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Pre-Budget Memorandum 2014 (Direct Taxes The Institute of Chartered Accountants of India
June, 03rd 2014
PRE-BUDGET MEMORANDUM - 2014




             DIRECT TAXES




THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA
                   NEW DELHI
          The Institute of Chartered Accountants of India




Page ii                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
                      The Institute of Chartered Accountants of India

                   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




Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                       Page iii  
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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



Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                      Page v  
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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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                    Page vii  
             The Institute of Chartered Accountants of India

            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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                 The Institute of Chartered Accountants of India

    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.




Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                 Page ix  
                 The Institute of Chartered Accountants of India

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



Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page xi  
                 The Institute of Chartered Accountants of India

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




Page xii                                       Pre-Budget Memorandum­ 2014 (Direct Taxes)  
            PART I

SUGGESTIONS FOR IMPROVING TAX
ADMINISTRATION AND COMPLIANCE
         The Institute of Chartered Accountants of India




Page 2                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
                   The Institute of Chartered Accountants of India

                       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

Pre-Budget Memorandum­ 2014 (Direct Taxes)                                               Page 3  
                   The Institute of Chartered Accountants of India

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


Page 4                                        Pre-Budget Memorandum­ 2014 (Direct Taxes)  
                   The Institute of Chartered Accountants of India

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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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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 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






Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 7  
                   The Institute of Chartered Accountants of India

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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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


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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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Sr.      Section               Issue/Justification                Suggestion
No
                       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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 Sr.      Section                Issue/Justification                         Suggestion
 No
                        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


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Sr.       Section               Issue/Justification                        Suggestion
No
                        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  
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 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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                         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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 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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 Sr.      Section               Issue/Justification                        Suggestion
 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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                   The Institute of Chartered Accountants of India

Sr.      Section               Issue/Justification                         Suggestion
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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 21  
                    The Institute of Chartered Accountants of India

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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                     The Institute of Chartered Accountants of India

Sr.        Section               Issue/Justification                        Suggestion
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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                 Page 23  
                    The Institute of Chartered Accountants of India

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


Page 24                                        Pre-Budget Memorandum­ 2014 (Direct Taxes)  
                   The Institute of Chartered Accountants of India

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)  
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 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

Page 44                                           Pre-Budget Memorandum­ 2014 (Direct Taxes)  
                    The Institute of Chartered Accountants of India

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


Page 46                                        Pre-Budget Memorandum­ 2014 (Direct Taxes)  
                    The Institute of Chartered Accountants of India

Sr.       Section                Issue/Justification                        Suggestion
No
                         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

Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 47  
                    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


Page 48                                         Pre-Budget Memorandum­ 2014 (Direct Taxes)  
                   The Institute of Chartered Accountants of India

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  
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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.




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                                 CHAPTER II

                         BASIS OF CHARGE




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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).


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              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


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                      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  
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                           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)




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                                  Chapter III

      INCOMES WHICH DO NOT FORM PART OF
                TOTAL INCOME




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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  
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 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


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 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.


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 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

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 Sr.      Section              Issue/Justification                        Suggestion
 No
                            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

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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  
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 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
 No
                            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

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 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,


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 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

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 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


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                   The Institute of Chartered Accountants of India

 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.


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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  
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                                CHAPTER IV

            COMPUTATION OF TOTAL INCOME




Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 85  
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                          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

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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.




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                               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  
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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. .




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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  
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             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


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 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  
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          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


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 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  
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 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

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 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

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 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.


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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.


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 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.


Page 100                                        Pre-Budget Memorandum­ 2014 (Direct Taxes)  
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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

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                           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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                           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

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                           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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 No
                           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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 No
                           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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 Sr.       Section                Issue/Justification                       Suggestion
 No
                           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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 Sr.        Section                 Issue/Justification                        Suggestion
 No
       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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 Sr.       Section                Issue/Justification                     Suggestion
 No
       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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 Sr.       Section                Issue/Justification                      Suggestion
 No
                                 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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 Sr.       Section                Issue/Justification                      Suggestion
 No
                                                                 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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 Sr.      Section              Issue/Justification                       Suggestion
 No
                        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
 No
                        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
 No
       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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                         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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                        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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                         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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 131  
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 Sr.       Section              Issue/Justification                        Suggestion
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                         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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 Sr.       Section              Issue/Justification                  Suggestion
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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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                        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.


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                    Page 135  
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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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                    Page 137  
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 Sr.       Section               Issue/Justification                   Suggestion
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                         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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                        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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                   Page 139  
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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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                          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


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 Sr.       Section              Issue/Justification                       Suggestion
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                         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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                        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.




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            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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                         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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                         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




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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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 Sr.       Section               Issue/Justification                     Suggestion
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                          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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 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




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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


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 Sr.       Section               Issue/Justification                        Suggestion
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                         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.

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 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


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 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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 Sr.      Section               Issue/Justification                        Suggestion
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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

Pre-Budget Memorandum­ 2014 (Direct Taxes)                                               Page 161  
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 Sr.       Section              Issue/Justification                  Suggestion
 No
                         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
 No
       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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 Sr.      Section                Issue/Justification             Suggestion
 No
                        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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                    Page 165  
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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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 Sr.      Section               Issue/Justification                           Suggestion
 No

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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 Sr.       Section              Issue/Justification                       Suggestion
 No
                             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
 No
                            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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                            Page 169  
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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  
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 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

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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
 No
                        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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 Sr.      Section               Issue/Justification              Suggestion
 No
                         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.



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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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Sr.       Section               Issue/Justification                       Suggestion
No
                                                                 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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                             Page 217  
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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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Sr.       Section               Issue/Justification              Suggestion
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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 223  
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Sr.        Section               Issue/Justification                  Suggestion
No
                          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
No
                         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

Pre-Budget Memorandum­ 2014 (Direct Taxes)                                           Page 225  
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Sr.        Section               Issue/Justification                       Suggestion
No
                          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
No
                         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


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                          Page 227  
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Sr.        Section               Issue/Justification                      Suggestion
No
                          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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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
No
                         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

Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 231  
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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
No
                              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,


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                               Page 233  
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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
No
                          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

Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 235  
                     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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Sr.        Section                Issue/Justification                      Suggestion
No
                           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.


Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 237  
                     The Institute of Chartered Accountants of India

Sr.        Section               Issue/Justification                       Suggestion
No
                          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


Page 238                                        Pre-Budget Memorandum­ 2014 (Direct Taxes)  
                    The Institute of Chartered Accountants of India

Sr.       Section               Issue/Justification                     Suggestion
No
                         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

Pre-Budget Memorandum­ 2014 (Direct Taxes)                                           Page 239  
                     The Institute of Chartered Accountants of India

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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                    The Institute of Chartered Accountants of India

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  
                     The Institute of Chartered Accountants of India

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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                     The Institute of Chartered Accountants of India

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.




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               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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   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.




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            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


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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)




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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.




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                              CHAPTER XX-B

 REQUIREMENT AS TO MODE OF ACCEPTANCE,
 PAYMENT OR REPAYMENT IN CERTAIN CASES
     TO COUNTERACT EVASION OF TAX




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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


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                        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


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                    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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                   The Institute of Chartered Accountants of India

       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.




Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                  Page 297  

 
 
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