The Finance Act, 2017

1       Background

          Shri Arun Jaitley, the Finance
Minister, presented his Fourth Budget with the Finance, Bill 2017, in the Lok
Sabha on 1^st February, 2017. This was a departure from the old
practice inasmuch as that this year’s Budget was presented to the Parliament on
the first day of February instead of the last day and the Railway Budget was
now merged with the General Budget. Thus, the Railway Minister has not
presented a separate Railway Budget.

          After some discussion, the Parliament
has passed the Budget with some amendments to the Finance Bill, 2017 as
presented. The President has given his assent to the Finance Act, 2017, on 31^st
March, 2017. There are in all 150 Sections in the Finance Act, 2017, which
include 89 sections which deal with amendments in the Income-tax Act, 1961, the
Finance Act, 2005 and the Finance Act, 2016.

1.1     During the Financial year 2016-17, the
Parliament passed the Constitution Amendment Act paving the way for introduction
of Goods and Services Tax (GST) legislation to replace the existing Excise
Duty, customs Duty, Service Tax, value Added Tax etc., GST council has
been constituted and it is hoped that GST will be introduced effective from 1^st
July, 2017. Another major step taken by the Government during the financial
year 2016-17 was demonetisation of high denomination bank notes with a view to
eliminate corruption, black money and fake notes in circulation.

1.2     In Financial Year 2016-17, two Income
disclosure schemes were introduced by the Government with a view to enable
persons, who had not disclosed their unaccounted income to declare the same and
get immunity from rigorous penalty and prosecution provisions under the
Income-tax Act. The first disclosure scheme was provided in the Finance Act,
2016, and was in force from 01-06-2016 to 30-09-2016. The second scheme was
provided by the Taxation (Second Amendment) Act, 2016 which was in force from
17-12-2016 to 31-03-2017.

1.3     In Para 181 of the Budget Speech, the Finance
Minister has stated that the net revenue loss due to Direct Tax proposals in
the Budget is about Rs. 20,000/- crore. There is no significant loss or gain in
any of the indirect tax proposals.

1.4     In this article, some of the important
amendments made in the Income-tax Act by the Finance Act, 2017, are discussed.
Most of the amendments have only prospective effect. Some of the amendments
have retrospective effect.

2.      Rates of Taxes:

2.1     In the case of an Individual, HUF, AOP etc.,
following changes are made w.e.f. A.Y. 2018-19 (F.Y. 2017-18)

(i)  The rate of tax in the first slab of Rs. 2.50
lakh to Rs. 5.00 lakh has been reduced from 10% to 5%. Similarly, in the case
of a Senior Citizen the rate of tax in the first slab of Rs. 3.00 Lakhs to
Rs.  5.00 lakh will now be 5% instead of
the existing rate of 10%. This will give some relief to assessees in the lower
income group. There is no change in the rates of tax in other two slabs or in
the rate of Education Cess which is 3% of tax

(ii) Section 87A granting rebate upto Rs. 5,000/- to
a Resident Individual if his total income does not exceed Rs. 5 lakh has been
reduced from A.Y. 2018-19 in view of the above relief in tax. It is now
provided that the maximum rebate available under this section shall not exceed
Rs. 2,500/- and that such rebate will be available only if the total income
does not exceed Rs. 3.50 lakh.

(iii) At present, the rate of Surcharge is 15% of the
tax if the total income of an Individual, HUF, AOP etc., is more than
Rs. 1 crore. In view of the reduction in the rate of tax in the first slab, as
stated above, it is now provided that a surcharge of 10% of the tax will be
chargeable if the income of such an assessee is more than Rs. 50 lakh but less
than Rs.1 crore. If the income exceeds Rs. 1 crore, the existing rate of 15%
will continue.

2.2     In the case of a domestic company, the
rates of tax for A.Y. 2018-19 (F.Y. 2017-18) will be as under:

(i)  Where the total turnover or gross receipts of
a company does not exceed Rs. 50 crore, in F.Y. 2015-16, the rate of tax will
be 25%. It may be noted that in A.Y. 2017-18 (F.Y. 2016-17) where the turnover
or gross receipts of a company did not exceed Rs. 5 crore., in F.Y. 2014-15,
the rate of tax was 29%.

(ii) In case of all other companies the rate of tax
will be 30%.

(iii) There is no change in the rate of surcharge or
education cess.

2.3     In the case of a Domestic company which is
newly set up on or after 1.3.2016, engaged in the business of manufacturing or
production etc., the rate of tax will be 25% subject to the conditions
laid down in section 115 BA of the Income-tax Act. This concessional rate is
applicable at the option of the company as provided in the above section. This
section was inserted by the Finance Act, 2016.

2.4     In the case of a Firm (including LLP),
Co-operative Society, Foreign Company or Local Authority, there is no change in
the rates of Income tax, Surcharge and Education Cess. Similarly, there is no
change in the rate of tax on book profit of a Company as provided in section
115JB.

2.5     Last year, a new section 115BBDA was
inserted in the Income tax to provide for levy of tax at the rate of 10% (Plus
applicable Surcharge and Education Cess) on the Dividends in excess of Rs. 10
lakh received from Domestic companies by any resident Individual, HUF or a Firm
(including LLP). This section is now amended to provide that, w.e.f. A.Y.
2018-19, this tax of 10% will be payable by all resident assessees, excluding
domestic companies and certain funds, public trusts, institutions referred to
in section 10(23C) (iv) to (via) and public trusts registered u/s. 12AA. This
will mean that this additional tax of 10% on dividends received in excess of
Rs. 10 lakh will be payable in A.Y. 2018-19 and subsequent years by all
resident Individuals, HUF, Firms, LLPs, Private trusts, AOP, BOI, foreign
companies etc. The exemption is given to only domestic companies and
certain public recognised trusts.

3.      Tax Deduction and collection at source:

3.1     TDS from Rent (New Section 194-1B) –
Increase in obligation of Individuals and HUF’s

          At present, section 194-I provides
that an Individual or HUF who is liable to get his accounts audited u/s. 44AB
should deduct tax from Rent if the amount exceeds Rs.1,80,000/- per year. Now,
section 194-1B is inserted w.e.f. 1.6.2017 which provides that any Individual
or HUF who is not covered by section 194-I (Tenant) will have to deduct tax at
source at the rate of 5% from payment of rent for use of any building or land
or both if such rent exceeds Rs. 50,000/- per month or part of the month. This
tax is to be deducted at the time of credit of rent for the last month of the
Financial Year. If the premises are vacated by the tenant earlier during the
year, the tax is to be deducted from rent of the month in which the premises
are vacated. Thus, the deduction of tax is to be made only once in the last
month of the relevant year or last month of the tenancy. The tax deductor is
not required to obtain Tax Deduction Account Number (TAN). The person receiving
the rent will have to furnish his PAN to the tenant. If PAN is not provided,
the tax will have to be deducted at the rate of 20% of the rent. It may be
noted that the amount of tax required to be deducted at the rate of 20% should
not exceed the rent payable for the last month of the relevant year or the
month of vacating the premises. The obligation under this section applies to a
lessee, sub-lessee, tenant, sub-tenant etc.

3.2     TDS from consideration payable u/s.
45(5A) – New section 194-1C:

          New section 194-1C is inserted w.e.f.
1.4.2017 to provide that tax at the rate of 10% shall be deducted from the
monetary consideration payable to a resident in the case of a Joint Development
Agreement (JDA) to which section 45(5A) is applicable.

3.3     TDS from fees payable to Professionals –
Section 194-J:

          Section 194-J is amended w.e.f.
1.6.2017 to provide that in the case of a payment to a person engaged in the
business of operation of Call Centre, the rate of TDS shall now be 2% instead
of 10%.

3.4     TDS from payment on Compulsory
Acquisition – Section 194-LA:

          This section is amended w.e.f.
1.4.2017 to provide that no tax shall be deducted at source from compensation
payable pursuant to an award or agreement made u/s. 96 of Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013.

3.5     TDS from Insurance Commission – Section
194D:

          Under Section 194D, the rate for TDS
from Insurance Commission is 5% if such commission exceeds Rs. 15,000/-. In
order to give relief to Insurance Agents, section 197A is now amended w.e.f.
1.6.2017 to provide that an Individual or HUF can file self-declaration in Form
15G / 15H for non-deduction of tax at source in respect of Insurance Commission
referred to in section 194D. Therefore, an Insurance Agent who has no taxable
income can now take advantage of this amendment.

4.      Exemptions and Deductions:

4.1     Exemption on partial withdrawal from
National Pension Scheme (NPS) New section 10(12B)

          At present withdrawal from NPS is
chargeable u/s. 80CCD(3) on closure or opting out of the NPS subject to certain
conditions. Section 10(12A) provides that 40% of the amount payable on such
closure or opting out of NPS. Now, new section 10(12B) provides that if an
employee withdraws part of the amount from NPS according to the terms of the
Pension Scheme, exemption will be allowed to the extent of the Contribution
made by him. This benefit will be available from A.Y. 2018 – 19 (F.Y. 2017-18)
onwards.

4.2     Income of Political Parties – Section
13A:

          At present, political parties
registered with the Election Commission of India are exempt from paying Income
tax subject to certain conditions provided in section 13A. This section is
amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide as under:

(i)  No donation of Rs. 2000 or more shall be
received by a Political Party otherwise than an account Payee Cheque, bank
draft or through Electoral Bonds.

(ii) Political Party will have to compulsorily file
its return of income as provides in section 139(4B) on or before the due date.

          Thus, even if a donation of Rs. 2000/-
or more is received in cash or its Income tax Return is not filed in time, the
Political Party shall lose its exemption u/s. 13A.

          A new Scheme of issuing Electoral
Bonds is to be framed by RBI. Under the scheme, a person can buy such Bonds and
donate to a Political Party. Such Bonds can be enchased by the Political party
through designated Banks. It will not be necessary for the Political party to
maintain record about the name, address etc. of donors of such Bonds
consequential amendments are made in the Reserve Bank of India Act, 1934 and
the Representation of the People Act, 1951.

4.3     Deduction of Donations – Section 80G:

          At present, section 80G (5D) provides
that no deduction for donation u/s. 80G will be allowed the amount of donation
exceeding Rs. 10,000/- is in cash. This limit is now reduced to Rs. 2,000/- by
amendment of the section w.e.f. A.Y. 2018-19 (F.Y. 2017-18). Therefore, if
donation of more than Rs. 2,000/- is given in cash, deduction u/s. 80G will not
now be available.

4.4     Deduction to Start-Up Companies – Section
80 -IAC:

          At present, section 80-IAC provides
that eligible Start-ups-incorporated between 1.4.2016 to 31.3.2019 can claim
100% deduction of the profit earned for 3 consecutive years. This claim can be
made in any 3 years out of the first five years from the date of incorporation.
This period of 5 years has been extended to 7 years by amendment of the section
to provide relief to start-up companies. Thus, an eligible Start-up company can
claim the deduction u/s. 80-1AC in respect of profits for any 3 years out of 7
years from the date of its incorporation.

4.5     Deduction in respect of affordable Housing
Projects – Section 80 IBA:

          This section was enacted last year by
the Finance Act, 2016, w.e.f. 2017-18. It provides for deduction of 100% of the
income from affordable Housing Projects approved during the period 1.6.2016 to
31.3.2019 subject to certain conditions. By amendment of this section w.e.f.
1.4.2017, some of the conditions are related as under:

(i)  Under the existing section, the eligible
project should be completed within 3 years. This period is now increased to 5
Years.

(ii) The reference to “Built-up Area” in the section
is changed to “Carpet Area”. Therefore, it is now provided as under:

(a) If the project is located within cities of
Chennai, Delhi, Kolkata or Mumbai the carpet are of the residential Unit cannot
exceed 30 Sq. Mtrs.

(b) For other places (including at places located
within 25 Kilometers of the cities mentioned in (a) above) the carpet are of
the residential Unit cannot exceed 60 sq. Mtrs. It may be noted that other
conditions in existing section 80 – IBA will have to be complied with for
claiming the deduction provided in the section.

5.      Charitable Trusts:

          Some
of the provisions relating to the exemption granted to public Charitable
Trusts, University, Educational Institutions, Charitable Hospital etc.,
u/s. 10(23C), 11 and 12A have been amended w.e.f. A.Y. 2018 – 19 (F.Y. 2017-18)
with a view to make them more stringent. These amendments are as follows:

(i)  Under the existing provisions of section 11,
the corpus donations given by one trust to another trust were considered as
application of income in the hands of donor trust. Further, the recipient trust
was able to claim the exemption in respect of such corpus donations without
applying them for charitable or religious purposes. In order to curb such a
practice, amendment of the section provides that any corpus donation out of the
income to any other trust or institution registered u/s./12AA shall not be
treated as application of income of donor trust for charitable or religious
purposes.

(ii) Similar amendment has been made in section
10(23C) in respect of corpus donations given by any fund, trust, institution,
any university, educational institution, any hospital or other medical
institution referred to in Section 10(23C)(iv) to (via) or to any other trust
or institution registered u/s./12AA.

(iii) It may be noted that the above restriction
applies to corpus donation given by a trust from its income to another trust.
This restriction does not apply to a donation given by one trust to another
trust out of the corpus of the donor trust.

(iv) At present, there is no explicit provision in
the Act which mandates the trust or institution to approach for fresh
registration in the event of adoption of new object or modifications of the
objects after the registration has been granted. Section 12A has now been
amended to provide that the trust shall be required to obtain fresh
registration by making an application to CIT within a period of thirty days
from the date of such adoption or modifications of the objects in the prescribed
Form.

(v) Further, the entities registered u/s. 12AA are
required to file return of income, if the total income without giving effect to
the provisions of sections 11 and 12 exceeds the maximum amount which is not
chargeable to income-tax. A new clause (ba) has been inserted in section 12A
(1) so as to provide for a further condition that the trust shall furnish the
return of income within the time allowed u/s. 139 of the Act. In case the
return of income is not filed by a trust in accordance with the provisions of
section 139(4A), within the time allowed, the trust or institution will lose
exemption u/s. 11 and 12.

6.      Income from House Property:

6.1     At present, section 23(4) provides that if
an assessee owns two or more houses, which are not let out, he can claim
exemption for one house for self occupation. For the other houses, he has to
pay tax by determining the ALV on notional basis as provided in section 23(1)
(a). In the cases of CIT vs. Ansal Housing Construction Ltd 241 Taxman
418(Delhi) and CIT vs. Sane and Doshi Enterprises 377 ITR 165 (Bom),
it has been decided that this provision is applicable in respect of houses held
as Stock-in-trade by the assessee. In order to give relief to Real Estate
Developers, section 23 is amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18). By this
amendment, it is provided that if the assessee is holding any house property as
his stock-in-trade which is not let out for the whole or part of the year, the
Annual Value of such property will be considered as NIL for a period upto one
year from the end of the financial year in which the completion certificate is
obtained from the Competent Authority. This new provision will benefit the Real
Estate Developers. It may be noted that this relief cannot be claimed by other
assessees who do not hold the house property as their stock-in-trade.

6.2     Section 71 provides that Loss under any
head of income (Other than Capital Gains) can be set off against income from
any other head during the same year. Therefore, loss under the head “Income
from House Property” can be set off against income under any other head of
Income. Section 71 is now amended to provide that any loss under the head
income from house property which is in excess of Rs. 2 lakh in any year will be
restricted to Rs. 2 lakh. In other words, an assessee can set off loss under
the head income from house property in A.Y. 2018-19 and onwards only to the
extent of Rs. 2 lakh in the year in which loss is incurred. The balance of the
loss can be carried forward for 8 assessment years and set off against income
from house property as provided in section 71B. This amendment will adversely
affect those cases where, on account of high interest rates on housing loans,
the assesses have to suffer loss in excess of Rs. 2 lakh in any year.

7.      Income from Business or profession:

7.1     Provision for Doubtful Debts – Section
36(1) (viia) – At present, specified banks are allowed deduction upto 7.5%
of the total income, computed in the specified manner, if they make provision
for doubtful debts. From the A.Y. 2018-19 (F.Y. 2017-18) this limit is
increased to 8.5% by amendment of section 36(1)(viia).

7.2     Determination of Actual Cost – Section
43(1) and 35AD(7B) – Where any asset on which benefit of section 35AD is
taken is used for any purpose not specified in that section, the deduction
granted under the section in earlier years will be deemed to the income of the
assessee. There was no provision for determination of actual cost of the asset
in such cases. In order to clarify this position, an amendment is made in
Explanation 13 of section 43(1) to provide that in such cases the actual cost
of the asset shall be the actual cost, as reduced by the depreciation which
would have been allowed to the assessee had the asset been used for the
purposes of the business since the date of its acquisition. Although this
amendment is effective from A.Y. 2018-19, since it is a clarificatory
amendment, it may be applied with retrospective effect.

7.3     Maintenance of Books – Section 44 AA
– This section requires a person carrying on Business or Profession to maintain
books of accounts in the manner specified in the section. At present such
person has to comply with this requirement if his income exceeds Rs. 1.20 lakh
or his turnover or gross receipts exceed Rs. 10 lakh in any one of the three
preceding years. In order to reduce compliance burden in the case of an
individual or HUF carrying on a business or profession, these monetary limits
are increased from A.Y. 2018-19 (F.Y. 2017-18) in respect of income from Rs. 1.20
lakh to Rs. 2.50 lakh and in respect of turnover or gross receipts from Rs. 10
lakh to Rs. 25 lakh .

7.4     Tax Audit u/s. 44 AB in Presumptive Tax
Cases – Finance Act, 2016, had raised the threshold limit for turnover in
cases of persons eligible to take advantage of section 44AD from Rs. 1 crore to
Rs. 2 crore w.e.f. A.Y 2017-18. However, the limit for turnover for tax audit
u/s. 44AB was not increased in such cases. Section 44AB has now been amended
w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to provide that in the case of a person who
opts for the benefit of section 44 AD, the threshold of total sales turnover or
gross receipts u/s. 44AB will be Rs. 2 crore. In other words, such person will
not be required to get his accounts audited u/s. 44AB for F.Y. 2016-17 and
subsequent years.

7.5     Presumptive Taxation – Section 44AD
– An assessee who is eligible to claim the benefit of presumptive taxation u/s.
44AD can offer to pay tax by estimating his income at the rate of 8% of his
sales turnover or gross receipts if such turnover / gross receipts do not
exceed Rs. 2 crore. In order to encourage digital transactions, this section is
amended w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to provide that the profit presumed
to have been earned in such cases shall be 6% (instead of 8%) of the gross
turnover or gross receipts which are received by account payee cheque, bank
draft or any other electronic media during the financial year or before the due
date for filing return of income u/s. 139(1). In respect of the balance of the
turnover / gross receipt the rate of presumptive profit will continue to be at
the rate of 8%.

7.6     Tax on Carbon Credits – Section 115BBG
– As per the Kyoto Protocol, carbon credits in the form of Certified Emission
Reduction (CER) Certificate are given to entities which reduce the emission of
Greenhouse gases. These credits can be freely traded in the market. Currently,
there are no specific provisions in the Act to deal with the taxability of the
income from carbon credits. However, the same is being treated as business
income and taxed at the rate of 30% by the Income-tax Department. There are
some conflicting decisions (Refer TS-141 (Ahd), 365 ITR 82 (AP) and 385 ITR 592
(Kar). In order to clarify the position, a new section 115BBG has been inserted
to tax the gross income from transfer of Carbon Credit at the rate of 10% plus
applicable surcharge and cess. No expenditure will be allowed from such income.
This section will come into force w.e.f. A/Y:2018-19 (F.Y:2017-18).

8.      Measures to discourage Cash Transactions:

          One of the themes, as stated in the
Budget Speech of the Finance Minister this year, was to encourage Digital
Economy in our country. In Para 111 of the Budget Speech he had stated that
promotion of a digital economy is an integral part of Governments strategy to
clean the system and weed out corruption and black money. To achieve this goal
some amendments are made in the various sections of the Income-tax Act which
will be effective from 1^st April, 2017. In brief these amendments
are as under:

8.1     Section 35AD – This section provides
for investment linked deduction of capital expenditure incurred for specified
business, subject to certain conditions. This section is now amended to provide
that any capital expenditure exceeding Rs. 10,000/- paid by the assessee in a
day, otherwise than by an account payee cheque, bank draft or any electronic
media will not be allowed as deduction.

8.2     Section 40A(3) and (3A) – Under this
section, any payment of expenses in excess of Rs. 20,000/-, in a day, is not
allowed as a deduction in computing income from business or profession unless
such payment has been paid by account payee cheque, bank draft or any
electronic media. This section is now amended and the limit of Rs. 20,000/-
is reduced to Rs. 10,000/-. Thus, payments in excess of Rs. 10,000/- made in
cash to any party, in a day, will be disallowed from A.Y. 2018-19
(F.Y. 2017-18).

8.3     Section 80G – At present, deduction
u/s. 80G for any eligible donation is not allowed if such donation in excess of
Rs. 10,000/- is paid in cash. This limit is reduced to Rs. 2,000/- by amendment
of section 80G. Therefore, all donations to eligible public trusts in excess of
Rs. 2,000/- will have to be made by account payee cheque, bank draft or any
electronic media.

8.4     Section 13A – As stated earlier, a
political party, claiming exemption u/s. 13A, cannot receive any donation in
excess of Rs. 2,000/- in cash.

8.5     Section 43(1) – This section deals
with determination of actual cost of a capital asset used in a business or
profession. In order to curb cash transactions, this section is amended w.e.f.
1.4.2017 to provide that capital expenditure in excess of Rs. 10,000/- paid, in
a day, otherwise than by an account payee cheque, bank draft or through
electronic media shall be ignored for calculating the cost of the asset
acquired by the assessee. Therefore, payments made for purchase of an asset,
payments to a labourer or similar payments for transport or installation of a
capital asset, if made in cash, in excess of Rs. 10,000/-, in a day, will not
form part of the cost. Thus, the assessee will not be able to claim
depreciation on such amount.

8.6     Section 44AD – As stated earlier,
with a view to encourage digital economy section 44AD (1) has been amended
w.e.f. A/Y: 2017-18 (F.Y: 2016-17).  A
person carrying on business in which the Sales Turnover or Gross Receipts do
not exceed Rs. 2 crore has option to pay tax on presumptive basis by estimating
net profit @ 6% of such turnover or gross receipts if the amount received is in
the form of account payee cheque, bank draft or any electronic media. This will
encourage small traders covered by this presumptive method of taxation to make
their sales through digital mode.

8.7    Curb on Cash Transactions – Sections 269ST,
271 DA and 206C (1B)

(i)       New Section 269ST: A new section
269 ST has been inserted in the Income-tax Act. This section has come into
force on 1.4.2017. The section provides that no person shall receive Rs. 2 lakh
or more, in the aggregate, from another person, in a day, or in respect of a
single transaction or in respect of transactions relating to one event or
occasion in cash. In other words, all such transactions have to be made by
account payee cheques, bank draft or any electronic media. It is, however, provided
that this section shall not apply to amount received by a Government, Bank,
Post Office, Co-operative Bank, transactions referred to in section 269 SS and
such transactions as may be notified by the Central Government. By a press note
dated 5.4.2017 the CBDT has clarified that this section will not apply to
withdrawal of Rs. 2 lakh or more from one’s Bank account. This section applies
to all persons whether he is an assessee or not.

(ii)      New Section 271DA: This is a new
section inserted in the Income-tax Act w.e.f. 1.4.2017. It provides for levy of
penalty equal to the amount received by the person in contravention of the
above section 269ST. This penalty can be levied by a Joint Commissioner of
Income tax. If the person is able to prove that there was good and sufficient
reason for such receipt of money, no penalty may be levied. Readers may note
that the test “good and sufficient reason”, is a sterner test than “reasonable
cause “.

(iii)     Section 206C(1D) and (1E): In view
of the introduction of the above two sections the requirement of collection of
tax at source u/s. 206C(1D) on sale consideration for sale of Jewellery in
excess of Rs. 5 lakh and other goods and services in excess of 2 lakh has been
deleted.

9.      Income from Other Sources:

9.1     Section 56(2) (vii) and (viia) : The
concept of taxation of Gifts received in the form of money or property, in
excess of Rs. 50,000/-, from non-relatives has been introduced in section 56(2)
(vii) some years back. This was extended to receipt of shares of closely held
companies by a firm or a closely held company at prices below market value u/s.
56(2) (viia). These provisions operated in a restricted field. In order to
widen to scope of these sections, substantive amendments are made in the
section. Therefore, operation of the provisions of these sections are now
restricted upto A.Y. 2017-18 (F.Y. 2016-17).

9.2     New Section 56(2)(x) – Effective
from 1.4.2017, section 56(2)(x) has now been inserted. This section will
replace sections 56(2)(vii) and 56(2)(viia). The new section provides that any
receipt by a person of a sum of money or property, without consideration or for
inadequate consideration, in excess of Rs. 50,000/-, shall be taxable in the
hands of the recipient under the head “Income from Other Sources”. There are,
however, certain exceptions provided in the section. This new provision will
now cover all persons, whether he is an Individual, HUF, Firm, Company, AOP,
BOI, Trust etc, and tax will be payable by them if any money or property is
received by the person and the aggregate value of such property is in excess of
Rs. 50,000/-.

9.3     The exceptions provided in section 56(2)
(x) are more or less the same as provided in existing section 56 (2) (vii).
Therefore, any receipt (a) from a relative, (b) on the occasion of the marriage
of the Individual, (c) Under a will or by way of inheritance, (d) in
contemplation of death of the payer or donor, (e) from a Local Authority, (f)
from or by a public trust registered u/s. 12A or 12AA, or an University, educational
institution, hospital or medical institution referred to in section 10(23C),
(g) by way of a transactions not regarded as transfer u/s. 47(i), (vi), (via),
(viaa), (vib), (vic), (vica), (vicb), (vid) or (vii) and (h) from an Individual
by a trust created or established solely for the benefit of relatives of the
Individual will not be taxable u/s. 56(d)(x). It may be noted the expressions
“Relative”, “Fair Market Value”, “Jewellery”, “Property”, “Stamp Duty
Valuation” etc., in the section shall have the same meaning as in the
existing section 56(2)(vii).

9.4     The effect of this new section 56(2)(x) can
be, briefly, explained as under:

(i)  Existing section 56(2)(vii) applied to only
gifts received by an Individual or HUF. New section will now apply to gifts
received by an Individual, HUF, Company, Firm, LLP, AOP, BOI, Trust (excluding
public trusts and private trust for relatives) etc.

(ii) Existing section 56(2) (viia) applied to a
closely held company, Firm, or LLP receiving shares of a closely held company
without consideration or for inadequate consideration. New section will apply
to any gift received by a company (whether closely held or listed company) Firm
or LLP in the form of shares of a closely held or a listed company, or a sum of
money, or any movable or immovable property.

(iii) New section exempts gifts from Local Authority
as defined in section 10(20). It is for consideration whether capital subsidy
received by a Company, Firm, LLP, AOP, Trust etc. from a Government will
now become taxable.

(iv) Similarly, if any movable or immovable property
is given to a company, Firm, LLP, AOP, Trust etc., by the Government, at
a concessional rate, the same may become taxable in the hands of the recipient.

(v) Gift by any Individual to a trust for his relatives
is exempt under this section. However, no exemption is provided in respect of a
gift received from a company, Firm , LLP etc., by a trust created for
the benefit of the its employees or others. Therefore, such gifts may now
become taxable under the new section.

(vi) In respect of an existing family trust, various
clauses of the trust deed giving benefits to beneficiaries will have to be
examined before making any further gift to the trust. If any benefit is given
to a non-relative, such further gift on or after 1.4.2017 will be taxable in
the hands of the Trust.

(vii)Any
Bonus Shares received by a Shareholder from a company may now be considered as
receipt without consideration. This may lead to litigation, and the CBDT should
come out with a clarification in this regard.

(viii)Any
Right shares issued to a shareholder by a company at a price below its market
value may be considered as a movable property received for inadequate
consideration.

(ix) From the wording of the Section, it is possible
that a view may be taken that in the case of transfer of capital asset (a) by a
company to its wholly owned subsidiary company, (b) by a wholly owned
subsidiary company to its holding company, (c) on conversion of a proprietary
concern or a firm into a company or (d) on conversion of a closely held company
into LLP as referred to in section 47(iv), (v), (xiii), (xiib) and (xiv) the
tax will be payable by the transferee under this new section on the difference
between the fair market value of the asset and the value at which the transfer
is made. This will be unfair as the transferor is exempt from tax and the cost
in the hands of the transferor is to be considered as cost in the hands of the
transferee under sections 47 and 49. This certainly is not the intent of
section 56(2)(x). The issue may arise because while the transaction is not a
transfer for the purposes of section 45, section 56 does not contain any
specific exclusion.

9.5     Consequential amendment is made in section
2(24) to provide that any gift which is taxable u/s. 56(2)(x) shall be deemed
to be “income” for the purposes of the Income-tax Act. Consequential amendment
is also made in section 49(4) to provide that for computing the cost of
acquisition of the asset received without consideration or for inadequate
consideration will be determined by adopting the market value adopted for levy
of tax u/s. 56(2)(x).

9.6     Section 58 – This section gives a
list of some of the payments which are not deductible while computing income
under the head “Income from Other Sources”. It is now provided that, with
effect from A.Y. 2018-19 (FY 2017-18), the provisions of section 40(a) (ia)
providing for disallowance of 30% of the amount payable to a resident if TDS is
not deducted. Similar provision exists for disallowance of expenditure for
computing income under the head income from business or profession.

10.    Capital Gains:

10.1   Section 2(42A) – This section defines
the term “Short Term Capital Asset” to mean a capital asset held by the
assessee for less than 36 months preceding the date of its transfer. There are
some exceptions to this rule provided in the section. Third proviso to
this section is now amended w.e.f. A.Y 2018-19 (F.Y. 2017-18) to provide that a
Capital Asset in the form of Land, Building or both shall be considered as a
short – term capital asset if it is held for less than 24 months. In other
words, the period of holding any Land / Building for the purpose of
consideration as long term capital asset is reduced from 36 months to 24
months.

10.2   Sections
2(42A), 47 and 49 – At present, there is no specific exemption from levy of
capital gains tax on conversion of Preference Shares of a company into Equity
Shares. Section 47 has now been amended w.e.f. AY 2018-19 (F.Y. 2017-18) to provide
that such conversion shall not be treated as transfer. Consequently, section
2(42A) has also been amended to provide that the period of holding of the
equity shares shall include the period for which the preference shares were
held by the assessee. Similarly, section 49 has been amended to provide that
the cost of acquisition of equity shares shall be the cost of preference
shares.

10.3   Sections 2(42A) and 49 – Last year,
section 47 was amended to provide that transfer of Unit in a consolidating plan
of a mutual fund scheme by a unit holder against allotment of units in the
consolidated plan under that scheme shall not be regarded as taxable transfer.
However, consequential amendments were not made in sections 2(42A) and 49.
Therefore, these sections are now amended w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to
provide that the period of holding of the unit shall include the period for
which the units were held in the consolidating plan of the M.F. Scheme.
Similarly, the cost of acquisition of the units allotted to the unit holder
shall be the cost of units in the consolidating plan.

10.4   Joint Development Agreement – Section
45(5A) (i) This is a new provision introduced from 1.4.2017, with a view to
bring clarity in the matter of taxation of joint development of any property
(land, building or both). Section 45(5A) provides that if an Individual or HUF
enters into a registered agreement (specified agreement) in which the owner of
the property allows another person to develop a real estate project on such property
in consideration of a share in such property, the capital gain shall be
chargeable to tax in the year in which the completion certificate is issued by
the competent authority for whole or part of the project. It may be noted that
the above consideration may be wholly by way of a share in the constructed
property or partly in such share and the balance in the form of monetary
consideration. In respect of the monetary consideration, the developer will
have to deduct tax at source @ 10% u/s 1941C. It may so happen that monetary
consideration is paid at the time of registration of the agreement whereas the
share in the constructed property may be received after 2 or 3 years. In such a
case, the assessee will be able to claim credit for TDS only in the year in
which capital gain becomes taxable when the completion certificate is received.

(ii)  It is also provided in the above section that
the full value of the consideration in respect of share in the constructed
portion received by the assessee shall be determined according to the stamp
duty valuation on the date of issue of the completion certificate.
Consequently, amendment is made in section 49 to provide that the cost of the
property received by the assessee under the above agreement shall be the stamp
duty value adopted for the computation of capital gains plus the monetary
consideration, if any.

(iii)  It is further provided that, in case the
assessee transfers his share in the project on or before the date of issue of
the completion certificate, the capital gain shall be chargeable in the year in
which such transfer takes place. In such a case, the stamp duty valuation on
the date of such transfer together with monetary consideration received shall
be deemed to be the full value of the consideration.

(iv) It may be noted that the above provision
applies to an Individual or HUF. Therefore, if such joint development agreement
is entered into by a Company, Firm, LLP, Trust etc. the above provision
will not apply.

10.7   Section 48 – Exemption from Capital Gains
tax is at present granted to a non-resident investor who has “Subscribed” to
Rupee Denominated Bonds issued by an Indian Company. This exemption is granted
is respect of foreign exchange gains on such Bonds. From the A. Y. 2018-19
(F.Y. 2017-18), this exemption can also be claimed by a non-resident who is
“holding” such Bond.

10.8   Shifting the base year for cost of
acquisition of a capital asset – Section 55

(i)  This section provides that where the assessee
has acquired a capital asset prior to 1.4.1981, he has an option to substitute
the fair market value as on that date for the actual cost. The amendment to
this section now provides that from the A.Y. 2018 – 19 (F.Y. 2017-18) if the
assessee has acquired the asset prior to 1-4-2001, he will have option to
substitute the fair market value on that date for the actual cost.

(ii) Consequently, section 48 has also been amended
to provide that indextion benefit will now be available in such cases with
reference to the fair market value of the asset as on 1.4.2001. Consequent
amendment is also made for determining indexed cost of improvement of the
capital asset.

10.9   Long term Capital Gains Tax. Exemption –
Section 10(38) (i) At present, Long term capital gain on transfer of equity
shares of a company is exempt u/s 10(38) where Securities Transaction Tax (STT)
is paid at the time of sale. In order to prevent misuse of this exemption by
persons dealing in “Penny stocks”, this section is amended w.e.f. A.Y 2018-19
(F.Y. 2017-18) to provide that this exemption will now be granted in respect of
equity shares acquired on or after 1-10-2004 if STT is not paid at the time of
acquisition of such shares.  However, it
is also provided that such exemption will be denied only to such class of cases
as may be notified by the Government. Therefore, cases in which this exemption
is not given will be liable to tax under the head long term capital gain.

(ii)  It may be noted that the Government has issued
a draft of the Notification on 3-4-2017 which provides that the exemption u/s.
10(38) will not be available if equity shares are acquired by the assessee
under the following transactions on or after 1.10.2014 and no STT is paid at
the time of purchase of equity shares.

(a)  Where acquisition of listed equity share in a
company, whose equity shares are not frequently traded in a recognised stock
exchange of India, is made through a preferential issue other than those
preferential issues to which the provisions of chapter VII of the Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009 does not apply:

(b)  Where transaction for purchase of listed
equity share in a company is not entered through a recognised stock exchange;

(c)  Acquisition of equity share of a company
during the period beginning from the date on which the company is delisted from
a recognised stock exchange and ending on the date on which the company is
again listed on a recognized stock exchange in accordance with the Securities
Contracts (Regulation) Act, 1956 read with Securities and Exchange Board of
India Act, 1992 and any rules made thereunder;

          Considering the intention behind this
amendment, it can safely be presumed that clause (b) of the above notification
refers to purchase of equity shares of a listed company whose shares are not
frequently traded.

10.10  Full
Value of Consideration – New Section 50CA             (i)  This is a new section which is inserted
w.e.f. A.Y. 2018-19 (F.Y. 2017-18). It provides that where the consideration
for transfer of shares of a company, other than quoted shares, is less than the
fair market value determined in the manner prescribed by Rules, such fair
market value shall be considered as the full value of consideration for the
purpose of computing the capital gain. For this purpose the term “Quoted Share”
is defined to mean share quoted on any recognised stock exchange with
regularity from time to time, where the quotation of such share is based on
current transaction made in the ordinary course of business.

(ii) This new provision will have far reaching
implications. It may be noted that section 56(2)(x) provides that where a
person receives shares of a company (whether quoted or not) without
consideration or for inadequate consideration, he will be liable to tax on the
difference between the fair market value of the shares and the actual
consideration. This will mean that in the case of a transaction for transfer of
shares of the unquoted shares the seller will have to pay capital gains tax on
the difference between the fair market value and actual consideration u/s. 50CA
and the purchaser will have to pay tax on such difference under the head income
from other sources u/s. 56(2) (x).

(iii) It may be noted that this section can be
invoked even in cases where an assessee has transferred for inadequate
consideration unquoted shares to a relative or transferred such shares to a
trust created for his relatives although such a transaction is not covered by
section 56(2)(x).

(iv) In the case of Buy-Back of shares by a closely
held company if the consideration paid by the company to the shareholder is
below the fair market value as determined u/s 50CA, this section may be invoked
to levy capital gains tax on the shareholder on the difference between the fair
market value and the consideration actually received by him.

10.11  Section 54EC – At present investment of
long term capital gain upto `50 lakhs can be made in Bonds of National High
Authority of India or Rural Electrification Corporation Ltd., for claiming
exemption. By amendment of this section it is provided that the Government may
notify Bonds of other Institutions for the purpose of investment u/s. 54EC to
claim exemption from capital gains.

10.12  Section 112(1)(c)(iii) –  In the case of a Non-resident the rate of tax
on long term capital gain on transfer of shares of unlisted companies is
provided in this section if the assessee does not claim the benefit of the
first and second proviso to section 48. This benefit was available
w.e.f. 1.4.2017 as provided in the Finance Act, 2016. By amendment of this
provision the benefit is given from 1.4.2013.

11.    Minimum Alternate Tax (MAT):

11.1   Section 115JB (2) provides for the manner in
which Book Profits of a Company are to be calculated. This is to be done on the
basis of the audited accounts prepared under the provisions of the Companies
Act 1956. Since, the Companies Act, 2013 (Act), has replaced the 1956 Act,
reference to 1956 Act is now modified and reference to relevant provisions of
2013 Act are made.

11.2   Impact of Ind AS – Section 129 of the
Companies Act provides that the financial statements shall be in the form as
may be provided for different class or classes of companies as per Schedule III
to the Act. This Schedule has been amended on 6/4/2016 and Division II has been
added. Instructions for preparation of financial statements and additional
disclosure requirements for companies required to comply with Ind AS have been
given in this part of Schedule III. The form of Statement of Profit and Loss is
also given. In the light of these changes, the provisions of section 115JB have
been amended by inserting new sub-sections (2A) to (2C) which are applicable to
companies whose financial statements are drawn up in compliance with Ind AS.
Since the Ind AS are required to be adopted by certain companies from financial
year 2016-17 onwards and by other companies in 2017-18 onwards, the following
adjustments are to be made in the computation of ‘book profit’ from the
assessment year 2017-18 onwards;

(i)   Section 115JB (2A) provides that any item
credited or debited to Other Comprehensive Income (OCI) being ‘items that will
not be reclassified to profit or loss’ should be added to or subtracted from
the ‘book profit’, respectively. It is also provided that for the following
items included in OCI, viz., Revaluation surplus for assets in accordance with
Ind AS 16 and Ind AS 38 and gains or losses from investment in equity
instruments designated at fair value through OCI as per Ind AS 109 the amounts
will not be added to or subtracted. However, it will be added to or subtracted
from ‘book profit’ in the year of realisation/disposal/retirement or otherwise
transfer of such assets or investments. Further, this section provides for
addition to or reduction from the book profit of any amount or aggregate of the
amounts debited or credited respectively to the Statement of Profit and Loss on
distribution of non-cash assets to shareholders in a demerger as per Appendix A
of the Ind AS 10. 

(ii)  Section 115JB (2B) provides that in the case
of resulting company, if the property and liabilities of the undertaking(s)
being received by it are recorded at values different from values appearing in
the books of account of the demerged company immediately before the demerger,
any change in such value shall be ignored for the purpose of computing of book
profit of the resulting company.

(iii)  Section 115JB (2C) provides that the ‘book
profit’ in the year of convergence and subsequent four previous years shall be
increased or decreased by 1/5^th of transition amount. The term
‘transition amount’ is defined to mean the amount or the aggregate of the
amounts adjusted in Other Equity (excluding equity component of compound
financial instruments, capital reserve and securities premium reserve) on the
convergence date but does not include (a) Amounts included in OCI which shall
be subsequently reclassified to the profit or loss; (b) Revaluation surplus for
assets as per Ind AS 16 and Ind AS 38; (c) Gains or losses from investment in
equity instruments designated at fair value through OCI as per Ind AS 109; (d)
Adjustments relating to items of property, plant and equipment and intangible
assets recorded at fair value as deemed cost as per Paras D5 of Ind AS 101; (e)
Adjustments relating to investments in subsidiaries, joint ventures and
associates recorded at fair value as deemed cost as per para D15 of Ind AS 101:
(f) Adjustments relating to cumulative translation differences of a foreign
operation as per para D13 of Ind AS 101.

(iv) Proviso to section 115JB (2C) further
provides that the effect of the items listed at (b) ;to (e) above, shall be
given to the book profit in the year in which such asset or investment is
retired, disposed, realised or otherwise transferred. Further, the effect of
item listed at (f) shall be given to the book profit in the year in which such
foreign operation is disposed or otherwise transferred.

(v)  The term ‘year of convergence’ means the
previous year within which the convergence date falls. The terms ‘convergence
date’ means the first day of the first Ind AS reporting period as per Ind AS
101.

        The above amendments are applicable
with effect from AY 2017-18 (F.Y:2016-17).

11.3   Extension of period for availing of MAT
and AMT credit Section 115JAAand 115JD: Under the existing provisions of
section 115JAA, credit for Minimum Alternate Tax (MAT) paid by a company u/s.
115JB is allowable for a maximum of ten assessment years immediately succeeding
the assessment year in which the tax credit becomes allowable. Similarly, for
non-corporate assessees liable to Alternate Minimum Tax (AMT) u/s.115JC, credit
for AMT is allowable for maximum of ten assessment years as per section 115JD.
Both the sections 115JAA and 115JD are amended and the period of carry forward
of MAT/AMT Credit is increased from 10 years to 15 years.

11.4   Restriction of MAT and AMT credit with
respect to foreign tax credit (FTC) – Section 115JAA and section 115JD have
been amended to provide that if the Foreign Tax Credit (FTC) allowed under
sections 90 or 90A or 91 against MAT or AMT liability, is more than the FTC
admissible against the regular tax liability (tax liability under normal
provisions), such excess amount of FTC shall be ignored for the purpose of
calculating MAT or AMT credit to be carried forward.

12.    Transfer Pricing:

12.1   Domestic Transfer Pricing – Section 92BA –
At present, payments by an assessee to certain “Specified Persons” u/s. 40A(2)
(b) were subject to transfer pricing reporting requirement u/s. 92BA. Sections
92,92C, 92D and 92E applied to such transactions if they exceeded Rs. 20 crore.
The assessee was required to obtain audit report u/s. 92E in Form 3CEB for such
transactions. This provision is now deleted from A.Y. 2017-18 (F.Y. 2016-17).
However, the provisions of section 92BA will continue to apply to transactions
referred to in sections 801A, 801A(8), 801A (10), 10AA etc., as stated
in section 92BA (ii) to (vi).

12.2   Secondary Adjustments in Income – New Section
92CE –

(i)   This is a new section inserted w.e.f. AY.
2018-19 (F.Y. 2017-18). This section provides for Secondary adjustment in
certain cases. Such adjustment is to be made by the assessee where primary
adjustment to transfer price is made (a) Suomoto by the assessee in his
return of income; (b) Made by the Assessing Officer which has been accepted by
the assessee; (c) Determined by an advance pricing agreement entered into by
the assessee u/s. 92CC; (d) Made as per the safe harbor rules framed u/s. 92CB;
or (e) Arising as a result of resolution of an assessment by way of the mutual
agreement procedure under an agreement entered u/s. 90 or 90A for avoidance of
double taxation.

(ii)  The terms ‘primary adjustment’ and ‘secondary
adjustment’ have been defined in section 92CE(3).

(iii)  Where, as a result of the primary adjustment,
there is an increase in the total income or reduction in the loss of the
assessee, the assessee is required to repatriate the excess money available
with the associated enterprise to India, within the time as may be prescribed.
If the repatriation is not made within the prescribed time, the excess money
shall be deemed to be an advance made by the assessee to such associated
enterprise and the interest on such advance, shall be computed as the income of
the assessee, in the manner as may be prescribed.

(iv) This section shall not apply where the primary
adjustment in any year does not exceed Rs. 1 crore.

(v)  This section will not apply to assessment year
2016-17 and earlier years. The wording of the section is such that the section
may apply to assessment year 2017-18.

12.3   Concept of Thin Capitalisation – New
Section 94.B – This is a new section inserted w.e.f. A.Y. 2018-19 (F.Y.
2017-18) – It provides that, where an Indian Company or permanent establishment
of a foreign company in India, being a borrower incurs any expenditure by way
of interest or of similar nature exceeding Rs. 1 crore and where such interest
is deductible in computing income chargeable under the head “Profits and Gains
from Business or Profession” in respect of debt issued by a non-resident, being
an associated enterprise of such borrower, deduction shall be limited to 30 per
cent of EBITDA (earnings before interest, taxes, depreciation and amortisation)
or interest paid, whichever is less. It is also provided that for the purpose
of determining the debt issued by the non-resident, the funds borrowed from a
non-associated lender shall also be deemed to be borrowed from an associated
enterprise if such borrowing is based on implicit or explicit guarantee of an
associated enterprise. It is, further, provided that interest which is not
deductible as aforesaid, shall be allowed to be carried forward for 8
assessment years immediately succeeding the assessment year in which the interest
was first computed, to be set-off against income of subsequent years subject to
overall deductible limit of 30 %. These provisions shall not apply to entitles
engaged in Banking or Insurance business.

13.    Return of Income:

13.1   Section 139 (4C) – This Section is
amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide that Trusts or
Institutions which are exempt from tax u/s. 10(23AAA) Fund for welfare of
Employees, section 10(23EC) and (23 ED) Investors Protection Fund, 10(23EE)
Core Settlement Guarantee Fund, and 10 (29A) Coffee Board, Tea Board, Tobacco
Board, Coir Board, Spices Board etc., shall have to file their returns
within the time prescribed u/s. 139 if their income (Without considering the
exemption under the above sections) is more than the
taxable limit.

13.2   Revised
Return of Income – Section 139(5) – At present return of income filed u/s.
139(1) or 139 (4) can be revised u/s. 139(5) before the expiry of one year from
the end of the relevant assessment year or before the completion of the
assessment. This time limit is now reduced by one year and it is provided that
from A/Y:2018-19 (F.Y: 2017-18) return u/s. 139(5) can be revised before the
end of the relevant Assessment Year. Therefore, an assessee can revise his
return u/s. 139(5) for A.Y. 2017-18 upto 31.3.2019 whereas return for A.Y.
2018-19 can be revised on or before 31.03.2019 u/s 139(5).

13.3   Quoting of Aadhaar Number – New Section 139AA
– This is a new section which has come into force w.e.f. 1.4.2017. It provides
for quoting for Aadhaar Number for obtaining PAN and in the Return of Income.
Briefly stated, the section provides as under.

(i)   Every person who is eligible to obtain
Aadhaar Number has to quote the same on or after 1.7.2017 in (a) the
application for allotment of PAN and (b) the return of income. Thus in the
return of income filed on or after 1.7.2017 for A.Y. 2017-18 or a revised
return u/s. 139(5) failed for A.Y. 2016-17 it will be mandatory to quote
Aadhaar Number.

(ii)  If a person has not received Aadhaar Number,
he will have to quote the Enrolment ID of Aadhaar application issued to him.

(iii)  Every person who is allotted PAN as on
1.7.2017 and who is eligible to obtain Aadhaar Number, will have to intimate
his Aadhaar Number to such authority on or before the date to be notified by
the Government in the prescribed form.

(iv) If the above intimation as stated in (iii)
above is not given, the PAN given to the person shall become invalid.

(v)  The provisions of this section shall not apply
to such persons as may be notified by the Central Government.

          As Non-Residents, HUF, Firms, LLP,
AOP, Companies etc. are not eligible to get Aadhaar Number this section
will not apply to them.

13.4   New Section 234F – (i) This is a new
section inserted w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide for payment of a
fee payable by an assessee who delays filing of return of income beyond the due
date specified in section 139(1). The fee payable in such cases is as follows:

(ii)      The above fee is payable mandatorily
irrespective of the valid reasons for not furnishing return within the due
date. As a result of levy of fee, the penalty leviable u/s. 271F for failure to
furnish return of income will not be leviable.

(iii)     The consequential amendment is also made in
section 140A to include a reference to the fee payable u/s. 234F. Therefore,
the assessee is required to pay tax, interest as well as fee before furnishing
his return. Section 143(1) has also been amended to provide that in the
computation of amount payable or refund due on account of processing of return,
the fee payable u/s. 234F shall be taken into account.

(iv)     This Fee is payable in respect of return of
income for A.Y. 2018-19 and onwards. It is necessary to make a representation
to the Government that there is no justification for such a levy of Fee when
section 234A provides for payment of interest at the rate of 1% PM or part of
the month for the period of the delay in submission of the return of income.
Further, section 239(2)(c) provides that a Return claiming Refund of Tax can be
filed within one year of the end of the assessment year. Therefore, persons
filing return of income claiming refund due to excess payment of advance tax or
TDS will be penalized by this provision of mandatory payment of Fee even if
they file the return claiming refund u/s. 239(2)(c) within one year from the
end of the assessment year.

14.    Assessments, Reassessments and Appeals:

14.1   Section
143(1D) : At present, it is not mandatory to process the return of income
u/s. 143(1) if notice u/s.143(2) is issued for scrutiny assessment. This
section is now amended to provide that, from the A.Y. 2017-18 onwards, the
processing of the returns and issuance of refunds u/s. 143(1) can be done even
if notice u/s. 143(2) is issued. It may, however, be noted that a new section
241A is inserted, from A.Y. 2017-18 to give power to the Assessing officer to withhold
the refund till the completion of assessment u/s. 143(2) if he is of the
opinion that granting the refund will adversely affect the revenue. For this
purpose, he has to record reasons and obtain prior approval of the Principal
CIT.

14.2   Section 153(1) – The existing time
limit for completion of assessment reassessment, re-computation etc., is
revised by amendment of section 153 (1) as under. Such time limit is with
reference to the number of months from the end of assessment year.

          Where a reference is made to the TPO,
the time limits for assessment will be increased by 12 months.

          Similar time limits have been
prescribed u/s. 153 A and 153B for completion of assessments in search cases.
It may be noted that the time limit of 2 years u/s. 245A (Settlement Commission
Cases) is also reduced as provided in section 153(1).

14.3   Foreign Tax Credit – Section 155(14A) A
new sub-section (14A) is inserted in section 155 w.e.f. A.Y. 2018-19 (F.Y.
2017-18) to enable an assessee to claim credit for foreign taxes paid in cases
where there is a dispute relating to such tax. Now section 155(14A) provides
that, where credit for income-tax paid in any country outside India or a
specified territory outside India referred to in sections 90, 90A or section 91
has not been given on the grounds that the payment of such tax was under
dispute, the Assessing Officer shall rectify the assessment order or an
intimation u/s. 143(1), if the assessee, within six months from the end of the
month in which the dispute is settled, furnishes evidence of settlement of
dispute and evidence of payment of such tax along with an undertaking that no
credit in respect of such amount has directly or indirectly been claimed or
shall be claimed for any other assessment year. It is also provided that the
credit of tax which was under dispute shall be allowed for the year in which
such income is offered to tax or assessed to tax in India.

14.4   Authority
for Advance Ruling (AAR) – Chapter XIX – B – With a view to promote ease of
doing business, various sections in Chapter XIXB dealing with Advance Rulings
by AAR have been amended w.e.f. 1.4.2017. By this amendment, the AAR will now
be able to give Advance Rulings relating to Income tax, Central Excise, Customs
Duty and Service Tax. It is possible that this provision will be extended to
GST also after this new tax is introduced by merging Excise, Customs, Service
Tax, VAT etc. Accordingly, consequential amendments are made in the
other sections. Further, amendments are made in the sections dealing with
appointment of Chairman, Vice-Chairman and other members of AAR.

14.5   Advance Tax Instalments – Section 211
– This section is amended w.e.f. A.Y. 2017-18 to provide that an assessee
engaged in a professional activity and opting for taxation on presumptive basis
u/s. 44ADA can pay Advance Tax in a single instalment on or before 15^th
March instead or usual 4 instalments. Thus, the benefit at present enjoyed by
the assessees covered u/s. 44AD is extended to those covered by section 44ADA.
Further, section 234C is amended to provide that in such cases interest will be
payable on shortfall of Advance tax only for one instalment due in March.

14.6   Interest on shortfall in Advance Tax –
Section 234C –  At present,
difficulty is experienced in paying Advance Tax instalments on dividend income
taxable u/s. 115 BBDA as the timing of declaration of dividend is uncertain.
Therefore, the first proviso to section 234C is now amended with effect from AY
2017-18, to provide that interest shall not be chargeable in case of shortfall
on account of under-estimation or failure to estimate the taxable dividend as
long as advance tax on such dividend is paid in the remaining instalments or
before the end of the financial year, if dividend is declared after 15^th
March of that year.

14.7   Interest on Refund of TDS – Section
244(1B) – Sub-section (1B) is added w.e.f. 1.4.2017 to provide for payment
of interest by the Government on refund of TDS. It is now provided that
interest @ 0.5% per month or part of the month shall be paid for the period
beginning from the date on which the claim for refund of TDS in Form 26B is
made, or, where the refund has resulted from giving effect to an order of any
appellate authority, from the date on which the tax is paid, till the date of
grant of refund. However, no interest will be paid for any delay attributable
to the deductor.

15.    Search, Survey and Seizure:

15.1   Sections 132 and 132A – Under sections
132(1) and 132(1A) if the specified authority has ‘reason to believe’ about
evasion of tax by any assessee he has power to pass order for search. Section
132(1) is now amended w.e.f. 1.4.1962 and section 132(1A) is amended w.e.f.
1.10.1975 to provide that the specified authority is not required to disclose
these reasons to the assessee or any appellate authority i.e CIT(A) or ITA
Tribunal. Similar amendment is made in section 132A(1) dealing with requisition
of books of account, documents etc., w.e.f. 1.10.1975. This provision
will deprive the right of the assessee from knowing the reasons for any search.
This amendment goes against the declared policy of the Government about
transparency in the tax administration and also against the assurance that no
amendments in tax laws will be made with retrospective effect. From the wording
of the section, it is evident that such reasons will be disclosed only to the
High Court or Supreme Court if the matter is agitated in appeal or a Writ.

15.2   Section 132(9B)(9C) and (9D) – Sub-sections
(9B) to (9D) have been inserted in section 132 w.e.f. 1.4.2017 to provide that
during the course of a search or seizure or within a period of sixty days from
the date of which the last of the authorizations for search was executed, the
authorised officer, for protecting the interest of the revenue, may attach
provisionally any property belonging to the assessee, with the prior approval
of Principal Director General or Director General or Principal Director or
Director. Such provisional attachment shall cease to have effect after the
expiry of six months from the date of order of such attachment.

          It is also provided that in the case
of search, the authorised officer may, for the purpose of estimation of fair
market value of a property, make a reference to a Valuation Officer referred to
in section 142A. It is also provided that the Valuation report shall be
submitted by the Valuation Officer within sixty days of receipt of such
reference.

15.3   Section 133 – This section authorises
certain Income tax Authorities to call for information for the purpose of any
inquiry or proceeding under the Income tax Act. By amendment of this section
w.e.f. 1.4.2017 this power is now given to Joint Director, Deputy Director and
Assistant Director. It is also provided that where no proceeding is pending,
the above authorities can make an inquiry. The existing requirement of
obtaining prior approval of Principal Director, Director or Principal
Commissioner or Commissioner is now removed.

15.4   Section 133A – At present, the
specified Income tax Authority can conduct a Survey operation at the premises
where a person carries on any business or profession. By an amendment of this
section from 1.4.2017, this power to conduct survey is extended to any place at
which an activity for charitable purpose is carried on. Thus, such survey can
be conducted on charitable trusts also. However, this amendment does not
authorise survey at a place where a Religious Trust carries on its activities.

15.5   Sections 153A and 153C – Section 153A
relates to assessment in cases of search or requisition. In such cases, at
present, assessment for six preceding assessment years can be reopened. The
section is amended w.e.f. 1.4.2017 extending the period of 6 years to 10 years.
The extension of 4 years is subject to the following conditions –

(i)   The Assessing Officer has, in his possession,
books of account or other documents or evidence which reveal that the income
which has escaped assessment amounts to or is likely to amount to Rs. 50 lakh
or more in the aggregate in the relevant four assessment years (falling beyond
the sixth year);

(ii)  Such income escaping assessment is represented
in the form of asset which shall include immovable property being land or
building or both, shares and securities, deposits in bank account, loans and
advances;

(iii)  The escaped income or part thereof relates to
such assessment year or years; and

(iv) Search u/s. 132 is initiated or requisition
u/s. 132A is made on or after the 1^st day of April, 2017.

          In a case where the above conditions
are satisfied, a notice can be issued for the relevant assessment year beyond
the period of six years. Further, similar amendment has been made to section
153C relating to assessment of income of any other person to whom that section
applies.

16.    Penalties:

16.1   New Section 271J – (i) This is a new
section inserted w.e.f. 1.4.2017. At present, assessees are required to obtain
reports and certificates from a qualified professional under several provisions
of the Income tax Act. The section provides that the assessing officer or
CIT(A) can levy penalty of Rs.10,000/- on a chartered Accountant, Merchant
Banker or Registered Valuer if it is found that he has furnished incorrect
information in any report or certificate furnished under any provision of the
Act or the Rules. However, section 273B is amended to provide that if the
concerned professional proves that there was a reasonable cause for any such
failure specified in section 271J, then the above penalty will not be levied in
such a case.

ii)   It may be stated that such a provision to
levy penalty on a professional who is assisting the Income tax Department by
giving expert opinion in the form of a report or certificate can be considered
as a draconian provision. The power to penalise a professional is with the
Regulatory Body of which he is a member. Giving such a power to an officer of
the Department, is not at all justified. Such a penal provision can be opposed
for the following reasons.

(a)  In the case of Chartered Accountants, there
are sufficient safeguards under the C.A. Act to discipline a member of ICAI if
he gives a wrong report or a wrong certificate. Therefore, there was no need
for making a provision for levy of penalty under the Income-tax Act.

(b)  This section gives power to levy such penalty
to the assessing officer or CIT (A).

(c)  There is no clarity as to which officer will
levy such penalty. Whether the A.O. under whose jurisdiction the professional
is practicing or the A.O. of his client to whom the report or the certificate
is given? Professionals issue such certificates to their clients situated in
various jurisdictions in the same city or in different cities. If the officers
making assessments of various clients are to levy such penalty, it will create
many practical issues and will require professionals to face litigation at
various places involving lot of time and expenses for actions of different
officers at various places.

(d)  This section refers to incorrect information
in a “Report” or “Certificate”. It is well known that Report given by a
professional only contains his opinion whereas the certificate states whether
information given in the certificate is true or not. Therefore, penalty cannot
be levied for the opinion given in a ‘Report’ (e.g. Audit Report or a Valuation
Report). Further, the certificate is also given on the basis of information
given by the client and the evidence produced before the professional.
Therefore, if incorrect information is given by the client, the professional
cannot be penalised.

(e)  This section comes into force w.e.f. 1/4/2017.
It is not clarified in the section whether it will apply to report or
certificate given by a professional on or after 1/4/2017. If this is not so,
the A.O. or CIT(A) can apply the penal provision under this section while
passing orders on or after 1/4/2017 in respect of report or certificate given
in earlier years. If the section is applied to reports or certificates given by
a professional prior to 1/4/2017 the provision will have retrospective effect.
This will be against the principles of natural justice. It is settled law that
no penalty can be levied for any acts or omissions committed prior to the date
of enactment of a penalty provision.

(f)   If this
section is considered necessary, the CBDT should issue a circular to the effect
that (a) the section shall apply to reports or certificates issued on or after
1.4.2017, and (b) the penalty under this section can be levied only by the A.O.
or CIT (A) of the range or ward where the professional is being assessed to
tax.

16.2   The Taxation (Second Amendment) Act, 2016,
was passed in December, 2016. This Act amends some of the sections of the
Income-tax Act relating to higher rates of taxation and penalties w.e.f. A.Y.
2017-18. These provisions are discussed in the following paragraphs.

16.3   Section 115 BBE:            (i) Section 115BBE of the Income-tax Act deals with
rate of tax on income referred to in sections (i) 68 – Cash Credits, (ii) 69 –
Unexplained Investments, (iii) 69A – Unexplained Money, bullion, jewellery or
other valuable articles, (iv) 69B- Amount of Investments, Jewellery etc.
not fully disclosed, (v) 69C – Unexplained Expenditure and (vi) 69D – Amount
borrowed or repaid on a hundi in cash. The section provides that the rate of
tax payable on addition made by the Assessing Officer (AO) under the above
sections, if no satisfactory explanation for the above deposits/investments/
expenditure etc., is furnished by the assessee, will be at a flat rate
of 30% plus applicable surcharge and education cess. This section is now
amended w.e.f. 1-4-2017 (A.Y. 2017-18) as under:

(a)  It is now provided that in respect of income
referred to in sections 68, 69, 69A, 69B, 69C or 69D which is offered for tax
by the assessee in the Return of Income filed u/s. 139 the rate of tax on such
income will be 60% plus applicable surcharge and education cess.

(b)  Further, if the income referred to in sections
68, 69, 69A, 69B, 69C or 69D is not offered for tax but is found by the AO and
added to the income of the assessee by the AO the rate of tax will be 60% plus
applicable surcharge and education cess. 

(ii)  Section 2(9) of the Finance Act, 2016 dealing
with surcharge on tax has also been amended w.e.f. A.Y. 2017-18. It is now
provided that the rate of surcharge will now be 25% in respect of tax payable
u/s. 115BBE irrespective of the quantum of total income for A.Y. 2017-18. This
means that any income in the nature of cash credit, unexplained investments,
unexplained expenditure etc. which is offered for taxation u/s. 139 or
which is added to declared income by the AO u/s. 68, 69,69A to 69D will now be
taxable in the case of Individual, HUF, AOP, Firm, Company etc. at the
rate of 60% (instead of 30% earlier) plus surcharge at 25% of tax (instead of
15% earlier). Besides the above, education cess at 3% of tax will also be
payable.

(iii)  It may be noted that if an Individual, HUF,
AOP, Firm, Company etc. deposits old `500/1,000 notes in his Bank a/c
between 10-11-2016 and 30-12-2016 and he is not able to give satisfactory
explanation for the source, he will have to pay tax at 75% (60%+15%) plus
Education Cess even if this income is shown in the Return u/s. 139 for A/Y:
2017-18.

16.4   Penalty in Search Cases – Section 271 AAB –
(i)    Section 271AAB was inserted in the
Income-tax Act by the Finance Act, 2012 w.e.f. 1-7-2012. Under this section,
penalty is leviable at the rate ranging from 10% to 90% of undisclosed income
in cases where Search is initiated u/s. 132 on or after 1-7-2012. By amendment
of this section, it is provided that the existing provisions of section 271AAB
(1) for levy of Penalty will apply only in respect of Search u/s. 132 initiated
between 1-7-2012 and 15.12.2016.

(i)       New Section 271AAB(1A) provides w.e.f.
15.12.2016  for levy of penalty at 30% of
undisclosed income in cases where Search is initiated on or after 15.12.2016.

For this
purpose, the conditions are as under:

(a)      The assessee admits such income u/s. 132(4)
and specfies the manner in which it was earned.

(b)      The assessee substantiates the manner in
which such income was earned.

(c)      The assessee files the return including
such income and pays tax and interest due before the specified date.

(ii)      If the assessee does not comply with the
above conditions the rate of penalty is 60% of undisclosed income. It may be
noted that prior to this amendment the rates of penalty were 10% to 90% under
specified circumstances.

16.5   Section 271AAC – (i)       This section is inserted w.e.f. 1-4-2017
(A.Y. 2017-18) to provide for levy of penalty in respect of income from cash
credits, Unexplained investments, unexplained expenditure etc. added by
the A.O. u/s. 68, 69, 69A to 69D. This penalty is to be computed at the rate of
10% of the tax payable u/s. 115BBE (1)(i). Since the tax payable u/s.
115BBE(1)(i) is 60% of the income added by the AO u/s. 68, 69, 69A to 69D, the
Penalty payable under this section will be 6% of the income added by the AO
under the above sections. Thus, the total tax (including penalty) in such cases
will be 83.25% (77.25% + 6%).

(ii)  It may be noted that no penalty under this new
section will be payable if the assesse has declared the income referred to in
sections 68, 69, 69A to 69D in his return of income u/s. 139 and paid the tax
due u/s. 115BBE before the end of the relevant accounting year. In other words,
if any assessee wants to declare the amount of old notes deposited in the bank
during the specified period in his return of income u/s. 139 for A.Y. 2017-18,
he will have to pay the tax at 75% (including surcharge) and education
cess.  In this case the above penalty
will not be levied.

(iii)  It is also provided that in the above cases no
penalty u/s. 270A will be levied on the basis of under reported income. It is
also provided that the procedure u/s. 274 for levy of penalty and time limit
u/s. 275 will apply for levy of penalty u/s. 271AAC.

17.    Other Important Provisions:

17.1   Section
79 – At present, a closely held company is not allowed to carry forward the
losses and set-off against income of a subsequent year if there is a change in
shareholding carrying more than 49% of the voting power in the said subsequent
year as compared to the shareholding that existed on the last day of the year
in which such loss was incurred. By amendment of this section, w.e.f. AY
2018-19 (F.Y. 2017-18), it is now provided to relax the applicability of this
provision to start-up companies referred to me section 80-IAC of the Act. This
section will enable the eligible start–up company to carry forward the losses
incurred during the period of seven years, beginning from the year in which
such company is incorporated, and set off against the income of any subsequent
previous year. However, it is provided that such benefit shall be available
only if all the shareholders of such company who held shares carrying voting
power on the last day of the year or years in which the loss was incurred
continue to hold those shares, on the last day of the previous year in which
loss is sought to be set-off. Thus, dilution of voting power of existing
shareholders would therefore not impact the carry forward of losses so long as
there is no transfer of shares by the existing shareholders. However, change in
voting power and shareholding consequent upon the death of a shareholder or on
account of transfer of shares by way of gift to any relative of shareholder
making such gift, shall not affect carry forward of losses.

17.2   Section 197(c) of Finance Act, 2016 –
This section came into force on 1-6-2016. A doubt was raised in some quarters
that under this section A.O. can issue notice for assessment or reassessment
for income escaping assessment for any number of assessment years beyond 6
preceding years. This had created some uncertainty. In order to clarify the
position this section is now deleted
w.e.f. 1.6.2016.

17.3   General Anti-Avoidance Rule (GAAR):

          It may be noted that sections 95 to
102 dealing the provisions relating GAAR inserted by the Finance Act, 2013,
have come into force from 1.4.2017. CBDT has issued a Circular No.7 of 2017
dated 27.1.2017 clarifying some of the doubts about these provisions.

17.4   Place of Effective Management (POEM) –
Section 6 (3) was amended by the Finance Act, 2016, w.e.f. 1.4.2017. Under this
section, a Foreign Company will be deemed to be Resident in India if its place
of Effective Management is in India. This provision will come into force from
A.Y. 2017 – 18 (F.Y. 2016-17). By circular No. 6 dated 24/1/2017 issued by the
CBDT,  it is explained as to when the
provisions of this section will apply to a Foreign Company.

17.5   Income Computation and Disclosure
Standards (ICDS) – CBDT has notified ICDS u/s 145(2) of the Income-tax Act.
They are applicable to assesses engaged in business or profession who maintain
accounts on accrual method of accounting. These standards are applicable w.e.f.
A.Y. 2017 – 18 (F.Y. 2016-17). By Circular No.10 of 2017 dated 23.03.2017, CBDT
has clarified some of the provisions of ICDS which can be followed while filing
the return of income for A.Y. 2017-18 and subsequent years.

18.    To Sum Up:

18.1   During the Financial Year 2016-17 the
Government has taken some major steps such as introduction of two Income
Disclosure Schemes, one during the period 01.06.2016 to 30.09.2016 and the
other during the period 17.12.2016 to 31.03.2017, advancing the date for
presentation of Budget to first day of February, merging Railway Budget with
the General Budget, Demonetisation of high value currency notes, finalising the
structure for GST etc. All these steps are stated to be for elimination
of corruption, black money, fake notes in circulation and other administrative
reasons.

18.2   The declared policy of the Government is to
ensure that there is “Ease of Doing Business in India”. For this purpose the
administrative procedures have to be simplified and tax laws also have to be
simplified. However, if we consider the amendments made in the Income-tax Act this
year it appears that some of the provisions have complicated the law and will
work as an impediment to creating an environment where there is ease of doing
business.

18.3   The insertion of new section 56(2)(x) is one
section which will create may practical problems during the course of transfer
of assets within group companies and for business reorganisation. In case of
some transfer of assets there will be tax liability in the hands of the
transferor as well as the transferee in respect of the same transaction.

18.4   Amendment in section 10(38) levying tax on
sale of quoted shares through stock exchange if STT is not paid at the time of
purchase will raise many issues. If the Notification to be issued for exclusion
of some of the transactions from this amendment is not properly worded,
assessees will find difficulties in taking their decisions about business
reorganization.

18.5   New section 50CA is another section which
will create many practical problems. There will be litigation on the question
of valuation of unquoted shares. In some cases the seller of unquoted shares
will have to pay capital gains tax u/s. 50CA and at the same time the purchaser
will have to pay tax under the head Income from other sources u/s. 56(2)(x) on
the same transaction.

18.6   Provision in new section 234F relating to
levy of Fee for late filing of the Return of Income is also unfair as the
assessee is also required to pay interest @1% p.m. for the period of delay.
Further, persons claiming refund of tax will also be required to pay such fee
for late filing of Return of Income with Refund application.

18.7   Provisions relating to levy of penalties are
very harsh. Further, insertion of new section 271J for levy of penalty on
professionals for giving incorrect information in the report or certificate
given to the assessee is not at all justified. Many practical issues of
interpretation will arise. Strong representation is required to be made for
deletion of such type of penalty.

18.8   Amendments in the provisions relating to
search, survey and seizure will have far reaching implications. Arbitrary
powers are given to officers of the Income tax Department which are liable to
be misused. Denial of reasons for conducting search and seizure operations upto
ITAT Tribunal level can be considered to be against the principles of natural
justice. This provision is liable to be challenged in a court of law.