Finance Act, 2010

1. Background :

1.1 The Finance Minister, Shri Pranab Mukherjee,
presented the second budget along with the Finance Bill, 2010 of UPA-II
Government to the Parliament on 26th February, 2010. The Finance Act, 2010, has
now been passed by both houses of the Parliament in April-May, 2010, after a
brief discussion. There are 56 Sections amending the various Sections of the
Income-tax and Wealth Tax Acts. It appears that the number of amendments in our
direct tax laws this year are the minimal, probably because the new Direct Tax
Code replacing the present Income-tax and Wealth tax Acts is proposed to be
introduced later this year.

1.2 While presenting the direct and indirect tax
proposals in Part ‘B’ of his budget speech, the Finance Minister has stated in
para 117 to 120 and para 186 and 188 as under :

“117. While formulating them (tax proposals), I have
been guided by the principles of sound tax administration as embodied in the
following words of Kautilya :

“Thus, a wise Collector General shall conduct the
work of revenue collection . . . . . in a manner that production and consumption
should not be injuriously affected . . . . . financial prosperity depends on
public prosperity, abundance of harvest and prosperity of commerce among other
things.”

“118. I had stated last year that tax reform is a
process and not an event. The process I had outlined in the area of direct
taxes was to release a draft Direct Taxes Code along with a Discussion Paper.
In the area of indirect taxes, the reform initiative was the introduction of a
Goods and Service Tax. I have presented the developments in both reform
initiatives in Part ‘A’ of my Speech.”

“119. We have continued on the path of
computerisation in core areas of service delivery in the administration of
direct taxes. This will reduce the physical interface between taxpayers and tax
administration and speed up procedures and processes. The Centralised
Processing Centre at Bengaluru is now fully functional and is processing around
20,000 returns daily. This initiatives will be taken forward by setting up two
more Centres during the year.”

“120. As a part of Government’s initiative to move
towards citizen-centric governance, the Income-tax Department has introduced
‘Sevottam’, a pilot project at Pune, Kochi, and Chandigarh through Aaykar Seva
Kendras. These provide a single-window system for registration of all
applications including those for redressal of grievances as well as paper
returns. This year the scheme will be extended to four more cities.”

“186. My proposals on Direct Taxes are estimated to
result in revenue loss of Rs.26,000 crore for the year. Proposals relating to
Indirect Taxes are estimated to result in a net revenue gain of Rs.46,500 crore
for the year. Taking into account concessions being given in my tax proposals
and measures taken to mobilise additional resources, the net revenue gain is
estimated to be Rs.20,500 crore for the year.”

“188. This Budget belongs to ‘Aam Aadmi’. It belongs
to the farmer, the agriculturist, the entrepreneur and the investor. The
opportunity is great. The time is right. I have placed my faith in the hands of
the people who, I know, can be depended upon to rise to any occasion in
national interest. I have placed my faith in the collective conscience of the
nation that can be touched to scale undreamt of heights in the coming
years.”

1.3 The various important amendments made in the
Income-tax Act can be broadly classified as under :

(i) Slabs for tax payable by Individuals/HUF/AOP have
been revised and tax burden of persons in higher income bracket considerably
reduced.

(ii) Surcharge on income of corporate bodies, if income
exceeds Rs.1 cr., is reduced from 10% to 7.5%.

(iii) MAT on corporate bodies increased from 15% to 18%.

(iv) Threshold limits for TDS increased.

(v) Scope for certain exemptions and deductions granted
in the computation of income
widened.

(vi) Scope for certain deductions granted under Chapter
VIA enlarged.

(vii) Scope of gifts taxable as income from other sources
enlarged.

(viii) Limited concession from tax on conversion of
closely held small companies into Limited Liability Partnership given.

(ix) Powers of Settlement Commission widened.

(x) Some procedural changes made to mitigate certain
hardships faced in the procedure for assessment and resolution of tax disputes.

1.4 In this article an attempt is made to discuss some of
the important amendments made by the Finance Act, 2010, in the Income-tax and
Wealth-tax Acts.

2. Rates of taxes, surcharge and education cess :

    2. Rates of taxes, surcharge and education cess :

2.1 Exemption limit and rates of taxes : The basic exemption limit for an Individual, HUF, AOP and BOI as increased in the last budget will continue for A.Y. 2011-12. This exemption limit is Rs.2.40 lacs for senior citizens (SC), Rs.1.90 lacs for women (below 65 years) (W) and Rs.1.60 lacs for others (O). However, the tax slabs are revised for A.Y. 2011-12 as under :

The impact of these changes can be noticed from the following comparative charts :

    i) Tax payable in A.Y. 2010-11 (Account year ending 31-3-2010)

    ii) Tax payable in A.Y. 2011-12 (Account year ending 31-3-2011)

So far as other assessees are concerned, there are no changes and, therefore, the existing rates will apply in A.Y. 2011-12.

    iii) Rate of tax u/s.115JB (MAT) :
The rate of tax on book profits u/s.115JB — Minimum Alternate Tax (MAT) is increased from 15% to 18% from A.Y. 2011-12.

2.2 Surcharge on income tax : No surcharge is payable by non-corporate assessees. Hitherto, companies were required to pay surcharge at 10% of the tax if their total income exceeded Rs.1 crore. This rate of surcharge is now reduced to 7.5% of the tax from A.Y. 2011-12. Foreign companies will continue to pay surcharge of 2.5% of the tax as in the earlier years. So far as Dividend Distribution Tax and Minimum Alternative Tax (MAT) are concerned, the rate of surcharge is reduced from 10% to 7.5% of the tax w.e.f. 1-4-2010 (A.Y. 2011-12). No surcharge is payable on Tax Deducted at Source (TDS). Similarly, no surcharge is payable by a Co-operative society, Artificial Juridical Person and Firm (including Limited Liability Partnership (LLP).

2.3 Education cess : As in earlier years, Education Cess of 3% (including 1% for higher education cess) on Income-tax and surcharge (if applicable) is payable by all assessees. However, no Education Cess is to be collected from TDS or TCS from payments to all corporate and non-corporate resident assessees. If tax is deducted on payments to (i) Foreign Companies, (ii) Non-residents or (iii) on Salary Payments, Education Cess at 3% of the tax and surcharge (if applicable) is to be applied.

2.4 MAT : Rate of Tax on Book Profits u/s.115JB is increased from 15% to 18% from A.Y. 2011-12. Surcharge of 7.5% on this tax (if total income exceeds Rs.1 cr.) and Education Cess of 3% on total tax and surcharge will also be payable.

    3. Tax Deduction at Source (TDS) :
Some significant changes are made in the provisions relating to TDS. These are discussed below.

3.1  Surcharge and Education Cess on TDS :
As stated earlier, while deducting TDS, the tax deductor has not to add surcharge or education cess to the tax deducted from payments to Residents under various provisions of the Income-tax Act. Similarly, while collecting tax at source u/s. 206C from certain income, no surcharge or education cess is to be collected. There are only two exceptions as under :

    i) As regards TDS/TCS on payments/receipts from Foreign Companies, surcharge at 2.5% of tax and education cess at 3% of tax and surcharge is to be added to the amount of tax.

    ii) As regards payments made to Non-residents u/s.195, collection of tax from Non-residents u/s.206C and salary payments to employees u/s 192, only Education Cess at 3% of tax is to be added to the amount of tax.

3.2 Rates for TDS :
The rates of tax prescribed in Part II Schedule I of the Finance Act, 2010, for TDS on various payments are the same as prescribed in the Finance (No. 2) Act, 2009. It may be noted that S. 206AA inserted in the Income-tax Act by the Finance (No. 2) Act, 2009, has come into force from 1-4-2010. Under this Section, it is provided that wherever tax is to be deducted at source under the Income-tax Act (S. 192 to S. 196D), the tax deductor should obtain PAN of the deductee. If the deductee does not provide his/its PAN, the tax deductor should deduct tax at source at the higher of the following rates :
    i) Rate specified under the applicable Sections (192 to 196 D).

    ii) Rate specified in Part II of Schedule I to the Finance Act, 2010.

    iii) Rate of 20%.

It is also provided in S. 206AA that in the application u/s.197 for lower deduction of tax and in the declaration u/s.197A (Forms 15G or 15H), the PAN of the deductee should be given. If this is not done, this application/declaration will be invalid. Further, in all correspondence, bills, vouchers and other documents which are exchanged between the tax deductor and the deductee, the PAN should be mentioned. If the PAN provided by the deductee is invalid, for any reasons, the tax deductor will be considered to have deducted tax at lower rate if he has deducted tax at a rate lower than 20%. From this provision it is now evident that all Residents, Non-residents and Companies (including Foreign Companies) have to obtain PAN if TDS rates applicable to them is less than 20%. Otherwise, minimum rate of 20% for TDS will be applicable to them.

3.3 Threshold limits for TDS :
The threshold limits for TDS in respect of certain payments u/s.194B to u/s.194J have been revised upwards w.e.f. 1-7-2010 as given in Table 1 on the next page.

3.4 Interest on Late Payment of TDS :
S. 201(1A) has been amended w.e.f. 1-7-2010. The rates for payment of interest for delay in deduction of TDS and for delay in payment of TDS amount will be as under :
    Interest for late deduction of whole or part of TDS amount at 1% p.m. payable as at present will continue.

    Interest for late payment of whole or part of TDS amount will now be 1.5% p.m. instead of 1% p.m. as at present.

    4. Exemptions and deductions :

4.1  Charitable trusts :
There are two main amendments relating to charitable trusts as under :
    i) S. 2(15) : S. 2(15) defining the expression ‘Charitable Purposes’ was amended by the Finance Act, 2008, w.e.f. 1-4-2009. Proviso to the Section added w.e.f. 1-4-2009 stated that ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business, etc. Now, by amendment of this Section, a second proviso is added w.e.f. 1-4-2009 to clarify that the above first proviso shall not apply to a charitable trust if the aggregate of the receipts from trade, commerce, business, etc. is Rs.10 lacs or less in any financial year. The effect of this amendment will, therefore, be that in a particular year when the receipts from such activities are more than Rs.10 lacs, the trust will not be considered as charitable trust. Normally, figure of receipts will be known only at the end of the financial year. Therefore, the question of tax liability will be known only at the end of the year. In the meantime if the trust has not paid advance tax and it is saddled with the tax liability due to this provision, it will have to suffer interest liability u/s.234B/234C. Moreover, if the trust has accepted donations and issued S. 80G cer-tificate to donors in the hope that its receipts from the above activities will be less than Rs.10 lacs, a question will arise whether the donors will get deduction u/s.80G in respect of such donations if the trust loses its exemption for non-compliance with the proviso to S. 2 (15). Consequential amendment in S. 80G has not been made to safeguard the position of a donor who has made donation to the trust without knowledge of these facts.

    ii) S. 12AA : S. 12AA(3) grants power to CIT to cancel registration granted to a charitable trust u/s.12AA if he is satisfied that the activities of the trust are not genuine or are not being car-ried out in accordance with the objects of the trust. The Allahabad High Court in the case of Oxford Acadamy for Career Development v. Chief CIT, (315 ITR 382) held that the CIT has no power to cancel registration granted to a trust prior to 1-10-2004 u/s.12A. Similar view has been taken by the Pune Tribunal in the case of Bharti Vidyapeeth v. ITO, 119 TTJ 261. The ratio of these and similar other decisions has now been reversed by amendment of S. 12AA(3) by extending the power of the CIT to cancel registration even to trusts registered u/s. 12A. This amendment comes into force w.e.f. 1-6-2010.

4.2 S. 10 (21) :
This Section provides for exemption to income of Scientific Research Association under certain circumstances. The expression ‘Scientific Research Association’ has now been replaced by the expression ‘Research Association’ w.e.f. 1-4-2011. The amendment only clarifies that the income from research in social science or statistical research will also be considered as research eligible for exemption. Consequential amendments are also made in S. 35, S. 80GGA, S. 139 and S. 143.

4.3 S. 10AA :
In the Finance (No. 2) Act 2009, this Section was amended to clarify that exemption u/s.10AA to income of an unit established in the SEZ will be allowed on the income worked out by applying the following formula :

Profits of the business of the SEZ unit x
Export turnover of SEZ unit
_____________________________________________

Total turnover of SEZ unit

This amendment was made last year w.e.f. A.Y. 2010- Prior to the amendment the denominator was with reference to ‘Total turnover of the business carried on by the assessee’. A number of representations were made to make the above formula effective from A.Y. 2006-07 as S. 10AA was inserted w.e.f. that year. In response to these representations, the above formula is now made effective from A.Y. 2006-07. In view of this, SEZ units established in 2005 onwards will get the benefit of this amendment with retrospective effect from A.Y. 2006-07.

    5. Taxation of non-residents :
S. 9(1)(v), (vi) and (vii) provides for situations where income by way of Interest, Royalty and Fees for Technical Services shall be deemed to accrue or arise in India. For the purpose of applying deeming provision contained in S. 9(1)(vii) for tax liability on fees for technical services in India, the Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. v. DIT, (288 ITR 408) held that the services should be rendered in India as well as used in India. The ratio of this decision was found to be not in accordance with the legislative intent, and, therefore, a retrospective amendment was made in the Finance Act, 2007, by adding an Explanation in S. 9(2) w.e.f. 1-6-1976. In this Explanation it was provided that interest, royalty and fees for technical services shall be deemed to accrue or arise in India even if the non-resident has no residence or place of business or business connection in India.

Subsequently, the Karnataka High Court in the case of Jindal Thermal Power Company Ltd. v. DCIT, (182 Taxman 252 and 225 CTR 220) held that even after the addition of the above explanation, income form services rendered outside India cannot be considered as accruing or arising in India. In order to reverse the effect of this judgment, the Explanation below S. 9(2) has now been amended with retrospective effect from 1-6-1976 to provide that the deeming fiction contained in the above provision shall apply whether or not the non-resident has a residence or place of business or business connection in India and whether or not the non-resident renders services in India.

    6. Business income :
Some concessions are provided by amendments of S. 35, S. 35AD, S. 40, S. 44AB, S. 44AD, S. 44BB and S. 44DA. These are discussed below :

6.1  S. 35 :
    i) S. 35(1)(ii) — At present, weighted deduction of 125% is allowable in respect of sums paid to a scientific research association or to a university, college or other institution, which is notified and approved under this Section. This deduction is now increased to 175% of the sum paid w.e.f. A.Y. 2011-12.

    ii) S. 35(2AA) — At present, weighted deduction of 125% is allowed in respect of payments to National Laboratory, University or Indian Institute of Technology in respect of approved programmes of Scientific Research. This deduction is now increased to 175% of the amount so paid w.e.f. A.Y. 2011-12.

    iii) S. 35(2AB) — At present, weighted deduction of 150% is allowable to companies engaged in the business of biotechnology or manufacture of articles or things, other than items mentioned in the Eleventh Schedule, in respect of scientific research expenditure (excluding cost of land or building) on an approved in-house research and development facility. This deductions has now been increased to 200% of such expenditure w.e.f. A.Y. 2011-12.

    iv) S. 35(1)(iii) — At present, weighted deduction of 125% is allowed in respect of contribution for research in social science or statistical research carried out by approved university, college or institution. This benefit is extended to contribution to approved research association carrying on such research w.e.f. A.Y. 2011-12.

    v) S. 80GGA — At present, deduction is allowed for donations to an approved university, college or institution for research in social science or statistical research. This benefit is now extended to donation to an approved research association undertaking research in social science or statistical research w.e.f. A.Y. 2011-12.

6.2 S. 35AD :
    i) This Section was inserted by the Finance (No.2) Act, 2009, effective from A.Y. 2010-11. In the last year’s budget the Finance Minister had stated that the Government would like to replace profit-linked incentives by investment-linked incentives. Introduction of S. 35AD was the first step taken last year. The benefit of 100% deduction of specified capital expenditure (other than land, goodwill and financial instruments) in certain specified businesses was introduced last year. The scope of this Section is now enlarged by making certain amendments effective from A.Y. 2011-12.

    ii) At present, the benefit of this Section is available to specified businesses of setting up and Operating Cold Chain Facilities, Warehousing Facilities for storage of Agricultural Products and Laying and Operating a Cross-Country Natural Gas, Crude or

Petroleum Net work. This benefit is now extended to the following businesses which commence operations on or after 1-4-2010 :
    a. building and operating, anywhere in India, a new hotel of two-star or above category as classified by the Central Government.
    b. building and operating, anywhere in India, a new hospital with at least 100 beds for patients.
    c. Developing and building a housing project under the scheme for slum redevelopment or rehabilitation framed by the Central or State Government and notified by the CBDT in accordance with the prescribed guidelines.

    iii) S. 35AD(3) is amended w.e.f. A.Y. 2011-12 to provide that, if deduction is claimed and allowed in respect of capital expenditure of specified business under this Section for any assessment year, then no deduction will be available under Chapter VIA (Part C) in that or any subsequent assessment year.

    iv) Simultaneously, S. 80A(7) as inserted from A.Y. 2011-12 now provides that if deduction is granted under any provisions of Part C of Chapter VIA in respect of income of any business specified u/s.35AD for any assessment year, no deduction shall be allowed u/s.35AD in relation to such specified business for the same or any other assessment year.

This makes it evident that the assessee has option to claim benefit of S. 35AD or benefit under any other provision of the Income-tax Act.

6.3 S. 40(a)(ia) :
    i) At present, in respect of expenditure on payment of any interest, commission, brokerage, rent, royalty, fees for professional services or technical services to a resident, deduction is not allowed, in computing income from business or profession, if tax is not deducted at source, as required under the Income-tax Act, and paid before the end of the relevant previous year. In order to remove hardships caused by this provision, the Section has been amended w.e.f. A.Y. 2010-11. According to this amendment, if the TDS amount is deposited with the Government before the due date for filing the return of income i.e., 31st July or 30th September, the deduction will not be denied.

    ii) Further, if the tax is deducted before the end of the relevant previous year or after that date and paid after the due date for filing the return for the relevant year, deduction for the expenditure will be allowed in the subsequent year when the TDS amount is deposited with the Government.

    iii) Since this provision is applicable from A.Y. 2010-11, assessees who have not deducted and/or deposited the TDS amount on such expenditure before 31-3-2010, can now deduct and/or deposit the same before the due date for filing the return of income for A.Y. 2010-11 (i.e., 31-7-2010 or 30-9-2010). It is possible for the assessee to take the view that this provision is applicable to earlier assessment years in view of the Supreme Court decision in the case of CIT v. Alom Extrusions Ltd., (319 ITR 306).

6.4 S. 44AB — Tax Audit :
    The existing threshold limit of total sales/ turnover/gross receipts for the purpose of tax audit u/s.44AB in the case of a person carrying on business or profession was fixed in 1984 w.e.f. A.Y. 1985-86 at Rs.40 lacs (Business) and Rs.10 lacs (Profession).

This has now been increased w.e.f. A.Y. 2011-12 as under :

    Business    —    Rs.60 lacs
    Profession    —    Rs.15 lacs

    ii) Consequential amendment is made in S. 271B providing for penalty for non-compliance with the provisions of S. 44AB. At present, if an assesee fails to get his accounts audited or to furnish audit report as provided in S. 44AB, he is liable to pay penalty u/s.271B at the rate of ½% of total sales, turnover or gross receipts, subject to a maximum of Rs.1.00 lac. This limit of maximum penalty is now enhanced to Rs.1.50 lacs from A.Y. 2011-12.

6.5    S. 44AD — Presumptive taxation of business profits :
This Section was inserted in place of old S. 44AD and S. 44AF w.e.f. A.Y. 2011-12 by the Finance (No. 2) Act, 2009. Under this Section, an eligible assessee having business income below Rs.40 lacs, had option to be assessed on an income by applying rate of 8% of gross turnover/receipts. This Section is now amended by increasing the limit of gross turnover/receipts from Rs.40 lacs to Rs.60 lacs from A.Y. 2011-12.

6.6 S. 44BB and S. 44DA :
S. 44BB deals with computation of presumptive income from services provided to the business of exploration, etc. of mineral oils. Under this Section, it is provided that 10% of the gross receipts of a non-resident engaged in providing such services in connection with prospecting for, or extraction or production of mineral oil shall be deemed to be income of the non-resident. For this purpose, the non-resident is not required to maintain books of accounts. The Section is now amended, effective from A.Y. 2011-12, to provide that this benefit will not now be available to a non-resident rendering technical services through a permanent establishment in India. In other words, such non-resident will now be governed by S. 44DA which provides for determination of income of such assessees having income from royalty or fees from technical services through a permanent establishment of the non-resident in India. This amendment will nullify the effect of the decision of the Calcutta ITA Tribunal in the case of DCIT v. Schlumbrger Seaco Inc., 50 ITD 348. Consequential amendment is also made in S. 44DA.

    7. Income from other sources (Gifts) :

7.1    S. 56(2)(vii) :
    i) In the Finance (No. 2) Act, 2009, S. 56(2)(vii) treating any sum of money received as gift from a non-relative by an Individual or HUF (specified assessee) as income from other sources was amended. Under this amendment, this concept was extended to gifts and deemed gifts received in kind on or after 1-10-2009. In other words, w.e.f. 1-10-2009, any sum of money (exceeding, in aggregate, Rs.50,000), any immovable property, (value exceeding Rs.50,000) or movable property viz. (i) shares and securities,
    jewellery, (iii) archaeological collections, (iv) drawings, paintings, sculptures or (v) any work of art (value exceeding Rs.50,000) received as gift or deemed gift from a non-relative, is taxable as income from other sources.

    ii) Under this Section, if immovable property (land or building) is received as gift by a specified assessee from a non-relative, the fair market value is to be considered as provided in S. 50C (i.e., stamp duty valuation). The amendment made last year also provided that if an immovable property was purchased by a specified assessee, from a non-relative, on or after 1-10-2009, at a price below the stamp duty valuation, the difference will be considered as a gift and taxed as income. This provision has now been reversed by amendment of this Section. It is now provided that if such immovable property is purchased on or after 1-10-2009, at a price below the stamp duty valuation, the difference will not be taxable u/s.56(2)(vii).

    iii) Further, it is now clarified that the ‘property’ received in kind on or after 1-10-2009, by an individual or HUF, should be a ‘Capital Asset’. The effect of this amendment will be that S. 56(2)(vii) will not apply if the specified assessee receives stock-in-trade, raw materials, consumable goods, personal effects, etc. as gift from a non-relative.

    iv) Another amendment in the Section provides that the property received in kind will now include ‘Bullion’ on or after 1-6-2010.

    v) It may be noted that for determination of fair market value of movable property u/s.56(2)(vii) the CBDT has framed Rules 11U and 11UA by Notification No. 23/2010 of 8-4-2010, effective from 1-10-2009.

7.2  S. 56(2)(viia) — New Section :
New S. 56(2)(viia) is inserted w.e.f. 1-6- 2010. This Section extends the concept of a gift or a deemed gift being considered as Income from Other Sources in the case of a Firm (including LLP) or a closely held non- listed company w.e.f. 1- 6-2010. The provisions of this new Section can be briefly stated as under :
(i)    The Section comes into force w.e.f. 1-6-2010.
    ii) The Section applies to any firm (including LLP) or a private limited company as well as non-listed public limited company (specified assessee).

    iii) Under this Section, if a specified assessee receives any shares of a private or public unlisted company from any person, without consideration, the fair market value of which exceeds Rs.50,000, the whole of the aggregate fair market value of such shares shall be considered as income from other sources of the recipient.

    iv) If the specified assessee purchases such shares of a private or public unlisted company from any person at a price which is less than the fair market value of such shares, and if the difference between the fair market value and the purchase price is more than Rs.50,000, such difference will be considered as income of the specified assessee under this Section.

    v) It may be noted that this Section is applicable even if shares of unlisted companies are acquired as stock-in-trade.

    vi) For the above purpose, fair market value of the shares of a private or public unlisted com-pany will have to be determined as provided in Rules 11U and 11UA notified by the CBDT by Notification No. 23/2010, dated 8-4-2010.

    vii) It may be noted that this Section will not apply to shares received by a specified assessee by way of a transaction not regarded as transfer under the following Sections :

    a) S. 47(via) — Transfer of shares in an In-dian company in a scheme of amalgama-tion between two foreign companies.
    b) S. 47(vic) — Transfer of shares in an Indian company by demerged foreign company
to the resulting foreign company.
    c) S. 47(vicb) — Transfer on reorganisation of two co-operative banks.
    d) S. 47(vicd) — Transfer or issue of shares by the resulting company in a scheme of demerger to shareholders of demerged company.
    e) S. 47(vii) — Transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company.
    
viii) It may be noted that the above exceptions do not cover the following transactions which are not considered as transfers u/s.47 :
    a) S. 47(iv) and (v) — Transfer of shares by a holding company to a 100% subsidiary or vice versa.
    b) S. 47(vi) and (vib) — Transfer of shares in a scheme of amalgamation of two Indian companies or by demerged company to the resulting company.
    c) S. 47(xiii) and (xiv) — Transfer of shares by a firm or a proprietary concern when the firm or proprietary concern is con-verted into a company.
    d) S. 47(xiiib) — Transfer of shares on conversion of a non-listed company is converted into LLP.
    e) Transfer of shares by a firm on conversion into LLP.

In view of the fact that there is no specific exemption granted to the above transactions, the transfer of shares of private or public unlisted companies held by the transferor to a firm, LLP or private/public unlisted company under a scheme of amalgamation, demerger or conversion at a value below the fair market value may attract the provisions of S. 56(2)(viia).

7.3 It may be noted that the Assessing Officer is now given power to refer the question of determination of fair market value of any property covered u/s.56(2)(vii) or 56(2)(viia) to a Valuation Officer. For this purpose, S. 142A(1) has been amended w.e.f. 1-7-2010.

7.4 S. 49(4) is amended w.e.f. 1-6- 2010 to provide that when the specified assessee is charged to tax u/s.56(2)(viia) on the fair market value of the shares of any unlisted company received by it without consideration, the cost of acquisition of such shares in the hands of the specified assessee, for the computation of capital gain u/s.48, shall be the fair market value of such shares adopted for computation of income from other sources. Similarly, if such shares are purchased by the specified assessee at a price below the fair market value, the difference in the value treated as income u/s. 56(2)(viia), shall be added to the actual cost of such shares for computing capital gains u/s.48.

    8. Valuation rules :
As stated above, the CBDT has issued a Notification No. 23/2010 on 8-4-2010 prescribing Rules 11U and 11UA for determination of fair market value for movable properties received as gifts or purchasedat a value below the fair market value which is taxable as income from other sources u/s.56(2)(vii) or 56(2)(viia). These Rules have come into force on 1-10-2009. Briefly stated these Rules are as under :

(i)    Valuation of jewellery :
    a) The fair market value of the jewellery shall be estimated to be the price which it would fetch if sold in the open market on the valuation date. If the jewellery is purchased from a registered dealer, the invoice value of the jewellery shall be the fair market value.

    b) In any other case, the assessee should obtain a report of the registered valuer about the fair market value.

    ii) Valuation of archeological collections, drawings, paintings, sculptures or any work of art :

    a) The fair market value shall be the price which it would fetch if sold in the open market.

    b) If the assessee has purchased the asset from a registered dealer, the invoice value shall be the fair market value. In other cases, the assessee should obtain a report of the registered valuer in respect of the fair market value.

    iii) Valuation of shares and securities :
    a. In the case of quoted shares and securities, the fair market value shall be determined as under :

•     If the quoted shares and securities are purchased through any recognised stock ex-change, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange.

•     If these shares and securities are purchased in a manner other than through recognised stock exchange, the fair market value of the same shall be the lowest price of such shares and securities quoted on the stock exchange on the valuation date or the lowest price quoted on the immediately preceeding date if there is no quotation as on the valuation date.

    b. The fair market value of unquoted equity shares shall be determined in the following manner :

The fair market value of unquoted equity shares =(A-L) x (PV)
                                                                               _____________  
                                                                                       (PE)
Where,
    A =  Book value of the assets in the balance sheet as reduced by any amount paid as advance tax under the Income-tax Act and any amount shown in the balance sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset.

    L = Book value of liabilities shown in the bal-ance sheet but not including the following amounts :

    i) the paid-up capital in respect of equity shares;

    ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

    iii) reserves, by whatever name called, other than those set apart towards depreciation;

    iv) credit balance of the profit and loss account;

    v) any amount representing provision for taxation, other than amount paid as advance tax under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

    vi) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

    vii) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

PV    = the paid-up value of such equity shares.
PE    = Total amount of paid-up equity share capital
as shown in balance sheet.

   c) The assessee shall obtain a report of the registered valuer or a merchant banker in respect of the fair market value of unquoted shares and securities other than equity shares in a unlisted company. Such value should be the price which such shares or securities would fetch if sold in the open market.

    9. Conversion of a Company into Limited Liability Partnership (LLP) :

9.1  New S. 47(xiiib) :
New S. 47(xiiib) has been inserted w.e.f. A.Y. 2011-12 which provides that when a private or public unlisted company is converted into an LLP, exemption from capital gain on such conversion will be granted. Similarly, exemption from capital gain will also be granted on conversion of shares held by the shareholder in the company into his capital account on conversion of the company into LLP. There are, however, certain conditions for grant of such exemption. These conditions are as under :

    i) All the assets and liabilities of the company should be transferred to the LLP.

    ii) All the shareholders of the company should become partners of the LLP and their contribution as well as profit sharing ratio in the LLP should be in the same proportion in which they held shares in the company.

    iii) Shareholders of the company should not receive any consideration or benefit other than by way of share of profit and capital contribution in the LLP.

    iv) The aggregate profit sharing ratio to the ex-tent of 50% or more of the shareholders of the company should continue in the LLP for a period of 5 years.

    v) The total sales, turnover or gross receipts in the business of the company in any of the three 3 preceeding years should not exceed Rs.60 lacs.

    vi) The partners of the LLP should not withdraw the accumulated profits (including Reserves) of the company for a period of 3 years after the conversion.

9.2 S. 47A :
This is also a new Section inserted w.e.f. A.Y. 2011-12 to provide that, if any of the above conditions of S. 47(xiiib) be are violated during the specified period of 3 years or 5 years (as may be applicable), the tax on capital gain exempted u/s.47(xiiib) will be payable in the year in which any of the conditions are violated. This tax will be as under :

    i) In the case of transfer of assets and liabilities of the company to the LLP, the tax on capital gain will be payable by the LLP and

    ii) In the case of conversion of shares held in the company to capital in the LLP, the tax on capital gain will be payable by the shareholder.

9.3 It may be noted that several other amendments, which are consequential to the above provisions, have been made. These provisions are as under :

    i) S. 32 : This Section is amended to provide that the aggregate depreciation allowable to the converted company and the LLP shall not exceed the total depreciation allowable in the year of conversion. Such depreciation shall be apportioned between the two entities in the ratio of number of days for which the assets are used by them.

    ii) S. 35DDA : The benefit of amortisation for VRS payments u/s.35DDA will be available to the LLP for the unexpired period.

    iii) S. 43 : It is now provided in S. 43(6) that, if the company is having depreciable assets and such a company is converted into an LLP, the WDV of Block of Assets in the case of the LLP will be the same as in the case of the company. Further, actual cost of the capital asset u/s.43(1) in the hands of the LLP shall be taken as ‘Nil’ in case deduction of the entire cost is allowed to the converted company u/s.35AD.

    iv) S. 49 : Under S. 42 of the LLP Act, share of a partner of an LLP is a transferable right i.e., capital asset. It is now provided u/s.49(2AAA) that the cost of such right of the partner in the LLP shall be the same as the cost of acquisition to him of the shares of the converted company.

    v) S. 72A : On conversion of a company into an LLP, the accumulated losses and unabsorbed depreciation in the case of the company will be allowed to be carried forwarded in the hands of the LLP and will be set off against its income. However, if any of the conditions of S. 47(xiiib) are violated in any year, the benefit allowed by way of carry forward and set-off of losses and unabsorbed depreciation will be deemed to have been wrongly allowed and will become taxable in that year.

    vi) S. 115JAA : In the case of the company, if it has paid tax on book profits u/s.115JA/115JB and the company is entitled to the benefit of carry forward of MAT Credit u/s.115JAA, it is now provided that this MAT Credit will not be available to the LLP on such conversion of the company into the LLP.

9.4 From reading the above conditions, it is evident that the condition No. (v) stated in para 9.1 above is very harsh inasmuch as the benefit of conversion of a company will not be available to all private companies and unlisted public companies. The benefit of the Section can be enjoyed only by small companies. When the LLP Act was passed, this was never the intention of the Parliament that a company having turnover or gross receipt exceeding Rs.60 lacs will be made liable to pay tax under the Income-tax Act if it is converted into an LLP. S. 56 and S. 57 read with Schedules 3 and 4 of the LLP Act already provide that if such companies have taken secured loans, they cannot be converted into LLP. This ensures that large-sized companies are not converted into LLP. By introducing a cap on the sales, turnover or gross receipts, the purpose of the LLP Act to encourage conversion of existing companies into LLP will be defeated.

9.5 In the Explanatory Memorandum attached to the Finance (No. 2) Bill, 2009, it was stated that since partnership firm and LLP are being treated as equivalent, the conversion of partnership firm into LLP will have no tax implications if the rights and obligations of the partners remain the same after the conversion and if there is no transfer of any asset or liability after conversion. It was further stated that if there was a violation of these conditions, the provisions of S. 45 will apply and capital gains will be payable. However, no specific provision has been made in the Income-tax Act granting such conditional exemption in the case of conversion of a partnership firm into an LLP in the Finance (No. 2) Act, 2009 or in the Finance Act, 2010. In the absence of such a specific provision granting exemption similar to S. 47(xiii), S. 47(xiiib) or S. 47(xiv), the existing partnership firm will hesitate to convert itself into LLP.

9.6 It appears that the Government has only made a half-hearted attempt while granting tax exemption on conversion of a company into an LLP. It has not given due consideration to the following issues :

    i) Exemption on conversion of a partnership firm into an LLP is not specifically provided.

    ii) By putting a cap of Rs.60 lacs on total sales, turnover or gross receipts, the benefit of such conversion is restricted to very tiny companies.

    iii) The benefit of exemption/deduction available to the company u/s.10A, u/s.10AA, u/s.10B, u/s.10C, u/s.35A, u/s.35AB, u/s.35D, u/s.35DD, u/s.80IA, u/s.80IB, u/s.80IC, u/s.80ID, u/s.80IE, etc. for the unexpired period has not been granted to the LLP on conversion.

    iv) Proposed S. 56(2)(viia) provides that if a firm or a closely held company receives shares of another closely held company, the difference between the fair market value of such shares and the cost in the hands of the recipient firm or company, will be deemed to be income from other sources of the recipient. Provision is made to exempt certain transfers under a scheme of amalgamation or demerger u/s.47(via), (vic), (vicb), (vid) or (vii) from the provisions of this Section. No exemption is granted to transfer of shares in closely held company when a company is converted into LLP u/s.47(xiiib), or a firm is converted into LLP or a firm or proprietary concern is converted into a company u/s. 47(xiii) and (xiv), or a holding Company transfers to 100% subsidiary or vice versa u/s.47(iv) or (v) or on transfer in amalgamation or in demerger u/s.47(vi) and (vib).

9.7 The question of levy of stamp duty on transfer of assets of the company to the LLP has also not been considered. This is an issue which will have to be considered by the State Governments. This is possible only if specific recommendation is made by the Central Government for grant of exemption from stamp duty.

9.8 Unless these and several other related issues are amicably resolved, the new provisions for LLP will not become popular. Therefore, a comprehensive study about the various issues arising from conversion of a firm or company into LLP should be made by the Central Government as well as by the State Governments if they really want the alternate business model of LLP to become more popular.

    Chapter VIA deductions :
A new S. 80CCF is inserted and following Sections are amended as under :

10.1 New S. 80CCF — Infrastructure bonds :
This new Section comes into force from A.Y. 2011-12 Under this Section an Individual or HUF will be entitled to claim deduction from total income up to Rs.20,000 invested in long-term infrastructure bonds to be notified by the Central Government. This deduction will be over and above deduction upto Rs.1 lac allowed u/s.80C. This benefit will be available for any such investment made during the accounting year 2010-11 and onwards.

10.2    S. 80D — Deduction for Health Insurance Premium :
This Section is amended w.e.f. A.Y. 2011-12. It is now provided that the benefit of deduction under this Section will now be available for any contribution made to a Central Government Health Scheme. This will be besides deduction for Medi-claim Insurance Premium within the existing limits provided in this Section. This will benefit the Government employees and retired Government employees.

10.3    S. 80IB(10) — Development of housing projects :
    i) S. 80IB(10) has been amended effective from A.Y. 2010-11 (Accounting Year 2009-10). At present, the deduction under this Section is available in respect of profits derived from developing specified residential housing project if the same is completed within a period of 4 years from the end of the financial year in which the project is approved. This position will continue in respect of projects approved between 1-4-2004 and 31-3-2005.

    ii) In respect of projects approved on or after 1-4-2005, the period for completion of the project is now extended to 5 years by amendment of this Section.

    iii) Further, the existing limit of built-up area for shops and other commercial establishments in the residential housing project is now increased from A.Y. 2010-11. At present, this limit is 5% of the aggregate built-up area of the housing project or 2500 sq.ft., whichever is less. This limit is now revised to 3% of the aggregate built-up area of the housing project or 5000 sq.ft., whichever more. The Explanatory Memorandum to the Finance Bill, 2010, states that this benefit will be available to housing projects approved on or after 1-4-2005, which are pending for completion, in respect of their income relating to A.Y. 2010-11 and subsequent years.

10.4    S. 80ID — Deduction for hotels or convention centres :
Under this Section, 100% deduction for profits derived by specified hotels or convention centres in specified places is available for a period of 5 years if such hotels start functioning or such convention centres are constructed during the period 1-4-2007 to 31-3-2010. To provide some more time for these facilities to be set up in the light of the Commonwealth Games to be held in October, 2010, the period for start of such hotels or completion of construction of such convention centres has been extended from 31-3-2010 to 31-7-2010.

    11. Settlement Commission :
The following amendments are made in S. 245A, S. 245C and S. 245D(4A) of the Income-tax Act and S. 22A and S. 22D of the Wealth-tax Act, w.e.f. 1-6-2010.

    i) S. 245A : At present, the definition of ‘Case’ excludes proceedings for assessment and reassessment resulting from search or resulting from requisition of books of account, other documents or assets. This definition is now amended to include such cases of search or requisition of books, etc. Further, it is provided that proceedings for assessment or reassessment for any relevant assessment year shall be deemed to have commenced on the date of issue of notice initiating such proceedings and concluded on the date on which assessment is made.

    ii) S. 245C : At present, an application for settlement of a case can be filed if the additional amount of Income-tax payable on the income disclosed in the application exceeds Rs.3 lacs. It is now provided that in the case of a search or requisition of books, etc. such application can only be made if the additional amount of Income-tax payable on the income disclosed in the application exceeds Rs.50 lacs. However, in other cases, the limit is increased from Rs.3 lacs to Rs.10 lacs.

    iii) S. 245D(4A) : At present, the Settlement Commission can pass order of settlement within 12 months from the end of the month in which application is made to the Settlement Commission. This time limit is increased to 18 months in cases of applications made on or after 1-6-2010.

    iv) S. 22A and S. 22D of the Wealth-tax Act : Consequential amendments as in S. 245A and S. 245D(4A) are made in the Wealth Tax also.

    12. Other amendments :

12.1    S. 203 and S. 206C — Certificate for TDS and TCS :
With computerisation in the Income-tax Department, it was proposed to dispense with the requirement to issue physical TDS/TCS certificates by tax deductor. Accordingly, it was provided in S. 203(3) and S. 206C(5) that the tax deductor/collector shall not be required to furnish certificates for TDS/TCS w.e.f. 1-4-2010. It appears that the Income-tax Department has not geared up to take up the responsibility of giving credit for TDS/TCS without verification of physical certificates. Therefore, these provisions in S. 203(3) and S. 206C(5) have now been deleted and the practice of furnishing TDS/TCS certificates by the tax deductor/ collector will continue even after 1-4-2010.

12.2    S. 256 and S. 260A — Reference/Appeal to High Court :
Various High Courts, including the Full Bench of the Allahabad High Court, in the case of CIT v. Mohd. Farooq, 317 ITR 305, and the Bombay High Court in the case of CIT v. Grasim Industries Ltd., 225 CTR 127 held that the High Court had no power to condone the delay in filing reference application u/s.256 or appeal u/s.260A. To remedy this situation, S. 256 has been amended w.e.f. 1-6-1981 and S. 260A has been amended w.e.f. 1-10-1998, giving power to the High Court to admit belated reference applications as well as appeals if it is satisfied that there was sufficient cause for delay in filing such reference applications or appeals.

Similar amendments are also made in S. 27 and S. 27A of the Wealth Tax Act granting similar power to the High Courts with retrospective effect.

12.3    S. 282B — Allotment of Document Identification Number :
Every Income-tax Authority is required  to allot computer-generated Document Identification Number (DIN) in respect of every notice, order, letter or any correspondence issued by him/received by him to/from any other Income-tax Authority or to/from assessees or to/from any other person, effective from 1-10-2010. The implementation of this provision is now postponed to 1-7-2011.

    13. Computation of income of General Insurance Companies :
The First Schedule to the Income-tax Act (Rule 5) provides for computation of profits and gains of general insurance companies. This provision is now amended as under effective from A.Y. 2011-12 :
    
i) Any gain or loss on realisation of investments would alone be taxable/deductible. This will be the position even if such gain or loss is included in the profit and loss account or not. Therefore, gain or loss on revaluation of investments will not be considered for determination of taxable income.

ii) Further, provision for diminution in the value of investments i.e., unrealised loss or loss on revaluation of investments, which is debited to the profit and loss account will be added back in computing the taxable income.

This amendment will bring welcome relief for general insurance companies as unrealised gains on investments will not be taxed from A.Y. 2011-12.

    14 . To sum up :
From the above analysis of the Finance Act, 2010, it will be noticed that about 20 important amendments have been made in the Income-tax and Wealth-tax Acts. Compared to earlier Finance Acts, this number can be considered as insignificant. As mentioned earlier, these amendments have reduced the burden of direct taxes this year by about 26,000 crores. To this extent we can give credit to our Finance Minister.

The concept of treating gifts as income of the donee is being enlarged every year and this trend has continued this year also. Further, when the concept of Limited Liability Partnership was recognised in our country as an alternate business model, by passing a separate LLP Act in 2008, it was believed that all-out efforts will be made to encourage existing partnerships and unlisted companies to convert themselves into this new business model without any tax liability. However, even after two years of this legislation, no major steps have been taken either by the Central Government for the reforms of tax laws or by the State Governments for the matter of concession in stamp duty. In the 2009 budget and in the 2010 budget, only some half-hearted steps are taken which are not likely to encourage the business community to opt for this alternate business model.

The Income-tax Act, 1961, came into force on 1-4-1962. We have lived with this Act for about 5 decades. It will complete 50 years of its existence and will celebrate its Golden Jubilee next year. During this journey of 5 decades, this Act has suffered with innumerable amendments. Many of these amendments have been made with retrospective effect. Most of these retrospective amendments were made to reverse the decisions of ITA Tribunals, High Courts and the Supreme Court. These amendments have complicated our tax structure to such an extent that the successive Governments have been promising that they would like to introduce tax reforms and enact such tax laws which lay taxpayers can understand. Several committees were appointed for this purpose and attempts were made to draft simple tax laws. None of these attempts have succeeded in the past. Now, it appears that the present Finance Minister is serious about replacing the present direct tax laws and indirect tax laws by new legislation. This is evident from paras 25 and 26 of his budget speech delivered in the Parliament on 26-2-2010. These two paras read as under :

Tax reforms :
“25. I am happy to inform the Honourable Members that the process for building a simple tax system with minimum exemptions and low rates designed to promote voluntary compliance, is now nearing completion. On the Direct Tax Code the wide-ranging discussions with stakeholders have been concluded. I am confident that the Government will be in a position to implement the Direct Tax Code from April, 2011.”

“26. On Goods and Services Tax, we have been focussing on generating a wide consensus on its design. In November, 2009 the Empowered Committee of the State Finance Ministers placed the first discussion paper on GST in the public domain. The Thirteenth Finance Commission has also made a number of significant recommendations relating to GST, which will contribute to the ongoing discussions. We are actively engaged with the Empowered Committee to finalise the structure of GST as well as the modalities of its expeditious implementation. It will be my earnest endeavour to introduce GST along with the DTC in April, 2011.”

Let us hope that new Direct Tax Code in its revised form and GST system of collecting indirect taxes are brought into force from April, 2011. For this purpose, the legislative process will have to be expedited. At the same time, all members of the Parliament will have to co-operate with the Government in passing this legislation well in time before the end of 2010. Let us also hope that with this legislation the tax laws and procedures are simplified and tax litigation is considerably reduced. The new law should be such that a lay tax-payer can understand the same and cost of the compliance is reduced. Further, the Government should ensure that no major amendments are made in this new legislation from time to time. The effort of the Government should be to provide a simple tax structure and an efficient non-corrupt tax administration.