PREBUDGET
MEMORANDUM
2018
DirectTaxes
and
InternationalTax
TheInstituteofCharteredAccountantsofIndia
(Set up by an Act of Parliament)
New Delhi
PRE-BUDGET MEMORANDUM - 2018
DIRECT TAXES AND INTERNATIONAL TAX
THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA
NEW DELHI
The Institute of Chartered Accountants of India
PRE-BUDGET MEMORANDUM - 2018
DIRECT TAXES AND INTERNATIONAL TAX
1.1 The Council of the Institute of Chartered Accountants of India considers it a privilege to
submit this Pre-Budget Memorandum - 2018 on Direct Taxes and International tax to the
Government. The memorandum contains suggestions for the consideration of the
Government while formulating the tax proposals for the year 2018-19.
1.2 The suggestions have been broadly categorized under the following heads:
Part A : Suggestions relating to the policy &provisions of Income-tax Act, 1961
Part B : Suggestions for improving Tax Administration and Citizen Services
1.3 The suggestions are given Chapter wise and are intended to serve the following purpose:
I. Improve tax collection.
II. Reduce/minimize litigations
III. Rationalization of the provisions of direct tax laws.
IV. Removal of administrative and procedural difficulties relating to Direct Taxes
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INDEX
Sr. No. Suggestion Page
No.
PART A Suggestions relating to the policy & provisions of Income-Tax
Act, 1961
CHAPTER I PRELIMINARY
1. Increase in the rate of surcharge increases cost of doing 22
business for domestic companies
2. Section 2(15) Need for defining "Yoga" 24
3. Section 2(15) Substitution of existing provisos with new 24
proviso requiring satisfaction of two new conditions for qualifying
as a "charitable purpose"
4. Mandatory application of income by charitable trusts/ institutions 27
under section 10(23C)
5. Clarification regarding exemption of interest on deposits by co- 28
operative societies with multi-State co-operative banks
6. Section 2(42A) Reduction in holding period in case of 29
immovable property, being land or building or both, to qualify
as long term capital asset Consequential amendments to be
made in sections 54, 54B, 54D and 54F
7. Section 2(42A), section 47(xb) and section 49(2AE) - Tax 30
neutral conversion of preference shares to equity shares
Clarification regarding tax treatment for earlier years
8. Section 3- Definition of Previous year 31
9. Place of Effective Management provisions section 6 (3) 32
CHAPTER II BASIS OF CHARGE
10. Provisions regarding indirect transfer of capital asset situated 35
in India Section 9
11. Section 9(1)(i)- Benefit of non-applicability of indirect transfer 37
provisions in case of Category I and II FPIs - Provisions for
avoidance of double taxation in case of such indirect transfer
provisions, where direct transfer has already been subject to tax
12. a) Scope of Royalty Income -Section 9(1)(vi) of 39
Income-tax Act, 1961
b) Use of Standard Facilities 41
c) Exclusion of packaged software from applicability of
TDS under Section 194J of the IT Act:
13. Explanation 5 to Section 9(1)(vi) e commerce services 43
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14. Explanation 6 to Section 9(1)(vi) telecom services 44
15. Carry forward of excess foreign tax credit 44
CHAPTER III Incomes which do not form part of Total income
16. Definition of "Keyman Insurance Policy" -Section 10(10D) 46
17. Section 10(13)- Payment from approved superannuation fund 47
18. Annual receipts under section 10(23C) 47
19. Rationalisation of Provisions of Section 10(23C) 48
20. Income-tax exemption for securitization trusts, levy of distribution 49
tax on income distributed by such trusts under section 10(23DA)
21. Section 10(23FB) Tax exemption for Alternative Investment Funds 53
Venture Capital Funds
22. Income of minors - to increase exemption limits under section 55
10(32)
CHAPTER IV Computation of Total Income
PART A SALARIES
23. Re-introduction of standard deduction for salaried assessees- 57
Section 16
24. Deduction to salaried assesses- Payment for notice period 57
25. Medical reimbursements for retired employees 59
26. Partial double taxation of contribution to superannuation fund 59
Section 17(2)(vii)
PART C INCOME FROM HOUSE PROPERTY
27. Profits and gains of business or profession (Section 28) 61
28. Deduction for maintenance charges paid to societies, federation 61
etc.- Section 23
29. Section 23(5) Deemed Taxability of unsold stock of house 62
property after 1 year of lying vacant Non-applicability of restriction
contained in section 71(3A)
30. Deduction for ground rent other than u/s 24(a) 64
PART D PROFIT AND GAINS OF BUSINESS AND PROFESSION
31. Section 28(iiia) Sale of license 65
32. Section 28(iiid) Duty Entitlement Pass Book Scheme no more in 65
existence
33. Section 32 - Depreciation in case of slump sale 65
34. Benefit under Section 35(1)(iia) should be increased to 200 per cent 67
from the present level of 125 per cent
35. Applicability of Section 35(2AB) of the Act on expenditure incurred 67
on scientific research carried outside the in-house R&D facility
approved by the prescribed authority
36. IT and ITES sectors should also be entitled to weighted deduction 68
under Section 35(2AB) of the Act
37. Weighted deduction should be available on expenditure incurred on 68
internally developed intangible assets
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38. Extension of the weighted deduction under Section 35(2AB) of 69
the Act for a further period of 10 more years
39. Profit linked incentives for specified industries vis-a-vis 69
investment-linked incentives - Section 35AD
40. Clarification on amendment to Section 35AD(3) 70
41. Dilution of tax incentive under Section 35AD by insertion of 72
Section 73A
42. Section 35AD and 43(1) Cash payment exceeding Rs 10,000 72
to be disallowed Exceptions contained in Rule 6DD may be
extended to section 35AD and 43(1) also
43. Section 35D 74
(a) Capital raising expenses
(b) Amortization of Capital expenditure 74
44. Due date for crediting the contribution of employees to the 74
respective fundSection 36(1)(va) read with Section 2(24)(x)
45. Corporate Social Responsibility Costs section 37 75
46. Disallowance for TDS defaults on payments to non-resident 77
Section 40(a)(i))
47. Section 40(a)(ia) - Disallowance of expenditure for non - 78
deduction of tax at source on payment made to resident
48. Disallowance of expenses incurred in favour of members 78
Section 40(ba)
49. Section 40A(3) Payment to electricity companies 79
50. Depreciation on assets acquired in satisfaction of debts- Section 79
43(1)
51. Explanation 5 to Section 43(1) "building" to be replaced by 80
"assets"
52. Section 43A - Exchange fluctuation loss due to sharp fall in 80
Rupee value
53. Section 43CA - Special provision for full value of consideration for 82
transfer of assets other than capital assets in certain cases.
54. Taxability of interest on Non-Performing Asset 84
55. Section 44AD Clarifications required regarding provisions of 87
section 44AD
56. Section 44AD Deletion of proviso to sub-section (2) providing for 90
deduction of interest and remuneration paid to partners by firm from
the presumptive income under section 44AD Proviso to
remain/restored to avoid genuine hardship to small and medium
firms
57. Section 44AD-Presumptive Income Some Issues 92
58. Benefit of presumptive taxation to LLP- Section 44AD 92
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59. Omission of sub- section (4) to Section 44AD 93
60. Section 44ADA - Special provision for computing profits and gains 93
of profession on presumptive basis Issues and concerns arising
there from to be addressed
a) Threshold limit of Rs 50 lakhs may be increased 94
b) Rate of estimated tax @ 50% too high 94
PART E CAPITAL GAINS
61. Section 45(5A) - Special provision for computation of capital gain 96
in case of joint development agreement (JDA) - Certain concerns
to be addressed and scope to be enlarged
62. Limited Liability Partnership (LLP)- 99
(a) Merger and Amalgamation of Limited Liability
Partnership to be Revenue Neutral.
(b) Section 47 Insertion of clause (viab) to provide 99
exemption in respect of transfer of capital asset
consequent to amalgamation of foreign companies -
Consequent exemption to be provided in respect of
transfer of shares by resident shareholders
(c) Consequential amendment required in section 47(xiiib) 100
(d) Extension of benefit of conversion to Sole Proprietary 101
and Partnership Firms
(e) Section 47(xiiib) - Conversion of company into LLP 101
Clarification required relating to additional condition
63. Business reorganizations Section 47(x)/(xa) 102
64. Sections.47(x) & (xa) and 49(2A) - Capital Gain on Conversion of 103
Foreign Currency Exchangeable Bonds (FCEB) and other Bonds &
Debentures.
65. Conversion of One kind of share into another 104
66. Section 50C - Option for adopting stamp duty value on date of 104
agreement Amendment to be treated as clarificatory in nature
67. Section 50CA and section 56(2)(x)(c) - Fair Market Value to be full 105
value of consideration in case of transfer of unquoted shares
Amendment required in view of double taxation in the hands of
seller as well as buyer
68. Section 50CA - Valuation of shares of a company in distress 107
69. Section 54 and 54F - Capital gains exemption in case of 108
investment in ONE residential house property in INDIA
70. Certification of deductions claimed under section 54, 54F, 54EC etc 111
71. Section 54EC- Capital gains exemption on investment in Specified 111
Bonds during the financial year
72. Exemption u/s 54 not to be denied due to delay in completion of 112
project beyond the control of assessee
73. Capital gain on transfer of residential property to be taxed in certain 113
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cases-Section 54GB
74. Reference to the Valuation Officer (Section 55A) 115
PART F INCOME FROM OTHER SOURCES
75. Definition of the term relative- Explanation to Section 56(2) (vii) 117
76. Section 56(2)(ix) - Taxability of forfeited advance for transfer of a 118
capital asset
77. Taxation on transfer of money/property without consideration or for 119
inadequate consideration
78. Section 56 - Insertion of new clause (x) in section 56(2) vide the 123
Finance Act, 2017
CHAPTER VI AGGREGATION OF INCOME AND SET OFF OR CARRY
FORWARD OF LOSS
79. Restriction of set off of loss from House Property 126
80. Section 79 carry forward and set-off of losses in certain cases 126
81. Section 79- Carry forward and set off of loss in case of eligible start- 126
ups - Condition to be further relaxed
CHAPTER VIA DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME
PART B DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
82. Complexity of internal & external caps on deduction Section 80C 130
83. Section 80C- annual interest accruing on cumulative deposits 130
84. Section 80D Mediclaim premium deduction 131
85. Donations made of any sum exceeding ten thousand rupees in 131
cash- sections 80G and 80GGA
PART C DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
86. a) Section 80-IA Unit-wise deduction should be allowed 132
b) Benefit u/s 80-IA shall be allowable to the resulting / 132
amalgamated company in case of demerger / amalgamation
87. Incentivizing investments in respect of agricultural infrastructure 134
88. Affordable Housing [Sec. 80-IBA(2)(h)] 135
89. Section 80-IBA Relaxation of certain conditions from 1.4.2018 136
Relaxation may be effective from 1.4.2017
90. Section 80U Consequential amendments required due to the 137
enactment of `The Rights of Persons with Disabilities Act, 2016'
w.e.f. 28.12.2016
PART CA DEDUCTIONS IN RESPECT OF OTHER INCOME
91. Deduction in respect of interest on deposits in savings account - 138
Section 80TTA.
CHAPTER IX DOUBLE TAXATION RELIEF
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92. Applicability of Education Cess and Secondary and Higher 140
Education Cess -Double Taxation Avoidance Agreement
93. Agreement with foreign countries or specified territories Section 140
90- Tax treaties vis-a-vis the Act
94. Sections 90 & 90A Clarification with regard to interpretation of 141
'terms' used in tax treaties under Section 90/90A but not defined in
such treaties - Concern to be addressed
CHAPTER X SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX
95. Country By Country Reporting - Penalty for non-furnishing of 145
Country by Country report
96. Threshold limit of INR 20 crore for applicability of transfer pricing 145
provision
97. Reporting of issuance of Share Capital Transaction in Form 3CEB 145
98. Computing Profit Level Indicators (PLIs) 146
99. Advertising Marketing & Promotion Expenses (AMP) 147
100. Clarification to prevent erosion of Indian tax base through Transfer 147
Pricing adjustments in hands of Foreign Companies
101. Valuation under Customs and Transfer Pricing 154
102. Section 92CE- Introduction of secondary adjustment 155
103. Rollback of APA 161
104. Dispute resolution 162
105. a) Domestic Transfer Pricing [DTP] Sections 92, 92BA, 92C, 163
92CA, 92D & 92E
b) Arm's Length Price vs Ordinary Profits 164
c) Documentation Requirements 164
CHAPTER X-A GENERAL ANTI AVOIDANCE RULES
106. Section 94A-Special measures in respect of transactions with 166
persons located in notified jurisdictional area
107. Section 94B- Limitation of interest benefit provisions introduced 166
certain concerns to be addressed
108. Section 95 Applicability of GAAR to be effective from A.Y.2018- 175
19 - Protection from applicability of GAAR should not be restricted
to only investments, but may extend to all transactions upto
31.03.2017
109. Section 95 - GENERAL ANTI-AVOIDANCE RULE 176
CHAPTER XII DETERMINATION OF TAX IN SPECIAL CASES
110. Removal of anomalies in sections 111A & 112 181
111. Section 112(1)(c) - Long-term capital gains on shares of a 181
company, not being a company in which public are substantially
interested, to be eligible for concessional rate of tax @10% -
Amendment to be made effective retrospectively
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112. Section 115BBC read with section 13(7) - taxation of anonymous 182
donations
113. Section 115BBDA Dividend received by resident individuals, 183
HUFs and firms receiving dividend in excess of Rs.10 lakh to be
subject to tax @ 10% in their hands Consequence of the new levy-
Triple taxation
114. Tax on certain dividends received from domestic companies 183
(Section 115BBDA)
115. Section 115BBDA Scope of section 115BBDA, initially 184
restricted to individuals, HuFs and Firms, expanded
Certain pooling vehicles like Mutual funds, AIFs etc. to be
exempted
116. Section 115BBF Concessional rate of tax @ 10% on 185
income from patent Issues to be addressed
a) Benefit may be extended to other intellectual property rights 185
b) Benefit restricted to `true and first inventor of the invention': 186
Benefit may be extended to assignee of the true and first inventor
in respect of the right to make an application for a patent
c) Benefit may be extended to capital gains arising on sale of 187
patented products
d)Extension of benefit to royalty income earned from inventions for 188
which patents are applied under Patents Act 1970 but registration
is awaited
e)Other Issues which need to be addressed 188
117. Insertion of section 115BBG - Income from transfer of carbon 189
credits to be taxed @ 10% - Inclusion in definition of income under
section 2(24) and clarification regarding tax treatment for prior
assessment years
CHAPTER XII-B SPECIAL PROVISIONS RELATING TO CERTAIN
COMPANIES
118. Section 115JAA Extension of period of carry forward of MAT 192
credit from 10 years to 15 years - Clarity regarding carry forward
and set off of MAT credit in cases where the ten year period has
expired on or before AY 2016-17 but the fifteen year period has still
not expired
119. Section 115JAA(2A) - Restriction on carry forward of MAT/AMT 194
credit and claim of FTC in relation to taxes under dispute -
Restriction to be removed
120. Set Off of MAT Credit from Tax on Total Income before charging 195
surcharge and education cesses- Section 115JAA
121. Section 115JB Amendment required and clarification sought in 196
respect of taxability of waiver of Principal amount by banks/ NBFC
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122. Exclusion of Capital Profit/Loss & Profit & Loss on Sale of Fixed 200
Assets & Investments in computing Book Profit for the purpose of
Levy of Mat u/s 115JB
123. Section 115JB - Applicability of Minimum Alternate Tax (MAT) on 202
foreign companies Benefit may be extended to foreign companies
having permanent establishment and covered under the
presumptive tax regime in India
124. Tax Credit u/s 115JAA & 115JD read with section 115JB & 115JC 203
125. Section 115JB-Minimum Alternate tax 203
126. Rationalization of provisions of MAT for short term capital gains 204
127. Section 115JB MAT implications for Ind AS compliant companies 205
128. Clarity on MAT u/s 115JB 205
129. Proposed amendment to Section 115JB(2A) of the Act 206
CHAPTER XII- SPECIAL PROVISIONS RELATING TO CERTAIN PERSONS
BA OTHER THAN A COMPANY
130. Section 115JD- Tax Credit in case of succession 211
CHAPTER XII-D SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED
PROFITS OF DOMESTIC COMPANIES
131. Tax on distributed profits of domestic companies - Section115- 213
O(1A)
CHAPTER XII- SPECIAL PROVISIONS RELATING TO TAX ON
DA DISTRIBUTED INCOME OF DOMESTIC COMPANY FOR
BUY-BACK OF SHARES
132. Section 115QA Effect on foreign investments 218
133. Section 115QA - Rules to be prescribed for determining the amount 219
received by the company for issue of shares Rules to be
applicable for buy-back effected on or after 01.06.2016
CHAPTER XII- SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED
EA INCOME BY SECURITISATION TRUSTS
134. Section 115TCA- Tax on income from Securitisation Trust Tax 222
Treatment in respect of distributions in April and May 2016 may be
clarified
CHAPTER XII- SPECIAL PROVISIONS RELATING TO TAX ON ACCREDITED
EB INCOME OF CERTAIN TRUSTS AND INSTITUTIONS
135. Sections 115TD to 115TF Special provisions relating to tax on 224
accreted income of certain trusts and institutions Issues to be
addressed
136. a) Tax on accreted income - Section 115TD (1) clause (b) merger 225
of two trusts / organisations.
b) Tax on accreted income - Section 115TD(c) time limit for 226
transfer of assets to any other trust or institution
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c) Section 115TD(4) Trust to pay tax on accreted income even 226
though it is not otherwise required to pay income-tax
d) Recovery provisions on trustees etc.Section 115TD(5) 227
e) Section 115TD - Period of 14 days insufficient 228
CHAPTER XII- SPECIAL PROVISIONS RELATING TO TAX ON INCOME OF
FB INVESTMENT FUNDS AND INCOME RECEIVED FROM SUCH
FUNDS
137. Section 115UB Taxation of income of Investment funds - 230
Clarity required on taxation of Category III AIF
CHAPTER XIII INCOME TAX AUTHORITIES
PART C POWERS
138. Section 132B rws 245C(1) - Application of seized or 233
requisitioned assets
139. Section 132 (8A) - Immunity from Penalty and Searches 233
140. Section 132(1), 132(1A) and 132A(1) Reason to believe to 234
conduct a search, etc. not to be disclosed Request to bring back
erstwhile provisions to reduce undue hardship to genuine assessee
141. Section 133C- Power to call for information by prescribed Income 234
tax Authority
CHAPTER XIV PROCEDURE FOR ASSESSMENT
142. Section 139 -Enlarging the scope 237
143. Section 139(4) and 139(5) Time limit for filing belated return 238
reduced - Reference to return in response to section 142(1) may be
included in Sections 139(4) and 139(5)
144. Section 139(5) Reduction in time limit for filing revised return 240
Request to bring back erstwhile time limit for filing of revised
tax return at least in cases of claim of foreign tax credit
145. Special audit - section 142(2A) 241
146. Section 142A- Estimation of value of asset by Valuation Officer 244
147. Section 143 - Need to create pre-assessment filters 246
148. Section 143(1) Increase in scope of "Incorrect claim apparent 249
from any information in the return" sub-clause (iv) may be
redrafted to include specific reference to report under section 44AB
149. Hardship arising out of the Apex Court's decision in Goetze (India) 249
Ltd. v. CIT (2006) 284 ITR 323 (SC)
150. Section 144C(2) requirement of filing voluminous details within 30 251
days
151. Section 145(2) - Quashing of ICDS 252
152. Reopening of assessment based on audit objections Section 147 255
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153. Section 148 - Reasons for reopening to be sent along with notice 255
for reopening of assessment
154. Section 153A and Section 271AAB Need for effective deterrence 256
and finality in Search Cases
155. Credit of Tax Collected at Source relating to earlier years (for which 259
Assessments are already over & time period mentioned in Sec
155(14) has elapsed) demanded by the Government authorities at
a later date
156. Section 155(14A) - Claim of FTC pertaining to taxes which are 260
under dispute in the foreign country Clarification required on
certain issues relating to period of limitation and documents which
shall constitute evidence of settlement
157. Section 167B Indeterminate/unknown equivalent to nil share 262
CHAPTER-XVII COLLECTION AND RECOVERY OF TAX
PART B DEDUCTION AT SOURCE
158. Different Methods of accounting followed by the deductor and 265
deductee
159. Exemption of TDS on certain payments 266
160. Payment of hire purchase installments under a hire purchase 267
agreement - applicability of tax deduction u/s 194A or 194-I
161. Section 194C-Definition of the term "work" 267
162. Section 194C Coverage of term `Goods Carriage' 267
163. Clarification regarding TDS on Commission to a partner under 269
section 194H read with section 40(b)
164. Section 194-I - TDS on rental income 270
165. Section 194-IB Requirement of tax deduction at source 270
by individuals/HUFs paying monthly rent exceeding
Rs.50,000 - Enabling measures to facilitate ease of
compliance to be introduced & issue of clarification
regarding the amount on which tax has to be deducted at
source in a situation where monthly rent is increased during
the previous year and the increased monthly rent exceeds
Rs.50,000
166. Section 194J- Fees for professional or technical services 272
167. Section 194LC- Income by way of interest from Indian Company 272
(a) Income by way of interest from Indian Company
b) Expansion of scope and extension of time limit 273
168. Section 194LC and Section 206AA - Scope of concessional rate of 274
tax on overseas borrowings
169. Enhancement of Limits of TDS on professionals 276
170. Section 195 277
a) Scope and applicability
b) Time limit for Issuance of "general or special order" 277
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c) Withholding tax on reimbursements [Section 195 of the Act] 278
d) Consequential amendment required in section 204 278
e) Section 195- Clarification required 280
f) Applicability of Rule 37BB read with Section 195 for 281
making remittances outside India
g) Penalty for failure to furnish information or furnishing 282
inaccurate information under Section 195
171. Consequences of failure of deduct or pay withholding tax Section 283
201) Extension of benefit in respect of payments made to non-
residents
172. a) Section 206AA - Exemption from requirement of furnishing PAN 283
under section 206AA to certain non-residents Request to treat the
amendment as clarificatory
b) Relieve return filing obligation if royalty/ FTS/ capital gains has 284
suffered TDS and also clarify that s.206AA(7)(ii) read with Rule
37BC has retrospective effect
c) PAN for foreign parties i.e. non-residents 285
PART C ADVANCE PAYMENT OF TAX
173. Section 208 -Revision of Limit of advance tax 286
174. Draft notification for introduction of proposed Rule 39A dealing with 286
the reporting of estimated income and advance tax liability
PART F INTEREST CHARGEABLE IN CERTAIN CASES
175. Section 220(2A), 273A, 273AA Time limit for disposing waiver 293
applications provided - Consequence of not passing the order
within the time limit to be spelt out
PART G LEVY OF FEE IN CERTAIN CASES
176. Waiver of fees in case of delay in filing quarterly TDS returns 294
Section 234E
177. Fees under section 234E 294
178. Section 234F Fee for delayed filing of return Removal of 296
provision levying fees to prevent undue hardship for the genuine
assessees
CHAPTER XIX-A SETTLEMENT OF CASES
179. Restoration of the provisions of erstwhile Section 245E 299
CHAPTER XX APPEALS & REVISION
180. Delay by Assessing Officer in issuing Order giving effect to Orders 303
of higher Appellate authorities, and also delay in issuing refunds
arising out of such Order
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181. Explanation 2 to section 263 Circumstances when an order 303
passed by the Assessing Officer is erroneous in so far as it is
prejudicial to the interest of revenue Need for clarification
CHAPTER XX-B REQUIREMENT AS TO MODE OF ACCEPTANCE, PAYMENT
OR REPAYMENT IN CERTAIN CASES TO COUNTERACT
EVASION OF TAX
182. Section 269SS and 269T Mode of taking or accepting and 307
repayment of certain loans and deposits through banking channels
183. Section 269ST - Restriction on cash transactions Certain 307
concerns to be addressed
CHAPTER XXI PENALTIES IMPOSABLE
184. Section 270A inserted to provide for levy of penalty in case of under 313
reporting of income and misreporting of income- Issues to be
addressed
a) Penalty order under section 270A be made an order appealable 313
before Commissioner (Appeals) under section 246A
b) Penalty for under-reporting of income 313
c) Order to specify the specific clause of under-reported or 315
misreported income for levy of penalty under section 270A
d) Clarification when tax increases due to re-characterisation 316
of income under a different head of income but assessed
income equals the returned income
e) Mere making of a claim which is not sustainable in law 316
would not tantamount to furnishing inaccurate particulars for
attracting levy of penalty
185. Section 270AA- Immunity from Imposition of penalty 317
186. Section 271AAB -Penalty where search has been initiated 318
187. Section 271AAB Relaxation in restrictions to claim the 318
benefit of concessional rate of penalty @ 10%
188. Section 271B - Failure to get accounts audited 319
189. Rationalization of Section 271D & 271E 320
190. Section 271H - Penalty for failure to furnish TDS/TCS statements 321
191. Section 271J Request to issue guidelines for levy of penalty under 322
section 271J for furnishing incorrect information in reports or
certificates
192. Genuine hardship faced by tax deductors on account of provisions 327
of section 276B of the Income-tax Act, 1961 attracting prosecution
proceedings for delay in remittance of tax to the credit of the Central
Government
CHAPTER XXIII MISCELLANEOUS
193. Section 281B - Provisional attachment of property- Treatment of 331
amount realized by invoking bank guarantee- Clarification required
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194. Signing of notices under Section 282A 331
195. Section 285BA(3) - Obligation to furnish statement of financial 332
transaction or reportable account
196. Modification to the amended definition of "accountant" under 334
section 288 of the Income- tax Act 1961 (IT Act)
Others
197. Relaxation from scrutiny provisions for assessees, having taxable 340
income upto Rs.5 lakhs other than business income, filing return for
the first time Scope of relaxation to be extended
198. Rates of Taxation 341
199. Reduction of 1% in rate of taxation in case of company assessees 344
with total turnover/gross receipts of uptoRs. 5 crore Reduction in
rate may be made applicable to Firms/ Limited Liability Partnerships
also
200. Issues arising from applicability of Companies Act, 2013: 345
a) One person Company (OPC):
b) Reopening of accounts on Court's/ Tribunal order 346
under section 130 of the Companies Act, 2013:
c) Difference in the definition of "related party" in 347
Companies Act, 2013 and Income tax Act,1961
d) Amalgamation 347
e) Amalgamation and Demergers Limitation on powers 348
forassessment of cases dealing with Amalgamation
and Demergers effected under the Companies Act,
2013.
201. Introduction of Group consolidation tax 350
202. Rationalization of MAT rates 351
203. Phasing of exemption/incentives vis-à-vis industry needs 352
CHAPTER VIII of EQUALISATION LEVY
the Finance Act,
2016
204. Chapter VIII of the Finance Act, 2016 - Equalisation Levy-Issues to 355
be addressed
205. Equalization levy 356
PART B Suggestions for improving tax administration and Citizen
Services
206. Tax consolidation Scheme 358
207. Need for educating tax payers in the right manner 364
208. Targets for collection of taxes - Not essential 365
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209. Mandatory filing of return of income by Non-residents owning a 366
property or asset in India
210. Verification of all income-tax returns 367
211. Forms of Income tax return to incorporate details of tax payments 369
made under other legislations
212. Consolidation of multiple reports to be issued by Chartered 370
Accountants in a single format
213. Reconciliation of Interest payments by banking sector with TDS 370
returns of Banks
214. Generation of Form No.60 and 61 through system 371
215. A single ITR form to replace all ITR forms 371
216. PAN card to be chip enabled for certain transactions 372
required to be reported in TDS/TCS returns
217. Gaps in electricity generations 373
218. Allowability of Interest paid under Income-tax Act, 1961 373
219. Issues regarding PAN allotment 374
220. Practical difficulties faced by assessees in migration of PAN 375
221. Unique code for high valued property transactions 376
222. Foreign contribution to be reported/populated in form 26AS 376
223. Applicability of SA - 700 on form of audit reports 377
224. Desirability to bring back block assessment system 379
225. Valuation of Sweat Equity under Rule 3(9) 379
226. Rule 26 - Telegraphic transfer buying rate 380
227. Reconciliation of Foreign Currency Remittances 381
228. Number of Returns and payment schedule should be curtailed 382
229. Challan rectification mechanism 383
230. Audit of TDS returns 383
231. Monetary limits in the Income-tax Act, 1961 384
232. Clarity / guidelines in attribution of profits to PE of a non-resident in 384
India
233. Furnishing Bank Guarantee for amount specified in the notice of 384
demand
234. Suitable tax incentive to industries using fly ash as their major raw 387
material
235. Incentives to Sugar and Power industries 387
236. Sustainability Initiatives Towards Maintaining the Growth of 8% + 387
GDP
237. Leave Travel Concession/Assistance -Replacement of 388
"Calendar year" by "Financial year":
238. Section 14A Instruction for proper application 389
239. Taxation of ESOPs 389
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240. Taxation of specified security or sweat equity shares allotted to 391
employees under Employee Stock Option Plans (ESOPs) in
case of migrating employees
241. Depreciation on books used by professionals 392
242. Rule 6F - Upward revision of limit of Rs.1,50,000 393
243. Rule 6F(2)(iv) requires to be dispensed with 394
244. Exemption under section 54 & 54F 394
245. Deputation of employees - [Taxability as fees for technical 399
services/ Permanent Establishment issues]
246. Due date of furnishing statement in Form No. 64 under 400
section 115U read with Rule 12C
247. Guidelines for the empanelment of auditors under section 400
142(2A)
248. Section 154 - Mistake apparent from record 401
249. Section 200 -Furnishing of TDS returns 402
250. Auto fill of TDS data in Income Tax Returns(ITR) 403
251. Reconciliation of each payment made by deductor to avoid 403
duplication of work of TDS return
252. Master Circular on TDS-Need of the hour 408
253. Interest under section 234C for newly formed Firms and 409
Companies
254. Section 285BA read with Rule 114E Payment exceeding the 409
specified amount in respect of credit card(s)
255. Mechanical disallowance of expenditure U/s 14A r.w. Rule 8D 411
256. Double taxation in case of buy back of shares by the company 412
in case of ESOP's - Section 17
257. Quantum of R&D expenditure entitled to weighted deduction 413
under Section 35(2AB) of the Act by DSIR
258. Incentivise transactions through credit/debit cards and other 414
banking instruments
259. Recognize digital payments/evidences 414
260. Clarity on MAT 416
261. Rule 4 of Part C of Fourth Schedule 417
262. Section 40A(3) Cross Cheques 418
263. Valuation of shares- Section 56(2)(viib) 419
264. Sec.115-O 420
a) Inter Corporate Dividend Distribution Tax (DDT)
b) Grossing up of rate of dividend distribution tax 421
c) Abolition of dividend distribution tax (DDT) 423
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265. TDS on payment made to non-residents 425
266. Validity of Certificate issued under section 197 427
267. Mismatch on account of punching of data 427
268. Time limit for TDS assessments of payments made to non-residents 429
269. Section 201(1A)-Consequences of failure to deduct or pay TDS 429
270. Section 245Q Need for Rationalisation of filing fees for AAR 431
271. Section 255 Limit of Rs 50 lakhs may be made w.r.t. disputed 431
income instead of total income
272. Quarterly audit of TDS compliances 432
273. Taxability of National Pension Scheme 433
274. Association of Persons vis-à-vis EPC contracts/turnkey projects 433
275. TDS credit should be allowed solely on the basis of Form 26AS 435
and procedural requirements for issuance of TDS certificates
(Form 16 / 16A) should be dispensed with
276. Provision for the employer to provide tax treaty benefits while 442
calculating TDS
277. TDS on monthly and year end provision entries in books of 443
account
278. TDS credit should be allowed on the basis of Form 26AS, even if 444
the payee has not claimed the same in the return of income (due
to non updation of Form 26AS) but has claimed TDS credit during
the assessment proceedings (during which time the updated TDS
credit is reflected in Form 26AS)
279. Limits for various salary related allowances exempt from tax 447
280. Lower deduction certificate u/s 197 through TRACES Site 448
ANNEXURE I 450
ANNEXURE A 453
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The Institute of Chartered Accountants of India
PART A
SUGGESTIONS RELATING TO THE POLICY &
PROVISIONS OF INCOME-TAX ACT, 1961
Page 20 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
CHAPTER I
PRELIMINARY
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 21
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
1. Increase in the The Finance Act, 2015 increased The increased rate of surcharge
rate of the rate of surcharge levied on on tax and DDT makes cost of
surcharge domestic companies by 2 per doing business in India
increases cost cent. The surcharge at the rate significantly high. It is
of doing of 7 per cent shall be levied in recommended that the levy of
business for case of a domestic company if additional surcharge on tax rates
domestic the total income of the domestic should be removed (regardless of
companies company exceeds INR one crore the ceiling of income) on
but does not exceed INR ten domestic companies. Further the
crore and at the rate of 12 per additional surcharge on DDT
cent in case total income should also be removed.
exceeds INR ten crore.
The comparative scenarios of Since the government has
tax rate for domestic companies already decaled that it will be
(including surcharge and reducing corporate tax rates from
education cess) is as follows:- 30 per cent to 25 per cent in a
Partic Inc Inco Inco phased manner, without
ulars ome me me prejudice to the above
upt abov abov
suggestion, the tax rates should
o e e
INR INR INR be made inclusive of all
1 1 10 surcharge.
cror cror cror
e e but e
upto
INR
10
cror
e
Pre 30.9 32.4 33.9
2015 % 45% 9%
surchar
ge
scenari
o
Post 30.9 33.0 34.6
2015 % 63% 08%
surchar
ge
scenari
o
Page 22 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
The Finance Act, 2015 has also
increased the surcharge rate
from 10 per cent to 12 per cent
on DDT. The increase in
surcharge by 2 per cent will bring
the effective DDT rate to 20.358
per cent as against the present
rate of 19.995 per cent.
The increased rate of surcharge
on tax makes cost of doing
business in India significantly
high. The increased tax cost will
adversely impact the investors'
sentiments and economic
growth.
Further, the effective tax rate
applicable to domestic
companies also happens to be
one of the highest in the world
with a very few countries 1 levying
a higher tax rate (of 34.6%) for
income levels of more than INR
10 crore.
DDT is a levy on the company
which was earlier levied in the
hands of the shareholders. The
increased DDT rate (inclusive of
surcharge and education cess)
creates disparity when
compared with the tax rate of
dividends received by an Indian
company from specified foreign
subsidiaries.
In the past, the government has
introduced additional surcharge
for a limited period, for example
the Finance Act, 2013 had
increased the surcharge from 5
1
For the purposes of comparison, the tax rate in the case of the other BRICS nations is as follows:
Brazil 34%; China 25%; Russia 20%; and South Africa 28%.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 23
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
per cent to 10 per cent on
domestic companies whose
taxable income exceeds 10 crore
per year. Further in case of
foreign companies, who pay the
higher rate of corporate tax, the
surcharge was increased from 2
per cent to 5 per cent. In case of
dividend distribution tax or tax on
distributed income, surcharge
was increased from 5 per cent to
10 per cent. However, such
additional surcharge were in
force only for one year i.e. for
Financial Year 2013-14.
2. Section 2(15) The definition of "charitable It is suggested that the term
Need for purpose" under section 2(15) has `yoga' be defined in order to
defining been amended to include `Yoga' confine its scope and prevent
"Yoga" as a specific category abuse of the provision by
thereunder. However, `yoga' is
institutions engaged in other
not defined in section 2(15).
activities of similar nature not
Generally, the term `yoga' is used
in a wide sense to encompass constituting yoga.
different forms of meditation and
physical, mental and spiritual
practices. In the absence of
specific definition, the scope and
ambit of what constitutes yoga
would be a subject matter of
litigation, especially in the
context of claiming exemption
under section 11.
3. Section 2(15) The proviso to Section 2(15) It is suggested that:
Substitution of provides that the advancement of
existing any other object of general public
The proviso also includes a
provisos with utility shall not be a charitable
monetary limit, say Rs 25
new proviso purpose, if it involves the
lakhs, in line with the erstwhile
requiring carrying on of any activity in the
second proviso so that
satisfaction of nature of trade, commerce or
charitable trusts with lower
business, or any activity of
Page 24 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
two new rendering any service in relation turnover continue to get the
conditions for to any trade, commerce or benefit available to charitable
qualifying as a business, for a cess or fee or any trusts under the current law.
"charitable other consideration, irrespective The same may be given effect
purpose" of the nature of use or to by amending the condition
application, or retention, of the given in (ii) as below:
income from such activity, "(ii) the aggregate receipts from
unless,- such activity or activities, during
such activity is undertaken in the previous year, do not exceed
the course of actual carrying twenty percent. of the total
out of such advancement of receipts, of the trust or institution
any other object of general undertaking such activity or
public utility; and activities, or twenty-five lakh
the aggregate receipts from rupees, whichever is higher, for
such activity or activities, the previous year."
during the previous year, do
not exceed 20% of the total (a) Since section 11(4A)
receipts, of the trust or already contains a similar
institution undertaking such condition for grant of
activity or activities, for the exemption, the condition
previous year.
specified in clause (i) of the
proviso to section 2(15) may be
Probable hardship removed.
a) The erstwhile section Further, appropriate
2(15) provided for a guidelines/clarification may be
monetary limit of Rs. 25 issued in respect of clause (i) of
lakhs upto which the the proviso to section 2(15)to
receipts as may be derived enable trusts to comply with the
from the activities in the condition requiring such activity
nature of trade, commerce to be undertaken in the course of
or business, or any activity actual carrying out of
of rendering any service in advancement of any other object
relation to any trade, of general public utility for claim
commerce or business of exemption.
may still be regarded as
charitable purpose, in
case of a trust whose
object is advancement of
any other object of general
public utility. The
amendment by the
Finance Act, 2015 has
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 25
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
replaced this monetary
limit with a percentage of
total receipts.
Unintentionally, it may
adversely impact small
charitable trusts and
benefit charitable trusts
having a higher turnover.
For example, a charitable
trust having annual receipts
of Rs.100 crores would be
able to retain its charitable
status if its business receipts
are Rs.20 crores or less,
whereas a charitable trust
having total receipts of
Rs.10 lakhs may lose its
charitable status even if it
has Rs.2.50 lakhs as
receipts from activity in the
nature of trade, commerce or
business. The amended
proviso may, therefore,
result in unintended
hardship to small charitable
trusts engaged in genuine
charitable activities.
b) Further, there appears to be
an element of subjectivity in
the first condition in the
proposed proviso requiring
such activity to be
undertaken in the course of
actual carrying out of such
advancement of any other
object of general public
utility, which may give rise to
unnecessary litigation.
Therefore appropriate
guidelines/clarification may
be issued by way of a
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
circular or otherwise to
ensure clarity as to when an
activity is not considered as
being undertaken in the
course of actual carrying out
of such advancement of any
other object of general public
utility. This would provide
the necessary guidance to
the charitable trusts to
ensure compliance with the
said condition and also
enable the Assessing
Officers to examine
judiciously whether the said
condition has been satisfied
for grant of exemption.
In this context, it may also be
noted that there is already a
requirement in section
11(4A) that the business
should be incidental to the
attainment of the objects of
the trust or institution and
separate books of account
should be maintained by
such trust or institution in
respect of such business.
Therefore, there is no need
for a similar condition in
section 2(15).
4. Mandatory Application of income is Section 10(23C) should be
application of mandatory by charitable amended to specifically exclude
income by trusts/institutions including those 'corpus donations' from the
charitable enjoying benefits under section requirement of mandatory
trusts/ 10(23C) to its objects, subject to application of income by such
institutions accumulation of not more than trusts / institutions.
under section 15% of its income including (SUGGESTIONS FOR
10(23C) income from voluntary RATIONALIZATION OF THE
contributions. Similar provisions PROVISIONS OF DIRECT TAX
under section 11(1) read with LAWS)
section 12(1) exclude 'corpus
donations' (voluntary
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 27
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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.
5. Clarification It is seen that that when a co- The anomalous position may be
regarding operative society places deposits rectified by making suitable
exemption of in a co-operative bank the amendment in section 2(19)
interest on Assessing Officers are denying defining a Co-operative Society,
deposits by the benefit of Section 8OP on the by including therein a society
co-operative interest earned on such deposits. registered under the Central Act
societies with The denial is based on the currently applicable.
multi-State co- erroneous application of a
operative judgement that has held that a
banks co-operative bank is not entitled
to the benefit of Section 80P.
This may be set right by a
clarificatory amendment.
Further, the intent of legislation is
clearly to allow the deduction to
any co-operative society which
earns interest from deposits with
a co-operative bank. However,
the definition of co-operative
Society as given in section 2(19)
of the Act refers to Co-operative
Society registered under the Co-
operative Societies Act 1912 and
societies registered under the
State Co-operative Societies Act.
Page 28 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
Since this definition does not
refer to Societies registered
under the Central Act, under
which numerous Multi-state Co-
operative Banks are registered,
the interest earned by a co-
operative society from a deposit
with a Multi-state Co-operative
Bank is therefore technically not
eligible for deduction of the
interest earned on such deposit.
This leads to an anomalous
situation `that a cooperative
society keeping a bank deposit
with a State level Co-operative
Bank gets such interest as non-
taxable but if the same co-
operative society keeps the
deposit with a Multi-state Co-op
Bank, then such interest is taxed.
It is submitted that this is not the
intent of the legislation.
6. Section 2(42A) The Finance Act, 2017 amended
Reduction in section 2(42A) so as to reduce
holding period the period of holding from the
in case of existing 36 months to 24 months
immovable in case of immovable property,
property, being land or building or both, to
being land or qualify as long term capital
building or asset. The same is done to
both, to qualify promote the real estate sector
as long term and to make it more attractive for
capital asset investment.
Consequential
amendments It is suggested that:
Issues
to be made in
sections 54,
54B, 54D and (1) Consequential (1) Consequential
54F amendments for reducing the amendments may be made
holding period of immovable in sections 54, 54B, 54D &
property from 3 to 2 years is 54F so as to enable the
required to be made in holding period of the new
sections 54, 54B, 54D and 54F asset purchased to be
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 29
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
in line with the amendment in reduced to 2 years from 3
section 2(42A). At present, years in case of land and/or
these sections restrict transfer building.
of new assets purchased for 3
years.
(2) Circular may be
(2) In order to avoid litigation, issued/Explanation may be
clarification is required on inserted to clarify that
whether leasehold rights and leasehold rights and
tenancy rights would be tenancy rights are also to
considered to fall within the be treated as falling within
meaning of "land and building" the meaning of "land and
to avail the benefit of reduced building" for the purpose of
holding period for being availing the benefit of
treated as a long-term capital reduced holding period for
asset. being treated as a long-term
capital asset.
(3) Ambiguity may also arise with
(3) In order to avoid any
respect to flats in a co-operative
interpretation issue, it may
society i.e. whether shares in a
be clarified that flats in a
co-operative society qualify
co-operative society are
within the meaning of immovable
also covered within the
property being land or building or
meaning of immovable
both to become eligible for lower
property being land or
holding period of two years.
building and are hence,
eligible for lower holding
period of two years for
computation of capital
gains.
7. Section 2(42A), The Finance Act 2017 amended It is suggested that
section 47(xb) Section 47 of the Act, by virtue of
and section which conversion of preference
a) Since this amendment has
49(2AE) - Tax share of a company into equity
clarified the real legislative intent,
neutral share of that company will not be
a clarification may be given by
conversion of regarded as transfer. The
way of Explanation in section 47
preference amendment is made by insertion
or by way of an Explanatory
shares to of sub-section (xb) in section 47.
Circular that the aforesaid
equity shares Consequent amendments were provisions would be applicable in
Clarification also made in section 2(42A) of respect of earlier years as well.
Page 30 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
regarding tax the Act by insertion of sub-
treatment for clause (hg) in clause (i) of b) Also, conversion of warrants
earlier years Explanation 1 to section 2(42A) into equity shares may be
for determining the period of covered under section 47.
holding of such equity shares, by
including the period of holding of
the preference shares as well.
Further, sub-section (2AE) is
inserted in section 49 to compute
the cost of acquisition of the
converted equity shares. As per
the amendment, the cost of such
equity shares shall be deemed to
be the cost of acquisition of
preference shares.
Currently, conversion of bond or
debenture of a company into
shares of that company is not
regarded as transfer. However,
no similar tax exemption was
available so far in case of
conversion of preference shares
of a company into its equity
shares.
8. Section 3- In Income-tax Act, 1961 is In line with the provision of
Definition of "Assessment Year" defined in section 320(92) read with section
Previous year Section 2(9) as: "Assessment 2 of the Direct Taxes Code, 2013
Year" means the period of twelve the concept of "previous year"
months commencing on the 1st and "assessment year" may be
day of April every year. replaced with the "financial year"
"Previous Year" is defined in to mean as below:
Section 3 of the Income-tax Act,
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
preceeding the assessment
year. (a) the period beginning with the
date of setting up of a business
There is no difference in the
and ending with the closure of
period of Assessment 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;
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
A normal income tax assessee
does not understand the (b) the period beginning with the
difference of wordings of date on which a source of
Assessment Year (AY) & income newly comes into
Previous Year/ Accounting Year existence and ending with the
(AY) and gets confused in closure of the business or the
presenting his details, while 31st day of March following the
paying Advance Income tax, date on which such new source
TDS or filing the return of income comes into existence,
Tax. Everybody considers whichever is earlier;
Assessment Year (AY), previous
year (PY) and Accounting Year
(AY) as same. (c) the period beginning with the
To avoid misunderstanding or 1st day of the financial year
confusion among Income Tax and ending with the date of
payers (Assessees) and for discontinuance of the business
keeping the records, the concept or dissolution of the
of "previous year" and unincorporated body or
"assessment year" may be liquidation of the company, as
replaced with the "financial year" the case may be;or
of "previous year". Even though,
the said suggestion has been (d) the period of twelve months
considered while framing the commencing from the 1st day of
Direct Taxes Code, to simplify April of the relevant year in any
the law, it would be appropriate other case;
to bring the change in the
Income-tax Act itself.
9. Place of POEM Guidelines have been In light of the above, it is
Effective recently finalised only on 24 th suggested that applicability of
Management January, 2017, whereas the POEM should be deferred by a
POEM provisions are already year (i.e. from A.Y. 2018-19
provisions
applicable w.e.f. 1st April 2016 onwards) .
section 6(3) (applicable from AY 2017-18 and
onwards)
The Finance Act 2016, while
deferring POEM by one year to
be effective from AY 2017-18
onwards, also introduced section
115JH which gives power to
CBDT to notify a transitory
regime setting out the manner in
Page 32 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
which the provisions of Income
Tax Act shall apply to companies
whose POEM is held, for the first
time, to be located in India as
also to companies whose POEM
is held to be in India during the
course of assessment
proceedings. CBDT is yet to
notify this transitory regime.
The taxpayers must be given
some time to arrange their affairs
to comply with POEM Guidelines
and also have clarity on
transitory regime.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 33
The Institute of Chartered Accountants of India
CHAPTER II
BASIS OF CHARGE
Page 34 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
10. Provisions The Finance Act, 2015 has · Since the objective of
regarding amended provisions dealing with the amendment is to
indirect transfer indirect transfer of capital asset tax indirect transfer
situated in India. The amendment through shell
of capital asset
provides clarity on certain companies, a listed
situated in India contentious aspects with regards company should not
Section 9 to taxation of income arising or be considered as a
accruing from such indirect shell or conduit
transfers. The following company. The same
amendments have been was also suggested by
introduced in the Act. the Shome Committee.
It is recommended
· Share or interest in a that exemption should
foreign company or entity be provided in respect
shall be deemed to derive of transfer of shares in
its value substantially from a foreign company
Indian assets only if the (listed on a stock
value of Indian assets exchange outside
(whether tangible or India) having
intangible) as on the substantial assets
specified date exceeds the located in India.
amount of INR 10 crores
and represents at least 50
per cent of the value of all · Intra-group transfers
the assets owned by the as part of group re-
foreign company or entity. organisations (other
than amalgamation
· The value of an asset shall and demerger) should
be its Fair Market Value also be exempt from
(FMV). Subsequently, the the indirect transfer
CBDT notified the Rules provisions.
prescribing the manner of
computation of FMV of
assets of the foreign · While Explanation 5 to
company or entity and the Section 9(1)(i) of the
reporting requirements by Act provides that
the Indian concern. shares of a foreign
company which
derives directly or
· The date of valuation of indirectly its
assets (without reducing substantial value from
the liabilities) shall be as at the assets located in
the end of the accounting India shall be deemed
to be situated in India.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 35
The Institute of Chartered Accountants of India
period preceding the date of Section 47(vicc) of the
transfer. However, in case Act provides
the valuation of assets as exemption only if the
on the date of transfer shares of foreign
exceeds by at least 15 per company derive
cent of book value of the substantial value from
assets as on the date on shares of an Indian
which the accounting period company. While the
of the company/entity ends intent may be to
preceding the date of exempt all cases of
transfer, then the specified demerger where
date shall be the date of foreign company
transfer. derives substantial
value from assets
· Exemption from located in India, the
applicability of the aforesaid reading of Section
provision has been 47(vicc) of the Act
provided in the following indicates that the said
situations exemption would be
o Where the transferor available only in cases
along with its related where the shares of
parties does not hold (i) the foreign company
the right of control or derive substantial
management; (ii) the value from shares of
voting power or share Indian company. Due
capital or interest to this inconsistency
exceeding 5 per cent of in the language of
the total voting power Section 47(vicc) vis-à-
or total share capital in vis Explanation 5 to
the foreign company or Section 9(1)(i),
total interest in the transfer of shares of a
entity directly holding foreign company
the Indian assets which derives its value
(Holding Co). predominantly from
assets located in India
(other than shares of
o In case where the an Indian company)
Indian assets are not under a scheme of
directly held, then if the demerger may be
transferor along with deprived of the
related parties does not aforesaid exemption.
hold (i) the right of It is recommended
management or control that Section 47(vicc)
in relation to such of the Act should be
foreign company or the amended to provide
entity; and (ii) any that "any transfer in a
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The Institute of Chartered Accountants of India
rights in such foreign demerger, of a capital
company which would asset, being a share of
entitle it to either a foreign company,
exercise control or referred to in
management of the Explanation 5 to
holding company or clause (i) of sub-
entitle it to voting power section (1) of section
exceeding 5 per cent in 9, which derives,
the holding company. directly or indirectly,
its value substantially
· The Finance Act, 2015 has from the assets
introduced Section 47(vicc) located in India, held
in the Act which, subject to by the demerged
fulfillment of certain foreign company to
conditions provides that the resulting foreign
transfer of shares of a company, if, --
foreign company (which ...................."
directly or indirectly derives
its value substantially from It is suggested that a
shares of an Indian similar amendment should
company) by the demerged also be made under Section
foreign company to the 47(viab) of the Act (in case
resulting foreign company of amalgamation).
under a scheme of
demerger will not be · of Section 234A, 234B,
regarded as transfer. 234C and 201(1A) of
· The Indian entity will be the Act should not be
required to furnish applied in cases where
information relating to a demand is raised on
indirect transfers. The same a taxpayer on account
has also been notified. In of retrospective
case of any failure, the amendment relating to
Indian company will be indirect transfer. An
liable for a penalty of INR 5 appropriate
lakhs or 2 per cent of the amendment should be
value of the transaction as made in the respective
specified. provisions of the Act.
11. Section 9(1)(i)- The Finance Act, 2012 amended It is suggested that:
Benefit of non- Section 9(1)(i) of the Act with
applicability of retrospective effect from 1st April While issuance of
indirect transfer 1962 to provide that any share or Circular no. 28/2017 is a
provisions in interest in an entity incorporated welcome clarification for
case of outside India shall be deemed to non-residents in respect
Category I and II be situated in India if such share of redemption or buy-
FPIs - or interest derives, directly or back of shares held
Provisions for indirectly, its value substantially indirectly through
specified funds (FPIs
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 37
The Institute of Chartered Accountants of India
avoidance of from assets located in India. registered as Category -I
double taxation or Category II), in
in case of such respect of other offshore
The Finance Act, 2017 provided
indirect transfer funds the indirect
that the aforesaid deeming
provisions, transfer provisions may
provisions shall not apply to an
where direct still lead to double
asset or capital asset mentioned
transfer has taxation
in Explanation 5 of section
already been 9(1)(i), which is held by a non-
Therefore, a suitable
subject to tax resident by way of investment,
amendment should be
directly or indirectly, in a Foreign brought in to the effect
Institutional Investor as referred that exemption is
to in clause (a) of the Explanation extended to all offshore
to section 115AD and registered funds (interalia
as Category-I or Category-II Category-III FPIs) and
foreign portfolio investor under should not be restricted
the Securities and Exchange to specified funds.
Board of India (Foreign Portfolio
Investors) Regulations, 2014
made under the Securities and
Exchange Board of India Act,
1992.
The Finance Act, 2017
exempted investors (direct /
indirect) in category I (sovereign
funds) and category II (broad-
based funds) FPIs from the
application of indirect transfer tax
provisions.
The CBDT has, recently, issued
a Circular No. 28/2017 dated 7
November 2017 clarifying that
the indirect transfer provisions
shall not apply to income arising
to a non-resident on redemption
or buy-back of shares held
indirectly through specified
funds, if such income is
consequent to transfer of shares
held in India by the specified
funds and such direct transfer is
Page 38 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
taxable in India.
The Circular applies to specified
funds (VCF, Category I or II
AIF) and not to offshore funds in
general. Further, the exemption
will be restricted to pro-rata share
(of the non-resident) in the total
consideration realized by the
specified funds from the said
transfer of shares or securities in
India.
12. Scope of (a) Right to use a copyright It is suggested that
Royalty Income vis-à-vis Right to use a payments for
-Section 9(1)(vi) copyrighted article copyrighted article like
of Income-tax Internationally, as evidenced shrink-wrapped software
Act, 1961 by OECD Commentary and as also payments made
opinion of eminent experts, the by distributors of
following two basic principles software be specifically
with regard to software excluded from the
payments are recognized and definition of "royalty".
well settled:
(i) The proposition that "right to
use a copyright" is different
from "right to use a copyrighted
article" is recognized and it is
only the `righ t to use a
copyright' which is covered
within the definition of royalty.
(ii) The distributor of computer
software does not pay to
exploit any rights in the
software but only for
acquisition of the software for
further circulation. In view of
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
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 39
The Institute of Chartered Accountants of India
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). 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
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`copyrighted article' and not a
`copyright'.
(b) Use of Standard facilities In view of decision of
Apex Court in CIT Vs.
Kotak Securities Limited
The Apex Court in CIT Vs.
an exception should be
Kotak Securities Limited has
carved out in
clarified that the common
Explanation 6 to Section
services which are necessary
9(1)(vi) so as to exclude
for carrying out trading in
payments for use of
securities for which
standard facilities to the
transaction charges are paid,
general public at large
do not amount to technical
like payments for
services.
telephone service,
internet service, cable
television services and
other similar services.
c) Exclusion of packaged To bring utmost clarity,
software from applicability of it is also suggested that
TDS under Section 194J of the a specific amendment be
Income-tax Act made to Section 194J to
exclude sale of software
products from the ambit
Circular No. 13/2006, dated
of tax withholding. In
13.12.2006 issued by the
this regard, it is
CBDT states that TDS shall be
suggested that the
applicable only when there is a
following provision be
`contract for work' and not
included in Section 194J
where there is a `contract for
of the Act:
sale'. This proposition has
also been upheld in various Amendment required
judicial precedents like BDA "194J. (1) Any person, ...
Limited vs. ITO (TDS) 281 Provided that no
ITR 99 (HC Bom), CIT vs. deduction shall be made
Dabur India Limited (283 ITR under this section --
197) (HC Del). 1. ...
Considering the facts and 2. ...
arguments above, it is clear from any sums, if
that transaction of sale of credited or paid for
`Packaged/Canned Software' the transfer of a
is a `contract for sale' as computer software
against a "contract for work' (including the
and consequently, should not granting of a
attract TDS provisions. It is
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The Institute of Chartered Accountants of India
relevant to note that licence), along with
`Packaged/Canned Software' or without a
is also subject to excise duty. computer or
There are no other goods in computer-based
India which are subject to both equipment or for
excise duty and TDS. ancillary services
An amendment to the Income- such as up
tax Act to exclude gradation or
`Packaged/Canned Software' subscriptions,
from the purview of `royalty' which does not
involve transfer of
would automatically exclude
all or any rights in
the transactions from the
respect of any
purview of Section 194J of the
copyright."
Income-tax 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 `Pac kaged
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
Page 42 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
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 Income-tax 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 Income-tax Act and that
such transaction are not liable for
TDS under Section 194J of the
Act.
13. Explanation 5 to Explanation 5 to Section 9(1)(vi) In view of the reasoning
Section 9(1)(vi) has been introduced by Finance given, it is suggested that
Act, 2012 w.e.f. 1st June 1976 to
e commerce the Government should
clarify that royalty includes and
services clarify by way of insertion
has always included
consideration in respect of any of a proviso or issue of a
right, property or information, Circular that Explanation 5
whether or not the right, property as mentioned would not be
or information is used directly by applicable to any payments
the payer or is located in India or for telecom services; e-
is in the control or possession of commerce transactions;
the payer. etc.
It appears that this amendment
may also cover within its domain
payment for telecom services
(including basic / mobile
telephony, internet charges,
roaming charges, interconnect
charges, etc.); e-commerce
transactions like access of data
bases, cloud computing; etc.
which may not be the real
intention. Even internationally, a
large variety of above referred
transactions are not covered
within the ambit of "royalty".
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The Institute of Chartered Accountants of India
14. Explanation 6 to Expansion of definition In a bid to fuel the highly
Section 9(1)(vi) [Explanation 6 to section 9(1)(vi)] competitive and unnerved
of 'process' so as to include
telecom Telecom Industry as well as
transmission by satellite, cable,
services to bring in certainty, the
optic fiber or by any other similar
technology within definition of government should clarify
"Royalty" should be dropped as it by way of insertion of a
is negatively impacting telecom proviso or issue of a
sector and leading to: circular that Explanation 6
would not be applicable to
(i) Non viability for Indian any payments for telecom
entrepreneurs to run services including basic /
such capital intensive mobile telephony, internet
projects due to rise in charges, roaming charges,
cost, as the overseas interconnect charges, etc.
service providers (of
roaming, bandwidth,
etc.) would seek to shift
their tax burden (TDS
and Income-tax) to
Indian players.
(ii) Increase in cost of basic
amenities (like
telephone, internet,
electricity, cable
charges etc.) to the
general public at large
and adding on to
inflation.
15. Carry forward of The Income-tax Act, 1961 allows It is suggested that
excess foreign for set off in respect of foreign assessees be permitted to
tax credit taxes paid on overseas income. carry forward (say for five
However, in case of years) such unutilized
loss/inadequate profits, no set off credit (in USA such relief is
may be possible. In the current granted vide section 904(c)
economic scenario of the global of Federal Tax Act) for
economy, business outlook has adjustment in future years.
become extremely uncertain and (SUGGESTIONS FOR
results have become very RATIONALIZATION OF THE
volatile. PROVISIONS OF DIRECT
TAX LAWS)
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Chapter III
INCOMES WHICH DO NOT FORM PART OF
TOTAL INCOME
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 45
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
16. Definition Any sum received under a Keyman It is suggested that section
of insurance policy is not exempt under 17(3)(ii) may be
"Keyman section 10(10D). The meaning of appropriately amended to
Insurance "Keyman Insurance Policy" given in provide that tax would be
Policy" - Explanation 1 to section 10(10D) was levied only to the extent of
Section amended by Finance Act, 2013 to such difference, or in the
10(10D) include such policy which has been alternative, deduction for
assigned to a person at any time during surrender value may be
the term of the policy, with or without provided for under section
consideration". This amendment is 16. In such a case, the
effective w.e.f. 1.4.2014 (i.e. A.Y.2014- employer can deduct tax at
15). source on the differential
The effect of this amendment is to deny amount treated as "profit in
the benefit of exemption in respect of lieu of salary" at the time of
maturity proceeds of keyman insurance assignment.
policy which has been assigned to a
person during the term of the policy, Further, in any case, the
whether with or without consideration, maturity proceeds received
by including the assigned policy within on death of the assignee
the definition of "Keyman insurance should be kept out of the
policy". tax net. This benefit is
The issues under consideration and similar to the exemption
suggestions thereof in this regard are given in respect of life
as follows insurance policies, where
the annual premium paid
exceeds 10% of minimum
The entire proceeds would be subject to
sum assured.
tax under section 17(3)(ii) in the hands
of the person to whom the policy is
assigned, whereas only the premium
paid by the employer on which
deduction has been claimed less the
surrender value paid by the employee to
the employer at the time of assignment
should be subject to tax, since the same
represents the actual benefit availed by
the assignee.
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Sr. Section Issue/Justification Suggestion
No
17. Section Section 10(10AA) provides for Section 10(13) may be
10(13)- exemption for payment received as amended to exempt
Payment cash equivalent of leave salary in commuted value received
from respect of earned leave period at the by an employee from the
approved time of retirement whether superannuation corpus
superannua superannuation or otherwise . standing to his credit at the
tion fund time of voluntary
Section 10(13) provides for exemption retirement, by including the
with regard to payment from an words "or otherwise" in
approved superannuation fund. Section line with section 10(10AA)
10(13)(ii) of the Act provides for of the Income tax Act, 1961.
exemption in the hands of the employee (SUGGESTIONS FOR
in respect of the amount received on RATIONALIZATION OF THE
comm PROVISIONS OF DIRECT
utation of the annuity in case of TAX LAWS)
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.
18. Annual Under section 10(23C)(iiiad) and (iiiae) It is suggested that
receipts of Income-tax Act, it is provided that the "Annual Receipts" be
under income of University/Educational clearly defined as income
section institutions/hospitals/ other institutions of the hospitals/
10(23C) specified therein will be exempt educational institutions
provided they comply with the arising regularly/every year
conditions stipulated therein. Also, it is but excluding value of
provided that "aggregate annual donation received in kind
receipts" of such institutions shall not by way movable assets,
exceed the amount of annual receipts land, hospitals/educational
as may be prescribed. Though annual equipment, sale
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
receipts have been prescribed as Rs.1 consideration received on
crore vide Rule 2BC of Income-tax disposal of land, shares or
Rules, the word "annual receipts" have other movable property,
not been defined in the Income-tax Act. hospital/educational
It is not clear as to whether: equipment etc.
(a) for computing "annual receipts" Further, it may be
only the receipts of such specifically provided that
institutions from donations received
educational/hospital activities towards corpus by way of
alone are to be considered each land, movable assets are
year; excluded from computation
(b) Certain receipts of such institutions of "Annual Receipts" as
that are not received on annual prescribed under Rule 2BC
basis e.g. receipts from sale of of Income-tax Rules.
property, equity shares and other (SUGGESTIONS TO
proceeds on divestment are to be REDUCE / MINIMIZE
excluded from the computation of LITIGATIONS)
"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 receipts since they are not
received annually.
19. Rationalisa The 15th Proviso to Section 10(23C) It is suggested that:
tion of states that application for obtaining Such application
Provisions approval under this section shall be should be allowed to
of Section made on or before 30 th September of be made at any time
10(23C) the relevant assessment year from during the financial
which the exemption is sought. For year for which
example, if an institution seeks approval exemption is sought
for Financial year 2017-18, it will have even if the annual
to apply up to 30 th September 2018. receipts have not
Further, the 9 th proviso to Section exceeded or is not
10(23C) states that order granting expected to exceed the
approval or rejection shall be passed limit of Rs 1 crore.
within 12 months from the end of month Time limit for granting
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Sr. Section Issue/Justification Suggestion
No
in which such application was received. approval may be
In view of this proviso, in respect of reduced from 12
applications received on 30 th months to "within 4
September 2018, the order has to be months from the end of
passed on or before 30 th September, the month in which
2019. So the status of the application is application has been
not known till next 12 months i.e. for 2 filed", so that any
financial years. institution should be
well aware of its status
If such institution is not granted
before due date of
approval as on 30 th September 2019
filing its income tax
then it will have to pay income tax for
return.
Financial year 2017-18 and 2018-19.
Resultantly, the charitable institution
will have to face heavy tax burden.
At the same time it is to be noted that
ITD doesn't accept such application
before close of financial year i.e.
application for F.Y. 2017-18 cannot be
made on or before 31 st March 2018,
though there is no such restriction
under the Act.
20. Income-tax The securitization trust has so far been Instead of distribution tax
exemption treated as a pass through vehicle for tax model, a complete pass
for purposes i.e. all the income of the through model identical to
securitizati securitization trust has been offered to pre 1st June 2013 regime be
on trusts, tax by its investors (unless the investor made applicable to Venture
levy of is tax exempt viz., a mutual fund). This Capital Funds/Venture
distribution is consistent with the tax rules that Capital Companies under
tax on apply to trusts under the tax law which section 10(23FB) read with
income prescribes a single level tax on a trust's section 115U, since the
distributed income (i.e. tax is levied either on the participation in PTCs is
by such trustee or on the beneficiaries). The largely restricted to well-
trusts interest income arising to such trusts regulated financial
under from securitized debts is taxed directly institutions.
section in the hands of the contributories. (SUGGESTIONS TO
10(23DA) The tax implications may be REDUCE / MINIMIZE
summarized as follows:- LITIGATIONS)
If contributory is a Mutual Fund, it
will be entitled to exemption under
section 10(23D).
Any other contributory can claim
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
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 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
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Sr. Section Issue/Justification Suggestion
No
instead of taxable income as was
the case hitherto. This implies that
the investors would not be able to
set-off expenditure/ 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 is
as follows :-
Particulars Pre Post
amend amend
ment ment
Interest (A) 10.00 10.00
income @ Cr Cr
10% on Rs.
100 Cr
distributed
by
Securitised
Trust
Less: N.A. 3.00 cr
Distribution
tax paid by
the
trust@30%
on gross
income
Net income 10.00 7.00 Cr
distributed Cr
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Sr. Section Issue/Justification Suggestion
No
Less :- (B) 8.00 Cr 8.00 Cr
Interest
expenditur
e @ 8% on
Rs. 100 Cr
Net income C= 2.00 Cr (1.00)
(A- Cr
B)
Tax
payable
By Investor (D) 0.60 Cr3 -
@ 30%2 on
net income
Profit/(Loss (C- 1.40 Cr (1.00)
) after tax D) Cr
Not
allowed
to be
set-off
on
account
of
section
14A.
The above illustration highlights that a
structure which was commercially
viable prior to amendment made by
Finance Act, 2013 has 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
2
Surcharge and cess ignored for the sake of simplicity
3
30% of Rs. 2.00 Cr
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Sr. Section Issue/Justification Suggestion
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investments and own cost of borrowing.
Levy of distribution tax severely impacts
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 NIL withholding
certificates. The securitization
trust will be required to file return
to claim refund of such TDS. The
securitization trust should be able
to set off TDS credit against
distribution tax payable by it.
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.
21. Section Earlier under Section 10(23FB) of It is suggested that section
10(23FB) Income-tax Act, any income of a 10(23FB) be reworded as
Tax Venture Capital Company (VCC) or follows:
exemption Venture Capital Fund (VCF) set up to "Any income of a
raise funds for investment was exempt
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
for from taxation. However, in 2007, this venture capital
Alternative was amended and the scope of VCC / company or venture
Investment VCF was narrowed down to select capital fund from
Funds sectors and the exemption from income investment set up to
Venture tax was limited to "any income of a VC raise funds for
Capital company or VC fund from investment in investment in a venture
Funds a venture capital undertaking". capital undertaking."
(SUGGESTIONS FOR
The sectoral restriction stands removed RATIONALIZATION OF THE
in Union Budget, 2012 which was a PROVISIONS OF DIRECT
welcome move. However, the tax TAX LAWS)
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.
Page 54 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
22. Income of At present income of minors included in It is suggested that this
minors - to the hands of parents is exempt to the should be raised to at least
increase extent of Rs.1,500/- for each minor. The Rs.10,000/- for each minor
exemption average expenditure to meet cost of a child.
limits under minor's education/health/living (SUGGESTIONS FOR
section expenses which has gone up RATIONALIZATION OF THE
10(32) considerably in recent years, limit of PROVISIONS OF DIRECT
Rs.1,500/- fixed is woefully inadequate. TAX LAWS)
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 55
The Institute of Chartered Accountants of India
CHAPTER IV
COMPUTATION OF TOTAL INCOME
Page 56 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
PART A-SALARIES
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
23. Re- Salaried employees are not Provisions similar to that of
introduction allowed deduction of any expenses erstwhile standard deduction
of standard incurred during the course of the may be re-introduced.
deduction for employment other than profession Simultaneously, the multiple
salaried tax on employment. exemptions that are available
assessees- There are various expenses that (with miniscule upper limits) may
Section 16 the employees incur during the be done away with.
course of employment which they
cannot claim as deduction.
At the same time, the few
exemptions that are available to
them u/s 10 are subject to upper
limits which have been fixed
several years back and virtually
serve no purpose on account of
inflation.
Employees during the course of
their employment incur various
expenses, including for upgrading
skill, for rendering their services as
employees, deduction for such
expenses should be allowed.
For avoiding leakage of revenue if
any such deduction maybe a fixed
sum or certain percentage of
salary, say 25% of the salary, but
maximum may be restricted upto
say Rs. 5,00,000/- .
Doing away with the multiple
exemptions will help in cleaning up
the Act and removing unwieldy
provisions thereby simplifying the
law.
24. 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 The notice period, however, notice period pay is
period varies from organisation to chargeable in the hands of ex-
organisation. For example, in an employer and deduction of the
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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 60 days.
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 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
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Sr. No Section Issue/Justification Suggestion
for more than 12 months without
any deduction available to him.
25. Medical Under section 17 of the Income- It is suggested that the
reimbursemen tax Act, medical reimbursements provisions of section 17 be
ts 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.
26. Partial Section 17(2)(vii) of the Act, as It is suggested that the
double amended by the Finance Act, employer contributions to an
taxation of 2016, provides that any approved superannuation
contribution contribution to an approved fund may be made fully
to superannuation fund by the exempt from tax. This will
superannuati employer, to the extent it also encourage one of the
on fund - exceeds one lakh and fifty key focus areas of the
Section thousand rupees, will be Government of creating a
17(2)(vii) taxable as a perquisite in the pension based society.
hands of the employee.
Contributions to
superannuation fund may or
may not result in
superannuation benefits to the
employees, since there are
various conditions to be
fulfilled by the employees like
serving a stipulated number of
years, reaching a certain age
etc. Further, the pension
payments are subject to tax at
the time of actual receipt by the
employee after his retirement.
This may lead to partial double
taxation for the employee
where the contributions had
been taxed earlier also (when
the contributions exceeded
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
INR one lakh and fifty
thousand rupees).
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The Institute of Chartered Accountants of India
PART C-INCOME FROM HOUSE PROPERTY
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
27. Profits and gains of In the recent supreme court The Finance Act may
business or ruling in Rayala corporation consider the aforesaid
profession (Section (P) ltd V. ACIT reported in 72 decision and enact a
TAXMAN 149 it has been suitable provision for
28)
decided that treating certain rental
income received by
"where assessee company assesses as business
was having house property income to end the
and its business was to infructuous litigations.
lease out its property and to
earn rent, income so earned
as rent should be treated as
'business income', and not
as 'income from house
property'".
28. Deduction for In most urban areas, Contribution towards
maintenance charges maintenance of building is maintenance charges
actually paid to society,
paid to societies, undertaken by the society,
company, federation or
federation etc.- federation, company or
common body should be
Section 23 common body and the allowed as deduction.
expenses for such
maintenance are substantial.
The same need to be allowed
as deduction against rental
income so as to ensure that it
is only the real income that is
brought to tax. There is a
spate of litigation that prevails
in the country on account of
this item of expense.
Amending the law and
allowing a deduction for the
same would lead to
considerable reduction in
litigation.
No provision presently exists
to allow deduction for
maintenance charges paid to
a housing society etc even
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
though it is a substantial and
recurring expense.
New clause be inserted to
provide deduction of
maintenance charges paid to
Society, federation etc.
29. Section 23(5) The Finance Act 2017 Considering the interest
Deemed Taxability of inserted sub-section (5) in deduction so far available
unsold stock of existing section 23 to under section 36(1)(iii) in
house property after provide that where the respect of loan borrowed
1 year of lying vacant house property consisting of for construction of houses
Non-applicability of any building and land held as stock-in-trade, it is
restriction contained appurtenant thereto is held suggested that the
in section 71(3A) as stock-in-trade and the restriction as per section
property or any part of the 71(3A) may not be made
property is not let during the applicable in the case of
whole or any part of the interest deduction in
previous year, the annual respect of income from
value of such property or house property held as
part of the property, for the stock-in-trade. This would
period upto one year from go a long way in avoiding
the end of the financial year any negative impact on the
in which the certificate of real estate sector.
completion of construction of
the property is obtained from
the competent authority,
shall be taken to be nil. The
same is being done
considering the business
exigencies in case of real
estate developers and would
provide much needed relief
to such assessees.
Another related amendment
has been made in section 71
by insertion of sub-section
(3A) so as to provide that
set-off of loss under the
head "Income from house
property" against any other
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Sr. No Section Issue/Justification Suggestion
head of income shall be
restricted to two lakh rupees
for any assessment year.
Now an issue has arisen in
case of assessees engaged
in the business of real estate
sector. Normally, the
interest which the builder
assessee pays on
borrowings which were
taken for construction
purpose is allowable under
section 36(1)(iii) as his
income is assessable under
the head business and
profession. However, on a
combined reading of
provisions as contained in
section 23(5) and 71(3A),
i.e., if the notional income is
to be treated as "Nil" during
the period of one year and
thereafter, as income from
house property, it appears
that the interest deduction
would be available under
section 24 and
consequently, the restriction
contained in section 71(3A)
would apply. This would
create genuine difficulty,
since the businesses were
so far eligible for deduction
of entire interest under
section 36(1)(iii). Therefore,
the restriction contained in
section 71(3A) should not be
applicable in the case of
interest deduction in respect
of income from house
property held as stock-in-
trade.
Thus, on one hand, the
insertion of sub-section (5)
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
to section 23 of the Act
deems the annual value of
house property held as
stock-in trade, as Nil, if the
same is not let out; on the
other hand, the amendment
to section 71(3A) restricts
the claim of set off of loss
from house property (arising
mainly on account of interest
deduction) against income
from any other head. This
would curtail the benefit of
entire interest deduction so
far available under section
36(1)(iii).
30. Deduction for ground At present, there is no It is suggested that ground
rent other than u/s provision for allowing rent shall be allowed as
24(a) deduction towards ground deduction in addition to
rent paid in computation of section 24(a)
income from house property
(SUGGESTIONS FOR
& the same has been
RATIONALIZATION OF THE
merged into 24(a). Ground
PROVISIONS OF THE
rent shall be allowed as
INCOME-TAX ACT)
deduction in addition to
section 24(a) deduction
since 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.
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The Institute of Chartered Accountants of India
PART D-PROFIT AND GAINS OF BUSINESS AND PROFESSION
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
31. Section Section 28 provides for income that is Since the Import and
28(iiia) Sale chargeable to income tax under the head exports Control Act,
of license "profit and gains from business or 1947 has been
profession". As per sub -section (iiia) of repealed and advance
section 28, profit on sale of license granted Authorization issued
under the Imports (Control) Order, 1955, in place of erstwhile
made under the Imports and Exports advance licenses are
(Control) Act, 1947 is chargeable to tax not transferable as per
under the head "profit and gains from the Foreign Trade
business or profession". Policy issued under
It is pertinent to mention that "The Import Foreign Trade
and Exports Control Act, 1947" as (Development and
mentioned in section 28(iiia) has been Regulation) Act, 1992,
repealed. Further, advance Authorization sub-section (iiia) to
issued in place of erstwhile advance section 28 be omitted.
licenses are not transferable as per the
Foreign Trade Policy issued under Foreign
Trade (Development and Regulation) Act,
1992.
32. Section Section 28(iiid) provides that any profit on It is suggested that
28(iiid) transfer of the Duty Entitlement Pass Book sub section (iiid) to
Duty Scheme, being the Duty Remission section 28 be omitted
Entitlement Scheme under the export and import policy since the Duty
Pass Book formulated and announced under section 5 Entitlement Pass Book
Scheme no of the Foreign Trade (Development and Scheme was
more in Regulation) Act, 1992 (22 of 1992) shall be abolished w.e.f.
existence chargeable to income-tax under the head 1.10.2011 vide
"Profits and gains of business or Notification No.
profession". However, the aforementioned 51/2011 Customs,
DEPB scheme was abolished w.e.f dated 22.06.2011.
1.10.2011 vide Notification No. 51/2011
Customs, dated 22.06.2011.
33. Section 32 - The proviso to section 32 provides that the a) Section 32 may be
Depreciation aggregate deduction, in respect of amended to clarify
in case of depreciation of buildings, machinery, plant the legal position
slump sale or furniture, being tangible assets or know- as to whether
how, patents, copyrights, trademarks, depreciation can
licenses, franchises or any other business be claimed on the
or commercial rights of similar nature, being basis of
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
intangible assets allowable to the proportionate
predecessor and the successor in the case number of days by
of succession referred to in clause (xiii) and the transferor and
clause (xiv) of section 47 or section 170 or the transferee
to the amalgamating company and the company in case
amalgamated company in the case of of slump sale also
amalgamation, or to the de-merged considering the
company and the resulting company in the proviso to section
case of de-merger, as the case may be, 32 read with
shall not exceed in any previous year the section 170 of the
deduction calculated at the prescribed rates Act.
as if the succession or the amalgamation or b) Due to practical
the de-merger, as the case may be, had not and administrative
taken place, and such deduction shall be difficulties, there
apportioned between the predecessor and may be a time gap
the successor, or the amalgamating between holding
company and the amalgamated company, of the asset and
or the de-merged company and the using the asset so
resulting company, as the case may be, in transferred. To
the ratio of the number of days for which the avoid genuine
assets were used by them . difficulties in such
The following issues may be considered for cases, instead of
appropriate amendment in the law : the words, "used
(a) An issue arises whether depreciation by them", the
can be claimed on the basis of words "held by
proportionate number of days by the them" may be
transferor and the transferee company in substituted in the
case of slump sale considering the proviso proviso to section
to section 32 read with section 170 of the 32.
Act. (SUGGESTIONS TO
(b) As per the current provisions of proviso REDUCE / MINIMIZE
to section 32 the depreciation can be LITIGATIONS)
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
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Sr. No Section Issue/Justification Suggestion
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.
34. Benefit under Section 35(2AB) of the Act has been It is recommended
Section gradually amended to provide increased tax that the tax benefits
35(1)(iia)
benefits on expenditure incurred towards under Section
should be
in-house R&D facilities i.e. from 125 per 35(1)(iia) should be
increased to
200 per cent cent to 200 per cent. However, Section increased to 200 per
from the 35(1)(iia) of the Act, which provides tax cent from the present
present level incentives in respect of payments made to level of 125 per cent.
of 125 per R&D company, has remained same at 125
cent per cent. The conditions specified by the
DSIR for grant of approval for a recognized
R&D facility/ company under Section
35(2AB) and Section 35(1)(iia) are the
same and hence, the tax benefits provided
under Section 35(1)(iia) should be at par
with the tax benefits provided under Section
35(2AB) of the Act.
35. Applicability In the pharmaceutical Sector, discovery is a It is suggested that the
of Section lengthy, risky and expensive proposition. In existing provisions
35(2AB) of
this business environment, necessitated by should be specifically
the Act on
the current business needs, companies clarified to allow
expenditure
incurred on have to incur expenditure towards scientific weighted deduction in
scientific research outside their Research & respect of expenditure
research Development (R&D) facility for e.g. incurred outside the
carried expenditure incurred outside the approved R&D facility which are
outside the R&D facility towards clinical trials (including sometimes
in-house those carried out in approved hospitals and necessitated by the
R&D facility institutions by non-manufacturing firms), industry's business
approved by bioequivalence studies conducted in needs.
the overseas CROs and regulatory and patent Additionally, it could
prescribed approvals, overseas trials, preparations of also be provided that
authority dossiers, consulting/ legal fees for filings in where the risk of doing
USA for new chemicals entities (NCE) and research is assumed
abbreviated new drug applications (ANDA) by a company, the
as approved by the Department of Scientific entire cost of R&D
activities (whether
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
and Industrial Research (DSIR) which are outsourced or
directly related to the R&D, etc. undertaken in-house)
is eligible for weighted
deduction in the
hands of company
undertaking the risk.
36. IT and ITES Currently, there is no clarity whether a It suggested to amend
sectors company engaged in the business of provisions of Section
should also
development and sale of software or 35(2AB) of the Act to
be entitled to
providing IT / Information Technology specifically include
weighted
deduction Enabled Services (ITES) services, is R&D with respect to
under eligible for weighted deduction on the R&D the development and
Section expenditure incurred by it. sale of software and
35(2AB) of As per DSIR guidelines amount spent by a providing relevant
the Act recognized in-house R&D unit towards IT/ITES services.
foreign consultancy, building maintenance,
foreign patent filing etc. are not eligible for
weighted deduction under Section 35(2AB)
of the Act. Such expenditure are essential
in carrying out research at the approved
R&D centers.
37. Weighted The DSIR guidelines provide that eligible It is recommended to
deduction capital expenditure on R&D will include provide weighted
should be
expenditure on plant, equipment or any deduction for
available on
other tangible item only. It also provide that expenditure incurred
expenditure
incurred on capital expenditure of intangible nature is on internally
internally not eligible for weighted deduction. developed intangible
developed assets under Section
intangible 35(2AB) of the Act.
assets It is also
recommended that
any initial cost paid
for acquiring R&D
related intangible
assets, which are
used in the R&D unit
should also be
allowed for weighted
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deduction under
Section 35(2AB) of the
Act.
38. Extension of The Finance Act, 2015, with a view to With a view to achieve
the weighted phase out weighted deduction under a growth rate of 8 per
deduction Section 35(2AB) of the Act, restricted the cent and put India on
under allowability of expenditure incurred on the growth trajectory
Section scientific research (other than expenditure and to ensure having a
35(2AB) of in the nature of cost of any land or building) robust R&D database,
the Act for a on in-house research and development it is suggested that the
further facility incurred on and from 1 April 2020 to weighted deduction
period of 10 100 per cent from the existing 200 per cent. under Section 35(2AB)
more years of the Act should be
extended for a further
period of 10 years.
This would enable the
country to be on par
with the developed
nations which have
robust R&D centres
fuelling growth in the
economy.
39. Profit linked Section 35AD of the Act extends The profit-linked
incentives investment linked incentives to taxpayers incentives currently
for specified with respect to the capital expenditure available for
industries incurred for setting up and operation of infrastructure and
vis-a-vis specified businesses. Further, once crucial sectors should
investment- investment linked incentive for the capital not only be expanded
linked expenditure is availed under this Section, but also continued till
incentives - no benefit shall be allowed in respect of the end of the next
Section 35AD such specified business under Chapter VI- Five Year Plan to
A (Deductions in respect of certain encourage investment
incomes) and Section 10AA of the Act. and growth of India's
The Finance Act, 2016 has amended infrastructure sector.
section 35AD of the Act so as to reduce the With the governments
deduction from 150 per cent to 100 per cent `Make in India'
in the case of a cold chain facility, campaign, there would
warehousing facility for storage of be a need to bring
agricultural produce, an affordable housing under the ambit of
project, production of fertilizer and building deduction of Section
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The Institute of Chartered Accountants of India
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and operating hospitals with effect from 1 35AD of the Act more
April 2017. sectors to further
Deduction under Section 35AD of the Act is strengthen the
an alternate form of accelerated deduction industrial base of the
for the capital expenditure in the specifiedcountry, for e.g. the
business. However, the cash flows of these steel industry being a
capital intensive industries suffer on high capital intensive
account of levy of MAT. This is because industry, capital
book profits continue to be higher than expenditure should be
taxable profits (given that deduction for allowed as a
deduction on the
capital expenditure is not taken to the profit
and loss account other than in the form of amount of expenditure
depreciation) and hence, MAT is paid by incurred.
the industry during the incentive period. It should be
While MAT is creditable against normal considered further
taxes in future, the period for recovery of reduce the rate of MAT
MAT paid could result in being longer than more so for the
under profit linked incentives. Further, infrastructure sector
given the restriction on the years for carryas levy of the same
forward of MAT, it is possible that MAT paiddefeats the very
in initial years may not be recovered, purpose of extending
especially for those taxpayers who have a tax incentives to the
longer period before reaching break-even. industry, especially
given the high rate of
MAT now.
40. Clarification The amendment to Section 35AD(3) of the A clarification should
on Act introduced by the Finance Act, 2010, be issued that the
seeks to prevent a taxpayer from claiming taxpayer may exercise
amendment
dual deduction in respect of the same an option (where
to Section
business. available to the
35AD(3) taxpayer) to avail tax
It appears that if a taxpayer carrying on a incentive under
specified business does not claim Section 35AD or
deduction under Section 35AD of the Act, Chapter VI-A/ Section
he may opt for deduction under the relevant 10AA of the Act,
provisions of Chapter VI-A or Section 10AA depending upon
of the Act, if the same exist for such which is more
business and it is more beneficial. beneficial to the
taxpayer.
Further, it is
suggested that a
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clarification may also
be issued that in the
event the taxpayer
opts for the
investment linked
incentive under
Section 35AD of the
Act and the same is
denied/ rejected at
time of assessment
proceedings (could be
on account of non-
satisfaction of
prescribed
conditions), in such a
case the taxpayer
should be eligible to
make an alternative
claim under Chapter
VI-A or Section 10AA
of the Act, on
satisfaction of the
conditions provided
therein,
notwithstanding the
requirement
stipulated in Section
80A(5) or 10AA of the
Act. This is because, a
taxpayer who is
otherwise entitled to
deduction in respect
of qualifying profits of
the specified business
would lose such
deduction on account
of Section 80A(5) of
the Act that mandates
a claim for deduction
under chapter VI-A be
made in its return of
income. As the
taxpayer would not
have claimed
deduction under the
provisions of Chapter
VI-A/ Section 10AA of
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
the Act in its return of
income since claim
was made under
Section 35AD, such
taxpayer would be
precluded from
claiming deduction in
view of Section 80-
A(5)/ Section 10AA of
the Act.
41. Dilution of The underlying idea behind allowing the The losses from the
tax incentive investment linked incentive granted under specified business
under Section 35AD of the Act is to enable the under Section 35AD of
Section 35AD taxpayer to set-off the business losses the Act ought to be
by insertion incurred by this write-off against the taxable made eligible for set-
of Section profits from their existing businesses and off against profits
73A reduce their tax liability in the year of from other businesses
deduction and thereby to provide part of the of the taxpayer, and
resources of investment required for setting not restricted to be
up of the businesses. However, the set-off against only
incentive so intended cannot be achieved the specified
owing to the insertion of Section 73A of the businesses, as it is
Act, which restricts the set-off/ carry not always the case
forward of losses by specified business that the taxpayer
only against the profits and gains, if any, of would only be carrying
any other specified business carried on by on the 'specified
the taxpayer in that AY and the amount of business'. In light of
loss not so set-off can only be carried the above, Section
forward and set-off against profits from 73A of the Act should
specified business in the subsequent AYs. be deleted.
42. Section In order to discourage cash transactions It is suggested that:
35AD and even for capital expenditure, the Finance
43(1) Cash Act, 2017 amended section 43(1) to provide
(i) In the interest of
payment that where an assessee incurs any
certainty and to avoid
exceeding expenditure for acquisition of any asset in
retro-applicability of
Rs 10,000 to respect which a payment or aggregate of
the provision, it is
be payments made to a person in a day,
recommended that
disallowed otherwise than by an account payee
disallowance of
Exceptions cheque drawn on a bank or account payee
depreciation should
contained in bank draft or use of electronic clearing
trigger only if cash
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Rule 6DD system through a bank account, exceeds expenditure as well as
may be ten thousand rupees, such expenditure asset acquisition is on
extended to shall be ignored for the purposes of or after 1 April 2017.
section determination of actual cost of such asset.
35AD and Similar amendment is made in section (ii) Only such
43(1) also 35AD. Further, cash payment limit under expenditure for
section 40A(3) is also reduced to acquisition of asset
Rs.10,000. may be disallowed
Thus, the Finance Act 2017 disallowed which has been
even the capital expenditure incurred in incurred in cash and
cash thereby restricting the amount of accordingly,
allowable depreciation under section 32 depreciation under
with effect from 1 April 2018 i.e. AY 2018- section 32 may be
19. permitted for balance
portion expended in
non-cash mode.
Issues
(iii) Exceptions on the
(1) There is no clarity whether disallowance
lines contained in
will trigger if cash expenditure is incurred
Rule 6DD may also be
post 1st April 2017 or if asset is acquired
provided with respect
after 1st April 2017.
to the amendments in
(2) As per the language of the proviso to section 35AD and
section 43(1), it appears that whole of the 43(1) which restrict
expenditure for acquisition of any asset the maximum amount
may be disallowed even if only a small part that can be
of the expenditure may have been incurred paid/incurred in cash
in cash. Say for example, expenditure on to Rs.10,000.
asset costing Rs.1 crore may be disallowed
fully for depreciation purposes even if
expenditure incurred in cash is only Rs.
10,000.
(3) Permissible exceptions to the provisions
of section 40A(3) and (3A) have been
provided in Rule 6DD of the Income-tax
Rules, 1962 having regard to the nature
and extent of banking facilities available,
considerations of business expediency and
other relevant factors.
Since similar situations may occur in case
of compliance of the
provisions/amendments to section
43(1)/35AD restricting the maximum
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amount that can be paid in cash to
Rs.10,000, exceptions on the lines
provided in Rule 6DD may be considered.
43. Section 35D Expenses incurred for raising capital are Section 35D should be
(a) Capital being treated as capital in nature and no amended to allow
raising deduction is allowed in tax assessment. deduction for all
expenses Section 35D provides for deduction in expenses incurred by
respect of some of the expenses, over a an assessee for
period of five years, subject to conditions raising capital in five
and limits. Raising capital is necessary equal installments
activity for carrying out the business over a period of five
activity. Not allowing deduction of years.
expenses for raising capital increases cost
of carrying out the business and adversely
(SUGGESTIONS FOR
affects the competitiveness of the business
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
(b) Cash outflows by way of capital It is suggested that
Amortization expenditure logically reduce the income. provisions may be
of Capital However, certain preliminary expenditure incorporated in the
expenditure allowed to be amortised under section 35D, Act to allow
there is no provision in the act for amortisation of such
amortization of capital expenditure like fees capital expenditures
paid for increase in authorized share capital which are essential to
and payment made towards elimination of run the business.
competition etc.Such expenditures being (SUGGESTIONS FOR
capital in nature cannot be charged to RATIONALIZATION OF
revenue as there is no provision for THE PROVISIONS OF
claiming these expenses in computing the DIRECT TAX LAWS)
income. As a result there is a difference
between real income & taxable income.
44. Due date for Section 2(24)(x) of the Act, inter alia It is suggested that the
crediting the defines "Income", to include any sum due date defined
contribution received by the employer from its under Explanation to
of employees' as contribution towards certain Section 36(1)(va) shall
employees specified funds. However, deduction for be amended and
to the such income are available under section accordingly the due
respective 36(1)(va), provided that the contributions date shall mean the
fundSection collected by the employer are credited to due date for filing
36(1)(va) the respective fund within the due date return of income
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read with specified under the relevant legislation of under section 139(1),
Section the fund. thereby bringing it at
2(24)(x) The employee's contribution credited to the par with the due date
employees account in the relevant fund specified for the
after the due date specified under section Employer's
36(1)(va) are disallowed to the employer. contribution under
Further, any payments made by the Section 43B of the Act.
employer after the due date is also NOT (SUGGESTIONS FOR
allowed as a deduction in the year of RATIONALIZATION OF
payment. This causes undue hardship to THE PROVISIONS OF
the assessee especially during the DIRECT TAX LAWS)
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 Hon'ble
Uttarakhand High Court and Hon'ble Delhi
High Court have considered the due date
under section 36(1)(va) to be read in sync
with the due date mentioned in section 43B,
Hon'ble 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.
45. Corporate Corporates are currently involved in various It is suggested that:
Social areas of social responsibility / community a) The amendment
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Responsibilit development as part of nation building. made in Section
y Costs Further, the concept of Corporate Social 37 vide Finance
section 37 Responsibility Costs has been introduced (No. 2) Act, 2014
under Companies Act, 2013. The should be
expenditure is mandatory in its nature and reconsidered.
as such it is a statutory levy. Accordingly it b) A deduction of the
deserves tax deduction. However, expenditure on
amendment made in section 37 vide community /social
Finance (No. 2) Act, 2014 has made it clear development
that expenditure incurred on activities (both capital and
relating to CSR under Companies Act, 2013 revenue) be
will be deemed to be a non business introduced,
expenditure. Providing suitable tax specifically
incentives in respect of such Corporate covering critical
Social Responsibility Costs would areas like
accelerate the process and ensure that the education, health,
country can reach the goal of being a animal husbandry,
developed nation in the near future and is water
the need of the hour. management,
women
empowerment,
poverty alleviation
and rural
development.
c) Even in cases
where a company
has its own trust
or foundation, the
deduction in
respect of
expenditure
incurred for CSR
activities should
be allowed.
d) CSR expenditure
is allowed by way
of donation to
Prime Minister
Relief Fund/ Trust
registered u/s.
80G/ associations
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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)
46. Disallowance In relation to section 40(a)(ia), Explanatory In line with section
for TDS Memorandum to Finance (No.2) Bill 40(a)(ia) of the Act, it
defaults on 2014/CBDT Circular No. 1 of 2015 is recommended that
explained that disallowance of whole of the s.40(a)(i) should also
payments to
amount of expenditure in case of payments be amended
non-resident to residents for whom TDS is a merely restricting the
Section mode of collection of tax and not discharge disallowance to 30
.40(a)(i)) of final tax liability results into undue percent of the amount
hardship for the taxpayers and accordingly, of expenditure
s.40(a)(ia) is amended to restrict
disallowance only to 30% of the expenditure
amount. Thus, disallowance should be in
proportion to the TDS rates which apply to
residents which ranges from 2% to 30%.
However, similar changes are not made in
section 40(a)(i) which governs the non-
deduction of TDS on payments to non-
residents. It may be noted that TDS rates
applicable to majority of payments to non-
residents by way of interest, royalty and
FTS also are in the range of 5% to 10%
which are also final tax payable by non-
resident payees.
Disallowance of 100% of expenditure
involving payments to residents effectively
results in recovery of 30% tax by the
Revenue from the payers whereas the final
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tax payable by non-residents is only in the
range of 5% to 10%.
47. Section Section 40(a)(ia) is amended via Finance Since the language of
40(a)(ia) - (No. 2) Act, 2014 to restrict the amount of the present amended
Disallowance disallowance for non-deduction of tax to provision of section
30% of expenditure. The proviso is also 40(a)(ia) does not
of
amended to the effect that 30% of such sum allow full claim of the
expenditure shall be allowed as a deduction in 100% disallowance
for non - computing the income of the previous year made in earlier years,
deduction of in which tax has been paid. it is suggested that the
tax at source said amendment may
on payment be brought by way of
However, the language of the proviso raises insertion of a separate
made to a doubt as to whether any expenditure
sub-clause instead of
resident disallowed 100% in earlier year(s) will be amending the existing
allowed fully on TDS compliance in the sub-clause (ia) to
current year. The wordings of the said section 40(a). This will
proviso indicate that only 30% of amount of maintain status quo in
expenditure disallowed in the past year(s) respect of allowabilty
will be allowed as a deduction. of such expenditure
(which was 100%
disallowed under this
provision during the
Assessment year
2014-15 and before), in
the subsequent year
on TDS compliance.
48. Disallowance S.40(ba) does not permit deduction in the To provide level
of expenses hands of AOP of any interest, salary, bonus, playing field between
incurred in commission or remuneration paid to firms and AOPs, an
member of AOP. amendment may be
favour of
made to provide for
members - In many cases, a consortium may be non-application of
Section formed by two or more members to jointly section 40(ba) for
40(ba) bid for big projects wherein each of the payments towards
members brings in his own expertise and specialized services
resources. If the consortium is assessed as [i.e. expert knowledge]
AOP, the AOP's profits are assessed at rendered by
higher amount by disregarding the consortium members
commercial understanding between the subject to the
parties for sharing of profits after factoring condition that
in specialised services or expert knowledge deduction of
made available by some of its members. payments made by
This results in disproportionate sharing of consortium to its
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tax burden between the members. members will be
allowed only if the
Unlike s.40(ba), s.40(b) permits deduction same has been
for interest and remuneration paid to considered as income
partners of firm/LLP as per partnership by the members in
agreement upto specified limits. This their respective
enables the partners to share the tax return.
burden proportionate to their contribution to
the firm.
49. Section Currently, bill payments related to electricity It is suggested that the
40A(3) consumption made to electricity companies provisions of section
Payment to are not allowed through cheque in case 40A(3) be rationalized
electricity payment is made after a certain date or to exclude payments
companies delayed/late payment after due date. in cash to Electricity
Assessee in such situations is left with no companies where the
option but to pay in cash. The same is payment is not
disallowed under section 40A(3) in case accepted beyond a
payment exceeds Rs 20,000 as Rule 6DD date through cheque.
currently do not provide exception in such Due to this genuine
cases.. electricity payments
made in cash due to
commercial
expediency are
getting disallowed and
hardship is caused to
assessee.
50. Depreciation In many cases, assessees engaged in the Suitable Explanation
on assets business of financing assets, acquire such may be inserted to the
acquired in assets which were used by the borrower for definition of the term
the purpose of his business or profession. "actual cost" given in
satisfaction
Post-acquisition of such assets, the finance section 43(1) of the
of debts- companies lease out the same to another Act.
Section 43(1) person under operating lease. The
acquisition of assets in satisfaction of
debts, many a times, exceeds the written
down value of the assets as on the date of
acquisition. The existing definition of the
term "actual cost" given in secti on 43 (1) of
the Act does not allow the financing
companies to claim depreciation at the
price/cost at which the assets are acquired
by it from the borrower. Considering the fact
that Asset Financing Company is acquiring
the depreciable asset from the borrower for
a particular price and using it for the
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purpose of its business by way of leasing
out the same to the lessee, it should
logically be entitled to claim depreciation on
the "actual cost" at which it is acquired from
the borrower.
51. Explanation 5 Section 43 deals with actual cost. There are In line with the other
to Section 14 explanations provided in section 43(1) explanations to
43(1) describing the method of computation of section 43(1), it is
"building" to actual cost of asset under different suggested that the
be replaced situations. Explanation (5) deals with actual term "Assets" be used
by "assets" cost in respect of building previously used instead of the term
by the assessee for certain purposes & "building" in
subsequently brought into business or Explanation 5 to
profession. According to this explanation, section 43(1).
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.
52. Section 43A Section 43A was inserted in the Income-tax It is suggested that
- Exchange Act, 1961 by Finance (No. 2) Act 1967, Section 43A be
fluctuation which permitted Capitalization of Foreign amended to allow
loss due to Exchange Fluctuation Loss in the Capitalization of such
sharp fall in borrowing used for acquisition of assets foreign exchange loss
Rupee value outside India. The exchange fluctuation even for domestically
loss on borrowings used for domestically acquired asset.
acquired assets is not permitted to be (SUGGESTIONS FOR
capitalized for tax purposes. RATIONALIZATION OF
Over the years Rupee has depreciated THE PROVISIONS OF
significantly against the US $ severely DIRECT TAX LAWS)
impacting the industry particularly those
who have exposure to External Commercial
Borrowings (ECBs) and Foreign Currency
Convertible Bonds (FCCBs).
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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 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
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"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 this Schedule 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 31 st March, 2009 and G.S.R. 914(E)
dated 29 th 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.
53. Section 43CA This section provides for adoption of stamp a) The section in its
- Special duty value in case of transfer of land or present form may not
provision for building or both held as stock-in-trade. be desirable and may
full value of Several issues have cropped up due to lead to structuring of
consideratio implementation of this section in its present transactions. Thus,
n for transfer form and suggestions thereof are as under: the provision of this
of assets section needs to be
other than reconsidered.
a) This amendment encourages structuring
capital (SUGGESTIONS FOR
of real estate transactions in such a manner
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assets in to circumvent increased tax liability arising RATIONALIZATION OF
certain on account of adoption of stamp duty value. THE PROVISIONS OF
cases. For example- Having agreed to sell the DIRECT TAX LAWS)
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 double taxation b) Suitable provisions
of income, since, the difference between may be incorporated
the stamp duty value and actual in the statute so that
consideration would be taxable in the the same income is
hands of the seller. However, the buyer can not subject to tax
claim only the actual cost as deduction twice.
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 adoption of c) It may be clarified
stamp duty value on the date of agreement, as to whether the term
where the date of agreement is different "otherwise than by
from the date of registration, provided at way of cash" would
least a part of the consideration has been include transfer by
received on or before the date of book entries, transfer
agreement by any mode otherwise than by by Hundi, promissory
way of cash. In this context, it may be notes etc. and transfer
clarified whether "otherwise than by way of by exchange
cash" would include transfer by book agreement.
entries, transfer by Hundi, promissory
notes etc. and transfer by exchange
agreement.
d) Further, in a case where the year of d) It may be clarified
agreement and the year of registration are as to whether the tax
different, a clarification is required as to liability would arise in
whether the tax liability would arise in the the year of agreement
year of agreement or year of registration or or year of registration
the year in which possession is obtained. or the year in which
possession is
obtained.
e) Since only capital assets are excluded e) It is suggested that
from the applicability of this section, agricultural land be
agricultural land which is not included in the specifically excluded
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definition of capital asset may fall within the from the ambit of this
scope of this section. Therefore, specific provision.
exclusion of agricultural land from the ambit
of this provision may be provided for.
f) This section provides for adoption of f) It is suggested that
stamp duty value in case of "transfer" of the term "transfer" be
land or building or both held as stock-in- specifically defined
trade. It may be noted that the definition of for the purposes of
term "transfer" in section 2(47) is in relation section 43CA.
to a capital asset only. The intended scope
of coverage of the term "transfer" for the
purpose of section 43CA needs to be
defined.
54. Taxability of Section 43D of the Act provides that income Amendment to
interest on by way of interest in relation to bad and section 43D
doubtful debts of a public financial In light of the above,
Non-
institution or a scheduled bank or a co- an amendment
Performing
operative bank or a state financial should be made to
Asset corporation or a state industrial investment
corporation or a housing finance company
section 43D of the
is chargeable to tax in the previous year in Act, to extend the
which it is credited to the profit and loss benefit of section
account or, as the case may be, in which it 43D to "Non -
is actually received. Banking Financial
The reason for introduction of section 43D Company" (other
in the Act, was that interest from bad and than housing
doubtful debts in the case of banks and finance companies
financial institutions is difficult to recover which are already
and taxing such income on accrual basis covered by the
reduces the liquidity of the bank without
provisions of
actual generation of income. Therefore,
with a view to improve the viability of banks
section 43D),
and financial institutions, the provisions of whereby interest
section 43D were introduced w.e.f. AY income on non-
1992-93. performing assets
should be taxed only
Subsequently with a view to boost the on receipt basis.
viability of housing finance companies and Amendment to Rule
to provide a boost to the housing sector, 6EA of Income-tax
w.e.f. AY 2000-01, the benefit of the said Rules (`the Rules')
provision was also extended to housing Section 43D refers to
finance companies (a category of NBFCs)
the income by way of
which are regulated by the National
interest in relation to
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Housing Bank. such category of
bad and doubtful
Further, w.e.f. AY 2018-19, to provide a debts as may be
level playing field to co-operative banks, the prescribed in Rule
provisions of section 43D have recently
6EA of the Rules
been rationalised to extend the benefit of
having regard to
the said provisions to co-operative banks as
well. guidelines issued by
RBI in relation to
While NBFCs (other than housing finance such debts.
companies which are already covered by Accordingly,
the provisions of section 43D) have not consequential
been specifically covered by the aforesaid amendment should
provisions, various judicial precedents 4 also be made in Rule
have held that interest income on NPA's 6EA of Rules, which
under the provisions of the Act should be provides special
chargeable to tax only on receipt basis provision regarding
following the principle of real income.
interest on bad and
However, in absence of specific provisions
under the Act, this matter has constantly doubtful debts of
been a subject matter of litigation. banks and financial
institutions, to
Impact of Income Computation and include the "Non -
Disclosure Standards (`ICDS') on Banking Financial
taxation of Interest on NPAs Company" as well.
The Central Board of Direct Tax (`CBDT') Amendment to
has recently notified the Income section 43B
Computation and Disclosure Standards Consequential
(`ICDS') which are e ffective from AY 2017- amendment should
18. As per ICDS IV on Revenue
Recognition, interest income shall be
also be made in
recognised on time proportionate basis i.e. section 43B of the
on accrual basis. Act which provides a
This has been further clarified by the CBDT list of deductions
in its recent FAQs issued on 23 March which are allowed to
2017, which provides clarification on the payer on actual
various aspects of applicability of ICDS. As payment basis. As
per Question 13 of the FAQ, it has been represented above,
clarified that interest accrues on time basis. given that interest
Further, as per Question 2 of the FAQ, income on NPA for
4UCO Bank vs. CIT [1999] 237 ITR 889 (SC); CIT v. Vasisth Chay Vyapar Ltd [2011] 330 ITR 440; CIT v. India
Equipment Leasing Co. Ltd. [2007] 293 ITR 350 (Mad); CIT v. Elgi Finance Ltd., [2007] 293 ITR 357 (Mad); Ted
Co Investment and Financial Services (P.) Ltd. v. DCIT [2003] 87 ITD 298 (Delhi)
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CBDT has also clarified that provisions of "Non-Banking
ICDS shall prevail over past judicial Financial Company"
precedents (thus overriding the real income should be taxed on
principle laid down by various judicial receipt basis,
precedents).However, recently it has been
deduction to the
held by the Hon' ble Delhi HC in the case of
payer of interest on
Chamber of Tax Consultants v. Union of
India, dated 8.11.2017 that, inter alia, ICDS NPA to "Non-
cannot supercede past judicial decisions. Banking Financial
In view of the above CBDT clarifications, it Company" should
may be challenging for NBFCs (other than be allowed on actual
housing finance companies) to adopt the payment basis.
position of taxing interest on NPA on receipt
basis, severely impacting their cash flows
and liquidity.
Like Banks even NBFCs are regulated by
Reserve Bank of India (`RBI') and are
mandated to follow RBI guidelines including
on the prudential norms. As per RBI circular
on NBFC (Deposit Accepting or Holding)
Prudential Norms, Banks as well as NBFCs
are required to create provision for NPAs.
Further, as per the prudential norms, Banks
as well as NBFCs shall recognise interest
income on NPA only when it is actually
realised. However, despite these
similarities between a Bank and a NBFC,
there is a distinction in the applicability of
various tax provisions which puts NBFC s in
a disadvantageous position vis-à-vis other
financial institutions including Banks. Thus,
the need for a uniform practice and level
playing field in terms of tax treatment for
NBFCs is indispensable.
In this regard, as mentioned above, in
accordance with the directions issued by
the RBI, similar to other financial
institutions, NBFCs also follow prudential
norms and are required to create provision
for NPAs and defer income in respect of
their non-performing accounts.
Considering the fact that similar to Banks,
NBFCs are also engaged in financial
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lending to different sectors of the society,
the Finance Act 2016, has expanded the
scope of section 36(1)(viia) of the Act, by
providing deduction to the extent of 5% of
total income in respect of provision for bad
and doubtful debts to NBFCs.
However, in absence of specific coverage
of NBFCs (other than housing finance
companies which are already covered by
the provisions of section 43D) in section
43D and in light of the ICDS provisions,
NBFCs would be required to recognise
income on such NPAs for tax purposes on
an accrual basis, resulting in levy of tax on
income which may not be realised at all.
This would severely impact the liquidity of
NBFCs in terms of cash flow pay-outs,
impacts their profitability and also has a
consequent impact on their cost of
operations.
Given the same, it is appropriate in all
fairness that the provisions of section 43D
which recognises the principle of taxing
interest income on NPAs on receipt basis
to certain banks and financial institutions,
also be extended to NBFCs (other than
housing finance companies which are
already covered by the provisions of
section 43D).
55. Section 44AD Relevant provisions It is suggested that
The Finance Act, 2016 amended the appropriate
Clarifications provisions of section 44AD w.e.f. from clarification be issued
required 1.4.2017. The relevant extracts of the as to, whether or not,
regarding amended provisions of section 44AD are the eligible assessee
provisions of given hereunder: carrying on an eligible
section 44AD business, who:
"(4) Where an eligible assessee declares
profit for any previous year in accordance a) has NOT in
with the provisions of this section and he any previous year
declares profit for any of the five declared profits in
assessment years relevant to the accordance with the
previous year succeeding such previous provisions of
year not in accordance with the section 44AD AND
provisions of sub-section (1) , he shall not b) has total
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be eligible to claim the benefit of the income exceeding the
provisions of this section for five maximum amount
assessment years subsequent to the which is not
assessment year relevant to the chargeable to
previous year in which the profit has not income-tax
been declared in accordance with the AND
provisions of sub-section (1). c) has a
(5) Notwithstanding anything contained in turnover less than the
the foregoing provisions of this section, an limits prescribed
eligible assessee to whom the under section 44AB
provisions of sub-section (4) are AND
applicable and whose total income d) claims the
exceeds the maximum amount which is profits from the
not chargeable to income-tax, shall be eligible business to be
required to keep and maintain such books less than 8% (or 6% as
of account and other documents as the case may be) of
required under sub-section (2) of section total turnover or gross
44AA and get them audited and furnish a receipts
report of such audit as required under
shall be required to
section 44AB" [emphasis supplied ]
get the books of
As per the plain reading of the section accounts audited and
44AD, it is clear that in case the eligible furnish a report of
assessee engaged in an eligible business, such audit as required
is declaring profits equal to 8% (or 6% as under section 44AB of
the case may be) of the total turnover or the Income-tax Act,
gross receipts or any sum higher than 8% 1961.
(or 6% as the case may be), such sum will
be treated as income under the head "Profit
and gains of Business or profession". Such Also, it may be
assessee will not be required to maintain clarified, whether or
books of account or other documents as not, an assessee who
per the provisions of section 44AA and also has opted for
will not be required to get the accounts presumptive
audited under section 44AB of the Income- provisions under
tax Act. This situation remains the same as section 44AD in the AY
per the provisions of the erstwhile section 2016-17, would be hit
44AD. by the provisions of
section 44AD(4) and
Sub-section (4) of the amended section
44AD(5) if he does not
44AD requires that the assessee who
opt for presumptive
declares profit otherwise than as per the
tax provisions under
provisions of section 44AD(1) in any of the
section 44AD in the AY
5 AYs succeeding the PY in which the
2017-18.
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assessee has computed profits as per
section 44AD, shall not be eligible to claim
profit as per the provisions of section 44AD
for the next 5 Assessment years.
Further, section 44AD(5) provides that
such an assessee (to whom the provisions
of sub-section (4) are applicable) and
whose total income exceeds the maximum
amount which is not chargeable to income-
tax will be required to maintain books of
account or other documents as per the
provisions of section 44AA and also will be
required to get the accounts audited and
furnish a report of such audit under section
44AB of the Income-tax Act, 1961.
Issue/ Concern
In effect, the eligible assessee carrying on
an eligible business, who:
a) has declared profits less than 8%
(or 6% as the case may be) of the total
turnover or gross receipts in any of the five
assessment years subsequent to the
assessment year relevant to the previous
year in which eligible assessee declares
profit at 8% or more AND
b) has total income exceeding the
maximum amount which is not chargeable
to income-tax
shall be required to keep and maintain such
books of account and other documents as
required under section 44AA and get them
audited and furnish a report of such audit
as required under section 44AB for five
assessment years subsequent to the
assessment year relevant to the previous
year in which the profit has not been
declared in accordance with the provisions
of sub-section (1).
The amended provisions are applicable
from 1.4.2017 ie AY 2017-18 (PY 2016-17).
The provisions of the amended section
44AD provide for a situation wherein the
assessee shall not be eligible to claim the
benefit of the provisions of this section for
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five assessment years SUBSEQUENT to
the assessment year relevant to the
previous year in which the profit has not
been declared in accordance with the
provisions of sub-section (1). The
treatment in respect of a situation, where
the eligible assessee has an eligible
business with turnover LESS than 1 crore
(say Rs. 50 Lakhs) and has declared profit
LESS than 8% (or 6%, as the case may be),
for the first time in the previous year 2016-
17 or in the previous years 2016-17 and
thereafter, has not been covered by the
amended provisions.
The erstwhile section 44AD(5) required
such assessees to maintain their books of
account and other documents as per the
provisions of section 44AD and also get the
accounts audited and furnish a report of
such audit under section 44AB of the
Income-tax Act, 1961. Such eligible
assessees are in a state of confusion as to
whether or not they are required to get their
books of account audited and furnish the
same as per the provisions of section 44AB
of the Act.
56. Section 44AD The amendment made via the Finance Act, For facilitating ease of
Deletion of 2016 to disallow deduction of expenditure doing business by
proviso to in the nature of salary, remuneration, small firms and
sub-section interest paid to the partner as per section removing the genuine
(2) providing 40(b) out of presumptive income. This hardship of having to
for deduction amendment would hit small and medium pay higher taxes on
of interest firms, especially running family businesses. their presumptive
and Taxing the entire income of the firm, without income on account of
remuneration deduction for partner's salary/interest paid the denial of
paid to within the permissible limits set out in deduction in respect
partners by section 40(b), at flat rate of tax at 30% may of remuneration paid
firm from the hit the small and medium firms badly and to partners within the
presumptive adversely affect their business. This would limits set out in
income be against the government's objective of section 40(b), the
under facilitating ease of doing business. proviso to section to
section 44AD 44AD(2) may be
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Proviso to It is pertinent to mention here that the same restored. Similarly,
remain/restor issue had crept in the past as well. While separate deduction
ed to avoid introducing presumptive income for firms in may be allowed for
genuine the Finance Bill 1994, initially there was no professional firms as
hardship to provision providing for deduction of interest well in respect of
small and and remuneration to firm assessees. remuneration paid to
medium However, the said proviso was introduced partners under the
firms vide Finance Act 1997, thereby giving new section 44ADA.
effect to the true intent of the law, and that
too with retrospective effect from 01-04-
1994.
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57. Section Section 44AD was repealed w.e.f. It is suggested that
44AD- 01/04/2011 i.e. from AY 2011-12. instead of sub-section
Presumptive According to the new provisions, in case of 44AD(6), the definition
Income an eligible assessee engaged in eligible of "eligible business"
Some Issues business, income shall be deemed equal to be amended to
a sum @ 8% of the turnover or higher exclude professions,
income as per books. Section 44AD is agency business and
applicable to any business except the business in respect of
business of plying, hiring or leasing goods which the earnings are
carriages referred to in section 44AE, in the form of
agency business, commission / brokerage commission or
income business and whose total turnover brokerage.
or gross receipts in the previous year does
not exceed an amount of Rs. 2crore. It was
further amended by the Finance Act, 2016.
Applicability of section 44AD
The Finance Act, 2012 had inserted sub-
section (6) with retrospective effect from
1st April, 2011 to clarify that the
presumptive tax provisions under section
44AD shall not be applicable to, inter alia,
persons earning income in the nature of
commission or brokerage or 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.
58. Benefit of Section 44AD relating to presumptive taxation The benefit of section
presumptive applies only to businesses run by residents 44AD should also be
taxation to Individual, HUF and Firms excluding LLP. made available to LLP.
LLP Tax on presumptive basis should be extended
to all assessees, including a LLP. Only
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- Section section 44AD excludes LLP, for which there
44AD appears to be no cogent reason. Otherwise
under the Act, a LLP and a Firm are treated at
par.
59. Omission of In section 44AD of the Income-tax Act, with The new sub section (4)
sub- section effect from the 1st day of April, 2017,-- (a) in may be deleted and the
concept of declaration
(4) to Sectionsub-section (2), the proviso shall be omitted;
of deemed income for
44AD (b) for sub-sections (4) and (5), the following
continuous period of 5
sub-sections shall be substituted, namely:-- years to be removed
"(4) Where an eligible assessee declares and status quo may be
profit for any previous year in accordance with maintained.
the provisions of this section and he declares
profit for any of the five assessment years
relevant to the previous year succeeding
such previous year not in accordance with
the provisions of sub-section (1), he shall
not be eligible to claim the benefit of the
provisions of this section for five
assessment years subsequent to the
assessment year relevant to the previous
year in which the profit has not been declared
in accordance with the provisions of sub-
section (1).
The businesses are highly unpredictable and
casting additional burden of continuous
reporting of presumptive income for five years
will be counterproductive and small
businesses will be hit hard and will be pushed
out of simplified scheme by this amendment
defeating the very purpose of introducing
presumptive taxation and will severely affect
ease of doing business.
60. Section The Finance Act, 2016 has inserted a new
44ADA - section 44ADA providing for special
Special provision for computing profits and gains of
provision for profession on presumptive basis. This
computing measure would definitely help the specified
profits and professionals in payment as well as
gains of compliances under the income-tax law.
profession
on
presumptive
basis
Issues and
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concerns
arising there
from to be
addressed
a) Threshold The sub-section (1) provides that: It is suggested that the
limit of Rs 50 threshold limit of Rs
lakhs may be 50 lakh may be raised
"Notwithstanding anything contained in
increased appropriately so that a
sections 28 to 43C, in the case of an
sizable percentage of
assessee, being a resident in India, who is
professionals in the
engaged in a profession referred to in sub-
small and medium
section (1) of section 44AA and whose total
segment are covered
gross receipts do not exceed fifty lakh
under the said
rupees in a previous year, a sum equal to
provisions; which
fifty per cent. of the total gross receipts of
would ultimately lead
the assessee in the previous year on
to the achievement of
account of such profession or, as the case
stated objective of
may be, a sum higher than the aforesaid
introducing the new
sum claimed to have been earned by the
provision.
assessee, shall be deemed to be the profits
and gains of such profession chargeable to
tax under the head "Profits and gains of
business or profession".
The threshold limit of Rs 50 lakhs appears
to be low. Consequently, this provision may
not achieve the intended objective of
providing relief to professionals in the small
and medium segment. Even the Income
Tax Simplification Committee headed by
Justice R V Easwar recommended a
threshold limit of Rs 1 crore. This appears
to be a more justifiable limit considering the
present economic conditions prevailing in
the country.
b) Rate of The rate of 50% appears to be on the higher It is suggested that the
estimated tax side and may cause very high tax incidence estimated rate of
@ 50% too on such professionals particularly since the income @ 50% of the
high scheme is intended to cover professionals total gross receipts
with low gross receipts/total turnover may be reduced
resulting in low margins due to nature of appropriately
work and high competition. This high rate considering the high
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may cause a lot of professionals not to opt cost of providing the
for this scheme thereby defeating the services by specified
ultimate objective of introducing this professionals
provision. specially the small tax
Considering the above reasons, the profit payers having income
@ 50% is difficult to achieve specially for from profession.
intended professionals with low gross
receipts/total turnover. Also, the Income
Tax Simplification Committee headed by
Justice R V Easwar has recommended the
rate of 33.33% of the receipts as the
income from profession.
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61. Section 45(5A) The Finance Act 2017 inserted It is suggested that:
- Special sub-section (5A) in the existing
provision for section 45 to provide that the
a) In a case, where only some
computation capital gains arising to an
of the units of flats/floors are
of capital gain individual or Hindu undivided
transferred by the owner when
in case of joint family under a Joint
the project is in progress, the
development Development Agreement shall
benefit of this provision may
agreement be taxed in the year in which
not be denied in respect of
(JDA) - completion certificate for the
capital gains arising from sale
Certain whole or part of the project is
of the entire share of owner's
concerns to be received, based on the stamp
property. The benefit may
addressed and duty valuation on the date of
continue to be available in
scope to be issue of certificate of completion
respect of capital gains
enlarged as increased by cash
arising from those units which
consideration received, if any.
are transferred after receipt of
However, the above provisions completion certificate. This
shall not apply where the would address the concern of
assessee transfers his share in the tax payer and at the same
the project on or before the date time, the Government would
of issue of said certificate of realise revenue at an early
completion, and the capital point of time in respect of
gains shall be deemed to be the those units which were
income of the year in which such transferred when the project is
transfer takes place. in progress.
Relief is provided to individuals
and HUFs on transfer of capital
b) The benefit of this section
asset by postponing the date of
may be extended to assessees
taxability from the date of
other than individuals and
transfer to the date of obtaining
HUFs also.
of the Completion Certificate
which was a matter of concern
since quite a long time. This is a c) The benefit of this section
very welcome provision which may also be extended to cases
addresses the concern of the tax where the property is held as
payer in having to pay tax when a business asset.
he has still not realised the
income from the project. d) The safeguards contained
in section 50C may be
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Issues incorporated in section 45(5A)
as well.
a) In case the owner transfers
his share of the property before e) In order to ensure symmetry
receipt of the Completion and consistency, the
Certificate, then, the benefit definition of Competent
envisaged in this amendment authority may be the same as
will not be available to him. This per section 2(p) of the Real
may cause genuine difficulty Estate (Regulation and
since typically in these kinds of Development) Act, 2016
JDAs, the owner receives wherein "Competent
several units of flats/floors as his Authority" has been defined
share of property and while the as follows- "competent
project is in progress some of authority" means the local
the units may be sold by him. authority or any authority
Since only some of the units created or established under
may be transferred when the any law for the time being in
project is in progress, the benefit force by the appropriate
of this provision may not be Government which exercises
denied in respect of capital authority over land under its
gains arising from sale of his jurisdiction, and has powers
entire share of property. to give permission for
b) The applicability of this development of such
section has been restricted to immovable property;
Individuals and HUFs. The
difficulty envisaged by the f) In order to enable the
legislature is faced by all assessee to claim exemption
assessees and therefore, this under section 54/54F, it is
section may be made applicable suggested that the time limit
to all classes of assessees. under sections 54/54F are
c) Due to sluggishness in the reckoned from the date of
economy and scarcity of funds, issuance of completion
developers too are entering into certificate.
this kind of arrangement
wherein they forgo part of their
total profits by entrusting the
task of development to another
developer who has the funds
required for development of the
property. Therefore, similar
provision may also be
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introduced for property held as a
business asset.
d) The aforesaid provisions
appear to be in line with the
existing provisions of section
50C. However, certain
safeguards contained in section
50C do not find place in the
section 45(5A). For example,
section 50C provides that where
the assessee claims before any
Assessing Officer that the value
adopted or assessed or
assessable by the stamp
valuation authority exceeds the
fair market value of the property
as on the date of transfer, then
the Assessing Officer may refer
the valuation of the capital asset
to a Valuation Officer.
Similar safeguards may be
incorporated in section 45(5A)
as well, in a case where stamp
duty value is higher than FMV.
e) Competent authority is
defined in the Explanation below
section 45(5A) to mean the
authority empowered to approve
the building plan by or under any
law for the time being in force.
This does not appear to be in
sync with the definition of
"competent authority" as per
section 2(p) of the Real Estate
(Regulation and Development)
Act, 2016.
f) The provisions of this sub-
section defers the taxability of
capital gains to the year of
issuance of the completion
certificate. However, the time
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limit for claiming benefit under
sections 54 and 54F of the Act is
reckoned from the date of
transfer.
62. 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
(a) Merger succession. As business grows to be revenue neutral.
and there will be merger, (SUGGESTIONS FOR
Amalgamation amalgamation, demerger of RATIONALIZATION OF THE
of Limited LLP's as wel l. At present merger PROVISIONS OF DIRECT TAX
Liability and amalgamation of companies LAWS)
Partnership to is Revenue neutral.
be Revenue
Neutral.
(b) Section 47 Clause (viab) is inserted in New clauses may be inserted
Insertion of section 47 so as to provide in section 47 to provide for
clause (viab) exemption in respect of any (i) consequent exemption in
to provide transfer in a scheme of respect of transfer of shares
exemption in amalgamation, of a capital by the resident shareholders
respect of asset, being a share of a foreign of the amalgamating foreign
transfer of company which derives, directly company if transfer is made in
capital asset or indirectly, its value consideration of the allotment
consequent substantially from the share or to him of any shares or shares
to shares of an Indian company, in the amalgamated foreign
amalgamatio held by the amalgamating company.
n of foreign foreign company to the
(ii) exemption in respect of
companies - amalgamated foreign company.
transfer in a scheme of
Consequent business reorganisation of a
exemption to However, no clause has been capital asset, being a share of
be provided inserted to provide consequent a foreign company, which
in respect of exemption in respect of transfer derives, directly or indirectly,
transfer of of shares by the resident its value substantially from
shares by shareholders of amalgamating the share or shares of an
resident foreign company in Indian company
shareholders consideration of allotment of
shares of amalgamated foreign
company. This appears to be an
inadvertent omission, since in
case of exemption under section
47(vi) in respect of transfer of
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capital asset in a scheme of
amalgamation by an
amalgamating company to the
amalgamated company, where
the amalgamated company is an
Indian company, consequent
exemption has been provided
under section 47(vii) in the
hands of the shareholders of the
amalgamating company for
transfer of shares of
amalgamating company in
consideration of allotment of
shares of amalgamated
company.
Further, transfer in a scheme of
business reorganization of a
capital asset, being a share of a
foreign company, which derives,
directly or indirectly, its value
substantially from the share or
shares of an Indian company
should also be exempt under
section 47. Business
reorganization may be defined
to mean the reorganization of
business, otherwise than by way
of amalgamation or demerger of
foreign companies.
(c) The existing section 47(xiiib) Many companies are now
Consequential provides that no capital gains converting themselves to LLP.
amendment tax is payable on conversion With a view to popularize the
required in of a private limited or unlisted concept of LLP and also in
section public company into LLP view of the fact that such
47(xiiib) subject to certain conditions. provision should apply to all
Proviso (e) states that this cases of revenue neutral
provision will not apply if the conversions from one form of
total sales, turnover or gross entity to another form of
receipts in the business of any entity, there should be no
of the three preceeding years threshold on turnover, to avail
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exceed Rs. 60 lakhs. Since this the benefit under section
was an amendment to facilitate 47(xiiib) or alternatively, the
conversion of private limited limit of sixty Lacs rupees
companies and unlisted should be substantially
companies into LLPs, ideally, enhanced or the condition of
there should be no restriction on the turnover should be
the turnover to avail the benefit deleted.
of section 47(xiiib).It may also (SUGGESTIONS FOR
be noted that the parent Act i.e. RATIONALIZATION OF THE
Limited Liability Partnership Act PROVISIONS OF DIRECT TAX
2008, allows this conversion LAWS)
without any such restrictions.
(d) Extension Extending exemption from It is suggested that the benefit
of benefit of Capital Gains Tax for conversion of exemption in respect to
conversion to to LLP by Partnership and Sole conversion to LLP may also be
Sole Proprietary Firms. Presently extended to Sole Proprietary
Proprietary clause (xiiib) to section 47 of the and Partnership Firms
and Act provides for an exemption on intending to convert itself into
Partnership levy of capital gains tax in the LLP.
Firms event of transfer of a capital
assets or shares held by/in the
private limited company or
unlisted public company on
conversion of such company to
LLP on fulfillment of various
conditions. However, such an
exemption is not provided to
Sole Proprietary and Partnership
Firms intending to convert itself
into LLP to achieve an organized
and regulated entity structure
whereby retaining the flexibility
and minimizing the formalities.
(e)Section LLP is a preferred form of 1. In view of the aforesaid, it is
47(xiiib) - organisation for smooth conduct suggested that the condition
Conversion of of business. Accordingly, section of asset base being less than
company into 47(xiiib) provides for an Rs. 5 crores be rationalised.
LLP exemption enabling smooth
Clarification conversion, subject to
2. Also, the scope of the term
required compliance with the conditions.
`value of total assets as
relating to There was a case for making the
appearing in the books of
exemption more liberal by
accounts' be clarified to
relaxing the turnover limit which
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additional is one of the present conditions. provide certainty and reduce
condition However, conversion will litigation .
become all the more difficult as
a result of an additional condition
which will deny exemption in a
case where the company was
possessed of total assets worth
Rs. 5 crores in any of the 3
years.
The expression "value of total
assets appearing in the books of
accounts" is not defined and may
create certain interpretational
issues such as whether status of
assets is to be seen on balance
sheet date or even one day' s
presence during the year will be
considered if asset no longer
exists with the assessee as on
balance sheet date. Also,
whether `Miscellaneous
Expense' as an item reflected on
balance sheet will constitute an
asset, treatment of advance tax
paid shown on asset side (with
corresponding provisions for tax
on liability side), etc. are the
other issues which need to be
addressed.
63. Business Presently, section 47(x)/(xa) In view of the aforesaid, it is
reorganizatio clarifies that conversion of suggested that Section 79
ns bonds/debentures (including may be appropriately
FCCBs/FCEBs) into shares or amended since abusive
Section
debentures shall not be transactions of change in
47(x)/(xa) regarded as `transfer' and hence shareholding with a view to
shall not trigger capital gains. avoid or reduce tax liability
shall be addressed by GAAR
In absence of similar from 1st April, 2017.
clarification, there is ambiguity
when there is conversion of
equity shares into preference
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shares or conversion of one
class of shares into another
class of shares. Such
conversions do not trigger any
immediate cash flows for the
investors.
Section 79 denies carry forward
of loss for closely held
companies where there is
change in shareholding beyond
50% from shareholding which
prevailed in the year of loss. This
provision is intended as anti-
abuse provision to prevent
business reorganizations with
sole motive of benefit of tax
losses. However, this provision
acts as impediment in many
bonafide circumstances like
investment by PE investor in a
start-up company or
amalgamation or demerger of
shareholder company or intra-
group reorganization.
64. Sections. Section 47 (xa) read with Section It is suggested that appropriate
47(x) & (xa) 49(2A) effectively provide that amendment should be made in
and 49(2A) -
conversion of FCEB in to shares of Section 2(42A) to provide that
Capital Gain
any company will not give rise to holding period of such shares
on Conversion
of Foreign capital gain and for the purpose of should be taken from the date
Currency computing capital gain arising on of acquisition of
Exchangeable sale of such shares at subsequent FCEB/debentures/ other bonds
Bonds (FCEB) stage, cost of acquisition shall be and not from the date of
and other taken as the relevant part of cost allotment of shares.
Bonds & of FCEB. There is no
Debentures. corresponding provision for taking
holding period of the shares from
the day of acquisition of the Bonds
[FCEB]. Similar difficulty exists in
case of conversion of debentures
and other bonds in to shares for
which also similar provision exists
in Section 47(x).
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65. Conversion of At present, the conversion of one It should be clarified as to
One kind of kind of share into another kind of whether such conversion is
share into share has a dichotomy in as far intended to be tax exempt, and
another the period of holding and cost of if so, the relevant amendments
acquisition is concerned. in section 47 and section 2(42A)
should be carried out.
Section 55(2)(v) states that cost of
acquisition of the converted
shares received by an assesse
would be the cost of the original
shares from which these
converted shares were derived.
This seems to indicate that the
original shares and the converted
shares are similar and hence
there is no transfer on such
conversion.
However, section 47 does not
provide any exemption on such
conversion other than conversion
of preference shares into equity
shares as per clause (xb).
Additionally, section 2(42A)(f)
states that the period of holding for
the converted share shall be from
the date of receipt of the
converted share and not from the
date of acquisition of the original
share.
66. Section 50C - In relation to computing capital It is suggested that the
Option for gains tax liability on transfer of amendment may be treated as
adopting land or building, amendment clarificatory in nature since it
stamp duty made via the Finance Act, 2016 conveys the real intent of law
value on date gives an option for considering to ensure equity in tax
of agreement the stamp duty value as on date treatment vis-à-vis section
Amendment of agreement instead of stamp 43CA.Alternatively, a circular
to be treated duty value on date of may be issued to achieve the
as registration, subject to part or same result in pending
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clarificatory whole of the consideration being assessments or appeals.
in nature received by way of account
payee cheque or bank draft or
ECS through bank account on or
before the date of agreement.
The said amendment in section
50C is in line with the similar
provision already existing in
section 43CA. This provision
was, therefore, long due to be
incorporated in section 50C.
The incorporation of similar
provision in section 50C has
alleviated the genuine hardship
faced by the taxpayers.
67. Section 50CA The Finance Act 2017 inserted a It is suggested that:
and section new section 50CA to provide
56(2)(x)(c) - that in case of transfer of shares
· Keeping in mind the
Fair Market of a company other than quoted
consequential double
Value to be shares, the fair market value of
taxation arising on
full value of such shares determined in the
account of the same
consideration prescribed manner shall be
income being subject to
in case of deemed to be the full value of
tax both in the hands of
transfer of consideration for the purpose of
seller and recipient,
unquoted computing income chargeable to
suitable amendment may
shares tax as capital gains.
be made to prevent
Amendment Further, Explanation to the said unjust enrichment of the
required in section states that "quoted revenue.
view of share" means the share quoted
double on any recognised stock
taxation in the exchange with regularity from · The definition of quoted
hands of time to time, where the quotation shares is very subjective
seller as well of such share is based on and complicated. In
as buyer current transaction made in the actual practice, it may
ordinary course of business. involve problems of
interpretation, which
The Finance Act 2017 inserted
would invite unending
new clause (x) in sub-section (2)
litigation. It is, therefore,
of section 56 so as to provide
suggested that this
that where any person receives
section should be made
immovable property without
applicable to transfer of
consideration and its stamp duty
shares of a company in
value exceeds Rs.50,000, the
which the public is not
same would be subject to tax.
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Likewise, if any person receives substantially interested.
immovable property for
inadequate consideration, and
the difference between the
stamp duty value and actual
consideration exceeds
Rs.50,000, the difference would
be subject to tax in the hands of
the recipient under the head
"Income from other sources".
Clause (x)(c) provides that
where any person receives any
property other than immovable
property -
Without consideration, the
aggregate fair market value of
which exceeds fifty thousand
rupees, the whole of the
aggregate fair market value of
such property shall be
chargeable to tax as `income
from other sources'.
For a consideration which is
less than the aggregate fair
market value of the property by
an amount exceeding fifty
thousand rupees, the aggregate
fair market value of such
property as exceeds such
consideration shall be
chargeable to tax as `income
from other sources'.
In light of the aforesaid
provision, there will be a double
taxation of the same income on
deeming basis as explained in
the example below:
Example:
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For example,' X' transfers his
unquoted shares purchased at a
cost of Rs.8 lakhs to `Y' at Rs.
10 lakhs whereas the Fair
Market Value of the shares as
determined in the prescribed
manner is Rs. 1 crore. Then in
this situation, the provisions of
Section 50CA would be
attracted in the hands of the
seller, whose full value of
consideration for computation of
capital gains would be Rs.1
crore. Further, `Y' who is
purchaser would be liable to tax
under section 56(2)(x)(c) on Rs.
90 lakhs (i.e. Rs. 1 crore less
Rs. 10 lakhs) as income from
other sources.
Hence, the difference of Rs. 90
lakhs between the fair market
value and the actual
consideration will be taxable:
under section 50CA, in the
hands of seller; and
under section 56(2)(x), in the
hands of recipient.
Further, even though the
recipient, at the time of sale of
such shares at a later date
would treat the FMV as the Cost
of Acquisition, tax has been
collected upfront and at times it
may happen that the person
may not sell shares at a later
date.
68. Section 50CA In case, where the shares of a It is therefore suggested that
- Valuation of company are transferred in in case where the shares of a
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shares of a distressed condition, the rule company are transferred in
company in 11UA/11UAA prescribing the distressed condition, the FMV
distress method to determine the FMV as determined by the
would not provide the correct merchant banker or an
FMV of shares. accountant as defined in Rule
11U shall be considered.
The said Rules do not provide
the method to value the shares
of a company sold/transferred in
distressed condition.
69. Section 54 Section 54(1) has been It is suggested that an
and 54F - amended by the Finance (No.2) explanation be inserted in the
Capital gains Act, 2014 by substituting sections 54 and section 54F
exemption in "constructed, a residential clarifying the intent with
case of house", with "constructed, one regard to meaning of one
investment in residential house in India". RESIDENTIAL HOUSE in the
ONE Similar amendment is made in context of the aforesaid
residential section 54F(1). sections.
house
property in
Even though there is a positive
INDIA
intent to put to rest the
controversy and the conflicting
judgements on the meaning of `a
residential house', certain
issues are still expected to
continue. A doubt would still
remain as to what constitutes
one "RESIDENTIAL HOUSE" as
most of the past litigations on
Section 54(1) and 54F(1) is on
this very issue.
In ITO vs. SushilaJhaveri 292
ITR (AT) 1 (Mum)(SB ), Hon'ble
Special Bench of Mumbai ITAT
held that where more than one
unit is purchased which are
adjacent to each other and are
converted into one house for the
purpose of residence by having
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common passage, common
kitchen, etc., then, it would be a
case of investment in one
residential house and
consequently, the assessee
would be entitled to exemption.
The assessee making
investment 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. AnandaBasappa [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 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
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one registered sale deed or
more than one deed could not
be determinative of the building
being considered as one
residential unit or otherwise.
In the case of CIT vs. Gita
Duggal [2013] 357 ITR 153
(Delhi), the Assessing officer
disallowed the exemption in
respect of one floor out of two
floors constructed by the
assessee through a developer
since the floors were
independent of each other and
self-contained and therefore
they cannot be considered as
one unit of residence.
Accordingly, he held that the
assessee was not eligible for the
exemption under Section 54.
The Delhi High Court decided in
favour of assessee on the
ground that section 54/54F uses
the expression "a residential
house". The expression used is
not "a residential unit". The
Court felt that the fact that the
residential house consists of
several independent units
cannot be permitted to act as an
impediment to the allowance of
the deduction under Section
54/54F since it is neither
expressly nor by necessary
implication prohibited.
The above noted case laws
clearly bring out the point on the
confusion surrounding the
definition of `a residential
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house'. Even after the
amendment made by the
Finance (N.2) Act, 2014, doubts
will persist as to what would
constitute one RESIDENTIAL
HOUSE.
70. Certification a) At present deductions u/s 54, It is suggested that the
of deductions 54F, 54EC etc. are not subject assessee claiming deduction
claimed under to any audit or certification. The exceeding a specified amount
section 54, possibility that the assessee under the provisions of
54F, 54EC etc claims inaccurate amount of section 54, 54F, 54EC etc may
deduction under such provisions be required to obtain a
cannot be ruled out. In order to certificate from a Chartered
reduce such possibility of Accountant certifying the
furnishing of inaccurate accuracy of the 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.
71. Section 54EC- In furtherance of the existing a) Considering the fact that
Capital gains proviso to section 54EC, a new the new proviso takes care of
exemption on proviso has been inserted to the true intent of the law, and
investment in clarify that the investment made appears to be contrary to the
Specified by an assessee in the long-term existing proviso, thereby
Bonds during specified asset, from capital gains causing hardship to the
the financial arising from transfer of one or genuine taxpayers, it is
year more original assets, during the suggested that the act be
financial year in which the amended to substitute the first
original asset or assets are proviso with the newly
transferred and in the subsequent
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financial year does not exceed inserted proviso.
fifty lakh rupees.
The change is proposed to plug b) Considering the
the revenue leakage and to clarify inflationary conditions in the
the real intent of the law. Since, economy, it is further
the new proviso is in furtherance suggested that the said limit
of the existing proviso; it may of Rs.50 Lakhs may be raised
cause hardship in genuine cases to Rs. 1 crore.
where investment has to be made
in long term specified asset in
respect of two previous years in a
single financial year. For example,
an assessee selling a long term
capital asset in February, 2015
(Previous year 2014-15) may
invest in Section 54EC assets
either in 2014-15 or 2015-16 (upto
August,2015). However, in
respect of any long term capital
asset sold by him in the year
2015-16, he will not be able to
invest in 54EC bonds since
exemption will be available to him
due to applicability of first proviso
to section 54EC.
72. Exemption With difficulties being faced by It is suggested that where
u/s 54 not to the Real Estate Sector business substantial part of the
be denied due (due to delay in clearances, non- consideration of the new
to delay in availability of finance and a flat has been paid, but
completion of sluggish demand) numerous completion of
project projects are delayed in construction has been
beyond the execution. As a result, an delayed for reasons
control of assessee who has sold a house beyond the control of the
assessee and invested in another flat assessee; exemption u/s
which is under construction by a 54 may not be denied.
builder /developer and is to be Suitable safeguards to
completed within the time limit prevent misuse of such
prescribed u/s 54, is being provision may be
denied exemption for no fault on incorporated in the
his part. statute. However,
hardship caused to
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genuine home-buyers,
should be alleviated.
73. Capital gain The Finance Act, 2012 had It is suggested:
on transfer of inserted a new section 54GB to a) The benefit under
residential exemptlong-term capital gains section 54GB may be
property to be on transfer of a residential extended to long-term capital
taxed in property, being a house or a plot gains on sale of any capital
certain cases- of land, owned by an individual asset which is invested in the
Section 54GB or HUF, if the net consideration equity of a new start-up SME
on sale of property, is invested in company for purchase of new
equity of a new start-up SME plant and machinery within
company in the manufacturing the prescribed time.
sector which is utilised by the
b) Investment in
company to purchase new plant
existing SME company may
and machinery.
also be considered for the
Since this section was purpose of such exemption.
introduced with a view to
c) Further, investment
incentivise investment in the
in LLP which satisfies the
Small and Medium Enterprises
condition of SME enterprises
(SME) in the manufacturing
may also be permitted,
sector as per the National
subject to conditions as may
Manufacturing Policy announced
be necessary. Restrictive
by the Government in 2011, the
clauses may be inserted in
benefit of exemption under
line with the appropriate
section 54GB should not be
clauses of the proviso to
restricted to capital gains from
section 47(xiiib).
sale of residential house and plot
of land alone, but should be d) The restricted time
extended to long term capital limit for acquiring new plant
gains derived from other capital and 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
the following conditions.
new plant and machinery
(i) The investee company within a period of 2 years
should qualify as a Small or from the date on which the
Medium SME under the Micro, assessee makes the
Small and Medium Enterprises investment in its equity
Act, 2006. shares.
(ii) The company should e) The period of 5 years
be engaged in the business of for retaining the equity shares
may be reduced to 3 years, in
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manufacture of an article or a line with the requirement
thing. under section 54EC. Suitable
(iii) SME company should exceptions for takeover/
be incorporated within the merger/ amalgamations etc.
period from 1 st of April of the may also be provided.
year in which capital gain arises f) Similarly, lock-in-
to the assessee and before the period for plant and
due date for filing the return by machinery acquired by the
the assessee u/s 139 (1). SME company may be
(iv) The assessee should reduced from 5 years to 3
hold more than 50% of the years.
share capital or the voting right g) It may be clarified
after the subscription in the that the net consideration
shares of a SME company. after deduction of tax at
Sometimes in case of capital source @1% may be required
intensive SME , a single co- to be invested, so that there is
owner may not be able to fund no cash flow mismatch.
the said SME from his own share h) In case of a Sale of
of sale proceeds of the property joint property , the condition
sold which will prevent formation regarding holding of more
of a new SME so as to achieve than 50% of the share capital
the desired objects. of the SME company by the
(v) The assessee will not assessee should be deemed
be able to transfer the above to have been fulfilled if the co-
shares for a period of 5 years. owners of the said property
It may be noted that the lock-in hold more than 50% of the
period under section 54EC is Share Capital of the SME
only 3 years. company.
(vi) The company will have (SUGGESTIONS FOR
to utilize the amount invested by RATIONALIZATION OF THE
the assessee in the purchase of PROVISIONS OF DIRECT TAX
new plant and machinery within a LAWS)
period of one year from the date
of subscription in equity shares
of an eligible company. If the
entire 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
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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.
74. Reference to This section empowers the It is recommended that the
the Valuation assessing officer to refer the meaning of variance under
Officer matter to the valuation officer for clause (a) be defined and
the purposes of ascertaining the given a reasonable tolerance
(Section 55A)
fair market value of the capital limit. If the variance is within
asset. such limits, matter should not
be referred to the valuation
Under clause (a), the power has officer.
been given to the valuation
officer to refer the matter, where Further it is also
the value of the asset has been recommended that the limits
claimed by the assesse in prescribed under Rule 111AA
accordance with the estimate be enhanced, percentage
made by the registered valuer being 25% and value being Rs
and the assessing officer is of the 10,00,000 so that substantial
opinion that the value is in litigation on the reference to
variance with its fair market valuation officer will be
value. reduced.
The variance has not been
defined by the board and hence
it is creating lot of difficulties to
the assesses as even in case of
minor variation, the matters are
getting referred to the valuation
officer.
Further under clause (b), the
assessing officer can refer the
matter where he is of the opinion
that the fair market value of the
asset exceeds the value claimed
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by the assesse by more than
such percentage of the value of
the asset or by more than such
amount as may be prescribed.
The above limit has been
prescribed under Rule 111AA by
IT (Fourth Amendment) Rules,
1972. The limit in percentage is
15% and in value is Rs 25,000.
Looking at the situation today
and the values of immovable
properties, the limits defined are
too less and needs a revision
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PART F-INCOME FROM OTHER SOURCES
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No
75. Definition of the Under the existing provisions of Suggestions:
term relative- section 56(2)(vii), any sum or (i) The provisions of
Explanation to property received by an individual clubbing of income as
Section 56(2) (vii) or HUF for inadequate contained in Chapter V
consideration or without of the Income-tax Act,
consideration is deemed as 1961 should not be
income and is taxed under the attracted once the sum
head `Income from other sources'. of money or value of
However, in case of any assets are subject to
individual, receipts from specified tax under section 56(2)
relatives are excluded from the in the hands of the
purview and hence, are not recipient.
taxable. (ii) Lineal descendents of
The Explanation to section brothers and sisters of
56(2)(vii) was amended by the self and spouse may
Finance Act, 2012 so as to provide also be included in the
that any sum or property received definition of "relative"
without consideration or in line with the
inadequate consideration by an provisions of section
HUF from its members would also 13(3).
be excluded from taxation. (iii) The application of the
The provisions of clubbing of provision should also
income as contained in Chapter V be extended to the
of the Income-tax Act, 1961 are relatives of the
attracted in respect of income members of HUF.
from any sum of money or value of (SUGGESTIONS FOR
assets transferred to a non- RATIONALIZATION OF THE
relative. Once the sum of money PROVISIONS OF DIRECT
or value of assets are subject to TAX LAWS)
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,
does not include nieces and
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Sr. Section Issue/Justification Suggestion
No
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.
76. Section Clause (ix) is inserted in section It is suggested that a
56(2)(ix) - 56(2) by Finance (No. 2) Act, 2014 suitable amendment may be
Taxability of to provide for taxability of any sum made in the Act which
forfeited received as an advance or allows the benefit of
advance for otherwise in the course of deduction of forfeited
transfer of a negotiations for transfer of capital amount to the payer of such
capital asset asset. Since it is a capital receipt it amount.
was earlier allowed as a deduction
from the cost of acquisition under
section 51. The same is now taxed
as a revenue receipt in the year of
receipt under the head "Income
from other sources".
Making it taxable in the year of
receipt is a good move and in the
interest of the revenue. However,
the other side of the same
transaction also needs
consideration i.e. from the payer's
point of view whose money has
been forfeited. Since the receipt is
deemed to be revenue due to the
enactment, it follows that the
expenses in the hands of the payer
would also be revenue in nature.
Consequently, corresponding
benefit needs to be provided to the
payer.
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No
77. Taxation on An amendment should be
The Finance Act, 2017 expanded
transfer of made in proviso to clause
the scope of section 56(2)(vii) and
money/property (x) of sub-section (2) to
56(2)(viia) by inserting a new clause
without section 56 of the Act, which
(x) in sub-section (2) of section 56,
provides exemption to
consideration so as to provide that receipt of the
certain assesses/
or for sum of money or any property by
transactions/transfers from
inadequate any person, without consideration or
applicability of section
consideration for inadequate consideration in
56(2)(x) to include
excess of Rs. 50,000 shall be
`transaction not regarded
chargeable to tax in the hands of
as transfer under clause (iv)
recipient under the head "Income
and clause (v) of section 47'
from other sources".
along with other transaction
It has also widened the scope of not regarded as transfer
existing exceptions by including under clause [(i), (vi), (via),
receipt by certain trusts or (viaa), (vib), (vic), (vica),
institutions and receipt by way of (vicb), (vid), (vii) of section
certain transfers not regarded as 47)
transfer under section 47 namely:
Section Particulars
reference
Section In relation to
47(i) distribution of
capital assets
on partition of
HUF
Section In relation to
47(vi) / transfer of
47(via) / capital asset
47(vii) in scheme of
amalgamation
Section In relation to
47(viaa) transfer in a
scheme of
amalgamation
of banking
company with
banking
institution
Section In relation to
47(vib)/ transfer of
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Sr. Section Issue/Justification Suggestion
No
47(vic)/ capital asset
47(vid) in demerger
Section In relation to
47(vica) / transfer of
47(vicb) capital asset
in business
reorganization
by a co-
operative
bank to
successor co-
operative
bank
The below exempt transfers are
currently not forming part of the
exception to section 56(2)(x) of the
Act:
· As per provisions of section
47(iv) of the Act, any
transfer of capital asset by a
company to its subsidiary
company is exempt from tax
where
(a) the parent company or its
nominees holds the whole of
the share capital of the
subsidiary company; and
(b) the subsidiary company is an
Indian Company.
· Similarly as per
provisions of section
47(v) of the Act, any
transfer of capital asset
by subsidiary company
to its holding company
is exempt from tax
where:
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No
(a) the whole of the share
capital of the
subsidiary company is
held by the holding
company; and
(b) the holding company
is an Indian Company.
Akin to amalgamation/demerger
such inter-se transfers between
holding company and subsidiary
company are typically undertaken
with an intention of internal re-
organization or to comply with some
regulatory requirement [Example:
Transfer of shares of group
companies, by the promoter holding
company to its subsidiary company
(being a non-operative financial
holding company which shall hold
the Banking and other financial
services entities) to comply with
Banking Regulations for the
purpose of Universal Bank Licence,
which requires all the regulated
financial service entities of the group
to be held under a non-operative
financial holding company
structure].
However, while exemption from
applicability of section 56(2)(x) has
been provided to certain transfers
[which are exempt transfers under
section 47] in the nature of
amalgamation/demerger/business
reorganisations, no such exemption
in section 56(2)(x) has been
provided to transfer of capital asset
by holding company to its subsidiary
company and vice-a versa [which is
also an exempt transfer under
section 47(iv) and section 47(v) of
the Act].
Consequently, such transfer of
capital asset (including shares) by
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Sr. Section Issue/Justification Suggestion
No
holding company to its subsidiary
company or vice-a-versa, without
consideration or for a consideration
which is less than FMV5, by an
amount exceeding Rs.50,000,
would be subjected to tax as
`Income from other source" in the
hands of the recipient.
Thus, despite the fact that transfer of
capital asset by holding company to
Indian subsidiary company and
subsidiary company to Indian parent
is not regarded as `transfer' under
section 47(iv) and section 47(v) of
the Act, the same would be
subjected to tax in the hands of the
recipient under the newly introduced
section 56(2)(x) of the Act. This
would defeat the whole purpose of
providing exemption to such internal
re-organisations under section
47(iv) and section 47(v) of the Act
and would result in genuine
hardship to the assessee.
Further, the cost of acquisition of
capital asset in the case of transfers
covered within the provisions of
section 47(iv) and section 47(v) [i.e.
transfer of capital asset between
holding company and subsidiary
company], shall be the cost for
which the previous owner acquired
the property. Thus, there would be a
inconsistency between the
provisions of section 47(iv) and
5Determined in accordance with Rule 11U/ 11UA of the Income-tax Rules, 1962
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Sr. Section Issue/Justification Suggestion
No
section 47(v) read with section 49
which stipulate transfer at cost
versus section 56(2)(x) which
stipulates transfer at fair market
value. Accordingly, by bringing the
aforesaid transactions under the
ambit of section 56(2)(x) would not
serve any meaningful purpose and
would be contrary to the provisions
of section 47(iv) and (v).
78. Section 56 - The Finance Act, 2017 inserted a It is suggested that:
Insertion of new clause (x) in sub-section (2) of
new clause (x) section 56 so as to provide that i. In order to avoid the
in section 56(2) receipt of the sum of money or the unintended hardship to
vide the property by any person without small taxpayer, the limit of
Finance Act, consideration or for inadequate exemption may be
2017 consideration in excess of Rs. increased from Rs. 50,000
50,000 shall be chargeable to tax in to Rs. 5 lakhs.
the hands of the recipient under the
head "Income from other sources". ii. Suitable exception to
carve out the case of
Further, the following are the subvention granted by
concerns in respect of the aforesaid parent company to
section: subsidiary company from
(i) The scope of section is widened, the purview of section
but at the same time, the limit of 56(2)(x) may be provided.
exemption of Rs. 50,000 fixed as
back as in 2006, has not been
increased considering the inflation
and reduction in the value of money.
(ii) Revival of Sick Companies are
necessary and is in overall interest
of the economy. Taxing the amount
received by the sick companies may
not be fair. Considering this,
subvention granted by parent
company to subsidiary company to
recoup the financial losses or to
improve the financial health of the
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No
company was considered as capital
receipt.
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CHAPTER VI
AGGREGATION OF INCOME AND SET OFF OR
CARRY FORWARD OF LOSS
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
79. Restriction of The Finance Act 2017 introduced The restriction should apply to
set off of loss a new section 71(3A) to provide loss arising on account of
from House that with effect from financial year interest payable on loans
Property 2017-18, set-off of loss under the availed after 31st March 2017.
head "Income from house
property" against any other head
of income should be restricted
upto Rs 2 lakh per year. In other
words, amount of loss under the
head "Income from house
property' exceeding Rs 2 lakh will
not be entitled to be set-off.
This restriction affect thousands
of taxpayers who have availed
housing loan(s) in the past based
on the provisions of the Act on
set-off as it stood then. This also
have an adverse impact on the
real estate sector.
80. Section 79 In a recent decision, the It is recommended that it be
carry forward Karnataka High Court (in the case clarified that whether section
and set-off of of AMCO Power Systems Ltd.) 79 would apply only to a
losses in held that the term beneficial change of more than 51% in the
certain cases shareholding as used in section immediate holding company, or
79 would apply to the ultimate whether it would also apply in
holding company as well, and not the case of a change in the
be restricted to the immediate ultimate holding company.
shareholding.
81. Section 79- The Finance Act, 2017 amended It is, therefore, suggested that
Carry forward section 79 to provide that where a the condition of continuous
and set off of change in shareholding has taken holding of the
loss in case of place in a previous year in the promoters/investors (being
eligible start- case of a company, not being a persons holding shares in the
ups - company in which the public are year of loss) be relaxed. Inter-
Condition to substantially interested and being se transfers between such
be further an eligible start-up as referred to shareholders be permitted.
relaxed in section 80-IAC of the Act, loss Also, it should suffice that the
shall be carried forward and set group of promoters/investors
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off against the income of the hold upto 26% of the voting
previous year, if all the power in the year of set-off. In
shareholders of such company any case, the turnover
which held shares carrying condition for a company to be
voting power on the last day of the an `eligible start up' may be
year or years in which the loss omitted in Explanation (ii)(b) to
was incurred, being the loss section 80IAC.
incurred during the period of 7
years beginning from the year in
Also, the period for carry
which such company is
forward and set-off of losses
incorporated, continue to hold
can be extended based on
those shares on the last day of
period of gestation in the
such previous year.
particular industry instead of
The existing provisions provide initial period of 7 years.
for restrictions on carry forward of
losses in case of substantial
change in shareholding of the
Indian company. As per the
current provisions, shareholders
of the company at the end of the
financial year in which the loss
was incurred must continue to
own at least 51% of the shares in
that company in the year in which
such carry forward loss is to be
set off; otherwise, the company
loses the ability to carry forward
such loss.
The Government, in pursuance of
the start-up action plan and
facilitating ease of doing
business, introduced a beneficial
regime for start-up to carry
forward and set off losses. It has
been provided that as long as all
the original shareholders of the
Company at the end of the
financial year in which the loss
was incurred continue to be
shareholders of such shares in
the financial year in which the
loss is to be set off, the benefit of
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The Institute of Chartered Accountants of India
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carry forward of loss would be
available.
Another issue is on account of
turnover condition specified in
Explanation (ii)(b) of section 80-
IAC for a company to qualify as
`eligible start up'. The condition is
that turnover of such company
should not exceed Rs. 25 Crore
anytime between F.Y. 2016-17 to
F.Y. 2020-21. This condition also
creates uncertainty for start ups in
the matter of section 79 limitation
as generally applicable to closely
held companies i.e., whether the
turnover limit has to be adhered
to in the year of set-off as well.
The condition of continuing to
hold all shares appears to be
applicable not only to the initial
promoters but also all persons
investing subsequently in the
start up, which may cause
genuine practical hardship. This
may also be practically difficult for
the start-up company to achieve
since PE investors generally look
at time frame of 3 to 5 years for
exit at a higher price. The exit
may happen either through
secondary sale in subsequent
round of PE funding or through
IPO. Any such exit will trigger
section 79 limitation for the start-
up company.
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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. No Section Issue/Justification Suggestion
82. Complexity The working of overall deduction The deduction for different
of internal u/s. 80C is quite complex with investments and expenditure
& external several internal caps and overall should be simplified with
cap to be computed with separate provisions/sub-
caps on
reference to other provisions. provisions for each investment
deduction with independent outer cap
Section For instance, for children tuition
80C fees, there is internal cap of Rs.
12,000 per child upto two
children. For premium on life
insurance policies, internal cap is
20% of sum assured and so on.
Similarly, there is internal cap of
Rs. 1,20,000 on eligible term
deposits with banks.
The overall cap of Rs. 1,50,000
applies jointly to s.80C, 80CCC
(pension policies) and 80CCD
(New Pension Scheme)
The overall cap of Rs. 1,50,000
does not offer any meaningful
benefit with multiple investments
clubbed under one single
provision.
DTC 2013 had attempted to
classify deduction into incentives
for savings (provident fund,
superannuation fund and life
insurance policy) and other
expenses under separate
provisions with independent
deductions.
83. Section At present, Tax Saving FDR is It is suggested that in the case
80C- annual allowed as deduction u/s 80C but of cumulative deposits, the
interest its interest is taxable. amount of annual interest
accruing on accruing may be deemed to
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cumulative It is pertinent to note that the have been reinvested for the
deposits deduction u/s 80C on reinvestment purpose of deduction under
of interest on NSC is available. section 80C.
84. Section Currently, deduction of Pro-rata deduction of single
80D mediclaim premium is allowed premium paid in year one
Mediclaim in the year in which the should be allowed over the
payment has been made. term of the policy. E.g. if the
premium
premium paid is Rs.42,000/- for
deduction a 3-year policy, Rs.14,000/-
There are many mediclaim
should be allowed each year
policies available in the market starting from the year in which
for which a single premium is the payment has been made
payable in year one but the
policy cover is for more than
one year. These policies are
more economical compared to
traditional yearly policies.
85. Donations Sub-section (5D) was inserted in It may be clarified as to
made of section 80G and sub-section (2A) whether the limit of Rs.10,000
any sum was inserted in section 80GGA to is applicable in respect of each
exceeding provide that no deduction shall individual contribution or
ten be allowed under these sections aggregate contributions to an
thousand in respect of donation of any sum institution or to all institutions
rupees in exceeding Rs.10,000 unless covered under section 80G(2)
cash- such sum is paid by any mode and section 80GGA(2),
sections other than cash. respectively
80G and It is not clear from the language (SUGGESTIONS FOR
80GGA 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).
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PART C-
DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
86. a) Section 80- Plain reading of section 80-IA gives the A specific
IA Unit-wise impression that deduction under section 80-IA clarification/
deduction is available 'unit wise'. But, nowadays, losses provision
should be of other units are clubbed to deny deduction should be made
allowed under section 80-IA of the Income-tax Act, in section 80-IA
1961 on the reasoning that all units constitute itself to provide
one single business. Since total income from that deduction
eligible business is loss, deduction under under section
section 80-IA is disallowed (Even when loss of 80-lA is 'UNIT
other unit has been set off against profit of non SPECIFIC'. For
eligible business income). This practice is each unit
discretionary in nature. An assessee/company deduction
who is claiming deduction under section 80-IA under section
from one unit cannot start another unit of 80-IA should be
similar business as the initial losses of new separately
unit will get adjusted with the profits of old unit calculated.
However, if the new unit is started by another (SUGGESTIONS
assessee/ company ,old unit will not suffer any TO REDUCE/
disallowance under section 80-IA. This put MINIMIZE
existing assessee/company into LITIGATIONS)
disadvantageous position vis-à-vis new
assessee/company. Many Tribunal benches
(Bangalore, Mumbai etc.) have already
rejected this practice.
b) Benefit u/s Section 80-IA of the Income-tax Act, 1961 The original
80-IA shall be provides exemption from income tax on position, under
allowable to infrastructure projects subject to specified which the
the resulting / conditions in order to encourage investment in transferee
amalgamated these areas. Sub-section (12) provides that in company
company in case of demerger or amalgamation, the enjoys the
case of benefits to the undertaking under Section 80- benefit in case
demerger / IA will continue in the hands of the transferee of a demerger or
amalgamatio company and will cease in the hands of the amalgamation,
n transferor company. may be
However, as per sub-section (12A) inserted by reinstated.
the Finance Act, 2007 the benefits will cease, (SUGGESTIONS
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Sr. No Section Issue/Justification Suggestion
if there is a transfer in a scheme of FOR
amalgamation or demerger, on or after 1st RATIONALIZATI
April, 2007. The unfortunate result of this ON OF THE
amendment is that neither the transferor nor PROVISIONS
the transferee company will enjoy the benefit OF DIRECT TAX
of section 80-IA in case there is an LAWS)
amalgamation or demerger.
The original position, under which the
transferee company will enjoy the benefit in
case of a demerger or amalgamation, needs to
be 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
80-IA may therefore, continue to be
available in the hands of the transferee,
like in the past, prior to insertion of Sub-
section (12A) by 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 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
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
like that of 80-IA 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 80-IA like those under Sections 80-
IB, 80-IC 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 benefit years, in
the Finance Act of 2011 clearly underscores
and reiterates their importance.
87. Incentivizing There is an urgent need to invest heavily in The tax
investments building up of a viable and efficient incentives may
in respect of infrastructure in the agriculture sector in India. take the
agricultural This would necessitate building up of proper following
infrastructur computerized infrastructural facilities and forms:
e electronic highways for procurement, (i) deduction of
dissemination of best agricultural practices, proportionate
weather information, storage practices etc. as profits for the
well as offering the best possible price to the total value of
farmers. Also, this would result in cutting down turnover arising
intermediaries/ middlemen and thereby reduce from such
the transaction costs. computerized
Section 80-IA of the Income-tax Act, 1961 infrastructural
provides for deduction in respect of profits/ facilities (in line
gains from industrial undertakings engaged in with the
infrastructure development. This covers road, provisions of
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Sr. No Section Issue/Justification Suggestion
section
bridge or rail, highway projects, water projects, 80-IA
ports, airports, telecommunication services, read in
industrial parks and power generation. The conjunction
definition of infrastructure should be extended with section
to include rural infrastructure like: 80HHC) for
· Village kiosks housing Information purposes of
Technology infrastructure like computers, simplification
VSATs, Modems, smart cards, projectors, and avoidance
screens etc. of disputes.
· Support infrastructure like solar-panels, (ii) deduction of
UPS, Batteries etc. at these locations. the total
expenditure
· Water harvesting facilities like check incurred, both
dams, wells ponds and other rain capital and
harvesting structures. revenue, for
· Storages including farmer facility center creating such
housing training centers, cafeteria, health infrastructure
clinic, pharmacy, bank counters and (similar to the
necessary parking area. provisions of
· Green houses and poly houses. section 35).
(SUGGESTIONS
FOR
RATIONALIZATI
ON OF THE
PROVISIONS
OF DIRECT TAX
LAWS)
88. Affordable This clause (h) prescribes a condition Thus in such
Housing towards utilisation of Floor Area Ratio projects the
[Sec. 80- (FAR) to be 90% in case of four metros and condition of
80% in other places. 80% need to be
IBA(2)(h)]
revised to 60%
It is a factual position in the industry that of FAR.
there are two types of constructions. One
is a high-rise/multi-storied buildings
equipped with lifts and other structural
specifications. Another is simple structure
with Ground+3 or Ground+4 structures. In
case of latter types of projects which are
not multi-storied but low- rise buildings, it is
practically not possible to achieve FAR of
80%. And most of the affordable housing
comes under low rise buildings because of
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
cheaper and faster construction. All these
low rise projects will never be able to fulfil
the condition of 80% FAR utilisation.
89. Section 80- Under section 80-IBA, inserted by the Finance It is suggested
IBA Act, 2016 from 1.4.2017, deduction of 100% of that
Relaxation of profits derived from development of affordable
housing projects approved on or after 1st June (i) To avoid
certain
2016 is available, subject to fulfilment of possible
conditions specified conditions. The Finance Act, 2017 litigation as
from 1.4.2018 has made amendments in section 80-IBA so as also to ensure
Relaxation to relax some of the conditions required to be that housing
may be fulfilled for grant of deduction. These projects
effective from amendments provide for: approved prior
1.4.2017 (i) Extending period within which housing to 1 April 2017
project is to be completed to five years from the are treated on
date of approval; par with
(ii) Substituting references to "built -up area" housing
with "carpet area" as defined in the Real Estate projects
(Regulation and Development) Act, 2016; approved on or
(iii) Housing project located in the outskirts of after 1 April
metro cities (i.e. located within 25 KM 2017, the
periphery of municipal limits of metro cities), amendments
which were earlier required to comply with made in the
conditions applicable for housing project Finance Act
located in metro cities, now need to comply 2017 relaxing
with less restrictive conditions as applicable to the conditions
housing project located in any other place in to be fulfilled
India. under 80-IBA for
The above amendments are welcome and are availing the
likely to give a boost to affordable housing in benefit of
India. However, while section 80-IBA was deduction
introduced vide Finance Act, 2016 and is thereunder may
effective from A.Y. 2017-18 for housing be introduced
projects that are approved on or after 1st June with
2016, the above amendments vide Finance retrospective
Act, 2017 are being made effective only from effect from the
A.Y. 2018-19. date of insertion
Therefore, there is scope for litigation on the of the section
issue as to whether amended provisions will i.e. from A.Y.
apply to projects which are approved on or 2017-18.
after date of amendment being 1 April 2017 or
also to projects approved between 1 June 2016 (ii)
and 31 March 2017. Alternatively,
CBDT may issue
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a clarification
that housing
projects
approved prior
to A.Y. 2018-19
in respect of
which profits
are earned
during or after
A.Y. 2018-19 will
be considered
for tax holiday
benefit as per
the amended
provisions.
90. Section 80U Section 80U, inter alia, provide for a deduction It is suggested
Consequenti to an individual, being a resident, who, at any that section 80U
al may be suitably
time during the previous year, is certified by the
amended so as
amendments medical authority to be a person with disability.
appropriately
required due As per Explanation to the said section, certain incorporate the
to the terms like "disability", "medical authority", provisions of
enactment of "person with disability" and "person with the newly
`The Rights severe disability" have been defined w.r.t. to enacted law i.e.
of Persons provisions of the Persons with Disabilities `The Rights of
with (Equal Opportunities, Protection of Rights and Persons with
Full Participation) Act, 1995. However, the said Disabilities Act,
Disabilities
Act has been repealed w.e.f. 28.12.2016 with 2016' repealing
Act, 2016' the law `the
the enactment of the `The Rights of Persons
w.e.f. with Disabilities Act, 2016'. Accordingly, Persons with
28.12.2016 section 80U needs amendment in consonance Disabilities
with the new Act. Some of the salient features (Equal
of the new law are: Opportunities,
Protection of
i. Disability has been defined based on an Rights and Full
evolving and dynamic concept. Participation)
ii. The types of disabilities have been Act, 1995' w.e.f.
increased from existing 7 to 21 and the Central 28.12.2016 as
Government will have the power to add more referred in
types of disabilities. existing section
80U.
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PART CA-
DEDUCTIONS IN RESPECT OF OTHER INCOME
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
91. Deduction Section 80TTA was inserted by Interest on all types of deposits
in respect the Finance Act, 2012 to provide may also be included within the
of interest deduction of up to Rs.10,000 in scope of section 80TTA.
on the hands of individuals and (SUGGESTIONS FOR
deposits in HUFs in respect of interest on RATIONALIZATION OF THE
savings savings account with banks, post PROVISIONS OF DIRECT TAX
account - offices and co-operative societies LAWS)
Section carrying on business of banking.
80TTA. 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. No Section Issue/Justification Suggestion
92. 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 / MINIMIZE LITIGATIONS)
Avoidance to 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.
93. Agreement Section 90(2A) of the Act provides Given the resultant
with foreign that notwithstanding anything implications on the non-
countries or contained in Section 90(2) of the resident taxpayers and the
specified Act, the provisions of Chapter X-A same being against the
territories i.e. GAAR shall apply to the internationally accepted
Section 90- taxpayer even if such provisions principles, sub-section
Tax treaties are not beneficial to the taxpayer. should be withdrawn.
vis-a-vis the
Act
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Insertion of this provision would
nullify the international principle on
`treaty overriding domestic tax
laws'.
A tax treaty is a bilateral agreement
entered between two sovereign
governments. As per Article 26 and
31 of the Vienna Convention, a tax
treaty should be implemented in
good faith. Further as per Article 27
of the Vienna Convention, a
government cannot invoke its
internal law as a justification for its
failure to perform the tax treaty.
Therefore, a unilateral amendment
in the domestic law of any particular
country cannot override a tax treaty
which has been signed with full
knowledge, understanding and
consent of both of the governments.
94. Sections 90 & Under the existing provisions of It may therefore be
90A Section 90 of the Act, power has suggested to withdraw the
Clarification been conferred upon the Central proposed amendments to
with regard Government to enter into a tax Section 90 and 90A of the
to treaty with the Government of any Act.
interpretation country outside India for granting
of 'terms' relief in respect of income on which
Without prejudice to the
used in tax income-tax has been paid both
above suggestion, the
treaties under the said Act and Income-tax
proposed amendment
under Act in that foreign country,
should be restricted to the
Section avoidance of double taxation of
terms defined under the Act
90/90A but income, exchange of information
and should not apply to
not defined in for the prevention of evasion or
`Explanation to be issued by
such treaties avoidance of income-tax or
the Government'. In other
- Concern to recovery of income-tax. Similar
words, reference to the
be addressed provisions are provided in section
`Explanation to be issued by
90A of the Act in the case of a treaty
the Government' should be
entered into by any specified
removed.
association in India with any
specified association in the
specified territory outside India.
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The Institute of Chartered Accountants of India
It is further provided in section 90
and 90A of the Act that any 'term'
used but not defined in this Act or in
the tax treaty referred to in sub-
section (1) of respective sections
shall have the meaning assigned to
it in the notification issued by the
Central Government in the Official
Gazette in this behalf, unless the
context otherwise requires,
provided the same is not
inconsistent with the provisions of
this Act or the agreement.
The Finance Act 2017 amended
sections 90 and 90A of the Act, to
provide that where any 'term' used
in an agreement entered into under
sub-section (1) of Section 90 and
90A of the Act, is defined under the
said agreement, the said term shall
be assigned the meaning as
provided in the said agreement and
where the term is not defined in the
agreement, but is defined in the
Act, it shall be assigned the
meaning as per definition in the Act
or any explanation issued by the
Central Government.
A tax treaty is a bilateral agreement
entered between two countries
based on mutual negotiations by
executives of respective countries.
As per Article 31 of the Vienna
Convention, a treaty shall be
interpreted in good faith in
accordance with the ordinary
meaning given to the terms of the
treaty in their context and in the
light of its object and purpose.
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In view of above, the Government
cannot unilaterally introduce an
amendment in the Act which would
override a bilateral tax treaty. In
several cases , the courts have also
held the same.
Article 3(2) of the Indian tax treaties
provides that if any term which has
not been defined under the tax
treaty, unless the context otherwise
requires, the meaning defined
under the Act shall apply.
Therefore, the tax treaties already
provide a mechanism in such a
situation.
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CHAPTER X
SPECIAL PROVISIONS RELATING TO AVOIDANCE
OF TAX
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95. Country by Section 271GB of the Act There is a need to
Country prescribes stringent penalty for rationalise penalty for the
Reporting - non-furnishing of Country by filing requirements in the
Penalty for Country (CbyC) report as first year atleast as even
non-furnishing prescribed in section 286 by the OECD's guidelines under
of Country by due date. BEPS Action Plan 13
Country report The deadline for filing the CbyC provide for a 12 month
report in India is 30 November 2017 period in the first year of
for first covered FY 2016-17 i.e. only filing. Accordingly,
8 months post the end of FY 2016- partial relief from the
17 have been provided to the stringent penalties
taxpayers to prepare and furnish the should be provided for
CbyC report. the first year of CbyC
report filing, such that
penalty is applicable for
CbyC report filed on or
after 1 April 2018.
96. Threshold limit The existing provisions under It is therefore
of INR 20 crore Section 92BA of the Income-tax recommended that, the
for Act, 1961, require an assesse to threshold limit of INR 20
applicability of comply with the transfer pricing crores needs to be
transfer provisions if the aggregate of the revised upwards,
pricing Specified Domestic Transactions preferably up to INR 50
provision exceeds INR 20 crore during an crores providing relief to
assessment year. the small assesse. The
A small assesse is required to above proposed
comply with the transfer pricing amendment will also
provisions, leading to increase in provide a boost to the
the compliance burden and cost. ease of doing business
initiative of the
government, as it will
reduce compliance
burden and cost of the
assessee.
97. Reporting of Clause 16 of the Form 3CEB In view of Vodafone India
issuance of requires the reporting of particulars Services Pvt. Ltd. vs. UOI
Share Capital in respect of the purchase or sale of (Dated 10th October
Transaction in marketable securities, issue and 2014)" and PIB dated
Form 3CEB buyback of equity share, optionally 28th January 2015 issued
convertible/ partially convertible/ by CBDT, it is suggested
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compulsorily convertible that clause 16 of Form
debentures/ preference shares. No. 3CEB should be
Bombay High Court in the case of amended so as clarify
"Vodafone India Services Pvt. Ltd. that share Capital
vs. UOI (Dated 10th October transaction is not
2014)" has held that Chapter X of required to be reported
the Income Tax Act 1961 i.e. /justified in Form 3CEB.
Transfer Pricing Provision does not
apply on any transaction involving
issue/receipt of share capital
money (including issued on
premium) as no income/expense
will arises from such transaction.
Government of India in its PIB
dated 28th January 2015, has
accepted the order of Bombay High
Court in the case of Vodafone and
came to the view that the
transaction involved is on capital
account and there is no income to
be chargeable to tax. So, applying
any pricing formula is irrelevant.
However even after the acceptance
of the Bombay High Court
Judgment by Government of India,
Share Capital transaction is still
required to be reported /justified in
Form 3CEB.
98. Computing The three most important aspects It is suggested that Profit
Profit Level of application of TNMM are level indicators be clearly
Indicators 1) selection of the tested party defined so as to avoid
(PLIs) usually the simpler of the two adoption of different
related parties involved with the approaches by the
intercompany transactions; taxpayer and the
Department leading to
2) selection of the profit level
increased litigation.
indicator (PLI); and
3) selection of the comparables.
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PLIs are ratios between the
operating profits and operating
costs / operating revenue /capital
employed. It provides a sound
basis to match operating profits of
the company with that of the
unrelated companies.
The issue emerging out of this
pertains to categorizing of
expenses/incomes as
operating/non-operating while
calculating the PLIs. Since these
terms are not being defined in the
Indian TP Regulations, both
taxpayers and tax authorities take
different approaches to compute
PLI
99. Advertising From last many years, companies It is suggested that
Marketing & advertising foreign brands in India clarifications be issued
Promotion are been scrutinized in TP audits, in respect of AMP
Expenses for the AMP expenditure made by expenditure made by
(AMP) them. On this issue large TP companies advertising
adjustments are been made. This foreign brands in India so
has led to litigation between the that litigation can be
companies and TPOs resulting in avoided
the disallowance all
marketing expense and the same is
been challenged in higher
authorities.
Still after several cases been
disposed by the High Court and the
Appellate Tribunals, there is no
clear resolution to this issue and it
is still one of the most litigated TP
issues before the courts.
100. Clarification to There are many cases where Indian Considering the above,
prevent taxpayers may receive loans, services we request you to clarify
erosion of or licenses of intangibles from their either by making
Indian tax base overseas associated enterprises necessary amendments
through (AEs), with respect to which, the in the provisions of
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Transfer overseas AEs may decide either not to section 92 of the Act; or
Pricing charge any consideration; or charge by issuance of a circular,
adjustments in moderate consideration, which may ideally being the latter, to
hands of otherwise be less than the market prevent the unintended
Foreign driven or arm's length price (ALP). application of the TP
Companies provisions of India in the
Any receipt of interest, fees or royalty manner, as aforesaid;
on such loans, services and licenses and also obviate the
respectively, would attract income tax hardship faced by
in the hands of the overseas AEs in foreign companies in
India @ 10% under Indian domestic India.
tax laws and/ or tax treaties, where the
overseas AEs do not have permanent
establishments in India.
On the other hand, any payment of
such consideration would obtain tax
breaks in the hands of the Indian
taxpayers @ 30%, through deduction
or allowance while computing
business profits.
Thus, in other words, the Indian
taxpayers, either by not paying any
such consideration; or paying any
consideration less than the arm's
length price, the Indian exchequer
would have only benefitted in the form
of tax savings @ 20% thereof. This is
generally referred to as the "base
erosion" theory or concept.
In the background of identical facts, a
TP adjustment was made by the
Indian Revenue in the hands of a
foreign company in the case of
Instrumentarium Corporation Ltd v
ADIT [2016] 49 ITR(T) 589 (Kolkata -
Trib), by disregarding the concept of
"base erosion". The TP adjustment
ultimately reached the Hon'ble Income
Tax Appellate Tribunal (the Tribunal)
for resolution. Being a matter having
nationwide ramification, the erstwhile
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Hon'ble President of the Tribunal had
constituted a Special Bench of the
Tribunal in Kolkata in 2009 for
deciding the matter. The case was
finally heard and disposed of by the
Special Bench of the Tribunal in the
month of July, 2016, by dealing with
the matters arising in the hands of the
aforesaid assessee and another
intervener.
The Special Bench had decided the
issue in favour of the Revenue, by
disregarding the concept of "base
erosion".
Incidentally, while doing so, the
Special Bench had seemingly
misinterpreted the provisions of
section 92(3) of the Income-tax Act,
1961 (the Act) read with Circular No.
14 of 2001 issued by the Central
Board of Direct Taxes (CBDT) in the
year 2001 to explain the newly
introduced provisions of TP (Circular).
Section 92(3) of the Act reads as
under (inserted the context, wherever
required):
"The provisions of this
section shall not apply in a
case where the computation
of income under sub-section
(1) or sub-section (2A) or the
determination of the
allowance for any expense or
interest under sub-section
(1) or sub-section (2A), or the
determination of any cost or
expense allocated or
apportioned, or, as the case
may be, contributed under
sub-section (2) or sub-
section (2A) (all these sub-
sections provides for
determination of value of
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international transaction at
arm's length price), has the
effect of reducing the income
chargeable to tax or
increasing the loss, as the
case may be, computed on
the basis of entries made in
the books of account in
respect of the previous year
in which the international
transaction or specified
domestic transaction was
entered into."
Though it is not very explicitly coming
out from the above mentioned
provisions of section 92(3) of the Act,
the Central Board of Direct Taxes
(CBDT) at paragraph 55.5 of the said
Circular explained as under:
"The new provision is
intended to ensure that
profits taxable in India are
not understated (or losses
are not overstated) by
declaring lower receipts or
higher outgoings than those
which would have been
declared by persons entering
into similar transactions with
unrelated parties in the same
or similar circumstances.
The basic intention
underlying the new transfer
pricing regulations is to
prevent shifting out of profits
by manipulating prices
charged or paid in
international transactions,
thereby eroding the country's
tax base. The new section 92
is, therefore, not intended to
be applied in cases where
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the adoption of the arm's
length price determined
under the regulation would
result in a decrease in the
overall tax incidence in India
in respect of the parties
involved in the international
transactions."
The Revenue Officers and the Special
Bench of the Tribunal have actually
applied TP provisions in a reverse
manner, which again, defeats the
whole purpose of introducing TP. You
may note that the concept of "base
erosion", under identical
circumstances, has been approved by
the Australian Tax Office (ATO) vide
one of its rulings, being equivalent to
circulars issued by the CBDT.
However, the Special Bench of the
Tribunal had refused to be persuaded
by the ruling of the ATO on grounds,
not appealing to logic.
The main logic applied by the Special
Bench of the Tribunal in taking the
aforesaid view, is that since the Indian
TP regulations do not contain the
provisions of compensatory
downward adjustment in the hands of
the paying company upon a TP
adjustment being made in the hands
of the payee company, by virtue of the
restrictions contained in section 92(3)
of the Income-tax Act, 1961 (Act) as in
the aforesaid cases, the concept of
"base erosion" could not be applied in
the context of Indian TP provisions.
The aforesaid ruling of the Special
Bench of the Tribunal is likely to have
far reaching negative tax
consequences in the hands of several
foreign companies in India, who might
not have charged either any
consideration of the above nature; or
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charged less than arm's length
consideration, from their Indian AEs,
under a bona fide and correct belief
that by not charging such
consideration, the Indian exchequer
was not getting impacted in any way,
being the very object of introducing TP
regulations in India.
Further, if the said interpretation of the
Special Bench of the Tribunal is to be
accepted, then all foreign companies
would, most likely, start charging
interests, royalties and fees from their
Indian AEs, even under situations,
where, for various commercial
reasons, they would not have charged
so, as a result of which, the
Government exchequer would be
actually losing to the extent of 20% of
all such charges, in the form of income
tax, being a reverse form of "base
erosion", which one finds difficult to
comprehend. This will significantly
erode the tax base of India, which
perhaps could be only the country in
the world to be applying the provisions
of TP to its disadvantage.
In the case of Cummins Inc. v. ADIT
[2016] 73 taxmann.com 207 (Pune),
the assessee had provided services to
the Indian entities and had received
charges in respect of desktop/laptop
software licence and internet mail and
had determined the value of
transactions by allocating cost based
on cost estimates. However, the TPO
did not accept the same and made the
adjustment. The Pune Tribunal held
that where the assessee is a foreign
company and is a recipient of internet
mail charges and desktop /laptop
service charges from the Indian
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entities and in case the assessee
have to charge higher amounts from
the Indian entities, then the same
would result in reduction of overall tax
base of India. In such circumstances,
the Indian Transfer Pricing provisions
are not to be applied.
The Pune Tribunal observed that
during the subsequent Assessment
Years, the DRP and the AO have not
made any similar adjustment in the
hands of assessee on account of
internet mail service charges and
desktop/laptop service charges
though identical international
transactions were carried out in those
years.
The said intention of the TP provisions
is also clear from the introduction of
section 92CE providing for secondary
adjustment vide Finance Act, 2017
wherein it is provided that "where, as
a result of primary adjustment to the
transfer price, there is an increase in
the total income or reduction in the
loss, as the case may be, of the
assessee, the excess money which is
available with its associated
enterprise, if not repatriated to India
within the time as may be prescribed,
shall be deemed to be an advance
made by the assessee to such
associated enterprise and the interest
on such advance, shall be computed
in such manner as may be
prescribed."
The above clearly demonstrates that
intention of the TP provisions is to
bring back excess money eroded from
India rather than allowing foreign
companies to take excess money out
of India. If upward TP adjustment in
the hands of the foreign company is
sustained, as per the provisions of
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section 92CE, foreign company is
required to bring money, however,
since they have earned this income
they will be required to remit this
money out of India, this will create an
absurd situation, not intended by the
law.
101. Valuation Both Customs and TP require There is a need for a
under taxpayer to establish arm's length common platform that
Customs and principle with respect to would provide a 'middle-
Transfer transactions between related path' of ALP that is
Pricing parties. Objective under respective equally acceptable under
laws is to provide safeguard Customs Law and under
measures to ensure that taxable the Transfer Pricing.
values (whether it is import value of
goods or reported tax profits) are
the correct values on which
respective taxes are levied. The
above objective, while established
on a common platform has diverse
end-results as seen below:
- To increase Customs duty
amounts, the Customs Cell
(General Agreement on Tariffs
and Trade Valuation)would
prefer to increase the import
value of goods
- To increase taxable income,
the Revenue Authorities would
prefer to reduce import price of
goods
The diverse end-results create
ambiguity in the manner in which
the taxpayer should report values
under the Customs and the
Transfer Pricing. Further, even the
judicial decisions on the issue do
not give a clear precedence or
guidance for the appropriate
approach to be adopted by the
taxpayer.
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Further, various contradicting
Tribunal decisions necessitate a
greater need for convergence of
transfer pricing mechanism under
the Act and the Customs
Regulations.
102. Section 92CE- The Finance Act, 2017 introduced
Introduction of the concept of secondary
secondary adjustment on Transfer Pricing
adjustment (TP) adjustments. A taxpayer is
required to make a secondary
adjustment, where the primary
adjustment to transfer price has
been made in the following
situations:-
· Suo moto by the taxpayer in
the return of income;
· By the AO during assessment
proceedings, and has been
accepted by the taxpayer;
· Adjustment determined by an
Advance Pricing Agreement
(APA) entered into by the
taxpayer;
· Adjustment made as per the
safe harbour rules under
section 92CB; or
· Adjustment arising as a result
of resolution of an assessment
by way of the mutual
agreement procedure (MAP)
under an agreement entered
into under section 90 or section
90A for avoidance of double
taxation.
Further, the section 92CE(3)(v)
defines `Secondary adjustment' as
an adjustment in the books of
account of the assessee and its
associated enterprise to reflect that
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the actual allocation of profits
between the assessee and its
associated enterprise are
consistent with the transfer price
determined as a result of primary
adjustment, thereby removing
the imbalance between cash
account and actual p rofit of the
assessee.
The additional amount receivable
from the AE as a result of the
primary adjustment should be
repatriated by the taxpayer into
India within a prescribed time limit.
If the same is not received by the
taxpayer within the time-limit, then
the primary adjustment will be
deemed as an advance extended to
the overseas AE and a secondary
adjustment in the form of notional
interest on the outstanding amount
should also be offered to tax as an
income of the taxpayer.
The above requirements for
repatriating the adjustment amount
into India and imputing a notional
interest are triggered if the TP or
primary adjustment exceeds
rupees one crore. The manner of
computation of interest on the
amount deemed as advance made
by the taxpayer to the AE would be
prescribed.
The situation of excess payment
treated as loan given to AE on
which notional interest in computed
and added to the income of the
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assessee till the excess amount is
repatriated by AE.
It would be difficult for AE to
repatriate the money to India on
account of secondary adjustment
as the income-tax laws and any
other relevant laws pertaining to
such country may not allow to
repatriate money. Further the AE
would have paid tax on such
amount in its home country. This
would lead to double taxation. This
would lead to double taxation.
Further, the same cannot be
treated as advance in the books of
account maintained in India as the
books of account are prepared as
per the provisions of Companies
Act, 2013 read with Indian
Accounting Standards.
(i) Sub-section (1) of the proposed Sub-sections (1), (2) and
section 92CE provides for (3) need to be revisited to
secondary adjustments to be made streamline and
in respect of primary adjustments in appropriately link up the
certain situations. The phrase three sub-sections to
"secondary adjustment" has been provide adequate clarity
defined in Clause (v) of Sub-section as to the specific
(3) to mean an adjustment in the requirements from the
books of account of the assesse taxpayers on this front.
and its associated enterprise to
reflect that the actual allocation of
profits between the assessee and
its associated enterprise are
consistent with the transfer price as
determined as a result of primary
adjustment, thereby removing the
imbalance between cash account
and actual profit of the assessee.
Sub-section (2) lays down the
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requirement for excess monies to
be repatriated to India and for
interest to be levied thereon, if not
repatriated within the prescribed
time. However, Sub-section (2)
does not refer to `secondary
adjustment' as envisaged under
Sub-section (1) and defined in
Clause (v) of Sub-section (3). The
absence of references to Sub-
section (1) and/or `secondary
adjustment' in Sub -section (2)
results in an apparent disconnect
between Sub-sections (1) and (2)
which may have unintended
consequences.
(ii) In respect of Unilateral APAs that A specific clarification
have been entered till date, there should be issued under
was no provision relating to the APA Rules as well as
secondary adjustments in the in Section 92CE that the
statute. As a result, APAs have consequences for a delay
been concluded wherein terms that in bringing money into
are not consistent with the Section India pursuant to a
92CE have been imposed on unilateral APA would be
taxpayers. In view of a specific only under Section
provision having been introduced, 92CE(2) and the APA
taxpayers should be entitled to would not be disqualified
follow the mandate of Section 92CE merely on this account.
in respect of APAs signed till date.
(iii) For better clarity and in order to The Government may
avoid any confusion regarding the issue a clarification that
assessment year from which the section 92CE will be
secondary adjustment provisions applicable from A.Y.2018-
would be applicable, it may be 19, in relation to primary
clarified that the section will be adjustments for fiscal
applicable from AY 2018-19, in years 2016-17 and
relation to primary adjustments for thereafter.
fiscal years 2016-17 and thereafter.
(iv) Clause (ii) to sub-section (1) of the Government should
section 92CE provides that a clarify the term `has been
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taxpayer is required to make a accepted by the taxpayer'
secondary adjustment where in order to provide
primary adjustment to transfer price certainty on the
has been made by the AO during applicability of these
assessment proceedings, and has provisions in such
been accepted by the taxpayer. situations. For e.g. if the
There is lack of clarity on what taxpayer is in appeal
exactly the term `has been against the assessment
accepted by the tax payer' means. order to Tribunal, in such
cases, will secondary
adjustment provisions be
applicable only after the
Tribunal proceedings are
completed or the same
will be applicable after
Court proceedings are
completed i.e. if the
taxpayer further appeals
to High Court/ Supreme
Court.
(v) Since adjustments are made The said issues may be
subsequently when returns are considered and
taken up for scrutiny, any appropriate remedial
requirement to make secondary measures may be
adjustment would depend upon incorporated to avoid
whether the Associated Enterprise genuine hardship.
is willing to accept the secondary
adjustments to be made in its books
abroad. Non-acceptance of the
same will lead to inter-company
issues during consolidation. It
could also require restatement of
financial statements of an Indian
entity if adjustments are material.
This in turn might lead to filing of
revised returns. Implication on
shareholders value and lenders
agreement (where there are
borrowings) would need to be
evaluated besides implications
under the Companies Act, 2013.
Further, FEMA requires money to
be remitted within 6 months from
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the end of the accounting year.
Also, if the Associated Enterprise
(AE) located abroad does not pass
entries in the books, inter-company
adjustments/eliminations could be
a challenge if the AE is a holding
company.
(vi) The proviso to the section 92CE(1) It is suggested that the
states that nothing contained in this proviso may be restated
section shall apply, if;- as under:
(i) the amount of primary (i) the amount of
adjustment made in any previous primary adjustment made
year does not exceed one crore in any previous year does
rupees; and not exceed one crore
(ii) the primary adjustment is made rupees; and OR
in respect of an assessment year
commencing on or before the 1st (ii) the primary
day of April, 2016. adjustment is made in
respect of an assessment
From a bare reading of the section, year commencing on or
it appears that both conditions i.e. before the 1st day of
primary adjustment made before April, 2016.
1.4.2016 and it being less than 1
crore need to be complied,
because the word "AND" is written
between two conditions. It ought to
be "OR". Else, in future years, there
will be no threshold limit for
secondary adjustment.
(vii) Applicability of section 92CE has to In order to remove this
be restricted only to cases anomaly it is
satisfying the base erosion test. recommended that
The provisions, as presently section 92CE(2) be
worded, may give rise to an amended to clarify that
interpretation that even where the the section applies only
primary adjustment is made in the in case where the primary
hands of non-resident, secondary adjustment is made in the
adjustment follows. As a hands of the Indian AE.
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consequence, it may be interpreted
as allowing repatriation of funds
outside India, which may not be
permitted even in terms of FEMA/
RBI regulations.
(viii) Section 92CE provides for In order to avoid any
secondary adjustment in case unwarranted litigation, it
where excess money (difference may be clarified that
between transaction price and section 92CE applies
arm's length price), which remains only to international
outside India, due to the primary transaction and not
adjustment under TP is not domestic transactions as
repatriated to India. covered under section
92BA.
Taxable funds may remain outside
India only in case where a foreign
party is involved. In other words,
there may be possible base erosion
only in case where one of the
parties to the transaction is foreign
AE. A transaction between two
domestic entities, will not lead to
profits allocable to India, remaining
outside India.
(ix) Section 92CE deems the difference It may be specifically
between the transaction price and provided that the
arm's length price as an advance advances appearing in
(which is to be recorded in the the books of the parties
books) and provides for imputation be reversed in following
of interest on such advances. cases where AE
However, there is no specific relationship ceases to
provision to reverse the advances exist or excess money is
appearing in the books even in repatriated.
case where the AE relationship
ceases to exist or in case where the
excess money is repatriated.
103. Rollback of The CBDT introduced the rollback It is recommended that
APA rules under the APA program on 14 this provision should be
March 2015. There were some relaxed to the extent that
ambiguities about the the taxpayers with similar
implementation of the rollback transactions with no
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rules, and therefore, CBDT issued substantial changes in
Frequently Asked Questions the functional, asset and
(FAQs) clarifying certain issues. In risk profile should be
this regard, some of the aspects allowed to take benefit of
that need to be further addressed this provision. Further, if
are as under: the same/ similar
The international transaction transaction is undertaken
proposed to be covered under the with another AE, the
rollback is to be the same as benefit of rollback should
covered under the main APA. The be provided.
term `same international Thus, it is recommended
transaction' implies that the that the provision should
transaction in the rollback year has be made applicable to
to be of the same nature and similar nature of
undertaken with the same AEs, as transactions and with
proposed to be undertaken in the different AEs.
future years and in respect of which Further, the rules provide
APA has been reached. that if the applicant does
not carry out any actions
prescribed for any of the
rollback years, the entire
APA shall be cancelled.
It is recommended that
this provision should be
relaxed and should not
result in the cancellation
of the entire APA.
104. Dispute The Indian APA authorities have India may introduce a
resolution been refusing to accept clarification, giving effect
applications for bilateral APAs
to the point 2 above, to
from countries like Germany,
enable taxpayers from
France, Singapore and Italy as
the Double Taxation Avoidance the countries like
Convention (DTAC) of India with Germany, France,
these countries do not contain Singapore and Italy to file
Article 9(2) which provides for for bilateral APAs.
corresponding adjustment to be
allowed to the taxpayer for any
economic double taxation that
arises on account of transfer
pricing adjustments. The OECD
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Sr. No Section Issue/Justification Suggestion
has in its commentary given two
options if such an issue arises:
The Article 25 on Mutual
Agreement Procedures in
various DTACs covers such
instances of allowing a
corresponding adjustment for
TP, hence bilateral APAs should
be allowed, or the countries (like
India) that do not agree that
Article 25 of DTACs cover
corresponding TP adjustments,
should make unilateral changes
in their regulations to allow such
adjustment.
105. a) Domestic The Finance Act 2012 has There is clearly a need for
Transfer introduced DTP in spite of existing harmonization of the
Pricing [DTP] provisions under the Act which different thresholds for
Sections 92, empower the Assessing Officer the related party
92BA, 92C, (AO) to re-compute the income of definitions' in the
92CA, 92D & assessees availing profit-linked sections 92A(2) and 80A
92E deductions if there are transactions read with section
with related parties or other 35AD(8). Necessary
undertakings of the same assessee amendments in this
(Sections 80A, sub section (8) and regard may be
(10) of section 80-IA, certain appropriately made.
sections under Chapter VI-A, 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, two
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:
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Sr. No Section Issue/Justification Suggestion
· Associated Enterprises - Not
less than 26% of voting power
Section 92A(2)(a) & (b)
· Associated Person - Not less
than 26% of voting power
Section 80A read with section
35AD(8)
b) Arm's Section 80-IA(8) deals with Conceptually, `price
Length Price "ordinary profits" whereas transfer principles' cannot apply
vs Ordinary pricing compliance refers to the for benchmarking of
Profits: "Arm`s Length Price" of the `profits'.
transactions.
Currently, APA provisions are The same should also be
being made applicable to only made applicable to
international transactions. domestic transactions
covered by DTP
provisions
c) Where the volume of specified It is suggested that the
Documentation domestic transactions is below the maintenance of
Requirements: threshold limit, the maintenance of documentation as
documentation as required for required for transfer
transfer pricing should not be pricing should not be
applicable. applicable. Alternatively
a threshold limit of Rs. 25
crore be introduced for
TP documentation
requirements.
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CHAPTER X-A
GENERAL ANTI AVOIDANCE RULES
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
106. Section 94A- One of the tax consequences of Section 94A and/or section
Special a country or area being notified 206AA may be suitably
measures in as NJA is that payments to amended to clarify that section
respect of persons located in that NJA 94A would prevail in case tax
transactions would be subject to a higher is to be deducted with respect
with persons withholding @ 30%. The relevant to any payment to a person
located in provision which provides for this located in a NJA.
notified implication i.e., section 94A(5),
jurisdictional would be applicable
area notwithstanding anything to the
contrary contained in the Act.
Section 206AA which provides
for higher withholding @ 20% in
absence of PAN of payee is also
applicable not withstanding
anything to the contrary
contained in the Act.
Though the intent appears to be
that section 94A would override
section 206AA, there may be
some difficulties in interpretation.
107. Section 94B- The Finance Act, 2017 In view of the above policy
Limitation of introduced limitation of interest level issues, it is suggested
interest benefit (deduction) provisions in that the restrictions imposed
benefit where an Indian company, or a on the interest benefits on
provisions permanent establishment of a overseas borrowings may be
introduced foreign company in India, being done away with entirely or at
certain the borrower, pays interest least deferred for 5-10 years to
concerns to exceeding rupees one crore in give India a chance to achieve
be respect of any debt high growth and achieve
addressed issued/guaranteed (implicitly or significant infrastructural
explicitly) by a non-resident AE. development and maturity.
The interest shall not be
deductible in computing income
chargeable under the head
`Profits and gains of business or
profession' to the extent, it
qualifies as excess interest.
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Excess interest shall mean total
interest paid/payable by the
taxpayer in excess of thirty per
cent of cash profits or earnings
before interest, taxes,
depreciation and amortisation
(EBITDA) or interest paid or
payable to AEs for that previous
year, whichever is less.
There will be restriction on the
deductibility of the interest in the
hands of the taxpayer in a
particular financial year to the
extent it is excess as explained
above. However, the same shall
be allowed to be carried forward
for a period of eight years and
allowed as deduction in
subsequent years. The above
restrictions shall not be
applicable to the taxpayer
engaged in the business of
banking or insurance. These
provisions will be applicable for
FY 2017-18 and subsequent
years.
(i) India is a developing country
with a need for foreign
investment to fund various
initiatives, in particular, the
development of India's
infrastructure. The Government
has given its support at a policy
level, inter-alia, consistently
reducing tax withholding rates on
ECBs by Indian entities from
non-residents, which indicates
encouragement by the
Government towards debt
obtained by Indian entities by
overseas parties. However, the
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restrictions imposed under the
proposed Section 94B above in
respect of interest of overseas
loans is giving mixed signals to
foreign as well as Indian parties
at a policy level on overseas
borrowings. This inconsistency
may lead to further policy level
uncertainty in the minds of the
business community in India and
may undermine the attempts at
enhancing the "ease of doing
business" by the Government.
Under existing ECB guidelines,
there is already a mechanism in
place to limit the Borrower's
Debt/Equity ratio, which
effectively safeguards India's
interests with regard to
excessive debt. As such, there is
no need for any additional
measure to protect India's
interests in this regard.
(ii) Without prejudice to the It is recommended to carve
aforesaid, if at all it is considered out exceptions for
necessary to have provisions to inherently highly leveraged
limit the deductibility of interest, industries from the
the exclusions granted to aforesaid restrictions. The
banking and insurance exclusions granted to banking
companies may be extended to and insurance companies may
other sectors such as be extended to other sectors
Infrastructure and Non-Banking such as Infrastructure, Non-
Finance Companies. Large Banking Finance Companies
capital intensive companies with and loss making companies.
long gestation periods, Non-
Banking Finance Companies, Also, the provisions should not
companies in the real estate be made applicable to new
sector and companies in the companies/start-ups (i.e.
infrastructure sector (requiring companies formed after 1 April
significant foreign capital which 2016) for initial period of 3
may not always come in the form years. This would help them to
build good track record and be
of equity) are typically highly
leveraged on account of the
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business requirements (either by able to independently obtain
way of external or related party debt without support of AE.
debt) and might be negatively
impacted by the interest Alternatively, the provisions may
restriction. not be applicable, subject to
certain conditions in line with
BEPS Action Plan 4.
(iii) The proviso to sub-section (1) The said section should be
provides that where debt is amended to specify limitation
issued by a non-associated of benefits in guarantee cases
lender but an AE either provides only to the extent of the
implicit or explicit guarantee to guarantee commission (if any)
such lender, such debt shall be paid by the Indian entity to the
deemed to have been issued by overseas guarantor (being its
an AE. AE) and not the interest.
Further, the word implicit
guarantee may be dropped
In respect of explicit guarantees,
from the provisions. The term
the transaction relating to
`explicit guarantee' may also
associated enterprises is only
be appropriately defined to
towards a guarantee commission
obviate future litigation on this
(in case charged by the overseas
front.
guarantor). The interest towards
the borrowing is paid in this case
only to a third party wherein the
rate and terms are decided
purely through negotiation.
Hence, restriction of benefit in
relation to guarantees ought to
be only to the extent of the
guarantee commission (if any)
claimed as a deduction by the
Indian entity and not interest paid
to the third party lender.
Further, including implicit
guarantees under the above
restrictions would lead to
significant hardship for the
taxpayers and may result in
protracted litigation in the coming
years. It is pertinent to note that
there is no clear definition of
implicit guarantee and it would
be an onerous task for the
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The Institute of Chartered Accountants of India
taxpayers and tax authorities to
determine existence of an
implicit guarantee. E.g. when a
letter of comfort or simply an
undertaking is provided by one
AE to a lender or a bank, the tax
authorities may contest that
guarantee exists, without going
into details whether the same
has benefited the borrower and
whether the AE has actually
rendered any service or
assumed any liability.
(iv) Based on the definition of the It is recommended that:
term `debt' as provided in clause · Appropriate guidelines
(ii) of sub-section (5) of proposed may be issued to clarify
section 94B, interest may include what the term `interest o r
many other payments made on similar consideration'
various kinds of financial should include or exclude
arrangements and instruments. as the definition provided
There may be an issue as to what in the existing Section
payments made by the taxpayer 2(28A) of the Act may not
needs to be included in the term be adequate for the
interest e.g. which payments on purposes of thin-
account of finance lease and capitalisation rules based
financial derivatives should be on the definition of the
included in the term `interest or term `debt'.
similar consideration' etc. which · the provisions of this
may again lead to litigation. section should be made
applicable to new debts
taken on or after 1 April
2017.
· Interest disallowed under
other provisions (sections
40(a)(i) or 43B) should be
specifically excluded from
definition of "total
interest".
(v) There is lack of clarity on the It is suggested that the
mechanism to calculate EBITDA mechanism to calculate
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i.e. say, on the basis of book EBITDA be clearly laid down.
profits calculated on the basis of
accounting standards, Ind-AS or
otherwise. This may result in
unnecessary litigation.
(vi) The BEPS Action Plan 4 provides It is suggested in place of a
for a Group Ratio Rule wherein fixed 30 per cent EBITDA
the Group's overall third party restriction, a Group Ratio
interest as a proportion of the could be considered in order
Group's EBITDA is computed to apply the interest deduction
and that ratio is applied to the restriction under the above
individual company's EBITDA to provision.
determine the interest restriction.
This would take into account the
actual third party debt and
leverage at global level vis-à-vis
third parties. This also addresses
the issue relating to inherently
highly leveraged industries since
the global leverage ratio would
take into account the significant
debt and would be
commensurate to the leverage
ratio required at individual
country level. Given this, a
relatively fair leverage
requirement at India level would
emerge.
(vii) Sub-section (1) of Section 94B It is suggested that
specifically requires the lending borrowings by Indian
to be from a non-resident AE for companies from Indian
the section to trigger. However, branches or permanent
branches or permanent establishments of foreign
establishments of foreign banks banks may be wholly excluded
are also "non-residents" for the from the purview of the
purposes of the Income-tax Act. aforesaid Sec 94B (either by
Whilst branches or permanent way of direct borrowing from
establishments of foreign banks or by way of guarantee by AE
operate essentially as Indian to such branches or
companies and compete directly permanent establishments of
with Indian banks, debt by foreign banks).
related Indian branches of banks
or guarantees given by AEs
towards borrowings by Indian
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The Institute of Chartered Accountants of India
companies from branches or
permanent establishments of
foreign banks would qualify for
disallowance under the above
provision. This places the Indian
branches of foreign banks at a
disadvantageous position vis-à-
vis competing Indian banks.
(viii) Section 94B(4) provides that · The CBDT may consider
where for any assessment year, allowing carry forward of
the interest expenditure is not excess interest without
wholly deducted against income any restriction on the
under the head "Profits and gains number of years similar
of business or profession", so to provisions adopted in
much of the interest expenditure case of depreciation.
as has not been so deducted, However, in case the
shall be carried forward to the same is not feasible carry
following assessment year or forward of excess credit
assessment years, and it shall be should be allowed for a
allowed as a deduction against longer period, say 15
the profits and gains, if any, of years, instead of the
any business or profession prescribed 8 years to
carried on by it and assessable cushion the long
for that assessment year to the gestation periods for
extent of maximum allowable such industries.
interest expenditure in
accordance with sub-section (2):
Provided that no interest · It may further be clarified
expenditure shall be carried that set off will be
forward under this sub-section available even if the
for more than eight assessment section is not triggered in
years immediately succeeding the subsequent year due
the assessment year for which to interest expense being
the excess interest expenditure less than INR 1 Crore.
was first computed.
(ix) Carry forward of unused · It is suggested that there
interest capacity: Section should be a credit
94B(2) provides that the excess mechanism to offset the
interest shall mean an amount of unutilized limit in
total interest paid or payable in subsequent years.
excess of thirty per cent of
earnings before interest, taxes,
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depreciation and amortisation of · The period of set-off may be
the borrower in the previous year restricted to 3-5 years.
or interest paid or payable to
associated enterprises for that
previous year, whichever is less.
Business may not earn
consistent profit year on year.
However, the interest
expenditure may be consistent.
Given that EBITDA may vary on
account of economic
considerations, it may be that the
cap of 30% may not be
exhausted in a particular year
(say year 1).
(x) Section 94B deals with limitation Thus with a view to resolve the
on interest deduction in certain issue discussed, it is suggested
cases. The relevant extract of the that for the purpose of computing
same is reproduced below: `excess interest' under section
94B(2), the term `total interest paid
"94B. (1) Notwithstanding anything or payable' should only include
contained in this Act, where an interest paid to the associated
Indian company, or a permanent enterprise.
establishment of a foreign
company in India, being the
borrower, incurs any expenditure
by way of interest or of similar
nature exceeding one crore
rupees which is deductible in
computing income chargeable
under the head "Profits and gains
of business or profession" in
respect of any debt issued by a
non-resident, being an associated
enterprise of such borrower, the
interest shall not be deductible in
computation of income under the
said head to the extent that it
arises from excess interest, as
specified in sub-section (2):
Provided that where the debt is
issued by a lender which is not
associated but an associated
enterprise either provides an
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The Institute of Chartered Accountants of India
implicit or explicit guarantee to
such lender or deposits a
corresponding and matching
amount of funds with the lender,
such debt shall be deemed to have
been issued by an associated
enterprise.
(2) For the purposes of sub-
section (1), the excess interest
shall mean an amount of total
interest paid or payable in
excess of thirty per cent of
earnings before interest, taxes,
depreciation and amortisation
of the borrower in the previous
year or interest paid or payable
to associated enterprises for
that previous year, whichever is
less."(emphasis supplied).
I. Issue
Whether for purpose of
determining amount of excess
interest under section 94B(2),
interest paid to third party lenders
(i.e. other than associated
enterprises) should be included in
`total interest paid or payable' or it
should only include interest paid or
payable to associated
enterprises?
Rationale:
· Sub-section (2) to section 94B
refers to "an amount of total
interest paid or payable". The
literal reading of the section
does not create any limitation
on inclusion of interest paid or
payable to associated
enterprises only. The words
referred to are `total interest
paid or payable'.
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· The legislature in its wisdom
has separately referred to "an
amount of total interest paid or
payable" and "interest paid or
payable to associated
enterprises" within the same
sub-section itself.
Thus, basis the literal reading of
the section, interest paid to third
party lenders shall be included in
`total interest paid or payable' for
the purposes of computing the
excess interest under section
94B(2).
Having said the above, it may be
possible to contend that interest
paid to third party lenders may not
be included in `total interest paid or
payable' for the purposes of
computing the excess interest
basis the intention of the
legislature as per the
Memorandum explaining the
provisions of Finance Bill
Basis the intention of the
legislature as per the
Memorandum explaining the
provisions of Finance Bill, it may
be possible to contend that interest
paid to third party lenders may not
be included in `total interest paid or
payable' for the purposes of
computing the excess interest.
Reference could also be made
Commentary on Finance Act, 2017
published in Taxmann's Master
Guide to Income Tax Act [at page
1.91 para 1.7-8a]
108. Section 95 Section 95 was amended via It is suggested that:
Applicability the Finance Act, 2015 to provide (a)All transactions entered
of GAAR to that provisions of Chapter X-A into before 01.04.2017 be
be effective relating to General Anti- provided protection from
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The Institute of Chartered Accountants of India
from Avoidance Rule (GAAR) are applicability of GAAR, so as to
A.Y.2018-19 - made applicable from A.Y. further improve the investment
Protection 2018-19. In effect, the climate in the country.
from applicability of GAAR is
applicability deferred by two years.
(b)Section 144BA, providing
of GAAR In this regard, the following
for reference to Principal
should not further amendments are
Commissioner or
be restricted required:
Commissioner in certain
to only (a) As per the Explanatory
cases, be consequently
investments, Memorandum to the Finance
deferred by two years and
but may Bill, 2015, investments made up
made applicable with effect
extend to all to 31.03.2017 are to be
from A.Y.2018-19.
transactions protected from the applicability
upto of GAAR by amendment in the
31.03.2017 relevant rules in this regard.
Accordingly, Rule 10U has been
appropriately amended, and all
investments made before
1.4.2017 are protected from the
applicability of GAAR.
However, all transactions
entered before 01.04.2017, and
not only investments made,
need to be protected from the
applicability of GAAR, so as to
further improve the investment
climate in the country
(b) Further, the applicability of
section 144BA providing for
reference to Principal
Commissioner or Commissioner
to declare an arrangement as
an impermissible avoidance
arrangement in order to
determine the consequence of
such an arrangement within the
meaning of Chapter X-A, also
needs to be consequently
deferred by two years and made
applicable from A.Y.2018-19.
109. Section 95 - a) Meaning of the terms · It needs to be clarified
General Anti- `Substantial' and 'Significant' what shall constitute as
in Section 97(1) of the Act "substantial commercial
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Avoidance purpose' and "significant
Rule The Finance Act, 2015 deferred effect' for the purpose of
implementation of General Anti section 97 of the Act.
Avoidance Rules (GAAR) by two
years so as to introduce · Substantial commercial
provisions of GAAR with effect purpose may be explained
from Financial Year (FY) 2017- with reference to the terms
18. The Finance Act, 2016 used viz. location of an
provides for the effective date as asset/transaction or place
1 April 2017. of residence of a party (for
e.g. whether it would be
Section 97(1) of the Act provides specified value of assets
that an arrangement shall be located; value of a
deemed to be lacking transaction as comparable
commercial substance, if inter to the total assets of the
alia;- business or any other
· it involves the location of such related parameter).
an asset or of a transaction
or of the place of residence · Similarly, what will
of any party which is constitute as `significant
without any substantial effect' vis -a-vis business
commercial purpose other risks / net cash flows
than obtaining a tax benefit needs to be clarified.
for a party; or
· it does not have a
significant effect upon
business risks, or net cash
flows apart from the tax
benefit.
The terms `substantial
commercial purpose' and
`significant effect' in the context
of GAAR have not been defined
in the Act.
b) Clarification on the term `tax Clause (e) and (f) should be
benefit' as defined under appropriately worded to
section 102(10) of the Act correspond with the `tax'
amount. In other words, the
The term `tax benefit' as defined reference to income/loss
under section 102(10) of the Act should not be the base for
includes,-- defining the term `tax benefit'.
In line with the Expert
"(a) a reduction or avoidance or Committee recommendations,
deferral of tax or other amount it is suggested that:
payable under this Act; or a) the tax benefit should be
(b) an increase in a refund of tax computed in the year of
or other amount under this Act; or deferral and the present value
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The Institute of Chartered Accountants of India
of money should be
(c) a reduction or avoidance or
ascertained based on the rate
deferral of tax or other amount that
of interest charged under the
would be payable under this Act,
Act for shortfall of tax payment
as a result of a tax treaty; or
under section 234B of the Act.
(d) an increase in a refund of tax
or other amount under this Act as b) for the sake of clarity it
a result of a tax treaty; or may be specified that tax
benefit for the purposes of
(e) a reduction in total income; the threshold shall include
or only income tax, dividend
(f) an increase in loss, distribution tax and profit
distribution tax, and shall
in the relevant previous year or not include other amounts
any other previous like interest, etc.
year;"(Emphasis
supplied)
Clause (e) and (f) in the definition
refer to "reduction of total income"
and "increase in loss" as tax benefit.
An ambiguity arises as to how tax
benefit is conditioned at income /
loss level. This may also defeat the
objective of INR 3 crore tax benefit
threshold as provided in Rule 10U
of the Income-tax Rules, 1962 (the
Rules).
Computation of tax benefit on
deferral of tax (which is merely a
timing difference) needs to be
clarified. As observed by the Expert
Committee recommendations6, in
cases of tax deferral, the only
benefit to the taxpayer is not paying
taxes in one year but paying it in a
later year. Overall there may not be
any tax benefit but the benefit is in
terms of the present value of
money.
6
Page 48 and 49 of the Final Report by the Expert Committee on GAAR chaired by Dr. Parthasarathi Shome.
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Further, as observed by the Expert
Committee7, the term tax benefit
has been defined to include tax or
other amount payable under this
Act or reduction in income or
increase in loss. The other amount
could cover interest.
c) India has signed the `Multilateral It is suggested that GAAR
Instrument' (MLI) in accordance provisions should not be made
with the Base Erosion Profit applicable to abusive
Shifting (BEPS) Action Plan 15 of transactions (in the case on
the OECD, which, inter alia, deals MNE's) which are subjected to
with the denial of tax treaty anti-abuse provisions under the
benefits in certain cases of anti- tax treaty pursuant to adoption
abuse arrangements/transactions of the MLI provisions. Once the
entered into by the taxpayer. The anti-abuse provisions are
MLI provides for insertion of anti- inserted in the respective tax
abuse provisions (the PPT and the treaties through the MLI, the
LOB provisions) in the tax treaties government could then assess
so as to deny tax treaty benefits in the situation and examine if
case of abusive GAAR provisions should be
arrangements/transactions being made applicable in the case of
entered into by the taxpayer. The the said non-resident
anti-abuse provisions inserted taxpayers'. This would also
through the MLI would be effective pave the way for a conducive
once the same are ratified by both economic environment and
the signatories to the MLI. With persuade the global
India having signed the MLI, there multinationals to establish their
could be a possibility that the same foot print in India with a clarity
transaction/arrangement could be on the domestic tax laws
subjected to multiple anti-abuse prevalent in the country.
provisions, one would be through
the anti-abuse provisions inserted
in the tax treaty network through
the MLI and second by way of the
same transaction being subjected
to the GAAR provisions which also
targets anti-abuse provisions.
7
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The Institute of Chartered Accountants of India
CHAPTER XII-
DETERMINATION OF TAX IN SPECIAL CASES
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
110. Removal of At present, long term capital It is suggested that
anomalies in gain is taxed @ 20% in appropriate provisions be
sections 111A pursuance of the provisions of made in the Act whereby the
& 112 section 112. Whereas, in case tax liability of an individual
of individual assessee having whose taxable income
normal income, the rate of tax consists of only long term or
upto Rs. 5,00,000 is only 10%. short term capital gain,
This leads to a situation where should not in any case,
in case if one's gain from exceed the amount of tax
transfer of long term capital liability calculated deeming
asset is below Rs. 5,00,000 the capital gain as regular
then also he is required to pay income. This can be done by
tax @ 20% plus cess as per making the provisions of
section 112 whereas his tax Section 111A & 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.
111. Section Section 112(1)(c)(iii) was It is suggested that the
112(1)(c) - introduced in the year 2012 to benefit of concessional rate
Long-term extend the beneficial rate of tax of 10% be extended to
capital gains at the rate of 10 percent, on resident shareholders also
on shares of a long-term capital gains (which on sale of shares of a
company, not was earlier only available to company not being a
being a Foreign Institutional Investors) company in which public are
company in to other non-resident investors substantially interested.
which public including Private Equity
are Investors.
substantially The Finance Act, 2016
interested, to amended Section 112(1)(c)(iii)
be eligible for of the Act to replace the word
concessional `unlisted securities' with
rate of tax @ `unlisted securities or shares of
10% a company not being a
company in which the public are
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
substantially interested' wi th
retrospective effect from FY
2012-13.
It has been stated in the
Memorandum explaining the
Finance Bill, 2016 that under
the existing provisions of
Section 112(1)(c)(iii) of the Act,
a view was taken by some of
the Courts that shares of a
Private Company do not
constitute `Securities' under
SCRA.
The amendment has been
made to clarify that the section
was introduced with an
intention to extend the benefit
to LTCG arising on shares of a
company, being a company in
which the public are not
substantially interested (i.e.
private company) as well.
112. Section The Finance (No.2) Act, 2014 Section 13(7) may be
115BBC read had substituted Section reworded as follows:-
with section 115BBC(1)(ii) w.e.f 1-4-2015 to "Nothing contained in
13(7) - taxation provide income tax payable section 11 and 12 shall
of anonymous shall include the amount of operate so as to exclude from
donations income tax with which the the total income of the
assessee would have been previous year of the person in
chargeable had his total income receipt thereof, any
been reduced by the anonymous donation
anonymous donations received referred to in section 115BBC
in excess of 5% of donations on which tax is payable in
received or Rs.1,00,000 as the accordance with the
case may be. provisions of clause (i) of
sub-section (1) of that
section.
Further, section 13(7) provides that
nothing contained in sections 11 and
12 shall operate so as to exclude
from the total income of the previous
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year of the person in receipt thereof,
any anonymous donation referred to
in section 115BBC on which tax is
payable in accordance with the
provisions of that section.
Section 13(7) refers to the
anonymous donations on which
tax is payable in accordance
with the provisions of section
115
BBC. Since the income tax
payable under section 115BBC
in aggregate of tax payable on
such donations (115BBC(1)(i))
and tax payable on other
income (115BBC(1)(ii)), the
language of section 13(7)
needs to be amended to include
reference of tax payable in
accordance with the provisions
of section 115BBC(1)(i).
113. Section The provision to tax dividend in It is suggested that this levy
115BBDA the hands of the recipient amounting to multiple level
Dividend results in economic four level taxation on profits may be
received by taxation viz. done away with.
resident - once as corporate tax on Alternatively, the earlier
individuals, profits, system of taxation of
HUFs and dividend, prior to 1997,
- secondly as DDT in hands of
firms receiving namely, tax in the hands of
the company,
dividend in the shareholder can be re-
excess of - thirdly as tax on dividends.
introduced and levy of
Rs.10 lakh to - Fourth by disallowing Dividend Distribution Tax in
be subject to expenses on dividend u/s. 14A. the hands of the company
tax @ 10% in The economic tax ultimately may be removed.
their hands borne by resident shareholders
Consequence may be as high as 54%.
of the new
levy- Triple
taxation
114. Tax on certain In the Finance Act, 2016 new As the timing of receipt of
dividends section 115BBDA was dividend is uncertain and
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received from introduced to levy tax on certain estimation of the same is also
domestic dividend income received by a not possible, it is suggested
companies resident individual, HUF and that exemption from advance
firms aggregating Rs.10 lakhs tax provisions may be given
(Section
at the rate of 10%. However the for such Dividend Income
115BBDA) act has not clarified about the taxable under section
payment of advance tax on the 115BBDA.
same. Further, it is suggested that
full and complete advance tax
in this respect may be
permitted to be paid by the
31st march of the previous
year.
115. Section The Finance Act, 2016 had To remove such hardship, it
115BBDA inserted a new Section is requested that a suitable
Scope of 115BBDA to tax dividend amendment may be brought
income in excess of Rs. 10 lacs in to exclude pooling
section
in case of an Individual, HUF vehicles like Mutual funds,
115BBDA, and Firm at the rate of 10%. AIFs, etc. from the purview of
initially The Finance Act, 2017 section 115BBDA.
restricted to extended the scope of section
individuals, 115BBDA of the Act to include
HuFs and all categories of persons within
Firms, its purview except a domestic
company, a fund or institution
expanded
or trust or any university or
Certain other educational institution or
pooling any hospital or other medical
vehicles like institution referred to in section
Mutual funds, 10(23C)(iv) or section
AIFs etc. to be 10(23C)(v) or section
exempted 10(23C)(vi) or section
10(23C)(via), a trust or
institution registered under
section 12AA.
The aforesaid amendment as
made in section 115BBDA of
the Act only excludes certain
specified persons from its
purview. Therefore, by
implication, all other persons
are covered within the purview
of Section 115BBDA of the Act.
The said amendment
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particularly impacts some of the
pooling vehicles such as Mutual
funds and Alternative
Investment Funds (AIFs) which
represent multiple investors, to
whom the income earned has to
be distributed.
Pursuant to the amendment
made, dividend in excess of Rs.
10 lakhs would become taxable
in the hands of the aforesaid
pooling vehicles even though
the share of dividend income of
each investor in such pooling
vehicles may not exceed Rs. 10
lakhs.
116. Section 115BBF Concessional rate of tax @ 10% on income from patent
Issues to be addressed
a) Benefit may The Finance Act, 2016 has It is suggested that the
be extended to inserted section 115BBF to tax benefit of concessional rate
other of tax @ 10% of income by
royalty income derived from
way of royalty in respect of a
intellectual worldwide exploitation of
patent developed and
property rights patents developed and registered in India be also
registered in India @ 10%. extended to other intellectual
It is a welcome move and would property rights like know-
greatly boost the research and how, copyright, trade-mark
innovation environment in the etc.
country. However, the provision
provides the benefit of reduced
rate of tax to only royalty
income derived from patents
subject to specified conditions.
This may partly achieve the
intended objective of the
government behind introduction
of this provision i.e. to
encourage indigenous research
& development activities and to
make India a global R & D hub,
research is the driver of
innovation and innovation
provides a thrust to economic
growth.
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The current income tax law
treats the other intellectual
rights like any know-how,
copyright, trade-mark, license,
franchise or any other business
or commercial right of similar
nature or information or
technique likely to assist in the
manufacture or processing of
goods or provision for services
in the same vein as patent.
Hence, there appears to be no
reason not to extend the benefit
of section 115BBF to income
from other intellectual property
rights.
In particular, it needs mention
that jurisdictions like Ireland,
Luxemburg extend benefit by
specifically covering software
within the list of qualifying
assets though; commercially it
enjoys protection under
Copyright Act and not under
Patent Act.
b) Benefit The benefit of the provision is It is, hence, suggested that
restricted to restricted to `true and first the condition of joint
`true and first patentee also being `true and
inventor of the invention'. As
first inventor' be omitted. If
inventor of the per the provision, even a
the intent is to allow benefit
invention': person who is jointly registered only to first person to register
Benefit may be with `true and first inventor' patent, the phrase `being the
extended to should be `true and first true and first inventor of the
assignee of inventor'. invention' used in context of
the true and In view of following features joint person may be
first inventor under the Patent law, the substituted with the phrase
benefit of the provision may be `being the assignee of th e
in respect of
denied to true and first inventor in
the right to respect of the right to make
make an firms/LLPs/companies who
an application for a patent'.
register the patents jointly with
application for
true and first inventor who may
a patent
be an employee even though
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they may have incurred
significant expenditure for
development of the patent and
they are first economic owners
of such patent.
Under the Patents Act,
following persons can apply for
patent (a) a person claiming to
be true and first inventor of the
invention (b) an assignee of the
true and first inventor in respect
of right to make an application
and (c) legal representative of a
deceased person who
immediately before his death
was entitled to apply.
It is also settled under the
Patent Act that a company or
firm cannot claim to be `true and
first inventor'. They can only
apply as assignee of true and
first inventor.
Similarly, whether an invention
made by employee should
belong to employer depends
upon contractual relations,
express or implied. It is possible
that, in the absence of any
contractual obligation, an
employee may apply for an
invention in his own name even
though he developed the
invention in the course of
employment and by using
employer's resources.
c) Benefit may The taxpayer may exploit its It is suggested that, in line
be extended to Intellectual Property by outright with BEPS Action 5, in
capital gains transfer which has no addition to royalty income,
differential impact merely this concessional regime
arising on sale
because for one assessee the maybe extended to income
of patented amount is assessable as on sale of patented products
products business income whereas for also.
other it is assessable as capital
gains income. There is no
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reason to exclude amount
which is chargeable as capital
gains in the hands of the
taxpayer.
d) Extension of The commercial exploitation of It is suggested that the
benefit to invention starts even before it is concessional tax regime be
royalty income formally registered as a `patent' extended to royalty income
under the Patents Act. The earned from patents which
earned from
Patents Act recognises that are applied for and awaiting
inventions for even the right to apply for registration as well.
which patents patent can be assigned. As per
are applied the provision, royalty from a
under Patents patent which is `registered'
Act 1970 but alone will qualify for the new
registration is regime. If royalty income is
earned when patent application
awaited
is filed but registration is
awaited, there may be denial of
the benefit.
e) Other Issues Some of the conditions for To make the regime truly
which need to availing the benefit of meaningful and comparable
be addressed concessional tax regime is that
to the regimes which exist in
the patent should be developed
other jurisdictions, its scope
and registered in India, the
patentee should be a resident need to be extended to cover
and income should be in the or clarify the following:
nature of royalty. a. That consideration
received for settling
infringement disputes is also
an alternative form of royalty
which qualifies for the
benefit.
b. To provide an
option to the taxpayer to opt
out of the regime if the
expenditure and allowances
admissible in computation of
royalty income is likely to
result in net taxation below
the regime prescribed rate.
c. Since almost all
comparable jurisdictions
extend benefit to non-
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resident permanent
establishment which
develops IP under the
circumstances comparable to
those under which IP is
developed by the resident.
The benefit may be extended
to non-resident having
permanent establishment in
India.
d. In case of a
business reorganisation in
the form of merger, demerger
etc., the successor entity and
in case of death of the patent
owner, its legal heir/inheritor
of the patent may be
considered as eligible to
claim the benefit provided
such successor/legal heir
satisfies the condition of
being a resident of India.
117. Insertion of The introduction of section It is suggested that:
section 115BBG vide the Finance Act,
115BBG - 2017 providing for a 10 percent
a. Section 2(24) may be
Income from tax on income from transfer of
amended to include
transfer of carbon credits is a welcome
income from transfer of
carbon credits move. This would go a long
carbon credits in the
to be taxed @ way in helping to resolve the
definition of "income".
10% - uncertainty and litigation over
Inclusion in the taxability of income from the
transfer of carbon credits going b. for the periods prior to
definition of
forward. Assessment Year 2018-
income under
19, an option may be
section 2(24) given to taxpayers to
and Consequent amendment is
voluntarily offer income
clarification required in the definition of the
from transfer of carbon
regarding tax term `income' under Section
credits to tax at the same
treatment for 2(24) of the Income-tax Act to
10% rate as
include the income from
prior contemplated in section
transfer of carbon credits.
assessment 115BBG. This can help
years put an end to protracted
litigation on the issue.
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Further, the position regarding Considering that such
taxability of income from receipts have been held
transfer of carbon credits for as non-taxable capital
earlier years may be clarified receipts by two High
since there have been Courts, such a move will
divergent decisions given by also benefit the
the courts on whether such exchequer.
receipts are capital or revenue
in nature. If the tax treatment is
The option to pay tax on such
made applicable for earlier
receipts at 10% could be
years also, it would garner more
structured as a one-time
revenue from assessees who
scheme open for a limited
have not offered the same to
time.
tax on the ground that the same
represents capital receipt. This
would also help avoid future
litigation and complete pending
assessments.
The Government has also been
taking several steps aimed at
curbing litigation. These include
coming up with schemes for
dispute resolution both for
legacy disputes arising out of
retrospective amendments as
well as other disputes that are
pending in the appellate
hierarchy. These measures and
schemes are welcome steps
and have been commended by
the taxpayers. A similar
scheme for income from
transfer of carbon credits for the
past years would go a long way
towards furthering the
Government's stated objective
of curbing litigation.
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CHAPTER XII-B
SPECIAL PROVISIONS RELATING TO CERTAIN
COMPANIES
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118. Section 115JAA The Finance Act, 2017 amended In line with the intent of
Extension of period section 115JAA of the Income-tax the legislative
of carry forward of Act, 1961 to provide that the tax amendment and to
credit in respect of Minimum ensure equity, it is
MAT credit from 10
Alternate Tax (MAT) paid by suggested that
years to 15 years - companies under section 115JB of appropriate clarification
Clarity regarding the Act can be carried forward up to either by way of an
carry forward and set fifteenth assessment year Explanation in section
off of MAT credit in immediately succeeding the 115JAA or by way of an
cases where the ten assessment year in which such tax Explanatory circular be
year period has credit becomes allowable. This issued to the effect that
amendment is being made effective such benefit is available
expired on or before
from 1 April, 2018. even in cases where the
AY 2016-17 but the Earlier, the MAT credit was not ten year period expired
fifteen year period allowed to be carried forward before A.Y.2018-19 but
has still not expired beyond ten assessment years. The the fifteen year period
relevant provisions of Section has still not expired.
115JAA of the Act are reproduced
as under-
"(3A) The amount of tax credit
determined under sub-section (2A)
shall be carried forward and set off
in accordance with the provisions of
sub-sections (4) and (5) but such
carry forward shall not be allowed
beyond the tenth assessment year
immediately succeeding the
assessment year in which tax credit
becomes allowable under sub-
section (1A).
(1A) Where any amount of tax is
paid under sub-section (1) of
section 115JB by an assessee,
being a company for the
assessment year commencing on
the 1st day of April, 2006 and any
subsequent assessment year ,
then, credit in respect of tax so paid
shall be allowed to him in
accordance with the provisions of
this section." (Emphasis supplied)
An issue arises in cases where the
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ten year period has expired with the
assessment year 2016-17 owing to
completion of 10 years period on the
basis of the erstwhile provisions.
In such cases, having regard to the
amendment made, a question
arises as to whether the benefit
which has already lapsed will get a
new lease of life. The ambiguity
arises since the extension of carry
forward period to fifteen years shall
take effect only from April 1, 2018
(i.e. A.Y. 2018-19).
It may be noted that a similar
amendment was made in Section
115JAA vide the Finance Act, 2009
wherein the carry forward of MAT
credit was extended upto 10
assessment years from 7
assessment years. The Explanatory
Memorandum to the Finance Bill,
2009 reads as under:
".. .the assessees, being
companies, who pay Minimum
Alternate Tax under section 115JB
for any assessment year beginning
on or after the 1st day of April,
2006, it is also proposed to amend
the provisions of sub-section (3A) of
section 115JAA..." ( Emphasis
Supplied)
The issue discussed above did not
exist when the tenure was extended
from 7 to 10 years as the
amendment was brought before the
expiry of the available bracket for
carry forward.
The memorandum explaining the
provisions of the Finance Bill, 2017
states as follows:
"Section 115JAA contains
provisions regarding carrying
forward and set off of tax credit in
respect of Minimum Alternate Tax
(MAT) paid by companies under
section 115JB. Currently, the tax
credit can be carried forward upto
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tenth assessment years. With a
view to provide relief to the
assessees paying MAT , it is
proposed to amend section 115JAA
to provide that the tax credit
determined under this section can
be carried forward up to fifteenth
assessment years immediately
succeeding the assessment years in
which such tax credit becomes
allowable...
....These amendments will take
effect from 1st April, 2018 and will,
accordingly, apply in relation to the
assessment year 2018-19 and
subsequent years." (Emphasis
Supplied)
It appears from the language of the
Memorandum that the intent of the
legislature is to provide relief to the
taxpayers paying MAT by extending
the carry forward period for MAT
credit. However, the strict
interpretation of the provisions does
not appear to sync with this intent.
The issue in hand needs to be
addressed so that taxpayers' whose
MAT credit carry forward period has
lapsed should not be at a
disadvantage and suffer from the
transitional impact of the said
amendment.
119. Section 115JAA(2A) - In line with Rule 128(7), the Finance The restriction on carry
Restriction on carry Act 2017 inserted second proviso to forward of MAT/AMT
forward of MAT/AMT section 115JAA(2A) restricting credit may be removed.
quantum of MAT credit to be carried
credit and claim of
forward to subsequent years. The
FTC in relation to proviso provides that where the
taxes under dispute - amount of FTC (Foreign Tax Credit)
Restriction to be available against MAT/AMT is in
removed excess of FTC available against
normal tax, MAT/AMT credit would
be reduced to the extent of such
excess FTC.
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Similar restriction is imposed in S.
115JD(2) on AMT credit.
Both the provisions are made
effective from 1 April, 2018 i.e. will
apply in relation to A.Y. 2018-19 and
onwards.
The rationale of aforesaid
restriction/limitation is not clear. The
restriction on quantum of MAT/AMT
credit to be carried forward subjects
taxpayer to duplicated MAT liability
while denying the rightful carryover
of MAT/AMT credit.
The FTC is an alternative form of tax
payment. For all purposes including
for grant of refund or levy of interest,
FTC is treated as advance tax paid
to the extent the same is creditable
against tax liability in India. Once
MAT liability is admitted to be tax
liability on income in India, there is
no justifiable reason for treating
FTC separately depending on
whether FTC is creditable against
normal tax liability or MAT liability.
The said amendment is inconsistent
with the Government's assurance
that MAT is to be effectively phased
out and incidence of MAT is to be
counter matched by grant of
extended period of MAT credit.
120. Set Off of MAT Credit There is no ambiguity with regard to It is suggested that Set-
from Tax on Total the method of computation of tax off of B/f MAT Credit as
Income before liability in view of the fact that per Section 115JAA may
income tax e-filing return Form ITR be allowed against tax
charging surcharge
6 allows deduction for credit under on total income before
and education cesses Section 115JAA from the gross tax charging any surcharge
- Section 115JAA payable excluding surcharge and and education cesses.
education cesses and specifically
instructs an assessee to compute
surcharge and education cess on
the tax payable after reduction of
MAT Credit brought forward u/s
115JAA. The manner of set off of
brought forward MAT Credit is
nowhere prescribed in the Income-
tax Act, 1961. But the issue is
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squarely covered by the decision of
the Hon'ble Allahabad High Court in
CIT v Vacment India (2014) 369 ITR
304.
121. Section 115JB BACKGROUND In view of aforesaid, it is
Amendment required Presently, there is increased focus suggested that:
and clarification on resolution of large NPAs faced by 1. (i) The
banking sector. The Government provisions of section
sought in respect of
and RBI are vigorously pursuing 115JB of the Income-tax
taxability of waiver of several measures to reduce NPAs Act,1961 may be
Principal amount by through different debt-restructuring suitably amended to
banks/ NBFC schemes. Extreme measure of provide for specific
initiating insolvency proceedings exclusion for:
against large borrowers through a) principal
newly enacted Insolvency and amount of loan waiver
Bankruptcy Code 2016 is also being credited to the
pursued. The Sick Industrial statement of Profit and
Companies (Special Provisions) loss and
Act, 1985 (for which necessary b) interest waiver
benefit is given under existing credited to the
section 115JB) is repealed in statement of Profit and
December, 2016. loss to the extent it was
not debited to the
The outcome of compromise or debt statement of Profit and
restructuring measures is likely to loss in earlier years
result in a situation where where the waiver is
substantial part of debt owed by the granted by banks or
borrower company may be waived public financial
by the lenders. The borrowing institutions or NBFC
companies may consequently write pursuant to any scheme
back such liabilities in their books by framed under RBI
credit to Profit & Loss statement as guidelines or
required by applicable Accounting proceedings under
Principles. Insolvency and
Bankruptcy Code 2016.
Issues (ii) The existing
The loan waiver (which may include provisions which
outstanding principal and interest) is provides for reduction
not likely to adversely impact of lower of loss or
companies in normal tax depreciation for the
computation having regard to purpose of computation
following:- of book profit may be
i. Waiver of outstanding amended to remove the
interest which has not been allowed condition of
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as deduction in view of limitation of depreciation and
section 43B (which permits thereby the entire
deduction only on actual payment) unabsorbed losses
is not taxable u/s 41(1). This (including unabsorbed
includes interest which is depreciation) as per
capitalised to asset cost as required books of accounts
by proviso to section 36(1)(iii) read should be allowed to be
with ICDS IX and/or ICAI's AS16. reduced for the purpose
Section 41(1) being a claw back of calculation of book
provision captures only those items profit.
which have earlier been allowed as 2. There are
deduction in normal tax disputes about
computation. taxability of waiver of
ii. Waiver of principal principal amount in
amount of loan which has been used respect of working
for capital purposes, as per capital loans from
preponderant judicial view, is not Banks/ NBFC. As
taxable as `income' under normal explained, waiver of
computation. It is not taxable u/s principal amount in
41(1) since the loan was not allowed Resolution Plan under
as deduction in the past. The waiver Insolvency and
represents a capital receipt which is Bankruptcy Code will
outside the scope of charging help to revive the
provisions of section 4 and 5 of the company. On principles,
Income-tax Act, 1961. However, on there is no difference
waiver of principal amount of loan between loan used for
used for working capital purposes, acquiring capital asset
taxpayers are facing difficulty in or for working capital.
view of court rulings which have The loan raised is not
held such waiver to be taxable as allowed as business
business income deduction to trigger
Due to the waiver of loan and section 41(1) on waiver.
interest which will be credited to Also, waiver of loan
profit and loss account, borrower cannot be regarded as
companies will have to consider business perquisite u/s.
Minimum Alternate Tax provisions 28(iv) which can apply
of section 115JB which seeks to only to benefits
levy minimum tax @ 18.5% of `book received in regular
profit'. The `book profit' is computed course of business (like
by adopting net profit as per Profit freebies or gifts) Hence
and loss A/c and subjecting it to it is requested to clarify
upward and downward adjustments that any waiver of
prescribed in section 115JB. principal amount by
To the extent, waiver of outstanding banks/ NBFC will not be
interest which was debited to Profit taxable under normal
and loss in earlier years is included provisions of the Act.
in `book profit' of current year and
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taxed under MAT, it would be fair to
treat the amount as income being
identical to taxation under normal
computation u/s 41(1).
Under MAT provisions, the taxation
of principal amount of loan waiver
used for capital purposes and/or
interest which was capitalised to
asset cost under AS 16 by including
the same in `book profit' creates
onerous burden on borrower
companies for following reasons :-
i. It is well settled that
waiver of said amounts are not
liable to tax under normal
computation. This results in
mismatch between normal
computation and MAT based on
`book profit'.
ii. The waiver amounts are
likely to be substantial resulting in
huge MAT liability at effective MAT
rate of 18.5% on waived amounts.
iii. The exclusion provided in
MAT computation for profits of sick
industrial companies till net worth of
such companies becomes NIL or
positive is not effective since Sick
Industrial Companies (Special
Provisions) Act, 1985 is now
repealed and all such companies
will now have to file the application
under Insolvency and Bankruptcy
Code. Further, even under existing
provision, exclusion does not apply
if waiver is granted when net worth
of the company is positive.
iv. The provisions for set-off
of brought forward book
loss/unabsorbed depreciation in
MAT computation are very
restrictive. Set off is available for
lower of the two figures and no set
off is available if one of the two
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figures is NIL. Hence, company is
not able to effectively absorb past
book losses in its MAT computation.
v. A company which is
already reeling under high debt and
losses and is attempting to recover
through debt restructuring scheme
will face substantial cash flow
burden due to MAT liability with no
visibility on whether it will be able to
utilise the MAT credit over next 15
years. Companies which get
liquidated pursuant to insolvency
proceedings will never be able to
utilise the MAT credit.
vi. Bankers will also be
reluctant to waive off their secured
debt if they realise that substantial
part of debt waived off in the
interests of reviving the company
will get locked up in MAT payment.
Besides it is also unfair to tax the
principal amount of loan waiver
under MAT for following reasons:-
i. MAT was introduced to
make companies which declared
high profits and paid dividends to
shareholders but paid very little or
low taxes by availing different tax
incentives, pay a minimum amount
of tax.
ii. It is an alternate basis of
taxation in lieu of normal
computation. MAT cannot
overreach the charging provisions
of section 4 and 5 and seek to levy
tax on capital receipts which are not
liable to tax under normal
computation. It is well settled that
every receipt is not income.
iii. Principal amount of loan
waiver as a capital receipt stands on
a different footing as compared to
other capital receipts like exempt
capital gains which, but for specific
exemption under normal
computation, are otherwise within
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the scope of definition of `income'
and charging provisions of section 4
and 5.
iv. It is unfair to exempt
revenue incomes like dividend from
companies or mutual funds but tax
capital receipts in the form of loan
waiver under MAT.
Unfortunately the subject is highly
controversial and there are
conflicting judicial precedents
some in favour of taxpayer and
others favouring the Tax Authority.
The Government is very keen for
implementation of Insolvency and
Bankruptcy Code for reducing the
NPAs and to provide support to
companies for revival / restructuring
their operation in the best possible
manner. To attain this objective it is
suggested that necessary
amendment may be made in section
115JB of the Income-tax Act to align
with the Government's objective for
proper implementation of IBC Code.
122. Exclusion of Capital Sec 115JB of the Income-tax Act, It is suggested that:
Profit/Loss & Profit & 1961read with first proviso to
Loss on Sale of Fixed Section 10(38) of the Act. (i) Section 115JB may
be suitably amended so
Assets & Investments
Under the general arrangement of that capital profit/loss &
in computing Book the provisions in the Act under each Profit & Loss on Sale of
Profit for the purpose head of income, normally the Fixed Assets &
of Levy of MAT u/s charging provision is accompanied Investments is excluded
115JB by a set of provisions for computing in computing Book
the income subject to that charge. Profit u/s 115JB;
The character of the computation
provisions in each case bears a (ii) the first proviso to
relationship to the nature of the Section 10(38) of the
charge. Thus, the charging section Act, 1961 be also
and the computation provisions omitted.
together constitute an integrated
code. When there is a case to which
the computation provisions cannot
apply at all, it is evident that such a
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case was not intended to fall within
the charging section. In this regard,
it is pertinent to note that capital
receipt which does not have any
element of `income' or `profit'
embedded therein is neither
chargeable to tax under the Income-
tax Act nor includible in P&L A/c
prepared as per Schedule III to the
Companies Act, 2013. The
expression `income' has been
defined in Section 2(24) of the Act.
The said section defines the
expression `income' in an inclusive
manner and has been expanding
from time to time. Several items
have been brought within the
definition of `income' from time to
time by various amending Acts. Any
receipt may partake any of the two
character, either revenue nature or
capital nature. Receipt in revenue
nature only amounts to income
which is chargeable to tax. On the
other hand, capital receipts are not
income, and accordingly, they are
not subject to income tax levy.
Above view has been fortified by the
Hon'ble Apex Court in the case of
Padmaraje R. Kadambande v CIT
(1992) 195 ITR 877 (SC) wherein it
has been held that capital receipt
are not income within the meaning
of section 2(24) of the Act. The
above decision of the Apex Court
clearly lays down that a capital
receipt, in principle, is outside the
scope of income chargeable to tax.
A receipt, which is not in the nature
of income, cannot be taxed as
income. When the accounts are
prepared in accordance with
Schedule III of the Companies Act,
2013 and while making adjustments
as per the provisions of section
115JB, to compute book profits, the
amounts which are not taxable or
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exempt are excluded, because such
amounts do not really reflect a
receipt in the nature of income.
123. Section 115JB - The Ministry of Finance has clarified It is suggested that
Applicability of that foreign company not having a (a) a suitable
Minimum Alternate permanent establishment in India amendment may be
Tax (MAT) on foreign will be exempt from MAT. An made providing that
companies Benefit appropriate amendment has been foreign companies
may be extended to made in the Act in section 115JB in having permanent
foreign companies this regard vide the Finance Act, establishment in India
having permanent 2016. and covered under the
establishment and
The Income-tax Act, 1961 contains presumptive tax regime
covered under the
various provisions which provides may be kept outside the
presumptive tax
for presumptive tax regime for non- purview of MAT.
regime in India
residents (for example Section (b) in order to
44BB). avoid any controversy,
Under the presumptive tax regime, it may be clarified that in
foreign companies pay tax at lower case of foreign
rate. Such foreign companies do companies having PE /
form permanent establishment in Place of Business in
India even when their activities are India, the computation
confined to the areas specified in of book profits may be
the presumptive tax provisions. If based on India profits
such foreign companies are and not global profits.
subjected to MAT, the purpose for
which the beneficial concessional
tax rate regime has been introduced
as specified in the relevant sections
would be defeated.
MAT levy may be restricted to
India profits
Companies not having PE or Place
of Business in India are eligible for
absolute exclusion from MAT levy.
However, in relation to foreign
companies with presence in India,
who may or may not have separate
India specific accounts, issue may
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arise whether book profits should
be computed based on global
profits or only with regard to India
profits.
124. Tax Credit u/s 115JAA Minimum Alternate tax and It is suggested that for
& 115JD read with Alternate Minimum tax is paid u/s setting off of MAT
section 115JB & 115JC 115JB &115JC of the Act credit, a fresh period of
respectively. The amount of tax 10 years be allowed
credit so determined under section after the completion of
115JAA and 115JD is carried period of exemption
forward and set off in accordance under section 10A to
with the provisions of these sections 10C and deduction
but such carry forward is not under section 80-IA to
allowed beyond 15 th assessment 80-IE under normal
year immediately succeeding the provisions of the Act
assessment year for which tax provided it is the
credit becomes available. exclusive business of
In case of an assessee who is the assessee.
eligible to claim the exemption u/s (SUGGESTIONS FOR
10A to 10C or deduction u/s 80-IA RATIONALIZATION OF
to 80-IE, the said amount of tax THE PROVISIONS OF
credit is eligible for set off only after DIRECT TAX LAWS)
the expiry of the 10 th Assessment
year (in most cases) in which such
exemption and deduction is allowed
respectively. 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 15 th
assessment year immediately
succeeding the assessment year for
which tax credit become available.
125. Section 115JB - It appears that Disallowance/Adding Clause (b) and (i) of
Minimum Alternate back of provision for diminution in Explanation 1 to section
tax value of any asset for computation 115JB may be amended
of "book profit" is to be made in case as follows-
of every class of company {clause "(b) the amounts carried
(i) to Explanation 1 to section to any reserves, by
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115JB(2)}. However, in case of whatever name called
banking companies, the [other than a reserve
Government may reconsider specified under section
applicability of the disallowance 33AC and a reserve
provision. This is because of the fact created and allowed in
that in computation of business accordance with the
income under normal provision, provisions of section
deduction in respect of provision for 36(1)(viii)]
bad debts is allowed under express ....
provision contained in section
(i) the amount or
36(1)(viia) subject to the limit
amounts set aside as
specified in the said section. If
provision for diminution
provision for bad debts is allowed as
in the value of any asset
deduction in computation of
(other than provision for
business income under normal
bad and doubtful debts
provision, there does not appear to
allowed as a deduction
be any cogent reason for
under section
disallowing the same in computation
36(1)(viia))"
of "book profit" under section 115JB.
Similarly, any special reserve (SUGGESTIONS TO
created in accordance with the REDUCE/ MINIMIZE
provisions of section 36(1)(viii) also LITIGATIONS)
does not require any disallowance in
computation of book profit under
section 115JB.
126. Rationalization of As per section 115JB, where in It is suggested that in
provisions of MAT for case of a company, the income tax case of companies
short term capital payable on the total income as under the MAT regime,
gains computed under the Income-tax income tax liability for
Act in respect of any previous year short term capital gains
is less than 18.5% of its book profit, be the lower of the
then such book profit shall be following:
deemed to be the total income of 1) Income tax computed
the assessee and the tax payable as per provisions
on such total income shall be the of Section 111A of the
amount of income tax at the rate of Income-tax Act.
18.5%. This income tax is further to
2) Income tax computed
be enhanced by surcharge (as
as per provision of
applicable) and education cess(es)
section 115JB
(@ 3%).
of Income-tax Act.
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However, specified short term
capital gains are taxable @ 15%
under section 111A.
Due to this, companies under the
MAT regime may not be able to get
away with a lower tax rate of 15%
on Short term capital gains.
127. Section 115JB MAT Under Ind AS, prior period It is suggested that a
implications for Ind adjustments are not reflected in the specific provision for
AS compliant financials in which error is revising return in the
companies discovered but earlier period aforesaid situation may
financials are restated to which be provided or prior
such errors pertain. There could be period adjustments may
an issue if the return of income for be allowed to be
such earlier year has already been adjusted from book
filed and due date of filing revised profit in the year in
return has lapsed. which errors are
discovered
128. Clarity on MAT u/s The computation of book profit Most of the aforesaid
115JB under section 115JB is a questions are directly or
complicated and vexed issue with indirectly answered by
diverse interpretations possible on Circular 495 dated
various issues. These issues need 22.9.1987 w.r.t.
to be clarified to reduce litigation erstwhile section 115J.
before the appellate authorities, It may be clarified that
which is one of the aims of the the said Circular is also
Government. applicable to current
provisions of section
115JB as well.
The issues in question are as under:
For issues which are not
1) Meaning of the terms "loss
covered by the said
brought forward or unabsorbed
Circular, clarifications
depreciation" and "as per books of
may be issued to
accounts i.e. whether the intention
explain the legislative
is to prepare a separate
intent.
computation for the purposes of
computing brought forward losses,
as explained in Circular 495 (dated
22 September 1987) which was in
the context of section 115J of the
Act.
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2) The point of time at which loss or
unabsorbed depreciation should be
considered whether at the end of
the previous year or at the end of the
relevant previous year in which the
loss or unabsorbed depreciation
arose?
3) Is book loss of a year to be set-
off against profits of earlier years?
4) If book loss of a year is set-off
against reserves, will it be available
for set-off?
5) Is the book loss of an
amalgamating entity eligible for set-
off by the amalgamated entity?
6) Whether the brought forward loss
and unabsorbed depreciation is to
be aggregated separately first and
then these aggregates are to be
compared to determine which one is
lower?
129. Proposed amendment MAT-Ind AS Committee placed its Based on the proposed
to Section 115JB(2A) report dated 17 June 2017 providing carve outs in the
recommendations on proposed Committee Report dated
of the Act
amendments to the provisions of the 17 June 2017, the following
Section 115JB of the Act in respect of adjustments to any item of
Ind AS Compliant Companies. The "Other Equity" should also
Committee observed that in order to be excluded from addition /
have parity between the transition deletion from the book
adjustments and ongoing profit:
adjustments on account of items
adjusted to "Other Equity", an Capital reserve in respect
amendment is required to be made of Business combinations
with effect from 1 April 2017 i.e. the in respect of any other
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effective date of the amendment Business combinations as
made by the Finance Act 2017. per Ind AS 103.
As per the proposed amendment to Securities premium
Section 115JB of the Act, all amounts reserve arising on issuance
of shares or securities in
credited or debited during the
compliance with the
previous year to any item of "Other
provisions of the
Equity", excluding the carve outs as Companies Act, 2013.
mentioned therein, would need to be Adjustment to any item of
added / reduced in computing the "Other Equity" on account
book profit of the Company for MAT of capital reduction of
purposes. share capital of a company.
Issues
(i) One of the carve outs on which
MAT would not be applicable is
"capital reserve" in respect of
Business combinations of entities
under common control as per
Appendix C of IndAS 103.
However, capital reserve which
could arise in respect of any other
Business combinations under
IndAS 103 would fall under the
ambit of MAT. For example, any
re-structuring involving merger of
a target NPA entity (distressed
acquisition or bargain purchase)
with the acquirer (unrelated) may
qualify as a Business
Combination resulting in creation
of capital reserve (being the
difference in the fair value of fixed
assets acquired less the value of
shares issued by the acquirer).
Such capital reserve would need
to be added to book profits of the
Company and hence, subject to
MAT. It is recommended that
Capital reserve arising in respect
of any other Business
combinations as per IndAS 103
should be excluded from the
"Other Equity" for the Book Profit
computation.
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(ii) Another proposed carve out is
"securities premium collected in
cash and cash equivalents".
There is express definition of what
constitutes "cash and cash
equivalents" but in normal
parlance it means Cash and cash
equivalents comprise cash in
hand, demand deposits with
banks/corporations and short
term highly liquid investments
(original maturity less than 3
months) that are readily
convertible into known amount of
cash and are subject to an
insignificant risk of change in
value. However, in case where
the securities premium reserve
arises on account of a re-
structuring exercise e.g. on
conversion of loans or compound
instruments into shares or
securities at fair market value, or
on business combinations, such
securities premium would be
added to book profits and hence,
subject to MAT. It is
recommended that Securities
premium reserve arising on
issuance of shares or securities in
compliance with the provisions of
the Companies Act, 2013 should
be excluded for computation of
Book Profit.
(iii) In continuation of the example
cited in (ii) above, there could be
a scenario where an entity
proposes to re-structure its
financial statement by reducing
its equity share capital either for
re-alignment of shareholding
(e.g. reduction of promoter's
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equity on settlement with lenders
under applicable RBI guidelines)
or to adjust such share capital
against a debit balance in the
Retained Earnings. Such credit
to "Other Equity" or "Retained
Earnings" on Capital Reduction
of share capital would be liable to
be added to book profits of the
Company and subject to MAT. It
is recommended that Adjustment
to any item of "Other Equity" on
account of capital reduction of
share capital of a company
should be excluded for
computation of Book Profit.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 209
The Institute of Chartered Accountants of India
CHAPTER XII-BA
SPECIAL PROVISIONS RELATING TO CERTAIN
PERSONS OTHER THAN A COMPANY
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130. Section 115JD - Tax Section 115JD provides for tax It is suggested that
Credit in case of credit in respect of alternate Section 115JD be
succession minimum tax. The provisions of amended to allow carry
section 115JC are applicable to forward of AMT credit in
persons other than a company i.e. the hands of the
individual, HUF, Partnership firm successor entity for
including LLPs, AOPs etc. In this remaining/unexpired
era of growth, the possibility of period of credit.
reorganisation of the assessee
liable to pay AMT cannot be ruled
out. A proprietor ship firm eligible to
claim credit under section 115JD
can convert itself into a Partnership
firm or a LLP or AOP or any other
person. However, as per the
present provisions, once it will
convert itself, the successor shall
not be liable to claim AMT credit.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 211
The Institute of Chartered Accountants of India
CHAPTER XII-D
SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED PROFITS OF DOMESTIC COMPANIES
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DETAILED SUGGESTIONS
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131. Tax on · As per the provisions of Section
distributed 115-O of the Act, the domestic · It is suggested that all
profits of holding company will not have to dividends on which
domestic pay DDT on dividends paid to its DDT has been paid, be
shareholders to the extent it has allowed to be reduced
companies
received dividends from its from dividends
- subsidiary company on which irrespective of the
Section115- DDT has been paid by the percentage of equity
O(1A) subsidiary. The current holding keeping in
provisions give relief in respect mind that investment
of dividend received from only companies which do
those companies in which the not necessarily
recipient companies are holding own/have subsidiaries
more than half of the nominal as they invest in
value of equity capital. various companies in
the open market, be
· Section 115-O of the Act also also made eligible for
provides that the domestic such benefit.
holding company will not have to · The proviso to Section
pay DDT subject to the condition 115-O(1A) of the Act
that the dividend should be provides that the same
received from a subsidiary, amount of dividend
where such subsidiary is a shall not be taken into
foreign company, and the tax is account for reduction
payable by the Indian company more than once. The
under Section 115BBD of the Act levy of DDT at multiple
on the dividend received from the levels has been a
foreign company. Section subject matter of
115BBD of the Act prescribes the grievance. A part of
tax to be payable @ 15 per cent this issue has been
in case where the dividends are resolved by providing
received by an Indian company that if a holding
from a specified foreign company company receives
in which the Indian company dividend from its
holds 26 percent or more of the subsidiary, a further
nominal value of the equity share distribution of
capital. The condition of more dividend by the parent
than 50 percent holding in will not attract levy of
Section 115-O of the Act needs DDT. Promoter
to be realigned with the condition holdings in operating
of 26 percent holding in case of companies are not
Section 115BBD of the Act to necessarily in a single
enable less than 50 percent parent. Also,
shareholding entities also to irrespective of
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avoid the multiple taxation on whether there exists a
dividends distributed. parent-subsidiary
relationship, a tax on
· The condition that the dividend dividends which have
should be received from a already suffered levy
subsidiary is in a sense of DDT amounts to
restrictive in as much as a multiple taxation
company is stipulated to be a which should be
subsidiary of another company, if avoided. It is therefore
such other company, holds more suggested that
than half in nominal value of the dividends which have
equity share capital of the suffered DDT be
company. The said condition is treated as pass
unlikely to be fulfilled by majority through and be not
of the promoter companies which subjected to levy of
hold investment in operating DDT.
companies listed on stock · Further even Section
exchanges. Even shareholders 115BBD of the Act
of joint venture companies are prescribes for a lower
impacted by the above threshold of 26 per
restrictions. In both the cent holding in the
scenarios, since the operating / foreign company and
joint venture company i.e. the the dividends received
company declaring the dividend from the foreign
is not a subsidiary of any company are to be
company, the first condition i.e. taxed at 15 per cent.
dividend should be received from Thus, the said
a subsidiary company is never threshold should also
fulfilled and accordingly when be reduced in case of
the promoter company / Section 115-O of the
shareholder of joint venture Act from 50 per cent to
company declares dividend to a lower limit to enable
their shareholders, it cannot avoidance of multiple
deduct the dividend so received taxation of the same
from the operating / joint venture dividends received by
company for the purpose of the holding
payment of DDT. companies.
· The tax rate of DDT is
· DDT is currently payable at the suggested to be
basic rate of 15 per cent. Further, reduced to 10 per cent
dividends distributed by from the current
domestic companies and mutual effective rate of about
funds will be grossed up for the 20 per cent (after
purpose of computing DDT, including grossing-up
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translating into an effective tax of the dividend).
rate of about 20 per cent (after · To incentivise the
the levy of surcharge of 12 per investment in
cent and cess of 3 per cent). infrastructure sector,
it is suggested that
· The Memorandum explaining the DDT on industrial
provision of the Finance (No.2) undertakings or
Bill, 2014 states that prior to enterprises engaged
introduction of DDT, the in infrastructure
dividends were taxable in the development, eligible
hands of the shareholder. for deduction under
However, after the introduction Section 80-IA, may be
of the DDT, a lower rate of 15 per abolished. It is also
cent is currently applicable but recommended that
this rate is being applied on the further exemption
amount paid as dividend after from DDT be granted
reduction of tax distributed by the to the `infrastructure
company. Therefore, the tax is capital company/fund'
computed with reference to the with the condition that
net amount. In order to ensure it invests the dividend
that tax is levied on proper base, received from its
the amount of distributable subsidiary in the
income and the dividends which infrastructure
are actually received by the projects.
shareholder of the domestic · The Ministry of
company need to be grossed up Commerce and
for the purpose of computing the Industry (Department
additional tax. of Commerce) has
recommended the
The above memorandum restoration of original
appears to be contrary to the exemption from MAT
speech of the Finance Minister and DDT to SEZ
while introducing DDT in the developers and units.
Budget of 1997-98 stated as In line with these
follows: intentions of the
"Some companies distribute Government and to
exorbitant dividends. Ideally, attract more
they should retain the bulk of investment in the
their profits and plough them into SEZs, DDT on SEZ
fresh investments. I intend to developers and units
reward companies who invest in may be abolished.
future growth. Hence, I propose
to levy a tax on distributed profits
at the moderate rate of 10% on
the amount so distributed. This
tax shall be an incidence on the
company and shall not be
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passed on to the shareholder'.
Thus, the then moderate rate of
10 per cent has almost doubled
with an effective rate of DDT
resulting to about 20 per cent.
· The earlier DDT rate of 10
percent was comparative in line
with the rate of TDS on dividends
in most Indian and international
tax treaties. The increased basic
DDT rate of 15 per cent (effective
rate of about 20 per cent)
reduces the dividend distribution
ability of domestic companies
and the uncertainty with respect
to its credit in overseas
jurisdictions impacts the non-
resident shareholders adversely.
· Currently, DDT is also levied on
undertakings engaged in
infrastructure development
which are eligible for tax benefit
under Section 80-IA of the Act.
This is detrimental to the growth
of infrastructure facility in India.
Further, the Finance Act, 2011
has also burdened the SEZ
developers by including them in
the scope of DDT.
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CHAPTER XII-DA
SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED INCOME OF DOMESTIC COMPANY
FOR BUY-BACK OF SHARES
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
132. Section 115QA As per section 115QA of Income- In view of the concerns
Effect on foreign tax Act 1961, (Chapter XII-DA), in faced by foreign
investors after
investments the case of distribution of income
introduction of section
by the unlisted company on Buy
115QA, suitable
back of shares the law casts an amendments may be
obligation on the company to pay carried out in the
additional income tax @20% on Income-tax Act, 1961
the distributed income in addition so that foreign
to the corporate tax. In the case of investors do not have
foreign investor, the tax of 20% to pay tax when their
becomes payable even though the holding results in
amount received by him in foreign losses only due to
currency works out to less than the foreign exchange
amount which was brought in at fluctuation.
the time of initial investment. To
elaborate, the following illustration
has been given:
1. Amount invested by foreign
investor in unlisted company =
USD 1 million
2. Amount for which shares were
issued (Exchange rate USD 1 =
INR 40) = INR 4 Crores
3. No. of shares issued @10 per
share = 40,00,000
4. No. of Shares bought back by
the company (25% of share
issued) 10,00,000
5. Amount paid to foreign investor
(buy back price INR 12.50 per
share) = INR 1,25,00,000
6. Amount received by foreign
investor {USD 1 = INR 60} = USD
208,333
7. Loss to foreign investor (i.e.
250,000- 208,333) = USD 41,667
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8. Additional tax payable by the
company(125,00,000
100,00,000)*20% = INR 500,000
Tax to be paid by the company on
Rs. 25,00,000 is the final tax in
addition to corporate tax and the
amount of tax so paid is nothing
but tax paid by the foreign
investor. The foreign investor is
thus required to pay tax even when
he makes losses. Private equity
investor who had invested in India
are facing double concern - firstly
in the form of sharp depreciation in
Indian Rupee and secondly in the
form of tax amendment in the form
of section 115QA.
In this connection, it would be
worthwhile to say that distributable
income for foreign investor shall
be worked out by making the
foreign currency adjustment as per
the provisions which exists in
section 48 of Income-tax Act, 1961
used for computing capital gains,
and tax should be levied only on
the excess of amount received by
investors over the amount brought
in at the time of investment.
133. Section 115QA - As per the amendment to It is suggested that it
Rules Explanation (ii) to section may be explicitly
prescribed vide provided that the
115QA(1), (effective from 1.6.16),
specified rules,
Notification no. consideration received by
notified via Notification
94/2016 dated company on issue of shares to be No 94/2016, dated
17.10.2016 for bought back is to be determined as 17.10.2016, shall be
determining the per the Rules to be prescribed. applicable only for
amount received by Thereafter, Notification No computing
the company for 94/2016, dated 17.10.2016 consideration received
issue of shares inserted Rule 40BB to specify on issue of shares in
Rules to be rules pertaining to amount respect of buy back
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 219
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
applicable for buy- received by the company in which takes place on
back effected on or respect of issue of share or after 1 st June 2016.
after 01.06.2016 applicable w.r.e.f. 1.6.2016. An Further, necessary
issue arises as to whether these provision may be
rules can be applied only for buy- incorporated so that
back of shares taking place after the cost paid for
intermediate transfers
1st June 2016, or whether the
between the
same can be applied even for buy-
shareholders post
back of shares prior to 1st June issue of share by the
2016. company is reduced
for the purpose of
calculating the buy-
back tax.
Page 220 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
CHAPTER XII-EA
SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED INCOME BY SECURITISATION
TRUSTS
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 221
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
134. Section 115TCA The Finance Act, 2016 inserted It is suggested that the new
- Tax on income section 115TCA to provide for regime (section 115TCA) may
from transition of securitisation trusts be made applicable for
Securitisation from distribution tax regime to distributions on or after 1 st
Trust Tax complete pass through regime June 2016.
Treatment in (with TDS on distributions).
respect of However, the cut-off date
distributions in between old and new regime is
April and May not clear. Distribution Tax
2016 may be applies for distributions upto 31
clarified May 2016 whereas new regime
for complete-pass through (with
TDS) applies from A.Y. 2017-
18. This raises ambiguity on
whether distributions made
between April, 2016 to May,
2016 are covered under old
regime or new regime.
Page 222 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
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CHAPTER XII-EB
SPECIAL PROVISIONS RELATING TO TAX ON
ACCREDITED INCOME OF CERTAIN TRUSTS AND
INSTITUTIONS
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 223
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
135. Sections 115TD The Finance Act, 2016 inserted a. The provisions of
to 115TF a new Chapter XII-EB to Chapter XII-EB be
Special provide for levy of additional appropriately aligned
provisions income tax in case of with the intent expressed
relating to tax conversion into, or merger with, in the Explanatory
on accreted any non-charitable form/entity Memorandum i.e., to levy
income of or on transfer of assets of a exit tax only in case of
certain trusts charitable organisation on its voluntary wind-up of
and institutions dissolution to a non-charitable activities or dissolution
Issues to be institution. However, sub or merger with
addressed section (3) deems such charitable/non-charitable
conversion to have taken place institutions or
if registration granted to a trust conversion of charitable
under section 12AA is institution into non-
cancelled. In other words, the charitable institution.
process of `conversion'
includes a case where
b. The amount on which tax
registration of charitable trust is
has been levied in an
cancelled under section 12AA.
earlier year due to non-
There may be host of grounds
compliance of the
including inadvertent defaults
provisions of section 11
of non-compliance with section
to 13 should not be
13(1) which can be a ground for
included once again
invoking cancellation under
while computing
section 12AA. This neither
accreted income for levy
indicates intent to convert
of exit tax, since the
property into a non-charity nor
same would result in
a case where the charitable
double taxation.
objects are abandoned. In fact,
the order cancelling registration
under section 12AA is
appealable and there is a
possibility of reversal of such
order at the appellate stage.
Further, sub section (5)
requires payment of tax within
fourteen days of the
cancellation of registration
under section 12AA, which may
cause hardship in genuine
Page 224 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
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Sr. No Section Issue/Justification Suggestion
cases. There are a number of
judgements where the orders of
cancellation of registration
have been struck down
subsequently in appellate
proceedings. In such
circumstances, requiring the
trust to pay the tax and interest,
when an appeal is pending,
may not be justifiable.
The levy of exit tax may result
in double taxation in cases
where a whole or part of the
amount, may have been
assessed to tax in earlier years.
For instance, trust may have
suffered tax on account of non-
compliance of provisions of
section 11 or section 13.
Accordingly, the amount on
which tax has been levied in an
earlier year should not be
included once again while
computing accreted income for
levy of exit tax.
136. a) Tax on a. One will appreciate that entire It is suggested that the
accreted income scheme of Income tax is existing clause (b) be
- Section 115TD based on Real income theory. substituted by the following
(1)(b) merger of b. Tax on accreted income is clause:
two trusts / payable even if entity is "(b) merged with any entity
organisations merged with other entity other than an entity which is a
which is registered u/s 12AA trust or institution registered
but whose objects are not under section 12AA;"
similar.
c. Further, the term "similar
object" is subjective and
prone to litigation.
d. Provisions of section 115TD
will apply even if a charitable
institution transfers its assets
to an institution substantially
financed by government or
which has turnover not
exceeding the specified limit.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 225
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
e. Said provisions will apply
even if a charitable institution
transfers its assets to an
institution which is approved
by Charity Commissioner
under Maharashtra Public
Trust Act, 1950.
These provisions create a charge
without considering practical and
real difficulties.
b) Tax on Time limit of 12 months as Appropriate provisions may be
accreted income envisaged in section 115TD(1)(c) made which would empower
- Section may not be enough for the trust Pr. CIT/CIT to extend this
115TD(1)(c) to comply with, in some cases period.
time limit for due to various genuine reasons.
transfer of
assets to any
other trust or
institution
c) Section a. The balance sheet approach It is suggested that provisions
115TD(4) Trust envisaged in section 115TD of section 115TD may not
to pay tax on may result in taxation of apply to the assets generated
accreted income income which has legitimately out of specified income on
even though it is enjoyed exemption in earlier which exemption was not
not otherwise years. claimed.
required to pay b. It may result in taxing an
income-tax amount which was always
eligible or entitled to an
exemption. The proposed
suggestion would ensure that
only the following assets
would be liable to accreted
tax:
(1) assets acquired out of non-
agricultural income which is
otherwise exempt, (e.g. dividend
income, etc.);
(2) assets acquired out of the
basic accumulation of 15% of
income;
(3) assets acquired out of corpus
donations exempt under section
11(1)(d);
Page 226 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
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Sr. No Section Issue/Justification Suggestion
(4) assets acquired out of
bequests;
(5) assets acquired out of income
below exemption limit;
(6) assets acquired out of
business income on which tax is
paid under section 11(4A);
(7) assets acquired out of
income, taxed upon application
of first proviso to section 2(15);
(8) assets acquired out of income
which has suffered tax on
account of application of section
13;
(9) agricultural land.
d) Recovery Section 115TD(5) reads as Applicability of recovery
provisions on follows: provisions on the trustees etc.
trustees etc. "(5)The principal officer or the should be made only if it is
Section trustee of the trust or the proved that non-recovery is
115TD(5) institution, as the case may be, attributed to any gross
and the trust or the institution neglect, misfeasance or
shall also be liable to pay the tax breach of duty on his part in
on accreted income to the credit relation to the affairs of the
of the Central Government within charitable institution or trust.
fourteen days from,-..."
The term 'principal officer' is very
widely defined in section 2(35) as
follows-
"'principal officer', used with
reference to a local authority or a
company or any other public
body or any association of
persons or any body of
individuals, means--
"(a) the secretary, treasurer,
manager or agent of the
authority, company, association
or body, or
(b) any person connected with
the management or
administration of the local
authority, company, association
or body upon whom the
Assessing Officer has served a
notice of his intention of treating
him as the principal officer
thereof;"
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 227
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
The AO can consider almost any
person connected with the
management as the principal
officer of the institution.
It seems that primary liability to
pay tax is on principal officer or
the trustee and if they don't pay
then that would be of Trust.
e) Section Section 115TD(5) reads as Time limit may be suitably
115TD(5) - follows: modified /increased.
Period of 14 days "(5) The principal officer or the
insufficient trustee of the trust or the
institution, as the case may be,
and the trust or the institution
shall also be liable to pay the tax
on accreted income to the credit
of the Central Government
within fourteen days from,----
..."
a. Time limit is too short to pay
especially when institution is
required to dispose of its assets
to make payment.
b. It takes longer time to take
permission from Charity
commissioner appointed under
Maharashtra Public Trust Act,
1950.
c. Further when capital assets
are sold, proceeds would also be
subject to capital gains tax.
As per section 115TD(5),Tax
need to be paid within a period of
14 days.
Page 228 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
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CHAPTER XII-FB
SPECIAL PROVISIONS RELATING TO TAX ON
INCOME OF INVESTMENT FUNDS AND INCOME
RECEIVED FROM SUCH FUNDS
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 229
The Institute of Chartered Accountants of India
Detailed Suggestions
Sr. No Section Issue/Justification Suggestion
137. Section 115UB Several Category I and II It is suggested that clarity
Taxation of Alternative Investment Funds may be provided on taxation
income of (AIFs) are registered with SEBI. of Category III AIF under
Investment With effect from Financial Year section 115UB.
funds - (FY) 2015-16, the taxability of
Clarity required the income earned by AIFs is
on taxation of governed by a special tax
Category III AIF regime as provided under
Section 115UB of the Income-
tax Act, 1961 (the Act), which is
summarised as follows:
· Any income (other than
business income) earned
by a SEBI registered
Category I and II AIF, is
exempt from tax in the
hands of the AIF under
Section 10(23FBA) of the
Act. Such income shall be
taxable directly in the
hands of the investors of
the AIF under Section
115UB of the Act.
· The investors shall be
chargeable to tax in the
same manner as if it were
the income accruing or
arising to, or received by,
such investor had the
investments, made by the
AIF, been made directly by
such investor. Income
taxable in investors' hands
shall be deemed to be of
the same nature and
proportion as in the hands
of the AIF.
Page 230 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
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Sr. No Section Issue/Justification Suggestion
· Further, in terms of Section
115UB(2) of the Act, in
case there is a loss at the
fund level (i.e. current loss
or loss which remained to
be set off), such loss shall
not be allowed to be
passed through to the
investors but would be
carried forward at AIF level
to be set off against income
of future years in
accordance with the
provisions of Chapter VI of
the Act.
While the said section provides
methodology of taxing of AIF
Category I and II, however, it is
silent regarding the taxability of
AIF category III.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 231
The Institute of Chartered Accountants of India
CHAPTER XIII
INCOME TAX AUTHORITIES
Page 232 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
PART C-POWERS
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
138. Section 132B After search, as per amended Since cash is seized at the time
rws 245C(1) - provision by the Finance Act of search and lying in PD
Application of 2010, where assessee files account of CIT, such cash after
seized or application with Settlement adjusting existing tax
requisitioned Commission for settlement of his liabilities, may be permitted to
assets cases, the cash seized during be adjusted against the tax due
search be permitted to be as per settlement petition.
adjusted against the tax due as Suitable amendment /
per the offer made by the instruction are required to be
assessee in the settlement given to the authorities in the
application. It may be mentioned matter since they are not
that as per the provision permitting such adjustment for
contained in this regard, the want of clarity.
assessee has to make additional (SUGGESTIONS TO REDUCE /
disclosure of income in the MINIMIZE LITIGATIONS)
settlement petition and pay
additional tax of Rs.50 Lakhs
before filing the application with
the Settlement Commission.
139. Section Considering application of section It is suggested that the said
132(8A) - 132(3) read with section 132(8A), period of 60 days specified in
Immunity search in actual practice is kept section 132(8A) be reduced so
from Penalty open for a period of 60 days in as to avoid genuine hardship
and Searches case no incriminating evidence is caused to the assesse in
found against the assessee or the carrying on his business.
assessee has not surrendered
any unaccounted/concealed
income. This period of 60 days is
a very long period and frivolous
additions made during such
period are generally knocked
down in appeals. This practice
only leads to more litigation and
thereby leads to wastage of
precious resources of both
assessee and department. It also
hampers the ease of doing
business which is high on the
agenda of the current
government.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 233
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
140. Section The Finance Act, 2017 has It is suggested that the
132(1), inserted an Explanation to section requirement of `reason to
132(1A) and 132(1), 132(1A) and 132A(1) to believe' or 'reason to suspect'
declare that the 'reason to may be retained in these
132A(1)
believe' or 'reason to suspect', as sections to reduce undue
Reason to the case may be, shall not be hardship on genuine
believe to disclosed to any person or any assessees. Such reasons may
conduct a authority or the Appellate also be permitted to be
search, etc. Tribunal. The said amendment disclosed to appellate
not to be would lead to unnecessary authorities.
disclosed harassment of taxpayers.
Request to
bring back
erstwhile
provisions to
reduce undue
hardship to
genuine
assessee
141. Section 133C- Section 133C is inserted vide It is suggested that:
Power to call Finance (No. 2) Act, 2014 to
a)Section 133C may be
for enable the prescribed Income tax
reconsidered, or
authority to verify the information
information
in its possession relating to any
by prescribed person. The said authority, may, b)Section 133C must be
income-tax issue a notice to such person preceded by a satisfaction,
Authority requiring him, on or before a date
specified therein, to furnish c)This section may be amended
information or documents, to require approval of a higher
verified in the manner specified authority and recording of
therein which may be useful for, satisfaction, before invoking
or relevant to, any enquiry or the power, and
proceeding under the Act.
d) The assessee should not be
Hardships required to attend office of the
Assessing Officer in person
Section 133(6) of the Act gives and should be permitted to file
identical power to the authorities the information by
for seeking information etc post/electronic form.
relevant to any enquiry or
proceedings. Where no
proceedings are pending,
information can be sought with
Page 234 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
the approval of a higher authority.
The existing section 133(6) thus
gives power to the authorities for
seeking information etc but with
sufficient safeguards.
Section 133C seeks to grant the
same power of enquiry etc to any
Income-tax authority without
seeking any sanction or approval
from a higher authority. This
provision will provide unbridled
powers in the hands of the
authorities with probability of
abuse.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 235
The Institute of Chartered Accountants of India
CHAPTER XIV-
PROCEDURE FOR ASSESSMENT
Page 236 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
142. Section 139 - Enlarging The scope of filing return of The scope of filing return of
the scope income should be widened. income should be widened
so 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. 60000 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/SFT transaction
should also come under
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 237
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
the scope of return of
income, and if he/she
does not file return of
income then penalty u/s
271F/234F should be
levied instead of giving
notice for filing return
of income.
Cash withdrawals from
saving bank account
above certain limits
should also take place
in the annual
information
return/statement of
financial transaction.
(SUGGESTION TO WIDEN
THE TAX BASE)
143. Section 139(4) and Prior to amendment made It is suggested that-
139(5) Time limit for by the Finance Act, (i) Reference to sub-section
filing belated return 2016:Section 139(4) (1) of section 142 may be
reduced - Reference to provided that a person who reinstated in new section
return in response to has not furnished a return 139(4) i.e., enabling
section 142(1) may be within the time allowed to provision to be made for
included in Sections him under sub-section (1), or filing of belated return in
139(4) and 139(5) within the time allowed response to notice under
under a notice issued under section 142(1).
sub-section (1) of section
142, may furnish the return
for any previous year at any (ii) Section 139(5) may be
time before the expiry of one amended to provide for
year from the end of the revision of return filed in
relevant assessment year or response to notice under
before the completion of the section 142(1), in line with
assessment, whichever is the intent expressed in the
earlier. Explanatory Memorandum.
Similarly, Prior to
amendment made by the
Finance Act, 2016, Section
139(5) provided that if any
Page 238 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
person, having furnished the
return under sub-section (1),
or in pursuance of a notice
issued under sub-section (1)
of section 142 discovers any
omission or any wrong
statement therein, he may
furnish a revised return at
any time before one year
from the end of the relevant
assessment year or
completion of assessment,
whichever is earlier.
The Finance Act, 2016 has
substituted section 139(4) &
139(5) as follows:
"(4) Any person who has not
furnished a return within the
time allowed to him under
sub-section (1), may furnish
the return for any previous
year at any time before the
end of the relevant
assessment year or before
the completion of the
assessment, whichever is
earlier.";
"(5) If any person, having
furnished a return under
sub-section (1) or sub-
section (4), discovers any
omission or any wrong
statement therein, he may
furnish a revised return at
any time before the expiry of
one year from the end of the
relevant assessment year or
before the completion of the
assessment, whichever is
earlier.";
Reference to return filed in
response to section 142(1)
is missing in new sub-
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 239
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
section (4) and sub-section
(5) of section 139.
As per the Explanatory
Memorandum to the Finance
Bill, 2016, the return which
can be revised under section
139(5) also includes a return
furnished in response to
notice issued under sub-
section (1) of section 142.
However, reference to
notice under section 142(1)
does not find place in the
new sub-section (5) in the
Finance Act, 2016.
144. Section 139(5) The Finance Act 2017 Keeping in mind the
Reduction in time limit amended section 139(5) to aforesaid hardship of
for filing revised return provide that the time for double taxation which may
Request to bring back furnishing of revised return arise to the individual
erstwhile time limit for shall be available upto the assessee as he may not be
filing of revised tax end of the relevant able to claim foreign tax
return at least in cases assessment year or before credit in the absence of
of claim of foreign tax the completion of overseas income-tax
credit assessment, whichever is return, there is a need to
earlier. retain the time limit for
This particularly impacts filing of revised tax return at
claims for any Foreign Tax any time before the expiry
Credit (FTC) in respect of of one year from the end of
the taxes paid by the the relevant assessment
individual assessee(s) in the year or before the
overseas tax jurisdiction. completion of assessment,
Generally the information/ whichever is earlier.
final payment of foreign Therefore, the earlier time
taxes/ tax return is unlikely limit may be brought back
to be available within the at least in respect of
timeline for filing the revised revision required for
tax return i.e. by the end of claiming foreign tax credit.
the relevant assessment
year.
Page 240 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
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Sr. No Section Issue/Justification Suggestion
As an example, USA follows
calendar year as their tax
year and the first due date of
filing a USA income-tax
return is April 15th of the
following calendar year,
meaning thereby, the USA
income-tax return for
calendar year 2018 will be
required to be filed by 15th
April, 2019.
In a case of Indian income-
tax return for tax year 2017-
18, the due date to file a
revised return as per the
said amendment will be 31st
March, 2019.
In the above situation, the
assessee may not have his
final tax return available with
him till 15th April 2019,
hence, such assessee will
not be able to claim the FTC
of the final USA taxes paid
by him in his Indian income-
tax return as he may not
have the final USA tax
details by 31 March 2019.
145. Special audit - Section Section 142(2A) was It is suggested that :
142(2A) amended by Finance Act, a) the amendment made by
2013 apparently to amplify Finance Act, 2013 be
the scope of special audit reconsidered and
i.e. the Assessing Officer withdrawn.
now has the power to direct
b) The provision prior to
a special audit, having
amendment included within
regard to volume of
its ambit all cases of
transactions, doubts about
complexities and there is
the correctness of the
absolutely no need to give
accounts, multiplicity of
further powers to the AO to
transactions in the accounts
order a Special Audit on the
or specialized nature of
reason such as doubts
business activity of the
about the correctness of
assessee. Till the aforesaid
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 241
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
amendment, the "nature and accounts and multiplicity of
complexity of the accounts" transactions etc.
was the necessary and The amendment in section
sufficient criterion for 142(2A) vide the Finance
directing special audit. Act, 2013 needs to be
The amended section withdrawn to ensure that
142(2A) appears to have the the wide powers entrusted
effect of enlarging the scope upon the AO are not
of special audit misused by way of directing
considerably. The scope of special audit in a routine
reasons for invoking the manner thereby defeating
powers under section the very purpose.
142(2A) to direct the (SUGGESTIONS TO
assessee to get the REDUCE / MINIMIZE
accounts audited by an LITIGATIONS)
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 in case of
large organisations. 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 to trigger the
application of this provision.
This may cause undue
hardship to even those
Page 242 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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 erstwhile
provision 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
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 243
The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
to special audit since it gives
them an extended time for
completing their
assessment.
146. Section - As per the provision prior to
142A Under Keeping in view the settled
Estimation of value of Finance (No. 2) Act, 2014 law on the subject, the
asset by Valuation contained in section 142A, legislature must
the Assessing Officer may, specifically provide that
Officer
for the purpose of making an satisfaction may be
assessment or re- recorded before making any
assessment require the reference to the Valuation
Valuation Officer to make an Officer.
estimate of the value of any
investment, any bullion,
jewellery or fair market value Alternately, sanction of a
of any property. On receipt higher authority must be
of the report of the Valuation taken before any reference
Officer, the Assessing is made by the Assessing
Officer may after giving the Officer
assessee an opportunity of
being heard take into
account such report for the
purpose of assessment or
re-assessment.
Section 142A did not
envisage rejection of books
of account as a pre-condition
for reference to the
Valuation Officer for
estimation of the value of
any investment or property.
Further, section 142A does
not provide for any time limit
for furnishing of the report by
the Valuation Officer.
As per the amended section
142A vide Finance (No. 2)
Act, 2014, the Assessing
Officer may, for the purpose
of assessment or re-
assessment, refer any asset,
property or investment to a
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Valuation Officer, necessary
for estimating its value. The
Assessing Officer is not
required to record any
satisfaction about the
correctness or completeness
of the accounts of the
assessee. Further, the
report of the Valuation
Officer may be accepted
after giving the assessee
opportunity of being heard.
Probable hardships after
amendment by Finance
(No. 2) Act, 2014
(a) As per the earlier
section 142A, the
Assessing Officer may
refer to valuation for the
purpose of estimating
the value of any
investment referred to in
section 69 or 69A or 69B
or 56(2). The law, as far
as the trigger for
valuation is concerned,
was settled and
permitted. The
Assessing Officer was to
resort to valuation only
after he was satisfied
that the books of
account were not correct
or were incomplete.
Henceforth, as per the
amendment made, the
Assessing Officer need
not record any reason
for making a reference.
In fact, as is the
experience, the
Assessing Officer may
even fear an audit
enquiry or objection if
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they do not refer cases
for valuation.
(b) The amended section
may open flood gates to
valuation in each and
every case resulting in
unnecessary litigation
and inappropriate use of
valuable resources of
the Department.
(c) The Valuation Officer
will become yet another
authority who will sit
over judgements on
what should be the
value of any property.
As per the discretion
available with him for
valuation, it may also
result in abuse.
(d) The power and scope of
reference to a Valuation
Officer has been
extended to any asset,
property or investment,
thus giving vast powers
in the hands of the
assessing authority
without any check.
147. Section 143 - Need to The whole process of
create pre-assessment assessment and appeals
filters needs to be looked at
afresh, with a view to
revamp and improve the
current circuitous
procedure. The following It is suggested that:
may be considered from
this perspective:
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i. A system of i. A system of Private
private rulings could be Rulings may be
introduced, whereby an introduced.
assessee can seek a
private ruling on the
manner of taxation of a
particular item of
income/expenditure
/transaction, before filing
his return of income. The
private ruling could be
provided by a Zonal
Committee of Chief
Commissioners, and
should be non-binding on
the assessee. The private
rulings could also be
published on a no-name
basis on the Income tax
Department's website,
which would act as a
guidance for other
assessees.
ii. A system of mediation
ii. A system of
in the form of agreed
mediation in the form of
assessments may be
agreed assessments can
instituted
be instituted, whereby a
Zonal Committee of
Commissioners could
arrive at an agreement
with the assessee as to
the quantum of
assessment. This agreed
assessment should be
binding on both the
department and the
assessees.
iii. A provision may be
iii. A provision can made to refer all
be made to refer all
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potentially high pitched potentially high pitched
assessments to a assessments to a
Committee before Committee before
completion of completion of
assessment, similar to assessment.
the existing local
Committees for post
referral of high pitched
assessments.
iv. International iv. International best
best practices in relation practices in relation to
to assessments can be assessments may also be
considered. Initially, considered.
assessments above a
threshold or category
could be made by a team
consisting of the
Commissioner, Additional
/ Joint Commissioner,
Assistant / Deputy
Commissioner / ITO. This
will prevent unwarranted
additions in assessments.
Since orders would be
passed by the
Commissioner, appeals
would lie directly to the
ITAT. This would avoid the
current conflict and bias
arising due to appeals
being decided by
Commissioner (Appeals),
who are Departmental
Officers. The power of
revision could lie with the
CCIT.
v. A large part of v. A system of awarding
the litigation today is on costs to assessees may
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account of the fact that be introduced.
there is no deterrent on
Assessing Officers from
making undue additions,
as there are no legal costs
of such litigation to the
Department. A system of
awarding costs to
assessees should be
introduced.
148. Section 143(1) The Finance Act, 2016 has It is suggested that sub-
Increase in scope of amended the said section by clause (iv) may be
"Incorrect claim inserting sub-clause (iv) to appropriately reworded to
apparent from any sub-section (1) of section disallow expenditure
information in the 143 for disallowing indicated in the report of
return" sub-clause expenditure indicated in the audit to be furnished under
(iv) may be redrafted to "audit report" but not taken section 44AB but not taken
include specific into account in computing into account in computing
reference to report the total income in the total income in the return.
under section 44AB return.
Since disallowance of
expenditure is expressly and
exhaustively covered in the
format of report under
section 44AB, sub-clause
(iv) needs to be
appropriately redrafted to
include specific reference to
the report under section
44AB.
149. Hardship arising out of a) In the case Goetze Appropriate amendments
the Apex Court's (India) Ltd. v. CIT (2006) 284 may be made to enable the
decision in Goetze ITR 323 (SC) the assessee assessee to get relief
(India) Ltd. v. CIT (2006) filed its return of income for during the assessment
284 ITR 323 (SC) the relevant assessment proceedings under section
year without claiming a 143(1) and section 144 by
particular deduction. Later methods otherwise than by
on, it sought to claim the way of filing a revised
deduction by way of a letter return.
addressed to the Assessing (SUGGESTIONS TO
Officer. The deduction was REDUCE / MINIMIZE
disallowed by the Assessing LITIGATIONS)
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Officer on the ground 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 said decision of the
Apex Court has unsettled
many a case law and has
caused unintended hardship
to the assessees
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b) No deduction is Provisions of section
permitted to an assessee 80A(5) should be modified
under section 10AA and Part to permit filing of new claim
C of Chapter VIA if the by the assessee in the
assessee fails to make a course of assessment, even
claim in the return of income. without filing of revised
This provision is very harsh return of income. This will
and disentitles the assessee remove unintended
to legitimately claim hardship.
otherwise legally allowable (SUGGESTIONS TO
due to technical reasons. In REDUCE / MINIMIZE
many cases, failure to make LITIGATIONS)
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.
150. Section 144C(2) The Assessee has to file Either 30 days may be
requirement of filing voluminous objections in form increased to 60 days or
voluminous details 35A, within 30 days of receipt alternatively Format of form
within 30 days of the order. There is no rule 35A should be revised only
to file a paper book or raise to include grounds and
additional arguments or statement of facts as were
grounds. before CIT(A).
30 days is very short time to
compile and file before the
DRP. There are many
mistakes and further many
arguments are also missed
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out.
151. Section 145(2) - Recently, the Hon' ble Delhi In view of aforesaid and the
Quashing of ICDS HC in its Judgement dated recent Judgement of the
Hon'ble Delhi HC dated
8.11.2017 in the case of
8.11.2017, it is requested
Chamber of Tax Consultants
that the ICDSs should not
v. Union of India has struck be implemented.
down certain paras of the
ICDSs to the extent as noted
in the said Judgement as
ultra vires the Income-tax
Act, 1961. The impugned
notification Nos. 87 and 88
dated 29th September 2016
and Circular No. 10 of 2017
issued by the CBDT are also
held to be ultra vires the Act
and struck down as such.
Issues in the implementation
of ICDS:
· Coordination
between specialised
bodies set up by the
Government of India
It is pertinent that the notified
ICDS have prescribed an
approach for deriving
income different from
Accounting Standards (AS)
and Indian Accounting
Standards (Ind AS) which
are global benchmarked
Standards for determination
of true and fair profits. This is
achieved by AS/Ind AS
notified by National Advisory
Committee on Accounting
Standards (NACAS), a body
set up under the Companies
Act by the Ministry of
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Corporate Affairs,
Government of India. Hence,
it is requested that there
should be proper
coordination between
specialised bodies set up by
the Government of India . In
the absence of coordination,
the gap would widen and
situation would get
complicated for tax payers.
· Significant
difference between the
provisions of ICDS and
Judicial pronouncements
The preamble states that if
there is any conflict between
the provisions of the Act and
the ICDS, the latter will
prevail. ICDSs, at many
places, differ significantly
from decisions pronounced
by the Supreme Court and
High Courts [ viz Bharat
Earth Movers Ltd 245 ITR
428 (SC); Sakthi trading
Company 250 ITR 871
(SC); East Coast
Construction I Ltd 283 ITR
297 (Mad)
P & C constructions P Ltd
218 ITR 113 (Mad); East
Coast Construction I Ltd
283 ITR 297 (Mad) etc.]
· Implementation
of ICDS Non-desirable - A
whole new set of
standards being
burdensome for taxpayers
and would create
confusion
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Sr. No Section Issue/Justification Suggestion
Implementation of ICDS has
been a matter of utmost
concern not only for
assessees, chartered
accountants but also the
Department officials. In
various representations
made by ICAI, it has been
respectfully submitted that a
whole new set of standards
would create confusion,
increase complexity and
drastically reduce the ease
of doing business in India,
which is not desirable.
· No need of ICDS
for Ind AS compliant
companies
Applicability of Ind As has
tax impact only on Book
Profit and not under normal
tax. Section 115JB has been
amended for Ind As
companies and hence
argument of need of ICDS
for Ind As companies is not
correct.
With the country resounding
the `Ease of business'
slogan, the emphasis needs
to be laid on `Simplification
of tax laws in India'. Ease of
complying with law would
ensure speedy and effective
justice. The notified ICDS
has more questions than
answers. There are apparent
contradictions with the Act
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and within itself. The
attendant confusion has the
power to slow down the
justice which effectively
translates in denial of
taxpayer rights. ICDS should
not obscure the original
fabric of the Act.
ICAI firmly believes that the
principle of "ease of doing
business" should be followed
holistically and there should
be only one set of
accounting standards and
different departments of the
Government should work for
"One Nation One Standard"
like Government has created
history by successfully
implementing and enacting
the much awaited GST law
"one nation one tax" regime.
152. Reopening of In all the cases of audit It is suggested that the Act
assessment based on objections, the assessing be amended to atleast give
audit objections - officer initiates corrective power to the assessing
steps irrespective of the fact officer to verify whether the
Section 147
whether the objection is valid objection is valid and
or not in the eye of the law. sustainable or not.
Consequently the
assessments are reopened
by the assessing officer
leading to unnecessary
litigation.
153. Section 148 - Reasons Section 147 empowers an In view of the aforesaid, It is
for reopening to be sent AO to reopen an assessment suggested that it would be
along with notice for if he has "reasons to believe" more appropriate if suitable
reopening of that income has escaped amendments be made in
assessment assessment. In practice, the section 147/148 so as to
said notice usually does not follow the procedure laid
spell out the reasons in down by Hon'ble Supreme
proper detail. Court in GKN Driveshafts
(India) Ltd. v ITO [2003] 259
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The said section does not ITR 19 (SC) ruling.
have any procedural
requirements, but a practice
has developed and been laid
down by the Hon'ble
Supreme Court in GKN
Driveshafts (India) Ltd. v
ITO [2003] 259 ITR 19 (SC)
case, to be mandatorily
followed while reopening
assessment. Presently
notice is issued under
section 148. Later, the
assessee has to request for
the `reasons for reopening'
from the AO. Thereafter the
Assessing officer provides
the reasoning.
154. Section 153A and a) Present scheme of It is suggested that the
Section 271AAB Need administration of Search continuance of earlier block
for effective deterrence and Assessment of search assessment procedure is
and finality in Search cases needs to be made desirable and would help in:
Cases effective to reduce (a) reducing controversy
technical complexities over the year of taxability of
income;
Desirability to bring back (b)providing suitable
block assessment system incentive for a person to
· Present scheme make the necessary
provided in section 132 read disclosure without
with section 271AAB and indulging in litigation and
section 153A provides (c)removing administrative
various different effective difficulties such as
incidences of tax on multiplicity of appeals,
assessee subjected to bunching together of
search if declaration is made assessments etc.
during search or beyond the
conclusion of search. The
complexity involved be
removed and single situation
be provided where assessee
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be subjected to 60% tax on
block assessment basis on
undisclosed income in the
return of income filed in
response to notice for filing
return after the search. This
will bring in the following
benefits:
· With concept of
block assessment, litigation
as regards the year of
taxability of certain
income/assets discovered in
search would be eliminated.
· The avoidable
technicality of abetted
assessment would be
removed.
· Presently,
avoidable litigation on
account of jurisdiction
maintainable u/s. 153A or
147 of the ACT for the
particular year based on
incriminating material would
be avoided.
· Present scheme
providing reduced incidence
of tax on undisclosed income
during search makes
assessee indulge in
unethical practise and the
search team susceptible to
compromises due to
administrative pressures to
achieve targets of surrender.
The focus will shift to
collection of incriminating
material, coordinated
investigation and quality of
assessment.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 257
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· If it is provided that
an assessee can agree to
subject the whole of
sums/assets to be taxed in
the block period of search at
a flat rate of 60% (tax which
is equal levy of 100% penalty
on today's maximum
marginal rate). No further
proceedings/assessments
would become necessary.
Taking into consideration the
ground reality, such
voluntary compliance at
every stage should be
encouraged. By closing the
option of voluntary
compliance in search cases
at higher cost, the defaulting
tax payers are compelled to
opt for litigation in respect of
the income, which he would
have otherwise readily
agreed to offer for taxation.
In this process he may or
may not succeed but can
definitely prolong the
litigation.
b) Need to simplify penal It is suggested that the
provisions of section provisions of section
271AAB 271AAB needs to be
simplified. The time of
admission may not be
· Amended Section
considered for imposition
271AAB provides for
of penalty amount as once
imposition of penalty @ 30%
admitted all culprit
on undisclosed income
assesses should be treated
found during the course of
on the same footings.
search and admitted at the
stage of search subject to
fulfilment of other specified
conditions in section
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271AAB(1A)(a) 60% penalty
is to be imposed in other
cases u/s 271AAB(1A)(b).
· The above system
of penalty is very complex to
implement in reality. In
search cases, penalty
should ideally be the same
irrespective of the time of
admission/declaration by the
culprit assessee. Assessing
officers sometimes puts
undue pressure on the
assesees during search
proceedings to extract the
maximum amount of
declaration. One of the
reasons for the same is the
pressure of target
achievement by the
assessing officers.
· In such cases,
quality of assessment
suffers a lot and high pitched
assessments are made
unnecessarily.
155. Credit of Tax Collected Currently, Many It is suggested that
at Source relating to government/semi- considering the hardship
earlier years (for which government authorities (viz. being faced by assessees in
Assessments are Mining Department) have respect of cases mentioned
already over & time been demanding TCS of aforesaid, the department
period mentioned in earlier years for which should give credit for such
Section 155(14) has assessments have already TDS/TCS even if the
elapsed) demanded by been completed, since they assessments have been
the Government had not collected the TCS in completed and also the
authorities at a later the those relevant years. period mentioned u/s
date After making payments of 155(14) has expired.
TCS the certificates for the (SUGGESTIONS FOR
same are issued in current RATIONALIZATION OF THE
year giving reference of PROVISIONS OF DIRECT
expenditure incurred by TAX LAWS)
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Sr. No Section Issue/Justification Suggestion
payer for earlier financial
years.
As per the provision of
section 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 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.
156. Section 155(14A) - Section 155(14A) provide (i) The time limit applicable
Claim of FTC pertaining that where the payment of for rectification of order
to taxes which are foreign tax is under dispute, may be clarified. Since all
under dispute in the credit of such taxes will be the sub-sections in section
foreign country available in India in the year 155, provide for the time
Clarification required in which the dispute is limit to be applied and some
on certain issues settled, on satisfaction of of the sub-sections provide
relating to period of certain conditions. To give for a different time limit, it
limitation and effect to this an enabling may be expressly clarified
documents which shall provision shall be inserted that what is the period of
constitute evidence of through which Tax Authority limitation which may apply
settlement will rectify the assessment to cases covered by the
orders or an intimation order section 155(14A).
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and allow credit of taxes in (ii) It may also be clarified
the year in which the that the period of limitation
taxpayer furnishes the (e.g. if it is 4 years), should
evidence of settlement of be 4 years from the end of
dispute and discharge of the year in which the
foreign tax liability. amended order is passed
However, the said and it should not be the
amendment does not date of the original order.
provide for time limit within This is for the reason that if
which the Assessing Officer the dispute in the foreign
has to rectify the country takes more than 4
assessment order. This years to get resolved and if
provision only gives a the limitation period is
reference to section 154. considered to be 4 years
Section 154 provides a time from the date of the original
limit of 4 years for order, the taxpayer may not
reassessment, excluding get credit for taxes which he
anything specifically has actually paid. Such may
provided under section 155. not be the intent of the said
Issues may arise on what is provision.
period of limitation which A similar provision is
may apply for section contained in Section
155(14A) and how it should 155(16) which provides that
be applied. where the compensation for
The said provision provides compulsory acquisition is
that the Assessing Officer reduced by any Court or
shall amend the earlier order Tribunal, then the period of
which denied FTC, if the limitation shall be reckoned
taxpayer, within six months to be 4 years from the end
from the end of the month in of the year in which the
which the dispute is settled, order of the Court or
furnishes to the Assessing Tribunal is passed.
Officer, evidence of (iii) The time limit may be
settlement of dispute and amended to provide for 6
evidence of payment of tax. months from date of
Time threshold of six months settlement of dispute or
from date of dispute date of effect of the
settlement gives a very small amended order passed u/s.
window for taxpayers to 155(14A), whichever is
claim the benefit for previous later.
years, hence, giving a (iv) Clarification may be
limited scope to the benefit. provided on what is the
documentation which shall
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 261
The Institute of Chartered Accountants of India
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It is also not clear as to what constitute as sufficient
could constitute sufficient evidence for justifying that
evidence on the part of the dispute has been
taxpayers to claim the FTC settled. This may be done
benefit on dispute by specifying an illustrative
settlement. set of documents, which
shall constitute as evidence
for settlement of dispute.
Illustratively the following
may be considered as
evidence for settlement of
dispute:
· Final assessment order/
final demand notice of the
tax authority of the foreign
country
· Judgment of the Court of
Law along with the final
demand notice of the tax
authority based on the
judgement
· Proof of payment of taxes
· Self-declaration
157. Section 167B Section 167B provides that It is suggested that in order
Indeterminate/unknown in case shares of members to reduce avoidable
equivalent to nil share in Association of Persons litigation, suitable
(AOP) or Body of Individuals amendment be made in the
(BOI) is unknown or section so as to provide
indeterminate, then tax on clarity that the nil share of
total income of such AOP or members be treated as
BOI is charged at maximum determinate/ known share
marginal rate or specified and the AOP/BOI concerned
rate whichever is higher. be taxed at individual slab
Currently, there are a lot of rate normally applicable to
AOPs or BOIs assessees it.
where the profits/surplus
and/or income is not paid to
its members. The same is
made in writing through
incorporation in bye laws or
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governing document of such
AOPs/BOIs. It implies that
the share of members is nil
i.e. determinate or
certain/fixed. However, the
Department has taken a
stand that in such situations;
nil share of members will be
treated at par with
indeterminate/unknown
share and hence is taxing
them at maximum marginal
rate instead of the individual
slab rates applicable to them
normally.
Such assessees are facing
genuine hardships and have
to go through the lengthy,
time consuming and costly
litigation process.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 263
The Institute of Chartered Accountants of India
CHAPTER-XVII
COLLECTION AND RECOVERY OF TAX
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PART B-DEDUCTION AT SOURCE
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
158. Different Methods One of the important reasons for TDS should not be
of accounting mismatch of TDS claimed and TDS linked with the year of
followed by the as per Form 26AS is adoption of income or the year of
deductor and different method of accounting (i. e. receipt. Credit for TDS
deductee Cash or Mercantile) by the deductor may be given on the
and deductee. Various situations basis of the claim made
that may arise have been explained by the assessee
below by means of examples: irrespective of the
i) Deductor Mercantile system assessment year in
of accounting which income is
received or income is
DeducteeCash system of
offered to tax. There
accounting
should be a clear
If the deductor follows mercantile differentiation between
system of accounting, the tax would amount deducted and
be deducted at source and amount claimed. The
deposited in the year in which TDS not claimed in a
provision is made. Whereas the particular year due to
deductee following the cash basis any reason may either
of accounting, would offer the be allowed to be
income and claim TDS in the year in claimed in the any other
which the amount is actually assessment year or to
received by him. For example audit be refunded to the
fees paid to a Chartered deductee. The total TDS
accountant's firm by a company. In claimed and the
such a case it is difficult for the balance, if any, may be
deductee to claim TDS as the TDS reflected in Form 26AS.
certificate is issued in respect of the Form No. 26AS should
year other than the year in which it be made as a bank pass
is claimed. book where the
Also in some cases, the receipts unclaimed credit is
may be spread over in two or more allowed to be carried
years. In such cases, there is forward for claiming in
difficulty in getting credit of TDS in the next year.
second and subsequent year in
which amount is actually received.
(ii) Deductor Cash system of
accounting
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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 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.
159. Exemption of TDS There is no specific exemptions from The exemption from tax
on certain tax deduction at source in case of deduction at source on
payments the payments made for
payments of personal nature, in
personal purposes may
respect of the cases covered in
be extended to the
Section 194A (interest), Sec. 194H payments covered u/s
(brokerage), and Section 194-I 194A and 194H and 194-I
(Rent). of the Act, in line with the
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There does not seem to be any logic provisions made in
to deduct tax at source on payments section 194J.
made on personal account. Merely Similar amendments may
because an assessee happens to be be carried out to provide
a proprietor of a concern which is the aforesaid exemption
liable for tax audit u/s 44AB of the Act, for TCS provisions as
well.
he should not be made liable for tax
deduction on the payments made for
personal purposes. He should be
treated at par with other individuals.
160. Payment of hire Under the existing tax deduction Specific amendment
purchase provisions, it has not been may be made to exclude
installments specifically provided whether requirement of
under a hire payment of hire purchase deduction of tax on the
purchase installments would attract tax finance charge u/s 194A
agreement - deduction. The hire purchase or 194-I.
applicability of installments comprise of principal &
tax deduction u/s hire finance charge element.
194A or 194-I
161. Section 194C - As per the existing provisions of the In order to avoid
Definition of the Act, the `work' for the purpose of genuine and avoidable
term "work" deduction of tax at source on hardship to assessee
payment to contractors has been for claiming refund of
defined to include "manufacturing or TDS, it is suggested that
supplying a product according to the the definition of "work"
requirement or specification of under section 194C in
customer by using material the appropriate clause
purchased from such customer" . may be modified as :
The above provision has resulted in "manufacturing or
deduction of tax by companies supplying a product
wherein even a small component is according to the
supplied on free of cost basis or requirement or
otherwise to the supplier and specification of a
supplier in turn supplies the final customer by using all/
product along with the component significant material
supplied to the customer. purchased from that
customer"
162. Section 194C Section 194C(6) provides It is suggested to
Coverage of term exemption to small good carriage provide a suitable
`Goods Carriage' contractor/transporter (owning not clarification to the issue
more than 10 goods carriage at any raised ie whether or not
time during the previous year) on auto rickshaws and/or
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furnishing of PAN along with the buses used for
declaration to that effect to deductor transportation of goods
from TDS. are covered under the
The sub-section (6) of section 194C definition of goods
reads as under : - carriage and hence is
not liable to TDS under
"No deduction shall be made from
section 194C(6) upon
any sum credited or paid or likely to
furnishing PAN along
be credited or paid during the
with the declaration of
previous year to the account of a
small transport operator
contractor during the course of
to the deductor.
business of plying, hiring or leasing
goods carriages, where such
contractor owns ten or less goods
carriages at any time during the
previous year and furnishes a
declaration to that effect along with
his Permanent Account Number, to
the person paying or crediting such
sum".
The issue that arises is whether
freight paid to auto-rickshaws for
transport within city or freight paid to
public buses for transport to some
other city will be covered in the term
"goods carriage" as defined in
clause (ii) of the Explanation to
Section 194C.
Clause (ii) of the Explanation to
Section 194C reads as under: -
"goods carriage shall have the
meaning assigned to it in the
Explanation to sub-section (7) of
section 44AE".
Explanation to sub-section (7) of
section 44AE reads as under: -
"the expression "goods
carriage" shall have the meaning
assigned to it in section 2 of the
Motor Vehicles Act, 1988 (59 of
1988)"
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Sub-section (14) of section 2 of the
Motor Vehicles Act, 1988 reads as
under : -
"goods carriage" means any motor
vehicle constructed or adapted for
use solely for the carriage of goods,
or any motor vehicle not so
constructed or adapted when used
for the carriage of goods.
The above definitions give rise to
following views: -
a) Auto-rickshaws and
buses when used for transporting
goods will be covered under the
definition of goods carriage and will
be liable to provide their permanent
account number for non-deduction
of tax at source.
b) The sub-section (6) was
introduced for transporters, and
Auto-rickshaw driver and bus driver
are not commonly known as
transporter.
163. Clarification In case of partnership firms, Section On the lines of the
regarding TDS on 40(b)(i) provides that provision of section
Commission to a "remuneration" shall mean any 194A, section 194H be
partner under payment of salary, bonus, amended to provide that
section 194H read commission or remuneration by Commission paid by the
with section 40(b) whatever name called. Considering Partnership firm to its
a partner and partnership firm as partners would not be
one entity, the provisions of tax liable to Tax deducted at
deduction at source under section source under section
192 have not been made applicable 194H.
on payment of such remuneration, (SUGGESTIONS TO
as the same is not taxable under the REDUCE / MINIMIZE
head "Salaries". Also, the LITIGATIONS)
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.
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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
deduction at source under section
194H.
164. Section 194-I - As per the provisions of section Considering the
TDS on rental 194-I, the tax is to be deducted at increase in the basic
income source @10% in respect of income exemption limit for
by the way of rent for any use of general assessees and
land or building or furniture or senior citizens, it is
fixture etc. The proviso to section suggested that the
194-I further provides that no tax be exemption limit of Rs.
deducted in case the total rent paid 1,80,000 in respect of
in a financial year does not exceed TDS on rent under
Rs.1,80,000/-. Considering the section 194-I be
general basic exemption limit of enhanced
Rs.2,50,000/- for the Assessment appropriately.
year 2017-18 and for Senior (SUGGESTIONS FOR
Citizens of Rs.3,00,000/- the RATIONALIZATION OF
present limit of Rs.1,80,000/- THE PROVISIONS OF
seems to be too low, especially for DIRECT TAX LAWS)
those Senior Citizens whose source
of income is only rent. Hence, the
limit of Rs. 1,80,000/- under section
194-I may be increased
appropriately.
165. Section 194-IB The Finance Act, 2017 inserted new It is suggested that a
Requirement of section 194-IB to provide that an suitable clarification be
tax deduction at Individual or a HUF (other than issued clarifying the
source by those covered under clause (a) & amount on which tax
individuals/HUFs (b) of section 44AB of the Act), needs to be deducted
paying monthly responsible for paying to a resident under section 194-IB in
rent exceeding any income by way of rent case the monthly rent
Rs.50,000 - exceeding fifty thousand rupees for has been increased
Enabling a month or part of month during the during the year and the
measures to previous year, shall deduct an amount of rent per
facilitate ease of amount equal to five per cent. of month before such
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compliance to be such income as income-tax increment was less than
introduced & thereon. Rs 50,000.
issue of It is further provided that tax shall
clarification be deducted on such income at the
regarding the time of credit of rent, for the last
amount on which month of the previous year or the
tax has to be last month of tenancy if the property
deducted at is vacated during the year, as the
source in a case may be, to the account of the
situation where payee or at the time of payment
monthly rent is thereof in cash or by issue of a
increased during cheque or draft or by any other
the previous year mode, whichever is earlier.
and the increased
Issues:
monthly rent
exceeds (1) The amount on which tax needs
Rs.50,000 to be deducted in the last month of
the previous year would generally
be the total rent paid during the
previous year. However, in a case
when the monthly rent currently
does not exceed Rs.50,000 but the
same is increased, say, in the
month of February and the
increased rent amount exceeds
Rs.50,000 per month, then it is not
clear on what amount the tax needs
to be deducted. Whether the tax
needs to be deducted on the rent
paid during that previous year
although the rent per month for
some of the months is less than
Rs.50,000 p.m or the rent needs to
be deducted on the aggregate
amount of rent for the months
where rent has exceeded
Rs.50,000 pm.
(2) Since it is also provided that the
deductor shall be liable to deduct
tax only once in a previous year,
requisite measures for one time
remittance of tax by such deductor
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may be implemented to facilitate
easy compliance.
166. Section 194J- The amendment to section 194J by It is suggested that
Fees for the Finance Act, 2012 requires section 194J be
professional or deduction of tax at source @ 10% amended to provide an
technical on any remuneration or fees or independent limit of
services commission, by whatever name Rs.30,000, above which
called, to a director of a company, remuneration or fees or
other than those on which tax is commission to director
deductible under section 192. may be subject to tax
However, the independent limit of deduction at source.
Rs.30,000 each provided for under
section 194J in respect of other (SUGGESTIONS FOR
payments covered therein, namely, RATIONALIZATION OF
royalty, fee for technical services, THE PROVISIONS OF
fee for professional services and DIRECT TAX LAWS)
non-compete fees, as a threshold,
beyond which TDS @ 10% would be
attracted, is not being provided in
respect of director's remuneration.
This unintended inequity may be
removed.
167. Section 194LC- a) Income by way of interest from a) In order to bring out
Income by way of Indian Company the real intent of the law,
interest from The Finance Act, 2012 inserted it is suggested that the
Indian Company section 194LC to provide that the section 194LC(2)(ii) may
interest income paid by specified be reworded to provide
company or business trust to a non- that the interest referred
resident shall be subjected to tax to in sub-section (1)
deduction at source at the rate of shall be the income by
5%. Section 115A was also way of interest payable
amended to provide that such by the specified
income will be taxed at the rate of company or business
5%. trust "IF such interest
does not exceed the
Section 194LC(2)(ii) provides that
amount of interest
for the purpose of deduction of tax
calculated at the rate
at source at the rate of 5%, the
approved by the Central
interest payable by the specified
Government in this
company or business trust to a non-
regard, having regard to
resident, not being a company or a
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foreign company, shall be the the terms of the loan or
income payable by the specified the bond and its
company TO THE EXTENT TO repayment"
WHICH SUCHINTEREST DOES (SUGGESTIONS TO
NOT EXCEED the amount of REDUCE / MINIMIZE
interest calculated at the rate LITIGATIONS)
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 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.
b) Expansion of scope and b) The concessional tax
extension of time limit rate of 5 per cent on
The Finance Act, 2012 had interest should be made
introduced Section 194LC in the Act applicable on other debt
to provide for lower deduction of tax securities including
@ 5 per cent on interest payments debentures, trade credit
by Indian companies on borrowings issued/ availed by any
made in foreign currency (under a Indian company.
loan agreement or by way of issue
of long term infrastructure bonds)
before 31 July 2017.
The Finance (No 2) Act, 2014,
amended Section 194LC of the Act
to include all long term bonds
(including infrastructure bonds).
Apart from loans and bonds,
debentures are also widely used for
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raising funds by the Indian
companies. Currently, there is no
clarity whether interest payment on
such debentures would be eligible
for reduced tax deduction rate under
Section 194LC of the Act.
Also, the cut-off date as provided in
the section (31st July 2017) is
impendent. In line with the objective
of the government to attract foreign
investments and a higher growth
rate, the current time lines may be
extended.
168. Section 194LC Currently as per the provisions of It is, therefore,
and Section section 194LC of the Act, interest suggested to make the
paid by an Indian company to a non- aforesaid amendments
206AA - Scope of
resident, in respect of approved to the Act effective from
concessional rate
borrowings made (during the period 1 April 2014 to enable
of tax on 1 July 2012 to 30 June 2015) in corporates to use this
overseas foreign currency from sources rare window of
borrowings outside India (under a loan opportunity to raise
agreement or on issue of long-term long term capital at
infrastructure bonds) is taxable at a competitive price, for
concessional rate of 5% (plus their capital
applicable surcharge and education expenditure. There are
cess). quite a few proposals in
the pipeline for raising
Further, as per section 206AA(7) of long term capital from
the Act, interest paid on the long- the international debt
term infrastructure bonds would be markets which could get
subject to a concessional rate of tax adversely impacted if
irrespective of whether the lender this amendment is
has a Permanent Account Number implemented as per the
(PAN) in India or not. currently enacted
timeline of 1 st October
In order to further augment low cost 2014. Therefore, there
long-term overseas borrowings, the is an urgent need to
amendments to section 194LC and make the amendment
section 206AA of the Act effective as suggested.
respectively are made effective from
1 October 2014. Under the
aforesaid proposed amendment,
the benefit of lower withholding tax
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@5% for overseas borrowing is
extended up to 1 July 2017 and it
shall apply to all long term bonds
and not merely restricted to
infrastructure bonds as is the case
under the relevant provisions of the
existing Income tax Act.
Further, the benefit of section
206AA(7) of the Act, shall be
extended to all types of long term
bonds including infrastructure
bonds, which means PAN of
beneficial holders of bonds shall not
be mandatory for all types of long
term bond issues in the international
market.
Hardships
While the fiscal measure taken by
the Government to encourage the
corporates to raise long term capital
at competitive price for their capital
expenditure are appreciated, there
is an urgent need for making the
proposed amendments effective
from 1 April 2014 so that companies
can take advantage of the prevailing
opportune market conditions.
In this connection, the global market
conditions have been summarized
below:
The international debt markets
are very strong and buoyant,
with the Asia ex Japan G3
market seeing over US$116bn
in 2014 till date in issuance
volumes, nearly 83% of total
issuance in 2013.
Investor liquidity remains very
strong, and there are consistent
fund flows back into emerging
market and Asian bonds for the
past 14 consecutive weeks.
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US treasury yields remain
significantly lower than at the
start of the year, as the markets
gauge the outlook for the global
economy, geopolitical risks and
the expected actions of the
Central Banks. 2.55% / 3.37%.
US rates at 2.55% for 10 years
and 3.37% for 30 years remain
conducive for issuers looking to
extend duration, with the 30-
year US Treasury currently
close to a 9 month low.
Global credit market conditions
remain very strong with credit
spreads having tightened
sharply over the past year.
The demand for Indian credits
has been extremely strong, with
Indian credit spreads having
tightened by 30-40 bps since 1
April and 80-100 bps since 1
February 2014. This has been
driven by supportive technicals,
relative lack of supply and
improved macro indicators.
These favourable financial market
conditions could get impacted in the
short term by changes in the
economic data emanating from the
major economies as well as due to
geopolitical factors such as the
continued unrest in the Middle East.
169. Enhancement of TDS threshold limits u/s 194J were It is suggested that the
Limits for TDS on last revised in 2010. The deduction TDS limit for payment
of tax at source on such small of professional or
professionals
amounts involves deployment of technical fees under
Section 194J
relatively large amount of resources section 194J may be
in terms of manpower, systems and
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other costs at the assessee's end increased from Rs.
without any significant benefits to 30000 to Rs. 100000.
the revenue.
170. Section 195 Finance Act, 2012 extended the Keeping in view the
a) Scope and obligation to withhold taxes to non- observations of the
applicability residents irrespective of whether Supreme Court, it is
the non-resident has - suggested that the
(i) a residence or place of amendment should be
business or business connection in modified to restrict the
India; or applicability of
withholding tax
(ii) any other presence in any
provisions to residents
manner whatsoever in India.
and non-residents
The aforesaid amendment was having a tax presence in
introduced with retrospective effect India.
from 1 April 1962.
At least, it should be
The amendment results in a clarified that the
significant expansion in the scope of amendment will not
withholding provisions under the Act have retrospective
and will cover all non-residents, application.
regardless of their presence/
connection in India.
The Supreme Court in the case of
Vodafone International Holdings
B.V. had observed that the
provisions of Section 195 of the Act
would not apply to payments
between two non- residents situated
outside India. The Supreme Court
also referred to tax presence as
being a relevant factor in order to
determine whether a non-resident
has a withholding obligation in India
under Section 195 of the Act.
b) Time limit for Section 195(2) provides where a It is suggested that an
Issuance of payer considers that whole of the appropriate time limit
"general or sum being paid to a non-resident is say thirty (30) days may
special order" not chargeable to tax, he may make be imposed for passing
an application to the Assessing such general or special
Officer to determine by general or order by the Assessing
special order, the appropriate officer.
portion of the sum so chargeable. Further, where an
It may be noted that no time limit of application is rejected,
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passing such order has been the Assessing Officer
prescribed in the Act, which causes may be required to pass
undue hardship in genuine cases. a speaking order after
providing a reasonable
opportunity of being
heard to the applicant.
(SUGGESTIONS FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
c)Withholding Cross border transactions may It is suggested that a
tax on result in reimbursements of clarification, perhaps by
reimbursements expenditures / costs incurred on way of a CBDT circular,
[Section 195 of behalf of the Indian company by the stating that withholding
the Act] foreign parent/group company. tax would not be
Contrary positions have been taken applicable for specific
by various judiciaries on the issue of cases of
withholding tax on reimbursements reimbursements, would
made by an Indian company to its help reduce undue
foreign parent / group company. litigation in this regard.
There is no clear view with respect
to the same. Further, non-
compliance with withholding tax
provisions will attract disallowance
under section 40(a)(i) of the Act
including interest and penal
proceedings.
d) Consequential Section 195(6) is amended w.e.f. (i) Section 204 may be
amendment 01.06.2015 to provide that the amended as follows -
required in person responsible for paying to a
section 204 non-resident (not being a company)
For the purposes of the
or a foreign company, any sum,
foregoing provisions of
whether or not chargeable under the
this Chapter and section
provisions of the Income-tax Act,
285, the expression
1961, shall furnish the information
"person responsible for
relating to payment of such sum, in
paying" means
such form and manner, as may be
prescribed.
However, consequential `(iii) in the case of
amendment has not been made in credit, or, as the
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section 204(iii), defining "person case may be,
responsible for paying " in case of payment of any
credit, or, as the case may be, other sum
payment of any other sum chargeable under
chargeable under the provisions of the provisions of
this Act, to mean the payer himself, this Act, or in the
or, if the payer is a company, the case of furnishing
company itself including the of information
principal officer thereof. relating to payment
The above definition o f "person of any sum to a non-
responsible for paying" given in resident (not being
section 204(iii) is in relation to credit a company), or to a
or payment of any sum chargeable foreign company,
under the provisions of this Act, and whether or not such
is hence, relevant in the context of sum is chargeable
section 195(1). However, the said under the
definition has to be amended to provisions of the
make the same relevant in the Act, the payer
context of section 195(6) also. himself or if the
payer is a company,
Further, in section 204, the "person
the company itself
responsible for paying" has been
including the
defined for the purposes of the
principal officer
foregoing provisions of Chapter
thereof. '
XVII and section 285. Since
section 285 is in respect of
submission of statement by a non- (ii) The penalty may be
resident having liaison office, the reduced, in case non-
definition of "person responsible for furnishing of
paying" given in section 204 is not information relates to a
relevant in the context of section transaction not
285. chargeable to tax.
Consequently, taking into
consideration the above issues, (iii) The meaning of
section 204 needs to be "person responsible for
appropriately amended. collecting" may be
A penalty of Rs. 1 lakh is leviable incorporated in the Act.
under section 271-I for failure to
furnish information or for furnishing
inaccurate information under
section 195. The penalty is quite
high, considering that the reporting
requirement may be relating to a
transaction which is not be
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chargeable to tax.
Also, while the meaning of "person
responsible for paying" has been
defined under the Act, "person
responsible for collecting" has not
been defined anywhere in the Act.
The meaning of "person responsible
for collecting" may be incorporated
in the Act for clarity.
e) Section 195- In section 195, Clarification on TDS In order to avoid
Clarification from payments to non-residents litigation it is suggested
required having no Indian branch/ fixed that a suitable
place/ Permanent Establishment in amendment in form of
India should be inserted. In various Explanation should be
cases, Income-tax department inserted in section 195
attracts the provision of section 195 of the Income-tax Act or
and ask the assessee to deduct alternatively an
TDS. For example, when expenses appropriate clarification
such as commission payment is by way of circular may
done by the Indian Residents to be given
Foreign Residents having no
branch/fixed place or Permanent
Establishment in India and who
work outside India and they help in
promoting and sales of Indian
Goods then the Income-tax
department attracts the provision of
section 195 and ask the assessee to
deduct TDS.
Hitherto, the export commissions
paid to foreign agents were never in
question of taxation in India. This
was fortified by CircularNo.23 dated
23 July 1969 which stated that
where a foreign agent of India
exporters operates in his own
country and his commission is
usually remitted directly to him and
is, therefore, not received by him or
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his behalf in India, such an agent is
not liable to income tax in India on
the commission.
Later Circular No. 786 dated 7
February 2000 emphasized the
clarification in the
above circular and laid down the
law that where non-resident agent
operates outside the country, no
part of his income arises in India
and since the payment is usually
remitted directly abroad, it cannot
be held to have been received by or
on behalf of agent in India. Such
payment were therefore, held to be
not taxable in India.
In 2009, vide circular No 7, both the
above circulars namely Circular No.
23 dated 23-07-1969 &Circular No.
786 dated 07-02-2000 were
withdrawn, reasoning that
interpretation of the Circular by
some of the taxpayers to claim relief
is not in accordance with the
provisions of section 9 of the
Income-tax Act, 1961 or the
intention behind the issuance of
the Circular.
With the withdrawal of the circulars,
it was left to the courts to decide the
issue afresh.
f) Applicability of Remittance under Liberalised Capital account
Rule 37BB read Remittances Scheme of RBI transactions should be
with Section 195 Amended Rule 37BB(3)(i) of the specifically included in
for making Rules exempts remittances as per the exclusion list of
remittances the provisions of Section 5 of the Rule 37BB(3)(i) of the
outside India FEMA read with Schedule-III i.e. Rules read with Section
only current account transactions. 195(6) of the Act.
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Sr. No Section Issue/Justification Suggestion
As per Section 5 of the FEMA, any
person may sell or draw foreign
exchange to or from an authorised
person if such sale or drawl is a
current account transaction
provided that the Central
Government may, in public interest
and in consultation with the Reserve
Bank of India, impose such
reasonable restrictions for current
account transactions as may be
prescribed.
The Master Direction No. 7/2015-16
dealing with the Liberalised
Remittance Scheme (LRS) is a
liberalisation measure to facilitate
resident individuals to remit funds
abroad for permitted current or
capital account transactions or
combination of both.
The press release issued by the
CBDT on 17 December 2015 states
that Form 15CA and 15CB will not
be required to be furnished by an
individual for remittances which do
not require RBI approval under the
LRS. However, it may be noted that
LRS does not find any specific
mention in the amended Rules.
LRS is a wider term as it includes
within its scope both permissible
capital and current account
transactions. The amended Rules is
silent with respect to the capital
account transactions under LRS.
g) Penalty for The Finance Act, 2015 has It is not clear whether
failure to introduced penalty (Section 271-I of the penalty is qua the
furnish the Act) in case of failure to furnish payment made or qua
information or information or furnishing of the transaction or qua
furnishing inaccurate information as required the contractual
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Sr. No Section Issue/Justification Suggestion
inaccurate to be furnished under Section obligations for a
information 195(6) of the Act, to the extent of specific financial year.
under Section INR one lakh. Therefore, the same
195 should be clarified in a
suitable manner.
171. Consequences of Where in case any person fails to The benefit of the first
failure of deduct deduct or pay the whole or any part proviso has only been
of the tax on the sum paid or on the provided to a person in
or pay withholding
sum credited to the account of a respect of payments
tax Section 201)
person, he shall be deemed to be an made to resident and
Extension of assessee in default in respect of the conditions
benefit in respect such tax. mentioned in the first
of payments made proviso have been
to non-residents fulfilled.
However proviso to S. 201 states
that a person shall not be
considered to be an assessee in With a view bring more
default in respect of such taxes, if relief to assessee, the
the resident has furnished his return benefit of the said
of income under Section 139, has proviso shall also be
taken into account such sum for extended in respect of
computing income in the return of payments made by
income, has paid the tax due on persons to non-
such income in the return of income residents
and the person has obtained a
certificate from an accountant in the
prescribed form.
172. a) Section 206AA - The Hon'ble Finance Minister has, It is suggested that this
Exemption from in para 176 of his Budget Speech amendment be treated
requirement of [Union Budget 2016-17] stated that as clarificatory.
furnishing PAN non-residents without PAN are
under section currently subjected to a higher rate
206AA to certain of TDS. Hence, the Finance Act,
non-residents 2016 amended the relevant
Request to treat provision to provide that on
the amendment as furnishing of alternative documents,
clarificatory the higher rate will not apply.
The said beneficial provision
appears to be clarificatory in nature
and hence, may be given effect to
since the inception of section
206AA.
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
b) Relieve return Pursuant to recommendations in the In limine with recent
filing obligation if first report of the Income Tax exemption provided to
royalty/ FTS/ Simplification Committee, Finance non-residents from
capital gains has Act 2016 has liberalized the obtaining PAN for
suffered TDS and provisions of s.206AA by inserting avoiding higher TDS u/s.
also clarify that s.206AA(7)(ii) which provides that 206AA if they furnish
s.206AA(7)(ii) read s.206AA shall not apply to TRC, they should also be
with Rule 37BC payments to non-residents subject relieved from return filing
has retrospective to conditions as may be prescribed. obligation where payer
has already withheld
effect
taxes and reported in
Recently, CBDT has notified Rule Form 15CA/CB.
37BC which provides that if the non-
resident payee furnishes certain Additionally the non-
information and documents like residents shall also be
TRC or Unique Identification relieved from filing Form
number in his home country, 3CEB and maintaining
s.206AA shall not apply to specified transfer pricing
document in case of
payments viz. interest, royalty, FTS
transactions with
and capital gains. associated enterprises
on which appropriate
This is a welcome relief to the TDS has been deducted.
taxpayers and considerably
improves ease of doing business
with non-residents by obviating the
need to obtain PAN for non-
residents.
However, the requirement of filing
returns by such non-residents still
continues (except for interest
payments covered by s.115A(1)(a))
and without PAN, it is also possible
to file return.
Thus the position which presently
exists is that while PAN is not
necessary at withholding stage, it is
still necessary for filing return. Non-
filing of return attracts penalty u/s.
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Sr. No Section Issue/Justification Suggestion
271F as also risk of prosecution u/s.
276CC
The TDS rates applicable for non-
residents is generally the final tax
payable by such non-residents. The
information of payments to non-
residents gets transmitted to Tax
Department on real time basis
through compliance u/s. 195(6) read
with Rule 37BB (Form 15CA/B) and
quarterly withholding tax returns.
Hence, requirement of filing return
has no real benefit to the Tax
Department. On the contrary, it
increases compliance burden for
the non-residents and makes them
liable for penalty or prosecution.
c) PAN for foreign India has entered into number of It is suggested that
parties i.e. non- DTAA under the Viena Convention section 206AA should
residents and the domestic law under section not override the DTAA
206AA should not override such entered in to by India.
agreements with other countries.
Therefore, it should be provided
that wherever the rate of tax under
the DTAA is lower than 20% under
section 206AA, same should be
applicable irrespective of the non
resident having PAN in India.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 285
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PART C-ADVANCE PAYMENT OF TAX
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
173. Section The Finance Act (No. 2), 2009 raised The limit to pay advance tax
208 - the limit to pay advance tax under under section 208 be raised
Revision of section 208 to Rs. 10,000. appropriately. Infact, any
Limit of Considering the inflationary assessee whose advance tax
advance conditions prevailing in the country, it payable does not exceed Rs.
tax is felt that the said limit needs to be 30,000 maybe allowed to pay
revised upwards so that the amount full amount in the last
payable in one instalment of the instalment.
advance tax exceeds at least Rs. (SUGGESTIONS FOR
5,000. The present amount of Rs. RATIONALIZATION OF THE
2,500 is too low. Infact, any assessee PROVISIONS OF DIRECT TAX
whose advance tax payable does not LAWS)
exceed Rs. 30,000 should be allowed
to pay full amount in the last
instalment. It is appreciable that the
Finance Act, 2016 has provided for an
exception to an eligible assessee in
respect of an eligible business
referred to in section 44AD to pay the
whole of the advance tax in one go by
15th March of the financial year itself.
174. Draft With a view to create a mechanism for In view of aforesaid, it is
notificatio self-reporting of estimates of current suggested that the draft
n for income, tax payments and advance notification which the
introductio tax liability by companies and persons government proposes to
n of to whom tax audit is applicable, on introduce should be done away
proposed voluntary compliance basis, the with as this would only lead to
Rule 39A government has proposed to additional burden of
dealing introduce new Rule 39A and Form compliance on the taxpayers.
with the No.28AA in the Income-tax Rules,
reporting 1962 (the Rules).
of
estimated
The draft notification states that the
income
taxpayer being a company and
and
person to whom tax audit is applicable
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advance shall furnish an intimation of
tax liability estimated income and payment of
taxes as on 30 September of the
previous year, on or before 15
November of the previous year. If the
income estimated as on 30
September of the previous year is
less than the income of the
corresponding period of the
immediately preceding previous year
by an amount of INR5 Lakh or 10 per
cent, whichever is higher, then the
taxpayer shall be required to furnish
an intimation of estimated income and
payment of taxes as on 31 December
of the previous year, on or before 31
January of the previous year.
The erstwhile regime
The erstwhile provisions under the
Income-tax Act, 1961 (the Act) (viz.
Section 215), required the taxpayer to
pay advance tax on the basis of his
own estimate (including revised
estimate). Up to Assessment Year
(AY) 1988-89, there was a similar
requirement of furnishing an estimate
of advance tax in Forms 28A and 29.
These requirements gave the
assessing authorities discretionary
powers to charge interest and also to
levy penalties for the same default,
which has also been mentioned in the
Circular No. 549 . This led to a lot of
litigation and consequent delay in the
realisation of the dues.
With a view to fulfil the rationale to
simplify the aforesaid provisions and
also to remove the discretion of the
assessing authorities, which had led
to litigation and consequent delay in
realisation of dues, the Direct Tax
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 287
The Institute of Chartered Accountants of India
Laws (Amendment) Act, 1987,
substituted the above provisions by a
simple scheme of payment of
mandatory interest for defaults
mentioned therein.
The provisions of Section 234B of the
Act have replaced the erstwhile
provisions of Section 215 and Section
217 of the Act, applicable from the AY
1989-90 to levy interest for failure to
deposit advance tax upto 90 per cent
of the tax liability on assessed income
before the end of the previous year.
The provisions relating the charge of
mandatory interest are contained in
the new sections 234A, 234B and
234C of the Act.
Under the erstwhile provisions of
Section 215/217 of the Act, the rate
prescribed was 15 per cent per
annum. The Direct Tax Laws
(Amendment) Act, 1987, has
increased this rate to 24 per cent
under Section 234B of the Act.
Similarly, the rate of 15 per cent under
the erstwhile Section 216 of the Act
was increased to 18 per cent under
Section 234C of the Act. A co-joint
reading of the above-referred
rationale along with the introduction of
Section 234B/234C of the Act seems
to suggest that on one hand the
taxpayers' compliance rigors have
been reduced by way of introduction
of the new set of provisions and on
the other hand, to compensate the
same, the interest rates have been
increased.
Under the Act, the taxpayer has been
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paying advance tax on his own accord
in accordance with the estimated
income of a particular year without
being required to disclose the method
of computation. On the other hand,
the tax officer also has the power
under Section 210 to require the
taxpayer to pay a particular sum of
advance tax based of his own
calculation.
Additional compliance burden on
the taxpayer as well as the tax
department
Companies listed on the recognized
stock exchange are required to
submit the quarterly and year-to-date
standalone financial results to the
stock exchange along with limited
review report or audit report as
applicable. There is already a
compliance procedure which needs to
be adhered to in case of listed
companies. Further, in today's times
where business acquisitions and
mergers are the norm of the day, the
business models and resultant
profitability may change post such
divestment/acquisition during the
year which may render the mid-year
reporting redundant.
This additional reporting under the
Rules will further increase the
compliance burden on the listed
companies which are already reeling
under the pressure of newly
introduced legislations like Ind-AS,
Goods and Services Tax (GST),
Income Computation Disclosure
Standards (ICDS), etc.
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This additional compliance in the form
of furnishing intimations will increase
the compliance cost of the taxpayer.
Further, the taxpayers may have to
spend more time and resources to
report such estimation of present year
as well as comparable earlier years.
This will also involve increase in the
additional work for the tax department
in the process of gathering
information and processing the same
through data mining techniques which
has been submitted on a mere
estimate basis.
`Ease of doing business' in India
The government has introduced
several measures in the recent years
to ensure that India's rankings get a
boost in the overall `Ease of doing
business' index as released by World
Bank and other similar o rganizations'.
The proposed rule could act as an
impediment in the process of paving
the way for a conducive environment
of `Ease of doing business' in India
and may impact India's rankings on
the "Doing business' index.
Even in the largest economy like USA,
the taxpayer has the freedom of
computing advance tax on own
accord based on estimated income
without disclosing to the tax
authorities.
Rationale for providing this
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additional information
The draft notification states that it is
proposed to create a mechanism for
self-reporting of estimates of current
income, tax payments and advance
tax liability by certain taxpayers. The
notification does not provide an
appropriate rationale/reasoning apart
from stating that the objective is to
create a mechanism for self-reporting.
Further, though it appears from the
draft notification that the requirements
are part of voluntary compliance it
seems that the requirements are
mandatory in nature for the specified
taxpayers.
It is important to note that the
mechanism requires the taxpayer to
provide details of estimated income,
tax liability for the previous year as
well as for the year immediately
preceding the previous year. The
taxpayer is also required to provide
details of turnover, profit etc. for the
same period as well as for the year
immediately preceding the PY and for
the PY ending 31 March (estimated)
and for the year immediately
preceding the corresponding PY.
The type of information asked for is
quite cumbersome and there does not
seem to be an appropriate rationale
for asking the taxpayer to provide
such information. More likely than not,
there is a possibility that the tax
officers may use this scheme causing
inconvenience to the taxpayers and
may lead to the taxpayer community
ending up providing repetitive
information. Further, this may lead to
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 291
The Institute of Chartered Accountants of India
unwarranted litigation.
Managing the information in a
secure manner
The information provided by the
taxpayers need to be maintained in a
secure manner. This kind of
information could also create volatility
in the stock price in case of the listed
companies if sensitive information is
not managed securely.
Further, the tax officers may assume
additional powers which could then be
used for verification and the
assessment process will indirectly
start before furnishing the return of
income.
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PART F-INTEREST CHARGEABLE IN CERTAIN CASES
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
175. Section Provision incorporated in sections 220, The time limit may be redundant
220(2A), 273A and 273AA requiring disposal of unless there is a specific
273A, wavier applications within twelve provision for consequences in
273AA months of receipt of application. case of failure to pass the
Time limit However, there is no specific provision waiver order within prescribed
for to address the consequences, if time limit. Hence, it may be
disposing authority does not pass waiver order provided that, if the Principal
waiver within stipulated period. Commissioner/ Commissioner
applicatio fails to pass the order within the
ns time limit, interest, penalty etc.
provided - may be deemed to be waived.
Consequ
ence of
not
passing
the order
within the
time limit
to be
spelt out
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 293
The Institute of Chartered Accountants of India
PART G-LEVY OF FEE IN CERTAIN CASES
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
176. Waiver Section 234E provides for It is recommended that Section 234E be
of fees levy of fees of Rs 200 per appropriately amended so that no penalty
in case day where there is delay in is levied on a casual basis and atleast
filing of quarterly TDS notice initiating the proceedings is first
of delay
returns. issued before the levy of penalty
in filing
quarterl This penalty is being levied
y TDS in all the cases on a causal
returns manner without going into
Section the facts of the case and
234E verifying the reasons for
delay in filing of TDS return.
This creates lot of difficulties
for the tax payers, as even
on account of genuine
delay, there is a penalty.
Section 119 empowers
CBDT to forego the levy of
penalty under Section 234E
if it feels necessary to do.
177. Fees a) The levy of fees under It is highly appreciable that the
under section 234E has been a Government has taken an open mind while
section matter of great concern. considering the problems of e-filing of
234E It is highly appreciable that statement of TDS /TCS and has extended
the Government has taken the time only for Government deductors
an open mind while earlier. In fact, considering the difficulties
considering the problems of being faced by the government deductors,
e-filing of statement of TDS the said circular (No. 7/2014 dated 4.3.14)
/TCS and has extended the was a step in the right direction. Since the
time only for Government above difficulty equally applies for other
deductors earlier. In fact, deductors also, one time amnesty is
considering the difficulties sought for all deductors with regard to all
being faced by the TDS statements pertaining to FY 2012-13
government deductors, the and FY 2013-14 to be submitted on or
circular No. 7/2014 dated before a cutoff date to be decided
4.3.14 was a step in the right appropriately.
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Sr. No Section Issue/Justification Suggestion
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.
b) According to the It is suggested to follow day wise slab
provisions of section 234E, system & it may be taken as:
where a person fails to
deliver or cause to be
Period of Default Max. Fees u/s 234E
delivered a statement within
the time prescribed then he Rs. 500/- or tax
shall be liable to pay, by way amount, whichever is
of fee, a sum of Rs. 200 for Upto 15 Days higher, but subject to
every day during which the maximum of Rs.
failure continues. But the 20,000/-.
amount of fee shall not Rs. 1000/- or tax
exceed the amount of tax amount, whichever is
deductible or collectible, as From 15 Days to 1 higher, but subject to
the case may be. Month maximum of Rs.
20,000/-.
Considering the hardships Rs. 1000/- + Rs. 200/-
being faced by the per day or tax
From 1 Month
taxpayers due to various amount, whichever is
Onwards
reasons, penal fees for late higher, but subject to
filing of TDS returns need to maximum of
be changed to period wise/ Rs.20,000/-.
slab of days instead of
current system.
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
178. Section The Finance Act, 2017 vide It is suggested that fees levied under
234F section 234Flevied fees of section 234F for delayed filing of return
Fee for Rs.5,000 in case where may be withdrawn and necessary
delayed return is furnished after the amendments be made in section 271F.
filing of due date but on or before
return 31st December of the
Remova relevant assessment year
l of and Rs.10,000, in other
provisio cases. However, it is also
n provided to restrict the fees
levying to Rs.1,000, where the total
fees to income does not exceed five
prevent lakh rupees.
undue Erstwhile provisions provide
hardshi for penalty of Rs.5,000
p for the under section 271F in case
genuine where return is furnished
assesse after end of relevant
es assessment year provided
there is no reasonable
cause for such delay.
The provision is made with a
view to ensure that returns
are filed within the due dates
specified in section 139(1).
However, fees levied under
section 234F will be leviable
on all assessees who have
furnished return beyond the
due date specified under
section 139(1) irrespective
of the reason for such delay
and whether all the taxes
have been paid through
TDS or Advance Tax.
Also, the assessee cannot
justify his cause for delay
under any appeal against
the same as there is no
provision to consider the
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Sr. No Section Issue/Justification Suggestion
reasonable cause for delay
on the part of assessee.
Further, fee is generally
levied in respect of services
rendered. Whereas
collection of tax by the
Government is a sovereign
function, as such, there is no
rendering of services. Delay
in filing of return is in
contravention of law for
which penalty should be
attracted. The same can be
waived if reasonable cause
is proved.
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The Institute of Chartered Accountants of India
CHAPTER XIX-A
SETTLEMENT OF CASES
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
179. Restoration Section 245E of the Act was It is suggested that the
of the inserted in year 1975, amended in provisions of erstwhile section
provisions of 1984, 1987 and the provisions 245E be restored in `Chapter
erstwhile were made inapplicable for XIX-A Settlement of Cases' for
Section 245E applications filed on or after 01- proper and justified disposal of
06-2007. The erswhile provisions cases of applicants.
of section 245E 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 of
application for settlement under
section 245C exceeds nine years.
Provided further that no
proceeding shall be reopened by
the Settlement Commission under
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
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
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)
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Sr. No Section Issue/Justification Suggestion
on the same issue or same modus
operandi.
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The Institute of Chartered Accountants of India
CHAPTER XX
APPEALS & REVISION
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
180. Delay by It has been experienced that It is suggested that time limits
Assessing when any order of higher for issuing the Order giving
Officer in appellate authorities is effects and Refund Orders
issuing Order received, and moreover when should be stipulated in the
giving effect to the order is in favour of the Act. If the order provides for
Orders of assessee, the Assessing officer fresh modification of the
higher delays in issuing the Order assessment, the same should
Appellate giving effect to such appellate be given effect to within 12
authorities, orders. Due to this delay, the months from the end of the
and also delay refund arising from such month in which it is received
in issuing appellate orders also gets by the Commissioner.
refunds delayed. Also the Interest on Refunds
arising out of Secondly, it is also observed should be calculated up to the
such Order that in most of the cases, the date of actual issuing of
issuing of Refund Cheques/ Refund warrants and not only
Warrants are purposefully up to the date of granting the
delayed and the interest on refund/date of Order (as per
such refunds, as per the the existing provisions of the
provisions of the Income-tax Act)
Act, 1961 is calculated only up (SUGGESTIONS TO REDUCE /
to the date of issue of MINIMIZE LITIGATIONS)
Assessment order / Order
Giving effects to appellate
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.
181. Explanation 2 Section 263(1) provides that if It is suggested that
to section 263 the Principal Commissioner or appropriate clarification may
Commissioner considers that be issued by way of a circular
Circumstances any order passed by the or otherwise to ensure clarity
when an order Assessing Officer is erroneous on the aforesaid issues and
passed by the in so far as it is prejudicial to the reduce the discretionary
Assessing interests of the Revenue, he exercise of revisionary powers
Officer is may, after giving the assessee by the
erroneous in an opportunity of being heard Commissioner/Principal
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The Institute of Chartered Accountants of India
so far as it is and after making an enquiry Commissioner.
prejudicial to pass an order modifying the Further, clause (a) of
the interest of assessment made by the Explanation 2 to section 263(1)
revenue Assessing Officer or cancelling providing that an order would
Need for the assessment and directing be deemed to be erroneous in
clarification fresh assessment. so far as it is prejudicial to the
Explanation 2 is being inserted interest of revenue, if it is
in section 263(1) w.e.f. passed without making
01.06.2015 to provide that an inquiries or verification which
order passed by the Assessing should have been made, may
Officer shall be deemed to be be removed, since the
erroneous in so far as it is condition is very subjective.
prejudicial to the interests of the
revenue, if, in the opinion of the
Principal Commissioner or
Commissioner, --
(a) the order is passed without
making inquiries or verification
which, should have been made;
(b) the order is passed allowing
any relief without inquiring into
the claim;
(c) the order has not been made
in accordance with any order,
direction or instruction issued
by the Board under section 119;
or
(d) the order has not been
passed in accordance with any
decision, prejudicial to the
assessee, rendered by the
jurisdictional High Court or
Supreme Court in the case of
the assessee or any other
person.
Probable hardship
The language of the Explanation
gives scope for multiple
interpretations and hence, can
be the subject matter of
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litigation. It is possible that
there may be cases where the
Assessing Officer makes
inquiries to his satisfaction, but
it may be inadequate in the
opinion of the Commissioner.
Also, it is not clear as to the
point of time when it must be
seen whether the order has
been passed by the Assessing
Officer in accordance with any
direction or instruction of the
CBDT under section 119 or in
accordance with any decision
rendered by the jurisdictional
High Court or Supreme Court
whether at the time of passing of
the order by the Assessing
Officer or at the time when the
Commissioner invokes his
jurisdiction under section 263. It
may be possible that the order
passed by the Assessing Officer
is not in accordance with the
decision of the Supreme Court
or jurisdictional High Court
pronounced after passing of
such order.
Further, since the amendment
has already been made
applicable from 1st June 2015,
it needs clarification whether
the same would be applicable
only in cases where the order of
the Assessing Officer is passed
on or after that date; or whether
the amended provisions would
get attracted even if the order is
passed before that date but the
revisionary proceedings are
pending before the
Commissioner/Principal
Commissioner on that date.
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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. No Section Issue/Justification Suggestion
182. Section Section 269SS of the Income tax Act, 1961 requires In order to
269SS and that acceptance of any loan or deposit or any clarify the
269T Mode specified sum exceeding Rupees twenty thousand intent of the
may be made only by an account payee cheque or law, it is
of taking or
an account payee bank draft or use of electronic therefore
accepting clearing system. suggested
and that the
repayment Further, Section 269T of the Income tax Act, 1961 beneficial
of certain requires that the repayment of any loan or deposit or amendment
loans and any specified advance exceeding Rupees twenty as made by
deposits thousand may be made only by an account payee Finance (No.
cheque or an account payee bank draft or use of 2) Act, 2014
through
electronic clearing system through a bank account. extending the
banking scope of
channels The Finance Act (No. 2), 2014 provided to allow the payment
other valid modes like "use of electronic clearing modes by
system through a bank account" w.e.f 01.04.2015. including
Extending the scope w.e.f Assessment year 2015-16 electronic
limits the purpose of the amendment. Several fund transfer
litigations are pending since transactions made should be
through RTGS, NEFT, ECS and EFT was not effective for
covered within the scope of section 269SS and all pending
269T. cases instead
of AY 2015-16,
by inserting
an
explanation in
both section
269SS and
section 269T.
183. Section In order to achieve the mission of the Government to
269ST - move towards a less cash economy to reduce
Restriction generation and circulation of black money, the
Finance Act 2017 inserted section 269ST in the Act
on cash
to provide that no person shall receive an amount of
transactions two lakh rupees or more, --
Certain
concerns to
be (a) in aggregate from a person in a day; or
addressed (b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or
occasion from a person,
otherwise than by an account payee cheque or
account payee bank draft or use of electronic
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clearing system through a bank account.
Further, vide notification no 28/2017, dated
5.4.2017, it has been provided that such restriction
on cash receipt shall not apply to receipt of cash by
any person from a bank, co-operative bank or a post
office savings bank. Thus, cash withdrawals from a
bank, co-operative bank or a post office savings
bank would not be hit by the provisions of section
269ST.
Subsequently, vide Circular No 22/2017, dated
3.7.2017, it has been clarified that in respect of
receipt in the nature of repayment of loan by NBFCs
or HFCs, the receipt of one instalment of loan
repayment in respect of a loan shall constitute a
`single transaction' as specified in clause (b) of
section 269ST of the Act and all the instalments paid
for a loan shall not be aggregated for the purposes
of determining applicability of the provisions section
269ST.
Issues
(i) The phrase "transactions relating to one event or
occasion" is very subjective and prone to multiple It is suggested
interpretations and may result in avoidable litigation. that suitable
Receipts exceeding Rs. 2 lakhs in respect of clarificatory
transactions relating to one "event or occasion" from guidelines
a person is prohibited. Say for example, if salary/ may be issued
wages is paid in cash to supervisor/ consultant every to illustrate
month such that yearly aggregate exceeds threshold the intent of
limit of Rs. 3 lakhs, tax authorities may argue that the phrase
such receipt is covered by section 269ST since "transactions
payment of salary constitutes one event or occasion relating to one
even though payments might have been disbursed event or
monthly and raise a demand notice. Hence, it may occasion from
be suggested that third limb of "event or occasion" a person". In
should be explicitly kept out of the scope to avoid any the
litigation and protect honest taxpayers. Similar alternative,
controversy may also arise in case of second limb clause (c) may
which covers receipt in respect of a "single be removed
transaction".
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(ii) Some exceptions on the lines of Rule 6DD need to Exceptions on
be provided. Payment of fund amongst relatives, say the lines of
for household expenses or medical emergencies, is Rule 6DD may
not exempted; settlement of debt by book entry or be provided.
conversion of loan into equity may also stand
covered since it does not strictly fall within the
specified modes mentioned above.
It is appreciable that certain exceptions were
provided vide Notification No 57/2017 dated 3.7.17.
However, there is a still a scope of further additions
to such exceptions.
(iii) The Finance Minister, in his budget speech on 1.2.17 It is suggested
has mentioned that promotion of a digital economy that payment
is an integral part of Government's strategy to clean made through
the system and weed out corruption and black banking
money. It has a transformative impact in terms of channels,
greater formalisation of the economy and including
mainstreaming of financial savings into the banking debit cards,
system. credit cards
Accordingly, the Finance Act 2017 has, introduced and e-wallets,
provisions encouraging payment through electronic may be
clearing system like, section 13A, section 35AD, permitted
section 40A etc. Further in section 269ST also, under the
receipt in excess of Rs.2 lakh otherwise than by way various
of account payee cheque or account payee bank provisions of
draft or use of electronic clearing system (ECS) the Income-
through a bank account is not permissible and would tax Act, 1961.
attract penal provisions. Alternatively,
It is pertinent to note that debit cards, credit cards ECS may be
and e-wallets are being widely used to make specifically
payments and these instruments leave an audit trail. defined in the
However, technically, they do not fall within the Income-tax
scope of "Electronic Clearing System" as per the Act, 1961 to
meaning of the said term clarified by RBI through its include
FAQs given at reference to
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=55 these modes
and reproduced below of payment.
"Electronic Clearing Service (ECS) is an electronic
mode of payment / receipt for transactions that are
repetitive and periodic in nature. ECS is used by
institutions for making bulk payment of amounts
towards distribution of dividend, interest, salary,
pension, etc., or for bulk collection of amounts
towards telephone / electricity / water dues, cess /
tax collections, loan instalment repayments, periodic
investments in mutual funds, insurance premium etc.
Essentially, ECS facilitates bulk transfer of monies
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from one bank account to many bank accounts or
vice versa. ECS includes transactions processed
under National Automated Clearing House (NACH)
operated by National Payments Corporation of India
(NPCI)."
(iv) The expression, `amount' has been used u/s 269ST It is suggested
whereas the expression `sum' has been used u/s that a uniform
271DA, which may create confusion and result in expression,
avoidable litigation. `amount' or
`sum of
money' may
be used at
both the
places i.e.
under section
269ST as well
as under
section 271DA
(v) In Note no. 83 of notes on clauses to the Finance It is suggested
Bill, 2017, the following amounts/ nature of that the above
transactions are excluded: - highlighted
transaction as
"Any receipt from sale of agricultural produce by any referred to in
person being an individual or Hindu Undivided family notes to
in whose hands such receipts constitutes agricultural clauses be
income " excluded from
the operation
This transaction has been inadvertently omitted from of section
the list of exclusions in section 269ST. 269ST by
suitably
amending the
proviso to
section
269ST.
It is also
suggested
that the
benefit of the
above
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exclusion be
not restricted
only to
individual and
HUF but also
to other
assessee's
also who are
deriving
agricultural
income only.
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CHAPTER XXI
PENALTIES IMPOSABLE
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184. Section 270A inserted to provide for levy of penalty in case of under reporting of
income and misreporting of income - Issues to be addressed
a) Penalty The Finance Act, 2016 has It is suggested that section
order under inserted a new section 270A 246A may be suitably amended
section 270A providing for penalty in case of so as to provide that penalty
be made an under-reporting and misreporting order under section 270A
order of income. As per the provisions, passed by Assessing Officer
appealable the said penalty order under below the rank of Commissioner
before section 270A has not been made may be made appealable under
Commission appealable under section 246A section 246A before
er (Appeals) i.e., no appeal would lie against Commissioner (Appeals).
under the penalty order under section
section 246A 270A before the first appellate
authority i.e., Commissioner
(Appeals). Although an
amendment has been made in
section 253 providing for appeal to
Tribunal against such penalty
order, no such amendment has
been made in section 246A.
In a case where the said penalty
order is imposed by an Assessing
Officer below the rank of
Commissioner, it is desirable that
an appeal may be filed against the
same to Commissioner (Appeals).
It may be noted that the penalty
order under the erstwhile section
271 is an appealable order under
section 246A. There appears to
be an inadvertent omission in not
including an order under section
270A as an order appealable
before Commissioner (Appeals)
under section 246A.
b) Penalty There are certain concerns arising Without prejudice thereto, with
for under- out of the provisions of new regard to the newly introduced
reporting of section 270A, due to which it is methodology of levying penalty,
income likely that the implementation may the following suggestions may
not yield the desired result and be considered.
fresh litigation is likely to arise · By way of express
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while interpreting the new requirement, the Assessing
provision. Officer may be required to
initiate the proceedings prior to
or concurrently with the closure
of assessment proceedings.
Unless this is done, there may
be initiation of penalty several
years after the assessment
proceedings are completed. The
time limit under section 275(c)
is, unfortunately, linked with the
date of initiation of
proceedings.
· Unlike Explanation 3 of
section 271(1)(c), in the new
provision, where return of
income is not furnished, penalty
will be calculated with reference
to tax on income assessed
without considering the impact
of tax deducted or advance tax
paid by taxpayer. For example,
in case of a person who is not
required to furnish return of
income under section 115A(5),
tax may have been paid, but, as
per new methodology, the whole
of the income, as assessed, may
be considered as unreported
income. Such would also be the
case in a situation where there
is no revenue loss since the
whole of the tax was already
paid up and yet, the return may
not have been furnished.
· There may be some
concern on resolution of the
formula specified in the section
if, intimation under section
143(1)(a) is not available. It may
be good to clarify that, in such a
case, returned income will be
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the substituted basis.
· If immunity is granted
under section 270A, the
immunity holds valid against
initiation of prosecution under
section 276C. The reference
may also be made to section
276CC which can be invoked in
a case where there is failure to
furnish return of income.
· Penalty proceedings
may be permitted only when
specific conditions are
satisfied. e.g. the adjustment
made exceeds a minimum
threshold or say 10% of taxable
income, etc.
c) Order to The newly inserted section 270A It is suggested that suitable
specify the has done away with the undue amendments be introduced or
specific discretion in the hands of alternatively administrative
clause of Assessing Officer by imposing instructions may be issued so
under - penalty at the rate of either 50% or that each order contains the
reported or 200% depending on whether the specific fact of either
misreported income is under reported or misreported income or under-
income for misreported. Certain controls may reported income or both along
levy of be required in the effective with the mention of specific
penalty implementation of the new clause of section 270A(2)/(9)
under section. against each
section 270A In order to reduce the practice of disallowance/addition. Such
Assessing Officers treating every measures would act as a
concealed income as misreported suitable control mechanism in
as well as the fact that the new the absence of recording of
section does not require recording satisfaction to initiate penalty
of satisfaction before imposition of proceedings and would also
penalty proceedings (as was enable assessee to opt for
required under the erstwhile section 270AA providing for
section 271), it is desirable that a immunity from penalty and
suitable control mechanism may prosecution in case income is
be put in place. Certain measures not misreported.
like making it mandatory for the
Assessing Officers to mention in
the Order that every disallowance
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Sr. No Section Issue/Justification Suggestion
or addition be specified as either
under-reported or misreported.
Further, measures like specifying
the exact clause from sub-section
(2) or (9) of section 270A ,in case
of under-reporting or misreporting
of income respectively in the order
would go a long way in reducing
disputes and litigation. The said
measures would also make it
clear to the assessee in time
whether he could opt for immunity
from penalty and prosecution
under section 270AA in case
order specifies that he has not
misreported the income.
d) Another issue in this regard is that It is suggested that suitable
Clarification section 270A is not providing clarification may be issued
when tax clarity in a situation when regarding the situation when tax
increases assessed income is determined to amount is increased due to rate
due to re- be equal to returned income increase (on account of, say,
characterisa during the assessment change of head of income from
tion of proceedings but tax amount long term capital gain income to
income increased due to change/increase profits and gains of business or
under a in tax rate. This may happen when profession or income from other
different a certain income returned by an sources) although the returned
head of assessee as a long term capital income and assessed income
income but gain but the said income is are exactly same.
assessed assessed as income from other
income sources thereby leading to
equals the increase in tax amount. At
returned present, the different clauses
income under sub-section (2) and (9) of
section 270A does not cover the
said situation. It is not clear
whether the said increase in tax
amount would be treated as
under-reported income or
misreported income.
e) Mere Scope of penalty under section It is suggested that section
making of a 270A has been widened and it 270A may be suitably amended
claim which would now include within its so that penalty is not
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is not scope, claims made by the automatically attracted for
sustainable assessee but disallowed by the merely making of a claim which
in law would Assessing Officer. Where no is not sustainable in law.
not information given in the return is
tantamount found to be incorrect or
to furnishing inaccurate, and the assessee has
inaccurate disclosed all material facts
particulars relevant for assessment, he
for attracting cannot be held guilty of furnishing
levy of inaccurate particulars. This
penalty principle of law has been settled
by the Apex Court ruling in
Reliance Petro Products' case.
Therefore, mere making of a claim
which is not sustainable in law
would not tantamount to
furnishing of inaccurate
particulars for attracting levy of
penalty. However, such cases are
now to be included within the
ambit of under reported income
under the new section 270A and
penalty would be attracted @
50%.
185. Section (a) Where penalty is levied on Suitable provision be inserted to
270AA - certain additions on ground of solve this anomaly.
Immunity
mis-reporting and certain
from
Imposition of additions on ground of only
penalty under-reporting than assessee
will have to make a choice
whether to file appeal or make
application for immunity as he
cannot file appeal on penalty
levied on mis-reported income
and immunity application for
under-reported income.
(b) Also, There is no guarantee Suitable provision may be
that appeal against quantum inserted.
order with application for
condonation of delay after
rejection of application for
immunity, will be admitted.
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186. Section Section 271AAB provides for Sub-section (3) may be
271AAB - imposition of penalty @ 10% on amended to provide that the
Penalty undisclosed income found during prosecution provisions under
where the course of search and admitted sections 274 and 275 would
search has at the stage of search. apply in relation to penalty
been Undisclosed income not admitted levied only under clause (c) of
initiated 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 cases, PROVISIONS OF DIRECT TAX
i.e. cases covered under clause LAWS)
(c), penalty to be imposed @ 60%
of undisclosed income. Aforesaid
provisions of section 271AAB are
applicable till 15.12.2016 due to
insertion of sub-section (1A) vide
the Taxation Laws (Second
Amendment) Act, 2016.
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).
187. Section Section 271AAB provides for In order to provide the real
271AAB imposition of penalty at specified benefit of imposition of penalty
Relaxation in rates where search has been at the reasonably reduced rate
restrictions initiated. The rate of penalty varies of 10% as specified in section
to claim the from 10% to 60 % depending on 271AAB(1)(a), the conditions as
benefit of the time when the assessee specified in its sub clause (i)
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concessiona admits the undisclosed income. w.r.t specifying the manner in
l rate of Eg Penalty would be levied @ which undisclosed admitted
penalty @ 10% in case assessee admits to income has been derived may
10% undisclosed income during the be suitably amended and sub
course of search and makes a clause (ii) w.r.t substantiating
statement under section 132(4) the manner in which
along with other conditions like undisclosed income has been
specifying and substantiating the derived may be done away with.
manner of deriving such income at
the time search proceeding is
going on among other conditions.
The aforesaid provisions of
section 271AAB are applicable till
15.12.2016 due to insertion of
sub-section (1A) vide the Taxation
Laws (Second Amendment) Act,
2016.
The benefit of reduced rate of 10%
is mostly lost as the assessee is
not in a frame of mind to specify
and substantiate the manner of
deriving such undisclosed
admitted income at the time of
search. Most assessees are under
a state of shock when search is
initiated at their premises and
turns out to be a drain on their
mental well being. The pressures
exercised during the course of
search makes it impossible for
majority of the assessees to
comply with the conditions to have
the benefit of reduced rate of
penalty @ 10%. Further, this
provision is in the nature of
settlement provision so the harsh
and difficult to meet conditions like
the one noted above may surely
be done away with.
188. Section 271B Section 271B of the Income-tax It is suggested that the penalty
- Failure to Act, 1961 provides for imposition under section 271B may be
of penalty at the rate of one-half
get accounts levied on the basis of delay in
per cent of the total sales, turnover
audited number of days in
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or gross receipts, as the case may filing/furnishing the tax audit
be, in business, or of the gross report which may be 1000 per
receipts in profession, in such day subject to maximum
previous year or years, or amount of 1,50,000.
1,50,000 whichever is less for
failure by a person to get his
accounts audited in respect of any
previous year or years relevant to
an assessment year or to furnish a
report of such audit as required
under section 44AB.
It may be noted that the said
provision causes undue hardship
to the genuine assessees
especially the small businessmen.
The assessee is penalised even
for a few days of delay in
furnishing his tax audit report. In
order to make the ease of doing
business in India a reality, such
high amount of penalty need to be
liberalised.
189. Rationalizati As per section 271D & 271E, if a It is suggested to restrict the
on of Section person accepts/repays a loan or levy of penalty to the maximum
271D & 271E deposit or specified sum/advance, marginal rate of tax i.e. 30% or
as the case may be in the slab rate applicable to the
contravention with the provisions assessee instead of 100% of the
of section 269SS/269T, he shall amount of loan or deposit taken
be liable to pay, by way of penalty, or repaid in violation of
a sum equal to the amount of loan provisions u/s 269SS & 269T
or deposit.
The penal provisions of section
271D & 271E may be restricted to
maximum marginal rate of tax i.e.
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.
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190. Section 271H The Finance Act, 2012 had It is suggested that:
- Penalty for inserted the penalty provisions i. Sub-section (3) may be
failure to under section 271H providing for amended to provide that
furnish penalty ranging from Rs.10,000 to penalty provisions under
TDS/TCS Rs.1,00,000 for failure to furnish section 271H would not be
statements quarterly statements of TDS and attracted if the person
TCS within the time prescribed proves that after paying tax
under the Income-tax law. deducted or collected along
However, such penalty would not with the fee and interest, if
be levied if the person has paid the any, to the credit of the
taxes deducted or collected along Central Government, he has
with fee and interest to the credit delivered or caused to be
of the Central Government and delivered the statement
has filed the statements within a referred to in section 200(3)
period of one year from the or the proviso to section
respective due dates i.e., namely, 206C(3) before the expiry of
31st July, 31st October, 31 st due date of filing of return of
January and 31 st May, income of the previous year
respectively for the quarters in which the tax was so
ending 30 th June, 30 th September, deducted or collected,
31st December and 31st March. irrespective of the quarter to
The TDS/TCS statements form the which the tax relates.
basis of preparation of annual tax ii. Penalty may be prescribed
statement in Form No 26AS. The having regard to quantum of
deductee is required to confirm the default and the period of
exact tax deducted/collected at delay, and no discretion may
source and remitted to the be given to the Assessing
Government by verifying Form No Officer in this regard. In any
26AS online, and thereafter pay case, it should not exceed
the remaining taxes by way of self- the tax deductible or
assessment tax. However, if TDS/ collectible at source, in
TCS statements are permitted to respect of which the
be filed within one year of the due quarterly statement has not
date prescribed for each quarter been filed.
on account of non-levy of penalty, (SUGGESTIONS FOR
then the same would extend RATIONALIZATION OF THE
beyond the due date of filing return PROVISIONS OF DIRECT TAX
of income of that assessment year LAWS)
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
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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
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.1,00,000 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.
191. Section 271J The Finance Act 2017 has In order to avoid unnecessary
Request to inserted a new provision by way of litigation with respect to
issue section 271J which provides that applicability of section 271J and
guidelines where the Assessing Officer (AO) to ensure that no penalty is
for levy of or Commissioner (Appeals) levied in bonafide cases, it is
penalty {CIT(A)}, in the course of any hereby clarified that following
under proceedings under the Income-tax approach shall be adopted
section 271J Act 1961, finds that an accountant before considering the case fit
for or a merchant banker or a for levy of penalty on a
furnishing registered valuer (hereinafter professional.
incorrect referred to as `professional') has
information furnished incorrect information in
1. While deciding upon levy of
in reports or any report or certificate furnished
penalty, the AO/CIT(A) may
certificates under any provisions of the Act or
consider that the penalty is
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the rules made thereunder, the AO for furnishing `incorrect
or CIT(A) may direct that such information'. While this
professional shall pay, by way of term is not defined in the
penalty, a sum of Rs. 10,000 for Act, the distinction between
each such report or certificate. furnishing of incorrect
The terms `accountant', `merchant facts and expression of
banker' and `registered valuer' are professional opinion
defined in section 271J. Further, should be duly considered.
section 273B has also been No penalty should be levied
amended to provide that if the where facts as stated in the
professional proves that there was report are not found to be
a reasonable cause for the failure incorrect. It may be noted
referred in section 271J, then that mere disagreement
penalty shall not be imposable in with the professional's
respect of section 271J. opinion does not justify
levy of penalty if the
professional has not been
The object of the new provision is
found to be negligent while
that the professional furnishing
issuing the report or
report or certificate undertakes
certificate. Views taken on
due diligence before making such
the basis of judicial
certification.
decisions and sound
judicial principles should
Representations have been not be treated as "incorrect
received by the Board stating that information".
in the absence of any clear 2. Before commencing the
definition of th e term "incorrect process of enquiry, the
information", materiality of the tax impact
clarification/guidelines on scope of may be considered. In case
section 271J may be provided by the tax impact owing to
the Board for proper incorrect information does
administration of the law and not exceed a specified
curtail chances of avoidable amount the enquiry should
litigation. not be proceeded further.
3. The inquiry should
preferably be made by
Jurisdictional AO/CIT(A) of
the Professional on being
referred by the
Jurisdictional AO/CIT(A) of
the assessee. The penalty
should be initiated by the
jurisdictional AO/CIT(A) of
the professional and for
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this purpose, if the inquiry
was initiated by a different
AO/CIT(A), the matter
should be referred to the
jurisdictional AO/CIT(A).
4. Also the possibility of
bonafide typographical
errors while furnishing
information in electronic
mode on the website of the
Department should be duly
considered. The matter may
be decided on merits on the
basis of physical copy of
the report/ certificate
and/or any other materials
available on record or
furnished by the
professional.
5. Due consideration should
be given to the fact that the
professionals are obliged
to comply with professional
standards laid down by
regulator of the profession
(eg. Institute of Chartered
Accountants of India for
Chartered Accountants or
Securities & Exchange
Board of India for merchant
bankers, etc) to exercise
due diligence while issuing
any report or certificate and
any breach thereof may
invite regulatory action
against the professional.
The penalty under section
271J of the Act is an
additional deterrent.
6. Since the object of the
provision is to ensure that
the professional has
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Sr. No Section Issue/Justification Suggestion
exercised due diligence
before issue of report or
certificate, inquiry should
be made whether the
professional has followed
professional standards laid
down by the respective
regulator of the profession
before issue of the
certificate or report. Such
inquiry should be made
with prior approval of
Principal Chief
Commissioner or Chief
Commissioner or Principal
Commissioner before
initiating the penalty. The
inquiry may be made by
referring the matter to the
respective regulator and
calling for a report within a
period of three to six
months. The report, if any,
received from the regulator
should be considered
before initiation of the
penalty.
7. If the report from the
regulator states that the
professional had exercised
due diligence as per
professional standards, the
proceedings should be
dropped with the approval
of the Principal Chief
Commissioner or Chief
Commissioner or Principal
Commissioner whose
approval was sought before
making the inquiry.
8. If adverse report is received
from the regulator, the
AO/CIT(A) may initiate
penalty proceedings
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Sr. No Section Issue/Justification Suggestion
against the professional.
9. If no report is received from
the regulator within a
period of three to six
months, the AO/CIT(A) may
initiate penalty
proceedings against the
professional.
10. In both circumstances
mentioned in VIII and IX
above the professional
should be heard or should
be given a reasonable
opportunity of being heard
before initiating the penalty
proceedings . The
AO/CIT(A) may then decide
the case on merits in
accordance with law.
11. Also, penalty shall not be
levied on any professional
in respect of any report or
certificate issued by such
professional in any
financial year relevant to
the assessment year, which
falls beyond the period of
limitation mentioned in
respective sections under
which proceedings are
initiated. For instance,
notice u/s 148 of the
Income-tax Act, 1961 for
Assessment Year 2010-11
(relevant to Financial Year
2009-10) is issued by the
Assessing Officer on 29th
March, 2017 and such
assessment or
reassessment proceedings
u/s 147 of the Income-tax
Act, 1961 are to be
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Sr. No Section Issue/Justification Suggestion
completed on or before
31st December, 2017. In
such case, the Assessing
Officer shall not be allowed
to impose penalty on
professional in respect of
documents signed in
financial year 2009-10 since
such year is already barred
by limitation after 31st
March, 2017 for the
professional.
12. Where penalty is levied by
CIT(A), since no specific
remedy of appeal to the
Appellate Tribunal has
been provided to the
professional in the Act, for
proper administration of
law and until the Act is
amended suitably, it is
hereby clarified that if the
professional files appeal
before the Appellate
Tribunal against such
order, no objection shall be
taken on the ground that
the Act does not confer
jurisdiction on the
Appellate Tribunal to admit
such appeal.
192. Genuine Under section 276B, the It is suggested that the matter
hardship consequence of failure to comply may be looked into and
faced by tax with the provisions of Chapter appropriate measures may be
deductors on XVII-B is rigorous imprisonment taken so that prosecution
account of for a term which shall not be less proceedings under section
provisions of than three months but which may 276B are not initiated against
section 276B extend to seven years and with genuine tax deductors, who
of the fine. The provisions of section have deposited the TDS
Income-tax 276B are basically intended to voluntarily after the prescribed
Act, 1961 discourage tax deductors from time limit but before service of
attracting retaining the legitimate any notice by the department.
prosecution government dues unjustly. Further, certain threshold limits
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The Institute of Chartered Accountants of India
Sr. No Section Issue/Justification Suggestion
proceedings However, at ground level may be prescribed to avoid
for delay in implementation, notices are being genuine errors in estimations.
remittance of issued for initiation of prosecution
tax to the proceedings under section 276B
credit of the even in cases where tax deductors
Central have deposited the tax deducted
Government by them voluntarily after the
stipulated time but before any
notice has been served upon
them. This may be due to the
modified guidelines issued in 2013
for identification of cases for
initiating prosecution, wherein the
criterion of minimum retention
period of 12 months has been
dispensed with. However,
initiation of prosecution
proceedings in cases of voluntary
deposit of TDS after the stipulated
time but before service of notice is
causing undue hardship to
genuine tax deductors. Voluntary
remittance of TDS before issue of
notice clearly indicates the
absence of any malafide intention
on the part of the tax deductors to
retain the taxes due to the
government. The tax deductors
are, in any case, being subject to
higher interest @ 1.5% per month
or part of a month under section
201(1A) for the period of delay in
remittance. The TDS statements
submitted by them also clearly
reflect the taxes deducted, the
date of deduction and the date of
remittance along with interest,
which indicates the bona fide
intent on the part of the deductors
to report the correct details to the
Department. However, it appears
that the notices for prosecution
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Sr. No Section Issue/Justification Suggestion
are issued on the basis of these
information provided by the tax
deductors in their TDS
statements. It is a settled law that
prosecution proceedings are
appropriate only in cases where
deductors deliberately do not
deposit the TDS, since Mens rea
or a guilty mind is a sine qua non
for attracting prosecution
provisions.
In this regard, it may be noted that
the erstwhile service tax law which
provided for a threshold limit of
Rs.2 crores for initiating
prosecution proceedings in case
of failure to pay service tax
collected to the credit of the
Central Government within a
period of 6 months from the date
on which such payment becomes
due. This implies that only if the
service tax collected but not
remitted within the prescribed
period exceeds Rs. 2 crores,
prosecution provisions would be
attracted. However, section 276B
of the Income-tax Act, 1961
neither prescribes any threshold
limit beyond which the prosecution
provisions thereunder would be
attracted nor does it prescribe any
retention period, after the expiry of
which, prosecution proceedings
would be initiated. Thus, absence
of threshold limit and retention
period under this provision of the
Income-tax Act, 1961 causes
undue hardship even to genuine
tax deductors.
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The Institute of Chartered Accountants of India
CHAPTER XXIII
MISCELLANEOUS
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DETAILED SUGGESTIONS
Sr. No. Section Issue/Justification Suggestion
193. Section 281B - Section 281B empowers It is suggested to clarify the
Provisional Assessing Officer to invoke bank aforesaid issues through
attachment of guarantee wholly or in part if appropriate
property- demand raised on the assessee is amendments/circulars.
Treatment of not paid within time limit provided
amount in the demand notice served. Very
realized by wide powers are conferred upon
invoking bank Assessing Officer. Mere non-
guarantee - payment within notice period will
Clarification empower Assessing Officer to
required invoke bank guarantee. There is no
clarity on the situation where the
application for stay of demand is
pending before Assessing Officer
or any higher authority or in case of
automatic stay on payment of 15%
demand.
The section provides that the
amount collected by invoking bank
guarantee is to be adjusted against
demand payable and surplus, if
any, to be deposited in personal
deposit account of the
Commissioner or Principal
Commissioner in the branch of
prescribed banks. Given that
section 281B(2) provides for
maximum period of attachment to
be 2 years from the date of
attachment or 60 days from the
date of assessment order,
whichever is later, reasons for
depositing the amount in the
personal deposit account of
authority and not to refund the
same to the taxpayer is not clear.
194. Signing of Section 282A provides for issue of It is suggested that the
notices under any income tax notice or other computerized notice /
Section 282A document without it being signed document should have a
by the requisite authority. separate control like
Although, the said section has provision for a digital
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The Institute of Chartered Accountants of India
been provided in the context of signature because these are
computerized generation of notices legal / statutory documents
and other documents, this can and this aspect should
result in widespread misuse of specifically be incorporated
powers and harassment. The in section 282A. The signed
assessees who are willing to hard copy should in any
receive communications through case be sent subsequently.
email should be given notices or In respect of manual
any other document in this form. In notices/documents the
such case also, the signed hard section should also provide
copy should be sent subsequently. that signatures will be
mandatory.
(SUGGESTIONS TO
REDUCE / MINIMIZE
LITIGATIONS)
195. Section Section 285BA may appropriately The meaning of "specified
285BA(3) - be amended to require information financial transactions' under
Obligation to regarding the following financial section 285BA(3) may be
furnish transactions involving an amount widened to include within its
statement of over and above specified sums: ambit the aforesaid
financial (a) Payment received by tour transactions.
transaction or operators exceeding a Further, in respect of the
reportable specified sum. afore- mentioned
account transactions, where the PAN
(b) Information regarding
Government tenders where is not provided by the payer,
the value exceeds a specified the provisions like TCS may
amount. This information be made applicable to the
may be provided by the payee. Accordingly, the
concerned Government payee should be allowed to
Department. collect tax at an appropriate
rate. Later, in case the
(c) Sales and purchases of
deductee provides PAN
shares exceeding a specified
within a specified period to
amount respectively in the
the deductor, the deductee
case of day traders. This
should be provided with a
information can be filed by
certificate like TCS
the concerned brokers who
certificate for claiming the
are dealing with the day
same in the return of
traders.
income. In case the
(d) Receipt of donations by deductee does not provide
trusts or Institutions PAN within the specified
exceeding a specified sum. period, the tax so collected
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Such information may be would be added to the
filed by the concerned trusts revenue of the Government.
or institutions. (SUGGESTION TO IMPROVE
(e) Educational fees paid in TAX COLLECTION)
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
Statement of Specified
Financial Transactions 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
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
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 333
The Institute of Chartered Accountants of India
return under section 285BA.
196. Modification The definition of accountant was In view of the above, the
to the amended vide the Finance Act, definition of the term
amended 2015. The reason for introducing accountant as contained in
definition of the amended definition of an section 288 of the IT Act
"accountant" "accountant" as per the should be modified suitably
under section Explanatory Memorandum to to remove the applicability
288 of the Finance Bill 2015 was to avoid of section 141(3) of the 2013
Income- tax conflict of interest and for better Act so that:
Act 1961 (IT governance. Infact, this
Act) amendment was brought in for the
a. A CA providing tax
limited purpose of disqualifying a
certification services to a
relative from conducting the tax
company of which he is not
audit report based on a CAG report
the statutory auditor has the
finding.
same opportunity to provide
the NAS to a company as a
In case of an assessee, being a CA who is not providing tax
company, the disqualification for certification services but is
being appointed for a tax providing tax advisory
certification service applies to the services and other NAS to a
person who is not eligible for company of which he is not
appointment as an auditor of the a statutory auditor to avoid
said company in accordance with unreasonable compliance
the provisions of sub-section (3) of requirements.
section 141 of the Companies Act,
2013 (2013 Act).
b. Requirements
prescribed for non-company
In this regard, one can consider two assesses should be made
situations where a CA in practice applicable to company
(individually or through a firm of assesses to ensure parity in
CA) is called upon by a company to applicability of the eligibility
provide tax certification services as requirements for being an
an accountant. accountant under section
288 of the IT Act. Further,
"Relative" under the
a. Situation 1 where the
explanation should be
CA is the statutory auditor of the
replaced with "Immediate
company.
Family Members" as is used
in in the IESBA Code of
From the governance perspective, Ethics.
the Board of Directors has to
approve the appointment of the
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statutory auditor for providing the
Non Audit Services (NAS) in terms
of section 144 of the 2013 Act.
It may be noted that, in the case of
a company, the statutory auditor
and entities related to it in the
manner specified in section 144 are
prohibited to provide the specified
NAS to the audit client or its holding
or subsidiary.
However, the list of the prohibited
NAS by the statutory auditor of a
company does not contain
provision of tax services including
tax certification services.
Therefore, there is no restriction on
the statutory auditor to provide tax
certification services subject to
approval of the Board under
section 144 of the 2013 Act.
b. Situation 2 where the
CA is not the statutory auditor of
a company.
In such a case, the CA can be
appointed to provide the NAS, by
the management on such terms as
it consider appropriate.
It is here that the amended
explanation of the term
`accountant" under Section 288 of
the IT Act becomes more onerous
than the original intention of the
amendment, which as stated
earlier, was for the limited purpose
of disqualifying a relative from
conducting the tax audit report
based on a CAG report finding.
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The Institute of Chartered Accountants of India
Thus, pursuant to the amendment
to the definition of "accountant"
under section 288, once a CA, who
is not the statutory auditor of the
company, is appointed to provide
tax certification services, he is
being subject to the same service
restrictions specified in section 144
of the 2013 Act as the statutory
auditor of the company although
the scope of work of tax
certification is much narrower than
statutory audit. The statutory
auditor is required to audit the
whole financial statements and
opine as to whether the same
present a true and fair view.
However, opining on the financial
statements as a whole is not
required in case of issue of a tax
certificate by a non-auditor wherein
the scope of enquiry is specific to
the section or sections concerned
of the IT Act. However, the CA even
in a case where the scope of
service is limited to tax certification,
is prohibited from providing other
NAS specified in section 144 of the
2013 Act which he could have
provided but for section 288 of the
I T Act. Further, it is discriminatory
if a CA who is providing tax
certification services to a company
of which he is not the statutory
auditor is subject to greater
restrictions for provisions of NAS
than a CA who is appointed to
provide tax advisory (not tax
certification services) to a company
of which he is not the statutory
auditor.
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In case of other than company
assesses, explanation under
section 288 of the Income- tax Act
prescribes the eligibility
requirements only for the assessee
and not for any other related
entities. Further, there is no
prohibition from providing other
NAS specified in section 144 of the
2013 Act. By making eligibility
criteria for company assesses with
reference to the section 141(3) of
the Companies Act, 2013, the
scope of restrictions have been
broadened to extend to other
related entities of the company as
well as prohibition of NAS under
section 144 of the Companies Act,
2013. A comparison of the
restrictions as applicable to an
accountant in the case of an
assessee, being a company, and in
the case of other assesses is
provided in Sec 288 of the Income-
tax Act, 1961.
The IESBA Code of Ethics issued
by IFAC / the ICAI Code of Ethics
distinguishes audit services and
non-audit assurance services. As
there is no expression of opinion on
the financial statements as a part of
tax certification services, at best,
such tax certification services
would fall under "non -audit
assurance services".
In such situations, the personal
independence
prohibitions/restrictions are
applicable to "assurance
engagement team members".
Further, NAS are subject to threats
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The Institute of Chartered Accountants of India
and safeguards, only if the NAS
relates only to the subject matter of
the assurance service i.e., tax
certification. Given the nature of
services, it would be prudent to
apply "non -audit assurance"
independence policies instead of
"audit" independence policies.
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OTHERS
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 339
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
197. Relaxation In the Budget Speech on 1.2.17, the Hon'ble It is a welcome move.
from Finance Minister mentioned that the However, in order to
scrutiny assessees, having taxable income upto Rs.5 encourage more
provisions lakhs other than business income, will not be people to file income
for subjected to scrutiny unless there is specific tax returns, necessary
assessees, information available with the Department provisions may be
having regarding his high value transaction: introduced, such as:
taxable
income
"In order to expand tax net, I also plan to have · Individuals having
upto Rs.5
a simple one-page form to be filed as Income taxable income
lakhs other
Tax Return for the category of individuals upto Rs.10 lakhs
than
having taxable income upto Rs.5 lakhs other may not be
business
than business income. Also, a person of this subjected to
income,
category who files income tax return for the scrutiny for 3
filing
first time would not be subjected to any Assessment Years
return for
scrutiny in the first year unless there is unless there is
the first
specific information available with the specific
time
Department regarding his high value information
Scope of
transaction. I appeal to all citizens of India to available with the
relaxation
contribute to Nation Building by making a Department
to be
small payment of 5% tax if their income is regarding his high
extended
falling in the lowest slab of Rs.2.5 lakhs to value transaction.
Rs.5 lakhs." (Para 176)
· Individuals who
pay 30% more
taxes as
compared to
immediately
preceding
assessment year,
may not be
subjected to
scrutiny for such
Assessment Year
unless there is
specific
information
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available with the
Department
regarding his high
value transaction.
198. Rates of With regard to rates of taxation for individuals In line with the
Taxation and HUFs, the Parliamentary Standing recommendations of
Committee on Direct Taxes Code had earlier the Standing
observed the following: Committee on Finance
"When the present Income Tax Act was on Direct Tax Code
enacted way back in 1961, the per capita earlier and for the
income of this country was extremely low. reasons mentioned
During the course of five decades of the therein, the following
working of the Income Tax Act, the national tax slabs are
per capita income has increased multifold, suggested:
widening the scope for taxing various Slab Tax rate
incomes. At the same time, the absolute (lakhs)
number of poor has also increased manifold,
warranting much larger government outlays. 0-3 Nil
The aspirations of the people for better living 3-10 10%
standards and their expectation from
government to deliver the same has also 10-20 20%
simultaneously increased. It is therefore, beyond 30%
necessary that these challenges in a growing 20
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
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,
there are three distinct categories of income,
which require to be tapped or brought to book,
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The Institute of Chartered Accountants of India
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 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
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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 Department 's 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 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
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 343
The Institute of Chartered Accountants of India
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 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%
199. Reduction The Finance Act, 2016 introduced a tax rate It is suggested that the
of 1% in of 29% of total income to (domestic) company benefit of reduced rate
assessees provided its total turnover or the of tax of 29% of total
rate of
gross receipts in the previous year 2014-15 income for small
taxation in
does not exceed five crore rupees. This domestic companies
case of reduction in corporate tax rate is a step in the may also be extended
company direction of implementing the proposal in to firms and Limited
assessees Finance Minister's Budget Speech during the Liability Partnerships
with total Union Budget 2014-15 on 10th July, 2014 as well since most of
turnover/gr wherein he had indicated reduction in rate of the deductions and
oss corporate tax along with gradual phasing out exemptions phased
receipts of of deductions & exemptions. out as per Finance Act,
upto Rs. 5 2016 via sunset clause
crore It may be noted that the rate of tax applicable are applicable to both
Reduction to firms including limited liability partnerships companies as well as
in rate may is 30%. Most of the deductions and firms/LLPs, so as to
be made exemptions where phasing out has been provide a level playing
applicable made by provision of sunset clause as per the field amongst these
Finance Act, 2016 are applicable to both forms of business.
to Firms/
companies as well as firms/LLPs. Therefore,
Limited
the benefit of reduction of 1% in rate of tax Further, the limit of Rs
Liability may be passed on to such assessees as well. 5 crore for determining
Further, if the said rate of 29% is also made the eligibility to avail
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Partnershi applicable to firms and LLPs, it would facilitate the reduced rate may
ps also ease of doing business in any form and not be with reference to
particularly restrict such facility to the small P.Y.2015-16, being the
corporates. previous year
immediately preceding
Further, it may be noted that firms and LLPs the current previous
are also incorporated under a statute and are year, namely, P.Y.
subject to certain compliance requirements as 2016-17, relevant to
provided in the Partnership Act, 1932 and A.Y. 2017-18.
Limited Liability Partnership Act, 2008,
respectively.
It is also suggested that the prescribed
turnover of Rs 5 crore may be considered for
previous year 2015-16, being the previous
year immediately preceding the P.Y.2016-17,
relevant to A.Y.2017-18.
200. Issues Section 2(62) of the Companies Act, 2013 has It is suggested that
arising introduced the concept of "One Person OPC should be treated
from Company" which means a company which has like any other company
applicabilit only one person as a member. Section 2(31) for taxation purposes.
y of of the Income-tax Act, 1961 which defines The concept of
Companies person has to be amended to include within its separate legal entity of
Act, 2013: ambit an OPC. OPC should be
a) One Section 2(68) of the Companies Act, 2013 followed for Income
person defines "private company" to mean a company tax. However a specific
Compan having a minimum paid-up share capital as clarification may be
y (OPC): may be prescribed, and which by its articles, -- inserted in the Income-
(i) restricts the right to transfer its shares; tax Act as to
allowability of
(ii) except in case of One Person Company,
remuneration paid by
limits the number of its members to two
OPC to member.
hundred:
Provided that where two or more persons hold (SUGGESTIONS FOR
one or more shares in a company jointly, REMOVING
they shall, for the purposes of this ADMINISTRATIVE AND
clause, be treated as a single member: PROCEDURAL
DIFFICULTIES
Provided further that --
RELATING TO DIRECT
(A) persons who are in the employment of the TAXES)
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
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The Institute of Chartered Accountants of India
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 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) b) Section 130 of the Companies Act, 2013 a) A provision be
Reopening provides for revision of the books of accounts inserted to provide
of and the financial statements of the Company that in cases where the
accounts on application made by the Central financial statements
on Court's/ Government, the Income-tax Authorities, the have been revised by
Tribunal SEBI and any other statutory regulatory body virtue of section 130 of
order or authority or any person concerned. the Companies Act,
under Such revision can, however, be done on an 2013, no refund shall
section 130 order by a court of competent jurisdiction or be granted in case
of the the Tribunal to the effect that the relevant such revision has the
Companies earlier accounts were prepared in a fraudulent effect of lowering of
Act, 2013 manner or the affairs of the company were profits of the company.
mismanaged during the relevant period, b) A specific provision
casting a doubt on the reliability of the is required in the
financial statements. Before passing the order Income-tax Act to take
notice of the same will be given to the Income- care of adjustments
tax authorities. required in taxable
This revision may, however, give rise to three income due to revision
situations namely, no effect on the profits, of accounts. The
higher profits or lower profits. These profits provision may be in
have a direct impact on the computation of line with Section 155 of
income of Companies due to applicability of the income-tax Act.
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 the
profits were inflated by the company and due
to the reopening of accounts, the actual profits
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are lowered. The company in such a 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) The concept of related party is relevant for There is a need for
Difference defining "specified domestic transactions" and alignment in the scope
in the "international Transactions" in the Income -tax of related parties in
definition Act, 1961. The Companies Act, 2013 also Companies Act, 2013
of "related defines "covered transactions" and "related with that of the
party" in party" However, the definition in both the Income-tax Act, 1961.
Companies cases is different.
Act, 2013
and
Income tax
Act,1961
d) a) Section 72A of the Income-tax Act, which It is suggested that
Amalgamati deals with treatment of unabsorbed sectoral restrictions
on losses and unabsorbed depreciation, in u/s 72A may be
case of amalgamation, is restrictive in its removed and
application. Presently benefits of Section provisions of this
72A are available only to company section be made
owning industrial undertaking or a ship or applicable for all the
a hotel or banking company. Due to this sectors.
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. 115JAA cannot The Income-tax Act
be carried forward by the amalgamated needs to be amended
company. so as to allow carry
forward of MAT Credit
in the hands of
amalgamated company
for remaining number
of years.
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c) Companies Act, 2013 has permitted Clause (vi) of Section
amalgamation of Indian company with 47 needs to be
foreign company. However, exemption amended in order to
from capital gains u/s 47 of the Income- make amalgamation
tax Act is available only when with foreign company
amalgamated company is an Indian also a tax neutral
Company. transaction. Similar
amendment is required
in clause (vii) of
Section 47 also, so that
shareholders are not
taxed when shares of
amalgamated company
are received and
amalgamated company
is not an Indian
company.
e) In recent times, tax litigation in relation to Since now under the
Amalgamat amalgamation and demerger has increased Companies Act, 2013,
ion and many folds. Certain examples of such at the time of approval
Demergers litigations are as under: of Scheme, adequate
a. Tax benefits of amalgamation and representation has
Limitation demerger have been denied on the ground been given to the
on powers that the assessee has not fulfilled the Income Tax
for conditions stated under section 2(1B) in Department,
assessmen case of amalgamation and section corresponding
t of cases 2(19AA) in case of demerger; amendments should
dealing be made in Income-tax
b. Litigation as to whether the transaction is
with Act, 1961 (may be by
in the nature of amalgamation, demerger
Amalgamat way of introduction of
or slump sale under the Income-tax Act;
ion and a separate chapter or
Demergers c. In certain cases, the Tax department has by introducing new
effected alleged that the scheme was a Tax section dealing with
under the avoidance device; these kind of
Companies d. Issues relating to carry forward of assessments) to the
Act, 2013 unabsorbed losses in the hands of effect that the tax
transferee company, availability of credit issues under the
for TDS and advance tax paid by the Income-tax Act, 1961
transferor company on behalf of relating to
transferee company, etc. amalgamations/demer
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e. In certain cases, the AO has invoked gers in the hands of
provisions of Section 28(iv) in the hands of the transferor
amalgamated company on the ground that company, transferee
the amalgamated company has acquired company and the
Reserve & Surplus from its amalgamating shareholders of
company under the scheme of transferor/transferee
amalgamation. The same was considered company should be
as a perquisite by the AO and taxed under examined and
section 28(iv) of the Income-tax Act after adjudicated by the tax
the scheme has been approved by the department at the
High Court. stage of making
Now, under Section 230(5) of the representation itself. In
Companies Act, 2013, it is mandatory for such a case, the
the companies to send a notice of Assessing Officer
amalgamation and demerger to the shall not be allowed to
income-tax department. Under the old re-examine and re-
Companies Act, 1956, such notice was not adjudicate the issues
mandatorily required. Hence, now, such relating to
notices would ensure that the income tax amalgamation or
department can make a representation in demerger at the time of
relation to the amalgamations and scrutiny assessment
demergers before the same is approved. or reassessment.
The said amendment
would have following
positive effects:
a. Reduction in tax
litigation in
respect of
amalgamations/de
mergers
b. The Assessees
would be saved
from hardship of
the double
scrutiny one at
the time of filing
of the scheme and
second at the time
of assessment.
c. Certainty as to the
tax treatment in
relation to
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The Institute of Chartered Accountants of India
amalgamations
and demergers,
which will lead to
improvement of
investors'
sentiment;
d. Safeguard of
shareholder's
interest since they
would be aware
about potential
tax exposures to
them and the
company in
respect of the
amalgamation and
mergers and
would consider
the same while
voting in respect
of the same;
201. Introductio Section 129(3) of the Companies Act 2013 It is suggested that on
n of Group requires the preparation of a consolidated similar lines, the tax
consolidati financial statements where a company has consolidation regime
one or more subsidiaries. may be introduced in
on tax
India as well.
Further, countries like United States, France,
Australia and New Zealand have adopted a
tax consolidation or combined reporting
regime. Tax consolidation, or combined
reporting, is a regime adopted in the tax or
revenue legislation which treats a group of
wholly owned or majority-owned companies
and other entities as a single entity for tax
purposes. The head entity of the group is
responsible for all or most of the group's tax
obligations (such as paying tax and lodging
tax returns).
The aim of a tax consolidation regime is to
reduce administrative costs for government
revenue departments and to improve the
quality of tax assessment.
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The regime also reduces compliance costs for
corporate taxpayers. For companies,
consolidating can help reduce taxable profits
by having losses in one group company
reduce profits for another. Assets can be
transferred between group companies without
triggering a tax on gain for the company
receiving assets, dividends can be paid
between group companies without incurring
tax liabilities.
202. Rationaliza The purpose behind introduction of MAT was Since government has
tion of MAT to bring all zero tax companies within the tax already started
rates net and to neutralize the impact of certain implementing phase
benefits/incentives. The Finance Minister out of exemptions and
while introducing the Finance Act, 2015 incentives, it is
announced to reduce the rates of corporate suggested that the levy
tax from 30 per cent to 25 per cent in a phased of MAT should be
manner. The Finance Minister further stated withdrawn.
that the reduction of tax has to be necessarily Without prejudice to
accompanied by rationalisation and removal above, since the
of various kinds of tax exemptions and exemptions and
incentives for corporate taxpayers. incentives being
phased out for
The Finance Act, 2016 has also amended the corporate taxpayers, it
relevant provisions of the Act that would would be necessary
ensure the phasing out of deductions and that the MAT
incentives available to companies to realign provisions, which were
with the governments' decision of reducing the introduced to bring in
corporate tax rates as mentioned above. the tax net the
Similar phasing out has been done by the corporate taxpayers
Finance Act, 2017. which were otherwise
not being taxed,
should also be
streamlined.
It is suggested that
with the phasing out of
exemptions and
incentives and
reduction of corporate
tax rates, the burden of
MAT should also be
gradually reduced
from the current levels
of 18.5 per cent to a
rate which will match
with phasing out of tax
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The Institute of Chartered Accountants of India
exemptions and
incentives.
203. Phasing of The Finance Minister while introducing the The process of
exemption/ Finance Bill, 2015, proposed to reduce the phasing out of
incentives rate of corporate tax from 30 per cent to 25 exemptions and
per cent over the next 4 years. It was also deductions should not
vis-à-vis
stated that the process of reduction has to be be done across
industry necessarily accompanied by rationalisation sectors. There are
needs and removal of various kinds of tax various sectors where
exemptions and incentives for corporate the turnaround time for
taxpayers, which incidentally account for a the companies to
large number of tax dispute. reach a break even and
start earning profits
Further, the Finance Act, 2016 has initiated takes longer than
the process of phasing out of various some other industries.
deductions and has also reduced the rate of Some of the sectors
tax in case of a domestic company to 29 would take long for the
percent in case where the total turnover or completion of projects
gross receipts in the previous year 2014-15 is eg deduction under
less than INR 5 crores. The reduction of Section 80-IA(4) of the
corporate tax of one percent is directly co- Act dealing with
related to the company satisfying the development,
threshold relating to turnover/gross receipts operation and
and does not seem related vis-à-vis the phase maintenance of an
out process of deductions initiated Similar infrastructure facility,
phasing out has been done by the Finance deduction under
Act, 2017. Section 80-IAB of the
Act dealing with
development of special
economic zone,
deduction under
Section 80-IB(9) of the
Act dealing with
production of mineral
oil and natural gas, etc.
The government and
health care sectors as
well have long
gestation periods.
There would be certain
entities which would
have recently
commenced
commercial
operations, will have to
tackle phasing out
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much faster than
anticipated and
planned. Thus, the
phase out of
deductions and
exemptions should be
applicable to select
industries and based
on long-term plans and
considering a
sensitivity analysis of
the related industries.
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CHAPTER VIII
of the Finance Act, 2016
EQUALISATION LEVY
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DETAILED SUGGESTIONS
Sr. No Section Issue/Justification Suggestion
204. Chapter The Finance Act, 2016 has inserted a In view of the issues detailed, it
VIII of the new Chapter VIII titled "Equalisation is suggested that suitable
Finance Levy" to provide for an equalisation amendments may be carried
levy of 6% of the amount of out in the Chapter VIII of the
Act, 2016 -
consideration for specified services Finance Act, 2016. Particularly,
Equalisati received or receivable by a non- after 1 April 2017, GAAR will
on Levy- resident not having permanent ensure that artificial avoidance
Issues to establishment ('PE') in India, from a of taxable presence is not likely
be resident in India who carries out to remain tax protected for the
addresse business or profession, or from a non- non-residents.
d resident having permanent
establishment in India. In other words,
the Finance Act, 2016 enacted a levy
of 6% on consideration paid or payable
by an Indian resident carrying on
business or profession, or by an Indian
permanent establishment of a non-
resident to a non-resident not having a
permanent establishment in India, for
providing specified online
advertisement services.
Certain issues arising from the same
are as below:
· The responsibility for
payment is cast on resident payer to
deduct and deposit the levy. Interest
and penalty would be levied for delay
or failure of compliance. This would
involve additional cost of compliance to
Indian businesses. It is an indirect levy.
· The equalization levy is a
separate levy under the Finance Act,
2016 and will not be part of the Income-
tax Act, 1961. This results in defeating
the option available to a non-resident
of choosing the more beneficial option
between the Treaty and the Income-tax
Act, 1961.
· Also, the non-resident may
not be able to claim tax credit of this
levy in his country of residence, if the
DTAA allows foreign tax credit in
respect of tax paid under the Act and
not in respect of similar taxes paid
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The Institute of Chartered Accountants of India
which are outside the ambit of the
Income-tax Act, 1961. It is
recommended that the provision be
withdrawn or be enacted under Act.
205. Equalizati The Finance Act, 2016 has introduced The responsibility for payment
on levy a levy of 6% on consideration paid or is cast on resident payer to
payable by an Indian resident carrying deduct and deposit the levy.
on business or profession, or by an Interest and penalty are levied
Indian permanent establishment of a for delay or failure of
non-resident to a non-resident not compliance. This involves
having a permanent establishment in additional cost of compliance
India, for providing specified online to Indian businesses.
advertisement services.
The equalization levy is a
separate levy under the
Finance Act and is not a part of
the Act. The non-resident liable
to equalization levy will not be
able to claim credit for the levy
paid in India in the country of
his residence. This will lead to
double taxation of the same
income.
Non-residents are liable to pay
service tax in India on the
above receipts.
It is recommended that Chapter
VIII should be omitted.
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PART B
SUGGESTIONS FOR IMPROVING TAX
ADMINISTRATION AND CITIZEN SERVICES
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr. Section Issue/Justification Suggestion
No.
206. Tax consolidation In India, separate entities are In view of the aforesaid
Scheme incorporated based on their benefits it is suggested
specialization in various lines of that a tax consolidation
businesses (like manufacturing, scheme may also be
trading, retail, infrastructure adopted in India. This
etc.) by the parent company. would create a positive
Separate companies are impact on business with
incorporated to attract investors significant reduction of
which suits their needs. compliance and litigation
Investors are more likely to cost.
invest in a well-structured
organisation.
Because of commercial
compulsions, the business
houses are forced to have many
subsidiaries under one parent.
The group as a whole and the
tax Department face many
challenges. Some of them are:-
· Each Entity is considered
as separated entity and
therefore required to file a
separate income tax return,
involving huge cost of
Income Tax compliance by
tax payer.
· Each entity is
assessed/scrutinised
separately resulting in
litigation cost for each
entity.Significant
administrative costs are
incurred by the Income tax
Department in keeping
track of records and
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Sr. Section Issue/Justification Suggestion
No.
assessing multiple
subsidiaries.
· Apart from cost, a lot of
efforts are required by both
tax payer as well as Income
tax Department for
undertaking compliance.
Tax consolidation or combined
reporting is a regime adopted in
the tax or revenue legislation of
a number of countries which
treats a group of wholly owned
or majority-owned companies
and other entities (such as
trusts and partnerships) as a
single entity for tax purposes.
The head entity of the group is
responsible for all or most of the
group's tax obligations such as
paying tax and lodging tax
returns.
In terms of mechanics, all
transactions between the group
companies of the consolidated
group are ignored for tax
purposes.
Benefits
i. Tax consolidation scheme
would help to centralize the
planning and payment of
tax by the parent company.
ii. It is common in India that
the parent company
engaged in various lines of
businesses incorporate
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No.
many subsidiary
companies. Since the
market is volatile, it may
happen that one company
is incurring losses and
other is earning profits. At a
group level, the tax outgo
would be more as under the
Income-tax Act at present,
there are no provisions to
set off loss of one group-
company with another profit
making group-company.
Under tax consolidation,
the company can set off the
losses of one inter group
company with the profits of
another company.
Tax consolidation would
take care of such situations
which facilitate
development of new
businesses of challenging
nature such as retail or
telecom. Where financial
risks are isolated in a new
company but at the same
time tax revenues and
losses can be consolidated.
iii. Any unused foreign tax
credit by one company can
be used by the other
affiliates within the group.
iv. Currently, in the Income-
tax Act, 1961 the Domestic
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Sr. Section Issue/Justification Suggestion
No.
Transfer Pricing provision
requires all the
intercompany transactions
to be at Arm's Lengt h
Priceand need to be
reported. Under the
consolidated tax scheme
such intra group
transactions would be net
off and thereby will reduce
the time and compliance
cost of the tax payer and
administrative cost of the
Income-tax Department.
v. In group taxation all
transactions between
group companies are
ignored for tax
purposes.This will help in
tax free movement of
assets across the group
which would aid in internal
restructuring.
vi. In India, each company is
individually liable for
separate tax assessments.
By introducing the tax
consolidation scheme, the
parent company would act
as an agent in all the tax
matters.
vii. The number of litigations
pending with the tax
department would also
reduce and thereby
reducing the administrative
cost of the Income-tax
Department.
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Sr. Section Issue/Justification Suggestion
No.
viii. In the long run such a
regime would not
negatively impact the
overalltax revenues as tax
offset of carry forward
losses/depreciation is
already allowed under the
Income-tax Act, 1961,
accordingly any tax offset
claimed by the individual
taxpayer would be offset
when the aggregate
approach for the economy
as a whole is considered.
ix. Member of the group
companies obtaining for tax
consolidation can enter into
an arrangement with
Income Tax Department/
CBDT for a nominated
member of the group to be
in liaison with Income Tax
Department/ CBDT, such
that all payments of tax flow
through that nominated
company.
x. It is believed that for capital
intensive sectors like
infrastructure and financial
services introduction of
such a progressive tax
regime would be beneficial
and fair to the taxpayer.
xi. The tax consolidation
regime has been adopted in
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Sr. Section Issue/Justification Suggestion
No.
tax legislations of a number
of foreign countries like
Australia, France,
Germany, Italy, Japan,
Korea, Spain, USA etc.
These countries have not
only successfully
implemented the said
regime but also created a
positive impact on business
with significant reduction of
compliance and litigation
cost.
xii. This will create a positive
impact on business and
provide a level playing field
to the Indian companies.
The tax consolidation
regime also endorses the
Government's efforts of
"Ease of doing business in
India" and assist in aligning
the business and tax
objectives of the industry.
xiii. No. of tax exemptions are
being reduced and very
soon, no
deduction/exemption will
be allowed in computing
taxable income. It is very
logical to introduce tax
consolidation scheme.
Many mergers, demergers
which are being done only
to take advantage of tax
losses will not be required.
A snapshot of the tax
consolidation regime in various
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The Institute of Chartered Accountants of India
Sr. Section Issue/Justification Suggestion
No.
jurisdictions is summarized in
Annexure A
207. Need for Till date all government There is a need for
educating tax awareness programmes for educating tax payers
payers in the right education of tax payers adopt about the benefits that will
manner the stick approach like making directly accrue to them if
them aware of penalties and taxes are paid honestly.
prosecution under the Income- Some of the suggestions
tax Act, 1961.This approach in this respect are as
may not yield the desired follows:
results. a) Honest payment of
taxes will lead to a
There appears to be a need to better credit rating for
change the way of educating the assessees which
the tax payers. will help them in
getting various loans
at much cheaper rates
The tax payer needs to be and with relative ease.
treated like a customer for the
Income tax department as Such loans provided
suggested in Tax by financial
Administration Reform institutions in the
Commission report by Mr. organized sector will
Shome earlier. The new age tax impact their personal
payers as well as older as well as
assessees need to be told the professional life. Their
benefits of paying the taxes business will grow if
honestly, the impact it will have they are able to get
on them. working capital loans
The Government should as well as loans for
organize tax awareness purchasing specific
programmes for the assets. Similarly, they
assessees/tax payers to may get housing loans
educate them about the and have better
benefits of paying the taxes residential facilities.
honestly and the need to All this would be
discharge their statutory possible only if they
obligations in a proper & timely declare their true
manner. income in Income Tax
Returns and pay taxes
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Sr. Section Issue/Justification Suggestion
No.
thereon. Every loan
provider looks at the
ITR first to gauge the
paying capacity of the
assessee.
b) Cash and other
incentives may be
provided for
compliances related
to Income taxes. Eg
1% or any specified
amount may be
provided as a cash
incentive to Tax
deductors as well tax
collectors in case of
100% accuracy in
timely depositing of
taxes and filing of
TDS/TCS returns
thereof.
c) Government should
organize tax
awareness
programmes for the
assessees/tax payers
to educate them about
the benefits of paying
the taxes honestly and
the need to discharge
their statutory
obligations in a proper
& timely manner
208. Targets for India adopts a progressive Since a majority portion of
collection of taxes system of taxation where the direct taxes is paid to the
- Not essential tax rate depends on the level of credit of the Government
income earned during a through TDS and advance
financial year. Taxes paid by tax, it is suggested that no
the taxpayers are utilized for the targets should be set by
betterment of the nation as a the Department for
whole. Since a majority portion collection of taxes. In fact,
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of direct taxes is paid to the internal mechanism is to
credit of the Government be developed to ensure
through TDS and advance tax, adherence of the timelines
the possibility of evasion of tax mentioned in the Citizens
gets meager in the private charter of the Department
sector. Also, today the about performance of
assessee wants to voluntarily services and adherence to
comply with the existing laws to the timelines should be
avoid any hassles. In such a made as a part of
scenario, it is difficult to performance appraisal of
understand as to why targets the concerned officer.
are set for Assessing Officers
for collection of tax. The
Government is not a profit
making organization. It 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.
209. Mandatory filing of Most Income tax return forms Filing of income tax return
return of income contain a Schedule FA where should be made
mandatory for all Non-
by Non-residents the resident assessee has to
residents owning a
owning a property provide details of any asset
property or asset in India.
or asset in India located outside India (including
financial asset) or signing
authority in any bank account
located outside India. However,
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similar provision for disclosing
details of assets located in India
is missing for Non-residents.
The Non-residents having one
or more properties or asset in
India should be required to file
return of income with regard to
income received or accrued or
arisen or deemed to accrue or
arise in India. Even if the return
filed is of nil income, the
Department will have the
details/ statistics of all such
properties held by non-
residents in India which may be
useful for taking informed
decisions with regard to non-
residents as a whole.
210. Verification of all There are classes of persons Since non-verification of
income-tax who are filing income tax admissibility of basic
returns returns but are not declaring deductions provided in
their income properly. Either the sections 80C, 80D and
income is suppressed or 24(b) have huge revenue
various deductions are being impact, it is imperative to
claimed which are not legally have a certification
permissible. With the increase /verifications of all claims
in the work of the Department it of deductions under
is not practicable to scrutinize section 80C, 80D, 24(b)
each and every return. Taking and the like. In this
into consideration this aspect verification, not only the
the person filing the return takes arithmetical accuracy but
a calculated risk. Further, basic the admissibility of the
deductions provided by the Act claim regarding the
like section 80C (Rs.1,50,000), expenditure incurred,
section 80D (25,000/30,000), income earned or
section 24(b) (Rs.2,00,000) investment made on the
being claimed by the individuals basis of the evidence
and HUFs, in large numbers, collected from various
have huge revenue impact. To sources will also be
check on the admissibility of the verified. Since this work is
claim for deduction, no proof of voluminous, the same will
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Sr. Section Issue/Justification Suggestion
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investment is called for by the also be required to be out-
assessee. Today as per e-filing sourced preferably to the
website of the department, professionals
there are 1.54 crore assessees understanding the law
who have filed return for ITR- better and who are in a
1,2,3 ,4 and 4S online for the FY position to identify the
2017-18 and are thus expected grey areas.
to have an income of (SUGGESTION TO
Rs.5,00,000 or more. IMPROVE TAX
Considering the slab rate of COLLECTION)
10%, the minimum revenue
impact is 3,80,000*10.3%*1.54
crore is approximately
Rs.60275 crores . In case the
applicable rate of tax is 20.6%,
the revenue impact is approx.
Rs.120551 crores . In case the
applicable rate of tax is 30.9%,
the maximum revenue impact is
Rs. 180826 crores.
To address this, it is important
that all the returns filed are
thoroughly checked and cross-
verified with the information
collected through AIR/SFT and
other sources by the
Department. This process is
entirely different from the
scrutiny process. In this
verification, not 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
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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
majority 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.
211. Forms of Income Income tax return forms are It is suggested that the
tax return to such that they have reasons to forms of income tax shall
incorporate details capture some Information incorporate all the
of tax payments about other tax payments like relevant details of tax
made under other service tax, VAT etc. The return payments made under
legislations form should be made more other legislations like
elaborate so as to give central excise, VAT,
comprehensive information service tax etc.
about the other indirect taxes (SUGGESTIONS TO
paid. INCREASE THE TAX
BASE)
Thereafter, the said information
be shared with the relevant
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Department of the Government
for 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.
212. Consolidation of As per the current provisions, Multiple reports to be
multiple reports to an assessee has to file multipleissued by chartered
be issued by audit reports in different accountants be compiled
Chartered formats as per the statutory and a single form of audit/
Accountants in a requirements. For a simplified certificate be prepared.
single format tax regime, a single audit form The said format may have
should be introduced which will multiple annexures i.e.
incorporate or consolidate existing formats in
multiple audit reports/different sections.
certificates required to be (SUGGESTIONS FOR
issued under various sections REMOVING
of the Income-tax Act, 1961. ADMINISTRATIVE AND
PROCEDURAL
DIFFICULTIES RELATING
TO DIRECT TAXES)
213. Reconciliation of Interest payments by banking It is suggested that such
Interest payments sector may be reconciled with exercise of reconciliation
by banking sector the TDS returns of Banks be undertaken by the
with TDS returns submitted with respect to
Income tax department to
of Banks section 194A of the Income-tax
Act, 1961. identify major defaults in
respect of TDS on interest
For example, as per the balance other than interest on
sheet of SBI on 31.03.2017, it securities.
held Rs. 11,13,000 crores of
Term deposits from others. It
had paid more than Rs.1,05,000
crores of rupees as Interest.
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Taking it as a sample study
since all the banks are not of the
same size, one can estimate
interest commitment paid in this
country from all the banks and
NBFCS exceed Rs.10 Lakhs
crores. It means TDS on
interest alone shall not be less
than Rs.1,00,000 crore.
214. Generation of Form No. 60 are used by Since there is no central
Form No. 60 persons who do not have a system to locate multiple
through system Permanent account number forms 60, filled by a
and who have entered into particular person, it is
transactions specified under suggested that the filing of
Rule 114B of the Income-tax the same be made
Rules, 1962. electronic in line with
This form is however being Notification 76/2015 dated
misused, since there is no 29.9.2015 in respect of
mechanism to track and control Form 15G and 15H. On the
those persons who wrongly fill basis of particulars
the form to avoid obtaining received from these
PAN. Considering the fact that forms, the banks should
presently PAN is allotted in less be mandated to punch the
than 7 days from the date of said particulars in the e-
online application, Form No. 60 form which will generate a
has lost its relevance. Further, unique number. This
filling of PAN should be made system if put in place will
mandatory in Form No. ensure genuine usage of
15G/15H without which such these forms.
forms should not be accepted (SUGGESTION TO
or given benefit of. INCREASE THE TAX
BASE)
215. A single ITR form At present, we have different A single ITR form instead
to replace all ITR ITR forms for different of ITR 1,2, 3,4, 5,6 and 7
forms assessees which make filing of should be prepared. The
ITR a cumbersome task. There common fields in all ITR
should be a single form for all can be clubbed and
the assessees so that filing of Income under the various
return will be done in a heads of income is
simplified & effective manner. restricted in the form of
Annexures. The assessee
should click and fill only
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No.
the annexure which is
relevant for him. This
would amount to
simplification in true
sense.
216. PAN card to be The misuse of PAN details of In order to curb the
chip enabled for assesees is prevalent since misuse of PAN to carry out
certain long. There is a need to provide benami transactions and
transactions new age chip enabled PAN the like, it is suggested
required to be cards so as to prove the identity that the PAN be made chip
reported in of the concerned person rather enabled and be required
TDS/TCS returns than using the photo copy of the swiping in the machines
card. specifically designed for it
so that the transactions
carried on by him are
Recently, a number of cases
recorded in the same and
have come to the notice where
the assessee is able to
the PAN of the assessees used
prove the transactions
at Photo ID was publically
entered into by him.
available at places like railway
stations (in charts) are found to
be misused and quoted in the
TDS/TCS returns.
eg The Finance Act, 2012
through an amendment in
section 206C made it
mandatory to collect tax at
specified rate in case of any
person selling jewellery or
bullion. The seller in this case
has to file TCS returns quarterly
where currently PAN of all the
buyers need to be reported. In
order to hide / accommodate
the information w.r.t the high net
worth individuals not quoting
their PAN at the time of
purchase in order to evade tax,
fake PANs are being mentioned
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in the TCS returns. Such sellers
are able to get the PAN
numbers by various means as
mentioned above.
In such cases, the asseessee
whose PAN has been quoted
faces severe hardship as he
may not have that much income
to substantiate the expenditure
quoted against his PAN. It will
also be difficult for him to prove
his innocence.
Thus, there is a need to curb
such practice and new age PAN
cards be issued in order to
prove the identity of the person
carrying the transaction.
217. Gaps in electricity In order to provide It is suggested that
generations Environmental friendly concessions or additional
solutions and Low-cost tax benefits may also be
availability of electricity to end provided where a new
user, alternate & clean energy building (resident/
resources may be promoted by commercial/ hotel etc)
way of installs a solar energy
additional exemptions/incentive devices & rain water
s if, the project gets completed harvesting instruments.
on time. (SUGGESTIONS FOR
RATIONALIZATION OF
THE PROVISIONS OF
DIRECT TAX LAWS)
218. Allowability of Presently, interest paid by the Interest paid by the
Interest paid Government to an assessee is assessees to the
under Income-tax chargeable to tax. However, Government under
Act, 1961 interest paid by the assessee to various sections of the
the Government under various Income-tax Act should be
sections is not allowed as allowed as deduction in
deduction while computing the computing total income. If
total income. Interest paid by the assessee does not
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Sr. Section Issue/Justification Suggestion
No.
the assessee is for the use of have business income,
money by him and is interest should be allowed
compensatory in nature. under the head `Income
from other Sources'.
Alternatively, the interest
received by the assessee
on refund should be
exempt from tax.
219. Issues regarding For filing of return, it is It is suggested that:
PAN allotment mandatory to have PAN. A a) The person entrusted
person applying for PAN has to with the work of
give his details in a prescribed verification should
form & the same will be allotted possess sufficient
to him by the Income Tax knowledge &
Department. Earlier, when the understanding of the
assessee identification system provisions of the
was based on "GIR Number" Income-tax Act so as
i.e. "General Index Register to complete the
Number" that used to be assigned work in a
allotted, "Free of Cost", by the timely manner.
concerned Income Tax Officer
b) If the application of the
who had a jurisdictional
applicant is withheld
authority to assess the
by NSDL, NSDL should
assessee.
inform the applicant
Later on this was switched over the reasons thereof.
to the era of "Permanent
c) If there are any
Account Number", under the
queries/doubts
authority of Section 139A,
regarding details
substituting the old one, by
provided in form no.
Finance Act, 1995, with effect
49A, NSDL should
from 1-7-1995 and by insertion
clarify the same with
of New Rule 114, by replacing
the applicant.
the old Rule 114, with effect
from 1-4-1976.
Due to some reasons, this
function of receiving
applications and allotment of
Permanent Account Number
and issue of PAN Card was
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transferred to NSDL. With this
switch over, now the applicants
are 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.
220. Practical When an assessee is moved It is suggested that the
difficulties faced from one place to another or his automated process of PAN
by assessees in jurisdiction is transferred from Migration applicable to
migration of PAN one A.O. to another, his PAN is individual assessees may
to be transferred to the new also be provided to other
Assessing Officer. It is the assessees as well so that
responsibility of the they do not have to face
Commissioner holding hardships due to delay in
jurisdiction of the PAN to PAN migration.
transfer it to the new charge,
either on request of the
assessee or the new A.O.
For Individual assessee, the
new A.O. (Where PAN to be
transferred) can make an online
request to send the PAN under
his jurisdiction. If the current
A.O.(where the PAN belongs
now) has no objection and he
does not take any online activity
within 10 days, the PAN will
automatically be migrated to
the new Assessing Officer.
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However, the above mentioned
automated process is available
for individual PAN only, PANs
of other categories are to be
transferred only by the
Commissioner holding previous
jurisdiction. It has been noticed
that migration of PAN is
causing unnecessary hardship
to the other assessees.
221. Unique code for Currently, every Registrar or It is suggested that a
high valued Sub-Registrar appointed under unique code be allotted to
property section 6 of the Registration all transactions reported
transactions Act, 1908 has to report through through AIR/SFT w.r.t
AIR/SFT, the data related to property transactions
every purchase or sale by any exceeding a certain
person of immovable property amount so as to help in
valued at thirty lakh rupees or data mining exercise of
more as per section 285BA rwr the government. One such
114E. There is a need for unique code can be as
integrating the data related to follows:
such high valued transactions (XX YY ZZZZZZZZZZ
and to strengthen the reporting MMMMMM)
requirements.
STATE code, Registrar
Code, PAN, Date of
Transaction
The first 2 digits should
reflect the state code
followed by 2 digit sub
registrar code and next
ten digits should be PAN
of the asseseess and last
8 digits showing the date
of registration in
DDMMYYYY format.
222. Foreign As per the Foreign Contribution In view of the fact that the
contribution to be (Regulation) Act, 2010 read data related to foreign
reported/populate with Foreign Contribution receipts are governed by
d in form 26AS (Regulation) Rules 2011 as the Foreign Contribution
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amended, any contribution (Regulation) Act, 2010
received above the specified read with Foreign
amount (INR 1 crore) needs to Contribution (Regulation)
be reported by the recipient Rules 2011 as amended is
bank on behalf of assessee already available with the
registered under the FCRA Act designated banks and the
to the Central Government. Ministry of Home Affairs, it
Further, all the receipts along is suggested that the
with the audited financial same may be incorporated
statements as at the end of the in the Form No. 26AS and
year is reported to the Ministry also in SFT under section
of Home affairs by the recipient 285BA. In case it is
(mostly NGOs) of such funds reflected in Form
from foreign sources. As on No.26AS, the assessee
date the same is not reported in would be more cautious of
form 26AS of such assessee. his tax obligations.
Since all the data w.r.t foreign
receipts is already available
with the designated bank as
well as Ministry of Home
Affairs, it would be really useful
if the same is also covered
under the scope of Statement
of Financial Transaction under
section 285BA. The foreign
receipts of such assessee
could be matched with the
Income Tax Returns and any
discrepancy may be scrutinized
accordingly.
223. Applicability of SA The ICAI had pursuant to the The suggested draft
- 700 on form of issuance of the Revised SA format of a clean report
audit reports 700, "Forming an Opinion and has been submitted to the
Reporting on Financial Under Secretary (TPL-III),
Statements", prescribed a CBDT vide its letter No.
revised format of the auditor's ICAI/DTC/2013-14/Rep-25
report on financial statements. dated 7th February, 2014.
As per SA 700 an auditor shall The modifications in the
modify the opinion in the audit report i.e. qualification,
report when: adverse opinion,
disclaimer of opinion, may
a) the auditor concludes that,
be reported by the auditor
based on the audit evidence
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obtained, the financial accordingly.
statements as a whole are not (SUGGESTIONS FOR
free from material REMOVING
misstatements ADMINISTRATIVE AND
b) the auditor is unable to PROCEDURAL
obtain sufficient appropriate DIFFICULTIES RELATING
audit evidence to conclude that TO DIRECT TAXES)
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.
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.
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224. Desirability to Since block assessment has The continuance of earlier
bring back block been discontinued, there is block assessment
assessment litigation as regards the year of procedure is desirable and
system taxability of certain would help in:
income/assets discovered in (a) reducing controversy
search. If it is provided that an over the year of taxability
assessee can agree to subject of income;
the whole of sums/assets to be
(b)providing suitable
taxed in the year of search at a
incentive for a person to
flat rate of 60% (tax which is
make the necessary
equal levy of 100% penalty on
disclosure without
today's maximum marginal
indulging in litigation and
rate). No further
proceedings/assessments (c)removing
would become necessary. administrative difficulties
Taking into consideration the such as multiplicity of
ground reality, such voluntary appeals, bunching
compliance at every stage together of assessments
should be encouraged. By etc.
closing the option of voluntary
compliance in search cases at
higher cost, the defaulting tax
payers will be compelled to opt
for litigation in respect of the
income, which he would have
otherwise readily agreed to
offer for taxation. In this
process he may or may not
succeed but can definitely
prolong the litigation.
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225. Valuation of Sweat In respect of sweat equity/ It is suggested that Rule
Equity under Rule ESOP the company law 3(9) should also be
3(9) guidelines specify that the amended to enable an
valuation is to be done by the accountant to do valuation
statutory auditors/ merchant of sweat equity. Thus,
bankers. Further, Rule Rule 3(9) may be re-
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11UA(c)(c ) also provides for worded as follows:-
the purposes of section 56, the
fair market value of unquoted
"for the purposes of
shares and securities
section 17(2)(vi) the fair
other than equity shares in a
market value of a specified
company which are not listed in
security, not being equity
any recognized stock exchange
shares in a company, on
shall be estimated to be a price
the date on which option is
it would fetch of sold in the open
exercised by the
market on the valuation date
employee, shall be such
and the assessee may obtain a
value as determined by a
report from a merchant banker
merchant banker OR AN
or an ACCOUNTANT in respect
ACCOUNTANT on the
of such valuation.
specified date."
However, Rule 3(9) of the
Income-tax Rules,1962 on
perquisite valuation provides
that for the purposes of section
17(2)(vi) the fair market value of
a specified security, not being
equity shares in a company, on
the date on which option is
exercised by the employee,
shall be such value as
determined by a MERCHANT
BANKER on the specified date.
226. Rule 26 - Rule 26 of the Income-tax The explanation to Rule 26
Telegraphic Rules, 1962 which states that may be substituted by
transfer buying "For the purpose of deduction of making a reference to the
rate tax at source on any income trading rate for that day as
payable in foreign currency, the declared and available on
rate of exchange for the the website of Reserve
calculation of the value in Bank of India.
rupees of such income payable
to an assessee outside India
The change is revenue
shall be the telegraphic transfer
neutral but can ease
buying rate of such currency as
practical difficulties.
on the date on which the tax is
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required to be deducted at
source under the provisions of
Chapter XVIIB by the person
responsible for paying such
income.
Explanation: For the purposes
of this rule, telegraphic transfer
buying rate, in relation to a
foreign currency, means [the
rate or rates of exchange]
adopted by the State Bank of
India constituted under the
State Bank of India Act, 1955
(23 of 1955), for buying such
currency, [having regard to the
guidelines specified from time
to time by the Reserve Bank of
India for buying such currency],
where such currency is made
available to that bank through a
telegraphic transfer.]"
The telegraphic transfer buying
rate, as mentioned above, are
easily available on the RBI
website and that if for any
reason one has to refer to a
prior period rate, old rates are
also available from RBI
Archives on their website,
whereas it is very difficult to get
past SBI buying rates.
227. Reconciliation of All the foreign currency Out of the said amount,
Foreign Currency remittances/payments are even if 1/3rd remittance is
required to be reconciled with
Remittances liable for tax @ 1%,
details provided in Form
government should have
No.15CA. RBI report 2012-13
provides that the foreign received Rs. 1,00,000 Lakh
currency remittances for crore by way of TDS on
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imports (all types of imports foreign currency
goods and services) is more remittance. It is thus
than 5,00,000 million dollars i.e. suggested that all the
more than Rs. 3,00 Lakhs foreign currency
million Rupees remittances/payments are
required to be reconciled
with details provided in
Form No.15CA.
228. Number of Even in the e-filing era, the For the convenience of the
Returns and assessees are overburdened tax payers it is suggested
payment schedule with the compliances to be that the number of returns
should be made with regard to filing of and payment schedule to
curtailed returns and payment be filed by the assessee
schedules. An assessee is should be curtailed
required to file quarterly appropriately.
returns relating to TDS on
salaries, Quarterly returns
(SUGGESTIONS FOR
relating to TDS on amounts
REMOVING
other than salary, and
ADMINISTRATIVE AND
quarterly returns relating to
PROCEDURAL
TCS. These are in addition to
DIFFICULTIES RELATING
the Income tax return form
TO DIRECT TAXES)
which is to 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.
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229. Challan Considering the fact that It is suggested that
rectification several mistakes were being challan Correction
mechanism reported which occurred on Mechanism be made
account of wrong punching of applicable to all types of
data in the OLTAS by the challans including
banks, the CBDT introduced a challans for online
new challan correction payments etc.
mechanism for paper based (SUGGESTIONS FOR
payments of income tax. The REMOVING
said system has been ADMINISTRATIVE AND
appreciated by the assessees. PROCEDURAL
Since, inadvertent mistakes can DIFFICULTIES``
occur while paying the income RELATING TO DIRECT
tax online also, it is felt that TAXES)
challan correction system be
made applicable to challans in
respect of online payments of
income tax also.
230. Audit of TDS A major portion of the revenue It is suggested that an
returns by way of income-tax is independent audit
recovered through deduction of provision may be inserted
tax at source. Thus, in-depth to provide for a
verification of all the TDS comprehensive audit of all
returns is necessary. Even the TDS returns filed with
though for furnishing the the Department.
information required under Appropriate forms of audit
clause 34 of Form No.3CD, an report can be prescribed
in-depth verification of the TDS to certify the correctness
returns is done, an independent of the quarterly TDS
audit provision only for audit of returns. This will enable
TDS returns would reduce the the Department to be rest
mismatch and other challenges assured about the
being faced by the Department. 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
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THE PROVISIONS OF
DIRECT TAX LAWS)
231. Monetary limits in The monetary limits for all Considering the Cost
the Income-tax exemptions or deductions were inflation Index (CII) of the
Act, 1961 provided long back. In has been year in which the various
long since the same have been monetary limits under the
revised considering the Income-tax Act, 1961 were
prevailing inflationary last revised and the CII of
conditions in India. An effort the year 2016-17, an effort
has been made to compile all has been made to make a
such monetary limits with the comparative statement of
Cost inflation index (CII) of the the present limit and the
year in which they were last figure of tentative limit,
revised and the CII of the year had the CII been applied to
2015-16 to arrive at the figure of them, has been prepared.
tentative present limit. The The same is given as an
same is given as an Annexure annexure to this
to this memorandum. memorandum. It is
suggested that the
present monetary limits be
revised upwards
appropriately.
232. Clarity / guidelines No clear rules laid down on It is suggested that
in attribution of profit attribution to a PE of a amendments may be made
profits to PE of a non-resident on income to the Act/ Rules to
non-resident in accruing or arising through or provide for a clear
India from business connection in methodology for
India. computation of profit
The existing Rule 10 is not attributable to a PE, after
specifically worded and could taking into account
potentially lead to unnecessary international best
litigation. practices and the rules
prescribed as per OECD
PE Attribution Guidelines.
233. Furnishing Bank Every year, the Union Budget Ideally, the assessee may
Guarantee for provides for the estimated tax be required to furnish
amount specified collection during the relevant bank guarantee for the
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in the notice of financial year. The said tax amount specified in the
demand collection targets percolate to notice of demand which
each and every Assessing will protect the interest of
Officer in the country by the the revenue, without
CBDT. The stiff collection affecting the assessee's
targets puts tremendous liquidity. Such an enabling
pressure on the Assessing measure would also be in
Officers and thereby affect the line with the current
quality of assessments they do. government's move to
It also forces the Assessing facilitate `ease of doing
Officers to make several high business'.
pitched assessments leading to
unjust demands. This is
Further, the appeals in
evidenced by reversal of such
high demand cases and
assessments during the
high pitched assessments
appellate proceedings.
should be taken up on
Every year, several demand priority basis.
notices are issued under
section 156 along with
assessment orders. Most
assessees, being aggrieved by
the unjust demands raised in
those orders, take up the issue
before the appellate authorities.
At the same time, they also file
an application for stay of
demand before the concerned
Assessing Officer. In reality,
Assessing Officers entertain
such stay applications with
minor modifications like
payment of certain portion of
demand say 20%/30%. It is
noteworthy to mention that
powers under section 220(6)
are discretionary in nature. In
recent times, in order to meet
the stiff collection targets, quite
a few Assessing Officers have
initiated recovery proceeding
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and attached bank
accounts/got the payment from
assessees bank by exercising
the powers under section 226
or exercising powers under
section 222 read with Schedule
II in case of expiry of stay
application. In such a case, the
assessee has no option but to
file a stay application to the
concerned authority where his
case is pending.
The above process of initiating
recovery proceedings and
recovering the amount due from
the assessee when his case is
still pending before the
concerned appellate authority
and has not attained finality,
puts a lot of financial strain on
assessee's resources and
affects his business operations.
Even stay applications are
approved for specific time
period (maximum 1 year by
ITAT under proviso to section
254 subject to satisfaction of
conditions specified therein).
Liquidity issues crop up due to
payment of demand and as a
result assessee's working
capital is locked up.
In a country like ours, where
appeals go on for several years
before reaching to their logical
end, the assesses end up facing
undue hardship on account of
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their working capital remaining
locked up for such a long time.
234. Suitable tax Flyash is one of the major It is suggested that
incentive to residues generated during the suitable tax incentive may
industries using combustion of coal in thermal be given to industries
flyash as their power plants. Air pollution is using flyash as raw
major raw caused by direct emissions of material.
material wind-blown ash dust from the
power plants. Flyash so
generated from thermal power
plants contain many toxins and
thus poses major
environmental problems.
Though it is a waste product for
the power sector, it is used as a
raw material, in many industries
primarily, in brick
manufacturing.
235. Incentives to Sugar industries and It is suggested that
Sugar and Power carbon/power industries suitable incentives under
industries generate a lot of electricity in the Income-tax Act, 1961
house using their resources. may be provided to such
However, due to the old assessees like sugar and
electricity law/Act, such carbon/power industries
industries are unable to sell the which generate power
excess power generated. As a required to run the
result, a precious resource industry in-house. Since
generated like electricity such industries ease the
generally goes waste. Same difficulty on account
happens with wind and solar shortage of power by
power generated. consuming power
generated in-house.
236. Sustainability The Indian economy has shown To achieve a GDP of 8% +
Initiatives considerable underlying per annum, India can
Towards strengths. India's reliance on promote saving levels at
Maintaining the external debt could pose 36% + of income by giving
Growth of 8% + pressure on the economy. The suitable incentives to
GDP best route to fund the economy assessees.
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is with no doubts by generating
funds within the economy.
On the fiscal side, the
government needs to target a
utilisation of domestic savings
for more productive asset
creation.
237. Leave Travel As per the provisions of section To be in line with the
Concession/Assist 10(5) of the Income-tax Act, concept of "financial year"
ance -Replacement 1961, an exemption of the value adopted by other
of "Calendar year" of leave Travel provisions of the Income
by "Financial Concession/Assistance tax Act, it is suggested
year": received by the employee from that the concept of
his employer is provided subject calendar year should be
to fulfillment of prescribed replaced with financial
conditions. Rule 2B provides for year (April March)
the specified conditions to be (SUGGESTIONS TO
fulfilled. One of the conditions is REDUCE / MINIMIZE
that the exemption can be LITIGATIONS)
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
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be shifted from Calendar year to
Financial Year.
238. Section 14A Even in cases where there is no It is suggested that an
Instruction for claim of expense in relation to instruction may be issued
proper application exempt income, it is generally so that no disallowance
seen that Assessing officers may be made under
are making disallowances by section 14A in such cases.
invoking Rule 8D.
239. Taxation of ESOPs The current Income Tax Law, It is suggested that the
provides for the inclusion of tax on ESOPs should be
ESOPs under section 17(2) to only at the point of sale
be taxed as a "perquisite", of the shares by the
consequent to the abolition of employees and not at the
FBT. time of exercise of
shares to encourage the
companies to grant
The section states that ESOPs
ESOPs in consideration
issued free of cost or at
of the talent pool and the
concessional rates will be taxed
contribution made by the
on the date of exercise on the
employees.
difference between the "fair
market value" and the amount
actually paid by the employee.
The "fair market value" is to be
determined based on stipulated
methods which will be
separately prescribed by the
CBDT.
This suffers from the following
drawbacks:
a) It seeks to tax a notional
benefit at a time when the
actual gain is not realized by
the employee. In fact, it is
possible that the actual sale
of shares could result in a
loss for the
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employee. Since the
perquisite tax paid earlier
cannot be set off against the
capital loss, the employee
suffers a double loss,
namely tax outgo and loss
on sale of shares.
b) The question whether the
ESOPs are granted at a
concessional rate is being
determined with reference to
the "fair market value" on the
date of exercise of the
options. Technically, this is
an incorrect approach. If the
ESOPs are issued at the
prevailing market price on
the date of grant, the issue
should be treated as "non
concessional". This would
be in line with the guidelines
issued by SEBI. Any
subsequent gain accruing to
the employee due to
favorable market
movements by the date of
vesting or exercise of option
cannot be treated as a
"perquisite" granted by the
employer.
c) Further, if such subsequent
gains are a perquisite in the
hands of employers, it would
stand to reason that the
value equivalent of such a
perquisite should have been
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a deductible expenditure in
the hands of the company
issuing the ESOP. Since the
tax law does not
contemplate such a
deduction, the taxation of
the perquisite would result in
double taxation.
d) Also, from the strictly legal
angle, there are a number of
differences between
ordinary shares and ESOP
shares. Therefore, they are
not comparable. The
taxation principles currently
existing result in
discrimination. The market
value is also strictly not
applicable since there are
lock-in periods applicable.
Since the actual sale of shares
will attract capital gains tax, if
applicable, it is unnecessary to
subject the employee to
perquisite tax. In fact, before
FBT was imposed on ESOPs,
specific provisions existed in
the Income Tax Act for
exempting the same from
perquisites and subjecting it
only to capital gains tax.
240. Taxation of Taxation of ESOPs creates an · During the erstwhile
specified security issue in the case of migrating Fringe Benefits Tax
or sweat equity employees, who move from one regime, there was a
shares allotted to country to another, while specific clarification
employees under performing services for the on the taxability,
Employee Stock company during the period where the employee
Option Plans between the grant date and the (who qualified as a
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(ESOPs) in case of allotment date of the ESOP. non-resident/ not
migrating The domestic tax law is ordinary resident) was
employees unsettled on the taxation of based in India only for
such migrating employees and a part of the period
does not clearly provide for between grant and
such cases. vesting. However,
there is no specific
provision in this
regard under the
amended ESOP
taxation regime from 1
April 2009.
· The Government may
look at providing
clarity on the taxability
of ESOP's for such
mobile employees.
241. Depreciation on Books are very important tools In view of the above, it is
books used by used by professionals to carry suggested that the
professionals on their profession. Though depreciation on books
expenditure on purchase of purchased by
books is no doubt capital in professionals be restored
nature, the books purchased by to its original rate of 100
professionals' have a very short per cent
shelf life of around a year or (SUGGESTIONS FOR
sometimes even less, due to RATIONALIZATION OF
the fast pace of developments THE PROVISIONS OF
in their respective fields, be it DIRECT TAX LAWS)
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
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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.
242. Rule 6F - Upward Rule 6F of the Income-tax Considering the prevailing
revision of limit of Rules, 1962 provides for books inflationary conditions in
Rs.1,50,000 of accounts and other India, the limit of Rs.
documents to be kept and 1,50,000 provided in the
maintained by persons carrying proviso to Rule 6F(1)
on certain professions. The needs an appropriate
proviso to Rule 6F(1) provides upward revision, say Rs.
that this rule will not apply in 5,00,000. Rule 6F may be
relation to any previous year if accordingly amended.
the total gross receipts from the
profession do not exceed
(SUGGESTION FOR
Rs.1,50,000 in any one of the
RATIONALIZATION OF
three years immediately
THE PROVISIONS OF THE
preceding the previous year.
INCOME TAX ACT, 1961)
This limit of 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.
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243. Rule 6F(2)(iv) Rule 6F(2) provides the books Clause (iv) to Rule 6F(2)
requires to be and other documents to be clause was inserted in the
dispensed with maintained by the year 1983. Since then,
professionals. Sub-clause (iv) there has been
of Rule 6F(2) requires phenomenal change in the
maintenance of carbon copies working of the
of bills exceeding Rs 25. businesses. 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.
244. Exemption under Under Section 54 of the In order to avoid
section 54 & 54F Income-tax Act, if an assessee unnecessary litigation, a
who has earned a Capital Gain Circular on the said
on sale of a residential house, subject be issued
has, within the prescribed clarifying that in a case
period, purchased or where an assessee has
constructed another residential entered into a Registered
house, then, to the extent of the Agreement for Purchase
cost of the new residential of a residential flat in an
house, no tax in respect of such "OAS" and the assessee
Capital Gain is payable. There has paid more than 50% of
is a similar provision under the cost of the residential
Section 54F under which the flat within the period
Capital Gains arising on prescribed in Sections 54
transfer of ANY long term and 54F and has, within a
capital asset will also be exempt further period of three
from tax, if the assessee has, years obtained actual
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within the prescribed period, possession of the
purchased or constructed a residential flat on payment
residential house, to the extent of its full price, the
of the cost of such new assessee shall be deemed
residential house. to have "constructed" a
A considerable volume of `residential house' within
litigation has arisen in the past the meaning of Sections
on the issue as to `when' exactly 54 and 54F on the date on
an assessee can be considered which the Agreement for
to have purchased or Purchase has been
constructed a new residential registered and the
house and also on the issue as exemption under the said
to whether the acquisition of the Sections will be available
new residential flat in an to the assessee to the
Ownership Apartments Scheme extent of the aggregate
(OAS) or a Co-operative cost of the residential flat
Housing Society is "purchase" agreed to be purchased.
or "construction". This (SUGGESTIONS TO
distinction is important REDUCE / MINIMIZE
because, the prescribed time LITIGATIONS)
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
"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
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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
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residential flat on payment of
full purchase price of the flat
within a further period of three
years after the expiry of the
prescribed 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
"ShashiVerma V. CIT 224 ITR
106(MP), CIT V. R.L. Sood 245
ITR 727 (DEL), HillaWadia . 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
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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 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
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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.
245. Deputation of An issue is under debate as to It is suggested that a
employees - whether payments made by the specific clarification may
[Taxability as fees Indian company to foreign be provided by the
for technical company towards Government to the effect
services/ reimbursement of the salary that as long as the
Permanent costs of persons deputed to employee works
Establishment India would be treated as fees exclusively for the Indian
issues] for technical services. company during the
Further, such deputations are period of deputation and
often tested for a risk of creation operationally works under
of a PE for the foreign the 'control and
enterprise in India. supervision' of the Indian
company, payments made
Employees deputed to the
by the Indian company to
Indian company work under the
the foreign company
control and supervision of the
would not qualify as FTS.
Indian company and are
Further, it should be
essentially employees of Indian
clarified that such an
company. Any payments made
arrangement would not
by the Indian company towards
trigger a creation of PE for
the amounts cross-charged by
the foreign enterprise in
the Foreign Company would be
India.
in the nature of re-imbursement
of the salary costs and ought
not to be taxable.
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246. Due date of Section 115U(2) read with Rule To enable the investor of
furnishing 12C requires that the person VCC/VCF being an
statement in Form responsible for crediting or individual, to declare his
No. 64 under making payment of the income income from VCC/VCF in
section 115U read on behalf of a Venture Capital his return of income by
with Rule 12C Company (VCC) or a Venture 31st July, the due date of
Capital Fund (VCF) and the furnishing statement
VCC/VCF shall furnish a under Rule 12C should be
statement in Form No. 64 to the changed to "30 th June"
person liable to tax in respect of from "30 th November".
such income by 30 th November
of the financial year following
the previous year during which
such income is distributed.
Difficulty is faced by asse
ssees who have to file their
return of income by 31 st 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.
247. Guidelines for the For the purpose of conducting Specific guidelines for the
empanelment of special audit under section appointment of auditor
auditors under 142(2A) of Income-tax Act, under section 142(2A) by
section 142(2A) 1961, the auditor is nominated Chief Commissioner or
by Chief Commissioner or Commissioner may be
Commissioner. Presently, no issued.
specific guidelines have been The said guidelines may
issued by the authorities to provide for conditions like
enable the Chief experience of the auditor
Commissioners or in the relevant field,
Commissioners to take an number of years of
informed decision. Considering experience, number of
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the fact, that the tasks involves partners etc. Further, in
auditing of complex accounts, order to maintain quality
some specific guidelines taking of work and to provide
into account the experience of equitable distribution of
the auditor in the relevant field work, a restriction on the
etc may be issued by CBDT. number of such audits by
Further, in order to maintain a particular auditor in a
quality of work and to provide particular year may be
equitable distribution of work, a imposed.
restriction on the number of (SUGGESTIONS FOR
such audits in a particular year RATIONALIZATION OF
may be imposed. THE PROVISIONS OF
DIRECT TAX LAWS)
248. Section 154 - Even after due efforts taken by The Assessing Officers
Mistake apparent the Government to ensure may be given appropriate
from record compliance relating to filing of instructions to accept
TDS returns by the deductors, rectification applications
the defaults on behalf of under section 154 in cases
deductors continue for one or where Form No. 26AS
the other reason. This deprives reflects the entries
the deductee from claiming the relating to TDS but the
Tax so deducted in his return of same has not been
income filed before due date of claimed in the return of
filing return. However, income.
situations do arise where the (SUGGESTIONS FOR
returns are belatedly filed or a REMOVING
correction statement has been ADMINISTRATIVE AND
filed at a later date by the PROCEDURAL
deductor resulting into a credit DIFFICULTIES RELATING
in Form No. 26AS of the TO DIRECT TAXES)
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
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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.
249. Section 200 - Section 200 provides for the Since the details are
Furnishing of TDS payment of TDS and filing of already available with the
returns TDS Returns. The Income Tax deductor at the time of
Law requires payment of TDS payment of taxes, the e-
every month by 7th of the challan itself can be so
following month and by 30th designed that it captures
April of the Assessment year for all the details at that time.
tax deducted in the month of The details so submitted
March of the Previous year. The at that time may
said payment is to be made respectively be reflected
under various codes as per the in the Form 26AS of all
sections under which the tax is deductees.
deducted. Currently, the (SUGGESTIONS TO
payment under each code is to REMOVE
be made under a separate ADMINISTRATIVE
challan which requires filling up DIFFICULTIES)
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 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
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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.
250. Auto fill of TDS data Currently an assessee filing his Necessary changes may
in Income Tax income tax return needs to fill be made to the e-filed ITR
Returns(ITR) all the data manually wrt the forms using excel utility
taxes paid by him/on his behalf so that data relating to
(TDS) in excel utility. Since TDS deposited on behalf
TDS returns are e-filed now of assessee deductee is
days, an asseesee by manually automatically picked from
punching the data relating to TDS statements filed by
prepaid taxes like TDS is prone deductors based on
to committing errors. Also, unique field like PAN.
there is an unnecessary effort
in punching the data manually
which can be automated as the
data can be picked from TDS
returns filed by deductors
based on unique field ie PAN of
the deductee assessee. This
will lead to efficient use of
technology and lesser errors in
ITRs relating to data of prepaid
taxes like TDS.
251. Reconciliation of In order to make the process of The mentioned circular is
each payment claim of TDS error free, a suggested to be
made by deductor system was devised some implemented with
to avoid years ago in 2009 and appropriate modifications
duplication of work published vide circular no in light of the current
of TDS return 2/2009, dated 21.05.2009. The technological
relevant excerpt from the said advancements.
circular is as follows:
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"12. With a view to enabling the
implementation of the aforesaid
decision, the TDS and TCS
payment and information
reporting system has been
redesigned vide Notification
No. 858(E), dated 25th March,
2009 published in Official
Gazette. The salient features of
the new TDS and TCS payment
and information reporting
system are the following : --
(i) The new system has been
harmonized for all deductors
(including Central and State
Governments). Therefore, like
non-governmental tax
deductors, every deductor in
the Central and State
Government have also been
made responsible for making
direct payment of TDS in the
bank. They are no longer
allowed to make payments of
the TDS and TCS by making
book adjustments or
consolidated payments. As a
result, the TDS payment and
information reporting system
will be uniform across
deductors.
(ii) Rule 30 and Rule 37CA of
the Income-tax Rules, 1962
have been substituted to
provide, inter alia, for the
following :--
(a) All sums of tax
deducted at source under
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Chapter XVII-B and of tax
collected at source under
Chapter XVII-BB shall, in
general, be paid to the credit of
the Central Government within
one week from the end of the
month in which the deduction,
or collection, is made. Similarly,
the same time-limit for payment
will also apply for income-tax
due under sub-section (1A) of
section 192.
(b) It is mandatory for
all deductors (including Central
Government and State
Governments) to pay the
amount by electronically
remitting it into the RBI, SBI or
any authorized bank.
(c) It is mandatory for
all deductors (including Central
Government and State
Governments) to make the
payment by electronically
furnishing an income-tax
challan in Form No. 17.
(iii) In the process of
electronically furnishing the
income-tax challan in Form No.
17, the deductor will be
simultaneously required to
furnish to the Taxpayer
Information Network (TIN)
system maintained by National
Securities Depository Limited
(NSDL) either through screen
based upload or file upload,
three basic information relating
to the deduction i.e., PAN,
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name of the deductee and
amount of TDS/TCS.
(iv) Upon successful
remittance of the TDS/TCS to
Central Government account
and the uploading of the basic
information as mentioned
above to the TIN system, every
deduction record will be
assigned a Unique Transaction
Number (UTN).
(v) NSDL will create a facility
to e-mail the UTN file to the
deductor if the e-mail address
of the deductor is available with
them. In addition, they will also
create a facility for the deductor
to download the UTN file.
(vi) The UTN will be required
to be quoted by the deductor on
the TDS/TCS certificate issued
by him to the deductee.
(vii) NSDL will also create a
facility to allow independent
viewing of the UTNs by the
deductee.
(viii) With a view to enabling
the Income-tax Department to
monitor compliance by the
deductor with the TDS
provisions, every person
(including Central Government
and State Government) who
has obtained a Tax Deduction
or Collection Account Number
(TAN) shall electronically
furnish a quarterly statement of
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compliance with TDS
provisions in Form No. 24C. It
is mandatory for all TAN
holders to furnish this form
irrespective of whether any
payment liable to TDS has been
made or not. This form shall be
furnished on or before the 15th
July, the 15th October, the 15th
January in respect of the first
three quarters of the financial
year, respectively, and on or
before the 15th June following
the last quarter of the financial
year. This e-form No. 24C has
to be furnished at
http://incometaxindiaefiling.gov
.in. The first quarter in respect
of which Form 24C is required
to be furnished is the quarter
ending on 30th June, 2009.
(ix) In order to enable the
deductor to furnish the UTN to
the deductee, the existing Form
16 and Form 16A have been
appropriately modified.
(x) The quarterly returns of
TDS and TCS hitherto required
to be filed in Form No. 24Q,
Form No. 26Q, Form No. 27Q
and Form No. 27EQ shall now
be required to be filed for all
quarters on or before the 15th
June following the financial
year. Effectively, the quarterly
returns have now been
replaced by an annual return."
As is clear from the above
reproduced para from the said
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circular, the proposed method
will automatically verify each
payment of TDS made by
deductor and will reduce the
duplicacy done while filing
quarterly TDS statements. The
above method will effectively
lead to an annual TDS return
instead of quarterly TDS
statements currently
252. Master Circular on In order to support/clarify the To improve compliance of
TDS-Need of the provisions of Chapter XVII, TDS/TCS provisions it is
hour various circulars have been suggested that a master
issued from time to time. circular exclusively on
Further various court decisions, TDS be issued, within a
favourable or unfavourable for period of 15 days of
the assessees, have also passing of Finance Act
clarified various provisions of every year.
Tax deduction at source or tax
collection at source. These
court
decisions/circulars/notifications
have been more or less
accepted by both the
Department and the assessees.
However, the difficulty arises
for the assessees since all
circulars, which may have been
issued way back in 1995, 1996
etc. (still applicable) are not
available at one place. Even
though ignorance of law is not
an excuse, it is quite possible
that due to non-availability of
the clarifications issued so far
at one place, some assessees
inadvertently might not have
deducted tax on particular
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transactions entered into by
them. Since approximately 40%
of total revenue is collected
through TDS /TCS, it is
essential to issue a master
circular every year on the lines
of circular on TDS on Salaries.
Issuing a master circular,
clearly laying down the well
established Court decisions
and circulars issued so far,
would on one hand improve
compliance of TDS/TCS
provisions and on the other
hand act as easy reference for
the assessees.
253. Interest under As per the provisions of section It is suggested that the
section 234C for 207 and section 211, the Departmental Software
newly formed assessee is liable to pay the needs to be suitably
Firms and advance tax on the `Current amended so that firm and
Companies Income' of the assessee. This companies are not
presupposes the existence of required to pay interest on
the assessee. In view of this, the short payment of
interest under section 234C instalment of advance tax
cannot be charged for the under section 234C for the
instalments of advance tax due period when they were not
before the date of coming into in existence.
existence of a Firm or a (SUGGESTIONS FOR
Company. In spite of this, the RATIONALIZATION OF
Departmental Software THE PROVISIONS OF
processing the ITR does not DIRECT TAX LAWS)
take care of such a situation
and interest under section 234C
is being charged in a routine
manner.
254. Section 285BA Currently, every bank/any other It is suggested that the
read with Rule company or institution issuing information provided
114E Payment credit card is required to report through Form No 61A w.r.t
exceeding the through Form No 61A, data credit card payments
specified amount related to all persons making exceeding the specified
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in respect of credit payment exceeding the amount as per Rule
card(s) specified amount in respect of 114E(2) currently provided
one or more credit cards issued by banks be provided by
to that person. Payment Gateway service
Specifically, Rule 114E(2), inter providers (i.e. visa, master
alia, provides that payments card, RuPay, American
made by any person of an express) by making a
amount aggregating to -- suitable amendment in the
Act/Rule.
(i) one lakh rupees or more in
cash; or
(ii) ten lakh rupees or more by
any other mode, against bills
raised in respect of one or more
credit cards issued to that
person, in a financial year
needs to be reported. A Large
number of banks/other
institutions operating in India
issue credit cards. Reporting all
such transactions through Form
No 61Abecomes a time
consuming task for such
banks/institutions who also
have to comply with other
requirements like TDS returns
etc. Banks have to put in lot of
efforts to provide such type of
data as the data needs to be
compiled first as it is not readily
available.
Credit card transactions are
done through payment gateway
services provided by certain
vendors. As of now, there are 4
payment gateway service
providers as follows:
1. Visa
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2. Mastercard
3. RuPay
4. American Express
(AmEx)
Since all the transactions
through credit card are
recorded/processed by the
above mentioned vendors, it
would be easier for them to
provide the required information
more accurately and in a timely
manner. It would also help the
department to scrutinize such
information using the latest
information technology tools.
In case the information is called
from payment gateways rather
than banks, it will reduce the
workload on banks and they can
concentrate on their core
services related to banking.
Further, if some lesser number
of entities can report such
requisite data, it would be easy
for both the AIR information
provider as well as the
government to control and
utilize the data/information.
255. Mechanical The mechanical disallowance The mechanical
disallowance of u/s 14A r.w. Rule 8D is also disallowance of
expenditure u/s being added to the book profit expenditure u/s 14A r.w.
by the AO irrespective of the Rule 8D alleged to have
14A r.w. Rule 8D
fact whether assessee has been debited by the
actually debited any such assessee in its P&L
expenditure in its P&L Account account may be done
which is against the away with while
pronouncements given by calculating its book-profit
various Judicial authorities in taxable u/s 115JB of the
the recent past. Act.
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256. Double taxation in At the time of buy back of It is recommended that for
case of buy back shares (not being shares listed shares issued under
of shares by the on a recognised stock ESOP/ equity incentive
exchange), by a company from scheme, the calculation of
company in case
the shareholder, the company is distributed income should
of ESOP's- liable to pay income tax on be regarded as difference
Section 17 distributed income under between the consideration
Section 115QA of the Act. paid by the company on
"Distributed income" has been buy-back of shares and
defined as the consideration FMV as on the date of
paid by the company on buy- exercise for such shares.
back of shares as reduced by Accordingly, the tax may
the amount which was received be calculated on the
by the company for issue of difference between the
such shares. Under ESOP's, buy-back price and FMV
the employee has already paid on the date of exercise.
tax on the perquisite value at
the time of exercise of shares
(i.e. tax on FMV) as on date of
exercise less the issue price or
amount actually paid by the
employee. Hence there is a
double taxation on the
difference between the FMV on
the date of exercise and the
issue price of the shares.
Section 49(2AA) of the Act
specifies that where the capital
gain arises from the transfer of
specified security or sweat
equity shares referred to in sub-
clause (vi) of clause (2) of
section 17, the cost of
acquisition of such security or
shares shall be the fair market
value which has been taken into
account for the purposes of the
said sub-clause. Similar
provision is missing in section
115QA of the Act.
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257. Quantum of R&D A plain reading of Section It is suggested that DSIR
expenditure 35(2AB) of the Act may suggest guidelines should not deal
entitled to that the weighted deduction is with the allowability or
not with respect to `expenditure' disallowability of any
weighted
on scientific research on in- expenditure incurred on
deduction under house R&D facility as approved in-house R&D facility.
Section 35(2AB) of by the prescribed authority. There are sufficient
the Act by DSIR provisions within the Act
Earlier, Rule 6 and Forms 3CK, which provides powers to
3CL and 3CM do not anywhere the Assessing Officer (AO)
state that the approval granted to examine the same.
by DSIR is with respect to the Further in case of doubt
expenditure. Recently, Rule 6 about the usage of asset
has been amended vide or activity constituting
Notification dated 28 April 2016, scientific research, the AO
where it has been stated that can always refer the
DSIR shall furnish electronically question to the Central
its report quantifying the Board of Direct Taxes
expenditure incurred on in- (CBDT) under Section
house R&D facility by the 35(3) of the Act, which in
company during the previous turn will refer the question
year and eligible for weighted to DSIR. Based on these
deduction under Section feedback the AO may
35(2AB) in Part B of Form No. decide the quantum of
3CL. R&D expenditure entitled
to weighted deduction
Further DSIR has issued its own under Section 35(2AB) of
set of guidelines which the Act.
specifically states that certain
expenditure are not permissible In other words, DSIR
for claiming weighted deduction should not decide the
under Section 35(2AB) of the quantum of R&D
Act viz. clinical trials conducted expenditure entitled to
outside the approved facilities, weighted deduction under
lease rent, building Section 35(2AB) of the
maintenance and municipal Act. The AO may decide
taxes of the R&D facility, foreign the quantum of R&D
patent filing expenditure and expenditure entitled to
consultancy expenditure, weighted deduction under
interest on loan for R&D facility, Section 35(2AB) of the
etc Act. Accordingly, the
provisions of Section
35(2AB), Rule 6 (including
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relevant forms) and DSIR
guidelines may be
amended
258. Incentivise Large majority of the Indian With an objective to bring
transactions consumer market is un- the transactions of the
through organised due to the presence unorganized sector into
of small businesses across the tracking system of the
credit/debit cards
sectors which largely deal in government and with the
and other banking cash, both, when buying easy availability of on-line
instruments products and selling them. mode of consummating
the transactions, it is
Secondly, the operations of suggested that the
these small establishments government should
spread across the county pose introduce some incentives
a challenge for the tax linked with payments
authorities to monitor and track made through the credit
the volume of trade of this card / debit card and other
sector banking instruments.
These incentives could
take the form of an
additional deduction while
computing the income of
such persons/entities,
which are directly related
to the said mode of
payments.
With robust mechanisms
in place, this will help the
government track the trail
of the transactions and
facilitate bringing into the
tax net the potential
taxpayers if any that earn
taxable income beyond
the maximum exemption
limit who were otherwise
outside the tax net.
259. Recognize digital Rule 3(7)(iii) exempts prepaid Recognize electronic
payments/evidenc meal vouchers upto Rs. 50 per forms of meal vouchers
es meal provided to employees. for tax purposes
But there is no clarification
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whether such meal vouchers Permit maintenance of
need to be necessary in evidences of exempt
physical form or whether allowances/perquisites in
electronic form of vouchers like electronic form
prepaid meal cards or digital
vouchers also qualify for the
same benefit. During FBT Further, the aforesaid limit
regime, there were special rules of INR 50 per meal/ tea/
prescribed (Rule 40E) for snack (set atleast eight
exempting fringe benefit years ago) is inadequate,
provided by way of electronic keeping in view the
prepaid meal card. Hence, increased cost of food etc,
there is ambiguity on validity of hence needs to be revised
such electronic form of
vouchers in absence of similar
dispensation under current
rules.
Electronic forms of payments
are convenient to use and have
transparent audit trail. Besides,
they are regulated by RBI under
Payments and Settlement
Systems Act, 2007 and hence
there should be no concern on
acceptance of such modes for
tax purposes.
It was expected that under
powers taken by CBDT u/s. 192
r.w. 295 to prescribe mode and
manner of maintaining
evidences supporting
exemption for different
allowances and perquisites,
CBDT will permit maintaining
evidences in electronic form as
alternative to paper form in
vogue. However, Rule 26C
notified on 29 April 2016 does
not specifically permit
maintaining evidences in
electronic form. Maintaining
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evidences in electronic form
reduces paper work and
compliance burden for both
employees and employer and
facilitates `ease of doing
business'
260. Clarity on MAT The computation of book profit Most of the above
under section 115JB is a questions are directly or
complicated and vexed issue indirectly answered by
with diverse interpretations Circular 495. It should be
possible on various issues. clarified that the said
These issues need to be Circular should be
clarified to reduce litigation applicable to section
before the appellate authorities, 115JB as well.
which is one of the aims of the
Government. For issues which are not
covered by the said
The issues in question are as Circular, clarifications
under: should be made to explain
the legislative intent.
i. Meaning of the terms
"loss brought forward or
unabsorbed depreciation" and
"as per books of accounts i.e.
whether the intention is to
prepare a separate computation
for the purposes of computing
brought forward losses, as
explained in Circular 495 (dated
22 September 1987) which was
in the context of section 115J of
the Act.
ii. The point of time at
which loss or unabsorbed
depreciation should be
considered whether at the end
of the previous year or at the
end of the relevant previous
year in which the loss or
unabsorbed depreciation
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arose?
iii. Is book loss of a year
to be set-off against profits of
earlier years?
iv. If book loss of a year
is set-off against reserves, will it
be available for set-off?
v. Is the book loss of an
amalgamating entity eligible for
set-off by the amalgamated
entity?
vi. Whether the brought
forward loss and unabsorbed
depreciation is to be
aggregated separately first and
then these aggregates are to be
compared to determine which
one is lower?
261. Rule 4 of Part C The employer company The time limit shall be set
of Fourth contributing towards gratuity for for disposals of
Schedule the employees is required to application for approval of
make such contribution to the gratuity trust. Further,
irrevocable trust. The said trust there shall be provision
required to obtain approval for deemed approval if the
under Part C of Fourth application for approval is
Schedule of Income-tax Act, not disposed of by tax
1961. The conditions for authorities within
approval are prescribed under specified time limit.
Rule 4 of Part C of Fourth Further, process be set to
Schedule of Income-tax Act. submit applications online
According to section 36(1)(v) not only for gratuity trust
read with section 40A(7) of but even for all other
Income-tax Act, 1961, any sum approvals for which
paid by the employer by way of applications are required
contribution towards gratuity to be made like Section
fund is allowable as expenditure 12AA, Part A & B of Fourth
if the gratuity fund is approved schedule of Income-tax
by the tax authorities. In
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practice, the employer files an Act, 1961 etc.
application with tax authorities
to obtain approval for the
gratuity trust.
However, there are cases
where such applications are
pending with tax authorities for
even 10 years. The applications
are neither approved nor
rejected. Further, no objections
are raised during the period of
pendency. The same tax
authority raises the question on
allowability of contribution to
such fund when the approval is
pending. The employer carries
unwarranted risk of
disallowance though the
required contributions are
made towards the irrevocable
gratuity fund. According to
Rule 8 of Part C of Fourth
Schedule of Income-tax Act, in
case the application for
approval is rejected then the
employer may appeal within
sixty days to the Central Board
of Direct Taxes (CBDT).
262. Section 40A(3) Any payment for purchase and I. Due to large volume of
Cross Cheques expenditure otherwise than this transaction in money
account payee cheques is market, records of
disallowed by 30%. Tax auditor crossed/bearer cheques
has to report in Clause 21(A) deposited in other
that all payments have to be accounts should be kept
made through account payee by nationalized bank,
cheques or not. private bank, co operative
bank, NBFC and shroff
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In absence of physical cheques who has obtained license.
with assessee, most of CA
writes opinion that they are not
If keeping of record above
in position to comment and
Rs.20000/- is too
verify the documents in
burdensome then such
absence of cheques with
limit may be revised to Rs.
assessee.
500000/-. All those details
may be filled by each bank
In textile market, cloth market through AIR.
and another unstructured
market, purchase payment has
II. However necessary
been rotated through different
changes can be suggested
parties through crossed/bearer
in Negotiable Instrument
cheques. Here, bankers have to
Act.
accept crossed/bearer cheques
to be deposited by any party
(May not be in name of party in
whom name crossed/bearer
cheques returned)
Lots of unregistered shroff are
discounting crossed cheques of
any party and issue cheques in
favour of other party by
charging commission.
263. Valuation of The Finance Act, 2012 had (i) A proviso similar to
shares- Section inserted clause (viib) in section the proviso to section
56(2)(viib) 56(2) to provide that if the 56(2)(viia) should be
consideration for shares is in incorporated in
excess of the fair value of the section 56(2)(viib) as
shares, the aggregate well. Further, the
consideration received in proviso should also
excess of the fair value cover transactions
determined as per method not regarded as
prescribed or substantiated by transfer under
the company to the Assessing sections 47(vi) and
Officer based on the value of its 47(vib).
assets, would be taxable as the (ii) Valuation Report
from an `Accountant'
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income of a closely held may be admissible so
company. as to determine the
The detailed suggestions fair market value of
regarding the draft rule which unquoted equity
prescribes for determination of shares.
fair market value of shares was (SUGGESTIONS FOR
submitted by ICAI to the Board. RATIONALIZATION OF
In furtherance to the same, it is THE PROVISIONS OF
submitted that the provisions of DIRECT TAX LAWS)
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).
264. Sec.115-O The Finance Act, 2008 For the reasons given, it is
a) Inter Corporate amended the provisions of suggested that the system
Dividend section 115-O to eliminate the of tax credit for the
Distribution Tax hardship of double taxation dividend distribution tax
(DDT) arising on account of cascading paid by the subsidiary
effect of DDT in case of inter- companies against the
corporate dividend. This is a dividend distribution tax
step in right payable by the respective
direction. However, the same holding companies at all
mitigates the hardship partially. levels be introduced.
The real objective should 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
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applies only to dividend
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 115-O 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.
b) Grossing up of Section 115-O was introduced In order to encourage
rate of dividend via Finance Act, 1997 w.e.f small shareholders to
distribution tax 1.6.1997, with a view to reduce invest in domestic
the hardship caused to the companies, it is
shareholders due to the suggested to drop the
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procedural work for refund and requirement of grossing
a lot of paper work. It was up the dividend
provided that any dividend distribution tax rate.
declared by an Indian company
will be taxable in the hands of
the company and it would be tax
free in the hands of the
shareholders. The rate of
dividend distribution tax was
increased over the years to 15%
(plus surcharge and education
cess).
However, the Finance (No. 2)
Act 2014 provided for the rate of
dividend distribution tax to be
grossed up w.e.f. 1 October,
2014. Thus, the effective
dividend distribution tax rate
would increase to 17.647%
(plus surcharge and education
cess). Table below will illustrate
the difference in cash outflow
after the amendment:
Particular Pre- Post
s Budget Budge
t
Dividend 500 500
declared
DDT (Incl. 84.975 99.95
of
surcharge
and
education
Cess)
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Total 584.97 599.95
Outflow for 5
the
company
If the company decides to keep
the outflow constant i.e. Rs
584.975/-, then as per the
amendment, dividend to be
received in the hands of
shareholders would reduce to
Rs 487.52/-
[584.975*500/599.95] as
compared to Rs 500/-.
In other words shareholders
would receive 2.499% less as
compared to what they would
have received under the current
provisions. Even though
dividend income is exempt in
the hands of shareholders, it will
mainly affect the large number
of small shareholders, whose
income is below exemption limit
or whose taxable income falls
within the tax bracket of 10%.
(i.e. less than Rs 5 lakhs) as
they would have paid tax on
dividend received at a lower
rate.
Further, the total outflow for the
company would also increase
by 2.99% (including surcharge
and education cess)
c) Abolition of Dividend Distribution Tax In order to do away with
dividend was introduced way back in highly unjustified
1997. It was introduced double taxation on
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distribution tax under the basic premise that corporate sector and to
(DDT) it will restrict the exorbitant act as an incentive for
dividends paid by corporate investment in shares to
sector. Further, it would give retail investors, it is
a push to the investments as suggested that it is high
the corporate sector would time to do away with the
prefer to plough back the additional income tax in
profits and put it for fruitful the form of dividend
purposes. Also, it would put distribution tax under
an end to the long drawn and section 115-O of the
cumbersome process of Income-tax Act, 1961.
paper work done by dividend
recipient assessees for In case it is not possible
refund purposes. to remove the dividend
The Finance (No. 2) Act, 2014 Distribution tax, a basic
provided for the rate of dividend exemption limit say 10%
distribution tax to be grossed up of profits/capital be
w.e.f. 1 October, 2014. Thus, provided where the
the effective dividend company distributing
distribution tax rate has Dividend upto 10% is
increased to 17.647% (plus not made liable to DDT.
surcharge and education cess).
Such high rate of DDT has
many problems associated
with it as follows:
DDT is a double taxation of
the same income as it is
calculated after the
corporate tax has been
paid by the company
assessee which is highly
unjustified.
It acts as a disincentive for
the retail investors to put
their money in corporate
stocks and shares. Most
corporate sector in India do
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not prefer to declare
dividend as high rate of
DDT is an impediment and
leaves them with limited
resources after the
distribution. As a result, the
retail investors are not
getting any regular returns
even from profit making
companies and hence are
reluctant to invest their
hard earned money in
shares.
265. TDS on payment a) Section 195(1) of the It is suggested that
made to non- Income-tax Act, 1961 provides a) the fact that any person
residents for the applicability of TDS including individuals,
provisions on "any person" making any payment to
responsible for paying to a non-residents, is liable to
"non-resident" subject to deduct tax at source
exceptions as provided in the should be widely
section. Practically, the fact that publicized by the
every person including Department.
individuals, making any
b) To remove
payment to non-residents, is
administrative hassles,
liable to deduct tax at source is
the payer or the payee
not known to many. There have
should be allowed to issue
been instances where the
certificate for short or
payment of rent is made to a
non-deduction of tax at
non-resident through online
source) Since a benefit
banking by a salaried employee
has been extended to the
who is claiming HRA, without
assessees by way of the
knowing that he is required to
provisions of section 54 to
deduct tax. This not only leads
54F, the same should be
to loss of revenue but also
taken into account by the
causes hardship to the
Assessing officers while
assessee only due to ignorance
issuing certificate of lower
of law, which but of course is
deduction of tax at source
not an excuse.
or no deduction under
b) Section 195(2) provides that section 195 and 197.
where the person responsible
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for paying any sum chargeable
under this Act to a non-resident
considers that whole of such
sum would not be income
chargeable in the case of the
recipient, he may make an
application to the Assessing
officer to determine by general
or special order, the appropriate
portion of sum so chargeable.
Further section 195(3) gives the
recipient an option to make an
application to Assessing Officer
for the grant of certificate
authorizing him to receive any
sum without deduction of tax at
source, subject to the rules
notified in this regard. Making
an application to the Assessing
officer and follow ups thereafter
leads to administrative hassles.
c) The provisions of section 54
to 54F relating to investments
allow the assessee to save tax
on capital gains arising from
transfer of property. However,
such investments are made
over the period of time i.e.
within 6 months or 1 year.
Certain assessees face
hardship on this account since
their income becomes non-
chargeable to tax only after
taking into consideration the
proposed investments. The
issue arises since the
investments proposed to be
made under sections 54 to 54F
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are not taken into account by
the Assessing Officer while
giving a certificate of lower
deduction of tax at source or no
deduction of tax.
266. Validity of The Certificate under section It is suggested that
Certificate issued 197 is at present issued with a a) the certificate should
under section 197 validity date from the date of be issued / application
issue. Though the assessee is should be decided
applying in the month of April, atleast before 15 th
i.e., at the beginning of the June of the financial
financial year, the certificate is year i.e. within three
issued much later. The date of months of
issue is taken as the validity commencement of the
date owing to which, the financial year before
deductors are deducting the tax planning for advance
for the earlier part of tax.
income/payments. By any
b) Such application
reasonable estimate, an
should be disposed
assessee cannot have taxable
off within 30 days.
income for some part of the
financial year and exempt (SUGGESTIONS FOR
income for remaining part of the RATIONALIZATION OF
year. THE PROVISIONS OF
DIRECT TAX LAWS)
267. Mismatch on The non-government deductors In continuation of the
account of majorly comprise of non- above suggestion, the
punching of data corporate sector which is not following is suggested :
very organized. Approximately To avoid such data
less than 6000 assessees are mismatch, it is necessary
listed companies who take the to have a PAN/TAN master
help of professionals to file file for each and every
statements of TDS/TCS in time. deductor. CPC(TDS) may
Approximately, 6,60,000 prepare a software freely
assessees are private limited downloadable for all
Companies, but majority of deductors wherein
them are family organizations or deductor may fill in the
organizations among the details like name, PAN and
friends registered as Private the applicable section/s
Limited companies under for deduction (it may be
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Companies Act. Further, last one section or more than
year there were approximately one).This temporary
18,00,000 tax audit assessees. master file may then be
This clearly reflects that more uploaded back. The
than 66% of the assessees who CPC(TDS) may verify the
are liable to deduct TDS are details so submitted and
non-corporate entities provide the deductor with
comprising of Individuals, error details, if any. The
HUFs, firms etc. In addition to deductor may then rectify
above, certain non corporate the errors and resubmit it.
and NGOs are also mandatorily The process goes on
liable to deduct TDS. unless the Department
The data entry in the non- agrees with the data
corporate sector is majorly done provided by the deductor.
by persons who are not even The final data so
graduates. This has infact lead generated may be stored
to the problem of huge as a master file for that
mismatch of data of the deductor in the database
deductees. There are clerical of the Department.
errors like wrong punching of The deductor while
name details, PAN details, making payment every
Section under which data is month through e-challan
punched and the like. will click on the section for
which payment is to be
made. Once a particular
section is clicked, all the
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 no
tax has been deducted
may be reflected/prefilled
as "0". This will on one
hand enable the deductor
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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)
268. Time limit for TDS Presently, there is no time limit It is suggested to fix a
assessments of specified by the Act for initiating specific time limit for
payments made to & completion of TDS initiating & completing
non-residents proceedings under section 201 TDS proceedings under
of the Act in respect of section 201 of the Act in
payments made to non- respect of payments made
residents. Thus, the TDS to non residents which
returns are scrutinized by the should not be more than 4
assessing officers for past years from the relevant
years without any limit, which financial year.
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.
269. Section 201(1A)- As per the provisions of section It is suggested that
Consequences of 201(1A), interest is charged on interest under section
failure to deduct or monthly basis. Even for delay in 201(1A) should be charged
pay TDS payment or deduction of tax at on daily basis and not on
source by one day, interest is monthly basis or if the
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charged for the whole month. interest is to be charged
Under clause (ii) of section on monthly basis then
201(1A), interest is payable at delay should be rounded
the rate of one and one-half off to the nearest month
percent for every month or part and the present system of
of a month on the amount of considering fraction of
such tax from the date on which month as full month
such tax was deducted to the should be dispensed with.
date on which such tax is It is further suggested that
actually paid. Delay from the interest under clause (ii)
due date of payment to the date of section 201(1A) should
of actual payment is not be charged for the delay
considered. e.g. if the tax was FROM THE DUE DATE OF
deducted on 01/09/2014 the PAYMENT TO THE
same has to be paid by ACTUAL DATE OF
07/10/2014. If the tax was paid PAYMENT.
on 08/10/2014 i.e. only one day (SUGGESTIONS FOR
delay, interest for the two month RATIONALIZATION OF
will be charged i.e. from THE PROVISIONS OF
01/09/2014 to 08/10/2014. It is DIRECT TAX LAWS)
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
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one-two days in payment is not
abnormal and punishing for
such delay by charging interest
for the whole month may not be
appropriate.
270. Section 245Q Vide the Finance Act, 2017, In view of the aforesaid, it
Need for section 245Q has been is suggested that fees for
Rationalisation of amended so as to filing of AAR for direct-tax
filing fees for AAR enlarge/expand the scope of disputes may be brought
Authority for Advance Rulings in line with Indirect-tax
to cover cases relating to dispute since, the matters
central excise, custom duty and are going to be decided by
service tax and thus have single the same authority for
AAR for both Direct and direct-tax and indirect-tax
indirect-tax dispute instead of 2 disputes.
separate benches. Fees for
filing application for advance
Further, since Goods and
ruling for Indirect-tax dispute
Services Tax law has been
amounts to Rs.2500/-. As
made applicable in India
against the same the filing fees
w.e.f. 1.7.2017 replacing
for AAR for direct-tax dispute as
the major indirect tax
per Rule 44E which has been
levies like Central Excise,
increased from Rs.10,000 to
Value Added Tax/Sales
Rs.2 lakhs to Rs.10 lakhs
Tax and the Service Tax
depending on value of
law etc., appropriate
transactions (w.e.f 28
amendments may be
November 2014).
carried out at relevant
places in Income-tax law
eg section 245Q and
section 28 etc.
271. Section 255 Limit Section 255(3) as amended by It is suggested that
of Rs 50 lakhs may the Finance Act, 2016 provides Section 255 dealing with
be made w.r.t. that a single member bench cases which a single ITAT
disputed income may dispose of a case where member can deal may be
instead of total the total income as computed amended so that limit of
income by the Assessing Officer does Rs 50 lakhs may be
not exceed fifty lakh rupees. considered w.r.t.
Earlier the limit was Rs 15 `disputed income' instead
lakhs. The said limit is raised to of Total income.
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Rs 50 lakhs due to increase in
monetary limit for filing appeal
before ITAT and to expedite the
process of dispute resolution at
the level of ITAT. However, to
truly achieve the legislative
intent, instead of total income,
disputed income may be
considered. It would ensure fast
track disposal of litigations of
small amount.
272. Quarterly audit of Since a major part of the In view of the aforesaid, it
TDS compliances income tax revenue is collected is suggested that a
through deduction of tax at provision may be made
source, errors committed at this whereby all transactions
point in time prove costly to the pertaining to TDS
exchequer. Currently withheld provisions are audited by
tax is deposited monthly and a professional once every
TDS statements are furnished quarter before filing of
quarterly. Further there is no TDS statement which will
mechanism as on date to have lead to early detection of
a check on the correct errors and maximizing the
deduction of tax and its revenue to the
payment. A lot of work related government.
to TDS compliances in majority
of the non organized sector is
handled by either graduates or
non professionals who may not
be well versed with the
applicable TDS provisions. The
income tax department is
having limited resources to
check and cross verify all the
TDS statements furnished
quarterly. It is the need of the
hour that the TDS statements
filed quarterly are certified by a
professional to enhance its
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accuracy and thereby
minimizing the loss in revenue
to the government.
273. Taxability of Currently, the National Pension In order to encourage
National Pension Scheme (NPS) works on taxpayers to make
Scheme Exempt, Exempt, Tax (EET) voluntary higher
regime whereby the monthly/ contributions towards
periodic contributions during NPS, it should be made
the pension accumulation more tax-friendly as the
phase are allowed as deduction objective of this scheme is
for Income-tax purposes, the to create a pensionable
returns generated on these society. Accordingly, the
contributions during the tax regime of NPS should
accumulation phase are also be made Exempt, Exempt,
exempt from tax, however, the Exempt (EEE) from the
terminal benefits on exit or current EET regime on the
superannuation, in the form of lines of other retirement
lump sum withdrawals, are schemes like Employee
partially taxable in the hands of Provident Fund and Public
the taxpayer in the year of Provident Fund.
receipt of such amount. An
amendment was introduced by
Finance Act, 2016, wherein
forty percent of the
accumulated corpus upon
withdrawal/ superannuation
was made tax-free whilst
balance corpus of sixty percent
continues to be taxable.
274. Association of Applicability of the CBDT It is suggested that the
Persons vis-à-vis Circular on formation of AOP benefit of this Circular
EPC vis-à-vis the EPC contracts/ should also be extended
contracts/turnkey turnkey projects in case of to AE situations where
projects associate enterprise being a such AEs are members of
member of the consortium the consortium for
The term `Association of executing EPC/turnkey
Persons' (AOP) has not been contracts.
defined in the Act. The issue as
to what constitutes AOP was
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considered by the Supreme
Court in certain cases. The
Supreme Court has observed
that there is no formula of the
universal application so as to
conclusively decide the
existence of an AOP and it
would rather depend upon the
particular facts and
circumstances of each case.
With a view to avoid tax
disputes and to have
consistency in approach while
handling these cases, CBDT
issued a Circular No. 7 of 2016,
dated 7 March 2016 clarifying
that a consortium arrangement
for executing EPC/turnkey
contracts which have the
specified attributes may not be
treated as an AOP. The CBDT
also clarified that there may be
other additional factors also
which may justify that a
consortium is not an AOP, and
the same shall depend upon the
specific facts and
circumstances of a particular
case, which needs to be taken
into consideration while taking
a view in the matter.
However, the Circular states
that it shall not apply where all
or some of the members of the
consortium are Associated
Enterprises (AE) under Section
92A of the Act. In such cases
the AO shall decide whether an
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AOP is formed or not, keeping
in view the relevant provisions
of the Act and judicial
precedents on the issue.
275. TDS credit should Regulation in force TDS credit should be
be allowed solely Section 203 of the Act requires allowed purely on the
on the basis of the deductor of TDS to issue the basis of Form 26AS
Form 26AS and TDS certificate to the deductee (irrespective of the fact
procedural to the effect that tax has been whether the same has
requirements for deducted and specifying the been claimed in the return
issuance of TDS amount so deducted. The or not) and the procedural
certificates (Form deductor has to log in to the requirement for issue or
16 / 16A) should be TDS CPC website and obtaining of TDS
dispensed with download the certificate of the certificate in the Form 16A
deductee and then send such should be dispensed with.
certificate to the deductee. CBDT must ensure that
this is implemented at
ground level and AO grant
The procedural compliance TDS credit as per 26AS
apparently looks easy and very and do not insist for
convenient. However in reality, production of Form 16A.
the deductors and deductees
face numerous difficulties in
practically complying with the
same. These difficulties are
explained as follows:
Practical difficulties faced by
deductor
Every quarter the deductor is
required to login into the TDS
Reconciliation Analysis and
Correction Enabling System
(TRACES) website and
download TDS certificate for all
the deductees and forward the
same to each deductee. In case
deductor is a big organisation
which has deducted TDS for
thousands of parties, it is
required to send the TDS
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certificate through mail or post
separately to each deductee.
Issuing TDS certificate to
thousands of parties every
quarter poses challenges and
also consumes lot of time which
can otherwise be used for
operations of the deductor. This
sometimes leads to incomplete
or non-compliance with issue of
TDS certificates.
Though there are penal
provisions provided under the
Act for non-issuance of TDS
certificate by the deductor, in
practice the AO do not enforce
those provisions.
Practical difficulties faced by
the deductee
It is the deductee who actually
suffers by way of denial of TDS
credit in absence of TDS
certificate and therefore it is a
must for the deductee to
continuously chase each
deductor for issue of TDS
certificate. It may be relevant to
mention here that the AO's do
not always give TDS credit,
especially for years in the past,
on basis of Form 26AS
appearing in the system but
require hard copies of the TDS
certificates.
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Section 199 of the Act and
Rule 37BA of Income-tax
Rules in relation to grant of
TDS credit
Conjoint reading of the Section
199 of the Act and Rule 37BA of
the Rules framed thereunder
suggests that credit for the tax
deduction should be
given/granted on the basis of
information relating to
deduction furnished by the
deductor (i.e. Form 26AS) and
the information in the return of
income of the claimant. The
requisite details in respect of
the tax deducted at source are
available in the Form 26AS. The
taxpayer may furnish the
information relating to tax
deducted at source in the return
of income based on the details
available in Form 26AS leading
to inference that both the
information furnished by
deductor and information in the
return of income are as per
Form 26AS.
CBDT Circulars on issuing of
TDS certificate
The CBDT vide Circular No
3/2011 dated 13 May 2011 and
Circular No 1/2012 dated 9 April
2012 has mandated for all
deductors to issue Form 16A
which is generated from TIN
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(Tax Information Network)
website.
· Further the CBDT in
para 3 of Circular No
3/2011 specifically
mentioned as under:
"3. The Department
has already enabled
the online viewing of
Form No. 26AS by
deductees which
contains TDS details
of the deductee based
on the TDS statement
(e-TDS statement)
filed electronically by
the deductor. Ideally,
there should not be
any mismatch
between the figures
reported in TDS
certificate in Form No.
16A issued by the
deductor and figures
contained in Form
No.26AS which has
been generated on
the basis of e-TDS
statement filed by the
deductor. However, it
has been found that in
some cases the
figures contained in
Form No. 26AS are
different from the
figures reported in
Form No.16A. The
gaps in Form No.
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26AS and TDS
certificate in Form No.
16A arise mainly on
account of wrong data
entry by the deductor
or non-filing of e-TDS
statement by the
deductor. As at
present, the activity of
issuance of Form
No.16A is distinct and
independent of filing
of e-TDS statement,
the chances of
mismatch between
TDS certificate in
Form No.16A and
Form No. 26AS
cannot be completely
ruled out. To
overcome the
challenge of mismatch
a common link has
now been created
between the TDS
certificate in Form
No.16A and Form No.
26AS through a
facility in the Tax
Information Network
website (TIN Website)
which will enable a
deductor to download
TDS certificate in
Form No.16A from the
TIN Website based on
the figures reported in
e-TDS statement filed
by him. As both Form
No.16A and Form
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No.26AS will be
generated on the
basis of figures
reported by the
deductor in the e-
TDS statement filed,
the likelihood of
mismatch between
Form No.16A and
Form No.26AS will
be completely
eliminated".
· CBDT Instruction No.
4/2012 [F. No.
225/34/2011-ITA.II]
dated 25 May 2012
states that " where the
difference between the
TDS claim and
matching TDS amount
reported in AS-26
data does not exceed
Rs Five thousands, the
TDS claim may be
accepted without
verification." CBDT
Instruction 1 / 2012
dated 2 February
2012 and Instruction 2
/ 2011 dated 9
February 2011
provides similarly .
· CBDT Instruction No.
4/2014 [F. No.
225/151/2014/ITA.II]
dated 7 April 2014 at
para (5.2.a) reads "AO
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should verify whether
TDS credits claimed
by the taxpayer are
available in the 26AS .
If the credits are
available in 26AS, a
suitable rectification
order......should be
passed".
· CBDT'S Action Plan for
the First Quarter of FY
2015-16 dated 24
March 2015 refers to
"....(b) Giving credit
for prepaid taxes ,
reflected in Form
26AS post
processing....".
The above clearly demonstrates
that there would not be any
variation between TDS credit
reflecting in the Form 26AS and
TDS credit as per Form 16A.
Further, in addition to these
circulars, the CBDT in Central
Actions plan of 2015 has also
directed to give TDS credit on
the basis of Form 26AS. Thus,
reducing the relevance of Form
16A for the purpose of claiming
TDS credit.
It is requested that CBDT may
call for details of cases in which
TDS credit has been denied on
the basis that credit was
available on the basis of 26AS
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but not on basis of data in
department's system. This
would demonstrate that the
CBDT instructions are not clear
at the ground level. We also
request that once again clear
instructions may be reiterated to
the field officers.
276. Provision for the Under the current tax regime, It is recommended to
employer to there is no provision under the provide for claiming relief
provide tax treaty Act which enables an employer available under the tax
benefits while to consider admissible benefits treaty, at the time of TDS.
calculating TDS under the respective Double
Taxation Avoidance
Agreements (e.g. credit for
taxes paid in another country/
treaty exclusions of income
etc.), while computing tax to be
deducted under Section 192 at
the time of payment of salaries
to employees. Further, the
foreign tax credit rules notified
by the CBDT in June 2016 also
does not contain explicit
provision for providing credit for
taxes paid in another country by
the employer at the time of
deduction of tax on salary
payments.
Due to the above, it creates
cash out-flow issues to the
employees (migrating
employees coming to and
leaving India) who are initially
subject to full TDS by their
employers and thereafter
required to claim refunds on
account of tax treaty benefits
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while filing their income tax
return. Many of these
employees may complete their
assignments and leave India
prior to obtaining their tax
refunds which also creates
hardships with respect to
receiving back the refund
amounts.
277. TDS on monthly Most of the companies record Relief from deduction of
and year end provision entries made towards tax at source should be
various expenditures on a given to the payee on
provision entries
monthly basis to report payments that are accrued
in books of
performance to the parent but are not due and
account entities that are reversed on the represents only a
first day of the subsequent provision made on a
month. While these accruals monthly basis for
are made on a very broad reporting purpose that are
estimate for reporting purposes, reversed on the first day of
the tax officers have been the subsequent month.
insisting to deduct tax on such Further, the relief should
provisional entries. also be given from
Year-end provisions are made deduction of tax at source
by taxpayers to follow accrual on payments for which the
system of accounting. Very payees are not
often provision for expenses at identifiable. The Tribunal
the year-end are made based has also held the same in
on best estimates available with certain cases8.
the taxpayer even if the
supporting invoice is received at
the subsequent date. In certain
instances, even the payees are
not identifiable; however the
year-end provisions are made
by taxpayers.
As per the current tax regime,
tax is required to be deducted
8
Industrial Development Bank of India v. ITO (2007) (107 ITD 45) (Mum) and Dishnet Wireless Limited (ITA
Nos. 320 to 329/Mds/2014) (Chennai)
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on such provisions which often
leads to excess deduction and
deposit of tax, disputes with the
vendor and unnecessary
burden posed on the payer in
carrying extensive
reconciliations .
278. TDS credit should TDS credit should be allowed Instructions could be
be allowed on the on the basis of Form 26AS, issued to the field officers
basis of Form even if the payee has not to accept Form 26AS
26AS, even if the claimed the same in the return based TDS credit claims
payee has not of income (due to non updation during assessment
claimed the same of Form 26AS) but has claimed proceedings (or even after
in the return of TDS credit during the completion of assessment
income (due to assessment proceedings proceedings), subject to
non updation of (during which time the updated the only condition that the
Form 26AS) but TDS credit is reflected in Form taxpayer furnishes
has claimed TDS 26AS) evidence that the
credit during the Options available for claiming corresponding income
assessment TDS credit to the taxpayer had been shown in the
proceedings income tax return.
(during which time A taxpayer claims credit of TDS
the updated TDS on the basis of TDS figures
Instructions should also
credit is reflected reflected in Form 26AS at the
time of filing the return of income. be issued for processing
in Form 26AS)
of rectification application
Continuous update of Form filed by the taxpayer under
26AS section 154 of the Act for
revising its claim for credit
Later on, the figures of TDS of TDS as per updated
reflected in Form 26AS Form 26AS
undergoes change owing to This would save
update/revision of TDS returns by
substantial time of the tax
tax deductor, thereby taxpayer
officers and taxpayers.
needs to claim such enhanced
credit of tax deducted by This taxpayer friendly
deductor on behalf of taxpayer. measure would not cause
Taxpayer has following options to any loss to the revenue.
avail such enhanced tax credit.
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Filing of Revised Return
A taxpayer can claim enhanced
tax credit by filing of revised
return within the time specified for
filing of revised return. However,
Form 26AS may keep on
changing/enhancing post filing of
revised return and hence there is
still a need for taxpayer to lodge
additional claim for tax credit.
Filing of enhanced claim of
TDS credit as per updated
Form 26AS during the course
of assessment proceedings
Once the time limit for filing the
revised return expires, the option
to claim such enhanced TDS
credit is to lodge the claim during
the course of assessment
proceedings along with the
necessary supporting evidence.
However, some of the AO's do
not accept such claims during
assessment proceedings and
mention that taxpayer should
have claimed it in the revised
return of income. The tax payer is
unable to claim the said
enhanced TDS credit as the time
limit for filing the revised return is
already lapsed. Then the other
option left with the taxpayer is:
· Filing of rectification
application - In case the
relevant assessment has
already been completed,
the request for Form 26AS
based increased TDS credit
claim by way of rectification
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under section 154 is denied
on the ground that the
same has not been claimed
in the revised return of
income.
· Approach CBDT under
section 119(2)(b) of the Act
for the said claim
However as per Circular
No. 9/2015 dated 9 June,
2015, the taxpayer has to
forgo interest on eligible
refunds under this section
and hence not a suitable
option for taxpayer.
Problems faced by the
taxpayer
The taxpayer has to file a revised
return with the figure of tax credit
appearing in the Form 26AS at
the time of filing the revised
return. However, this figure
changes as the Form 26AS gets
updated during the time of
assessment proceedings. Thus,
the taxpayer has to first file a
revised return and then again
request for the updated tax credit
as per the revised Form 26AS
during the assessment
proceedings. However, as stated
above the AOs do not accept the
said claim and accordingly, the
taxpayer has to approach CBDT
under section 119(2)(b) of the
Act. Filing of revised return to
claim TDS credit already
appearing in Form 26AS and/or
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approaching CBDT under section
119(2)(b) of the Act, would only
be procedural formalities which
may not serve any useful
purpose but would claim lot of
time of taxpayers and the tax
officers.
Further in a situation where
intimation under Section 143(1)
of the Act is issued subsequent to
the filing of return of income,
where no proper assessment
proceedings have taken place,
there is no mechanism for the
taxpayer to make a claim for TDS
credit.
279. Limits for various Currently following is the limit It is recommended to
salary related for certain tax free allowances: enhance these limits to the
allowances Salary Existing following:
Sr.
exempt from tax Componen exemptio
No S. Salary Recomme
t n limit N Component nded
Medical Rs o exemptio
1
Reimburs 15,000 n limit
ements p.a.
1 Medical Rs 50,000
2 Children Rs 100 Reimburse p.a.
Education per ments
Allowance month 2 Children Rs 500
per child Education per month
Children Rs 300 Allowance per child
3
Hostel per 3 Children Rs 1,500
Allowance month Hostel per month
per child Allowance per child
4 Lunch / Rs 50
refreshme per meal 4 Lunch / Rs 100
nt perks refreshmen per meal
t perks (i.e.
(i.e. Meal
Meal
Coupons) Coupons)
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These limits have been fixed
more than a decade ago.
280. Lower deduction TDS CPC has been one of the It is proposed that
certificate u/s 197 successful projects of the TRACES site should
through TRACES Government for online tracking develop an utility to do the
Site of the Tax deducted, deposited, above calculation for
corrections and reconciliations. issuing such certificate in
Now with this system the govt. time bound manner. The
is tracking the default and existing Form 13 should
issuing online notices and be modified accordingly
communication for immediate and various fields related
correction and payment of to returned income, tax
shortfall as the case may be. paid, tax deducted should
be automatically linked
with the data already
However one area of TDS
available in the TRACES
relating to lower Tax deduction
Site. As all tax Returns are
certificates (LDC's) issued by
being E filed also the tax
the jurisdictional tax authority is
audit reports are being
another area field which needs
uploaded on the system
to move online.
the information is already
in the public domain, it is
As per the prevailing practice merely a question of
an assessee has to file form 13 putting proper links and
requesting the officer handling checks to cross verify the
TDS for a LDC. The officer calls details fed by the
for information relating to assessee ( the onus is on
Returned/assessed income assesse self-certification
from the assessee and finds out ). In case there is some
the average rate at which tax is discrepancy the system
paid by the assessee. Based on should throw up the
this rate, he issues LDC. Thus defaults/ errors which
it is only an arithmetical need to attended by the
calculation which is based on tax payer and resubmit the
the data which is already form.
available with the department in
its computer systems.
This will be in line with the
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government's keenness to
increase the use of
technology in service
delivery to public and also
save a lot of time/ trouble
involved in obtaining a
lower rate certificate for
TDS. Additionally, as a
part of go green initiative
the requirement of issuing
of TDS certificates should
be dispensed with, going
ahead.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 449
The Institute of Chartered Accountants of India
ANNEXURE I
Sr. Section Limit (A) (Rs.) Year of Suggestive
No. introduction/ last limit as per
modification current CII
(Rs)
a) Workmen 500,000.00 April,1976 10,00,000
compensation- (Notification no.
10(10B) 10969 dt. 25-6-
1999)
b) Leave 300,000.00 May,2002 5,00,000
encashment-
10(10AA)
c) Voluntary 500,000.00 April,2001(amended) 10,00,000
Retirement or
termination-
10(10C)
d) Entertainment Exempt least of the following: April,2002(amended 12,000
Allowance i)5000 )
16(ii) ii)20% of Basic salary
iii)amount actually received
e) Hilly Area 3,000
Compensatory Rs. 800 p.m.
all.
f) Section 17 Motor car (perquisite) : Circular 15/2001, A)3,968/5,290
(A) Car owned by employee: dated Dec 12,2001
If car is partly used for official &
partly for private purpose:
Actual expenditure
Less: Amount of office use (ie
1800 pm if engine does not
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 B)
employer:
(i)If car is partly used for
official & partly for private
Page 450 Pre-Budget Memorandum 2018 (Direct Taxes and International Tax)
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purpose: 1800 pm if engine
does not 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 (ii)
official & partly for private 1,323/1,984
purpose & maintenance
expenses (private use) borne
by employee: Rs.600 pm if
engine does not exceed 1.6 lt or
Rs. 900 pm if exceeds 1.6 ltr
and Rs. 900 pm if chauffeur is
provided.
g) Lunch/refreshment (perk): Circular 15/2001, 110
Cost to employer in excess of dated Dec 12,2001
Rs.50 per meal Less:
recovered from employee
h) Interest free or concessional Circular 15/2001, 50,000
loans: Small loans uptoRs. dated Dec 12,2001
20,000 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.
i) Gift, voucher or token in lieu of Circular 15/2001, 11,000
gift: Rs.5000 dated Dec 12,2001
j) Section 64(1A) Income of minor: Rs. 1500 April,1993 5,000
[Deduction u/s
10(32)]
k) Section 80C Rs. 1,50,000 April,2015 (inserted Rs. 2,00,000
by Finance (No.2)
Act 2014
l) Section Rs.40,000 or actual April,2004 (inserted i)1,00,000 ii)
80DDB expenditure} whichever is by Finance (No.2) 1,50,000
lower (others) Act 1996
Rs.60,000 or actual
expenditure} whichever is
lower (senior citizen)
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 451
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m) Section Rs.3,00,000 or whole of such April,2004 5,00,000
80QQB income whichever is lower
n) Section Rs.3,00,000 or whole of such April,2004 5,00,000
80RRB income whichever is lower
o) Section 80TTA 10,000.00 April,2013 15,000
All Deposits
p) Section 80P Interest Income -Rs.20,000 April,1968 i) 48,278
Profit-Rs.50,000/Rs.1,00,000 April,1999(Substitut ii)3,00,000/1,
(Consumer cooperative) ed) 50,000
q) First Schedule Rs. 2,50,000 April,2015 (inserted Rs. 3,00,000
to the Finance by Finance (No.2)
Act Act 2014
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Annexure A
Sr. No Country Eligibility Applicability Others
1. Japan · The Consolidated Tax The amount of consolidated Under the
Return System (CTRS) taxable income and tax consolidated
applies to a domestic parent liability is computed by taxation
corporation and its 100% aggregating the separate system, the
domestic subsidiaries. taxable incomes of the parent
· Foreign companies are members of the company files
excluded. consolidated group and and pays the
adjusting for intercompany consolidated
transactions, net operating tax and each
losses, dividends received, subsidiary
donations etc. bears joint and
several liability
for the tax
payment
2. France · At least 95% of the share · Each member of the · If a member
capital and the voting rights consolidated group company
of the subsidiary must be (parent company leaves the
held directly, or indirectly, included), in particular, consolidated
by the parent company of must first assess its tax group, the
the group. separate taxable income adjustments
· Also, currently applicable to as if it was taxed on a previously
(i) foreign companies in stand-alone basis. A made at the
respect of their permanent number of special rules, level of the
establishments in France however, apply at this consolidated
subject to French corporate stage income may
tax, provided that at least · The group's taxable be
95% of that foreign income will, afterwards, reassessed
company's capital is held by be computed by the according to
a French parent company group's parent company. the standard
and (ii) French subsidiaries The latter will totalize the rules and,
held through a foreign positive and negative tax accordingly,
parent company situated in results of all group give rise to
the European Union, members and, additional
Norway or Iceland subsequently, make the taxation in the
necessary adjustments hands of the
like neutralization of intra- departing
group asset or share company.
transfers, intra-group · The
dividends etc. consolidated
tax group
regime allows
the parent
company to
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 453
The Institute of Chartered Accountants of India
become the
only entity
liable for tax
assessed on
the profits
and losses by
all the
companies,
which are
members of
the group.
This regime
requires also
to neutralize,
for corporate
tax purposes,
certain
transactions
within the
group.
3. Singapore · To qualify for the group The loss items that can be · Consolidated
relief scheme, companies transferred and order of returns are
must be, amongst others, transfer are as follows: not permitted
incorporated in Singapore - current year and each
and be atleast 75% owned, unabsorbed company is
directly or indirectly by capital required to
another company in the allowances; file a
group that is incorporated in - current year separate
Singapore and must have unabsorbed trade corporate tax
the same accounting year. losses; and return.
· However,
- current year
there is a
unabsorbed
group relief
donations.
system in
place under
which current
year
unabsorbed
losses,
capital
allowances
and
donations of
one qualifying
company can
be set off
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against the
profits of
another
qualifying
company.
4. USA (i) the parent corporation of The net operating losses of · The common
the group must own directly some members of the parent is
80% or more of the stock of at group can be used to offset responsible
least the taxable income of other for filing the
one subsidiary in the group members of the group, and consolidated
and transactions between group corporate
(ii) each other subsidiary in members, such as income tax
the group must be 80% or intercompany sales and return for the
more directly owned by the dividends, are generally group
parent and/or other deferred or eliminated until · The common
subsidiaries in the group. there is a transaction parent is the
outside the group. sole agent of
the
consolidated
group for
purposes of
dealing with
the IRS and
the US Tax
Court on all
matters
relating to the
tax liability of
the group. In
addition, the
IRS may deal
directly with a
subsidiary
member with
respect to its
liability for the
consolidated
income tax of
the group.
5. Australia · A Consolidated group · Consolidated groups file · Once the
consists of a head company a single tax return and head
and all of the wholly owned calculate their taxable company
resident subsidiary income or loss ignoring elects to form
members of the group, all intra - group a tax
includes Partnership transactions. consolidated
group, the
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· The wholly owned · Generally, losses can be head
subsidiaries of a foreign transferred to the group company
resident company may also only if the losses could becomes
choose to form a have been used outside primarily
consolidated group known the group by the entity responsible
as MEC (Multiple entry seeking to transfer them. for income
consolidated) · Once a subsidiary tax debts of
· A choice to consolidate is member of a group the entire
not revocable. transfers a loss, it is no consolidated
longer available for use group.
by the subsidiary, even if However, all
the subsidiary members of
subsequently leaves the the group
group. have joint and
several
liability for
income tax
debts of the
entire group,
including
penalties and
general
interest
charges.
· Transfer of
losses
between
group
companies
are not
allowed from
1 July, 2003
with certain
exceptions.
·A tax
consolidated
group is
treated as
one tax
payer.
Special
notification is
required in
respect of
formation,
admission of
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new
members,
etc.
6. Spain · The controlling company of · If tax consolidation is · All the
the tax group must hold a granted, profits and consolidated
75% or higher interest, losses within the group companies
either directly or indirectly, are eliminated must have
and the majority of the · Losses derived from the the same
voting rights in the transfer of a company closing date,
companies forming the tax which ceases to be part and the
group of the consolidated group financial
· It is possible to consolidate must be reduced by the period may
Spanish entities without a amount of any taxable not exceed
common Spanish owner, losses previously 12 months.
insofar as the non-resident generated by the The
owner of the shares in all transferred company and consolidation
those entities does not which had been already must be
reside in a tax haven and utilized by the group. approved in
meets certain conditions to the
be deemed the parent shareholders'
company (inter alia, a 75% annual
(70% if listed) participation general
in all entities). meeting of
· A PE may qualify as each of the
controlling company if non companies
resident entity does not involved,
reside in a tax heaven. including both
controlling
and
dependent
companies.
· Consolidation
is permitted
for an
indefinite
period,
provided that
the group
meets the
prescribed
requirements.
· When the
consolidation
period
expires,
whether
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 457
The Institute of Chartered Accountants of India
because a
company
leaves the
group or it is
disbanded,
any
remaining
losses or
credits are
generally
attributed to
the affiliated
companies in
proportion to
their
contribution
to the loss or
credit
7. United · A "group" normally means · Group Relief:- · There is
Kingdom two or more UK resident Group relief is a mechanism generally a
companies where the that allows members of a `degrouping'
parent company owns corporation tax loss relief charge if the
beneficially whether group to share the benefit of company
directly or indirectly at certain corporation tax leaves a 75%
least 75% of the subsidiary losses. One member of the group within 6
company or companies group can surrender these years.
· A consortium consists of UK losses to another member · The Group
resident companies which of the group, which can Member to
each own 5% or more and, deduct the loss from its total whom a tax
together, own at least 75% profits, thus reducing the refund is due,
of the ordinary share capital amount of corporation tax can surrender
of a UK resident trading or payable. that refund to
holding company · Consortium Relief:- another
Consortium relief is an member of
extension of group relief that group.
that allows the surrender of · There is no
losses between companies general
owned by a consortium and provision in
the members of that UK tax
consortium. legislation for
There is no automatic use consolidated
of group relief. It must be group tax
claimed in each period and treatment.
is entirely voluntary. However,
there are
certain reliefs
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which apply
to groups and
consortia of
companies.
· Each
Company in a
group is
taxed as a
separate
entity, subject
to the rules
prescribed.
Pre-Budget Memorandum 2018 (Direct Taxes and International Tax) Page 459
ABOUT DIRECT TAXES COMMITTEE AND
COMMITTEE ON INTERNATIONAL TAXATION OF ICAI
The Institute of Chartered Accountants of India (ICAI) is a statutory
body established under the Chartered Accountants Act, 1949 to
regulate the profession of Chartered Accountants in India. During its
more than six decades of existence, ICAI has achieved recognition as a
premier accounting body not only in the country but also globally, for
its contribution in the fields of education, professional development,
maintenance of high accounting, auditing and ethical standards. ICAI
now is the second largest accounting body in the whole world.
The Council of ICAI functions through various Standing and Non-
Standing Committees. Direct Taxes Committee and the Committee on
International Taxation are amongst the most important non-Standing
Committee's of ICAI. The main functions of these Committees is to
examine the laws , rules, regulations, circlars, notifications etc. relating
to Direct tax and international taxation which may be enacted or issued
by the Government from time to time and to send suitable memoranda
containing suggestions for improvements in the respective legislation.
The Direct Taxes Committee and the Committee on International
Taxation are actively involved in the process of formulation of budget
by offering pre-budget and post-budget suggestions/ comments to
simplify tax laws and their administration for the purpose of making it
more responsive to tax payers.
Direct Taxes Committee and the Committee on International Taxation
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
ICAI Bhawan, Indraprastha Marg, Post Box No. 7100, New Delhi - 110 002
Email: dtc@icai.in and citax@icai.in
Website: www.icai.org
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