single ITR form instead of ITR
form to forms for different assessees 1,2,3,4,5,6,7 should be prepared.
replace all ITR which make filing of ITR a The common fields in all ITR can
forms cumbersome task. There should be clubbed and Income under
be a single form for all the the various heads of income is
assessees so that filing of return restricted in form of Annexures.
will be done in a simplified & The assessee should click and
effective manner. fill only the annexure which is
relevant for him. This would
amount to simplification in true
sense.
12. Procedure for In case of firms, who have It is suggested that procedure
surrender of discontinued their business still for surrender of PAN &
PAN have to file return u/s 139(1), since exemption from filing of return
no procedure has been prescribed of income in respect of Firms
for surrender of PAN by the having business discontinued,
discontinued firms. Due to this may be prescribed. With this,
firms are liable to penalty u/s 271F firms may be saved from penalty
at any time. u/s 271F.
. (SUGGESTIONS FOR
RATIONALIZATION OF THE
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No
PROVISIONS OF DIRECT TAX
LAWS)
13. Creation of At present, no online grievance It is suggested that an online
Online handling mechanism is in grievance portal for speedy
grievance existence to resolve the difficulties resolution of queries of
portal being faced by assessees relating assesses be created. If required,
to TDS or E-filing of income-tax the ICAI would extend its full
returns. To enable the assessees support in developing the said
to seek early resolution of their grievance portal.
queries within a short span of
time, it is suggested that an online
portal may be created wherein the
assessee can post his
complain/query relating to his own
returns and which are answered
by the respective Assessing
Officer. The system may have
following features:
a) The query not replied within a
specified period of time is
escalated to higher authority
say Assistant Commissioner,
then to Deputy Commissioner
and so on according to the
hierarchy.
b) Once the issue is resolved the
assessee should be allowed
to reopen his query if he is not
satisfied with the response
received and has further
submissions to make.
c) The assessee should be able
to check the status of his
grievance online.
d) SMS and email alert may be
given at the time of receipt of
grievance and at the time of
disposal of grievance.
In this regard, we wish to mention
that the Institute of Chartered
Accountants of India is
Pre-Budget Memorandum 2014 (Direct Taxes) Page 19
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
successfully operating an online
grievance portal "E-Sahaayataa"
to cater to the queries of
approximately 10 Lakh students
and 2 Lakh members. All the
officials of the ICAI are mapped in
the portal to ensure that all
unanswered grievances are
escalated to higher levels. Since
the inception of this system in
June 2010, ICAI has successfully
answered approximately 98,000
queries.
14. Extension of Considering the provisions of It is suggested that the Circular
last date of section 10 of the General Clauses No. 676 dated 14.01.1994 be
Payment of Act, 1987 the Board had through revised in the light of existing
tax due to Circular No. 676 dated scenario. The circular should
Public 14.01.1994 clarified that if the last clearly provide as to whether or
holiday - day for payment of any instalments not the due date shall be
Circular No. of advance tax is a day on which deemed to be extended by one
676 dated the receiving bank is closed, the day if the last date is a public
14.01.1994 assessee can make the payment holiday.
read with on the next immediately following (SUGGESTIONS FOR
Section 10 of working day, and in such cases, REMOVING ADMINISTRATIVE
the General the mandatory interest leviable AND PROCEDURAL
clauses Act, under sections 234B and 234C of DIFFICULTIES RELATING TO
1897 the Income-tax Act, 1961 would DIRECT TAXES)
not be charged.
Considering the change in the
functioning of the Department,
assessees and the banking system
in India, it is felt that the said
circular needs revision.
Issues arisingSection 2(62) of the Companies It is suggested that OPC should
15.
from Act, 2013 has introduced the be treated like any other
applicability of
concept of "One Person Company" company for taxation purposes.
Companies which means a company which The concept of separate legal
Act, 2013: has only one person as a member. entity of OPC should be
a) One person Section 2(31) of the Income-tax followed for Income tax and
Company Act, 1961 which defines person Wealth tax both. However a
(OPC): has to be amended to include specific clarification may be
inserted in the income tax act as
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No
within its ambit an OPC. to allowability of remuneration
Section 2(68) of the Companies paid by OPC to member.
Act, 2013 defines "private (SUGGESTIONS FOR
company" to mean a company REMOVING ADMINISTRATIVE
having a minimum paid-up share AND PROCEDURAL
capital of one lakh rupees or such DIFFICULTIES RELATING TO
higher paid-up share capital as DIRECT TAXES)
may be prescribed, and which by
its articles,--
(i) restricts the right to transfer its
shares;
(ii) except in case of One Person
Company, limits the number of its
members to two hundred:
Provided that where two or more
persons hold one or more shares
in a company jointly, they
shall, for the purposes of this
clause, be treated as a single
member:
Provided further that--
(A) persons who are in the
employment of the company; and
(B) persons who, having been
formerly in the employment of the
company, were members of the.
company while in that employment
and have continued to be
members after the employment
ceased, shall not be included in
the number of members; and
(iii) prohibits any invitation to the
public to subscribe for any
securities of the company;
From the above it can be inferred
that one person company will be
required to comply with the
provisions applicable to private
Limited Company. However,
section 18 of the Companies Act,
2013 provides for conversion of
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Sr. Section Issue/Justification Suggestion
No
companies already registered from
one class to other class under that
Act. This implies an OPC can be
converted into a Private limited or
a public Limited Company
provided that conditions are
fulfilled.
b) Reopening b) Section 130 of the Companies a) A provision is inserted to
of accounts Act, 2013 provides for now provide that in cases where the
on Court's/ provides for revision of the books financial statements have been
Tribunal order of accounts and the financial revised by virtue of section 130
under section statements of the Company on of the Companies Act, 2013, no
130 of the application made by the Central refund shall be granted in case
Companies Government, the Income tax such revision has the effect of
Act, 2013: Authorities, the SEBI and any lowering of profits of the
other statutory regulatory body or company.
authority or any person concerned. b) A specific provision is
Such revision can however be required in the Income tax act to
done on an order by a court of take care of adjustments
competent jurisdiction or the required in taxable income due
Tribunal to the effect that the to revision of accounts. The
relevant earlier accounts were provision may be in line of
prepared in a fraudulent manner or Section 155 of the Act.
the affairs of the company were
mismanaged during the relevant
period, casting a doubt on the
reliability of the financial
statements. Before passing the
order notice of the same will be
given to the Income tax authorities.
This revision may, however, give
rise to three situations namely, no
effect on the profits, higher profits
or lower profits. These profits have
a direct impact on the computation
of income of Companies due
applicability of section 115JB of
the Income tax Act, 1961. In case
the profits are higher, the
Department can issue a notice
under section 147 of the Income
tax Act. The issue will arise where
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No
the profits were inflated by the
company and due to the reopening
of accounts, the actual profits are
lowered. The company is such
case may apply for refund by filing
a revised return of income within
the time limit prescribed under
section 139(5) of the Income-tax
Act, 1961.
c) Reference The Companies Act, 2013 Consequential amendments be
of Schedule VI provides for the General made in the Income tax Act,
of the instructions for preparation of 1961 and the Reference of
Companies "Balance Sheet" and "Statement of Schedule VI of the Companies
Act, 1956 to Profit and Loss" of the Company in Act, 1956 be substituted with
be substituted Schedule III. The references made Schedule III of the Companies
with Schedule in the Act to Schedule VI of the Act, 2013.
III of the erstwhile Companies Act, 1956 are
Companies to be substituted accordingly.
Act, 2013:
d) Difference The concept of related party is There is a need for alignment in
in the relevant for defining "specified the scope of related parties in
definition of domestic transactions" and Companies Act, 2013 with that
"related "international Transactions" in the of the Income-tax Act, 1961
party" in Income-tax Act, 1961. The
Companies Companies Act, 2013 also defines
Act, 2013 and "covered transactions" and "related
Income tax party" However, the definition in
Act,1961: both the cases is different.
e) Depreciation Sch. II of the Companies Act 2013 It is suggested that a specific
Transition requires depreciation to be provision be introduced u/s.
Provisions- charged in books of accounts 115JB to provide for that so
Impact on MAT calculated as per new useful life much amount of carrying cost of
specified in the schedule. Note 7 asset as has been adjusted
to part C of Sch II is providing that against opening balance of
in case of an asset whose usefull retained earnings, shall, for the
life is nil, its carrying amount is to purpose of computing book
be recognized in opening balance profit under Sec. 115JB, be
of retained earnings. allowed as deduction.
This means that so much amount
shall not routed through P & L
statement but shall be adjusted
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Sr. Section Issue/Justification Suggestion
No
directly in balance sheet. In case
of companies covered by MAT,
this shall have an adverse impact
in the sense that this much
amount shall not be available for
adjustment against book profit.
f) Amalgama- a) Sec. 72A of the Act, which a) It is suggested that sectoral
tion deals with treatment of restrictions u/s 72A may be
unabsorbed losses and removed and provisions of this
unabsorbed depreciation, in section be made applicable for
case of amalgamation, is all the sectors.
restrictive in its application.
Presently benefits of Sec.
72A are available only to
company owning industrial
undertaking or a ship or a
hotel or banking company.
Due to this restriction, other
sectors namely service
sector and real estate sectors
are not eligible for benefits in
the form of handing over of
loss from one company to
another.
b) Presently MAT credit u/s. Act needs to be amended so as
115JAAcan not be carried to allow carry forward of MAT
forward by the amalgamated Credit in the hands of
company. amalgamated for remaining
number of years.
c) Section 56(2)(vii)(c)(ii) applies It is suggested that a proviso on
when an individual or HUF the lines of clause (viia) be
receives shares for a introduced for the purpose of
consideration which is less clause (vii) (c )(ii) also.
than fair market value of the
shares by an amount
exceeding Rs. 50000. Similar
rule apply for a firm or closely
held company by virtue of
Sec. 56 (2) (viia). In case of
Section 56 (2) (viia), it has
been specifically provided that
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Sr. Section Issue/Justification Suggestion
No
this clause is not applicable
when shares have been
received by way of
amalgamation covered u/s.
47. No such exclusion is
applicable for Section 56
(2)(vii)(c)(ii).
d) Companies Act, 2013 has Clause (vi) of Section 47 need to
permitted amalgamation of be amended in order to make
Indian company with foreign amalgamation with foreign
company. However company also a tax neutral
exemption from capital gains transaction. Similar amendment
u/s. 47 of the Income tax act is required in clause (vii) of
is available only when Section 47 also, so that
amalgamated company is an shareholders are not taxed
Indian Company. when shares of amalgamated
company are received and
amalgamated company is not an
Indian company.
g) In recent times, tax litigation in Therefore, since now under the
Amalgamation relation to amalgamation and Companies Act, 2013, at the
and demerger has increased many time of approval of Scheme,
Demergers folds. Certain examples of such adequate representation has
Limitation on litigations are as under: been given to the Income Tax
powers for a. Tax benefits of amalgamation department, corresponding
assessment of and demerger have been amendments should be made in
cases dealing denied on the ground that the Income-tax Act, 1961 (may be by
with assessee has not fulfilled the way of introduction of a
Amalgamation conditions stated under separate chapter or by
and section2 (1B) in case of introducing new section dealing
Demergers amalgamation and section 2 with these kind of assessments)
effected under (19AA) in case of demerger; to the effect that the tax issues
the new under the Income Tax Act, 1961
b. Litigation as to whether the
Companies relating to
transaction is in the nature of
Act, 2013. amalgamations/demergers in the
amalgamation, demerger or
hands of the transferor
slump sale under the Income
company, transferee company
Tax Act;
and the shareholders of
c. In certain cases, the Tax transferor/transferee company
department has alleged that should be examined and
the scheme was a Tax
Pre-Budget Memorandum 2014 (Direct Taxes) Page 25
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
avoidance device; adjudicated by the tax
d. Issues relating to carry forward department at the stage of
of unabsorbed losses in the making representation itself. In
hands of transferee company, such a case, the Assessing
availability of credit for TDS Officer shall not be allowed to
and advance tax paid by the re-examine and re-adjudicate
transferor company on behalf the issues relating to
of transferee company, etc. amalgamation or demerger at
the time scrutiny assessment or
e. In certain cases, the AO has
reassessment.
invoked provisions of Section
28(iv) in the hands of
amalgamated company on the The said amendment would
ground that the amalgamated have following positive effects:
company has acquired a. Reduction in tax litigation
Reserve & Surplus from its in respect of
amalgamating company under amalgamations/demergers;
the scheme of amalgamation.
b. The Assessees would be
The same was considered as a
saved from hardship of the
perquisite by the AO and taxed
double scrutiny one at the
under section 28(iv) of the
time of filing of the scheme
Income Tax Act after the
and second at the time of
scheme has been approved by
assessment.
the High Court.
c. Certainty as to the tax
Now, under Section 230(5) of
treatment in relation to
the Companies Act, 2013, it is
amalgamations and
mandatory for the companies to
demergers, which will lead
send a notice of amalgamation
improvement of investors'
and demerger to the income-tax
sentiment;
department. Under the old
Companies Act, 1956, such d. Safeguard of shareholder's
notice was not mandatorily interest since they would
required. Hence, now, such be aware about potential
notices would ensure that the tax exposures to them and
income tax department can the company in respect of
make a representation in the amalgamation and
relation to the amalgamations mergers and would
and demergers before the consider the same while
same is approved. voting in respect of the
same;
Page 26 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
16. Corporate Corporates are currently involved It is suggested that:
Social in various areas of social a) a deduction of the
Responsibility responsibility/community expenditure on community /
Costs development as part of nation social development (both
building. Further, the concept of capital and revenue) be
Corporate Social Responsibility introduced, specifically
Costs has been introduced under covering critical areas like
Companies Act, 2013. The education, health, animal
expenditure is mandatory in its husbandry, water
nature and as such it is a statutory management, women
levy. Accordingly it deserves tax empowerment, poverty
deduction. Even though it may be alleviation and rural
covered under Section 37 it development.
deserves for a specific section in
b) Even in cases where a
Section 36. Allowing tax deduction
company has its own trust
may encourage corporate to incur
or foundation, the deduction
expenditure more then minimum
in respect of expenditure
prescribed limit. Providing suitable
incurred for CSR activities
tax incentives in respect of such
should be allowed.
Corporate Social Responsibility
Costs to accelerate the process c) Such expenses, however,
and to ensure that the country can should be subject to a limit
reach the goal of being a say 5% of total income.
developed nation in the near future d) CSR expenditure is allowed
is the need of the hour. by way of donation to Prime
Minister Relief Fund/ Trust
registered u/s. 80G/
associations approved u/s.
35AC . If deduction of CSR
expenditure is not allowed ,
this shall be discriminatory
for those corporates, who
may like to carry out CSR
activities on their own.
(SUGGESTIONS FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
17. Differential For representing the client, an In order to bring uniformity in
Stamp duty advocate is being charged a fee of Court fees for both Chartered
charges being Rs.5/- per Letter of Authority while Accountants & Advocates for
paid by CA's a Chartered Accountant has to pay their representing the client
Pre-Budget Memorandum 2014 (Direct Taxes) Page 27
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
and Rs.100/- per Letter of Authority. In before Income-tax Authorities,
Advocates on Maharashtra, in respect of section 288 which provides
letter of representing the client by "appearance by authorized
authority for Chartered Accountants, the Court representative" should be
representing fees is governed by the provisions amended to provide for the fees
the client of Bombay Stamp Act, according to be charged for authorisation.
to which the Letter of Authority (SUGGESTIONS FOR
must be accompanied by a Court RATIONALIZATION OF THE
fee of Rs.100/- or a stamp paper PROVISIONS OF DIRECT TAX
valued Rs.100/- LAWS)
18. Gaps in In order to provide Environmental It is suggested that concessions
electricity friendly solutions and Low cost or additional tax benefits may
generations availability of electricity to end also be provided where a new
user, alternate & clean energy building (resident/ commercial/
resources may be promoted more hotel etc) installs a solar energy
by way of devices & rain harvesting
additional exemptions/incentives if, instruments.
the project gets completed on (SUGGESTIONS FOR
time. RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
19. Allowability of Presently, interest paid by the Interest paid by the assessees
Interest paid Government to an assessee is to the Government under
under Income- chargeable to tax. However, various sections of the Income
tax Act, 1961: interest paid by the assessee to Tax Act should be allowed as
the Government under various deduction in computing total
sections is not allowed as income. If the assessee does
deduction while computing the not have business income,
total income. Interest paid by the interest should be allowed
assessee is for the use of money under the head `Income from
by him and is compensatory in other Sources'.
nature. Alternatively, the interest
received by the assessee on
refund should be exempt from
tax.
20. Issues For filing of return, it is mandatory It is suggested that :
regarding to have PAN.A person applying for a) The person entrusted with
PAN allotment PAN has to give his details in a the work of verification
prescribed form & the same will be should possess sufficient
allotted to him by the Income Tax knowledge & understanding
Department. Earlier, when the of the provisions of the
Page 28 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
assessee identification system Income-tax Act so as to
was based on "GIR Number" complete the assigned work
i.e."General Index Register in a timely manner.
Number" that used to be allotted, b) If the application of the
"Free of Cost", by the concerned applicant is withheld by
Income Tax Officer who had a NSDL, NSDL should inform
jurisdictional authority to assess the applicant the reasons
the assessee. thereof.
Later on this was switched over to c) If there are any
the era of "Permanent Account queries/doubts regarding
Number", under the authority of details provided in form no.
new Section 139A, substituting the 49A, NSDL should clarify the
old one, by Finance Act, 1995,with same with the applicant.
effect from 1-7-1995 and by
d) CBDT should fix a time limit
insertion of New Rule 114, by
for issuance of PAN &
replacing the old Rule 114, with
delivery of PAN card & also
effect from 1-4-1976.
should take appropriate
Due to the some reasons, this actions against undue
function of receiving applications delays in allotment of PAN.
and allotment of Permanent
Account Number and issue of PAN
Card transferred to NSDL. With
this switch over, now the
applicants were required to pay
requisite amount, as prescribed by
the authorities, along with the PAN
application.
Making an application for
allotment of the Permanent
Account Number and incurring
"COST" for that is "unfair and
unjust" to the applicant. It is the
proprietary/statutory function of
the Income Tax Department to
allot the same "Free of Cost", as
the same has been the normal
part of its function, empowered
by the Income-tax Act, 1961.
Moreover, there are some
hardships being faced by the
persons applying for PAN. One of
the hardships is that the allotment
Pre-Budget Memorandum 2014 (Direct Taxes) Page 29
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
of PAN is not done in a timely
manner. Though there is no time
limit prescribed under any of the
provisions of Income-tax Act
regarding issuing PAN & PAN card
but it is essential for the Income
Tax Authority to issue PAN & PAN
card within a prescribed time
period- In the case of The
Honorable Calcutta High Court in
the case of Chandrakant Kandalal
Sheth vs. Union of India & Ors.
[255 ITR407] it has been held that
three months period can be
construed as the maximum time
period for issuance of PAN &
delivery of PAN card & if the
concerned authority finds that
PAN cannot be given quickly, it
must give the reason therefore at
the earliest.
21. AIR Section 285BA requires various It is suggested that the AIR
information in entities to furnish Annual information of the assessee may
"My Account" information return with regard to be allowed to be reflected under
facility specified financial transactions in "My Account" Facility provided
a prescribed form to the Income by Department in CPC portal.
tax authorities. In order to bring in
more transparency, the AIR
information of the assessee may
be allowed to be reflected under
"My Account" Facility provided by
Department in CPC portal. A
consolidated view of the
transactions entered into by the
assessee, would also enable the
professionals handling the tax
matters of the assessee, to guide
the assessee regarding the
probable compliance of the
relevant provisions of the Income-
tax Act with regard to the said
transactions, leading to correct
payment of taxes.
Page 30 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
22. Applicability The ICAI had pursuant to the The suggested draft format of a
of SA -700 on issuance of the Revised SA 700, clean report has been submitted
form of audit "Forming an Opinion and to the Under Secretary (TPL-III),
reports Reporting on Financial CBDT vide its letter No.
Statements", prescribed a revised ICAI/DTC/2013-14/Rep-25 dated
format of the auditor's report on 7th February, 2014. The
financial statements. modifications in the report i.e.
As per SA 700 an auditor shall qualification, adverse opinion,
modify the opinion in the audit disclaimer of opinion, may be
report when: reported by the auditor
accordingly.
a) the auditor concludes that,
based on the audit evidence (SUGGESTIONS FOR
obtained, the financial statements REMOVING ADMINISTRATIVE
as a whole are not free from AND PROCEDURAL
material misstatements DIFFICULTIES RELATING TO
DIRECT TAXES)
b) the auditor is unable to obtain
sufficient appropriate audit
evidence to conclude that the
financial statements as a whole
are free from material
misstatement
Considering the materiality and
the pervasiveness of the effects or
possible effects on the financial
statements, the auditor may issue
a modified report with a:
a) Qualified opinion
b) Adverse Opinion
c) Disclaimer of Opinion
Also, SA 700 requires the auditor
to clearly lay down management's
responsibility and auditor's
responsibility. This revised format
has been made effective in
respect of audits of financial
statements for periods beginning
on or after 1st April 2012.
Considering the fact that SA700 is
applicable to non-corporate
entities also, ICAI had suggested
certain changes vide its letter No.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 31
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
ICAI/DTC/2013-14/Rep-25
dated 7th February, 2014 to
the Under Secretary (TPL-III) in
Format of Form No. 3CB so as to
enable our members to comply
with guidelines issued by its
Council.
23. Foreign tax Clause 207 relates to foreign tax It is suggested that detailed &
credit credit allowable to an assessee, clear guidelines on foreign tax
guidelines being a resident in India in any credit should be introduced.
financial year on income which is
taxed in India as well as outside
India. The said clause further
provides that where the assessee
is required to pay Indian income-
tax in respect of an income which
has been taxed in any specified
territory or other country with
which India has an agreement
under clause 291, the foreign tax
credit shall be allowed in
accordance with the agreement
entered into with such specified
territory or country. Where there is
no such agreement, the tax credit
shall be determined at the Indian
rate of tax or the rate of tax of the
other country, whichever is lower.
The credit, in either case shall not
exceed the Indian income-tax
payable in respect of income
which is taxed outside India and
the Indian income-tax payable on
total income of the assessee.
The existing foreign tax credit
guidelines are not sufficient to deal
with various foreign tax credit
issues. Hence, detailed guidelines
should be introduced to bring
clarity.
Page 32 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
24. Issues arising Ministry of Finance has recently Since "Advance payment
from amended Income tax Rules vide against imports" and "Payment
Notification Notification No 67/2013, dated 2- towards imports-settlement of
No 67/2013, dt 9-2013 with regard to Foreign invoice" are routine payment
2-9-2013 Outward Remittances and Form made by the importers, they
amending 15CA &15CB. This notification is may be included in the specified
Rule 37BB of in supersession of an earlier list.
IT Rules, 1962 Notification No 58/2013, dated 5- (SUGGESTIONS FOR
wrt Foreign 8-2013. REMOVING ADMINISTRATIVE
Outward AND PROCEDURAL
Remittances- DIFFICULTIES RELATING TO
Rule 37BB provides for the
Form 15CA & DIRECT TAXES)
method/procedure to be followed
Form 15CB
while furnishing of information in
case any payment is made to non-
resident which is chargeable to
tax. Notification No. 67/2013, dt 2-
9-2013 provides through an
explanation a list of 28 payments
where there is no need to file form
15CA/15CB. As per the earlier
Notication no 58/2013, dated 5-8-
13, there were a total of 39
payments in the specified list
which were required to furnish
information in Part B of the Form
No.15CA. Payments which are not
there in the new specified list are
as below:
(i) Advance payment against
imports
This is a routine payment made by
the importers. Non exclusion of
such payment from specified list is
unnecessarily increasing the
compliance burden of the
assessees. Further, it may lead to
harassment at the time of
assessment.
(ii) Payment towards imports-
settlement of invoice
As mentioned above, such
Pre-Budget Memorandum 2014 (Direct Taxes) Page 33
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
payment is also made in a routine
manner by the importers.
Similarly, other payments which
were earlier in the specified list of
Not No 58/2013, dt 5-8-13 but not
included in new specified list of
Not No 67/2013, dt 2-9-2013 and
thereby increasing the compliance
burden of assesses unnecessarily
are as follows:
(iii) Imports by diplomatic
missions
(iv) Payments for surplus
freight or passenger fare
by foreign shipping
companies operating in
India
(v) Freight on imports -
Shipping companies
(vi) Freight on exports -
Shipping companies
(vii) Booking of passages
abroad - Shipping
companies
(viii) Freight on imports -
Airlines companies
(ix) Payments for life
insurance premium
(x) Freight insurance -
relating to import and
export of goods
(xi) Other general insurance
premium
25. Number of Even in the e-filing era, the For the convenience of the tax
Returns and assessees are overburdened with payers it is suggested that the
payment the compliances to be made with number of returns and payment
schedule regard to filing of returns and schedule to be filed by the
should be payment schedules. An assessee assessee should be curtailed
curtailed is required to file quarterly returns appropriately.
relating to TDS on salaries,
Page 34 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
Quarterly returns relating to TDS (SUGGESTIONS FOR
on amounts other than salary, REMOVING ADMINISTRATIVE
and quarterly returns relating to AND PROCEDURAL
TCS. These are in addition to the DIFFICULTIES RELATING TO
Income tax return form which is to DIRECT TAXES)
be filed on annual basis. Due to
errors in the punched data or for
some other reason, the assessee
is required to file correction
statements or revised return
which is also a cumbersome
process.
Apart from this there is a payment
schedule to be followed in respect
of TDS/TCS, advance tax, Self
assessment tax and so on. This is
too cumbersome.
26. Extension of As the filing of e-TDS returns is an It is suggested that due date for
time limit for onerous task, it is very difficult for furnishing of the TDS returns
filing of TDS assessees to collate and compile may be extended to 30 days
Return all the voluminous data/information from the end of the quarter
for filing of TDS returns within 15 instead of 15 days.
days from the end of the relevant (SUGGESTIONS FOR
quarter. Further, as the payment REMOVING ADMINISTRATIVE
challans from banks reach the AND PROCEDURAL
deductors by 10th of the next DIFFICULTIES RELATING TO
month, it become all the more DIRECT TAXES)
difficult to file returns within a short
span of time.
27. Challan Considering the fact that several It is suggested that challan
correction mistakes were being reported Correction Mechanism be made
mechanism which occurred on account of applicable to all types of
wrong punching of data in the challans including challans for
OLTAS by the banks, the CBDT online payments, payments of
introduced a new challan wealth tax etc.
correction mechanism for paper (SUGGESTIONS FOR
based payments of income tax. REMOVING ADMINISTRATIVE
The said system has been AND PROCEDURAL
appreciated by the assessees. DIFFICULTIES RELATING TO
Since, inadvertent mistakes can DIRECT TAXES)
occur while paying the income tax
online also, it is felt that challan
Pre-Budget Memorandum 2014 (Direct Taxes) Page 35
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
correction system be made
applicable to challans in respect of
online payments of income tax
also.
28. a) Difficulties Presently, the refund, if exceeds It is suggested that old paper
in Rs. 1 lacs requires approval from refunds not exceeding Rs.1
obtaining the higher authorities. Apart from lakh, issued by the department
old paper these, re-issue of old paper and not received by the
refunds refunds, already issued by the assessees, may not require
department before the approval from higher authorities
implementation of Refund Banker and must be left to the
Scheme but not received by the Assessing Officers for disposal.
assessee, also requires approval This will help in reducing the
from the higher authorities. The pending grievances of non-
second part of the administrative receipt of old paper refunds.
steps in refund cases have (SUGGESTIONS FOR
become very cumbersome REMOVING ADMINISTRATIVE
procedures and at the same time AND PROCEDURAL
also increases the responsibilities DIFFICULTIES RELATING TO
of the higher authorities. Moreover, DIRECT TAXES)
refunds in such cases often
delayed by more than 6 months
inspite of furnishing of bank pass
book and the indemnity bond by
the assessee in support of refund
not received by them.
b) Refunds The assessees frequently change To handle such cases, it is
not their addresses due to several suggested that once the return
delivered reasons like change in job, has been processed by CPC, the
due to marriage etc. However, in majority file should be transferred to
change in of cases they are unable to get respective Assessing Officer,
address their refund cheque due to with whom the assessee can
changed address. Even if they interact to resolve the issues in
disclose the current address in the the processing of return, non
Income-tax return, the refund receipt of refund cheque and so
cheque often goes to the older on.
address and thus remains (SUGGESTIONS FOR
undelivered. REMOVING ADMINISTRATIVE
AND PROCEDURAL
DIFFICULTIES RELATING TO
DIRECT TAXES)
Page 36 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
c) Issue of New set of guidelines can be It is suggested that in case of
Refunds issued for granting refund of tax to refunds of an amount not
in case of the legal heirs of deceased exceeding Rs. 50,000 which are
legal heirs assesses. Most of the refund payable to legal heirs of
claims are pending for several deceased assessee, the
months as the department condition of obtaining Court
software (AST) requires Court Order be relaxed and refund be
Order for payment of refund. given as per the discretion of
Minimum period of disposal of the Assessing Officer.
order by Court is about 2 years. (SUGGESTIONS FOR
Obtaining Court Order can be REMOVING ADMINISTRATIVE
relaxed for refunds not exceeding AND PROCEDURAL
Rs.50,000/- and refund can be DIFFICULTIES RELATING TO
given as per the discretion of the DIRECT TAXES)
Assessing Officer.
d) Refund The speed and the amount of It is suggested that the refunds
amount to refunds that have been granted by in respect of all returns (e-filed
be directly the Department in last few years returns as well as manual
paid into have been commendable. In order returns) be mandatorily
the bank to be further be effective and deposited directly into
accounts assessee friendly, it is suggested assessee's bank account within
of the that the refunds in respect of e- maximum time limit of 6 months
assessees filed returns as well as manual from filing of returns
returns be issued directly into (SUGGESTIONS FOR
assessees bank account within REMOVING ADMINISTRATIVE
maximum time limit of 6 months AND PROCEDURAL
from filing of returns. This would DIFFICULTIES RELATING TO
solve the problem of undelivered DIRECT TAXES)
refund cheques and also save on
interest which is paid by the
Government on delayed refunds.
29. Audit of TDS A major portion of the revenue by It is suggested that an
returns way of income-tax is recovered independent audit provision
through deduction of tax at source. may be inserted to provide for a
For furnishing the information comprehensive audit of all the
required under revised clause 27 TDS returns filed with the
of Form No.3CD, an in-depth Department. Appropriate forms
verification of the TDS returns is of audit report can be
necessary. prescribed to certify about the
correctness of the quarterly TDS
returns. This will enable the
Department to rest be assured
Pre-Budget Memorandum 2014 (Direct Taxes) Page 37
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
about the correctness of the
TDS returns filed as well as the
remittance of the tax deducted
at source to the credit of the
Central Government.
(SUGGESTIONS FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
30. Monetary The monetary limits for all Considering the Cost inflation
limits in the exemptions or deductions were Index (CII) of the year in which
Income-tax provided long back. In has been the various monetary limits
Act, 1961 long since the same have been under the Income-tax Act,1961
revised considering the prevailing were last revised and the CII of
inflationary conditions in India. An the year 2013-14, an effort has
effort has been made to compile been made to make a
all such monetary limits with the comparative statement of the
Cost inflation index (CII) of the present limit and the figure of
year in which they were last tentative limit, had the CII been
revised and the CII of the year applied to them, has been
2013-14 to arrive at the figure of prepared. The same is given as
tentative present limit. The same an annexure to this memoranda.
is given as an Annexure to this It is suggested that the present
memorandum. monetary limits be revised
upwards appropriately.
Page 38 Pre-Budget Memorandum 2014 (Direct Taxes)
PART II
SUGGESTIONS RELATING TO THE PROVISIONS
OF INCOME-TAX ACT, 1961
The Institute of Chartered Accountants of India
CHAPTER I
PRELIMINARY
Pre-Budget Memorandum 2014 (Direct Taxes) Page 41
The Institute of Chartered Accountants of India
Page 42 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
31. Definition of The Finance Act, 2012 had (a) Since, these amendments
"amalgamation" amended Sections 47(vii) and are clarificatory in nature and
in section 2(1B) Section 2(19AA) of the Income-tax are proposed to remove the
Act. As per the Explanatory conditions which were
Memorandum to the Finance Bill impossible to fulfill, it is
2012, the purpose of aforesaid suggested to make them
amendments is as under: applicable with retrospective
In a case where a subsidiary effect i.e. from the date when
company amalgamates into the the above conditions were
holding company, it is not possible inserted in the said sections i.e.
to satisfy one of the conditions i.e. for Section 47 (vii) with effect
the amalgamated company (the from 1st April 1967 and for
holding company) issues shares Section 2(19AA) with effect from
to the shareholders of the 1 April 2000.
amalgamating company (b) Section 2(1B)(i) may be
(subsidiary company), since the amended appropriately to
holding company is itself the provide that all the property of
shareholder of the subsidiary the amalgamating company or
company and cannot issue shares companies (other than assets
to itself. like shares, debentures etc. held
Similarly, in the case of a by any amalgamating company
demerger there is a requirement or companies in another
under section 2(19AA)(iv) that the amalgamating company or
resulting company has to issue companies) before
the shares to the shareholders of amalgamation becomes the
the demerged company on a property of the amalgamated
proportionate basis. However, it company by virtue of
is not possible to satisfy this amalgamation. Corresponding
condition where the demerged amendment may also be made
company is a subsidiary company in Clause (ii) of section 2(1B).
and the resulting company is the (SUGGESTIONS FOR
holding company. RATIONALIZATION OF THE
Therefore, it is proposed to amend PROVISIONS OF DIRECT TAX
the provisions of section 47(vii) LAWS)
and 2(19AA) so as to exclude the
requirement of issue of shares to
the shareholder where such
shareholder itself is the
amalgamated company or the
Pre-Budget Memorandum 2014 (Direct Taxes) Page 43
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
resulting company.
Further, section 2(1B) of the
Income-tax Act, 1961 provides for
the definition of "amalgamation"
which, inter alia, states that all the
property of the amalgamating
company or companies
immediately before the
amalgamation becomes the
property of the amalgamated
company by virtue of
amalgamation.
This may lead to hardship in a
case where the two amalgamating
companies have cross holdings. In
such a case, on amalgamation the
shares held by the amalgamating
companies in each other are
cancelled out and thus the
requirement of transfer of all
assets to the amalgamated
company will never be fulfilled.
This seems to be an inadvertent
error in drafting and thus needs to
be amended appropriately.
32. Books of The existing income tax laws do Section 2(12A) defining books
accounts in not specifically clarify or permit or books of accounts should
electronic mode- the maintenance of books of clearly state that the books
Section 2(12A) accounts in electronic form maintained in digital form would
instead of physical books / print also be considered as books of
outs accounts for the purposes of
the Act. The assessees may
scan the original documents
With the IT and telecom revolution
and subsequently be permitted
and the consequent digitization in
to destroy the same as they
the past decade, the economies
would be available only in
globally are moving towards a
digitized form.
paperless environment and there
is an increasing reliance on the
digitized records. The permission to maintain the
books in electronic form should
be given to companies beyond a
Further, as the companies are
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Sr. Section Issue/Justification Suggestion
No
increasing in size, the volume of certain prescribed size & scale
documents generated has of operations. Consequential
increased manifold and there are amendments may be made and
logistic issues is maintaining the rules prescribed, as deemed
documents such as invoices, necessary to provide guidance
contract, ledgers, etc in a physical and check points to prevent
format. misuse.
Maintaining books of account in (SUGGESTIONS FOR
electronic mode, would not only RATIONALIZATION OF THE
free the precious and ever PROVISIONS OF DIRECT TAX
shrinking office space of the LAWS)
corporates but also ensures better
data storage & IT enabled Record
management sorting, Indexing,
Bar Coding at document & file
level to ensure speedy retrieval.
It may be noted that Section 6 to
Section 8 of the Information
Technology Act 2000 permits use
of electronic records and use of
electronic signature while dealing
with Government or its agencies.
Thus, Government itself accepts
the electronic mode while dealing
with it.
However, the Section 9 of the said
Act does not enforce the
electronic form and hence in the
absence of a suitable amendment
to the Act, it may not be possible
to use the electronic records as
envisaged by the Information
Technology Act, 2000.
33. a) Section a) Though as per section Rs.25 lakhs may be the basic
2(15)- Definition 2(15), "charitable purpose" exemption limit, and receipts in
of charitable includes the advancement of any excess of Rs.25 lakhs may be
purpose other object of general public subject to tax at maximum
utility, however, the advancement marginal rate after deducting
of any other object of general the related expenditure.
public utility would not be a (SUGGESTIONS TO REDUCE /
"charitable purpose", if it involves MINIMIZE LITIGATIONS)
Pre-Budget Memorandum 2014 (Direct Taxes) Page 45
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
carrying any activity in the nature
of trade, commerce or business or
rendering any service in relation to
any trade, commerce or business
for a cess, fee or any other
consideration irrespective of the
nature of use or application or
retention of the income from such
activities.
In order to provide relief to the
genuine hardship faced by
charitable organizations which
receive marginal consideration
from such activities, the Finance
Act, 2010 had provided that the
benefit of exemption will not be
denied to the institutions having
object of advancement of general
public utility, even where they are
engaged in the activity of trade,
commerce or business or
rendering any service for a cess or
fee, provided the aggregate value
of receipts from such activities
does not exceed Rs.10 lakh in the
year under consideration.
Therefore, in effect, "advancement
of any other object of general
public utility" would continue to be
a "charitable purpose", if the total
receipts from any activity in the
nature of trade, commerce or
business, or any activity of
rendering any service in relation to
any trade, commerce or business
does not exceed Rs.10 lakh in the
previous year. The said limit of
Rs.10 lakhs was increased to
Rs.25 lakhs by the Finance Act,
2011 with effect from A.Y. 2012-
13. Accordingly, if the receipts
from such activities are Rs.25
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Sr. Section Issue/Justification Suggestion
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lakhs or less, it would continue to
be a charitable purpose.
However, if the receipts from such
activities are Rs.25 lakhs or more,
the trust would lose its "Charitable"
status. Also, the "charitable"
status of the trust or institution is
likely to change every year
depending on whether or not its
receipts exceed Rs.25 lakhs in
that year.
In order to overcome this difficulty,
instead of denying exemption in
cases where the receipts exceed
the specified limit, the exemption
limit may be fixed at Rs.25 lakhs
and receipts over this limit may be
subject to the maximum marginal
rate after deducting the related
expenditure i.e., the net receipts
over and above Rs.25 lakhs may
be subject to maximum marginal
rate.
b) Activities of b) Proviso to section 2(15) of It is suggested that section
Governmental the Income-tax Act provides that 2(15) be amended to provide a
authorities be in case the receipt from any trade, third proviso to the effect that
treated as commerce, business or services the first proviso shall not apply
activities for related thereto exceeds to Rs 25 to a governmental authority
charitable Lacs, it would not be treated as carrying any function entrusted
purpose charitable purpose under the head to a municipality under article
"advancement of general public 243W of the Constitution. In
utility". As a consequence the effect, for such government
provisions of section 11 and 12 of authorities, even if the
the income tax act will not apply. activities incidental thereto
It may be noted that the result in receipts of an amount
Development authorities or urban exceeding Rs 25 lacs it should
improvement trust are carrying the be considered as incurred for
activities of the municipalities as advancement of general public
provided in the Article 243W in utility.
Schedule XII of the Constitution of Also, as in case of service tax
India. They are termed as Notification 25/2012 dated 20th
Governmental authority as per
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
Notification 25/2012-Service tax June 2012, the term
dated 20th June 2012. "governmental authority" may
The aforesaid notification provides be defined in the Income-tax
a negative list of services i.e. Act, 1961 as under:
services which are exempt from " `Governmental Authority'
the applicability of the service tax. means a board, or an authority
Para 39 of the said circular or any other body established
exempts services of a with 90% or more participation
governmental authority by way of by way of equity or control by
any activity in relation to any government and set up by an
function entrusted to a municipality Act of the Parliament or a State
under article 243W of the Legislature to carry out any
Constitution from applicability of function entrusted to a
service tax. municipality under article 243W
Since governmental authorities are of the Constitution."
carrying on activities in relation to (SUGGESTIONS FOR
any function entrusted to a RATIONALIZATION OF THE
municipality under article 243W of PROVISIONS OF DIRECT TAX
the Constitution, in line with the LAWS)
provisions of service tax, their
activities should atleast be
considered as being carried for
"charitable purpose" under the
provisions of the Income-tax Act,
1961. This may done by amending
the definition of "charitable
purpose" through insertion of third
proviso to the effect that the first
proviso shall not apply to the
activities of a governmental
authority carrying any function
entrusted to a municipality under
article 243W of the Constitution.
Also, as in case of service tax, the
term governmental authority
should be defined in the Income
tax Act, 1961.
Such clarity in law would reduce
avoidable litigations in this regard.
c) Mandatory a) The amendment by the Section 10(23C) should be
application of Finance Act, 2002 requires amended to specifically
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Sr. Section Issue/Justification Suggestion
No
income by mandatory application of income exclude 'corpus donations'
charitable by charitable trusts/institutions from the requirement of
trusts/ including those enjoying benefits mandatory application of
institutions under section 10(23C) to its income by such trusts/
under section objects, subject to accumulation institutions.
10(23C) of not more than 15% of its (SUGGESTIONS FOR
income including income from RATIONALIZATION OF THE
voluntary contributions. Similar PROVISIONS OF DIRECT TAX
provisions under section 11(1) LAWS)
read with section 12(1) exclude
'corpus donations' (voluntary
contributions made with a specific
direction that they shall form part
of the corpus of the trust or
institution) from the mandatory
requirement of application of the
income. No such provision has
been made in section 10(23C).
This will compel the Institutions
coming within the scope of section
10(23C) to apply even their
corpus donations to the day to-
day activities for getting the
exemption. This will be prejudicial
to them because they cannot build
up the corpus fund.
b) Provisions under section 11(1) Depreciation on assets acquired
read with section 12(1) exclude out of corpus donations
'corpus donations' (voluntary (voluntary contributions made
contributions made with a specific with a specific direction that they
direction that they shall form part shall form part of the corpus of
of the corpus of the trust or the trust or institution) should be
institution) from the mandatory treated as application of income.
requirement of application of the (SUGGESTIONS FOR
income. On the same lines, RATIONALIZATION OF THE
depreciation on assets acquired PROVISIONS OF DIRECT TAX
out of such corpus funds should LAWS)
be treated as application of
income.
c) Section 11(1) and section Since section 10 provides for
10(23C) require mandatory incomes which do not form part of
application of income by charitable total income, like dividend from
Pre-Budget Memorandum 2014 (Direct Taxes) Page 49
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Sr. Section Issue/Justification Suggestion
No
trusts/institutions to its objects, mutual funds etc such incomes
subject to accumulation of not should be exempted from the
more than 15% of its income. The mandatory provisions of
income to be applied includes application under section 10(23C)
income which is otherwise exempt and 11(1).
under section 10 of the Income tax (SUGGESTIONS FOR
Act, 1961 like dividend income, RATIONALIZATION OF THE
dividend from mutual funds. PROVISIONS OF DIRECT TAX
Since section 10 provides for LAWS)
incomes which do not form part of
total income, such incomes should
be exempted from the provisions
of application under section
10(23C) and 11(1).
34. Deemed According to section 2(22)(e), any a) Firstly, it would be in the
Dividend- payment by a company, not being interest of justice that genuine
section - a company in which public are & bonafide transactions of loan
2(22)(e): substantially interested, of any or advance should not be
sum, by way of advance or loan to treated as deemed dividend. To
a shareholder (holding not less effectuate this, a provision
than 10% of voting power) or to a should be introduced that if the
concern in which such shareholder loan or advance is not repaid
is a member or partner having within a certain period, it should
substantial interest shall be be taxed as deemed dividend in
treated as deemed dividend to the the year in which such certain
extent company possesses period expires. In this way,
accumulated profits & shall be bonafide assessee with an
taxable in the hands of intention to repay loan would
shareholder or concern, as the get excluded & those with an
case may be. intention of never repaying will
The logic behind insertion of this get taxed.
provision is to tax transactions b) Secondly, whenever the
coloured as loans or advances in loan or advance is to be taxed
an attempt to avoid dividend as a deemed dividend in the
distribution tax by the payer & also hands of recipient, tax should
avoiding tax in the hands of the not be levied on the entire
recipient. But the same is causing amount of loan or advance
difficulty in genuine and bonafide (provided there are sufficient
cases. For example, for the accumulated profits). Tax
purpose of diversifying into new should be levied only on that
business activities by a group, a proportion of the loan or
new entity is often formed & advance/ accumulated profits
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Sr. Section Issue/Justification Suggestion
No
therefore, management is having regard to the
common. So the conditions of shareholding percentage of the
section 2(22) (e) are satisfied. It's concerned shareholder. This is
natural that the new entity will for the very simple reason that
borrow funds from existing entity a particular shareholder does
to meet its funding requirements & not have a right on the entire
will repay when it becomes self accumulated profits of the
sufficient. company & his right is
The provision u/s 2(22) (e) is restricted to his shareholding
based on the blanket assumption only.
that there is an attempt to avoid
tax & the bona fide assessee will
also get crushed under this.
Therefore, there is a strong need
to amend the provisions of this
section so that the genuine
assessee shall be relieved.
35. Section 3- In Income-tax Act, 1961 In line with the provision of
Definition of "Assessment Year" defined in section 320(92) read with
Previous year Section 2(9) "Assessment Year" section 2 of the Direct Taxes
means the period of twelve Code, 2013 the concept of
months commencing on the 1st "previous year" and
day of April every year. "assessment year" may be
"Previous Year" is defined in replaced with the "financial
Section 3 of the Income-tax Act, year" to mean as below:
1961 to mean "for the purpose of "financial year" as per Direct
this Act, "previous year" means Taxes Code,2013 means--
the financial year immediately (a) the period beginning with the
preceding the assessment year. date of setting up of a business
There is no difference in the and ending with the closure of
period of Assessm.ent Year & the business or the 31st day of
Previous Year since both are March following the date of
financial year/Income Year for setting up of such business,
accounting purpose. whichever is earlier;
A normal income tax assessee (b) the period beginning with
does not understand the the date on which a source of
difference of wording of income newly comes into
Assessment Year (AY) & Previous existence and ending with the
Year/ Accounting Year (AY) and closure of the business or the
gets confused in presenting his 31st day of March following the
details, while paying Advance date on which such new source
Pre-Budget Memorandum 2014 (Direct Taxes) Page 51
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
Income tax, TDS or filing the comes into existence,
return of income Tax. Everybody whichever is earlier;
considers Assessment Year (AY), (c) the period beginning with the
previous year (PY) and 1st day of the financial year and
Accounting Year (A Y) as same. ending with the date of
To avoid misunderstanding or discontinuance of the business
confusion among Income Tax or dissolution of the
payers (Assesses) and for unincorporated body or
keeping the records, the concept liquidation of the company, as
of "previous year" and the case may be;or
"assessment year" may be (d) the period of twelve months
replaced with the "financial year" commencing from the 1st day of
of "previous year". Even though, April of the relevant year in any
the said suggestion has been other case;
considered while framing the
Direct Taxes Code, to simplify the
law, it would be appropriate to
bring the change in the Income-
tax Act itself.
Page 52 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
CHAPTER II
BASIS OF CHARGE
Pre-Budget Memorandum 2014 (Direct Taxes) Page 53
The Institute of Chartered Accountants of India
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
36. Scope of a) Various retrospective It is suggested that
Royalty amendments with effect from 1st 1) Payments for
Income - June, 1976 were made to section copyrighted article like
Section 9(1)(vi) dealing with royalty shrink-wrapped software
9(1)(vi) of income.Internationally, as as also payments made
Income-tax evidenced by OECD Commentary by distributors of
Act, 1961 as also books of eminent experts, software be specifically
the following two basic principles excluded from the
with regard to software payment definition of "royalty".
are recognized and well settled:
2) Infact `Explanation 4'
i) The proposition that "right to inserted by the Finance
use a copyright" is different from Act, 2012 should be
"right to use a copyrighted article" deleted from Section
is recognized and it is only the 9(1)(vi):
`right to use a copyright' which is
Such an amendment to remove
covered within the definition of
the clarificatory retrospective
royalty.
amendment made by Finance
ii) The distributor of computer Act, 2012 would positively
software does not pay to exploit impact the sentiment of the
any rights in the software but only software industry and also
for acquisition of the software for uphold the constitutional
further circulation. In view of validity.
these, payments made by a
distributor to the copyrighter
holder are in the nature of
business income and not royalty
income.
Also, `Packaged /Canned
Software' means ready-made
software that could be sold off the
shelf. Sale of such software
products represent sale of
copyrighted articles as against a
copyright i.e. such transactions
represent sale of goods.
Packaged software has been held
to be `Goods' even by the
Supreme Court in case of TCS
vs. State of AP (271 ITR 401).
Pre-Budget Memorandum 2014 (Direct Taxes) Page 55
The Institute of Chartered Accountants of India
The Central Board of Excise and
Customs ("CBEC") has
recognized `Information
Technology Software' as `Goods'
and classified the same as
Central Excise Tariff Item 8523
80 20 in Schedule I to the Central
Excise Tariff Act, 1985. Further,
`Packaged Software/Canned
Software' is recognized as
`Goods' for the purposes of
Central Excise Law by the CBEC,
which is another wing of the
Ministry of Finance. These facts
lead to the conclusion that
`Packaged Software/Canned
Software' are in the nature of
`Goods' and the legislation also
recognizes the same.
Given the above, it is
recommended that a specific
amendment be made to the
Income tax Act to exclude
`Packaged/ Canned Software'
from the purview of `royalty'
defined under Section 9(1)(vi).
Further, in certain cases, these
software products are
downloadable from the internet
and not necessarily delivered in
tangible media such as a CD or a
DVD. However, irrespective of the
mode of delivery, the fact remains
that what is sold is a `copyrighted
article' and not a `copyright'.
b) Exclusion of packaged To bring utmost clarity, it is
software from applicability of also suggested that a
TDS under Section 194J of the specific amendment be
IT Act: made to Section 194J of the
Circular13/2006 dated 13.12 2006 IT Act to exclude sale of
issued by the CBDT states that software products from the
TDS shall be applicable only ambit of tax withholding. In
when there is a `contract for work' this regard, it is suggested
and not where there is a `contract that the following provision
Page 56 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
for sale'. This proposition has be included in Section 194J
also been upheld in various of the Act:
judicial precedents like BDA Amendment required
Limited vs. ITO (TDS) 281 ITR 99
"194J. (1) Any person, ...
(HC Bom), CIT vs. Dabur India
Limited (283 ITR 197) (HC Del). Provided that no deduction
shall be made under this
Considering the facts and
section--
arguments above, it is clear that
transaction of sale of (A) ...
`Packaged/Canned Software' is a (B) ...
`contract for sale' as against a (C) from any sums, if
"contract for work' and credited or paid for the
consequently, should not attract transfer of a computer
TDS provisions. It is relevant to software (including the
note that `Packaged/Canned granting of a licence),
Software' is also subject to excise along with or without a
duty. There are no other goods in computer or computer-
India which are subject to both based equipment or for
excise duty and TDS. ancillary services such
An amendment to the Income tax as up gradation or
Act to exclude `Packaged/Canned subscriptions, which
Software' from the purview of does not involve
`royalty' would automatically transfer of all or any
exclude the transactions from the rights in respect of any
purview of Section 194J of the IT copyright."
Act and would help resolve the
withholding tax issue faced by
traders of hardware with
embossed software. The
distribution network and channel
partners for off the shelf
packaged software also deal with
hardware like computers, desktop
etc. The packaged software is
mostly sold along with the
hardware, on the same invoice.
There is no obligation of TDS on
any hardware items, and the
traders are finding it confusing
and difficult to discharge the TDS
obligation arising out of the sale
of the `Packaged
Software/Canned Software'.
Resolution of the definition of
royalty to exclude `Packaged
Pre-Budget Memorandum 2014 (Direct Taxes) Page 57
The Institute of Chartered Accountants of India
Software/Canned Software' would
also help traders and boost ease
of business.
Separately, Software Ancillary
Services such as Upgrade Fees,
Subscriptions, etc. which do not
involve transfer of rights, or grant
of license but involve only
payments of consideration for
services is not `Royalty' for the
purposes of Section 194J read
with Section 9(1)(iv) Explanation
2 of the IT Act. Clarification may
be issued that AMC's, Upgrade
Fees, Subscriptions, etc. which
do not involve transfer of rights,
or grant of license, but involve
only payments of consideration
for services is not "Royalty" for
the purposes of Section 194J
read with Section 9(1)(iv)
Explanation 2 of the IT Act and
that such transaction are not
liable for TDS under Section 194J
of the IT Act.
37. Carry forward The Income-tax Act, 1961 It is suggested that assessees
of excess allows for set off in respect of be permitted to carry forward
foreign tax foreign taxes paid on overseas (say for five years) such
credit income. However, in case of unutilized credit (in USA such
loss/inadequate profits, no set relief is granted vide section
off may be possible. In the 904(c) of Federal Tax Act) for
current economic scenario of adjustment in future years.
the global economy, business (SUGGESTIONS FOR
outlook has become extremely RATIONALIZATION OF THE
uncertain and results have PROVISIONS OF DIRECT TAX
become very volatile. LAWS)
Page 58 Pre-Budget Memorandum 2014 (Direct Taxes)
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Chapter III
INCOMES WHICH DO NOT FORM PART OF
TOTAL INCOME
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The Institute of Chartered Accountants of India
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
38. Leave Travel As per the provisions of section To be in line with the concept of
Concession/ 10(5) of the Income-tax Act, "financial year" adopted by
Assistance - 1961, an exemption of the value other provisions of the Income
Replacement of leave Travel tax Act, it is suggested that the
of "Calendar Concession/Assistance received concept of calendar year should
year" by by the employee from his be replaced with financial year
"Financial employer is provided subject to (April March)
year": fulfillment of prescribed (SUGGESTIONS TO REDUCE /
conditions. Rule 2B provides for MINIMIZE LITIGATIONS)
the specified conditions to be
fulfilled. One of the conditions is
that the exemption can be
availed only in respect of two
journeys performed in a block of
four CALENDER YEARS.
The concept of "Calendar year"
was introduced in the year prior
to 1989 when there was no
uniform Previous Year. Since
1989 uniform Previous Year has
been introduced i.e. April
March. To be in line with the
concept of "financial year"
adopted by other provisions of
the Income tax Act, it is
suggested that the concept of
calendar year should be replaced
with financial year (April March)
i.e. the calculation of block period
shall be shifted from Calendar
year to Financial Year.
39. CER Sale to be Carbon credit is an incentive This credit should be treated as
treated as available to the Industries capital receipt free from any
Capital reducing CO2 emission by taxes. Alternatively, the amount
Receipt investing in energy efficient spent should be eligible for
technologies. In the present day deduction under section 10AA,
scenario, the cost of putting 80IA, 80IB, 80IC etc.
additional technology for clean (SUGGESTIONS FOR
development mechanism is RATIONALIZATION OF THE
Pre-Budget Memorandum 2014 (Direct Taxes) Page 61
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
relatively high. The incentive is PROVISIONS OF DIRECT TAX
given to relatively offset the LAWS)
additional cost of Investments in
such Capex. Further, this credit
can be viewed as an incentive,
which augments country`s
foreign exchange earnings.
40. Section Section 10(10D) provides for It is suggested:
10(10D) TDS in non-taxability of sum received (a) that a provision relating
respect of from maturity of insurance to TDS should be inserted in
maturity of policies. However, following are Chapter XVIIB to cover such
insurance some exceptions to this: payments where the exemption
policies which (a) any sum received under under section 10(10D) is denied
are taxable section 80DD(3) or to the recipient of income from
under section 80DDA(3)(Substitutedby section insurance companies.
10(10D) 80DD by Finance Act,2003)or (b) that where the premium
(b) any sum received under paid is above 10% or 20%, as the
Keyman Insurance Policy. case may be, of capital sum
(c) any sum received under an assured, the premium paid
insurance policy issued after certificate (receipt) issued by
01.04.2003, but on or before insurance companies for the
31.03.2012 in respect of which purpose of 80C should clearly
premium payable for any of the mention that the qualifying
years during the term of policy amount for 80C deduction in
exceed 20% of actual capital sum respect of such premium paid is
assured. only up to 10%/20% as the case
may be, of capital sum assured.
(d) any sum received under an
insurance policy issued on or (c) Instead of any sum
after 01.04.2012 in respect of received being made chargeable
which premium payable for any to income tax, only the sum,
of the years during the term of which is in excess of the
the policy exceeds 10% of the premium payments made by the
actual sum assured. insured to the insurer should be
considered as income exigible to
(e) any sum received under an
tax. Suitable clarifications may
insurance policy issued on or
be made accordingly.
after 01.04.2012 in respect of
which premium payable for any (SUGGESTION TO IMPROVE TAX
of the years during the term of COLLECTION)
the policy exceeds 15% of the
actual sum assured, in case the
policy is issued on or after
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Sr. Section Issue/Justification Suggestion
No
1.4.2013 for insurance of life of
the person referred to in section
80U and section 80DDB.
Any sum received by the
beneficiary on maturity of
insurance policies in above-
mentioned cases is taxable.
However, there are no provisions
under chapter XVIIB to deduct
tax at source from the sum being
paid to the beneficiaries in such
cases due to which many policy
holders getting maturity from
insurance companies without
payment of taxes.
41. Definition of Any sum received under a It is, therefore, suggested that in
"Keyman Keyman insurance policy is not cases where keyman insurance
Insurance exempt under section 10(10D). policy is assigned to the
Policy" - The meaning of "Keyman employee, the employer should
Section Insurance Policy" given in not be made liable to deduct tax
10(10D) Explanation 1 to section 10(10D) at source. The insurance
was amended by Finance Act, company may be vested with the
2013 to include such policy obligation to deduct tax at
which has been assigned to a source in respect of such
person at any time during the payments.
term of the policy, with or without (SUGGESTIONS FOR
consideration". This amendment RATIONALIZATION OF THE
is effective w.e.f. 1.4.2014 (i.e. PROVISIONS OF DIRECT TAX
A.Y.2014-15). LAWS)
The effect of this amendment is
to deny the benefit of exemption
in respect of maturity proceeds
of keyman insurance policy
which has been assigned to a
person during the term of the
policy, whether with or without
consideration, by including the
assigned policy within the
definition of "Keyman insurance
policy".
The issues under consideration
Pre-Budget Memorandum 2014 (Direct Taxes) Page 63
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
and suggestions thereof in this
regard are as follows
a) Consequent to the
amendment in the definition of
"Keyman insurance policy", the
maturity proceeds received by
the person to whom the policy is
assigned, becomes taxable as
"Profits in lieu of salary" under
section 17(3)(ii). Since any
salary due from an employer or a
former employer to an assessee
in the previous year, is
chargeable under section 15 and
the definition of salary under
section 17(1) includes "profits in
lieu of salary", it appears that the
employer or the former
employer, as the case may be,
would be required to deduct to
tax at source under section 192
at the time of payment. It is
practically difficult for the
employer or former employer to
deduct tax at source on payment
received by the employee
directly from the insurance
company.
b) Further, the entire b) It is suggested that section
proceeds would be subject to tax 17(3)(ii) may be appropriately
under section 17(3)(ii) in the amended to provide that tax
hands of the person to whom the would be levied only to the
policy is assigned, whereas only extent of such difference, or in
the premium paid by the the alternative, deduction for
employer on which deduction surrender value may be provided
has been claimed less the for under section 16. In such a
surrender value paid by the case, the employer can deduct
employee to the employer at the tax at source on the differential
time of assignment should be amount treated as "profit in lieu
subject to tax, since the same of salary" at the time of
represents the actual benefit assignment.
availed by the assignee. Further, in any case, the
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Sr. Section Issue/Justification Suggestion
No
maturity proceeds received on
death of the assignee should be
kept out of the tax net. This
benefit is similar to the
exemption given in respect of
life insurance policies, where the
annual premium paid exceeds
10% of minimum sum assured.
42. Section 10(13)- Section 10(10AA) provides for Section 10(13) may be amended
Payment from exemption for payment received to exempt commuted value
approved as cash equivalent of leave received by an employee from
superannuatio salary in respect of earned leave the superannuation corpus
n fund period at the time of retirement standing to his credit at the time
whether superannuation or of voluntary retirement, by
otherwise. including the words "or
Section 10(13) provides for otherwise" in line with section
exemption with regard to 10(10AA) of the Income tax Act,
payment from an approved 1961.
superannuation fund. Section (SUGGESTIONS FOR
10(13)(ii) of the Act provides for RATIONALIZATION OF THE
exemption in the hands of the PROVISIONS OF DIRECT TAX
employee in respect of the LAWS)
amount received on commutation
of the annuity in case of
retirement at or after a specified
age or becoming incapacitated
prior to such retirement. This
provision however does not
cover commutation of an annuity
paid on voluntary retirement of
the employee.
Section 10(10AA) as mentioned
above has taken care of such
case by using the terminology "or
otherwise". Since the intention of
the law makers is clear by the
wordings of section 10(10AA),
section 10(13)(ii) may be
appropriately amended to
include the words "or otherwise".
This will provide relief to genuine
taxpayers who are taking
voluntary retirement.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 65
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
43. Annual "Under section 10(23C)(iiiad) It is suggested that "Annual
receipts" and (iiiae) of Income-tax Act, it is Receipts" be clearly defined as
under section provided that the income of income of the hospitals/
10(23C) University/Educational educational institutions arising
institutions/hospitals/ other regularly/every year but
institutions specified therein will excluding value of donation
be exempt provided they comply received in kind by way movable
with the conditions stipulated assets, land,
therein. Also it is provided that hospitals/educational
"aggregate annual receipts" of equipment, sale consideration
such institutions shall not exceed received on disposal of land,
the amount of annual receipts as shares or other movable
may be prescribed. Though property, hospital/educational
annual receipts have been equipment etc.
prescribed as Rs.1 crore vide Further, it may be specifically
Rule 2BC of Income-tax Rules, provided that donations received
the word "annual receipts" have towards corpus by way of land,
not been defined in the Income- movable assets are excluded
tax Act. from computation of "Annual
It is not clear as to whether: Receipts" as prescribed under
(a) for computing "annual Rule 2BC of Income-tax Rules.
receipts" only the receipts of (SUGGESTIONS TO REDUCE /
such institutions from MINIMIZE LITIGATIONS)
educational/hospital
activities alone are to be
considered each year;
(b) Certain receipts of such
institutions that are not
received on annual basis
e.g. receipts from sale of
property, equity shares and
other proceeds on
divestment are to be
excluded from the
computation of "annual
receipts";
(c) In certain cases where such
charitable institutions
receive donations in kind in
the form of land, movable
assets etc. whether "annual
receipts" would exclude such
Page 66 Pre-Budget Memorandum 2014 (Direct Taxes)
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Sr. Section Issue/Justification Suggestion
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receipts since they are not
received annually.
44. Tax policy for The National Rural Health The provisions of Section
MGNREGA, Mission (NRHM) of the Ministry 10(23C) (iiiac) of the Income-tax
SSA, NRHM of Health & Family Welfare was Act, 1961 may be applicable to
launched on 12th April, 2005 by such societies for getting
the Government of India to exemption from levy of Income
improve medical facilities in rural Tax which are reproduced
areas in the country. The NRHM below:
seeks to provide accessible, "Any hospital or other
affordable and quality health institution for the reception and
care to the rural population, treatment of persons, suffering
particularly vulnerable sections. from illness or mental
NRHM aims to reduce the defectiveness or for the
Maternal Mortality Ratio (MMR), reception and treatment of
Infant Mortality Rate (IMR) and persons during convalescence
the Total Fertility Rate (TFR). It or of persons requiring medical
also envisages increasing public attention or rehabilitation,
spending on health from 0.9% to existing solely for philanthropic
2-3% of the GDP with improved purposes not for profit and
arrangements for community which is wholly or substantially
financing and risk pooling. The financed by the Government"
NRHM has provided an umbrella
As per the above provisions a
under which the existing
notification may be issued
Reproductive and Child Health
granting exemption to all the
Programme (RCH) and various
Societies registered at State &
National Disease Control
District level being funded by
Programmes (NDCPs) have
Govt. (Central/ State) otherwise
been incorporated.
a specific exemption should be
The Ministry of Health & Family provided to such societies w.e.f.
Welfare is implementing National the date of the formation of such
Rural Health Mission as a societies/ launching of the
Centrally Sponsored Scheme programme. This may not be
(CSS). As against a Central applicable not only for societies
Sector Scheme, a CSS is funded formed for implementation of
by the Govt. of India and Health Programme but also for
implemented by and in the other programmes such as
States. For the Scheme's Education & National Aids
implementation, the funds are Control Programmes, where also
routed as Grants-in-Aid from the the funds are routed through
Govt. of India to the State Health societies.
Societies and District Health
As per the existing provisions of
Societies/ Sub district
Section 12A of the Income Tax
Pre-Budget Memorandum 2014 (Direct Taxes) Page 67
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
formations. Act, 1961 each State and District
As per the existing provisions of Health Societies are eligible to
the Income-tax Act, 1961, all the get tax exemption if they comply
States and District Health the conditions and procedure as
Societies are required to get laid down under Section 12A &
themselves registered under 12AA of Act which provides of
`Section 12AA' and required to getting Registration of the
file the return of income. Further, Society and filling a regular
as per the provisions of the Income Tax Return as per the
Income-tax Act, 1961 each such provisions of the Income Tax
society should spend 85% of the Act.
grant received during the year Recently introduced section
within the same year and if the empowers the Central
unspent balance is more than Government to notify for 100%
15% of the grant received the exemption u/s 10(46) if covered
same becomes taxable. Under under the provisions of this
the NRHM, States/ Districts section and the SHS and DHS
when unable to utilise the entire falls under such category, it is
Grant within the year of receipt therefore suggested that
have to carry forward the same exemption be granted to all SHS
for the ensuing financial year(s). and DHS so that the same is
The NRHM programme is an made available to all at least
ongoing programme and funds from the current financial year
unspent are being utilised in so that from the Assessment
subsequent years, as absorptive Year 2012-12 these societies are
capacity increases. exempted from filling the Income
Taxing the unspent balances Tax Return or even if they are
therefore in effect reduces funds required to file the return they
available for implementation of can do so as per the directions
the Mission and is a retrograde to be given in the Notification.
measure adversely impacting the (SUGGESTION FOR REDUCE/
programme and expenditure in MINIMIZE LITIGATIONS)
such a critical social sector as
health.
Several representations have
been from State of Tamil Nadu,
Karnataka & Himachal Pradesh
requesting to get exemption to
the State & District Health
Societies from the levy of
Income-tax, as either they are
not getting registration u/s 12AA
of Income-tax Act, 1961 or if got
registered being tax imposed on
Page 68 Pre-Budget Memorandum 2014 (Direct Taxes)
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Sr. Section Issue/Justification Suggestion
No
the unspent balances.
45. Income-tax The securitization trust has so far Instead of distribution tax model,
exemption for been treated as a pass through a complete pass through model
securitization vehicle for tax purposes i.e. all identical to existing regime be
trusts, levy of the income of the securitization made applicable to Venture
distribution trust has been offered to tax by Capital Funds/Venture Capital
tax on income its investors (unless the investor Companies under section
distributed by is tax exempt viz., a mutual 10(23FB) read with section 115U,
such trusts fund). This is consistent with the since the participation in PTCs
under section tax rules that apply to trusts is largely restricted to well
10(23DA) under the tax law which regulated financial institutions.
prescribes a single level tax on a (SUGGESTIONS TO REDUCE /
trust's income (i.e. tax is levied MINIMIZE LITIGATIONS)
either on the trustee or on the
beneficiaries). The interest
income arising to such trusts
from securitized debts is taxed
directly in the hands of the
contributories.
The tax implications may be
summarized as follows:-
If contributory is a Mutual
Fund, it will be entitled to
exemption under section
10(23D).
Any other contributory can
claim deduction for
corresponding expenses
against such income (eg.
interest and overheads)
Contributories can claim
credit of TDS, if any, made
by the borrower
However, due to disputes
regarding the person on whom
tax incidence lies, tax demands
were raised on the securitization
trusts rather than the investors,
by treating such trusts as AOPs.
In order to set at rest such
controversies, the Finance Act
Pre-Budget Memorandum 2014 (Direct Taxes) Page 69
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
2013 :
Exempted the securitization
trust from tax on income
earned.
Imposed a distribution tax
on income distributions by
the securitization trust @
25% in case of distributions
to individuals and HUFs and
@ 30% in other cases.
Distribution tax will not be
payable on income
distributed by the
securitization trust to a
person in whose case
income, irrespective of its
nature and source, is not
chargeable to tax under the
Act (viz. mutual funds).
Exempted the investors in
the securitization trust from
taxation on income
distributions received.
The above mentioned provisions
have, however, created certain
problems or securitized
structures in vogue on account of
the following reasons:
(a) The exemption to the
investors in the
securitization trust means
that investors (other than
exempt investors such as
mutual funds) in pass
through certificates (PTCs)
will now earn exempt
income instead of taxable
income as was the case
hitherto. This implies that
the investors would not be
able to set-off expenditure/
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Sr. Section Issue/Justification Suggestion
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losses against income
earned from PTCs in view of
provisions of section 14A
which prohibits deduction of
any expenditure incurred in
relation to exempt income.
This may result in the entire
transaction becoming
unviable for investors, which
is illustrated below.
If the investor is a bank investing
Rs.100 crores in a Securitized
debt yielding interest @ 10% p.a.
Assuming, that the bank's own
cost of borrowing is say 8% p.a.,
its tax liability on interest income
from securitized debt pre and
post amendment and profit after
tax will be as follows :-
Particul Pre Post
ars amen amen
dmen dmen
t t
Interest (A) 10.00 10.00
income Cr Cr
@ 10%
on Rs.
100 Cr
distribut
ed by
Securiti
sed
Trust
Less: N.A. 3.00
Distribut cr
ion tax
paid by
the
trust@3
0% on
gross
Pre-Budget Memorandum 2014 (Direct Taxes) Page 71
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
income
Net 10.00 7.00
income Cr Cr
distribut
ed
Less :- (B) 8.00 8.00
Interest Cr Cr
expendit
ure @
8% on
Rs. 100
Cr
Net C= 2.00 (1.00)
income (A- Cr Cr
B)
Tax
payable
By (D) 0.60 -
Investor Cr2
@ 30%1
on net
income
Profit/(L (C- 1.40 (1.00)
oss) D) Cr Cr
after tax Not
allow
ed to
be
set-
off on
acco
unt of
sectio
n
14A.
The above illustration highlights
1
Surcharge and cess ignored for the sake of simplicity
2
30% of Rs. 2.00 Cr
Page 72 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
that a structure which was
commercially viable prior to
amendment made by Finance
Act, 2013 may have the effect of
becoming unviable solely due to
change in the basis of incidence
of taxation.
It may be noted that the financial
sector works on spread between
yield from investments and own
cost of borrowing. Tax on gross
income at a rate ordinarily
applicable to net income may
severely impact the spread and
make securitization structures
commercially unviable defeating
the object of SEBI and RBI
guidelines for orderly
development of securitization
market.
(a) The trading of PTCs (most
PTCs are tradable
instruments) also creates
dual points of taxation (i.e.
at the time of distribution of
income by the securitization
trusts and at the time of
realization of gain when the
PTC itself is sold for a
profit) which seems to be
unintended.
(b) Ambiguity also arises for the
borrower while evaluating
withholding obligation at the
time of payment of interest.
Since the securitization trust
is assessable as a separate
tax entity and not a mutual
fund or bank exempt from
withholding, the borrower
will be required to withhold
tax unless the trust provides
Pre-Budget Memorandum 2014 (Direct Taxes) Page 73
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
NIL withholding certificates.
The securitization trust will
be required to file return to
claim refund of such TDS.
The securitization trust is
able to set off TDS credit
against distribution tax
payable by it.
(c) There is no grandfathering
provided for existing
securitized trusts. Hence,
any income distributed by
existing securitized trusts
on or after 1 June 2013 will
also be subject to the new
tax regime.
46. Section a) The Finance Act, 2012 (a) The pass-through status
10(23FB) Tax provided an exemption to may be extended atleast, to
exemption for venture capital funds (VCFs) with cover all sub-categories of
Alternative a corresponding direct tax Category I AIFs (i.e. not only
Investment charge on the investors on the to venture capital funds but
Funds income earned by the fund from also to SME Funds, social
Venture its investments. The VCF venture funds, infrastructure
Capital Funds Regulations were repealed on 21 funds), in line with the
May, 2012 with the simultaneous assurance held out explicitly
introduction of the SEBI by AIF Regulations.
(Alternative Investment Funds) (b) From a long-term
Regulations 2012 (AIF perspective, it is best to
Regulations). Funds raised maintain an alignment of the
under the VCF Regulations were tax laws and the AIF
resultantly grandfathered. Regulations to mitigate the
AIF Regulations now regulate all need to constantly update
privately pooled investment the tax law for changes in
vehicles which collect funds from Regulations so as to not
investors for investments in artificially stifle the AIFs.
accordance with a predefined In fact, the Finance Act, 2012
investment policy for the benefit had removed the sectoral
of its investors. AIF Regulations restrictions imposed on VCUs by
cover a much broader ambit of the Income-tax Act, 1961 on the
funds and categorize them into ground that since SEBI
broadly three categories: regulates the working of VCF,
Page 74 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
Category I AIF these are funds VCC & VCU, there is no
which invest in start-up or early necessity of having separate
stage ventures or social ventures conditions under the Income-tax
or SMEs or infrastructure or other Act, 1961 imposing sectoral
sectors or areas which the restrictions on the VCUs.
government or regulators Therefore, multiplicity of
consider as socially or conditions in different
economically desirable. regulations in respect of the
Category I AIF presently has 4 same entities should be avoided.
sub-categories, namely, venture Hence, additional conditions
capital funds, SME Funds, social should not be imposed under the
venture funds and infrastructure Income-tax Act, 1961 to qualify
funds. Investment norms have for tax benefit.
been prescribed for each of the (c) As regards condition of
sub-categories to ensure that the disqualification on account
fund allocates substantial of investment in associate
majority of its capital to the VCU, it is suggested that
target focus. The stated intent of disqualification from pass
Category I AIF is to cover AIFs through status may be
that are generally perceived to restricted to income arising
have positive spillover effects on from associate VCU only.
economy and for which the SEBI/ Further, to remove any
Government/ other regulators ambiguity, it may also be
might consider providing clarified that if breach of any
incentives or concessions. The condition is subsequently
Explanation to Regulation 3(4)(a) rectified, the pass through
of AIF Regulations which status may be restored.
clarified this aspect also clarified
(SUGGESTIONS FOR
that such funds which are formed
RATIONALIZATION OF THE
as trusts or companies shall be
PROVISIONS OF DIRECT TAX
construed as VCF/VCC as
LAWS)
specified under section 10(23FB)
of the Act. The said Explanation
is reproduced below:
"Explanation. For the purpose
of this clause, Alternative
Investment Funds which are
generally perceived to have
positive spillover effects on
economy and for which the
Board or Government of India or
other regulators in India might
Pre-Budget Memorandum 2014 (Direct Taxes) Page 75
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
consider providing incentives or
concessions shall be included
and such funds which are formed
as trusts or companies shall be
construed as venture capital
company or venture capital fund
as specified under sub-section
(23FB) of Section 10 of the
Income-tax Act, 1961"
Category II AIF is a residual
category and covers AIFs for
which no specific incentives or
concessions are given by the
Government/ other regulators.
Category II AIF will cover classic
private equity funds and debt
funds.
Category III AIFs are AIFs which
employ diverse or complex
trading strategies and may
employ leverage including
through investment in listed or
unlisted derivatives. Category III
AIF will cover hedge funds or
funds which trade with a view to
make short term returns. Similar
to Category II AIF, no specific
incentives or concessions are
given by the Government/ other
regulators.
The AIF Regulations provide that
Category I AIF which are formed
as trust/ company shall be
construed as venture capital
company/ venture capital fund
under s. 10(23FB) of the Act (and
will hence be eligible for the
basis of taxation described above
ie direct tax charge on the
investors).
The Finance Act, 2013 had
granted tax exemption and
Page 76 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
corresponding direct tax charge
on the investors to only the
Venture Capital Fund sub-
category of Category I AIFs.
Further, three conditions have
been imposed on AIFs in order
to be covered within the ambit of
section 10(23FB), namely:
(i) The units/shares of the AIF
should not be listed on a
recognised stock
exchange.
(ii) The AIF should not have
invested in associated
companies as defined.
(iii) The AIF should have
invested not less than
2/3rd of its investible funds
in unlisted equity
shares/equity linked
instruments of domestic
unlisted companies.
The first two of the above
conditions are imposed only in
the tax law (listing of AIFs is
permitted under the AIF
Regulations after the final close
of the fund subject to conditions
and investment in associated
companies is permitted subject
to obtaining a majority investor
consent).
The tax implications on account
of this amendment is as
follows
(a) VCCs/VCFs registered prior
to 21st May 2012 under VCF
regulations is impacted by
the proposed amendment.
They continue to be eligible
for pass through taxation
Pre-Budget Memorandum 2014 (Direct Taxes) Page 77
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
under section 115U.
(b) The impact on AIFs
registered on or after 21st
May 2012 under AIF
Regulations is summarized
as follows :-
Ca Sub- Tax status in
teg catego an event AIF is
ory ries registered on
which or after 21 May
qualify 2012
for
pass
throug
h
status
I VCF Will qualify as
being VCC/VCF
trust or under
compa s.10(23FB) but,
ny subject to
compliance of 3
additional
conditions viz.,
VCC/VCF
should remain
unlisted
Should invest >
2/3rd investible
funds in
unlisted equity
shares/equity
linked
instruments of
VCUs
Should not
invest in
associate VCU
I SME Will not qualify
Fund as (and, will
Page 78 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
Social cease to be)
Venture VCC/VCF
Fund under
Infrastr s.10(23FB) and
ucture consequently
Fund will not be
eligible for pass
through
taxation despite
being identified
as socially
desirable
having positive
spillover effects
on the economy
and eligible for
other
concessions
from
Government/SE
BI
Will be
governed by
normal rules of
taxation as
applicable to
relevant nature
of entity
II Generally Will not qualify
includes as VCC/VCF
Private under
equity s.10(23FB)
and debt
funds
III Generally
includes
hedge
funds
(c) Even for new VCCs/VCFs
which are registered under
AIF Regulations,
Pre-Budget Memorandum 2014 (Direct Taxes) Page 79
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
compliance with three
additional tax conditions
referred earlier is necessary
to be eligible for pass
through taxation. In case of
breach of any of the
conditions, VCC/VCF will be
governed normal rules of
taxation as applicable for
ordinary company or trust. A
clarification is required as to
whether tax status of
VCC/VCF will be restored if
the breach is subsequently
rectified.
(d) Another concern on account
of the proposed provisions
is that if a VCC/VCF makes
an investment in one
associate VCU, would it
lose its pass-through status
despite the fact that all
other VCUs in which it has
invested are not its
associates.
(e) When normal rules of
taxation are applied as a
consequence of
disqualification from pass
through taxation, issues
such as double taxation
and/or levy of DDT and/or
applicability of withholding
may arise due to
interposition of VCC/VCF
between VCU and investor.
b) Earlier under Section It is suggested that section
10(23FB) of Income-tax Act, any 10(23FB) be reworded as
income of a Venture Capital follows:
Company (VCC) or Venture "Any income of a venture
Capital Fund (VCF) set up to
capital company or venture
raise funds for investment was
Page 80 Pre-Budget Memorandum 2014 (Direct Taxes)
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Sr. Section Issue/Justification Suggestion
No
exempt from taxation. However, capital fund from investment
in 2007, this was amended and set up to raise funds for
the scope of VCC / VCF was investment in a venture
narrowed down to select sectors capital undertaking."
and the exemption from income
(SUGGESTIONS FOR
tax was limited to "any income of
RATIONALIZATION OF THE
a VC company or VC fund from
PROVISIONS OF DIRECT TAX
investment in a venture capital
LAWS)
undertaking".
The sectoral restriction stands
removed in Union Budget 2012
which was a welcome move.
However, the tax exemption still
remains limited to "any income of
a VC company or VC fund from
investment in a venture capital
undertaking". Keeping in mind
the growing importance of VC
funds in infrastructure and also in
other important sectors of our
economy, the previous wording
of "set up to raise funds for
investment" needs to be restored
in place of "from investment"
under Section 10(23FB).
A change in the wording from
"any income of a VC company or
VC fund from investment" to "any
income of a VC company or VC
fund set up to raise funds for
investment" will enable the VCC /
VCF to undertake analysis /
study necessary to evaluate the
project viability as well as to
render other services for the
projects in which investments are
made. Restricting the wording to
"any income of a VC company or
VC fund from investment"
severely restricts the tax
exemption thus affecting the
commercial viability of the VCC /
VCF.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 81
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
47. Section 10(26) Section 10(26) which provides Considering the development of
Exemption to exemption to the members of the areas mentioned in section
Scheduled Scheduled Tribes residing in 10(26), it is suggested that the
Tribes in specified areas was introduced in exemption provided be
specified the year 1974. This exemption withdrawn gradually withdrawn.
areas time for was basically provided for the Section 10(26) may be amended
removal development of persons residing to provide that only members
in backward areas and to enable having income up to, say Rs 20
them to have more disposable lakhs, are exempt from taxation.
income in their hands. In current
scenario, even these areas have
been developed and people
residing therein have high
disposable incomes. It is thus
suggested that this exemption be
gradually withdrawn.
48. Income of At present income of minors It is suggested that this should
minors - to included in the hands of parents be raised to at least Rs.10,000/-
increase is exempt to the extent of for each minor child.
exemption Rs.1,500/- for each minor. The (SUGGESTIONS FOR
limits under average expenditure to meet RATIONALIZATION OF THE
section 10(32) cost of a minor's PROVISIONS OF DIRECT TAX
education/health/living expenses LAWS)
which has gone up considerably
in recent years, limit of
Rs.1,500/- fixed is woefully
inadequate.
49. Section 10B Earlier section 10B provided for Explanation 2(iv) should be
Exemption to special provisions in respect of suitably amended to grant 100%
newly newly established 100% Export EOU status to STPI registered
established Oriented Units. The exemption unit.
100% EOUs provided was limited to 90% of (SUGGESTIONS TO REDUCE/
should be such profits and gains as is MINIMIZE LITIGATIONS)
extended to derived from export of articles or
STPIs things or computer software for a
registered period of 10 consecutive
units assessment years. Although
exemption under this section is
not available wef AY 2012-13,
there is a major issue on what is
100% EOU.
Page 82 Pre-Budget Memorandum 2014 (Direct Taxes)
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Sr. Section Issue/Justification Suggestion
No
Clause (iv) of explanation 2
which defines 100% EOU is as
follows:
"hundred per cent export-
oriented undertaking" means
an undertaking which has been
approved as a hundred per cent
export-oriented undertaking by
the Board appointed in this
behalf by the Central
Government in exercise of the
powers conferred by section 14
of the Industries (Development
and Regulation) Act, 1951 (65 of
1951), and the rules made under
that Act.
No Board has been appointed
under this section till now.
Instead of Board, Ministry of
Information technology and
communications of Central
government has appointed
Software Technology Park of
India to license 100% to claim
deduction u/s 10B. This has
created unnecessary litigation
between assessee and
department. A sword is hanging
on all STPI registered
undertakings who have claimed
deduction u/s 10B. . An
amendment in this regard will
avoid harassment to software
companies who have claimed
section 10B deduction by using
STPI approval.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 83
The Institute of Chartered Accountants of India
Page 84 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
CHAPTER IV
COMPUTATION OF TOTAL INCOME
Pre-Budget Memorandum 2014 (Direct Taxes) Page 85
The Institute of Chartered Accountants of India
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
50. Disallowance of As per the existing provisions of It is suggested that:
expenditure section 14A of the Act, no a) Only those expenses which
incurred in deduction shall be allowed in are directly related to
relation to respect of expenditure incurred by earning of exempt income
income not a taxpayer in relation to income shall be disallowed.
includible in which does not form part of the
b) Further, the overall
total income total income under the Act.
maximum limit of expense
under section Further, Section 14A of the Act
to be disallowed should not
14A of the Act: states that the provisions of this
exceed the tax payable on
section shall also apply in cases
exempted income earned.
where an assessee claims that no
expenditure has been incurred by c) Overall maximum limit of
him in relation to income which expense to be disallowed in
does not form part of the total case of dividend income
income under this Act. earned from holding
strategic investment in
In this regard, a method has been
group companies shall be
prescribed under rule 8D of the
capped.
Income-tax Rules, to calculate the
amount of disallowance for the (SUGGESTIONS FOR
purpose of section 14A of the Act. REMOVING ADMINISTRATIVE
As per the prescribed method in AND PROCEDURAL
rule 8D, the disallowance for the DIFFICULTIES RELATING TO
purpose of section 14A is DIRECT TAXES)
aggregate of the following:
a) Amount of expenditure
directly relating to exempted
income.
b) Amount of interest expenses
not directly attributable to
any particular income- in the
proportion of average value
of investments (whose
income is exempt) to
average of total assets.
c) Half percent of average
value of investments (which
generate exempt income)
Rule 8D has created genuine
hardships for tax payers, as the
Pre-Budget Memorandum 2014 (Direct Taxes) Page 87
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
calculation basis under rule 8D is
arbitrary. In many cases, the
disallowance calculated as per
rule 8D method exceeds the
amount of total exempted income
earned during the year.
This is because of the following
reasons:
Firstly, the interest expense,
which does not form part of
exempted income, is
disallowed.
Secondly, while working out
half percent of the average
investments, all the
investments in shares/mutual
funds are considered.
Thirdly, this method does not
demarcate between
investments that have
generated or not generated
income during the year.
Lastly, no distinction has
been made for companies
earning dividend income due
to holding strategic
investments in group
companies and very little
expenditure is attributable to
earn such dividend income.
Page 88 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
PART A-SALARIES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
51. Deduction to As per the prevalent norm, the It is suggested that said
salaried employees are required to serve anomaly may be resolved and
assesses- notice within the stipulated time appropriate provisions be
Payment for before leaving the organisation. inserted so that income from
notice period The notice period, however, notice period pay is
varies from organisation to chargeable in the hands of ex-
organisation. For example, in an employer and deduction of the
organisation the notice period amount of notice period pay
may be 90 days or an employee paid be made available to the
has to pay 90 days salary amount employee as he has not
to the organisation as an effectively received that
employee may get a better job income.
opportunity in another (SUGGESTIONS FOR
organisation wherein he is RATIONALIZATION OF THE
required to join within 30 days. PROVISIONS OF DIRECT TAX
Accordingly the employee has to LAWS)
give 30 days notice in old
organisation, and pay for short
notice of 60days.
Generally the contract of service
also provides that in case the
employer is not satisfied with the
performance of the employee he
may terminate his services by
giving a notice of 30 days or 30
days salary. In case the employer
suspends the employee with
immediate effect he pays an
amount equivalent to 30 days
salary and claims deduction
thereof. Such amount becomes
taxable in the hands of the
employee. However, in case the
employee is required to pay
notice period salary, no deduction
of such amount paid is allowed to
him. If the new employer agrees
to bear the brunt of notice period
Pre-Budget Memorandum 2014 (Direct Taxes) Page 89
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
pay, say of 60 days in above
example, the said amount will be
included in the total income of the
employee and tax will be
deducted thereon even if such
income belonged to the ex-
employer and is taxable in his
hands. Thus, in effect the
assessee will be liable to pay tax
on 14 months salary i.e. salary for
more than 12 months without any
deduction available to him.
52. Deduction for Grant of Employee Stock Option is Necessary amendment may be
Employee one of the accepted and widely made in Income-tax Act or
Stock Option followed practices for circular should be issued by the
Cost remunerating the employees. CBDT to allow deduction for
Detailed guidelines have been ESOP cost being employee
prescribed by SEBI in this regard. remuneration cost.
Further, the SEBI guidelines and (SUGGESTIONS FOR
Accounting Standards, provides RATIONALIZATION OF THE
for accounting of difference PROVISIONS OF DIRECT TAX
between option price and market LAWS)
value of security of the date of
grant as employee remuneration
cost. Under Income-tax Act,
difference between the fair market
value of shares and exercise price
is treated as income in the hands
of the employees. Recently, Delhi
Tribunal in the case of Ranbaxy
(39 SOT 17) has taken a view that
ESOP cost is not allowable as
deduction. Thus, the situation is
that for levy of tax on employee,
ESOP is income but the same is
not allowed as deduction in the
hands of the employer company. .
Page 90 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
53. Medical Under section 17 of the Income- It is suggested that the
reimbursements tax Act, medical reimbursements provisions of section 17 be
for retired to employees are exempted from amended to include retired
employees: tax up to Rs.15,000 per annum. employees for the tax benefit
Further, the expenditure incurred on medical reimbursements /
by the employer for the medical hospitalization expenditure in
treatment of the employees and approved hospitals.
his family in approved hospitals is (SUGGESTIONS FOR
also not treated as a perquisite in RATIONALIZATION OF THE
the hands of the employee. PROVISIONS OF DIRECT TAX
However, this tax benefit is not LAWS)
available to retired employees.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 91
The Institute of Chartered Accountants of India
PART C-INCOME FROM HOUSE PROPERTY
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
54. Deduction u/s a) Section 25B provides that the Section 25AA be suitably
24(a) of the arrears of rent received after amended to provide that
Income-tax allowing a deduction of 30% will unrealised rent subsequently
Act, 1961: be taxable as Income from House realised shall after deducting a
property. Further, section 25AA sum equal to thirty percent of
also provides for taxation of such amount shall be deemed
unrealised rent subsequently to be income chargeable under
charged to income-tax. Even the head "Income from House
though the nature of income being property"
charged to tax in both cases is (SUGGESTIONS FOR
similar, the deduction of 30% is RATIONALIZATION OF THE
not allowed in case of unrealised PROVISIONS OF DIRECT TAX
rent subsequently received. It LAWS)
may be noted that had the rent
been realised earlier in normal
course deduction of 30% would
have been allowed under section
24(a). This discrimination seems
to be inadvertent omission and
thus needs rectification.
b) Huge lease rent is generally Considering the cost involved
paid if the land is taken on lease in payment of lease rents, it is
and the building is constructed by suggested that ground rent
the assessee. However, section shall be allowed as separate
24 of the Income-tax Act, 1961 deduction while computing
does not provide any deduction income under the head "Income
from income from house property from House property".
for an amount so paid by the (SUGGESTIONS FOR
assessee. RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
Deduction for At present, there is no provision It is suggested that ground rent
55.
ground rent for allowing deduction towards shall be allowed as deduction in
other than u/s ground rent paid in computation of addition to section 24(a)
24(a) income from house property & the
(SUGGESTIONS FOR
same has been merged into
Page 92 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
24(a).Ground rent shall be RATIONALIZATION OF THE
allowed as deduction in addition PROVISIONS OF THE INCOME-
to section 24(a) deduction since TAX ACT)
24(a) mainly focuses on repairs &
maintenance. The logic behind
this suggestion is that the repairs
by way of 30% standard deduction
cannot accommodate a huge
lease rent which may have to be
paid if the land is taken on lease &
building is constructed by the
assessee.
Interest on Keeping in mind the prices of the Therefore, it is suggested that
56.
borrowed house properties and also the the deduction in respect of
Capital : rate of interest on housing loan, it interest on housing loan in case
is felt that the deduction under of self occupied property
section 24(b) in respect of should be increased from Rs.
Interest on borrowed capital for 1.5 Lakhs to Rs. 3 Lakhs
self-occupied property is very
(SUGGESTIONS FOR
less.
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
Pre-Budget Memorandum 2014 (Direct Taxes) Page 93
The Institute of Chartered Accountants of India
PART D-PROFIT AND GAINS OF BUSINESS AND
PROFESSION
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
57. a) Depreciation Books are very important tools In view of the above, it is
on books used used by professionals to carry on suggested that the
by professionals their profession. Though depreciation on books
expenditure on purchase of purchased by professionals be
books is no doubt capital in restored to its original rate of
nature, the books purchased by 100 per cent
professionals' have a very short (SUGGESTIONS FOR
shelf life of around a year or RATIONALIZATION OF THE
sometimes even less, due to the PROVISIONS OF DIRECT TAX
fast pace of developments in LAWS)
their respective fields, be it
medicine or engineering or law or
accountancy. Depreciation was
always allowed on books at 100
per cent till 1st April, 2003, from
which date, by the amendment to
Appendix I to the Income-tax
Rules, 1962, the rate of
depreciation has been reduced to
60 per cent for books not being
annual publications. This has
created numerous difficulties and
hardship for professionals who
need to capitalize each and
every book purchased by them
though its value may not be very
significant. It has resulted in
additional book-keeping for these
professionals. Also, the revenue
does not gain from such an
amendment as the expenditure
on books by professionals would
not be material.
b) Section 32 - The proviso to section 32 a) Section 32 may be
Depreciation in provides that the aggregate amended to clarify the
Page 94 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
case of slump deduction, in respect of legal position as to
sale depreciation of buildings, whether depreciation can
machinery, plant or furniture, be claimed on the basis of
being tangible assets or know- proportionate number of
how, patents, copyrights, days by the transferor and
trademarks, licenses, franchises the transferee company in
or any other business or case of slump sale also
commercial rights of similar considering the proviso to
nature, being intangible assets section 32 read with
allowable to the predecessor and section 170 of the Act.
the successor in the case of b) Due to practical and
succession referred to in clause administrative difficulties,
(xiii) and clause (xiv) of section there may be a time gap
47 or section 170 or to the between holding of the
amalgamating company and the asset and using the asset
amalgamated company in the so transferred. To avoid
case of amalgamation, or to the genuine difficulties in such
de-merged company and the cases, instead of the
resulting company in the case of words, "used by them", the
de-merger, as the case may be, words "held by them" may
shall not exceed in any previous be substituted in the
year the deduction calculated at proviso to section 32.
the prescribed rates as if the
(SUGGESTIONS TO REDUCE /
succession or the amalgamation
MINIMIZE LITIGATIONS)
or the de-merger, as the case
may be, had not taken place, and
such deduction shall be
apportioned between the
predecessor and the successor,
or the amalgamating company
and the amalgamated company,
or the de-merged company and
the resulting company, as the
case may be, in the ratio of the
number of days for which the
assets were used by them.
The following issues may be
considered for appropriate
amendment in the law :
a) An issue arises whether
depreciation can be
claimed on the basis of
Pre-Budget Memorandum 2014 (Direct Taxes) Page 95
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
proportionate number of
days by the transferor
and the transferee
company in case of
slump sale considering
the proviso to section 32
read with section 170 of
the Act.
b) As per the current
provisions of proviso to
section 32 the
depreciation can be
claimed on the basis of
proportionate number of
days for which the
assets were used by the
predecessor and the
successor, or the
amalgamating company
and the amalgamated
company, or the de-
merged company and
the resulting company,
as the case may be.
Due to practical and
administrative
difficulties, there may be
a time gap between
holding of the asset and
using the asset so
transferred. To avoid
genuine difficulties in
such cases, instead of
the words, "used by
them", the words "held
by them" may be
substituted in the proviso
to section 32.
c) Incentive for Presently, the whole country is It is suggested that an
installation of confronted with the problem of incentive may be given in the
Solar Power power cut. In order to curb this Income-tax Act, 1961 for
generating problem, solar power generating installation of solar power
Page 96 Pre-Budget Memorandum 2014 (Direct Taxes)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
devices devices may be installed, the generating device. In other
cost of which is also affordable. words, 100% depreciation may
An incentive provided by the be allowed to Companies in
Income-tax Act for installation of respect of installation of such
such devices would motivate devices. A deduction of the
people to take initiative and amount so invested may also
would in turn enable the be given to Individuals and
Government to tackle the power HUFs who install such devices
problem effectively. including salaried class.
(SUGGESTIONS FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
d) Depreciation As per the provisions of the In order to avoid unnecessary
on "Oil Well" Income-tax Act, the "oil well" is litigations, it is suggested that
considered as a "Building" and necessary amendment be
not Plant and machinery and made in the Income tax Act to
depreciation is accordingly, classify oil well as a plant and
allowed at rate of 10%. machinery.
In the exploration of Oil and Gas, (SUGGESTIONS TO REDUCE /
drilling of oil is a major activity MINIMIZE LITIGATIONS)
and Oil well is a key "Plant and
machinery" for Oil and gas
exploration. Since, the inclusive
definition provided in the notes
forming part of Appendix-I "Table
of rates at which depreciation is
admissible" provides that
"building" includes roads,
bridges, wells and tubewells, the
Oil wells are also being given a
treatment of a "building" rather
than a "plant and machinery".
There is a vast difference
between a normal well and an `oil
well'. As it is understood in
common paralance, well is a
hollow made to hols and
preserve the water and it is lined
by bricks and cement. However,
an oil well is significantly different
Pre-Budget Memorandum 2014 (Direct Taxes) Page 97
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
and more scientific and serves
larger purpose than a water or
tube well. Oil wells are not
normal wells since development
of the same requires special
equipment and knowledge skill.
An oil well is made up of various
machineries and cememting is
just the process to strengthen the
structure of such well and
therefore, oil wells cannot be
considered as a building.
It may be noted that a special
rate of depreciation @60% is
available for mineral oil concerns
in clause 8(xii) of the aforesaid
appendix as depreciation on
"plant and machinery". Since the
intention of the lawmakers is to
promote oil industry, it is felt that
the definition of "building" is
being misinterpreted to include
"oil wells" .
58. Additional With a view to give a boost to the It is suggested that an express
Depreciation u/s manufacturing sector, the provision may be incorporated
32(1)(iia) Finance Act, 2002 allowed a in the Act for the allowance of
deduction of a further sum equal the remaining 10% additional
to fifteen per cent of the actual depreciation in the next year
cost of such machinery or plant so that a number of litigations
acquired and installed after a may be avoided.
specified date in the case of a (SUGGESTIONS TO REDUCE /
new industrial undertaking in the MINIMIZE LITIGATIONS)
previous year in which it begins
to manufacture or produce any
article or thing or in the case of
an existing industrial undertaking
in the previous year in which it
achieves substantial expansion
by way of increase in the
installed capacity by not less than
twenty five per cent.
Page 98 Pre-Budget Memorandum 2014 (Direct Taxes)
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Sr. Section Issue/Justification Suggestion
No
In order to give a thrust to
investment in manufacturing
sector, the limit for increase in
installed capacity was reduced
from 25% to 10% by the Finance
Act (No.2),2004.
Further, in order to encourage
new investment, the Finance Act,
2005 increased the initial
depreciation on new machinery
and plant to 20 per cent. from 15
per cent. The requirement of
creating a minimum increase of
10 per cent. in installed capacity
for availing the initial depreciation
was also eliminated. This
amendment accordingly, applied
in relation to assessment year
2006-07 and subsequent years.
From all the above amendments,
the intention of the lawmakers
was clear i.e. encouraging the
investment in the business of
manufacture or production of any
article or thing. The Finance Act,
2013 further extended the benefit
of this section to the business of
generation or generation and
distribution of power.
As mentioned above additional
depreciation under section
32(1)(iia) is admissible @ 20% on
the cost of the new investments.
However, the same is reduced to
10% in case of additions which
are used for less than 180 days
in the year of acquisition. There
is no express provision for the
allowance of the remaining 10%
in the next year.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 99
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
As mentioned earlier, section
32(1)(iia) was introduced in the
Act with a specific purpose /
object of providing relief to
assessees who make investment
in the new plant and machinery.
The section therefore has to be
interpreted keeping in view the
intent and purpose for which it
was introduced. It is a cardinal
rule of interpretation that a
beneficial provision should be
given a liberal and purposive
interpretation so as to fulfill the
object of the legislation and
comply with the legislative intent.
The Delhi Bench of the Tribunal
in the case of DCIT v/s. Cosmo
Films Ltd. [ITA No
2831/Del/2007] inter-alia had
examined the provisions of
section 32(1) as to whether the
balance additional depreciation
under section 32(1)(iia) can be
claimed in the succeeding year.
The Tribunal held in favour of the
assessee and allowed the claim
of the balance additional
depreciation in the subsequent
year to the assessee. It observed
that this provision has been
directed towards encouraging
industrialization by allowing
additional benefit to the tax
payers setting up new industrial
undertakings/making more
investment in capital goods.
Thus, these are incentives aimed
to boost new investments in
setting up and expanding the
units.
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Sr. Section Issue/Justification Suggestion
No
59. Section 35(1)(ii) In case of assessees having Deduction at an enhanced
and 35(1)(iii)- `Income from Business or percentage be provided in
Removal of Profession', donations to the section 80GGA to all
discrimination institutions approved u/s 35(1)(ii) assessees in line with
u/s 80GGA and 35(1)(iii) are eligible for deduction provided in section
deduction @ 175% of the amount 35(1)(ii) and 35(1)(iii) which is
of donation. However, in case of available to an assessee
assessees not having `Income having income from business
from Business or Profession', or profession.
donations to the institutions (SUGGESTIONS FOR
approved u/s 35(1)(ii) and RATIONALIZATION OF THE
35(1)(iii) are eligible for PROVISIONS OF DIRECT TAX
deduction under section 80GGA LAWS)
@100% of the amount of
donation only.
In fact, this mistake crept in at
the time of amendment of
Section 35(1)(ii) and (iii) w.e.f. 1-
4-2000 without corresponding
and simultaneous amendment in
section 80GGA. This was an
inadvertent omission which
needs to be rectified by making
the necessary amendment in
Section 80GGA so as to allow an
enhanced deduction to other
assessees also. In fact, other
assessees who do not have
Business/ Professional income
deserve to be encouraged more
to invest for such purposes.
60. Deductibility of The Income-tax Act provides for A clear policy on what
R&D a weighted deduction of 200% of constitutes R&D activities in
expenditure the expenditure incurred on the software product industry
incurred by scientific research on in-house to be issued to DSIR. Attached
software research and development facility is a document which defines
development on obtaining an approval from the R&D in a software product
companies Department of Scientific and industry, which may be
under Industrial Research ("DSIR"). To considered. In line with the
Section 35(2AB) be eligible for such deduction, the attached document, it is
Companies should be engaged in suggested that R&D in the
the activity of manufacturing or software product industry be
Pre-Budget Memorandum 2014 (Direct Taxes) Page 101
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
producing an article/ thing. notified / clarified
While it is fairly arguable that (Annexure II)
development of software
products qualifies as 'production'
of article or thing, there is no
clarity in the Income tax Act.
While a few software product
development company have been
recognised by DSIR, there have
been reservations in granting
approval due to ambiguity of R&D
in software development
61. Expenditure on Section 35AD was introduced It is suggested that following
Specified with effect from A.Y. 2010-11 to businesses are required to be
Business under switch over from profit linked covered under this provision
section 35AD incentives to investment linked and to achieve this, the
incentives under the following sub-clauses be
Income-tax Act, 1961 as the added after sub-clause (viii) of
profit based incentives were clause (c) of sub-section (8) of
distorting the tax base. section 35AD:
Investment based incentives do "(ix) Power generation and
not put the Government in a Distribution
disadvantageous position as
(x) Petroleum & petrochemicals
these incentives only postpone
the payment of taxes and give (xi) Steel
relief to the tax payers in the (xii)Cement
initial years by granting deduction (Xiii) Port Facilities
for the CAPEX which would have (Xiv) Telecommunication and
been otherwise allowed by way of allied services"
depreciation over a longer period.
Granting of section 35AD
Accelerated deductions @150% benefit to the aforesaid sectors
were allowed under Section will ensure rapid development
35AD of the Income-tax Act for of infrastructure across the
specified core businesses with country, creation of
effect from A.Y. 2010-11 with a employment opportunities and
view to creating rural easy flow of foreign funds for
infrastructure. This incentive the debt ridden sectors.
should be provided to other core Considering the need for
businesses as well, which are greater penetration and
essential for the growth of the infrastructure development in
economy. Apart from the new such areas enhanced rate of
entities incurring expenditure,
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
even existing entities incurring deduction (1.5 times) under
capital expenditure for substantial 35AD (1A) for the capital
expansion of these essential core expenditure.
activities incurred by existing
entities should also be allowed
the accelerated deductions as
substantial capital infusion is
required periodically to sustain
their viability.
62. (a) Capital Expenses incurred for raising Section 35D should be
raising capital are being treated as amended to allow deduction
expenses capital in nature and no for all expenses incurred by an
deduction is allowed in tax assessee for raising capital in
assessment. Section 35D five equal installments over a
provides for deduction in respect period of five years.
of some of the expenses, over a
period of five years, subject to
(SUGGESTIONS FOR
conditions and limits. Raising
RATIONALIZATION OF THE
capital is necessary activity for
PROVISIONS OF DIRECT TAX
carrying out the business activity.
LAWS)
Not allowing deduction of
expenses for raising capital
increases cost of carrying out the
business and adversely affects
the competitiveness of the
business
(b) Amortization Cash outflows by way of capital It is suggested that provisions
of Capital expenditure logically reduce the may be incorporated in the Act
expenditure income. However, certain to allow amortisation of such
preliminary expenditure allowed capital expenditures which are
to be amortised under section essential to run the business.
35D , there is no provision in the (SUGGESTIONS FOR
act for amortization of capital RATIONALIZATION OF THE
expenditure like fees paid for PROVISIONS OF DIRECT TAX
increase in authorized share LAWS)
capital and payment made
towards elimination of
competition etc. Such
expenditures being capital in
nature cannot be charged to
revenue as there is no provision
for claiming these expenses in
Pre-Budget Memorandum 2014 (Direct Taxes) Page 103
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
computing the income. As a
result there is a difference
between real income & taxable
income.
63. Deduction for Under Section 35DDA, deduction Section 35DDA(1) may be re-
payments under @ 1/5th of the amount paid to the worded as follows:
Voluntary employees is allowed in respect "Where an assessee incurs any
Retirement of payments made to employees expenditure in any previous
Scheme under voluntary retirement year by way of payment of any
Section 35DDA: schemes. Thus, the deduction sum to an employee in
is allowed over a period of 5 connection with his voluntary
years. This section covers retirement or purchase of an
"payment of any sum to an annuity from an insurance
employee at the time of his company to cover such
voluntary retirement." Many payments, in accordance with
companies have structured any scheme or schemes of
different schemes to give voluntary retirement, 1/5th of
voluntary retirement to their the amount so paid shall be
employees. Some of them are deducted.............."
in the nature of monthly pension
(SUGGESTIONS FOR
or payments spread over a few
RATIONALIZATION OF THE
years. Many corporate would like
PROVISIONS OF DIRECT TAX
to fund these monthly pension,
LAWS)
etc. by purchasing an annuity
with LIC/any other insurance
company. It is submitted that
when the annuity is purchased
for covering such payments,
deduction @ 1/5th shall be
allowed under Section 35DDA of
the Income-tax Act, 1961.
64. Due date for Section 2(24)(x) of the Act, inter It is suggested that the due
crediting the alia defines "Income", to include date defined under Explanation
contribution of any sum received by the to Section 36(1)(va) shall be
employees to employer from its employees' as amended and accordingly the
the respective contribution towards certain due date shall mean the due
fundSection specified funds. However, date for filing return of income
36(1)(va) read deduction for such income are under section 139(1), thereby
with Section 2 available under section bringing it at par with the due
(24)(x): 36(1)(va), provided that the date specified for the
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contributions collected by the Employer's contribution under
employer are credited to the Section 43B of the Act.
respective fund within the due (SUGGESTIONS FOR
date specified under the relevant RATIONALIZATION OF THE
legislation of the fund. PROVISIONS OF DIRECT TAX
The employee's contribution LAWS)
credited to the employees
account in the relevant fund after
the due date specified under
section 36(1)(va) are disallowed
to the employer. Further, any
payments made by the employer
after the due date is also NOT
allowed as a deduction in the
year of payment. This causes
undue hardship to the assessee
especially during the economic
turbulence.
Further, the Employer's
contribution made after the due
date specified under the relevant
social security legislation but
deposited within the due date of
filing return of income are
allowed under the Act by virtue of
Section 43B.
It may be noted that the statutory
laws under the respective
contribution schemes have
provisions to levy interest,
penalty etc. for the delayed
payment. Hence, disallowing a
genuine business expenditure
merely on the ground that it has
been paid after relevant due date
is not justified.
On the subject there have
various conflicting judgments.
Where Honble Uttarakhand High
Court and Honble Delhi High
Court have considered the due
date under section 36(1)(va) to
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be read in sync with the due date
mentioned in section 43B,
Honble Gujarat High Court has
given a different view.
To remove the hardship caused
to the assessee and to reduce
avoidable litigations, it is
suggested that deduction be
allowed on the employee's
contribution made before the due
date of filing the return of
income.
65. NPA calculation Under section 36(1)(viia) of NBFCs may also be include in
for NBFCs Income-tax Act, only the banks Sec. 36(1)(viia) so that the
and financial institutions (FIs) are benefits are also extended to
allowed a deduction on infrastructure financing
provisions for bad and doubtful NBFCs.
debt. A deduction of 7.5% of (SUGGESTIONS FOR
gross total income is allowed as RATIONALIZATION OF THE
expenses for banks, if provision PROVISIONS OF DIRECT TAX
for bad and doubtful debts is LAWS)
made as per RBI directions, and
for FIs the figure is 5%.
It is pertinent to note that even
the foreign banks are allowed the
benefits under this section of
Income tax Act, but the NBFCs
are excluded, and this despite
the fact that both NBFCs and
banks are regulated by similar
guidelines and there is in fact no
material difference between the
businesses carried out by NBFCs
and banks.
In absence of specific inclusion of
NBFCs in section 36(1)(viia),
"provision for NPA" made in
terms of RBI prudential norms
does not constitute an expense
for purposes of Income tax Act.
So entire provisioning as per RBI
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prudential norms is disallowed for
purposes of computing taxable
income of NBFCs. Thus, NBFCs
are subjected to higher taxation,
and hence are at a
disadvantageous position vis-à-
vis banks and other FIs.
As the Government itself
considers NBFCs to be a vital
channel for credit delivery
especially to the under-privileged
segments of the society, it is
essential that such
discriminations between NBFCs
and banks be eliminated. This
inconsistency may be resolved by
including NBFCs also in Sec.
36(1)(viia) so that the benefits
are also extended to
infrastructure financing NBFCs.
66. Section 40(a)(iib) Section 40(a)(iib) provides that In order to provide level
- Disallowance of SGU will not be entitled to playing field to different
certain payments deduction of certain payments in business units in matter of
made by State the nature of royalty, licence fee, computation of business
Government service fee, privilege fee, service income, the amendment may
Undertaking charge or any other fee or charge be re-considered. The
(SGU) made to State Government in payments made by SGU to the
computing income from business Government are likely to be
or profession. subject to transfer pricing
Section 40(a)(iib) also defines the regulation under section 92BA
class of entities that will be read with section 40A(2).
considered as SGU. One of the In fact, the provisions of
classes covered within the section 40A(2) may be suitably
definition of SGU is a company in amended to ensure that the
which State Government holds impugned expenditure is
more than 50% equity. subjected to transfer pricing
Denial of deduction to such SGU, scrutiny, rather than
which has private participation, disallowing the expenditure
may create discriminatory which may result in inequity
treatment between two between undertakings which
enterprises one of which has have more than 50% State
Government holding and those
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49% as compared to 51% private having less than 50% State
participation. While disallowance Government holding.
will be made only in the case of (SUGGESTIONS FOR
the SGU, though both the entities RATIONALIZATION OF THE
may make identical pay-outs to PROVISIONS OF DIRECT TAX
the State Government. LAWS)
67. Required Payments made beyond Rs. It is suggested that a
clarification in 20,000 to a person in a day clarification may be issued to
respect of otherwise by an account payee clarify whether direct deposit
applicability of cheque drawn on a bank or an into the account of the
section 40A(3) account payee bank draft is a recipient in excess of Rs.
disallowed expense and is also 20,000/- by the debtor be
required to be specifically subject to disallowance u/s
reported in the tax audit report by 40A(3) of the Income-tax Act,
the auditor. Certain difficulties 1961.
are being faced with regard to (SUGGESTIONS TO REDUCE /
the applicability of Section MINIMIZE LITIGATIONS)
40A(3) in respect of payments
directly deposited into the
account of the recipient by the
payer located at a far place, in
excess of Rs. 20,000/-. The said
deposit directly in the account by
the payer is being disallowed and
is being reported in the tax audit
report. The Central Banking
system (CBS) in India allows
deposit and withdrawal from any
place in India. As the amount is
being deposited in the banking
channel through proper source,
the same should not be
disallowed under section 40A(3).
A clarification may be issued in
this regard.
68. Explanation 5 to Section 43 deals with actual cost. In line with the other
Section 43(1) There are 14 explanations explanations to section 43(1), it
"building" to be provided in section 43(1) is suggested that the term
replaced by describing the method of "Assets" be used instead of
"assets" computation of actual cost of the term "building" in
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asset under different situations. Explanation 5 to section 43(1) .
Explanation (5) deals with actual
cost in respect of building
previously used by the assessee
for certain purposes &
subsequently brought into
business or profession.
According to this explanation, the
building so brought in should be
notionally depreciated & the
resultant WDV as at the date of
introducing the building into
business shall be deemed to be
the actual cost.
While all other explanations use
the term "asset" or "capital
asset", Explanation 5 uses the
term "building" instead of
"assets". It has therefore been
held that this explanation would
not apply to all other assets other
than building.
69. Section 43A - Section 43A was inserted in the It is suggested that Section
Exchange Income-tax Act, 1961 by Finance 43A be amended to allow
fluctuation Act of 1967, which permitted Capitalization of such foreign
loss due to Capitalization of Foreign exchange loss even for
sharp fall in Exchange Fluctuation Loss in the domestically acquired asset.
Rupee value borrowing used for acquisition of (SUGGESTIONS FOR
assets outside India. The RATIONALIZATION OF THE
exchange fluctuation loss on PROVISIONS OF DIRECT TAX
borrowings used for domestically LAWS)
acquired assets is not permitted
to be capitalized for tax
purposes.
The last financial year saw
Rupee depreciate significantly
against the US $ severely
impacting the industry particularly
those who have exposure to
External Commercial Borrowings
(ECBs) and Foreign Currency
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Convertible Bonds (FCCBs).
The provisions of Section 43A
are similar to the provision
contained in Schedule III to the
Companies Act, 2013. As per
`instructions in accordance with
assets should be made out' as
contained in Schedule VI, vide
notification No. GSR 129 dated 3-
1-1968, the following instructions
were inserted:-
"Where the original cost
aforesaid and additions and
deductions thereto, relate to any
fixed asset which has been
acquired from a country outside
India, and in consequence of a
change in the rate of exchange
at any time after the acquisition
of such asset, there has been an
increase or reduction in the
liability of the company, as
expressed in Indian currency, for
making payment towards the
whole or a part of the cost of the
asset or for repayment of the
whole or a part of moneys
borrowed by the company from
any person, directly or indirectly
in any foreign currency
specifically for the purpose of
acquiring the asset (being in
either case the liability existing
immediately before the date on
which the change in the rate of
exchange takes effect), the
amount by which the liability is so
increased or reduced during the
year, shall be added to, or, as
the case may be deducted from
the cost, and the amount arrived
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at after such addition or
deduction shall be taken to be
the cost of the fixed asset."
The above provisions were
deleted vide notification no.
GSR 226(E), dated 31-03-2009
w.e.f. 31-03-2009.
The Schedule VI has been
amended vide Notification No.
SO 447(E) dt. 28-2-2011 w.e.f. 1-
4-2011. In the revised Schedule
VI (as also the New Schedule
III to the Companies Act, 2013) ,
under the heading "General
Instructions" Sr. No. 1 it is stated
as under:
"Where compliance with the
requirements of the Act including
Accounting Standards as
applicable to the companies
require any change in treatment
or disclosure including addition,
amendment, substitution or
deletion in the head/sub-head or
any changes inter se, in the
financial statements or
statements forming part thereof,
the same shall be made and the
requirements of the Schedule VI
shall stand modified accordingly."
The Accounting Standards have
been notified vide notification
GSR 739(E) dt. 7-12-2006. For
the above purpose the relevant
Accounting Standard is AS-11
`The Effects of Changes in
Foreign Exchange Rates'
Para 46 and Para 46A of AS-11
were inserted vide notification no
G.S.R. 225(E) dated 31st March,
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2009 and G.S.R. 914(E) dated
29th December, 2011
respectively. The effect of these
notifications is that foreign
exchange difference on foreign
loans can be capitalized to the
cost of the depreciable assets
even if the assets are acquired in
India. No distinction is made
whether the assets are imported
or are purchased within India.
70. Provision for Section 43B(f) provides for Clause (f) of section 43B may
leave salary deduction in respect of any sum be deleted. Further, deduction
Section 43B(f) payable by the employer as for provision made towards
leave salary on payment basis leave salary liability based on
only. At the time of insertion of actuarial valuation may be
section 43B(f), Accounting allowed.
Standard-15 "Employees benefit" Alternatively, on the lines of
was not into existence. As per gratuity and pension funding,
the AS-15, leave salary can be necessary provisions may be
differentiated as "short term included in the Income-tax Act
benefit" and "long term benefit". for funding of the leave salary
Short term benefits are allowed liability and deduction should
to be expensed off during the be allowed on such funding.
year. However, long term
(SUGGESTIONS FOR
benefits are treated as "defined
RATIONALIZATION OF THE
benefits plans" and are valued on
PROVISIONS OF DIRECT TAX
actuarial valuation. It may be
LAWS)
noted that the said AS is also
notified under the Companies Act
by National Advisory Committee
on Accounting Standards and is
required to be mandatorily
followed by all companies.
Allowing deduction in respect of
long terms benefits arising due
paid leave only on payment basis
may be inappropriate. Thus, it is
suggested that the deduction for
leave salary liability may not be
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linked to actual payment.
71. Section 43CA - This section provides for a) The section in its present
Special adoption of stamp duty value in form may not be desirable and
provision for full case of transfer of land or may lead to structuring of
value of building or both held as stock-in- transactions. Thus, the
consideration trade. Several issues that provision of this section needs
for transfer of may crop up due to to be reconsidered.
assets other implementation of this section in (SUGGESTIONS FOR
than capital its present form and suggestions RATIONALIZATION OF THE
assets in certain thereof are as under: PROVISIONS OF DIRECT TAX
cases. a) This amendment LAWS)
encourages structuring of real
estate transactions in such a
manner to circumvent increased
tax liability arising on account of
adoption of stamp duty value. For
example- Having agreed to sell
the property at Rs. 80 Lakhs, as
against the value of Rs. 100
Lakhs considered for stamp duty
purposes, the transaction may be
structured to record the
transaction value at Rs.100
Lakhs with a rebate of Rs. 20
Lakhs.
b) This provision results in b) Suitable provisions may be
double taxation of income,since, incorporated in the statute so
the difference between the stamp that the same income is not
duty value and actual subject to tax twice.
consideration would be taxable in
the hands of the seller. However,
the buyer can claim only the
actual cost as deduction while
computing his business income
or capital gains arising at a later
point of time when he sells the
asset.
c) This section provides for c) It may be clarified as to
adoption of stamp duty value on whether the term "otherwise
the date of agreement, where the than by way of cash" would
date of agreement is different include transfer by book
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from the date of registration, entries, transfer by Hundi,
provided at least a part of the promissory notes etc. and
consideration has been received transfer by exchange
on or before the date of agreement.
agreement by any mode
otherwise than by way of cash. In
this context, it may be clarified
whether "otherwise than by way
of cash" would include transfer
by book entries, transfer by
Hundi, promissory notes etc. and
transfer by exchange agreement.
d) Further, in a case where the d) It may be clarified as to
year of agreement and the year whether the tax liability would
of registration are different, a arise in the year of agreement
clarification is required as to or year of registration or the
whether the tax liability would year in which possession is
arise in the year of agreement or obtained.
year of registration or the year in
which possession is obtained.
e) Since only capital assets are e) It is suggested that
excluded from the applicability of agricultural land be specifically
this section, agricultural land excluded from the ambit of this
which is not included in the provision
definition of capital asset may fall
within the scope of this section.
Therefore, specific exclusion of
agricultural land from the ambit
of this provision may be provided
for.
f) This section provides for f) It is suggested that the term
adoption of stamp duty value in "transfer" be specifically
case of "transfer" of land or defined for the purposes of
building or both held as stock-in- section 43CA.
trade. It may be noted that the
definition of term "transfer" in
section 2(47) is in relation to a
capital asset only. The intended
scope of coverage of the term
"transfer" for the purpose of
section 43CA needs to be
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defined.
g) Para 12A of the Form No.3CD g) A specific clause may be
i.e. Statement of particulars included in Form No. 3CD in
required to be furnished under respect of such transactions.
section 44AB of the Income-tax
Act, 1961 requires reporting of
particulars of capital assets
converted into stock-in-trade. A
similar clause to report the
particulars of transfer of land or
building or both held as stock-in-
trade for a consideration less
than the stamp value may also
be included in Form No.3CD.
h) Section 43CA provides that h) A similar provision for
the stamp duty value may be adopting stamp duty value on
taken as on the date of the the date of agreement for
agreement for transfer instead of transfer instead of the date of
the date of registration, provided registration be inserted in
at least a part of the section 50C also
consideration for transfer has
been received by any mode other
than cash on or before the date
of agreement
72. Amendment in Section 43D provides for (i) The words "or Non-
Section 43D and taxability of interest on Bad and Scheduled Banks" be inserted
Rule 6EA with doubtful debts only when such in the section 43D of the
reference to interest is credited to Profit and Income-tax Act, 1961 and Rule
Non-Scheduled Loss Account or when such 6EA of the Income-tax Rules,
Co-op Banks interest is actually received, 1962 be amended suitably
whichever is earlier. Section 43D w.e.f. 01.04.2006 and relevant
is applicable only to public to A.Y. 2007-08.
financial institutions, scheduled (ii) In Rule 6EA (a)(i) the
bank, State Financial words `six months' be replaced
Corporation, State Industrial by "three months".
Investment Corporation etc. As
(SUGGESTIONS FOR
co-operative banks are not
RATIONALIZATION OF THE
scheduled banks they are not
PROVISIONS OF DIRECT TAX
covered by the provisions of this
LAWS)
section.
Further, Rule 6EA which is
related to Section 43D talks
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about Scheduled banks only.
Because section 43D and Rule
6EA do not take care of Non-
Scheduled Co-operative banks,
these banks are treated
differently than Scheduled banks.
Thus, is discriminatory to the
Non-Scheduled Co-operative
banks.
Further, it may be noted that Rule
6EA recognises a borrowing as a
Bad and Doubtful debt only if
certain specified conditions are
noticed in the accounts of the
borrower for a period of six
months or more. However, the
RBI has changed this period of
six months to 90 days i.e. three
months. Rule 6EA should also be
amended to be in line with the
RBI guidelines in this regard.
73. (a) Section 44AA- a) Section 44AA provides for Section 44AA may be amended
Monetary limits maintenance of accounts by appropriately and the limit of
to be withdrawn certain persons carrying on income of Rs.1,20,000 and
business or profession to enable turnover of Rs.10 Lakhs in any
the assessing officer to compute one of the three immediately
his total income in accordance preceding previous years may
with the provisions of the Act. be withdrawn for the
Sub-section (2) to section 44AA assessees carrying on
provides for certain monetary business and declaring income
limits for income or turnover of as per the provisions of
business or profession section 44AD and 44AE.
(i.e.income exceeding (SUGGESTION FOR
Rs.1,20,000 or sales or turnover RATIONALIZATION OF THE
exceeding Rs.10 Lakhs)which PROVISIONS OF THE INCOME
triggers maintenance of books of TAX ACT, 1961)
accounts. Further, the assessees
which declare their income from
business to be lower than
deemed profits under section
44AE, 44AD, 44BB and 44BBB
are also required to maintain
books of accounts in accordance
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with the provisions of section
44AA.
The Finance Act, 2009 made a
major amendment in section
44AD and brought within it ambit
all assessees carrying on
businesses except the business
covered under section 44AE,
agency business, assessees
having commission or brokerage
income. As per the provisions of
section 44AD read with section
44AA, only those assesses who
declare their income lower than
8% of total turnover or gross
receipts and whose income
exceeds the maximum amount
which is not chargeable to tax,
are required to keep and maintain
books of accounts.
As a result the assessee having a
turnover below 1 crore and
declaring income on presumptive
basis at 8% should not be
required to maintain books of
accounts as per the provisions of
section 44AA. Since the
monetary limits (as mentioned
above) provided in section
44AA(2) are not in alignment with
the limit of Rs.1 crore as provided
in section 44AD, difficulty is being
faced by assessees carrying on
business as they are required to
maintain books of accounts if
their income from business or
profession exceeds Rs.1,20,000
which is even below the
maximum amount not chargeable
to tax.
(b) Rule 6F- b) Rule 6F of the Income-tax Considering the prevailing
Upward revision Rules, 1962 provides for books inflationary conditions in India,
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of limit of of accounts and other documents the limit of Rs. 1,50,000
Rs.1,50,000 to be kept and maintained by provided in the proviso to Rule
persons carrying on certain 6F
professions. The proviso to Rule (1) needs an appropriate
6f(1) provides that this rule will upward revision say Rs.
not apply in relation to any 5,00,000. Rule 6F may be
previous year if the total gross accordingly amended.
receipts from the profession do
not exceed Rs.1,50,000 in any
(SUGGESTION FOR
one of the three years
RATIONALIZATION OF THE
immediately preceding the
PROVISIONS OF THE INCOME
previous year. This limit of
TAX ACT, 1961)
Rs.1,50,000 was enhanced long
back in the year 2000
considering the inflationary
trends at that point of time.
Considering the prevailing
inflationary conditions in India,
this limit needs an appropriate
upward revision say Rs.5,00,000.
Rule 6F may be accordingly
amended.
(c) Rule 6F(2)(iv) Rule 6F(2) provides the books Clause (iv) to Rule 6F(2) clause
requires to be and other documents to be was inserted in the year 1983.
dispensed with maintained by the professionals. Since then, there has been
Sub-clause (iv) of Rule 6F(2) phenomenal change in the
requires maintenance of carbon working of the businesses.
copies of bills exceeding Rs 25. Nowadays, the billing is
computerized and the value of
transactions being entered into
has increased manifold times.
Thus, this clause should be
dispensed with.
In case the same is continued,
the value of minimum bill
amount of Rs. 25 should be
increased to Rs.1000.
74. Section 44AD- Section 44AD was introduced
Presumptive w.e.f. 01/04/2011 i.e. from AY
Income Some 2011-12. According to the
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Issues provisions, in case of an eligible
assessee engaged in eligible
business, income shall be
deemed equal to a sum @8% of
the turnover or higher income as
per books. Section 44AD is
applicable to any business
except the business of plying,
hiring or leasing goods carriages
referred to in section 44AE and
whose total turnover or gross
receipts in the previous year
does not exceed an amount of
Rs. 1 crore.
a) Maintenance The general interpretation taken The section may be amended
of Books of from the reading of the section is or suitable provision be
Account that once a deemed income inserted so as to clarify the
@8% is returned u/s 44AD, the intentions of the section. The
assessee will not be required to erstwhile sub-section 4 read as
maintain any accounts as under:
required u/s 44AA. "The provisions of
There is a provision u/s 44AD(5), section 44AA and 44AB
that if the income is less than 8% shall not apply in so
then books will be required to be far as they relate to the
maintained and audited. Unlike business referred to in
the provision in the erstwhile the sub section (1) and
44AD(4), there is no direct in computing the
positive provision in present monetary limits under
section 44AD to the effect that those sections, gross
section 44AA and section 44AB receipts or as the case
will not apply and that the may be, the income
turnover covered under section from the said business
44AD will be excluded for the shall be excluded."
purposes of calculating the
turnover u/s 44AB.
Such ambiguity has developed
confusions and apprehensions in
the minds of the assessees who
are covered by the section.
b) Eligible As per the section 44AD eligible a) Section 44AD may be
Business business means: amended to clarify whether
i) Any business except the the receipts of Rs.1 crore
business of plying, hiring or under section 44AD intend
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leasing goods carriages to cover the receipts of a
referred to in section 44AE; single business or
and aggregate receipts of all
ii) Whose total turnover or businesses. As singular
gross receipts, in the includes plural, a
previous year does not clarification is required in
exceed an amount of one this regard. The difficulty
crore rupees. being faced can be
illustrated by way of
following example:
Suppose an assessee "A" is
engaged in four different
businesses. The individual
turnover of each his
businesses are as under:
a) Business I (Retail trade of
cloth) RS. 30 Lakhs
b) Business II (Manufacturing
of tyres) Rs. 25 Lakhs
c) Business III (Running a
sweet shop) Rs. 35 Lakhs
d) Business IV (Advertising
agency) Rs. 15 Lakhs
The aggregate turnover of all
four businesses amount to Rs.
105 Lakhs. In such a situation,
if the assessee opts for section
44AD for all four businesses, a
clarification is required
whether or not he will be liable
to get his accounts audited
under section 44AB of the
Income-tax Act, 1961.
b) The provisions of
section 44AD should not be
made applicable for all
businesses. The scope of
section 44AD may be clearly
defined to cover particular
businesses only. Further, in
such a case, the treatment
regarding set off of
unabsorbed depreciation of the
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non-eligible business against
the profits of eligible business,
also be clearly laid down.
c) Further, it may also be
clarified whether the
provisions of section 44AD
would be applicable for loss
making business and
businesses having income
below taxable limit.
c) Applicability The Finance Act, 2012 had It is suggested that Instead of
of section inserted sub-section (6) with inserting sub-section 44AD(6),
44AD retrospective effect from 1st the definition of "eligible
April, 2011 to clarify that the business" be amended to
presumptive tax provisions under exclude professions, agency
section 44AD shall not be business and business in
applicable to, inter alia, persons respect of which the earnings
earning income in the nature of are in the form of commission
commission or brokerage or or brokerage.
persons carrying on an agency
business.
Further, the section 44AD(6)
apparently seems to exclude the
applicability to persons carrying
on profession, agency business
and earning commission or
brokerage. It is possible that
such persons have other
businesses eligible for
presumptive taxation under
section 44AD. Therefore, it is
suggested that the definition of
"eligible business" be amended
to exclude professions, agency
business and business in respect
of which the earnings are in the
form of commission or
brokerage.
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PART E-CAPITAL GAINS
Sr. Section Issue/Justification Suggestion
No
75. Revision in As per the existing provisions of The date for determination of
date of the Act, in case of specified fair market value should be
determination capital assets acquired before 1st revised to a relatively recent
of Fair Market April, 1981, the cost of acquisition time frame (such as 1st April,
Value for such assets for the purpose of 2001) instead of 1st April, 1981.
capital gain can be taken either
the fair market value of such asset
prevailing on 1st April, 1981 or the
actual cost of such asset. The
determination of fair market value
as of 1st April, 1981 especially for
land becomes arbitrary & leads to
litigation. Hence, there is a need
to revise the date for
determination of fair market value.
76. Limited LLP though named as Limited It is suggested that similar
Liability Liability Partnership but for all provision need to be inserted
Partnership practical purposes it is a body for LLP allowing merger and
(LLP)- corporate having perpetual demerger and amalgamation to
(a) Merger succession. As business grows be revenue neutral.
and there will be merger, (SUGGESTIONS FOR
Amalgamation amalgamation, demerger of LLP's RATIONALIZATION OF THE
of Limited as well. At present merger and PROVISIONS OF DIRECT TAX
Liability amalgamation of companies is LAWS)
Partnership to Revenue neutral.
be Revenue
Neutral.
(b) Taxability The Finance Act (No.2), 2009 In view of the above, it is
on conversion introduced the taxation scheme suggested that a specific
of firm into relating to Limited liability provision be incorporated in the
LLP- Partnerships. It provided that a Income-tax Act, 1961 itself
Clarification "limited liability partnership" and a clearly specifying that the
required general partnership be accorded conversion from a general
same tax treatment. i.e. taxation partnership firm to an LLP will
in the hands of the entity and have no tax implications.
exemption from tax in the hands (SUGGESTIONS FOR
of its partners. Accordingly, the RATIONALIZATION OF THE
definition of the term `firm' was PROVISIONS OF DIRECT TAX
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amended to include within its LAWS)
meaning a limited liability
partnership.
The memoranda explaining the
introduction of such taxation
scheme for LLPs also provided
the following:
"As an LLP and a general
partnership is being treated as
equivalent (except for recovery
purposes) in the Act, the
conversion from a general
partnership firm to an LLP will
have no tax implications if the
rights and obligations of the
partners remain the same after
conversion and if there is no
transfer of any asset or liability
after conversion. If there is a
violation of these conditions, the
provisions of section 45 shall
apply."
Although, the memoranda
provided that the conversion from
a general partnership firm to an
LLP will have no tax implications,
no specific provision clarifying the
same has been incorporated in
the Income-tax Act, 1961.
(c) The existing section 47 (xiiib) One fallout of the new Company
Consequential provides that no capital gains Act is that lot many companies
amendment tax is payable on conversion are now converting themselves
required in of a private limited or unlisted to LLP. With a view to
section public company into LLP subject popularize the concept of LLP
47(xiiib) to certain conditions. Proviso (e) and also in view of the fact that
states that this provision will not such provision should apply to
apply if the total sales, turnover all cases of revenue neutral
or gross receipts in the conversions from one form of
business of any of the three entity to another form of entity,
preceeding years exceed Rs. 60 there should be no threshold on
lacs. Since this is an amendment turnover, to avail the benefit
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Sr. Section Issue/Justification Suggestion
No
to facilitate conversion of private under section 47(xiiib).
limited companies and unlisted (SUGGESTIONS FOR
companies into LLPs, ideally, RATIONALIZATION OF THE
there should be no restriction on PROVISIONS OF DIRECT TAX
the turnover to avail the benefit of LAWS)
section 47(xiiib). It may also be
noted that the parent Act i.e.
Limited Liability Partnership
Act 2008, allows this
conversion without any such
restrictions.
77. Section 49 - Section 2(42A) defines the term Section 49(1)(iii)(e) to be
Cost of `short term capital asset'. Clause amended to include reference
acquisition (i) (b) of Explanation 1 to Section to demerger which is exempt
with reference 2(42A) provides that in case a under Section 47(vib) and (vic).
to certain capital asset becomes the (SUGGESTIONS FOR
modes of property of the assessee in the RATIONALIZATION OF THE
acquisition circumstances mentioned on PROVISIONS OF DIRECT TAX
Section 49(1), there shall be LAWS)
included the period for which the
asset was held by the previous
owner. Further, Section 49(1)
refers to certain modes of
acquisition wherein the cost
would be substituted by the cost
of the previous owner.
Section 49(1)(iii)(e) covers
corporate restructurings such as
amalgamations, but does not
include a reference to a
demerger. As a consequence,
where a capital asset of the
demerged company is transferred
to a resulting company, the
resulting company would not get
the benefit of a period of holding
of the demerged company.
The government recognized the
importance of demergers in the
corporate sector and introduced
various amendments to the Act
vide Finance Act 1999 to facilitate
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Sr. Section Issue/Justification Suggestion
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corporate restructurings through
demergers. The Memorandum
explaining the provisions of the
Finance Bill 1999 had specifically
stated that the amendments have
been made on the principles that
the demergers should be tax
neutral and should not attract any
additional tax liability.
However, the omission of Section
47(vib) and (vic) in Section
49(1)(iii)(e) would mean that when
a capital asset is transferred to
the resulting company in a
scheme of demerger, holding
period of the capital asset would
commence from the date of
demerger and period for which the
capital asset was held by the
demerged company would not be
considered.
Accordingly, the resulting
company would not enjoy the
holding period of the demerged
company for the capital assets
transferred in the demerger, as
are available for other corporate
restructurings such as
amalgamations. To that extent, a
demerger would not be tax neutral
transaction.
It seems that the omission of
demerger sections in Section
2(42A) r.w. Section 49(1)(iii)(e)
seems inadvertent and no in sync
with the objective of the
introduction of the amendments
as stated in the Memorandum.
78. Forfeiture of Section 51 provides for deduction In order to provide relief to the
Advance of actual amount (without assessee, any forfeited money
Money u/s 51 indexation) of advance or other in respect of any long term
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Sr. Section Issue/Justification Suggestion
No
money received and retained by capital asset should be allowed
the assessee on previous to be deducted after Indexation,
occasions of negotiating the sale if any, from date of forfeiture to
of capital asset, from Cost of the date of sale.
Acquisition and indexation is done (SUGGESTIONS FOR
thereafter based on the CII for the RATIONALIZATION OF THE
year in which the asset was PROVISIONS OF DIRECT TAX
acquired/ first held by the LAWS)
assessee . The assessee in effect
is deprived of the full benefit of
indexation which may not be
correct intent of the law.
79. Section 54- Several disputes are in existence It is suggested that a provision
Investment in as to whether an assessee can be introduced whereby
residential buy more than one house under acquisition of more than one
house provisions of section 54 of the house be eligible for exemption
Income-tax Act, 1961. In the u/s 54.
recent times High Courts and (SUGGESTIONS FOR
ITAT have taken a consistent RATIONALIZATION OF THE
view that in order to avail the PROVISIONS OF DIRECT TAX
exemption u/s 54 of the Act, LAWS)
investment in a "residential
house" is required to be made.
Here a residential house means a
"dwelling unit", which may
encompass more than one flat or
living places, if all of them
together are meant for one family
for living together. It is submitted
that permitting investment of the
sale proceeds in more than one
house properties when the need
of housing is increasingly felt due
to increase in population, would
be a step in the right direction.
Even otherwise, investment upto
Rs. 50, 00, 000 is encouraged
and allowed u/s 54EC of the Act.
80. Certification a) At present deductions u/s 54, It is suggested that the
of deductions 54F, 54EC etc. are not subject to assessee claiming deduction
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Sr. Section Issue/Justification Suggestion
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claimed under any audit or certification. The exceeding a specified amount
section 54, possibility that the assessee under the provisions of section
54F, 54EC etc claims inaccurate amount of 54, 54F, 54EC etc may be
deduction under such provisions required to obtain a certificate
cannot be ruled out. In order to from a Chartered Accountant
reduce such possibility of certifying the accuracy of the
furnishing of inaccurate claim.
particulars by the assessee and (SUGGESTIONS FOR
further to reduce the burden of RATIONALIZATION OF THE
the Department in scrutinising PROVISIONS OF DIRECT TAX
such claims made by the LAWS)
assessee in his return, it is
suggested that such provisions
may be amended to require the
assessee to obtain a certificate
from an Accountant certifying the
accuracy of the claim. Further, a
ceiling may be created for
deductions u/s 54, 54F, 54EC etc.
that deduction amount in excess
of Rs. 30 lakhs in aggregate may
be certified by a Chartered
Accountant.
81. Withdrawal of b) Section 54, 54B, 54D, 54F and Since there is no check on the
deposit from 54G allows the assessee to withdrawal from capital gain
capital gain deposit capital gain/sale scheme account and utilisation
scheme consideration, as the case may thereof for specified purposes,
account be, not appropriated by the the provision is being misused
assessee for the purchase of a and leading to avoidance of tax.
new asset as per the provisions of In order to prevent the misuse,
the respective section, in an tax @1% should be deducted at
capital gain scheme account with source from any withdrawal
a bank/institution as may be from the capital gain scheme
specified by the Central account. To avail the credit of
Government. In order to claim the tax so deducted, the
exemption under the respective assessee should be required to
sections, the amount is required make appropriate disclosures in
to be deposited before the due the ITR form.
date of filing return of income (SUGGESTION TO INCREASE
under section 139(1). The amount THE TAX BASE)
so deposited is to be utilised
within the specified period for the
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Sr. Section Issue/Justification Suggestion
No
specified purpose. In case the
same is not done, the exemption
of capital gain so provided earlier
is withdrawn and the amount
becomes chargeable to tax after
the expiry of the specified period.
Since there is no check on the
withdrawal from capital gain
scheme account and utilisation of
the amount so withdrawn for
specified purposes, the provision
is being misused and leading to
avoidance of tax. In order to
prevent the misuse, tax @1%
should be deducted at source
from any withdrawal from the
capital gain scheme account. To
avail the credit of the tax so
deducted, the assessee should be
required to make appropriate
disclosures in the ITR form.
82. Issue on Section 2(47) of the Act defines In view of the above, capital
capital gain `transfer' in relation to a `capital gains should be taxed in the
arising on the asset'. Clause (v) to section 2(47) previous year in which the
transfer of states that transfer includes constructed area is received by
land in "any transaction involving the the land owner. In case of joint
respect of allowing of the possession of development agreement, the
joint any immovable property to be land owner is normally not
development taken or retained in part entitled to receive any
agreement performance of a contract of consideration at the time he
the nature referred to in section hands over possession of land
53A of the Transfer of Property for development. Exception to
Act, 1882". this effect may be provided in
section 2(47) or section 45 in
Accordingly, the transaction
the manner in which in case of
where, the land owner enters into
conversion of capital asset into
a JDA with the developer,
stock in trade, the capital gain
transferring the rights over the
is taxable in the Previous year
property to the developer in some
in which the stock is sold and
cases [as held in Chaturbhuj
not in the Previous Year in
Dwarkadas Kapadia v CIT (260
which it is converted into stock
ITR 491)], falls under the
in trade.
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Sr. Section Issue/Justification Suggestion
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definition of transfer u/s 2(47)(v) Further, the period for making
and capital gain arises in the year investment for availing
of transfer of property to the exemption under sections 54EC
developer pursuant to entering of etc should be reckoned from
JDA. Instantly, this is an the date of handing over the
arrangement entered into which possession and not the date of
has the effect of handing over the JDA.
possession, thus the transfer isThere should be no
said to have been taken place onapprehensions that the
the date of entering into such assessees might take
agreement. However, the same advantage of this method and
has caused a lot of hardship to delay obtaining letter of
the assessees due to following possession from the builder
reasons: indefinitely. Safety rules can be
a. In many cases projects are placed by mentioning that
not even started for several occupancy certificate given by
months or years and the the municipal authorities can be
landowner is required to pay treated as the date of handing
the capital gain tax at the over of possession.
agreement stage itself.
b. In some cases builders have
left the projects half way
through and landowners
have suffered both ways- by
not getting the built up area
on time and ending up paying
taxes at the time of handing
over of possession of land.
c. The landowner has no
choice of taking benefit of
Section 54, 54F or 54EC by
investing in other properties
or capital gain bonds as he
receives no money at the
time of handing over of
possession of land.
d. At the time of handing over of
possession of land, the
Landowner has no money
even if he wants to pay the
taxes.
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Sr. Section Issue/Justification Suggestion
No
e. In some cases Landowners
have paid taxes and the
projects have been stalled,
and the time for filing of
revised returns is over.
Landowners have no remedy
in such cases.
f. At present there is no
computation mechanism for
calculation of such capital
gain. Should the Landowner
compute the Sale
consideration at Registration
Value of the Land or should
he calculate it by estimating
the cost of construction for
the Builder. Cost cannot be
estimated correctly and this
result in revision of the capital
gain amounts at the time of
scrutiny and it gives lot of
room for reopening of cases.
g. A situation may arise where
the builder sells and registers
a portion of undivided share
in land in favour of buyers in
relation to built up area falling
to his share before the
building is complete. The
Landowner will not be able to
postpone capital gain on the
portion sold as conveyance
deed is being executed. He
will have to offer to tax capital
gain arising out of the sale
consideration mentioned in
the Sale Deed.
However, if the landowner
sells undivided share in the
retained area and registers a
sale deed for undivided share
in land or for semi-finished
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structure before the building
is ready for occupation,
capital gain arising on this
transaction will have to be
offered to tax separately as
and when sale deeds are
registered or property is
handed over, whichever is
earlier. This transaction has
nothing to do with the capital
gain arising out of the
Development Agreement.
h. Builder is handed over the
possession only for the
purpose of construction,
which cannot be construed as
transfer of title to him as long
as the Landowner does not
get possession of his built up
area.
83. Section 54EC- Section 54EC provides that the a) As the financial year
Capital gain capital gains arising from the may differ from assessee to
not to be transfer of a long term capital assessee, it is suggested that
charged on assets will be exempt, if the whole the term "financial year" be
investment in or part of the capital gain, is substituted with the term
certain bonds invested in the long term specified "previous year".
assets at any time within a period b) Considering the
of six months after the date of inflationary conditions in the
transfer. Further, proviso to this economy, it is further
section provides exemption shall suggested that the said limit of
be available only when Rs.50 Lakhs may be raised to
investment made in long term Rs. 1 crore.
specified asset by an assessee
(SUGGESTIONS FOR
during any financial year does not
RATIONALIZATION OF THE
exceed Rs. 50,00,000/-.
PROVISIONS OF DIRECT TAX
LAWS)
84. Exemption a) Under Section 54 of the a) In order to avoid avoidable
under section Income-tax Act, if an assessee litigation, a Circular on the said
54 & 54F who has earned a Capital Gain on subject be issued clarifying that
sale of a residential house, has, in a case where an assessee
within the prescribed period, has entered into a Registered
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Sr. Section Issue/Justification Suggestion
No
purchased or constructed another Agreement for Purchase of a
residential house, then, to the residential flat in an "OAS" and
extent of the cost of the new the assessee has paid more
residential house, no tax in than 50% of the cost of the
respect of such Capital Gain is residential flat within the period
payable. There is a similar prescribed in Sections 54 and
provision under Section 54F under 54F and has, within a further
which the Capital Gains arising on period of three years obtained
transfer of ANY long term capital actual possession of the
asset will also be exempt from residential flat on payment of
tax, if the assessee has, within the its full price, the assessee shall
prescribed period, purchased or be deemed to have
constructed a residential house, to "constructed" a `residential
the extent of the cost of such new house' within the meaning of
residential house. Sections 54 and 54F on the date
A considerable volume of litigation on which the Agreement for
has arisen in the past on the issue Purchase has been registered
as to `when' exactly an assessee and the exemption under the
can be considered to have said Sections will be available
purchased or constructed a new to the assessee to the extent of
residential house and also on the the aggregate cost of the
issue as to whether the residential flat agreed to be
acquisition of the new residential purchased.
flat in an Ownership Apartments (SUGGESTIONS TO REDUCE /
Scheme (OAS) or a Co-operative MINIMIZE LITIGATIONS)
Housing Society is "purchase" or
"construction". This distinction is
important because, the prescribed
time limits for both are different.
The above controversy has been
set at rest by the CBDT in relation
to the acquisition of a flat by an
allottee under the self-financing
scheme (SFS) of the Delhi
Development Authority (DDA) by
issuing the Circular No. 471 of
15.10.1986. The Circular has
clarified that in case of allotment
of a flat by the DDA under the
SFS, the allotment by DDA will be
treated as "construction" of a
residential house and that the
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"construction" shall be deemed to
have been made on the date of
allotment of the flat on payment of
the first installment of the price of
the flat even though, full price of
the flat has not been paid.
It is submitted that acquisition of a
residential flat in an Ownership
Apartments' Scheme (OAS), the
plans of which have been
approved by all the authorities
whose approval is necessary
under the law, should be treated
on par with acquisition of a flat
under the SFS of the DDA. On a
parity of reasoning, the exemption
under Sections 54 and 54F should
be available to an assessee who
has entered into an agreement for
purchase of a residential flat with
a Real Estate Developer (RED)
and he will be deemed to have
`constructed' the new residential
house on the date on which the
Agreement for Purchase has been
registered with the Registering
Authority after payment of the
amount payable on signing the
Agreement. To avoid misuse of
the exemption, a further condition
may be imposed that if the person
has not paid to the RED more
than 50% of the purchase price of
the residential flat within the
period prescribed under Sections
54 and 54F for "construction" of a
new residential house, and/or, has
not got actual possession of the
residential flat on payment of full
purchase price of the flat within a
further period of three years after
the expiry of the prescribed
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period, the exemption shall be
withdrawn. The exemption will be
to the extent of the total cost of
the residential flat as per the
Agreement for Purchase. The
presumption is that the RED
constructs the Ownership
Apartment on behalf of the flat
owners.
The preponderant view taken by
many Tribunals and Courts in
several decided cases supports
the submission made in the
precedent para. See "Shashi
Verma V. CIT 224 ITR 106(MP),
CIT V. R.L. Sood 245 ITR 727
(DEL), Hilla Wadia . CIT 216 ITR
376 (BOM). However, some
Tribunals and Courts have taken a
different view. As there have been
conflicting Judgements on the
issue, many Assessing Officers
(AO) take the view that the
exemption is available only if the
actual possession of the new
residential house has been taken
after payment of the entire cost of
the residential house within the
prescribed period. Some have
also taken a view that when an
assessee joins an "OAS" he is
"purchasing" a flat and not
constructing a flat. Such a view
causes considerable unjustified
hardship to the assessees and
has resulted in a lot of avoidable
litigation.
The aforesaid view taken by some
Assessing Officers strikes at the
very root of the intention of the
Parliament in enacting the
Sections 54 and 54F for giving the
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Sr. Section Issue/Justification Suggestion
No
much needed relief to assessees
who need to change a residential
house for various genuine and
valid reasons, and they have no
option but to join on "OAS". It is
evident that they do not earn a
real capital gain on sale of the first
residential house when they have
to necessarily utilize that capital
gain for acquiring the new
residential flat. The real estate
prices have been continuously on
the increase. Therefore, the new
residential flat will usually cost
more than the sale price of the
one sold. When a person books a
flat in a large OAS, he cannot be
sure that the scheme will be
completed within the period
prescribed in Sections 54 and
54F. In most case, large OAS take
a longer period for completion
than the one prescribed for
`construction' in Sections 54 and
54F.
It has been an `oft declared' policy
of the Government to take all
steps necessary to reduce
litigation because of the very large
number of pending cases with the
Supreme Court and the High
Courts. On this issue, there has
been considerable avoidable
litigation because of differing
interpretations taken by AOs,
Tribunals and Courts on the
question whether acquisition of a
residential flat in an OAS is
`purchase' or `construction' and
when the `purchase' or
`construction' can said to have
taken place.
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Sr. Section Issue/Justification Suggestion
No
b) A major issue which needs b) The issue "whether or not
clarification from the Department is exemption can be claimed under
whether or not exemption can be Sections 54 and 54F when capital
claimed under Sections 54 and 54F gains derived from transfer of a
when capital gains derived from single residential property is
transfer of a single residential used for purchasing multiple
property is used for purchasing residential properties" requires
multiple residential properties. clarification by the Board. Since
In ITO vs. Sushila Jhaveri 292 ITR there are several judgments on
(AT) 1 (Mum)(SB), Hon'ble Special the issue, an appropriate and
Bench of Mumbai ITAT held that comprehensive clarification in
where more than one unit are this regard, will not only reduce
purchased which are adjacent to the existing litigations but will
each other and are converted into also minimize future litigations
one house for the purpose of on the issue.
residence by having common (SUGGESTIONS TO REDUCE /
passage, common kitchen, etc., MINIMIZE LITIGATIONS)
then, it would be a case of
investment in one residential house
and consequently, the assessee
would be entitled to exemption. The
assessee making Investing made in
two flats located at different
localities in Mumbai will be entitled
to exemption in respect of
investment in one house only of her
choice. It was further held that the
expression "a residential house" in
sections 54 and 54F means one
residential house.
In Karnataka High Court
in CIT v. D. Ananda
Basappa [2009] 180 Taxman 4 the
taxpayer transferred a residential
building and invested the long-term
capital gain in acquisition of two
residential flats situated side by side
by means of two separate
registered sale deeds and claimed
exemption for both the residential
units acquired. Both the units were
in the occupation of two different
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tenants. The Court held that the
apartments were situated side by
side and the builder had made
necessary modifications to make
them one unit by fixing opening
door in between those two
apartments. The mere fact that
when the Inspector visited the
premises they were occupied by
two different tenants was not a
ground to hold that the apartments
were not one residential unit. The
aspect of one registered sale deed
or more than one deed could not be
determinative of the building being
considered as one residential unit
or otherwise.
The Court referred to section 13 of
the General Clauses Act, 1897
wherein it is declared that whenever
the singular is used for a word, it is
permissible to include the plural.
The expression 'a' residential house
should be understood in a sense
that building should be of residential
nature and 'a' should not be
understood to indicate a singular
number. In CIT v. Smt.Jyothi K.
Mehta [2011] 12 taxmann.com
440 (Kar.) decision was given on
similar lines.
In the case of CIT vs. Gita Duggal
(ITA No. 1237/2011); Delhi
High Court (decided on February
21, 2013), the assessing officer
disallowed the exemption in respect
of one floor out of two floors
constructed by the assessee
through a developer since the the
floors were independent of each
other and self-contained and
therefore they cannot be considered
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No
as one unit of residence.
Accordingly, he held that the
assessee was not eligible for the
exemption under Section 54.
The Delhi High Court held the
following:
" Section 54/54F uses the
expression "a residential house".
The expression used is not "a
residential unit". This is a new
concept introduced by the
assessing officer into the section.
Section 54/54F requires the
assessee to acquire a "residential
house" and so long as the assessee
acquires a building, which may be
constructed, for the sake of
convenience, in such a manner as
to
consist of several units which can, if
the need arises, be conveniently
and independently used as an
independent residence, the
requirement of the Section should
be taken to have been satisfied.
There is nothing in these sections
which require the residential house
to be constructed in a particular
manner. The only requirement is
that it should be for the residential
use and not for commercial use. If
there is nothing in the section which
requires that the residential house
should be built in a particular
manner, it seems to us that the
income tax authorities cannot insist
upon that requirement. A person
may construct a house according to
his plans and requirements. Most of
the houses are constructed
according to the needs and
requirements and even
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Sr. Section Issue/Justification Suggestion
No
compulsions. For instance, a
person may construct a residential
house in such a manner that he
may use the ground floor for his
own residence and let out the first
floor having an independent entry
so that his income is augmented. It
is quite common to find such
arrangements, particularly post-
retirement. One may build a house
consisting of four bedrooms (all in
the same or different floors) in such
a manner that an independent
residential unit consisting of two or
three bedrooms may be carved out
with an independent entrance so
that it can be let out. He may even
arrange for his children and family
to stay there, so that they are
nearby, an arrangement which can
be mutually supportive. He may
construct his residence in such a
manner that in case of a future
need he may be able to dispose of
a part thereof as an independent
house. There may be several
such considerations for a person
while constructing a residential
house. We are therefore, unable to
see how or why the physical
structuring of the new residential
house, whether it is lateral or
vertical, should come in the way of
considering the building as a
residential house. We do not think
that the fact that the residential
house consists of several
independent units can be permitted
to act as an impediment to the
allowance of the deduction under
Section 54/54F. It is neither
expressly nor by necessary
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Sr. Section Issue/Justification Suggestion
No
implication prohibited."
Since there are several judgments
on the issue, a clarification in this
regard may be issued by the Board.
An appropriate clarification in this
regard, will not only reduce the
existing litigations but will also
minimize future litigations on the
issue.
c) The proviso to section It is suggested that the
54F(1) provides that the nothing inconsistency in the sub-
contained in this sub-section shall section(2) and proviso to the
apply where (a) the assessee (ii) sub-section(1) and may be
purchases any residential house, removed to avoid unnecessary
other than the new asset within a litigations.
period of one year after the date of In fact, in order to promote
transfer of the original asset. construction of residential
Further, section 54F(2) provides houses, the time limit of 3 years
that where an assessee purchases, for completion of construction
within the period of two years after should be removed.
the date of the transfer of the
original asset, or constructs, within
the period of three years after such
date, any residential house, the
income from which is chargeable
under the head "Income from house
property", other than the new asset,
the amount of capital gain arising
from the transfer of the original
asset not charged under section 45
on the basis of the cost of such new
asset as provided in clause (a), or,
as the case may be, clause (b), of
sub-section (1), shall be deemed to
be income chargeable under the
head "Capital gains" relating to
long-term capital assets of the
previous year in which such
residential house is purchased or
constructed.
It may be noted that the proviso to
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Sr. Section Issue/Justification Suggestion
No
sub-section (1) discourages the
assessee to purchase a new house
within a period of one year and sub-
section (2) discourages the
assessee to purchase a new house
within a period of two years. There
seems to be inconsistency between
the two provisions of the same
section.
85. Capital gain on The Finance Act, 2012 had It is suggested:
transfer of inserted a new section 54GB to a) The benefit under
residential exempt long-term capital gains on section 54GB may be extended
property to be transfer of a residential property, to long-term capital gains on
taxed in being a house or a plot of land, sale of any capital asset which
certain cases- owned by an individual or HUF, if is invested in the equity of a
Section 54GB the net consideration on sale of new start-up SME company for
property, is invested in equity of a purchase of new plant and
new start-up SME company in the machinery within the prescribed
manufacturing sector which is time.
utilised by the company to
b) Investment in existing
purchase new plant and
SME company may also be
machinery.
considered for the purpose of
Since this section was introduced such exemption.
with a view to incentivise
c) Further, investment in
investment in the Small and
LLP which satisfies the
Medium Enterprises (SME) in the
condition of SME enterprises
manufacturing sector as per the
may also be permitted, subject
National Manufacturing Policy
to conditions as may be
announced by the Government in
necessary. Restrictive clauses
2011, the benefit of exemption
may be inserted in line with the
under section 54GB should not be
appropriate clauses of the
restricted to capital gains from
proviso to section 47(xiiib).
sale of residential house and plot
of land alone, but should be d) The restricted time limit
extended to long term capital for acquiring new plant and
gains derived from other capital machinery will create
assets also. difficulties and, therefore, it is
suggested that the SME
This exemption under section
company may be allowed to
54GB can be claimed subject to
make such investment in new
the following conditions.
plant and machinery within a
(i) The investee company period of 2 years from the date
Pre-Budget Memorandum 2014 (Direct Taxes) Page 141
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Sr. Section Issue/Justification Suggestion
No
should qualify as a Small or on which the assessee makes
Medium SME under the Micro, the investment in its equity
Small and Medium Enterprises shares.
Act, 2006. e) The period of 5 years
(ii) The company should be for retaining the equity shares
engaged in the business of may be reduced to 3 years, in
manufacture of an article or a line with the requirement under
thing. section 54EC. Suitable
(iii) SME company should be exceptions for takeover/
incorporated within the period merger/ amalgamations etc.
from 1st of April of the year in may also be provided.
which capital gain arises to the f) Similarly, lock-in-period
assessee and before the due for plant and machinery
date for filing the return by the acquired by the SME company
assessee u/s 139 (1). may be reduced from 5 years to
(iv) The assessee should 3 years.
hold more than 50% of the g) It may be clarified that
share capital or the voting right the net consideration after
after the subscription in the deduction of tax at source @1%
shares of a SME company. may be required to be invested,
Sometimes in case of capital so that there is no cash flow
intensive SME , a single co-owner mismatch.
may not be able to fund the said h) In case of a Sale of joint
SME from his own share of sale property , the condition
proceeds of the property sold regarding holding of more than
which will prevent formation of a 50% of the share capital of the
new SME so as to achieve the SME company by the assessee
desired objects. should be deemed to have been
(v) The assessee will not be fulfilled if the co-owners of the
able to transfer the above shares said property hold more than
for a period of 5 years. It may 50% of the Share Capital of the
be noted that the lock-in period SME company.
under section 54EC is only 3 (SUGGESTIONS FOR
years. RATIONALIZATION OF THE
(vi) The company will have to PROVISIONS OF DIRECT TAX
utilize the amount invested by the LAWS)
assessee in the purchase of new
plant and machinery within a
period of one year from the date
of subscription in equity shares of
an eligible company. If the entire
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Sr. Section Issue/Justification Suggestion
No
amount is not so invested before
the due date of filing the return of
income by the assessee u/s 139,
then, the company will have to
deposit the amount in the scheme
as notified by the Central
Government. Thereafter, Central
Government issued Notification
No 44/2012, Dt 25-10-2012 in this
regard.
(vii) The above new plant and
machinery acquired by the
company cannot be sold for a
period of 5 years.
(viii) The above scheme of
exemption granted in respect of
capital gains on sale of residential
property will remain in force up to
31.3.2017.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 143
The Institute of Chartered Accountants of India
PART F-INCOME FROM OTHER SOURCES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
86. Definition of Under the existing provisions of Suggestions:
the term section 56(2)(vii), any sum or (i) The provisions of clubbing
relative- property received by an individual of income as contained in
Explanation to or HUF for inadequate Chapter V of the Income-
Section 56(2) consideration or without tax Act, 1961 should not be
(vii) consideration is deemed as attracted once the sum of
income and is taxed under the money or value of assets
head `Income from other sources'. are subject to tax under
However, in case of any section 56(2) in the hands
individual, receipts from specified of the recipient.
relatives are excluded from the (ii) Lineal descendents of
purview and hence, are not brothers and sisters of self
taxable. and spouse may also be
The Explanation to section included in the definition
56(2)(vii) was amended by the of "relative" in line with the
Finance Act, 2012 so as to provisions of section 13(3).
provide that any sum or property (iii) The application of the
received without consideration or provision should also be
inadequate consideration by an extended to the relatives of
HUF from its members would also the members of HUF.
be excluded from taxation.
(SUGGESTIONS FOR
The provisions of clubbing of RATIONALIZATION OF THE
income as contained in Chapter V PROVISIONS OF DIRECT TAX
of the Income-tax Act, 1961 are LAWS)
attracted in respect of income
from any sum of money or value
of assets transferred to a non-
relative. Once the sum of money
or value of assets are subject to
tax under section 56(2) in the
hands of the recipient, the income
from such assets should not be
subject to the clubbing provisions
contained in Chapter V.
Further, it may be noted that, in
relation to an "individual", the term
relative, as it stands at present,
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Sr. Section Issue/Justification Suggestion
No
does not include nieces and
nephews. This may not be the
legislative intent as they also form
part of the close circle of relatives
and accordingly have been
considered as "relative" in the
Direct Taxes Code Bill, 2010 and
2013.
87. Section This section was amended by the It is, therefore, suggested that
56(2)(vii)(b) Finance Act, 2013 to bring within immovable property transferred
Immovable its scope immovable property for inadequate consideration be
property received for inadequate kept outside the scope of
received for consideration, where the section 56(2)(vii).
inadequate difference between the stamp (SUGGESTIONS FOR
consideration duty value of land or building or RATIONALIZATION OF THE
both and the actual consideration PROVISIONS OF DIRECT TAX
exceeds Rs.50,000. LAWS)
This amendment has lead to
double taxation of the differential
amount i.e. the difference
between the stamp duty value
and the actual consideration
would be taxable in the hands of
the buyer as "Income from other
sources" under section 56(2)(vii)
and "Capital Gains" in the hands
of the seller on account of
adoption of stamp duty value as
full value of consideration for
transfer of property as per section
50C.
88. Exclusion of Clause (viia) was inserted under It is suggested that rights
rights shares/ sub-section 2 of section 56 of the shares and fresh issue of
fresh issue of Income-tax Act, 1961 by the shares be excluded specifically
shares from Finance Act, 2010. The said from the ambit of these
the ambit of clause provides that the transfer provisions
section 56 of shares of a company without (SUGGESTIONS FOR
(2)(viia) consideration or for inadequate RATIONALIZATION OF THE
consideration would attract the PROVISIONS OF DIRECT TAX
provisions of section 56(2), if the LAWS)
recipient is a firm or a company.
The purpose is to prevent the
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Sr. Section Issue/Justification Suggestion
No
practice of transferring unlisted
shares at prices much below their
fair market value.
Though the intent of the
legislature may not be to bring
rights shares within the ambit of
these provisions however, a strict
interpretation of the provisions as
inserted in the Act, brings rights
shares within the mischief of
these provisions.
89. Valuation of The Finance Act, 2012 had (i) A proviso similar to the
shares- inserted clause (viib) in section proviso to section
Section 56(2) to provide that if the 56(2)(viia) should be
56(2)(viib) consideration for shares is in incorporated in section
excess of the fair value of the 56(2)(viib) as well. Further,
shares, the aggregate the proviso should also
consideration received in excess cover transactions not
of the fair value determined as regarded as transfer under
per method prescribed or sections 47(vi) and 47(vib).
substantiated by the company to (ii) Valuation Report from an
the Assessing Officer based on `Accountant' may be
the value of its assets, would be admissible so as to
taxable as the income of a closely determine the fair market
held company. value of unquoted equity
The detailed suggestions shares.
regarding the draft rule which (SUGGESTIONS FOR
prescribes for determination of RATIONALIZATION OF THE
fair market value of shares was PROVISIONS OF DIRECT TAX
submitted by ICAI to the Board. LAWS)
In furtherance to the same, it is
submitted that the provisions of
this clause should not apply to
any such property received by
way of a transaction not regarded
as transfer under clause (via) or
clause (vic) or clause (vicb) or
clause (vid) or clause (vii) of
section 47. Such exemptions
have been provided in relation to
section 56(2)(viia).
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CHAPTER VI
AGGREGATION OF INCOME AND SET OFF OR
CARRY FORWARD OF LOSS
Pre-Budget Memorandum 2014 (Direct Taxes) Page 147
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
90. Onus of proof The Finance Act, 2012 had made First proviso to section 68
in respect of amendments in section 68 to should be re-worded to provide
cash credits provide that in case the amount that the source of funds in the
consisting of credited consists of share hands of the resident
share application money, share capital shareholder is to be explained
application or share premium, then, the by the ASSESSEE Company or
money, share explanation offered by the the investor to the satisfaction
capital, share assessee company shall not be of the Assessing Officer.
premium etc- deemed to be satisfactory, unless (SUGGESTIONS FOR
Section 68 the resident shareholder also RATIONALIZATION OF THE
offers an explanation about the PROVISIONS OF DIRECT TAX
nature and source of such sum so LAWS)
credited to the satisfaction of the
Assessing Officer.
The Memorandum while
explaining the amendments
proposed by the Finance Bill,
2012, clearly mentioned that
section 68 is amended to provide
that the nature and source of any
sum credited, as share capital,
share premium etc., in the books
of a closely held company shall
be treated as explained only if the
source of funds is also
EXPLAINED BY THE ASSESSEE
COMPANY in the hands of the
resident shareholder.
It may be noted that as per the
memorandum, the intention of the
lawmakers is to place onus of
proving the source of funds in the
hands of the resident shareholder
on the ASSESSEE Company.
However, the language of the
proviso to section 68 has been
worded otherwise, placing the
onus of explaining the source of
funds in the hands of resident
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
shareholder on the shareholder
itself.
91. Rationalization As per Section 69C if an The above mentioned provision
of section 69C assessee has incurred any results in double taxation.
expenditure for which he has Therefore, it's suggested that
offered no explanation is deemed the provision of section 69C
to be the income of the assessee, may be reviewed & deleted in
not allowed as deduction under the interest of justice.
any head of income.
92. Section 72- At present under the provisions of It is suggested that the brought
Carry forward section 72 of the Income-tax Act, forward business loss may be
and set off brought forward business loss allowed to be set off against
can be set off against profits and short-term capital gain under
gains of business or profession section 50 in subsequent
carried on by an assessee up to assessment years.
subsequent 8 assessment years. (SUGGESTIONS FOR
Where any surplus arises from RATIONALIZATION OF THE
sale of the capital asset forming PROVISIONS OF DIRECT TAX
part of block of assets in respect LAWS)
of which depreciation has been
allowed (either because the block
of assets ceases to exist or
because the consideration
received exceeds the value of
block), such surplus is regarded
as "short-term capital gain" under
section 50 of the Income tax Act,
1961.
93. Tax incentives The tax benefits under section a) In the interest of the public
under Section 72A in respect of amalgamation at large, the benefit of
72A in respect or demerger are currently limited section 72A may be
of to industrial undertakings or a extended to all businesses
Amalgamation ship, hotel, aircraft or banking. It including financial services
or Demerger (to is suggested that in the current particularly NBFC's.
be extended to liberalized and buoyant b) Further, the provisions of
all businesses): environment where various new section 72A may be
sectors are growing at a rapid simplified specially in
pace, this benefit should now be respect of the conditions
extended to all businesses applicable for the
including financial services. amalgamating company like
losses / depreciation being
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Sr. Section Issue/Justification Suggestion
No
unabsorbed for at least
three years and holding
assets on the
amalgamation date upto ¾
of the book value of fixed
assets held two years prior
to the said date.
(SUGGESTIONS FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
94. Section 73A - All specified businesses eligible It is suggested that section 73A
set-off of for investment based incentives should be modified to allow the
losses of u/s 35AD are capital intensive. losses of specified business
specified Business houses commencing under section 35D to be set off
business any specified business have to against profits of other
against non- divert funds from other businesses.
specified businesses to the specified
business business. When other businesses
contribute towards the
establishment of a specified
business, it is imperative that the
losses of specified business are
allowed to be set off against
profits of other business.
95. Review of Section 78 deals with the It is suggested that the same
section 78(1) provisions of carry forward and shall be allowed to be
set off of losses in case of change considered either in the hands
in the constitution of firm or on of the firm or the partner so as
succession. Sub-section 78(1) to remove the genuine hardship
does not allow the firm to carry of assessee.
forward and set off the share of
loss attributable to the retired or
deceased partner. Also, by virtue
of provisions of section 10(2A) the
income (which includes loss) is
not allowed to be considered in
the hands of the person being a
retiring partner of the firm.
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CHAPTER VIA
DEDUCTIONS TO BE MADE IN COMPUTING
TOTAL INCOME
Pre-Budget Memorandum 2014 (Direct Taxes) Page 153
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PART B-
DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
96. Section The deduction available in the first Appropriate amendments may
80CCG- Rajiv year for investment by a new equity be made to clarify the real
Gandhi Equity investor, having gross total income intent of the proposed
Linked of up to Rs.10 lakh, in listed equity amendment i.e. whether Long
Savings shares or listed units of equity term capital gains taxable under
Scheme oriented funds under the Rajiv section 112 and Short term
Gandhi Equity Savings Scheme, capital gains taxable under
2013 , is extended to a new retail section 111A needs to be
investor having gross total income excluded for determining the
of up to Rs.12 lakh, for a period of limit of Rs.12 Lakhs.
three consecutive assessment (SUGGESTIONS FOR
years beginning with the RATIONALIZATION OF THE
assessment year relevant to the PROVISIONS OF DIRECT TAX
previous year in which the listed LAWS)
equity shares or listed units of
equity oriented fund were first
acquired.
Further, as per section 112(2),
where the gross total income of an
assessee includes any income
arising from the transfer of a long-
term capital asset, the gross total
income shall be reduced by the
amount of such income and the
deduction under Chapter VI-A shall
be allowed as if the gross total
income as so reduced were the
gross total income of the assessee.
Similar provision is contained in
section 111A as well.
According to these provisions, the
"gross total income" as reduced by
such capital gains would be the
"gross total income" for the purpose
of all deductions under Chapter
Pre-Budget Memorandum 2014 (Direct Taxes) Page 155
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
VIA. Since deduction under section
80CCG falls under Chapter VIA,
this provision would also imply that
for determining the threshold limit of
Rs.12 lakh for availing the benefit
under this section, the capital gains
taxable under section 112 & 111A
are to be excluded.
97. Preventive Section 80D was amended by It is suggested that section 80D
health check Finance Act, 2012 to provide for be appropriately amended to
up-Section deduction of up to Rs.5,000 in provide for a deduction of Rs.
80D aggregate for preventive health 5,000 for preventive health
check-up of the assessee, his check-up of any member of the
family and parents. This is within family, which is in addition to
the overall limit specified under the existing limits under that
section 80D. section for medical insurance
At present, there is a limit of premium paid.
Rs.15,000 in respect of medical (SUGGESTIONS FOR
insurance premium of self, RATIONALIZATION OF THE
spouse and dependent children PROVISIONS OF DIRECT TAX
and Rs.15,000 in respect of LAWS)
premium paid for parents. The
above limit would be Rs.20,000
instead of Rs.15,000, where any
of the persons insured are above
the age of 60 years.
With the rising cost of medical
treatment, it is necessary to have
an adequate insurance coverage
for all members of the family. The
cost of insurance coverage is also
increasing, and with the increase
in service tax with effect from
1.4.2012, the medical insurance
products have become dearer.
Therefore, the deduction of
Rs.5,000 for preventive health
check-up should be available in
addition to the existing deduction
for mediclaim premium
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Sr. Section Issue/Justification Suggestion
No
98. Increase in In view of the increase in It is suggested that the limit
limit of following costs, maximum specified in section 80DD & 80U
deduction u/s deduction in respect of medical be enhanced suitably.
80DD & 80U treatment of a dependent who is a (SUGGESTIONS FOR
person with disability u/s 80DD RATIONALIZATION OF THE
and deduction for persons with PROVISIONS OF DIRECT TAX
disability like total blindness or LAWS)
mental retarded or physically
handicapped person u/s 80U,
should be enhanced suitably:
(a) Increase in medical cost;
(b) Increase in travelling cost;
Increase in minimum wages and
difficulty in getting
nurses/attendants who are
charging not less than Rs.
10,000/- even in B/C type cities
99. Section 80EE - Section 80EE provides for Therefore, ideally, the benefit
Deduction in additional deduction of up to Rs. 1 under section 80EE may be
respect of lakh under Chapter VIA in respect extended to interest on the loan
interest on of interest on housing loan taken for the first house
loan taken for sanctioned by a bank or housing property acquired or
residential finance company during the constructed, irrespective of the
house period between 1.4.2013 and whether the housing loan is
property 31.3.2014 for acquisition of sanctioned before or after
residential house property. 1.4.2013. In any case, the
The issues emerging from the deduction of Rs.1,50,000 in
provision are as follows- respect of self-occupied
property was introduced fifteen
It may be clarified that
years back and keeping in mind
interest on loan taken for
the inflationary conditions, the
construction of residential
additional deduction of
house property also qualifies
Rs.1,00,000 should be extended
for the additional deduction
in respect of all loans, albeit for
i.e. the term "acquisition"
the first house property.
includes "construction" as
Further, instead of providing
well.
the same as a deduction under
As per sub-section (2) of Chapter VIA only for A.Y.2014-
section 80EE, in case interest 15 and A.Y.2015-16, the same
payable for the P.Y.2013-14 may be provided by way of
is less than one lakh rupees, insertion of another proviso to
the balance amount shall be section 24(b) for the sake of
allowed in A.Y.2015-16. consistency.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 157
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
It may be noted that deduction (SUGGESTIONS FOR
under section 80EE is an RATIONALIZATION OF THE
additional deduction, over and PROVISIONS OF DIRECT TAX
above the deduction allowable LAWS)
under section 24. Therefore, only
if the total interest exceeds
Rs.1,50,000, the benefit under
section 80EE itself would be
available. If the interest payable
is less than Rs.1,00,000, as
required in this sub-section, no
benefit under section 80EE would
be available even during the
P.Y.2013-14. Since the entire
interest would be deductible
under section 24 itself.
Therefore, sub-section (2) of
section 80EE may be reworded
to provide that in case "the
deduction allowable under this
section" for the P.Y.2013-14 is
less than one lakh rupees, the
balance amount shall be
allowed in the A.Y.2014-15.
Further, in case of extension
of benefit to interest on loan
taken for construction,
whether interest on a new
loan sanctioned during the
said period to repay an earlier
loan in respect of a house
property under construction
would be eligible for
deduction is another issue
requiring clarification.
The section, in its present
form, does not extend the
benefit to interest on housing
loans taken from employer,
unless the employer happens
to be a bank or financial
institution.
The restriction of eligibility for
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Sr. Section Issue/Justification Suggestion
No
deduction under this section
to housing loans sanctioned
on or after 1.4.2013 results in
inequity vis-à-vis persons
whose home loans were
sanctioned before 1.4.2013 in
respect of the first house
property. It is possible that in
many cases where loan is
sanctioned prior to 1.4.2013
in respect of the first house
property, the amount is yet
to be disbursed or even if the
amount is disbursed, the
person is yet to receive
possession of the property.
Considering the high cost of
acquisition of house
properties in metro cities, the
threshold limit of Rs.40 lakhs
and Rs.25 lakhs,
respectively, for the cost of
property and loan sanctioned,
for availing the benefit of
section 80EE is impracticable
and non-workable. Further,
since the banks generally
give loan upto 85%-90% of
the cost of property, the
threshold for loan should be
appropriately increased to at
least Rs. 35 Lakhs.
Further, the threshold limit of
Rs.25 lakhs is in relation to loan
sanctioned. Loan disbursed
would be a more realistic criterion
for fixing a threshold, since the
entire loan sanctioned may not be
disbursed in all cases.
100. Deduction u/s There are many charitable It is suggested that the ceiling
80G - to institutions all over India backed of 10% on gross total income be
liberalise the up by dedicated people serving withdrawn.
exemptions by the cause of poor, downtrodden, (SUGGESTIONS FOR
Pre-Budget Memorandum 2014 (Direct Taxes) Page 159
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
enhancing handicapped - both physically and RATIONALIZATION OF THE
ceilings mentally, deserted women, PROVISIONS OF DIRECT TAX
specified children, orphans, destitute and LAWS)
aged helpless people. Even
though there are many
magnanimous donors who are
willing to contribute to these
humanitarian causes after
ensuring that their donations are
properly utilised, the overall
ceiling of 10% of gross total
income u/s 80G impedes their
way to contribute liberally and
encourage more and more
institutions.
It is needless to mention that the
Government alone cannot achieve
the socialistic goal of upliftment of
downtrodden. Hence, there is a
need to encourage and nurture
these dedicated, service minded
institutions. Since hundreds of
institutions of this kind are in the
field and the willing donors with
large heart being limited, it is but
essential to remove the ceiling so
that at least the donors who want
to serve the cause of humanity
will not be tied up with such
artificial restrictions. This freedom
may even induce them to be more
generous in meeting the
requirements of these institutions.
In this context, it is pertinent to
note that the Income Tax
Department has enough scope to
exercise control over these
institutions while granting
recognition, issuing and renewal
of exemptions u/s 80G and lastly
while assessing these institutions.
The provisions of Section 11(5)
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relating to investment of their
funds also work as a check to
avoid misuse etc.
Also, the concept of Corporate
social responsibility introduced by
the Companies Act, 2013 reflects
that welfare activities from private
participation are being promoted.
In light of the same, it is
suggested that the ceiling of 10%
under section 80G may be
withdrawn.
101. Donations Sub-section (5D) was inserted in It may be clarified as to whether
made of any section 80G and sub-section (2A) the limit of Rs.10,000 is
sum was inserted in section 80GGA to applicable in respect of each
exceeding ten provide that no deduction shall be individual contribution or
thousand allowed under these sections in aggregate contributions to an
rupees in respect of donation of any sum institution or to all institutions
cash- sections exceeding Rs.10,000 unless such covered under section 80G(2)
80G and sum is paid by any mode other and section 80GGA(2),
80GGA than cash. respectively
It is not clear from the language (SUGGESTIONS FOR
of these sub-sections as to RATIONALIZATION OF THE
whether the limit of Rs.10,000 is PROVISIONS OF DIRECT TAX
applicable in respect of each LAWS)
individual contribution or with
respect to the aggregate
contribution made by a person
during a year to an institution or
to all institutions covered under
section 80G(2) or 80GGA(2).
102. Limits of As per the provisions of section Considering the prevailing
House Rent 10(13A), least of the following is inflationary conditions in India,
Allowance exempt from tax in case a it is suggested that the limits of
(HRA) & salaried employee receives both house rent deduction u/s
80GG: House rent allowance from his 80GG and House rent allowance
employer: u/s 10(13A) be reviewed and
i) House rent Allowance actually enhanced.
received ii) rent paid 10% of
salary iii) 40%/50% of salary and
For non-salaried persons, the
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Sr. Section Issue/Justification Suggestion
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deduction for house rent paid is
given under section 80GG
wherein Rs. 2000 p.m or 25% of
total income for the year,
whichever is less is allowed to an
assessee..
Considering the prevailing
inflationary conditions in India,
there is a need to review and
enhance the limits of both house
rent deduction u/s 80GG and
House rent allowance u/s
10(13A).
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PART C-
DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
103. a) Section 80IA Plain reading of section 80IA A specific clarification/
Unit-wise gives the impression that provision should be made in
deduction deduction under section 80IA is section 80 IA itself to provide
should be available 'unit wise'. But, that deduction under section
allowed nowadays, losses of other units 80lA is 'UNIT SPECIFIC'. For
are clubbed to deny deduction each unit deduction under
under section 80IA of the Income- section 80IA should be
tax Act, 1961 on the reasoning separately calculated.
that all units constitute one single (SUGGESTIONS TO REDUCE/
business. Since total income from MINIMIZE LITIGATIONS)
eligible business is loss,
deduction under section 80IA is
disallowed (Even when loss of
other unit has been set off against
profit of non eligible business
income). This practice is
discretionary in nature. An
assessee/company who is
claiming deduction under section
80IA from one unit cannot start
another unit of similar business as
the initial losses of new unit will
get adjusted with the profits of old
unit However, if the new unit is
started by another assessee/
company ,old unit will not suffer
any disallowance under section
80IA. This put existing
assessee/company into
disadvantageous position vis-à-
vis new assessee/company. Many
Tribunal benches (Bangalore,
Mumbai etc.) have already
rejected this practice.
b) Extension The terminal date for power In order to ensure clarity and
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Sr. Section Issue/Justification Suggestion
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of sunset sector undertakings to set up, certainty as regards the period
clause under start transmission or distribution within which the undertaking
section 80-IA or undertake substantial should be set-up or within
renovation is to be extended by which it should start
one year i.e. from 31.3.2013 to transmission etc. the terminal
31.3.2014. In fact, the terminal date may be extended till such
date has been extended several time the country has acquired
times in the last few years self-sufficiency in the supply of
power i.e. the terminal date may
be kept open-ended.
(SUGGESTIONS FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
c) Benefit u/s Section 80-IA of the Income-tax The original position, under
80IA shall be Act, 1961 provides exemption which the transferee company
allowable to from income tax on infrastructure enjoys the benefit in case of a
the resulting / projects subject to specified demerger or amalgamation, may
amalgamated conditions in order to encourage be reinstated.
company in investment in these areas. Sub- (SUGGESTIONS FOR
case of section (12) provides that in case RATIONALIZATION OF THE
demerger / of demerger or amalgamation, the PROVISIONS OF DIRECT TAX
amalgamation benefits to the undertaking under LAWS)
Section 80-IA will continue in the
hands of the transferee company
and will cease in the hands of the
transferor company.
However, as per sub-section
(12A) inserted by the Finance Act,
2007 the benefits will cease, if
there is a transfer in a scheme of
amalgamation or demerger, on or
after 1st April, 2007. The
unfortunate result of this
amendment is that neither the
transferor nor the transferee
company will enjoy the benefit of
80-IA in case there is an
amalgamation or demerger.
The original position, under which
the transferee company will enjoy
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the benefit in case of a demerger
or amalgamation, needs to
reinstated based on the following
reasons:
(i) Incentives of this nature
have been traditionally
linked to a unit/undertaking/
investment, and not to an
entity. It is logically so,
because the objective is to
incentivize an investment
regardless of which entity
houses that investment.
(ii) Amalgamations or
demergers are restricted
forms of transfer which are
also subject to (i) stringent
guidelines as prescribed in
the Income-tax Act, 1961
and (ii) Court supervision
and approval. The benefits
under 80IA used to be
allowed in the hands of the
transferee companies in
such restricted forms of
transfer. Such rationale
remains valid even now and
the benefits under Section
80IA may therefore, continue
to be available in the hands
of the transferee, like in the
past, prior to insertion of
Sub-section (12A) in the
Finance Act 2007.
(iii) The benefits of this section,
rightly, covers a long span of
15/20 years as infrastructure
projects by nature take a
long time to give economic
returns corresponding to
their risks. In such a long
span of time, the dynamic
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Sr. Section Issue/Justification Suggestion
No
and ever changing market
place, especially in a
growing economy like India,
will necessitate a company
to undergo many changes
(amalgamation or demerger
being some of these) in
order to continue to operate
efficiently. Removal of
benefits like that of 80IA
would lead to economic
inefficiencies by preventing
necessary amalgamations or
demergers.
(iv) The amendment therefore is
an undue constraint and may
even defeat the original
purpose of encouraging
infrastructure projects
(especially given the long
span of time), which are
necessary building blocks of
our economy.
The concept of an amalgamation
or demerger deserving
appropriate treatment is well
recognized under the Income-tax
Act, 1961 which rightly provides
for several benefits for such
transactions including exemption
from capital gains tax. Further,
fiscal benefits similar to 80IA like
those under Sections 80IB, 80IC
or 10A of the Income-tax Act,1961
continues to be available, rightly,
even after any amalgamations or
demergers, and these have not
been deleted. Extending the
timelines for some of these
benefits years, in the Finance Act
of 2011 clearly underscores and
reiterates their importance.
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104. Incentivizing There is an urgent need to invest The tax incentives may take the
investments heavily in building up of a viable following forms:
in respect of and efficient infrastructure in the i. deduction of proportionate
agricultural agriculture sector in India. This profits for the total value of
infrastructure would necessitate building up of turnover arising from such
proper computerized computerized
infrastructural facilities and infrastructural facilities (in
electronic highways for line with the provisions of
procurement, dissemination of section 80IA read in
best agricultural practices, conjunction with section
weather information, storage 80HHC) for purposes of
practices etc. as well as offering simplification and
the best possible price to the avoidance of disputes.
farmers. Also, this would result in
ii. deduction of the total
cutting down intermediaries/
expenditure incurred, both
middlemen and thereby reduce
capital and revenue, for
the transaction costs.
creating such
Section 80IA of the Income-tax infrastructure (similar to
Act, 1961 provides for deduction the provisions of section
in respect of profits/ gains from 35).
industrial undertakings engaged in
(SUGGESTIONS FOR
infrastructure development. This
RATIONALIZATION OF THE
covers road, bridge or rail,
PROVISIONS OF DIRECT TAX
highway projects, water projects,
LAWS)
ports, airports, telecommunication
services, industrial parks and
power generation. The definition
of infrastructure should be
extended to include rural
infrastructure like:
Village kiosks housing IT
infrastructure like computers,
VSATs, Modems, smart
cards, projectors, screens etc.
Support infrastructure like
solar-panels, UPS, Batteries
etc. at these locations.
Water harvesting facilities like
check dams, wells ponds and
other rain harvesting
structures.
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Storages including farmer
facility center housing training
centers, cafeteria, health
clinic, pharmacy, bank
counters and necessary
parking area.
Green houses and poly
houses.
105. (a) Section As per the current provisions, any It is suggested that the
80JJAA Indian company engaged in the amendment so made be
Deduction in manufacturing of any article or dropped in view of the above
respect of thing, gets a deduction of 30% for anomalies. It is recommended
employment new workmen employed during to state that the section should
of new the given year for three be modified to cover
workmen consecutive years including the `employees employed by the
year of employment. It is industrial undertaking'
proposed to restrict this deduction
to only those companies who
have a "factory" as defined under
the Factories Act, 1948. Further
any factory acquired by way of
amalgamation or hive off, etc.
would not be eligible for these
benefits. This provision would
harm software industry which is
the largest earning amongst
others.
In the given scenario, when the
economy needs a boost from the
corporate world and employment
opportunities could assist in
accelerating overall growth and
development of the nation.
Under such circumstances,
proposing restrictions on such
employment opportunities is unfair
and therefore we suggest that this
proposal be dropped in view of
the below difficulties that may be
faced:
There should be clarity to the
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Sr. Section Issue/Justification Suggestion
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effect that what is the
meaning of the term
`workmen' and the term
`employee'
Deduction perfected in terms
of old section 80JJAA for and
upto AY 2013-14 should be
available for residual years
even in absence of specific
grandfathering
It is suggested that the blue
collared employees who
support the organization while
being outside the factory
premises may be considered
as "employed in such factory"
Clarity is required where the
taxpayer who is not registered
under the Factories Act,
whether he may be granted
deduction under this section
(b) Section Section 80JJAA which grants It is suggested that a suitable
80JJAA deduction of an amount equal to clause be added in Form 3CD
Deduction in 30% of wages paid to new regular requiring the tax auditor to
respect of workmen employed in industrial certify the particulars of new
employment undertaking which is engaged in regular workmen employed and
of new "manufacture or production of the additional wages paid to
workmen article or thing" was amended by them to ensure the correctness
the Finance Act, 2013 to provide of claim under section 80JJAA.
that deduction shall be allowed to (SUGGESTIONS TO REDUCE /
an Indian company which is MINIMIZE LITIGATIONS)
engaged in "manufacture of
goods in a factory" and where
new regular workmen are
employed by the taxpayer in such
factory.
106. Deduction in a) Section 80QQB provides for a Since this does not appear to
respect of deduction of income up to be the intention, it is suggested
royalty on Rs.3,00,000/- in respect of royalty that clause (b) of the
books or copyright fees or lump sum Explanation to the section
Section consideration in respect of a should be amended by deleting
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Sr. Section Issue/Justification Suggestion
No
80QQB book. The term book is defined the word 'commentaries' from
as, inter alia, not including the list of exclusions.
commentaries. The intention (SUGGESTIONS FOR
appears to be to grant deduction RATIONALIZATION OF THE
in respect of all books of literary, PROVISIONS OF DIRECT TAX
artistic or scientific nature. It is LAWS)
possible that many books of
scientific nature may be regarded
as commentaries, and may not
qualify for the deduction.
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PART CA-
DEDUCTIONS IN RESPECT OF OTHER INCOME
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
107. Deduction in Section 80TTA was inserted by Interest on all types of deposits
respect of the Finance Act, 2012 to provide may also be included within the
interest on deduction of up to Rs.10,000 in scope of section 80TTA.
deposits in the hands of individuals and (SUGGESTIONS FOR
savings HUFs in respect of interest on RATIONALIZATION OF THE
account- savings account with banks, post PROVISIONS OF DIRECT TAX
Section offices and co-operative societies LAWS)
80TTA. carrying on business of banking.
However, it is unlikely that
salaried individuals would keep
their entire savings in a savings
bank account, which earns a
much lower rate of interest as
compared to term deposits. They
are likely to transfer some portion
of their savings to several
deposits to earn comparatively
better returns. Therefore, since
the money is anyway kept within
the banking channels, it is
suggested to include all types of
deposit interest within the ambit of
section 80TTA.
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CHAPTER IX
DOUBLE TAXATION RELIEF
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
108. Applicability Under the Income-tax Act, 1961, Appropriate amendment in
of Education Education cess and Secondary and the Act as well as ITR forms
Cess and Higher education cess are imposed may be made to clarify that
Secondary on account of the provisions EC & SHEC should not be
and Higher contained in sub-section (12) of applicable on the rates
Education Chapter III of the Annual Finance specified under DTAA.
Cess -Double Act which provides the rates of (SUGGESTIONS TO REDUCE
taxation income-tax. The education cess is to / MINIMIZE LITIGATIONS)
Avoidance be calculated on the amount of
Agreement income-tax as specified in sub-
sections (1) to (10) of the said
Chapter. However, none of these
sub-sections deal with the rate
specified in DTAA, which becomes
leviable by virtue of the provisions of
section 90A(2).Therefore, the moot
issue is whether the Education cess
and Secondary and Higher
education cess would be applicable
where the rates specified in the
respective DTAA becomes
applicable by virtue of the beneficial
provisions contained in section
90A(2).
It may be noted that at the time
when a Double taxation avoidance
agreement is entered, the intention
is to arrive at an all inclusive fixed
rate of tax.
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CHAPTER X
SPECIAL PROVISIONS RELATING TO
AVOIDANCE OF TAX
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
109. a) Domestic a) The Finance Act 2012 has There is clearly a need for
Transfer introduced DTP in spite of harmonization of the different
Pricing [DTP] existing provisions under the thresholds for the related party
Sections 92, Act which empower the definitions' in the sections
92BA, 92C, Assessing Officer (AO) to 40A(2),92A(2) and 80A read with
92CA, 92D & disallow unreasonable section 35AD(8). Necessary
92E expenditure incurred amendments in this regard may
between related parties be appropriately made.
(Section 40A) or re-compute
the income of assessees
availing profit-linked
deductions if there are
transactions with related
parties or other undertakings
of the same assessee
(Sections 80A, 80-IA, similar
Chapter VI-A deductions or
section 10AA). These
transactions are presently
benchmarked against fair
market value. In this regard
the following points require
consideration:
Harmonization of the "related
party" definitions: Presently,
three different sections
referred to in section 92BA
and section 92A of the Act
have different thresholds for
determination of the `related
party' definitions' which are
as under:
Substantial Interest Not
less than 20% of voting
power Explanation (b) to
Section 40A(2)
Associated Enterprises - Not
less than 26% of voting
power Section 92A(2)(a)
& (b)
Pre-Budget Memorandum 2014 (Direct Taxes) Page 179
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
Associated Person - Not less
than 26% of voting power
Section 80A read with
section 35AD(8)
b) Guidance in b) Presently, there is no Since payment of directors`
respect of guidance in respect of remuneration is subject to DTP
benchmarking benchmarking of the provisions, it is suggested that
of Directors Directors` remuneration. there should be no restrictions
remuneration on Directors' remuneration
based on profits computed
within the limits as specified
under the Companies Act &
also necessary guidance for
benchmarking in respect of the
same should be provided.
c) Arm's c) Section 80IA(8) deals with Conceptually, `price
Length Price "ordinary profits" whereas principles' cannot apply for
vs Ordinary transfer pricing compliance benchmarking of `profits'.
Profits: refers to the "Arm`s Length
Price" of the transactions.
d) Increase in d) The threshold limit of 5 crore In order to ensure that only
the threshold is too low for applicability of substantial transactions are
limit of Rs. 5 the Domestic Transfer covered under the DTP
crore Pricing provisions provisions, the threshold limit
should be raised to Rs. 50
crore.
e) Currently, APA provisions The same should also be made
are being made applicable to applicable to domestic
only international transactions covered by DTP
transactions. provisions
e) f) Where the volume of It is suggested that the
Documentation specified domestic maintenance of documentation
Requirements: transactions is below the as required for transfer pricing
threshold limit, the should not be applicable.
maintenance of Alternatively a threshold limit
documentation as required of 25 crore be introduced for TP
for transfer pricing should documentation requirements.
not be applicable.
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CHAPTER X-A
GENERAL ANTI AVOIDANCE RULES
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
110. GAAR GAAR provisions will undoubtedly To ensure that, the extra
have far reaching implications. ordinary powers are not
exercised by revenue officers
arbitrarily or de hors the key
objects behind introduction of
GAAR, it is very important that
the apprehensions of the
taxpayers are addressed at the
earliest.
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CHAPTER XII-
DETERMINATION OF TAX IN SPECIAL CASES
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
111. Removal of At present, Long Term Capital It is suggested that appropriate
anomalies in Gain is taxed @ 20% in provisions be made in the Act
sections 111A pursuance of the provisions of whereby the tax liability of an
& 112 section 112.Whereas, in case of individual whose taxable
individual assessee having normal income consists of only long
income the rate of tax upto RS. 5, term or short term capital gain,
00,000 is only 10%.This leads to a should not in any case, exceed
situation where in case if one's the amount of tax liability
gain from transfer of long term calculated deeming the capital
capital asset is below Rs. 5, gain as regular income. This
00,000 then also he is required to can be done by making the
pay tax @ 20% plus cess as per provisions of Section 111A &
section 112 whereas his tax 112 optional.
liability otherwise would be much
lesser.
Similar is the situation in case of
Short Term Capital Gain by way of
sale of equity shares as provided
u/s 111A, where the tax rate is
15% which is more than the
minimum rate of tax payable by
the individuals.
112. Sec.115- Inter The Finance Act, 2008 amended For the reasons given, it is
Corporate the provisions of section 115-O to suggested that the system of
Dividend eliminate the hardship of double tax credit for the dividend
Distribution taxation arising on account of distribution tax paid by the
Tax (DDT) cascading effect of DDT in case of subsidiary companies against
inter-corporate dividend. This is a the dividend distribution tax
step in right direction. However, payable by the respective
the same mitigates the hardship holding companies at all levels
partially. The real objective should be introduced.
be to eliminate the cascading
effect of DDT in case of inter
corporate receipt & distribution of
dividend. The amendment made
in the section is very restrictive as
it confines to receipt and
distribution of dividend only at one
level. It applies only to dividend
Pre-Budget Memorandum 2014 (Direct Taxes) Page 187
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Sr. Section Issue/Justification Suggestion
No
received by holding company from
its subsidiary and that too it
applies to only one level. In view
of this, the double taxation of DDT
continues in all other situations of
inter-corporate receipt and
distribution of dividends. For
commercial and other legitimate
business needs, inter-corporate
shareholding is almost
unavoidable.
Therefore, amendment in section
115O is required to eliminate the
double taxation arising on account
of cascading effect of DDT in all
such cases. Alternatively, the
amendment should not be
confined to one level of Holding -
Subsidiary relationship. The same
should cover all the levels.
It may be noted that in view of the
business requirements, which
necessitate the formation of
subsidiaries, the domestic tax
system needs to be tuned in
alignment with business
requirements. In fact, this problem
was recognized in the Income-tax
Act itself in old Section 80M which
provided mechanism to avoid
double taxation in such cases.
113. Section 115A- The Finance Bill, 2013 amended It is recommended that the
Rate of TDS section 115A and substituted new erstwhile tax rate of 10% on
on income by sub-clauses (A) and (B) in clause payments made to non-
way of (b) for sub-clauses (A), (AA), (B) residents towards income in the
royalty or and (BB), to increase rate of tax nature of Royalty and Fees for
Fees for from 10% to 25% on payments Technical Services (`FTS') be
technical made to non-residents towards retained as the same will also
services income in the nature of Royalty be in line with the rate which is
and Fees for Technical Services provided in majority of the tax
(`FTS'). treaties.
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Sr. Section Issue/Justification Suggestion
No
The above proposed
unreasonable increase in rate of
tax merits reconsideration for the
reasons stated under:
The Hon'ble Finance Minister in
his budget speech had stated that
the rate of tax on royalty in the
Income Tax Act is lower than the
rates provided in a number of
Double Tax Avoidance
Agreements (`DTAAs') and the
above proposal is aimed at
correcting this anomaly.
In this regard, it may be noted that
India has entered into DTAAs with
almost 84 countries and an
analysis of the rate of tax on
royalty/FTS in all these DTAAs
are as below:
Sr. Countries Rate of
No. tax
1 49 10%
2. 16 15%
3 5 20%
4. 2 22.5%
From the above table, it can be
observed that in almost 60% of
the countries with which India has
a DTAA, the rate of tax on
royalty/FTS is 10%. There are just
2 countries where the rate of tax
is higher than 20%. It should also
be noted that trade dealings with
these countries is also very
miniscule as compared to major
trading partners where the rate of
tax is 10% under the respective
DTAA.
Therefore, increase of rate of
taxation of Royalty/FTS on the
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Sr. Section Issue/Justification Suggestion
No
premise of aligning the same with
the rates under the DTAAs is not
justifiable.
114. Anonymous Section 115BBC taxes To clarify the intention of the
donations anonymous donations at a flat statute, it is suggested that
under section rate of 30%. The Finance (No.2) section 115BBC(1)(ii) may be
115BBC Act, 2009 had introduced an re-worded as follows:-
exemption limit for taxation of " the amount of income-tax with
anonymous donations received by which the assessee would have
charitable trusts and institutions. been chargeable had his total
Accordingly, the total tax payable income been reduced by the
by such trusts/institutions would aggregate amount of
be: anonymous donations received
(i) Tax @30% on anonymous WHICH ARE SUBJECT TO TAX
donations exceeding the IN CLAUSE (i) ABOVE."
exemption limit as (SUGGESTIONS FOR
calculated above; and RATIONALIZATION OF THE
(ii) Tax on the balance income PROVISIONS OF DIRECT TAX
i.e. total income as reduced LAWS)
by the aggregate of
anonymous donations
received.
The exemption would be the
higher of the following:
(i) 5% of total donations
received by the
trust/institution or
(ii) Rs.1,00,000
Thus, a clarification is required as
to whether the intention of the
statute is to altogether exempt
this amount from income-tax or to
bring it to tax at normal rates of
income-tax.
The issue is explained by way of
an illustration:
Total donation = Rs.10 lacs
Anonymous donations = Rs.3 lacs
Exemption under section 115BBC
= Rs.1 lac (i.e. higher of Rs.1 lakh
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Sr. Section Issue/Justification Suggestion
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or 5% of 10 Lakhs i.e. Rs. 0.50
lakhs)
Balance anonymous donations =
Rs.3 lakhs Rs.1 lakhs= Rs.2
lacs is taxable@ 30% under
section 115BBC.
Balance taxable income = Rs.10
lac Rs.3 lac = Rs.7 lacs would
be subject to normal rates of
tax.
The balance income of Rs.7 lakhs
would be exempt only if it is
applied for specified charitable
purposes.
The language of the section, as it
reads at present, exempts Rs.1
lakh unconditionally i.e. no
application is required for the
purposes of total exemption from
tax.
It is felt that this may not reflect
the correct intention of the
legislature. The amount of Rs.1
Lakh, exempt under section
115BBC, should also be required
to be applied for specified
purposes for claim of total
exemption from tax.
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CHAPTER XII-B
SPECIAL PROVISIONS RELATING TO CERTAIN
COMPANIES
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
115. Tax Credit u/s Minimum Alternate tax and It is suggested that for setting
115JAA & Alternate Minimum tax is paid u/s off of MAT credit, a fresh period
115JD read 115JB & 115JC of the Act of 10 years be allowed after the
with section respectively. The amount of tax completion of period of
115JB & 115JC credit so determined under exemption in section 10A to
section 115JAA and 115JD is 10C and deduction in section
carried forward and set off in 80IA to 80ID under normal
accordance with the provisions of provisions of the Act provided
these sections but such carry it is the exclusive business of
forward is not allowed beyond 10th the assessee.
assessment year immediately (SUGGESTIONS FOR
succeeding the assessment year RATIONALIZATION OF THE
for which tax credit becomes PROVISIONS OF DIRECT TAX
available. LAWS)
In case of an assessee who is
entitled to claim the exemption u/s
10A to 10C and deduction u/s
80IA to 80ID, the said amount of
tax credit is eligible for set off only
after the expiry of the 10th
Assessment year in which such
exemption and deduction allowed
accordingly. However, in effect
the purpose of making available
the tax credit gets defeated, as
tax credit is not utilized by those
companies up to 10 assessment
years and carry forward of the
Income tax paid on book profit
under this section, is not allowed
to be set off beyond 10th
assessment year immediately
succeeding the assessment year
for which tax credit become
available
116. Book Profit Presently, while computing the In order to promote in-house
tax (MAT) on `Book Profit' under Section 115JB, R&D in India, the amount of
Scientific the amount of weighted deduction weighted deduction u/s 35(2AB)
Research u/s 35(2AB) is not deducted. In may be allowed to be deducted
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Sr. Section Issue/Justification Suggestion
No
Expenditure the past, similar adjustment in while computing tax under
respect of export profits under 115JB.
Section 80HHC was permitted for (SUGGESTIONS FOR
purposes of computation of `Book RATIONALIZATION OF THE
Profit' under Section 115JB. PROVISIONS OF DIRECT TAX
LAWS)
117. Section a) Disallowance of provision Clause (i) of Explanation 1 to
115JB- for diminution in value of any section 115JB may be amended
Minimum asset for computation of "book as follows-
Alternate tax profit", it appears, is to be made "(b) the amounts carried to any
in every class of company. reserves, by whatever name
However, in case of banking called [other than a reserve
companies the Government may specified under section 33AC
give a relook and consider and a reserve created and
applicability of the disallowance allowed in accordance with the
provision to a banking company. provisions of section 36(1)(viii)]
This is because of the fact that in (i) the amount or amounts set
computation of business income aside as provision for
under normal provision, deduction diminution in the value of any
in respect of provision for bad asset (other than provision for
debts is allowed under express bad and doubtful debts allowed
provision contained in section as a deduction u/s 36(1)(viia))"
36(1)(viia) subject to the limit
specified in the said section. If (SUGGESTIONS TO REDUCE/
provision for bad debts is allowed MINIMIZE LITIGATIONS)
as deduction in computation of
business income under normal
provision, there does not appear
to be any cogent reason for
disallowing the same in
computation of "book profit" under
section 115JB. Similarly, any
special reserve created in
accordance with the provisions of
section 36(1)(viii) also does not
require any disallowance in
computation of book profit under
section 115JB.
b) The Government had Clauses (b) and (e) of
notified revised Schedule VI Explanation 1 may be deleted
(which is same as Schedule III of with effect from 1st April, 2012.
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in the Companies Act, 2013) (SUGGESTIONS TO REDUCE /
providing new formats for MINIMIZE LITIGATIONS)
presentation of Balance Sheet
and Profit & Loss A/c. The
changes in Revised Schedule
which may be of relevance to
MAT are omission of Part III,
moving of `below the line
adjustments' to Balance Sheet
and changes in certain disclosure
items.
The Finance Act, 2012 has
omitted reference to Part III of
Schedule VI since Revised
Schedule VI does not contain Part
III. However, other consequential
amendments are also necessary
consequent to notification of
Revised Schedule VI, which were
not addressed in the Finance Act,
2012.
As per Revised Schedule VI (and
also Schedule III of the
Companies Act, 2013), the profit
and loss account prepared as per
Part II does not include
appropriation to reserves and
proposed dividend. These
appropriations have to be
disclosed by way of Notes to
Accounts forming part of the
Balance Sheet.
Explanation 1 to section 115JB
provides that the book profit
means the net profit as shown in
the profit and loss account for the
relevant previous year, as
increased by the amounts
referred to in clauses (a) to (i)
thereunder, if the same is debited
to profit and loss account.
Since as per Revised Schedule VI
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Sr. Section Issue/Justification Suggestion
No
(as also Schedule III of the
Companies Act, 2013), the profit
and loss account prepared as per
Part II does not include
appropriation to reserves and
proposed dividend, Clause (b) of
Explanation 1 providing for adding
back of amount carried to any
reserves, by whatever name
called, and Clause (e) of
Explanation 1 providing for adding
back of the amount or amounts of
dividends paid or proposed may
be deleted with effect from 1st
April, 2012 i.e. Assessment Year
2012-13, being the date of
applicability of Revised Schedule
VI.
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CHAPTER XII-F
SPECIAL PROVISIONS RELATING TO TAX ON
INCOME RECEIVED FROM VENTURE CAPITAL
COMPANIES AND VENTURE CAPITAL FUNDS
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
118. Due date of Section 115U(2) read with Rule To enable the investor of
furnishing 12C requires that the person VCC/VCF being an individual, to
statement in responsible for crediting or declare his income from
Form No.64 making payment of the income on VCC/VCF in his return of
under section behalf of a Venture Capital income bu 31st July, the due
115U read Company (VCC) or a Venture date of furnishing statement
with Rule 12C Capital Fund (VCF) and the under Rule 12C should be
VCC/VCF shall furnish a changed to "30th June" from
statement in Form No. 64 to the "30th November".
person liable to tax in respect of
such income by 30th November of
the financial year following the
previous year during which such
income is distributed.
Difficulty is faced by assessees
who have to file their return of
income by 31st July of the
assessment year. Since income
received by the investor is taxable
in his hands, he has to declare his
income in his return of income.
However, the certificate is
received by them by 30th
November, which causes genuine
difficulty to him.
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CHAPTER XIII
INCOME TAX AUTHORITIES
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PART C-POWERS
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
119. Section 132- a) After search, as per Since cash is seized at the time
Search and amended provision by the of search and lying in PD
seizure Finance Act 2010, where account of CIT, such cash after
assessee files application with adjusting existing tax liabilities,
Settlement Commission for may be permitted to be adjusted
settlement of his cases, the cash against the tax due as per
seized during search be permitted settlement petition. Suitable
to be adjusted against the tax due amendment / instruction is
as per the offer made by the required to be given to the
assessee in the settlement authorities in the matter since
application. It may be mentioned they are not permitting such
that as per the provision adjustment for want of clarity.
contained in this regard, the (SUGGESTIONS TO REDUCE /
assessee has to make additional MINIMIZE LITIGATIONS)
disclosure of income in the
settlement petition and pay
additional tax of Rs.50 Lakhs
before filing the application with
the Settlement Commission.
b) Under the existing In view of above, it is suggested
provisions, the applicant is that the limit of additional tax of
allowed the benefit of filing Rs. 50 lakhs be removed and
application before the Settlement the provisions of section 245C
Commission subject to the limit of appropriate amended be made
additional tax of Rs. 50 lakhs in respect of persons who are
whereas the said benefit is covered under search along
available to specified person if the with the main searched party
additional tax exceeds Rs. 10 but are not the main applicant
lakhs. Therefore, a person whose under clause (i) of Proviso to
case is connected with the main Section 245C of the Income-tax
searched party but is not covered Act, 1961 in Chapter XIX-A,
in the meaning of specified Settlement of Cases.
person cannot file application
before the Settlement
Commission unless the additional
tax exceeds Rs. 50 lakhs.
It is significant to note that the
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Sr. Section Issue/Justification Suggestion
No
actions are initiated u/s 153A or
153C of the Act in consequence
to search conducted on the
applicant. The condition imposed
of Rs. 50 lakhs of additional tax
for filing the application in case of
non-specified person is
unreasonable as the proceedings
in the case of non-specified
person are merely as a result of
search in case of the main
applicant. It is important to note
that the Settlement Commission
will assess the correct income in
any case and therefore imposing
the limit of Rs. 50 lakhs is very
harsh for the cases which are
searched together and centralized
also by the Income Tax
Department.
c) Section 132B provides for In view of the practical difficulty
application of seized or being faced, it is suggested that
requisitioned asset. The first a provision like 132(5) [omitted
proviso to section 132B(1)(i) by Finance Act, 2002] which
provides that where the person provided for provisional
concerned makes an application assessment be introduced and
to the Assessing Officer within 30 the asset be released after
days from the end of the month in releasing the amount due as per
which it was seized for the provisional assessment.
release of asset and the AO is (SUGGESTIONS TO REDUCE /
satisfied about the explanation MINIMIZE LITIGATIONS)
provided regarding the source of
asset, the asset is released after
recovery of the amount of any
existing liability.
Further, second proviso to section
132B(1)(i) provides that such
asset or a portion thereof shall be
released within a period of 120
days from the date on which last
of the authorizations for search
under section 132 or for
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Sr. Section Issue/Justification Suggestion
No
requisition under section 132A as
the case may be, was executed.
Even after release of Instruction
No. 11/2006, dated 1-12-2006
practical difficulty is being faced
by assessees as the asset is not
released upto the completion of
assessment.
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CHAPTER XIV-
PROCEDURE FOR ASSESSMENT
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
120. (a) Due date of As per the Explanation 2 to In order to resolve the difficulty
filing of return in section 139(1), due date for filing being faced by partners other
section 139(1) for return of income is 30th than working partners, it is
partners other September of the AY in respect of suggested that wherever the
than working a working partner of a firm whose firm is liable to get its accounts
partners accounts are required to be audited, the due date for filing
audited under this Act or under return of income under section
any other law for the time being 139(1) of the Income-tax Act,
in force. While partners, other 1961, may be extended to 30th
than working partners, are September of the AY for all
required to file return of income partners of the firm including
by 31st July of the AY. It has been non-working partners of the
observed that difficulties are firm.
being faced by partners other Also, like Companies, all firms
than working partners as their are mandatorily required to file
Income-tax return form requires return of income, thus the due
them to mention the capital date of filing return of income
balance. It is imperative to note for all such firms should be in
that it becomes quite difficult for line with the companies
the partner other than working irrespective of whether or not
partner to mention such capital the accounts are required to be
balance on 31st March in the firm audited.
(liable to get its accounts audited
(SUGGESTIONS FOR
and file its return by 30th
RATIONALIZATION OF THE
September) in his return, until the
PROVISIONS OF DIRECT TAX
audit of such firm is completed.
LAWS)
Thus, it is suggested that said
difficulty may be resolved.
It may also be noted that Finance
Act, 2005 brought the firms at par
with companies by amending
section 139(1)(a) making it
mandatory for all firms to file their
return of income before the due
date. Since both of them are
mandatorily required to file return
of income irrespective of the
quantum of income, the due
dates of filing return of income for
both should also be at par.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 211
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Sr. Section Issue/Justification Suggestion
No
(b) Section 139- The scope of filing return of The scope of filing return of
Enlarging the income should be widened. income should be widened so
scope as to include in its ambit the
persons entering into the
following transactions:
A person having foreign
tour twice in a block of
three years or thrice in a
block of five years should
file his/her return of income
mandatorily.
A person having huge
agriculture income or is in
a possession of large
agriculture land should
also come within a purview
of return of income.
A person paying electricity
expense above certain limit
(say Rs. 36000 pa)
A person paying school
fees above specified limit
(say Rs. 72000 pa) should
also come under the scope
of return of income.
If the aggregate amount
deposited in the current
account exceed certain
limit (say Rs. 30,00,000)
then provisions of filing of
return should apply to that
person mandatorily.
The person has AIR
transaction should also
come under the scope of
return of income, and if
he/she not file return of
income then penalty u/s
271F should be levied
instead of giving notice for
filing return of income.
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Cash withdrawals from
saving bank account above
certain limits should also
takes place in the annual
information return.
(SUGGESTION TO WIDEN THE
TAX BASE)
121. Revised return - a) Section 139(5) provides for It is suggested that section
Section 139(5) filing of revised return in cases 139(5) may be amended to
where return has been furnished provide that the revised return
under section 139(1) or in can be filed even in the case of
pursuance of notice under section belated return.
142. There is no provision of filing (SUGGESTIONS FOR
revised return in case where RATIONALIZATION OF THE
return is filed belatedly under PROVISIONS OF DIRECT TAX
section 139(4). LAWS)
122. Guidelines for For the purpose of conducting Specific guidelines for the
the empanelment special audit under section appointment of auditor under
of auditors under 142(2A) of Income-tax Act, 1961 section 142(2A) by Chief
section 142(2A) (corresponding clause 151 of the Commissioner or
Direct Taxes Code Bill, 2010), the Commissioner may be issued.
auditor is nominated by Chief The said guidelines may
Commissioner or Commissioner. provide for conditions like
Presently, no specific guidelines experience of the auditor in the
have been issued by the relevant field, number of years
authorities to enable the Chief of experience, number of
Commissioners or partners etc. Further, in order
Commissioners to take an to maintain quality of work and
informed decision. Considering to provide equitable
the fact, that the tasks involves distribution of work, a
auditing of complex accounts, restriction on the number of
some specific guidelines taking such audits by a particular
into account the experience of auditor in a particular year may
the auditor in the relevant field be imposed.
etc may be issued by CBDT. (SUGGESTIONS FOR
Further, in order to maintain RATIONALIZATION OF THE
quality of work and to provide PROVISIONS OF DIRECT TAX
equitable distribution of work, a LAWS)
restriction on the number of such
audits in a particular year may be
imposed.
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Sr. Section Issue/Justification Suggestion
No
123. Special audit - Section 142(2A) was amended by It is suggested that no change
section 142(2A) Finance Act, 2013 apparently to is required in the existing
amplify the scope of special audit section, since it adequately
i.e. the Assessing Officer now takes care of all cases of
has the power to direct a special complexities, including doubts
audit, having regard to volume of about the correctness of
transactions, doubts about the accounts and multiplicity of
correctness of the accounts, transactions.
multiplicity of transactions in the (SUGGESTIONS TO REDUCE /
accounts or specialized nature of MINIMIZE LITIGATIONS)
business activity of the assessee.
So far, the "nature and
complexity of the accounts" was
the necessary and sufficient
criterion for directing special
audit.
The new section 142(2A) appears
to have the effect of enlarging the
scope of special audit
considerably. The scope of
reasons for invoking the powers
under section 142(2A) to direct
the assessee to get the accounts
audited by an accountant have
been substantially increased.
Empowering the Assessing
Officer to invoke tax audit under
section 142(2A) merely due to the
"volume of accounts" or
"multiplicity of transactions" may
have the effect of bringing each
and every case within the ambit
of special audit. Each and every
gas station, share broker, retailer,
agency business and the like may
fall within the purview of this
section solely on account of the
"volume of accounts" or
"multiplicity of transactions".
Also, as these expressions are
highly subjective, they are prone
to adoption of very low threshold
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Sr. Section Issue/Justification Suggestion
No
to trigger the application of this
provision. This may cause undue
hardship to even those
assessees who genuinely ensure
compliance with the provisions of
law. Further, the specialized
nature of business activity of the
assessee, like say electricity or
insurance business, in our
opinion, cannot be a standalone
reason for directing special audit.
Special audit, as the name
suggests, should be invoked only
in exceptional circumstances,
which is the reason why the
existing section aptly confines
that it is the nature and
complexity of accounts which has
to be considered while directing
such audit. There should be a
distinction between regular audit
and special audit. The scope of
special audit cannot be increased
to such an extent that majority of
the assessees, whose accounts
have already been audited, are
once again subject to a special
audit merely due to, say, volume
of accounts being more in case of
large enterprises. The special
audit is more in the nature of
investigation or due diligence,
and therefore, needs to be
directed only in exceptional cases
having regard to the nature and
complexity of accounts.
Further, this may increase the
possibility of some Assessing
Officers resorting to special audit
since it gives them an extended
time for completing their
assessment.
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Sr. Section Issue/Justification Suggestion
No
124. Hardship arising a) In the above-mentioned Appropriate amendments may
out of the Apex case the assessee filed its return be made to enable the
Court's decision of income for the relevant assessee to get relief during
in Goetze (India) assessment year without claiming the assessment proceedings
Ltd. v. CIT (2006) a particular deduction. Later on, under section 143(1) and
284 ITR 323 (SC) it sought to claim the deduction section 144 by methods
by way of a letter addressed to otherwise than by way of filing
the Assessing Officer. The a revised return.
deduction was disallowed by the (SUGGESTIONS TO REDUCE /
Assessing Officer on the ground MINIMIZE LITIGATIONS)
that there was no provision under
the Act to make amendment in
the return of income by making an
application at the assessment
stage without revising the return.
The assessee had relied upon
the decision of the Apex Court in
National Thermal Power
Company Ltd. v. CIT (1998) 229
ITR 383, to contend that it was
open to the assessee to raise the
points of law even before the
Appellate Tribunal. In that case,
it was held that the Tribunal had
jurisdiction to examine a question
of law (raised for the first time),
which arose from the facts as
found by the income-tax
authorities and which have a
bearing on the tax liability of the
assessee.
The Supreme Court held that this
decision does not in any way
relate to the power of the
Assessing Officer to entertain a
claim for deduction otherwise
than by filing a revised return.
Therefore, the assessee can
claim deduction only by filing a
revised return.
The above-mentioned decision of
the Apex Court has unsettled
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Sr. Section Issue/Justification Suggestion
No
many a case law and has caused
unintended hardship to the
assessees
b) No deduction is permitted to Provisions of section 80A(5)
an assessee under section 10AA should be modified to permit
and Part C of Chapter VIA if the filing of new claim by the
assessee fails to make a claim in assessee in the course of
the return of income. This assessment, even without filing
provision is very harsh and of revised return of income.
disentitles the assessee to This will remove unintended
legitimately claim otherwise hardship.
legally allowable deductions due (SUGGESTIONS TO REDUCE /
to technical reasons. In many MINIMIZE LITIGATIONS)
cases, failure to make claim in
return may be inadvertent and
mere omission. There are wide
powers given to the Income tax
Authorities under the Income-tax
Act to reopen / review / rectify
assessment if any error
prejudicial to the interest of the
Revenue is found.
Also in the case of Goetze (India)
Limited Vs CIT (284 ITR 323) the
Apex Court has held that it is
necessary for an assessee to
revise its return of income for
raising any new claim which is not
raised in the original return of
income.
Mistake apparent Even after due efforts taken by The Assessing Officers may be
125.
from record the Government to ensure given appropriate instructions
compliance relating to filing of to accept rectification
TDS returns by the deductors, the applications under section 154
defaults on behalf of deductors in cases where Form No. 26AS
continue for one or the other reflects the entries relating to
reason. This deprives the TDS but the same has not been
deductee from claiming the Tax claimed in the return of income.
so deducted in his return of (SUGGESTIONS FOR
income filed before due date of REMOVING ADMINISTRATIVE
filing return. However, situations AND PROCEDURAL
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Sr. Section Issue/Justification Suggestion
No
do arise where the returns are DIFFICULTIES RELATING TO
belatedly filed or a correction DIRECT TAXES)
statement has been filed at a later
date by the deductor resulting into
a credit in Form No. 26AS of the
deductee at a later date say after
the time limit of filing a revised
return has also expired.
Considering the fact that such an
omission in the return of income,
duly supported by the entries of
Form No. 26AS, is a mistake
apparent from record, it is
suggested that the Assessing
Officers may be intimated to
accept the rectification application
under section 154 in such cases.
This will surely be helpful in
removing the administrative
hindrances being faced by the
assessees as well as the
Government.
126. Credit of Tax Many government/semi- It is suggested that considering
Collected at government authorities (viz. the hardship being faced by
Source relating Mining Department) have been assessees in respect of cases
to earlier years demanding TCS of earlier years mentioned above, the
(for which for which assessments have department should give credit
Assessm already been completed, since for such TDS/TCS even if the
ents are already they had not collected the TCS in assessments have been
over & time the those relevant years. After completed and also the period
period making payments of TCS the mentioned u/s 155(14) has
mentioned in Sec certificates for the same are expired.
155(14) has issued in current year giving (SUGGESTIONS FOR
elapsed) reference of expenditure incurred RATIONALIZATION OF THE
demanded by the by payer for earlier financial PROVISIONS OF DIRECT TAX
Government years. LAWS)
authorities at a As per the provision of section
later date: 155(14) "the credit of TDS/TCS
certificates is available to
assessee within 2 years from the
end of the assessment year in
which such income is
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No
assessable" but since the
payment & certificates are
received after the above
mentioned period, it is difficult to
get the credit for the same. The
demand at such later date itself is
causing undue hardship to the
assessee and further the credit
for the same is not available to
the assessee because the
assessments have already been
completed. Hence, department
should give credit for such
TDS/TCS even if the
assessments have been
completed and also the period
mentioned u/s 155(14) has
expired.
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CHAPTER-XVII-
COLLECTION AND RECOVERY OF TAX
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PART B-
DEDUCTION AT SOURCE
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
127. Different One of the important reasons for TDS should not be linked with
Methods of mismatch of TDS claimed and the year of income or the year
accounting TDS as per Form 26AS is of receipt. Credit for TDS may
followed by the adoption of different method of be given on the basis of the
deductor and accounting (i. e. Cash or claim made by the assessee
deductee Mercantile) by the deductor and irrespective of the assessment
deductee. Various situations that year in which income is
may arise have been explained received or income is offered to
below by means of examples: tax. There should be a clear
i) Deductor Mercantile system differentiation between amount
of accounting deducted and amount claimed.
The TDS not claimed in a
DeducteeCash system of
particular year due to any
accounting
reason may either be allowed to
If the deductor follows mercantile be claimed in the any other
system of accounting, the tax assessment year or to be
would be deducted at source and refunded to the deductee. The
deposited in the year in which total TDS claimed and the
provision is made. Whereas the balance, if any, may be
deductee following the cash basis reflected in Form 26AS. Form
of accounting, would offer the No. 26AS should be made as a
income and claim TDS in the year bank pass book where the
in which the amount is actually unclaimed credit is allowed to
received by him. For example be carried forward for claiming
audit fees paid to a Chartered in the next year.
accountant's firm by a company.
In such a case it is difficult for the
deductee to claim TDS as the
TDS certificate is issued in
respect of the year other than the
year in which it is claimed.
Also in some cases, the receipts
may be spread over in two or
more years. In such cases, there
is difficulty in getting credit of TDS
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Sr. Section Issue/Justification Suggestion
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in second and subsequent year in
which amount is actually
received, as the physical Original
copy of TDS certificate was
already filed with the Department
at the time of getting the TDS
credit in 1styear and on
subsequent receipts, the
assessee would not be able to
produce the Original TDS
certificate.
(ii) Deductor Cash system of
accounting
Deductee Mercantile system
of accounting
There is a provision to take the
credit of TDS in the year in which
income is assessable to tax. If for
any reason, TDS certificate has
not been furnished; such
certificate can be produced within
two years u/s 155 of the Income-
tax Act. But issue generally arises
when the following situation
occurs:
In case of a deductee who
maintains books of accounts on
mercantile basis. The amount due
to him in respect of a government
contract is accounted for in his
books of accounts in a particular
year and advance tax/ self
assessment tax is paid by him in
respect of that income. However,
the government which maintains
books of account on payment
basis pays the amount after two
years after deducting tax at
source. In such a case, the
assessee would neither be
entitled to claim credit of TDS in
the year of receipt as the income
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Sr. Section Issue/Justification Suggestion
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has already been offered to tax in
an earlier year nor he would be
able to get refund of tax paid by
him as the time to file revised
return may also have expired.
This amounts to payment of tax
twice to the government.
128. Need to Form 26AS contains: In view of above, it is suggested
strengthen the a) Details of tax deducted on that the details of
validation behalf of the taxpayer by TDS/TCS/Advance Tax/Refund
system of deductors. etc should be feeded by both
FORM 26AS: PAN and Name or PAN and Date
b) Details of tax collected on
of Birth (DOB) or PAN and Date
behalf of the taxpayer by
of Incorporation (DOI) as well,
collectors
of the deductee and the same
c) Advance tax/self assessment should be validated.
tax/regular assessment tax,
On validation, if there is any
etc. deposited by the
mis-match in combination of
taxpayers (PAN holders)
PAN and Name/DOB/DOI of the
d) Details of paid refund deductee then an immediate
received during the financial alert browser with beep
year showing the error should
e) Details of the High value appear on the feeder's screen.
Transactions in respect of Further, it should be re checked
shares, mutual fund etc. that the correct amount is being
The Tax Credit Statement (Form uploaded in correct account &
26AS) is generated wherein valid to the correct assessee & the
PAN has been reported in the same is correctly reflected in
TDS statements. Assessee can Form 26AS.
view the details of Proper validation system
TDS/TCS/Advance Tax/ Self should be adopted while
Assessment tax etc. in Form uploading data regarding Form
26AS from Income Tax website. 26AS so as to curb the problem
Form 26AS is of great of mis-match of actual data and
convenience to the assessee as the data reflecting in FORM
he can view all the above 26AS.This suggestion will
mentioned details at one place. reduce the number of
But at the same time, there are rectification applications u/s
number of hidden hurdles that are 154 of Income Tax Act, 1961
being faced by both- the assessee and also strengthen the trust &
and Income Tax department on faith among the assessee that
account of mis-match of the details reflecting in FORM
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Sr. Section Issue/Justification Suggestion
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amount/details as per FORM 26AS are correct
26AS and the actual (SUGGESTIONS FOR
amount/details of REMOVING ADMINISTRATIVE
TDS/TCS/Advance Tax/Self AND PROCEDURAL
Assessment Tax and investment DIFFICULTIES RELATING TO
exceeding Rs. 2,00,000 made by DIRECT TAXES)
the assessee in securities during
the relevant assessment year.
Due to mis-match of tax details,
the Income Tax department is
issuing letters/notices to the
assessee regarding details of
TDS/TCS etc. resulting
harassment and unwanted mental
tension to the assessee.
129. Applicability of Currently tax is deductible even in It is suggested that the
TDS on genuine cases where payment is not made provision of TDS should not be
provisions on and the amount is credited in the made applicable on entries
estimate basis books of the assessee as made by assessees, which are
without bills: provision for expenses or as merely provision for expenses
suspense account or by any other for work completed/ services
name. Very often, such provisions rendered but for which bills
or credits are made by the have not been received. TDS
assessees to follow accrual may be imposed only on such
system of accounting so that true credit entries to the party
and fair state of affairs the accounts which are supported
business is reflected in the books by bills / invoices.
and to ensure that all revenues Alternatively,
and expenses are appropriately
It is suggested that the
matched. This does not
deductor should be allowed to
necessarily mean liability has
issue separate Form No. 16A for
crystallized or the amount has
Provision made for expenses.
become due. Very often exact
numbers are not available and the Alternatively,
provisions / credits are made As suggested earlier , a system
based on best estimates available on the lines of bank pass book
with the assessee. As per the be introduced in the Form No.
current position, the assessee is 26AS, wherein the credit not
required to deduct tax on such taken in a particular year is
provisions even before the carried forward to next year for
bill/invoice has been received. claiming against the tax
This often leads to excess payable of next year.
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Sr. Section Issue/Justification Suggestion
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deduction of tax, disputes with the (SUGGESTIONS FOR
vendor and extensive REMOVING ADMINISTRATIVE
reconciliation. Further, this causes AND PROCEDURAL
great amount of confusion DIFFICULTIES RELATING TO
between the assessee and the DIRECT TAXES)
vendor if the provisioning by the
assessee and invoicing by the
vendor fall in two different
financial years.
The CBDT has through Circular
No.-01/2012 dt-09.04.2012, made
it mandatory for all deductors to
issue TDS certificate in Form No.
16A generated and downloaded
from TIN website for deduction of
tax at source made on or after
01.04.2012. Since it has to be
downloaded from the TIN website,
all the data for entire quarter gets
generated in a single certificate
based upon TDS return filed by
the assessee. Prior to this
circular, most of the deductee,
who were following cash system
of accounting, used to get
separate Form 16A from the
deductor for Provision made for
expenses and accordingly, they
were getting TDS credit easily
(that means, in the last quarter the
deductee were getting two Form
16A, one for payment made and
the other for provision).
The problem arises when the
deductor is following accrual
method of accounting and the
deductee is following cash method
of accounting. In the last quarter,
the deductor would deduct tax at
source on Provision made for
expenses and it would get
reflected in Form 16A of the
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
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deductee. Now the deductor
cannot issue separate Form 16A
for provision made for expenses
which he could issue earlier.
Accordingly, it would create lot of
hardship
for deductees to claim the TDS
credit of the same in the year
when they receive the said
amount.
130. Synchronization Section 192 relating to TDS on Section 192 relating to TDS on
of Section 192 salary to be synchronized with the salary to be synchronized with
& Section 15 of provisions of the charging section chargeable section 15 so that
Income Tax Act 15 of the Income-tax Act, 1961. TDS can be deducted at the
time of accrual or received
whichever is earlier or
alternatively section 15 can be
amended to tax salary income
at the time of receipt only.
131. TDS under Section 194A(3)(iii)(a) provides a) To provide relief to the
Section 194A- that the tax on interest other than genuine taxpayers paying
Interest interest on securities is NOT interest to NBFC's, it is
payments to required to be deducted by a suggested that the section
NBFC person responsible for paying the 194A(3)(iii)(a) be amended to
same to a resident, if the income treat NBFC's at par with other
is credited or paid to any banking banking companies.
company to which Banking b) Further, in order to
Regulation Act, 1949 applies or ensure compliance of the
any co-operative society engaged provisions of the Act for timely
in the business of banking collection of taxes provisions of
(including a co-operative land Tax collection at source be
mortgage bank). made applicable to NBFC's in
It may be noted that Section 194A respect of such interest.
does not treat Non- Banking (SUGGESTION TO IMPROVE
Financial Institutions (NBFCs) at TAX COLLECTION)
par with the Banking companies
or Co-operative Banks. Due to
this, the middle class
businessmen who have borrowed
money from NBFC's are
disallowed interest paid on the
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Sr. Section Issue/Justification Suggestion
No
same due to non-deduction of tax
at source under section 194A of
the Income-tax Act, 1961. It is
suggested that section 194A
should not apply to NBFCs as:
(a) NBFCs principal business is
of lending money under
various products just like
Banking Company or a co-
operative Bank.
(b) There is no mechanism for
deduction of tax on interest
paid by the assessees as the
NBFCs collect cheques of
EMI for the tenure of loan.
(c) NBFCs are also regulated by
RBI just like Banking
Company and a Co-operative
Bank.
Considering the fact that there is
no mechanism for deduction of tax
on interest paid by the assessees
as the NBFCs collect cheques of
EMI for the tenure of loan, the
non-compliance of the provisions
of this section is inevitable. The
said provision creates problem for
the assessee who has borrowed
money as he is unable to claim
deduction in respect of said
interest due to operation of
section 40(a)(ia).
132. Payment of hire Under the existing tax deduction Specific amendment shall be
purchase provisions, it has not been made to exclude requirement of
installments specifically provided whether deduction of tax in the finance
under an hire payment of hire purchase charge u/s 194A or 194I.
purchase installments would attract tax
agreement- deduction. The hire purchase
applicability of installments comprise of principal
tax deduction & hire finance charge element.
u/s 194A or 194I
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
133. Section 194C- As per the existing provisions of In order to will avoid genuine
Defination of the Act, the `work' for the purpose and avoidable hardship to
the term "work" of deduction of tax at source on assessee for claiming refund of
payment to contractors has been TDS, it is suggested that the
defined to include "manufacturing definition of "work" under
or supplying a product according section 194C in the above
to the requirement or specification clause should be modified as
of customer by using material "manufacturing or supplying a
purchased from such customer". product according to the
The above provision has resulted requirement or specification of
in deduction of tax by companies a customer by using all/
wherein even a small component significant material purchased
is supplied on free of cost basis or from that customer"
otherwise to the supplier and
supplier in turn supplies the final
product along with the component
supplied to the customer.
134. Section 194H- In telecom industry, margins It is suggested that the
Deduction of earned by the distributors on sale distributors of recharge
tax at source of recharge vouchers are very low vouchers should exempted
from income in and the distributors sustain only from compliance requirement
the nature of on account of volumes. u/s 194H provided (a) TDS is
commission or Deduction of tax at source @ 10% deducted on gross margin at
brokerage: u/s 194H leads to hardship, the first level; and (b) Annual
compliance burden and huge Information Return is filed by
costs. the person taking benefit of
such an exemption.
Further, the rate of TDS u/s
194H should be reduced to 1%.
135. Clarification In case of partnership firms On the lines of the provisions of
regarding TDS Section 40(b)(i), provides that section 194A, section 194H be
on Commission "remuneration" shall mean any amended to provide that
to a partner payment of salary, bonus, Commission paid by the
under section commission or remuneration by Partnership firm to its partners
194H read with whatever name called. would not be liable to Tax
section 40(b) Considering a partner and deducted at source under
partnership firm as one entity, the section 194H.
provisions of tax deduction at (SUGGESTIONS TO REDUCE /
source under section 192 have MINIMIZE LITIGATIONS)
not been made applicable on
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Sr. Section Issue/Justification Suggestion
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payment of such remuneration, as
the same is not taxable under the
head "Salaries". Also, the
provisions of TDS under section
194A are not applicable to
interest (other than interest on
securities) credited or paid by a
firm to a partner of the firm.
Section 194H provides for tax
deduction at source in respect of
commission or brokerage. On the
lines of section 192 and 194A,
there is a need to clarify that
Commission paid by the
Partnership firm to its partners
would not be liable to Tax
deducted at source under section
194H.
136. Section 194I- As per the provisions of section Considering the increase in the
TDS on rental 194I the tax is to be deducted at basic exemption limit for
income source @10% in respect of general assessees and senior
income by the way of rent for any citizens, it is suggested that the
use of land or building or furniture exemption limit of Rs. 1,80,000
or fixture etc. The proviso to in respect of TDS on rent under
section 194I further provides that section 194I be enhanced
no tax be deducted in case the appropriately.
total rent paid in a financial year Further, the provisions of
does not exceed Rs.1,80,000/-. section 197A should be made
Considering the general basic applicable only to those
exemption limit of Rs.2,00,000/- assessees who do not own
for the Assessment year 2013-14 more than one house property
and for Senior Citizens of and whose total income does
Rs.2,50,000/- the present limit of not exceed the maximum
Rs.1,80,000/- seems to be too amount not chargeable to tax.
low, especially for those Senior
(SUGGESTIONS FOR
Citizens whose source of income
RATIONALIZATION OF THE
is only rent. Hence, the limit of
PROVISIONS OF DIRECT TAX
Rs. 1,80,000/- under section 194I
LAWS)
may be increased appropriately.
Further, the provisions of section
197A should be made applicable
only to those assessees who do
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
not own more than one house
property and whose total income
does not exceed the maximum
amount not chargeable to tax.
This will prevent misuse of the
provisions of section 197A and
section 194I.
137. Section 194-IA- Tax is to be deducted@1% on (SUGGESTIONS FOR
TDS on transfer consideration for transfer of RATIONALIZATION OF THE
of immovable immovable property, other than PROVISIONS OF DIRECT TAX
property agricultural land. However, no tax LAWS)
is to be deducted if the Section 194I may be
consideration for transfer of appropriately modified to
immovable property is less than require the transferee or the
Rs. 50 lakhs. payee, as the case may be, to
The issues emerging from this deduct tax at source from the
section are as under: consideration paid or credited
a) In a large number of cases, to the transferor.
loan is taken by the transferee
from a bank or financial
institution, employer etc. for
purchase of immovable
property. In such cases, the
payment is not made directly
by the transferee to the
transferor, except for the down
payment. The major part of the
consideration is paid by the
bank, financial institution etc. to
the transferor, either in
instalments or lump sum.
b) Further, the provisions for tax It is suggested that section 197
deduction are causing hardship may be amended to permit the
to those sellers who claim full assessee to make an
capital gains exemption by application to the Assessing
investing the capital gains or Officer for issuing a certificate
the net consideration, as the for no deduction of tax or
case may be, in the manner deduction of tax at a lower rate.
provided in section 54, 54F, In the alternative, the seller may
54EC etc., since in such cases, be permitted to give a
there would be no tax liability declaration to the Assessing
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Sr. Section Issue/Justification Suggestion
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on account of capital gains. Officer and furnish a copy of
Further, for the purposes of the same to the buyer
section 54F and 54GB, the
entire net consideration is
required to be invested, which
poses a difficulty, since tax
would already have been
deducted from the net
consideration
c) The assessees may face a) To ensure effective
practical hardship in applying compliance of the provisions of
the TDS provision, in case section 194IA the aforesaid
where the consideration is in issues may be clarified at the
kind (which is common practice earliest.
in real-estate sector). For e.g., b) Also, in order to overcome
a land-owner transfers the difficulties in cases where
development rights to a remittance and taxability arises
developer for agreed built-up in different years, a system of
area in consideration. pass book be introduced in
d) Dual TDS implications on the Form No.26AS wherein the
same transaction in such cases balance of unutilized credit be
may lead to practical difficulties allowed to be carried forward
as in the said case, both the
land-owner as well as the
developer would be liable for
TDS on the same transaction.
e) Hardship is also likely to be
faced in cases where the
property is purchased jointly,
as it is not clear whether the
threshold limit of Rs. 50 lakhs
is to be applied to each owner
or to the total consideration for
the property.
f) If the payment is being made in
installments, like in the case of
construction linked payments,
then the point of time when tax
deduction and tax remittance
should be made requires
clarification. In such cases,
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Sr. Section Issue/Justification Suggestion
No
there may be several
installment payments based on
the stage of completion.
Consequently, if tax is required
to be deducted in respect of
each payment, whether a
single remittance can be made
at the stage of tax deduction in
respect of the last payment or
multiple remittances are
required at each stage is an
issue which needs to be
addressed.
g) In case of non-compliance due
to non-furnishing of PAN, the
provisions of section 206AA
would be attracted. At present,
credit for tax deducted under
section 206AA is not being
reflected in Form No. 26AS,
even if deductee submits his
PAN subsequently. This issue
needs to be addressed so that
credit of tax deducted and
remitted is not denied to
genuine assessees.
h) The tax department may face
the difficulty of relating different
challans to the year of reporting
of income by the transferor.
For instance, the capital gains
may be chargeable to tax in the
year of transfer whereas
deduction of tax at source may
have taken place in a different
year.
138. Fees for The amendment to section 194J a) Section 194J be amended to
professional or by the Finance Act, 2012 requires provide an independent
technical deduction of tax at source @ 10% limit of Rs.30,000, above
services- on any remuneration or fees or which remuneration or fees
Section 194J commission, by whatever name or commission to director
called, to a director of a company, may be subject to tax
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Sr. Section Issue/Justification Suggestion
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other than those on which tax is deduction at source.
deductible under section 192 b) Section 40(a)(ia) be
However, the independent limit of amended to include within
Rs.30,000 each provided for its scope payment to a
under section 194J in respect of director on which tax
other payments covered therein, deductible at source has
namely, royalty, fee for technical not been deducted .
services, fee for professional (SUGGESTIONS FOR
services and non-compete fees, RATIONALIZATION OF THE
as a threshold, beyond which TDS PROVISIONS OF DIRECT TAX
@ 10% would be attracted, is not LAWS)
being provided in respect of
director's remuneration. This
unintended inequity may be
removed.
Further, corresponding
amendment is required in section
40(a)(ia) to provide for
disallowance in case of non-
deduction or short-deduction of
tax at source.
139. Section 194J- Under Section 194J of the In order to overcome the above
Claim of TDS on Income-tax Act, 1961, tax is situation and the inconsistency,
income deductible and payable at the time it is suggested that the system
declared on of credit or payment, whichever is on the lines of bank pass book
cash basis earlier. TDS is one of the modes be introduced in the Form No.
of recovery of tax. It is well known 26AS, wherein the credit not
that most of the professionals taken in a particular year is
follow `Cash Basis' of accounting. carried forward to next year for
As per the provisions of Section claiming against the tax
199 read with Rule 37BA, the payable of next year.
credit for TDS is allowable to the (SUGGESTIONS FOR
deductee in the year in which the RATIONALIZATION OF THE
corresponding income is offered PROVISIONS OF DIRECT TAX
for taxation. Rule 37BA further LAWS)
provides that if the receipts of the
fees are spread over more than
one year, the credit for TDS will
also be spread over such years in
which the income is received and
taxed. In view of this, it is
absolutely incorrect and against
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
the provisions of Section 199 read
with Rule 37BA to claim the credit
for T.D.S. on the basis of Form
No. 26AS. The Departmental
Software developed for the
processing of ITR does not take
care of the provisions of section
199 read with Rule 37BA in case
of assessees following Cash
Basis of accounting and there is a
clear inconsistency. This results in
credit for prepaid taxes not being
given correctly and fully as per the
claim made which are, otherwise,
as per the provisions of law.
140. Section 194LC- The Finance Act, 2012 had In order to bring out the real
Income by way inserted section 194LC to provide intent of the law, it is suggested
of interest from that the interest income paid by that the section 194LC(2)(ii)
Indian Company specified company to a non- may be reworded to provide
resident shall be subjected to tax that the interest referred to in
deduction at source at the rate of sub-section (1) shall be the
5%. Section 115A was also income by way of interest
amended to provide that such payable by the specified
income will be taxed at the rate ofcompany "IF such interest does
5%. not exceed the amount of
Section 194LC(2)(ii) provides that interest calculated at the rate
for the purpose of deduction of approved by the Central
tax at source at the rate of 5%, Government in this regard,
the interest payable by the having regard to the terms of
specified company to a non- the loan or the bond and its
resident, not being a company or repayment"
a foreign company, shall be the (SUGGESTIONS TO REDUCE /
income payable by the specified MINIMIZE LITIGATIONS)
company TO THE EXTENT TO
WHICH SUCH INTEREST DOES
NOT EXCEED the amount of
interest calculated at the rate
approved by the Central
Government in this regard, having
regard to the terms of the loan or
the bond and its repayment.
It is imperative to note that usage
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of the term "To the extent to
which such interest does not
exceed" may be interpreted to
mean that in case the borrowings
are made at a rate higher than the
rate approved by the Central
Government, the interest income
on the difference will be
chargeable to tax at the rate of
20%. As per the explanatory
memorandum, this amendment
was made in order to augment
long-term low cost funds from
abroad. It is felt that this is an
inadvertent mistake and thus
needs to be reworded.
141. TDS on interest Presently, Indian residents who Commercial banks may be
on NRO earn interest on their Indian bank instructed by proper authority,
account accounts are liable to pay TDS on not to deduct TDS on NRO
amounts over and above Rupees account interest upto 10,000
10,000. However when it comes per annum.
to NRIs they are not allowed this
benefit on their NRO accounts. All
interest earned in NRO accounts
is subject to a TDS rate of a
whopping 30%.
In majority cases, the NRE's are
not able to file for refunds due to
small amount as the cost of filing
is more than deduction.
142. Section 195- Section 195(2) provides where a It is suggested that an
Time limit for - payer considers that whole of the appropriate time limit say thirty
Issuance of sum being paid to a non-resident (30) days may be imposed for
"general or is not chargeable to tax, he may passing such general or special
special order" make an application to the order by the Assessing officer.
Assessing Officer to determine by Further, where an application is
general or special order, the rejected the Assessing Officer
appropriate portion of the sum so may be required to pass a
chargeable. speaking order after providing a
It may be noted that no time limit reasonable opportunity of being
of passing such order has been heard to the applicant.
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Sr. Section Issue/Justification Suggestion
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prescribed in the Act, which (Suggestions for rationalization
causes undue hardship in genuine of the provisions of Direct Tax
cases. Laws)
143. Validity of The Certificate under section 197 a) the application may be
Certificate is at present issued with a validity allowed to be made atleast
issued u/s 197 date from the date of issue. before 30th June of the
Though the assessee is applying financial year i.e. within
in the month of April, i.e., at the three months of
beginning of the financial year, the commencement of the
certificate is issued much late. financial year for before
The date of issue is taken as the planning for advance tax.
validity date owing to which, the b) Such application should be
deductors are deducting the tax disposed off within 30 days.
for the earlier part of
(SUGGESTIONS FOR
income/payments. By any
RATIONALIZATION OF THE
reasonable estimate, an assessee
PROVISIONS OF DIRECT TAX
cannot have taxable income for
LAWS)
some part of the financial year
and exempt income for remaining
part of the year.
144. Section 200- Section 200 provides for the Since the details are already
Furnishing of payment of TDS and filing of TDS available with the deductor at
TDS returns Returns. The Income Tax Law the time of payment of taxes,
requires payment of TDS every the e-challan itself can be so
month by 7th of the following designed that it captures all the
month and by 30th April of the details at that time. The details
Assessment year for tax deducted so submitted at that time may
in the month of March of the respectively be reflected in the
Previous year. The said payment Form 26AS of all deductees.
is to be made under various codes (SUGGESTIONS TO REMOVE
as per the sections under which ADMINISTRATIVE
the tax is deducted. Currently, the DIFFICULTIES)
payment under each code is to be
made under a separate challan
which requires filling up the same
PAN, TAN, name, address etc
details over and over again. This
is clubbed with the internet
connection problems and it
becomes a very cumbersome job
especially for the small and
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Sr. Section Issue/Justification Suggestion
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medium assessees.
Practically, for payment of tax so
deducted details of parties with
PAN and section under which it is
to be deducted is maintained.
However, except the section
under which tax is required to be
deducted, no other detail is
required to be mentioned in the
challan. The statement containing
all such details is to be submitted
for every quarter. This leads to
duplication of work and also a
cumbersome task of furnishing so
many statements and challans.
145. Mismatch on The non-government deductors In continuation of the above
account of majorly comprise of non-corporate suggestion, the following is
punching of sector which is not very suggested :
data organized. Approximately less that
To avoid such data mismatch, it
6000 assessees are listed is necessary to have a PAN/TAN
companies who take the help of master file for each and every
professionals to file statements of
deductor. CPC(TDS) may
TDS/TCS in time. Approximately, prepare a software freely
6,60,000 assessees are private downloadable for all deductors
limited Companies, but majority of
wherein deductor may fill in the
them are family organizations or details like name, PAN and the
organizations among the friends applicable section/s for
registered as Private Limited deduction (it may be one
companies under Companies Act. section or more than one).This
Further, last year there were temporary master file may then
approximately 18,00,000 tax auditbe uploaded back. The
asseessees. This clearly reflectsCPC(TDS) may verify the details
that more than 66% of the so submitted and provide the
assessees who are liable to deductor with error details, if
deduct TDS are non-corporate any. The deductor may then
entities comprising of Individuals,
rectify the errors and resubmit
HUFs, firms etc. In addition to it. The process goes on unless
above, certain non corporate and the Department agrees with the
NGOs are also mandatorily liable data provided by the deductor.
to deduct TDS. The final data so generated may
The data entry in the non- be stored as a master file for
corporate sector is majorly done that deductor in the database of
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Sr. Section Issue/Justification Suggestion
No
by persons who are not even the Department.
graduates. This has infact lead to The deductor while making
the problem of huge mismatch of payment every month through
data of the deductees. There are e-challan will click on the
clerical errors like wrong punching section for which payment is to
of name details, PAN details, be made. Once a particular
Section under which data is section is clicked, all the
punched and the like. parties registered under that
section will appear. The
deductor may accordingly, fill
the details of amount and
submit the same along with the
payment of taxes. The
deductees for which not tax has
been deducted may be
reflected/prefilled as "0". This
will on one hand enable the
deductor to save time on
rechecking his details at the
time of quarterly filing of TDS
returns and on the other hand
provide monthly credit details
in the Form 26AS of the
deductee. Since the data will be
downloaded from TAN/PAN
master verified by the
Department, there will be "0"
mismatch situation, which is
the need of the hour.
(SUGGESTIONS TO REMOVE
ADMINISTRATIVE
DIFFICULTIES)
146. Provision for Under section 200A, an intimation The provisions amending
rectification and is generated specifying the section 154, 156 and 246A to
appeal of amount payable or refundable provide for rectification and
intimation after processing of the TDS appeal of intimation under
under section statement. However, there was no section 200A and deeming such
200A provision for appeal or intimation as notice of demand
rectification of such intimation and may be given effect to
such intimation was also not RETROSPECTIVELY.
deemed as a notice of demand. (SUGGESTIONS FOR
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Sr. Section Issue/Justification Suggestion
No
Therefore, the Finance Act, 2012 RATIONALIZATION OF THE
had provided that such intimation PROVISIONS OF DIRECT TAX
would be deemed as a notice of LAWS)
demand under section 156.
Further, the intimation generated
after processing TDS statement
shall be subject to rectification
under section 154. Such
intimation is also appealable
under section 246A. However,
these amendments were made
effective only from 1st July, 2012.
Since these amendments were
necessitated on account of the
genuine hardship being faced by
the assessees, the provisions
incorporated to remove such
hardship should be given
retrospective effect.
147. TDS demand a) It has been observed Some mechanism may be
u/s 200A that intimations are being served developed to check the quoting
under section 200A on of wrong PAN in TDS quarterly
deductors, stating demands due statement at the time of
to short deduction of tax at validation of the TDS return, i.e.
source. In majority of cases the moment the return is being
these demands arise due to filed.
wrong quoting of PAN in TDS (SUGGESTIONS FOR
quarterly statements filed by REMOVING ADMINISTRATIVE
deductor/DDO. These demands AND PROCEDURAL
involve a huge amount on DIFFICULTIES RELATING TO
penalty has also been levied. DIRECT TAXES)
b) With regard to demand In respect of TDS demands
raised in respect of earlier years, pertaining to earlier years, the
the notice of demand so raised process of obtaining the FUV
only specifies the amount of files for verification should be
demand raised without any made user friendly. The FUV file
details. In case the deductor should be mandatorily provided
requires the details of the to the deductor at his registered
demand he is required to obtain email id so that the deductor
a FUV file from the Department does not have to visit the
office. The file so received is Income tax office for the same.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 241
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Sr. Section Issue/Justification Suggestion
No
then verified by the deductor and (SUGGESTIONS FOR
thereafter the discrepancies, if REMOVING ADMINISTRATIVE
any, are brought to the notice of AND PROCEDURAL
the Department. This is a DIFFICULTIES RELATING TO
cumbersome process and is DIRECT TAXES)
required to be made user
friendly.
148. Time limit for Presently, there is no time limit It is suggested to fix a specific
TDS specified by the Act for initiating & time limit for initiating &
assessments of completion of TDS proceedings completing TDS proceedings
payments made u/s 201 of the Act in respect of u/s 201 of the Act in respect of
to non payments made to non- residents. payments made to non
residents Thus, the TDS returns are residents which should not be
scrutinized by the assessing more than 4 years from the
officers for past years without any relevant financial year.
limit, which has resulted into
enormous difficulty for the
assessee as it becomes
practically difficult to store &
retrieve data beyond four years of
filing of TDS returns.
149. Consequences As per the provisions of section It is suggested that interest u/s
of failure to 201(1A), interest is charged on 201(1A) should be charged on
deduct or pay monthly basis. Even for delay in daily basis and not on monthly
TDS- section payment or deduction of tax at basis or if the interest is to be
201(1A)-: source by one day, interest is charged on monthly basis delay
charged for the whole month. should be rounded off to the
Under clause (ii) of section near month and the present
201(1A), interest is payable at the system of considering fraction
rate of one and one-half percent of month as full month should
for every month or part of a month be dispensed with.
on the amount of such tax from It is further suggested that
the date on which such tax was interest under clause (ii) of
deducted to the date on which section 201(1A) should be
such tax is actually paid. Delay charged for the delay FROM
from the due date of payment to THE DUE DATE OF PAYMENT
the date of actual payment is not TO THE ACTUAL DATE OF
considered. For e.g. if the tax was PAYMENT.
deducted on 01/09/2012 the same (SUGGESTIONS FOR
has to be paid by 07/10/2012. If RATIONALIZATION OF THE
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Sr. Section Issue/Justification Suggestion
No
the tax was paid on 08/10/2012 PROVISIONS OF DIRECT TAX
i.e. only one day delay, interest LAWS)
for the two month will be charged
i.e. from 01/09/2012 to
08/10/2012. It is suggested that
the delay from the due date of
payment to the date of actual
payment should be considered for
the purpose of calculating interest.
Further, since all the returns of
TDS are now days processed
electronically and interest is
calculated by the computer, there
is no procedural hurdle in
charging interest on daily basis,
infact charging the same on daily
basis will provide relief to the
taxpayers. It may be noted that in
all the indirect tax laws interest is
charged on daily basis. Since the
TDS is a routine business work,
delay of one-two days in payment
is not abnormal and punishing for
such delay by charging interest for
the whole month may not be
appropriate.
150. Section 206AA Section 206AA reads as A proviso should be inserted in
Requirement of "Notwithstanding anything section 206AA to the effect that
furnishing of contained in any other provisions the provisions of this section
PAN for of this act, any person entitled to shall not be applicable in
deduction of tax receive any sum or income or respect of the assessee who is
at source. amount on which tax is deductible not required to obtain
under chapter XVIIB, (hereinafter Permanent Account Number
referred as deductee) shall under section 139A.
furnish his PAN to the Deductor (SUGGESTIONS TO REDUCE /
failing which tax shall be MINIMIZE LITIGATIONS)
deducted at higher of three rates
specified in section 206AA".
This section however, does not
takes into account the situation
where payee is not required to
take PAN as per the provisions of
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Sr. Section Issue/Justification Suggestion
No
Section 139A or such payment is
not taxable in India (in case of
Non -Residents).
Due to applicability of this section
residents, who are not required to
obtain PAN as per section 139A,
will also have to take PAN. As this
section has a non-obstanate
clause, payer has no option but to
deduct TDS at a higher rate to
comply with the provisions of the
said section, though may not be
the intention of the legislature.
As no exception has been made
as regards the payments to a non-
Resident, it is assumed that
section 206AA is applicable to the
payment made to a non-resident
also. However, as per the
provisions of Rule 114C(1)(b) of
the Income-tax Rules, 1962,
specifying the class or classes of
persons to whom the provisions of
section 139A (PAN) shall not
apply, non-resident is not required
to get PAN allotted in his name.
Further, it may be noted that
Section 195(5) of Direct Taxes
Code Bill, 2010 reads as
follows:-
"Notwithstanding anything in this
Code, the appropriate rate
referred to in subsection (1) shall,
in a case where the deductee has
failed to furnish his permanent
account number to the deductor
(except where the deductee is not
required to obtain permanent
account number under section
292), be the higher of following
rates, namely:--
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Sr. Section Issue/Justification Suggestion
No
(a) twenty per cent.; and
(b) the rate specified in sub-
sections (2), (3) or sub-section
(4), as the case may be."
In line with the provisions of
proposed section 195(5) supra
those assessees who are not
required to obtain PAN should be
exempted from the provisions of
section 206AA of the Income-tax
Act, 1961.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 245
The Institute of Chartered Accountants of India
PART C-ADVANCE PAYMENT OF TAX
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
151. Section 208- The Finance Act, 2009 raised the The limit to pay advance tax
Revision of limit to pay advance tax under under section 208 be raised
Limit of section 208 to Rs.10,000. appropriately/- Infact, any
advance tax Considering the inflationary assessee whose advance tax
conditions prevailing in the payable does not exceed
country, it is felt that the same Rs.30,000 should be allowed to
limit needs to be revised upwards pay full amount in the last
so that the amount payable in one instalment.
instalment of the advance tax (SUGGESTIONS FOR
exceeds at least Rs. 5,000. The RATIONALIZATION OF THE
present amount of Rs. 3,000 is too PROVISIONS OF DIRECT TAX
low. Infact, any assessee whose LAWS)
advance tax payable does not
exceed Rs.30,000 should be
allowed to pay full amount in the
last instalment.
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The Institute of Chartered Accountants of India
PART F-INTEREST CHARGEABLE IN CERTAIN CASES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
152. Interest u/s As per the provisions of section It is suggested that the
234C for 207 and section 211, the Departmental Software needs to
newly formed assessee is liable to pay the be suitable amended so that
Firms and advance tax on the `Current firm and companies are not
Companies Income' of the assessee. This required to pay interest on the
presupposes the existence of the short payment of instalment of
assessee. In view of this, interest advance tax u/s 234C for the
u/s 234C cannot be charged for period when they were not in
the instalments of advance tax existence.
due before the date of coming into (SUGGESTIONS FOR
existence of a Firm or a Company. RATIONALIZATION OF THE
In spite of this, the Departmental PROVISIONS OF DIRECT TAX
Software processing the ITR does LAWS)
not take care of such a situation
and interest u/s 234C is being
charged in a routine manner.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 247
The Institute of Chartered Accountants of India
PART G-LEVY OF FEE IN CERTAIN CASES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
153. Fees under a) The matters relating to It is suggested that
section 234E TDS/TCS in a government a) the time limit to file quarterly
department is handled by persons TDS return for non-government
with reasonably good education deductors be also increased to
background. Appropriate 30 days as available to the
computer training is also given by government deductors. With
the Government to them for day to this change there will be neither
day functioning of the system. a revenue loss nor any hardship
Accordingly, the records are well to the deductees.
maintained and seemingly there
b) It is highly appreciable that
should be no issues for them in
the Government has taken an
timely furnishing the statement of
open mind while considering
TDS/TCS within 30 days from the
the problems of e-filing of
end of the quarter. However, in
statement of TDS /TCS and has
comparison to the same, the non-
extended the time only for
Government deductor who is a
Government deductors. In fact,
business man may not necessarily
considering the difficulties
be even a graduate. The non-
being faced by the government
government deductors majorly
deductors, this circular was a
comprise of non-corporate sector
step in the right direction. Since
which is not very organized.
the above difficulty equally
Approximately less that 6000
applies for other deductors
assessees are listed companies
also, one time amnesty is
who take the help of professionals
sought for all deductors with
to file statements of TDS/TCS in
regard to all TDS statements
time. Approximately, 6,60,000
pertaining to FY 2012-13 and FY
assessees are private limited
2013-14 to be submitted on or
Companies, but majority of them
before a cutoff date to be
are family organizations or
decided appropriately.
organizations among the friends
registered as Private Limited
companies under Companies Act.
Further, last year there were
approximately 18,00,000 tax audit
asseessees. This clearly reflects
that more than 66% of the
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Sr. Section Issue/Justification Suggestion
No
assessees who are liable to
deduct TDS are non-corporate
entities comprising of Individuals,
HUFs, firms etc. In addition to
above, certain non corporate and
NGOs are also mandatorily liable
to deduct TDS.
It has been brought to the notice
of ICAI that 15 days time limit is
too short for the same causing
genuine hardship to the deductor,
who has to deduct tax, pay tax
through challan, collect the same
from the bank, prepare the
TDS/TCS statements and
thereafter submit the same to TIN
Centre, which may not always be
located in the near vicinity. Also,
the levy of fees under section
234E has been a matter of great
concern.
It is highly appreciable that the
Government has taken an open
mind while considering the
problems of e-filing of statement
of TDS /TCS and has extended
the time only for Government
deductors. In fact, considering the
difficulties being faced by the
government deductors, this
circular was a step in the right
direction. Since the above
difficulty equally applies for other
deductors also, one time amnesty
is sought for all deductors with
regard to all TDS statements
pertaining to FY 2012-13 and FY
2013-14 to be submitted on or
before a cutoff date to be decided
appropriately.
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Sr. Section Issue/Justification Suggestion
No
b) According to the provisions of It is suggested to follow day
section 234E, where a person fails wise slab system & it may be
to deliver or cause to be delivered taken as:
a statement within the time
prescribed then he shall be liable
Period of Max. Fees u/s
to pay, by way of fee, a sum of
Default 234E
Rs. 200 for every day during
which the failure continues. But Rs. 500/- or tax
the amount of fee shall not exceed amount,
the amount of tax deductible or whichever is
collectible, as the case may be. Upto 15 Days higher, but
subject to
maximum of
Considering the hardships being Rs. 20,000/-.
faced by the taxpayers due to
Rs. 1000/- or
various reasons, penal fees for
tax amount,
late filing of TDS returns need to
From 15 whichever is
be changed to period wise/ slab of
Days to 1 higher, but
days instead of current system.
Month subject to
maximum of
Rs. 20,000/-.
Rs. 1000/- + Rs.
200/- per day or
From 1 tax amount,
Month whichever is
Onwards higher, but
subject to
maximum of
Rs. 20,000/-.
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CHAPTER XIX-A
SETTLEMENT OF CASES
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
154. Once in life Presently, for resolution of tax Assessees should be given the
time Settlement disputes government allows an freedom to settle disputes
Commission assessee to approach the through this settlement
Settlement Commission only commission without the
once and that too when the case restriction of this `once in a
is pending before the Assessing lifetime' conditionality. Also the
Officer (AO). If the case has assessee should be given the
escalated to a level above freedom to settle at any point
Assessing Officer, the once in a of time (i.e. at any level AO
lifetime window also gets and above) of the dispute.
closed. This is leading to non (SUGGESTIONS FOR
settlement of disputes and REMOVING ADMINISTRATIVE
delaying of revenue collection AND PROCEDURAL
and costly litigation. DIFFICULTIES RELATING TO
DIRECT TAXES)
155. Section 245A- Section 245A defines "case" to It is suggested that (i) Proviso
Settlement mean any proceeding for of section 245(b) along with the
Commission assessment under the Act, of any Explanation (i) be omitted.
person in respect of any (SUGGESTIONS TO REDUCE /
assessment year(s) which may MINIMIZE LITIGATIONS)
be pending before an Assessing
Officer on the date on which
application for settlement of case
is made. It further provides that a
proceeding for assessment or
reassessment or re-computation
under section 147, shall not be a
proceeding for assessment.
Before the enactment of Finance
Act, 2007, no such exclusion was
provided for in this sub-section
and the proceedings for
assessment or reassessment or
re-computation under section 147
were also considered as a
proceeding for assessment.
There are large number of cases
Pre-Budget Memorandum 2014 (Direct Taxes) Page 253
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Sr. Section Issue/Justification Suggestion
No
which fall under section 147. In
order to reduce further litigations,
it is suggested that the
proceedings under section 147
may not be excluded from the
definition of "case".
156. Restoration of section 245E of the Act was It is suggested that the
the provisions inserted in year 1975, amended provisions of erstwhile section
of erstwhile in 1984, 1987 and the provisions 245E be restored in Chapter
Section 245E were made inapplicable for XIX-A, Settlement of Cases for
applications filed on or after 01- proper and justified disposal of
06-2007. The existing provisions cases of applicants.
of statute reads as under:
"If the Settlement Commission is
of the opinion (the reasons for
such opinion to be recorded by it
in writing) that, for the proper
disposal of the case pending
before it, it is necessary or
expedient to reopen any
proceeding connected with the
case but which has been
completed under this Act by any
income-tax authority before the
application under section 245C
was made, it may, with the
concurrence of the applicant,
reopen such proceeding and
pass such order thereon as it
thinks fit, as if the case in relation
to which the application for
settlement had been made by the
applicant under that section
covered such proceeding also.
Provided that no proceeding shall
be reopened by the Settlement
Commission under this section if
the period between the end of the
assessment year to which such a
proceeding relates and the date
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Sr. Section Issue/Justification Suggestion
No
of application for settlement
under section 245C exceeds nine
years.
Provided further that no
proceeding shall be reopened by
the Settlement Commission
under this section in a case
where an application under
section 245C is made on or after
the 1st day of June, 2007."
The provisions of this section
empowered the Settlement
Commission to reopen the
previously completed
proceedings in respect of
assessment year(s) other than
the year(s) for which application
was filed by the applicant where
it is necessary or expedient for
proper disposal of the case.
The section also provided
limitation to such powers of the
Settlement Commission i.e. re-
opening must be with the
concurrence of the applicant and
the power cannot extend to a
period beyond nine years (as
amended in year 1987) from the
end of the assessment year to
which such proceeding relates.
However, with the insertion of
new scheme of settlement before
the Settlement Commission w.e.f.
01-06-2007, this section was
made inapplicable for
applications filed on or after 01-
06-2007.
The inapplicability of this section
placed restriction on the
Settlement Commission to limit
Pre-Budget Memorandum 2014 (Direct Taxes) Page 255
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Sr. Section Issue/Justification Suggestion
No
the settlement to the year(s) in
respect of which application has
been filed by the applicant
thereby depriving the applicant
from relief in respect of other
preceding completed assessment
years(s) on the same issue or
same modus operandi.
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CHAPTER XIXB
ADVANCE RULINGS
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
157. Introduction of In order to provide the facility of It is suggested that the same
Advance ruling determining the tax liability of scheme should be introduced
for residents non- residents in advance and for resident's tax purposes
with a view to avoid disputes in also. In case of residents also,
respect of assessment of income it has been observed that
tax liability in the case of non- assessee takes one
residents, a scheme of advance interpretation of law and
ruling was introduced by Finance executes the transactions
Act, 1993.The scheme enables which is denied by the
the non-resident to obtain, in department causing hardship of
advance, a binding ruling from the paying taxes which he thought
authority for advance ruling on is not actually payable.
issues which could arise in Further, in order to avoid
determining their tax liabilities. unnecessary application, the
Time consuming and expensive scheme can be so framed that
litigation can, then be avoided. only transactions involving
Such issues may relate to certain threshold of tax
transactions undertaken or implication can apply say
proposed to be undertaken by the transactions having tax
non-resident applicant. The implications of Rs. 1 crore or
Scheme has been very successful more or TDS implications of
in avoiding tax-litigation in case of Rs.50 Lakhs or more.
non- residents. Alternatively, a fee for advance
ruling can be fixed in a way that
small and unnecessary
applications are avoided.
(SUGGESTIONS TO REDUCE/
MINIMIZE LITIGATIONS)
Pre-Budget Memorandum 2014 (Direct Taxes) Page 259
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CHAPTER XX
APPEALS & REVISION
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
158. Delay by It has been experienced that It is suggested that time
Assessing when any order of higher limits for issuing the Order
Officer in appellate authorities is giving effects and Refund
issuing received, and moreover when Orders should be stipulated
Order giving the order is in favour of the in the Act. If the order
effect to assessee, the Assessing provides for fresh
Orders of officer delays in issuing the modification of the
higher Order giving effect to such assessment, the same
Appellate appellate orders. Due to this should be given effect to
authorities, delay, the refund arising from within 12 months from the
and also such appellate orders also gets end of the month in which it
delay in delayed. is received by the
issuing Secondly, it is also observed Commissioner.
refunds that in most of the cases the Also the Interest on Refunds
arising out of issuing of Refund Cheques/ should be calculated up to
such Order: Warrants are purposefully the date of actual issuing of
delayed and the interest on Refund warrants and not only
such refunds, as per the up to the date of granting the
provisions of the Income-tax refund/date of Order (as per
Act, is calculated only up to the existing provisions of the
the date of issue of Act)
Assessment order / Order (SUGGESTIONS TO REDUCE
Giving effects to appellate / MINIMIZE LITIGATIONS)
orders. This results in,
assessee being deprived of
interest on the delayed refunds
and also assessee does not
earn any interest on the
Interest on Refunds for the
period of such delay of issuing
of refund warrants by the
Assessing officers.
Pre-Budget Memorandum 2014 (Direct Taxes) Page 263
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CHAPTER XX-B
REQUIREMENT AS TO MODE OF ACCEPTANCE,
PAYMENT OR REPAYMENT IN CERTAIN CASES
TO COUNTERACT EVASION OF TAX
Pre-Budget Memorandum 2014 (Direct Taxes) Page 265
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Page 266 Pre-Budget Memorandum 2014 (Direct Taxes)
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
159. Inclusion of a) Section 269SS of the Income a) It is suggested that mode of
payments and tax Act, 1961 requires that transfers like RTGS, NEFT, EFT,
receipts made acceptance of any loan or deposit ECS etc. be included as valid
through the exceeding Rupees twenty modes of fund transfers under
modes like thousand may be made only by an section 269SS and 269T of the
RTGS, NEFT, account payee cheque or an Incometax Act, 1961.
EFT and ECS account payee bank draft. Alternatively, section may
as valid Further, Section 269T of the provide for any mode of
modes of fund Incometax Act, 1961 requires payment other than cash on the
transfers that the repayment of any loan or lines of section 80D.
under deposit exceeding Rupees twenty (SUGGESTIONS FOR
sections thousand may be made only by an RATIONALIZATION OF THE
269SS and account payee cheque or an PROVISIONS OF DIRECT TAX
269T of the account payee bank draft. LAWS)
Income-tax
However, now-a-days many
Act, 1961
banking transactions take place
by way of Net banking facilities
that include Real Time Gross
Settlement (RTGS), National
Electronic Funds Transfer (NEFT),
Electronics Funds Transfer (EFT)
and Electronic Clearing Service
(ECS). Use of payment gateways
for online transactions as well as
credit cards is also on the rise. In
fact section 80D which provides
for deduction in respect of medical
insurance premium permits any
mode of payment other than cash.
Similar provision may be
incorporated in section 269SS and
section 269T.
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CHAPTER XXI-
PENALTIES IMPOSABLE
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
160. Initiation of Assessing officers initiate penalty (1) Suitable remedial measures
penalty proceedings in each and every should be incorporated in the
proceeding in assessment order in view of Act providing relief to the
every Honble Supreme Court judgement genuine hardship faced by the
assessment in case of Dharmender Textile assessees on account of
order: 306 ITR 277 [2008], irrespective imposition of penalty even
of the fact whether or not there is where there is no concealment
any actual concealment of Income of income.
or furnishing of inaccurate (2) Further, in respect for
particulars of income by the pending cases, to reduce
assessee. It has been noticed litigations, it is suggested that a
that even in cases where there is scheme on the lines of Kar
difference in interpretation of Vivad Samadhan Scheme
provisions or wherever there are (KVSS) may also be introduced.
two views arising, the penalty It is suggested that in cases
proceedings are initiated. This is where addition made is NOT
causing undue hardship to the more than 50% of income or
assessees who have to file Rs.10,00,000 whichever is less:
separate appeal for dropping of
a) Penalty under section
such penalty proceedings leading
271(1)(c) may be dropped.
to prolonged litigation
b) 50% of the interest levied
may be waived off.
c) No further appeals should
be allowed to be filed
either by the Department
or by the assessee similar
to existing provisions of
Central Excise.
(3) Where unexplained money,
income or expenditure is
identified during the course of
assessment or unidentified
income not falling under
section 68 and 69 is identified
and added it shall be
chargeable to tax at maximum
marginal rate.
(SUGGESTIONS TO REDUCE /
MINIMIZE LITIGATIONS)
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Sr. Section Issue/Justification Suggestion
No
161. Penalty where Section 271AAB provides for Sub-section (3) may be
search has imposition of penalty@10% on amended to provide that the
been initiated- undisclosed income found during prosecution provisions under
Section the course of search and admitted sections 274 and 275 would
271AAB at the stage of search. apply in relation to penalty
Undisclosed income not admitted levied only under clause (c) of
at the stage of search but this sub-section, and not in
disclosed in the return of income respect of cases covered under
filed after the search to attract clauses (a) and (b).
penalty @ 20%. These are (SUGGESTIONS FOR
covered under clauses (a) and (b) RATIONALIZATION OF THE
of section 271AAB. In other PROVISIONS OF DIRECT TAX
cases, i.e. cases covered under LAWS)
clause (c), penalty to range
between 30% to 90% of
undisclosed income.
Sub-section (3) provides that the
prosecution provisions under
sections 274 and 275 would apply
in relation to penalty levied under
this section.
However, it may not be justified to
execute prosecution proceedings
where a person has disclosed
such income in the course of
search or before filing his return of
income. Therefore, the
prosecution provisions should be
made applicable only in respect of
cases covered under clause (c).
162. Rationalization As per section 271D & 271E, if a To restrict the levy of penalty to
of Section person accepts/repay in loan or the maximum marginal rate of
271D & 271E deposit, as the case may be in tax i.e. 30% or the slab rate
contravention with the provisions applicable to the assessee
of section 269SS/269T, he shall instead of 100% of the amount
be liable to pay, by way of of loan or deposit taken or
penalty, a sum equal to the repaid in violation of provisions
amount of loan or deposit. u/s 269SS & 269T
The penal provisions of section
271D & 271E may be restricted to
maximum marginal rate of tax i.e.
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Sr. Section Issue/Justification Suggestion
No
30% or the slab rate applicable to
the assessee instead of 100% of
the amount of loan or deposit
taken or repaid in violation of
provisions u/s 269SS & 269T.
163. Penalty for The Finance Act, 2012 had i. Sub-section (3) may be
failure to inserted the penalty provisions amended to provide that
furnish under section 271H providing for penalty provisions under
TDS/TCS penalty ranging between section 271H would not be
statements- Rs.10,000 to Rs.1,00,000 for attracted if the person
Section 271H failure to furnish quarterly proves that after paying tax
statements of TDS and TCS deducted or collected along
within the time prescribed under with the fee and interest, if
the Income-tax Rules, 1962. any, to the credit of the
However, such penalty would not Central Government, he has
be levied if the person has paid delivered or caused to be
the taxes deducted or collected delivered the statement
along with fee and interest to the referred to in section 200(3)
credit of the Central Government or the proviso to section
and has filed the statements 206C(3) before the expiry of
within a period of one year from due date of filing of return
the respective due dates i.e., of income of the previous
namely, 15 July, 15 October,
th th year in which the tax was so
15 January and 15 May,
th th deducted or collected,
respectively for the quarters irrespective of the quarter to
ending 30 June, 30 September,
th th which the tax relates.
31st December and 31st March. ii. Penalty may be prescribed
The TDS/TCS statements form having regard to quantum of
the basis of preparation of annual default and the period of
tax statement in Form 26AS. The delay, and no discretion
deductee is required to confirm may be given to the
the exact tax deducted/collected Assessing Officer in this
at source and remitted to the regard. In any case, it
Government by verifying Form should not exceed the tax
26AS online, and thereafter pay deductible or collectible at
the remaining taxes by way of source, in respect of which
self-assessment tax. However, if the quarterly statement has
TDS/ TCS statements are not been filed.
permitted to be filed within one (SUGGESTIONS FOR
year of the due date prescribed RATIONALIZATION OF THE
for each quarter on account of PROVISIONS OF DIRECT TAX
non-levy of penalty, then the same LAWS)
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Sr. Section Issue/Justification Suggestion
No
would extend beyond the due date
of filing return of income of that
assessment year in respect of the
second, third and fourth quarters.
It may cause genuine hardship to
the deductees as they would not
be able to verify the TDS/TCS
credited to their account, for
payment of self-assessment tax
before the due date of filing of
return of income.
Therefore, it is felt that penalty
provisions should be attracted if
such statements are not filed at
the latest before due date of filing
return of income.
Further, Section 271H provides for
the minimum and maximum
penalty, within which range,
penalty can be imposed. The
discretionary powers provided to
the Assessing Officer in levying a
penalty ranging from Rs.10,000 to
Rs.100000 may lead to hardship
to the assessee.
Discretion element in levying
penalty should be removed.
Penalty may be prescribed having
regard to quantum of default and
the period of delay. In any case,
it should not exceed the tax
deductible or collectible at source,
in respect of which the quarterly
statement has not been filed.
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CHAPTER XXIII-
MISCELLANEOUS
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No.
164. Signing of Section 282A provides for issue It is suggested that the
notices under of any income tax notice or other computerized notice / document
Section 282A document without it being signed should have a separate control
by the requisite authority. like provision for a digital
Although, the said section has signature because these are
been provided in the context of legal / statutory documents and
computerized generation of this aspect should specifically
notices and other documents, this be incorporated in section
can result in widespread misuse 282A. The signed hard copy
of powers and harassment. The should in any case be sent
assessees who are willing to subsequently. In respect of
receive communications through manual notices/documents the
email should be given notices or section should also provide
any other document in this form. that signatures will be
In such case also, the signed mandatory.
hard copy should be sent (SUGGESTIONS TO REDUCE /
subsequently. MINIMIZE LITIGATIONS)
165. Omission of In order to improve the standards Section 282B may be reinstated
section 282B- of service and transparency in the and the date of implementation
Document functioning of the Income-tax of DIN may be postponed till the
Identification Department, a computer based availability of requisite
Number system of allotment and quoting of infrastructure on all-India basis.
Document Identification Number (SUGGESTIONS FOR
(DIN) in each correspondence RATIONALIZATION OF THE
sent or received by the Income- PROVISIONS OF DIRECT TAX
tax Department was proposed to LAWS)
be introduced with effect from 1st
October, 2010 to facilitate tracking
of documents and alleviate the
taxpayers grievances.
Accordingly, section 282B was
inserted by the Finance (No.2)
Act, 2009, to provide that every
income-tax authority shall allot a
computer generated Document
Identification Number in respect of
every notice, order, letter or any
correspondence issued by him to
any other income-tax authority or
Pre-Budget Memorandum 2014 (Direct Taxes) Page 277
The Institute of Chartered Accountants of India
assessee or any other person and
such number shall be quoted
thereon.
Further, it was provided that every
document, letter or any
correspondence, received by an
income-tax authority or on behalf
of such authority, shall be
accepted only after allotting and
quoting of a computer generated
Document Identification Number.
Since it is essential to have the
necessary infrastructure to cover
the full range of services specified
in section 282B on pan-India
basis, the date for implementation
of the DIN was extended by the
Finance Act, 2010 to 1st July,
2011.
However, the Finance Act, 2011
omitted this section, on account of
the practical difficulties due to
non-availability of requisite
infrastructure on an all India
basis.
It is largely opined that
introduction of this provision
would increase the accountability
of the tax administration. For
proper discharge of
responsibilities, accountability is a
necessary counter balance.
Therefore, the provision for
implementation of DIN should be
reinstated.
166. Section Section 285BA may appropriatelyThe meaning of "specified
285BA(3) financial transactions' under
be amended to require information
Information to section 285BA(3) may be
regarding the following financial
be furnished widened to include within its
transactions involving an amount
in the Annual over and above specified sums: ambit the aforesaid
Information (a) Payment received by tour transactions.
Return operators exceeding a Further, in respect of the above
specified sum. mentioned transactions, where
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(b) Information regarding the PAN is not provided by the
Government tenders where payer, the provisions like TCS
the value exceeds a may be made applicable to the
specified amount. This payee. Accordingly, the payee
information may be provided should be allowed to collect tax
by the concerned at an appropriate rate. Later, in
Government Department. case the deductee provides
(c) Sales and purchases of PAN within a specified period to
shares exceeding a the deductor, the deductee
specified amount should be provided with a
respectively in the case of certificate like TCS certificate
day traders. This for claiming the same in the
information can be filed by return of income. In case the
the concerned brokers who deductee does not provide PAN
are dealing with the day with the specified period, the
traders. tax so collected would be added
to the revenue of the
(d) Receipt of donations by
Government.
trusts or Institutions
exceeding a specified sum. (SUGGESTION TO IMPROVE
Such information may be TAX COLLECTION)
filed by the concerned trusts
or institutions.
(e) Educational fees paid in
excess of a specified sum.
The concerned educational
institution should furnish the
relevant information to the
Department.
(f) Compulsory PAN on air-
ticket bookings for foreign
overseas package tours
Information to form part of
annual information return
under section
285BA.Persons booking
international air-tickets
should be required to give
their PAN while booking
tickets when such foreign
travel is organized as
foreign package tours. This
step will bring many high
value transactions into the
data system, which can be
Pre-Budget Memorandum 2014 (Direct Taxes) Page 279
The Institute of Chartered Accountants of India
scrutinized for expanding
the tax base. Alternatively,
the person who is funding
the package tour may be
required to give his PAN.
Those persons who are not
having PAN can be asked to
give a suitable declaration.
To begin with, this
requirement may be in
respect of those persons
who incur expenditure on air
travel above a prescribed
ceiling limit. Further, the
airline companies should be
required to forward such
declarations to their
respective Assessing
Officers. This information
can be included as part of
the return under section
285BA.
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PART III
SUGGESTIONS RELATING TO THE PROVISIONS
OF WEALTH-TAX ACT, 1956
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DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
167. Taxable The definition of "assets" was The amendment in the
Wealth - to amended in the year 1992. The definition of "assets" was made
exempt motor the then Honble Finance Minister by the Finance Act, 1992 with a
cars in his Budget speech had view to promote investment in
mentioned : productive assets. In line with
"67. The Wealth-tax Act, 1957 has intention of the lawmakers,
far too many exemptions making motor cars used for all
its administration enormously commercial purposes i.e.
complicated. The valuation of whether in business or
certain assets such as shares profession should be excluded
also presents problems, since from the definition of "assets"
very high market values reflecting since they are productive
speculative activity can lead to a assets.
heavy burden on shareholders
who are long term investors.
There is also no distinction at
present between productive and
non-productive assets. The
Chelliah Committee has
suggested that, in order to
encourage the taxpayers to invest
in productive assets such as
shares, securities, bonds, bank
deposits, etc. and also to promote
investments through Mutual
Funds, these financial assets
should be exempted from wealth
tax. Wealth tax should be levied
on individuals, Hindu undivided
families and all companies only in
respect of non productive assets
such as residential houses
including farm houses and urban
land, jeweller, bullion, motor
cars,planes, boats and yatchs
which are not used for commercial
purposes. The Committee has
further suggested that such tax
should be at the rate of one
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Sr. Section Issue/Justification Suggestion
No
percent.,with a basic exemption of
Rs.15 Lakhs. I propose to accept
this recommendation and I hope
this change will encourage
investments in productive assets
and discourage investment in
ostentatious non-productive
wealth."
Accordingly, the definition of
"assets" under section 2(ea) of the
Wealth-tax Act comprises inter
alia motor cars other than those
used by the assessee in the
business of running them on hire
or as stock-in-trade. As intended
by the abovementioned speech of
the then Finance Minister, motor
cars "used in the business of
running them on hire or as stock-
in-trade" were not treated as
assets as they were considered
as productive assets.
The motor cars comprised in
business assets are meant for
efficient and smooth operation of
the business. Since the motor
cars used in business or
profession directly or indirectly
contribute to the productivity of
the business or profession, they
should be exempted from the
definition of "assets" under
section 2(ea) of the Wealth tax
Act.
168. Increment in As there is tremendous rise in the Cash in hand limit should be
Cash Limit cost of living from last few years, it increased from Rs. 50,000 to
is therefore needed to enhance Rs. 2, 50,000.
the basic exemption limit of cash
in hand.
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Sr. Section Issue/Justification Suggestion
No
169. Enhancement The basic exemption limit under The basic exemption limit,
of the Basic the Wealth tax is Rs. 30,00,000. beyond which wealth tax is
Exemption There has been a tremendous rise charged be enhanced to Rs. 1
limit in the value of properties in last Crore.
few years, it is therefore,
suggested that the basic
exemption limit, beyond which
wealth tax is charged be
enhanced.
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ANNEXURE I
S. Section Limit (A) (Rs.) Year of introduction/ Suggestive
No. last modification limit as per
current CII (Rs)
2 Workmen comp- 500,000.00 April,1976(notification 10,00,000
10(10B) no. 10969 dt. 25-6-
1999
3 Leave ench- 25,500.00 Finance act ,1982 wref
10(10AA) 1-4-1978
300,000.00 May,2002 5,00,000
4 VRS- 10(10C) 500,000.00 April,2001(amended) 10,00,000
5 Entertainment Exempt: i)5000 ii)20% BS April,2002(Amended) 12,000
Allowance 16(ii) iii)Actually Recd
6 Sec: 10(14) read with Rule 2BB
i) Hilly Area 3,000
Compensatory all.
Rs.800 p.m
ii) Children education Rs. 100 p.m April, 89 (Amended) 500
allowance
iii) Hostel allowance Rs. 300 p.m 1500
iv)Transport Rs. 800 p.m 3,000
allowance
7 Educational facility- Rs. 1000 p.m 3,000 pm
17(2)
8 Deduction u/s 24 i) Rs. 30,000 ii) Rs. 1,50,000 April, 2002 3,00,000
(house prop)
10 Sec - 44 AA: if income > 1,20,000, or gross April,1976
Maintenance of A/c's receipts > 10,00,000 in any of 3
years imm. Preceeding the PY.
11 Sec-44 AB Audit of Turnover(business) exceeds 1 inserted by finance act
accounts crore, Gross 1984
receipts(profession) exceeds 25 April , 2013(amended)
lakhs
16 Sec-17 Motor car (perquisite): Circular 15/2001, A)3,968/5,290
(A) Car owned by employee: dated Dec 12,2001 B)(ii)
1,323/1,984
If car is partly used for official &
partly for private purpose:
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Actual expenditure
Less: Amount of office use (ie
1800pmif engine doesnot exceed
1.6 lt or rs. 2400 pm if exceeds 1.6
ltr and rs. 900 pm if chauffeur is
provided)
(B) Car owned or hired by
employer:
(i)If car is partly used for official
& partly for private purpose:
1800pm if engine doesnot exceed
1.6 lt or rs. 2400 pm if exceeds 1.6
ltr and rs. 900 pm if chauffeur is
provided.
(ii)If car is partly used for official
& partly for private purpose &
maintenence expenses (pvt use)
borne by employee: Rs.600 pm if
engine doesnot exceed 1.6 lt or rs.
900 pm if exceeds 1.6 ltr and rs.
900 pm if chauffeur is provided.
Lunch/refreshment (perk): Cost to Circular 15/2001, 110
employer in excess of Rs.50 per dated Dec 12,2001
meal Less: recovered from
employee
Interest free or concessional Circular 15/2001, 50,000
loans:Small loans upto Rs. 20,000 dated Dec 12,2001
in the aggregate are exempt.
Loans for medical treatment
specified in rule 3A are also
exempt, provided the amount of
loan for medical reimbursement is
not reimbursed under any medical
insurance scheme.
Gift, voucher or token in lieu of gift: Circular 15/2001, 11,021
Rs.5000 dated Dec 12,2001
17 Sec- 64(1A) Income of minor: Rs. 1500 April,1993 5,000
[Deduction u/s
10(32)]
18 Sec- 80C 100,000.00 April,2006 1,50,000
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24 Sec- 80D Rs. 15,000 : others April,2009 20,000
Rs. 20,000 : in case of senior (substituted)
citizen Inserted by income tax
SC 40,000
(amendment)act,1986
25 Sec-80DD Rs.1,00,000: if disability is 80%or April,2004 (inserted i)1,00,000
above Rs.50,000:other cases by finance act 1990 ii)1,50,000
26 Sec- 80DDB Rs.40,000 or actual expenditure} April,2004 (inserted i)1,00,000 ii)
w.e.l (others) by finance (no.2)act 1,50,000
Rs.60,000 or actual expenditure} 1996
whichever is lower (senior citizen)
27 Sec-80EE 100,000.00 April,2014 1,00,000
28 Sec-80GG i)Rs.2000 pm ii)25% of total April,1998(reintroduce 5,000 pm
income iii)excess of actual d)
rent paid over 10% of total income
whichever is lower
29 Sec- 80QQB Rs.3,00,000 or whole of such April,2004 5,00,000
income } whichever is lower
30 Sec-80RRB Rs.3,00,000 or whole of such April,2004 5,00,000
income } whichever is lower
31 Sec-80TTA 10,000.00 April,2013 15,000
All Deposits
32 Sec-80U Rs.1,00,000(severe disability ie April,2004 i)1,00,000 ii)
80% or above) 1,50,000
Rs.50,000 (other cases)
58 Sec-80P Interest Income -Rs.20,000 April,1968 i) 48,278 ii)
Profit-Rs.50,000/Rs.1,00,000 April,1999(Substituted) 3,00,000/1,
(Consumer cooperative) 50,000
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ANNEXURE II
Contents
Introduction ........................................................................................................................................... 290
Definition of R&D for software products ................................................................................................ 290
Definition of R&D for software products ................................................................................................ 290
Qualification as R&D Costs .................................................................................................................. 292
Activities that cannot be classified as R&D ........................................................................................... 292
Capitalization of R&D costs .................................................................................................................. 292
Accounting for R&D costs ..................................................................................................................... 295
Conclusion ............................................................................................................................................ 297
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Introduction
The clear definition of software product R&D activities and accounting of costs associated is
unavailable in current scenario. The R&D recognition is of high value for the growing number of
software product startups as it acts as a channel into many government funding schemes.
Also, tax benefits which can be carried over even if the startup is at a loss or fails, which is very
high likely, the founders still have an option to be acquired by a bigger company for the technology
or the team. Hence, the company is incentivised to do the same because it would get the benefit of
the tax deduction from losses being carried forward. This will be a huge step in creating parity
between Indian product startups and the startups in US or Canada which have these advantages.
To nurture the potential of Indian Product startups it becomes highly critical to revise the policies to
compete globally. The first step towards influencing government bodies to revise the policies is to
articulate a concise definition of R&D for software products.
Definition of R&D for software products
(as defined by UK government)
R&D includes developments leading to:
New or improved products, new or improved solutions, efforts to changing customer
requirements, cost reduction
Development of new technologies, solutions, architectures, integration designs, protocols,
specialized components and packages
Noticeable and quantifiable improvements to existing systems/processes affecting
security, scalability and availability
Redesign of existing systems with fundamentally new technologies or re-architecture of
systems to enable use of new technologies (such as cloud)
New or improved data processing solutions, risk management solutions, scalable engines
to automate work flows, message-oriented middleware are some of the examples/
categories of new solutions developed under R&D umbrella
Definition of R&D for software products
(as defined in FASB Statement No. 2)
As general definitions from FAS 2 section 8, research is planned search or critical investigation
aimed at discovery of new knowledge. Development is the translation of research findings into a
plan or design for a new product or process. Development deals more with the initial application of
knowledge, often to determine technological feasibility
The translation of research findings or other knowledge into a plan or design for a new
product or process or for a significant improvement to an existing product or process
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whether intended for sale or use. It includes the conceptual formulation, design, and
testing of product alternatives, construction of prototypes, and operation of pilot plants
o It does not include routine or periodic alterations to existing products, production
lines, manufacturing processes, and other ongoing operations even though those
alterations may represent improvements and it does not include market research
or market testing activities
For example, engineering activity required to advance the design of a product to the point
that it meets specific functional and economic requirements and is ready for manufacture
Efforts to develop a new or higher level of computer software capability intended for sale
(but not under a contractual arrangement) would be a research and development activity
Developing or significantly improving a product or process that is intended to be sold,
leased, or otherwise marketed to others is a research and development activity. Similarly,
developing or significantly improving a process whose output is a product that is intended
to be sold, leased, or otherwise marketed to others is a research and development activity
All costs of planning, designing, and establishing the technological feasibility of a
computer software product would be research and development costs
Research and development activities should be considered incomplete until technological
feasibility has been objectively established and that research and development activities
in the software product process include:
o All planning and designing (both product design and detail program design
o Any coding and testing necessary to establish technological feasibility
All software creation costs incurred prior to establishing technological feasibility are to be
charged to expense when incurred as research and development costs
The research and development classification of Statement 2 would apply only to the costs
of designing the product and determining the availability of proven technology for product
development
All software creation costs incurred subsequent to establishing technological feasibility
are capitalized and reported at the lower of cost or net realizable value
The technological feasibility of some products cannot be established with completion of
the detail program design because high-risk development issues remain. Resolution of all
uncertainties related to identified high-risk development issues is therefore included as a
requirement for establishing technological feasibility
Both establishing technological feasibility of the software component and completing
research and development activities for the hardware component are necessary for
beginning of capitalization of software costs
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Summary of FASB Statement No. 2: This Statement establishes standards of financial
accounting and reporting for research and development (R&D) costs. This Statement
requires that R&D costs be charged to expense when incurred. It also requires a
company to disclose in its financial statements the amount of R&D that it charges to
expense.
Qualification as R&D Costs
(As per UK government)
Salary costs of technical and other employees directly involved in R&D work, and of those
indirectly involved in eligible R&D projects
Costs of consumable items employed in the R&D process
65% of contract staff costs
Cost of software licences, power and fuel used in the R&D project
R&D subcontracted to individuals or universities can be claimed but not if sub contracted
to a corporate third party entity
o Specifically for small and medium enterprises, R&D relief can be claimed for 65%
of the costs of subcontracting to third party
Activities that cannot be classified as R&D
Statement 2, with its mandatory expensing requirement, extends a range of routine
production activities to the classification of research and development because it assigns
the bulk of computer programming activities (detail program design, coding, and testing).
Certainly, much research and development type activity does take place in the computer
software industry. However, most detail program design and coding activities are not
discovery or design-oriented in the sense of Statement 2, they are just the meticulous
execution of a plan with skilled employees applying proven methods as in any production
process
Costs incurred to purchase computer software are not research and development costs
unless the software is for use in research and development activities
Capitalization of R&D costs
Increasing the capitalization rates reduce operating expenses and lead to better EPS
results in a tough quarter, while during strong quarters management teams recognize a
little bit more R&D expenses to balance things back out
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Companies that provide software as a service will capitalize R&D expenses associated
with the software that supports those SaaS efforts as they are developing software to be
used internally, and it is only the service that is being provided to the customer
Change in the ASC rules causes some software companies to have to capitalize a portion
R&D expenses
The old rule: ASC 985-20 guided majority of software companies
ASC 985-20. ASC 985-20 states that R&D costs must be expensed on the income
statement until "technological feasibility" is established. Technological feasibility is defined
as completion of all planning, designing, coding, and testing necessary foe the product to
be produced to meet its designed functions, features, and performance. Then the
company may capitalize the remaining costs until the product is released to market
By capitalizing these costs and amortizing them over a (subjective) time period,
companies are able to boost their EPS by spreading R&D costs incurred in a quarter over
a long period of time. The capitalization rate could periodically be changed, allowing
management to subjectively fluctuate the levels
In late 1990's, many software companies chose to move to a practice of expensing 100%
of R&D costs as the time between the establishment of technological feasibility and
commercial release of software was minimal. It resulted in insignificant or no capitalization
of internally developed software costs.
The new rule: ASC 350-40 impacts companies offering SaaS
However, as per the new rule, companies with SaaS model have the software developed
internally and is never available as a product to be acquired or purchased, it is delivered
as a service (Software-as-a-Service)
Majority of the new age companies capitalize some portion of the R&D budget. The
largest amounts of capitalization are observed from SaaS (or Infrastructure as- a-Service
(IaaS)) companies such as Akamai, RackSpace, Verisign, and Neustar
o Since the software is used internally for the company to deliver that service, they
are covered by ASC 350-40
According to the new rule, ASC 985-20, the length of time you may amortize is the greater
of:
o The ratio of revenue in the current period to the total estimated revenue of the
product over its entire life or
o The estimated economic life of the product
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For example,
o if a company decides that the revenue over the life of the product is expected to
be $50M but only $10M in revenue in the current period, they can amortize the
R&D costs over a 5-year period ($50M/$10M) at $2M per year ($10M in
capitalized costs/5-year period)
o Holding the current revenue constant at $10M but raising the expected future
revenue to $60M or $75M means that they can amortize over a 6 and 7.5 year,
respectively
o Similarly, extend the estimates of the useful life of the product, the amount
amortized in each period is reduced. By extending the estimated useful life of the
product from, 2 years to 3 years one can reduce the annual amortized R&D costs
of the product by 33% from $5M per year ($10M of capitalized costs/2 year
economic life) to $3.3M per year ($10M of capitalized costs/3 year economic life)
o A company has some subjectivity in its estimations, and the effects have a direct
impact on how much the company realizes in expenses on its income statement
Example - EMC
o Research and development ("R&D") costs are expensed as incurred
o R&D costs include salaries and benefits, consultants, facilities related costs,
material costs, depreciation and travel
o Software development costs incurred subsequent to establishing technological
feasibility through the general release of the software products are capitalized
o Technological feasibility is demonstrated by the completion of a detailed program
design or working model, if no program design is completed
o Capitalized costs are amortized over periods ranging from eighteen months to
two years which represents the products' estimated economic life
Example Microsoft
o It must expense all costs until it has completed the activities (planning, designing,
coding, and testing) necessary to establish that it can produce the product to
meet its design specifications
o It should capitalize subsequently incurred costs and amortize them to current and
future periods
o Software purchased for alternative future uses can be capitalized
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o The rule applies to only the development of software that is to be sold, leased, or
otherwise marketed to third parties
ASC 350-40 defines three stages of internal use software development, which are
preliminary project, application development, and post-implementation/ operation
ASC 350-40 treatment of R&D cost
Preliminary Application Post-
Stage
Project Development Implementation/Operation
Activities Concept
Design path Training
within stage formulation
Evaluation of
Coding Maintenance
alternatives
Final selection Installation
Testing
Only capitalize costs
associated with upgrades
Treatment Expense as
Capitalize or enhancements,
of costs incurred
otherwise expense as
incurred
An example following the new rule:
o On page 7 of its 2012 10K, Akamai says, "In addition, for the years ended
December 31, 2012, 2011, and 2010, we capitalized $50.6 million, $40.4 million,
and $31.1 million, respectively, of external consulting and payroll and payroll-
related costs related to the development of internal-use software used by us to
deliver our services and operate our network." Akamai considers the software it
develops that is the Akamai network to be for internal use in order for the
company to deliver its content delivery network (CDN) and related services. That
is why it falls under the newer rule
Accounting for R&D costs
All costs incurred to establish the technological feasibility of a computer software product
to be sold, leased, or otherwise marketed are research and development costs. Those
costs shall be charged to expense when incurred as required by FASB Statement No. 2,
Accounting for Research and Development Costs
For purposes of this Statement, the technological feasibility of a computer software
product is established when the enterprise has completed all planning, designing, coding,
and testing activities that are necessary to establish that the product can be produced to
meet its design specifications including functions, features, and technical performance
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requirements. At a minimum, the enterprise shall have performed the activities in either
(a) or (b) below as evidence that technological feasibility has been established:
o If the process of creating the computer software product includes a detail
program design:
The product design and the detail program design have been completed,
and the enterprise has established that the necessary skills, hardware,
and software technology are available to the enterprise to produce the
product
The completeness of the detail program design and its consistency with
the product design have been confirmed by documenting and tracing the
detail program design to product specifications
The detail program design has been reviewed for high-risk development
issues (for example, novel, unique, unproven functions and features or
technological innovations), and any uncertainties related to identified
high-risk development issues have been resolved through coding and
testing.
o If the process of creating the computer software product does not include a detail
program design with the features identified in (a) above:
A product design and a working model of the software product have
been completed
The completeness of the working model and its consistency with the
product design have been confirmed by testing
Production Costs of Computer Software
Costs of producing product masters incurred subsequent to establishing technological
feasibility shall be capitalized. Those costs include coding and testing performed
subsequent to establishing technological feasibility. Software production costs for
computer software that is to be used as an integral part of a product or process shall not
be capitalized until both:
o Technological feasibility has been established for the software and
o All research and development activities for the other components of the product
or process have been complete
Capitalization of computer software costs shall cease when the product is available for
general release to customers. Costs of maintenance and customer support shall be
charged to expense when related revenue is recognized or when those costs are incurred,
whichever occurs first
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Amortization of Capitalized Software Costs
Capitalized software costs shall be amortized on a product-by-product basis. The annual
amortization shall be the greater of the amount computed using:
o The ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or
o The straight-line method over the remaining estimated economic life of the
product including the period being reported on. Amortization shall start when the
product is available for general release to customers
Disclosures
The disclosure requirements for research and development costs in Statement 2 apply to the
research and development costs incurred for a computer software product to be sold, leased, or
otherwise marketed
Conclusion
It is critical that the government works with the industry and facilitates the growth of the software
product startups in India. To realize the potential opportunities, startups need to be able to define
clear value and enhance their attractiveness in order to get funding and competitive valuations in
the global market.
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