Month: September

Section 12AA (3) of the Income-tax Act,
1961 (hereinafter referred to as “the Act”) deals with cancellation of
registration of a charitable institution in circumstances specified in
the said section. The Income-tax Appellate Tribunal [“Tribunal”] has
consistently held in a number of cases that registration of an
institution cannot be cancelled u/s. 12AA (3) merely because section
13(1) of the Act applies to it. [Krupanidhi Educational Trust vs. DIT,
(2012) 27 taxmann.com 11 (Bang); Cancer Aid and Research Foundation vs.
DIT, (2014) 34 ITR (Trib) 56 (Mum); Parkar Medical Foundation vs. DCIT,
(2014) 34 ITR (Trib) 286 (Pune), TS-469-ITAT -2014 (Pune)]. In order to
overcome this position in law, the Finance (No.2) Act, 2014 inserted
section 12AA (4) with effect from 1-10-2014 to provide for cancellation
of registration of a charitable institution upon operation of section
13(1). This article attempts to explain and analyse the provisions of
section 12AA(4).

2. Text

Section 12AA(4) reads as follows:

“(4)
Without prejudice to the provisions of sub-section (3), where a trust
or any institution has been granted registration under clause (b) of
sub-section (1) or has obtained registration at any time under section
12A [as it stood before its amendment by the Finance (No.2) Act, 1996]
and subsequently it is noticed that the activities of the trust or the
institution are being carried out in a manner that the provisions of
section 11 and 12 do not apply to exclude either whole or any part of
the income such trust or institution due to operation of sub-section (1)
of section 13, then, the Principal Commissioner or the Commissioner may
by an order in writing cancel the registration of such trust or
institution:

Provided that the registration shall not be
cancelled under this sub-section, if the trust or institution proves
that there was a reasonable cause for the activities to be carried out
in the said manner.”

3. Summary

Preconditions for applicability of section 12AA(4)

(a) A charitable institution been granted registration u/s. 12AA(1)(b) or section 12A.
(b) After the registration, it is noticed that
(i) section 13(1) applies to the charitable institution;
(ii)
the activities of the charitable institution are being carried out in a
manner that section 11/12 do not apply to whole or any part of the
income due to operation of section 13(1)
(c) The charitable
institution cannot prove that there was reasonable cause for the
activities to be carried out in the said manner.

Consequences of applicability of section 12AA94)

(a) The Principal Commissioner (“PCIT”) or the Commissioner (“CIT”) may cancel the registration of such charitable institution.
(b) Such cancellation shall be done by an order.
(c) Such cancellation order shall be in writing.

4. Rationale/Purpose

4.1 The relevant passage in Memorandum explaining the provisions of the Finance (No. 2) Bill, 2014 reads as follows:

“There
have been cases where trusts, particularly in the year in which they
have substantial income claimed to be exempt under other provisions of
the Act, deliberately violate provisions of section 13 by investing in
prohibited mode etc. Similarly, there have been cases where the income
is not properly applied for charitable purposes or has been diverted for
benefit of certain interested persons. Due to restrictive
interpretation of the powers of the Commissioner under section 12AA,
registration of such trusts or institutions continues to be in force and
these institutions continue to enjoy the beneficial regime of
exemption. …

Therefore, in order to rationalise the provisions
relating to cancellation of registration of a trust, it is proposed to
amend section 12AA of the Act to provide that where a trust or an
institution has been granted registration, and subsequently it is
noticed that its activities are being carried out in such a manner
that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Act);
(iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or
(iv)
its funds are invested in prohibited modes, then the Principal
Commissioner or the Commissioner may cancel the registration if such
trust or institution does not prove that there was a reasonable cause
for the activities to be carried out in the above manner.”

4.2 The relevant paragraphs in Circular explaining the provisions of the Finance (No.2) Act, 2014 read as follows:

“9.2
There have been cases where trusts, particularly in the year in which
they had substantial income claimed to be exempt under other provisions
of the Income-tax Act though they deliberately violated the provisions
of section 13 of the said Act by investing in prohibited modes other
that specified modes, etc. Similarly, there have been cases where the
income is not properly applied for charitable purposes or is diverted
for the benefit of certain interested persons. However, due to
restrictive interpretation of the powers of the Commissioner under the
said section 12AA, registration of such trusts or institutions continued
to be in force and these institutions continued to enjoy the beneficial
regime of exemption.
…

9.4 Therefore, in order to
rationalise the provisions relating to cancellation of registration of a
trust, section 12AA of the Income-tax Act has been amended to provide
that where a trust or an institution has been granted registration, and
subsequently it is noticed that its activities are being carried out in
such a manner that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Income-tax Act, 1961);
(iii)
any income or property of the trust is used or applied directly or
indirectly for benefit of specified persons like author of trust,
trustees etc.; or
(iv) its funds are not invested in specified modes,

then
the Principal Commissioner or the Commissioner may cancel the
registration, if such trust or institution does not prove that there was
a reasonable cause for the activities to be carried out in the above
manner.”

[CBDT Circular No. 1 / 2015, dated 21.01.2015]

5. Violation of section 13 cannot be used as a ground to deny registration

Courts/Tribunal have held that violation of section 13 is not a ground on which registration can be denied to a charitable institution [see CIT vs. Leuva Patel Seva Samaj Trust, (2014) 42 taxmann.com 181 (Guj), (2014) 221 Taxman 75 (Guj); Malik Hasmullah Islamic Educational and Welfare Society vs. CIT, (2012) 24 (taxmann.com 93 (Luck), (2012) 138 ITD 519 (Luck), (2013) 153 TTJ 635 (Luck); PIMS Medical & Education Charitable Society vs. CIT, (2013) 31 taxmann.com 371 (Chd)(Trib), (2013) 56 SOT 522 (Chad)(Trib), (2012) 150 TTJ 891 (Chd)(Trib); Chaudhary Bishambher Singh Education Society vs. CIT, (2014) 48 taxmann.com 152 (Del)(Trib); Kurni Daivachara Sangham vs. DIT, (2014) 50 taxmann.com 53 (Hyd)(Trib); Modern Defence Shikshan Sanstha vs. CIT, (2008) 26 SOT 21 (Joh)(URO); Ashoka Education Foundation vs. CIT, (2014) 42 CCH 0090 (Pune)(Trib)]. On a plain reading, there is no change in this position even after amendment. This is because section 12AA(4) provides that “where a trust or any institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [asit stood before its amendment by the Finance (No.2) Act, 1996] and subsequently it is noticed that …”. Thus, the section is triggered only subsequent to the registration.

6.    Is cancellation independent of assessment? Can CIT suo moto take cognisance of the violation of section 13(1) prior to assessment by AO?

The section states that “if it is noticed that the activities of the trust or the institution are being carried out in a manner …” It does not state that the violation of section 13(1) is noticed only upon assessment. If the CIT can independently come to a conclusion that there has been a default u/s. 13(1) and the provisions of section 11 and 12 do not apply as a result of the default, then, on a literal reading, he can suo moto take cognisance of the violation of section 13(1) prior to assessment by AO. Thus, the action u/s.er section 12AA(4)

     a. could precede the assessment; or

     b. be concurrent with the assessment; or

     c. succeed the assessment.

To illustrate :

Suppose, a search and seizure action u/s. 132 is taken against a charitable institution and during the proceedings, it is found that the Managing Trust has siphoned off certain funds of the institution. In that case, section 13(1)(c) could apply and the PCIT or CIT could initiate proceedings u/s. 12AA(4).

However, it appears that the ultimate outcome of cancellation would, inter alia, depend on the position taken or finally accepted in assessment proceedings vis-à-vis the operation of section 13(1). Hence, if the assessment order is reversed at the appellate stage, then the cancellation order cannot survive.

     7. Cancellation only in respect of operation of section 13(1)

7.1    The provision applies pursuant to operation of section 13(1). Thus, it does not apply pursuant to operation of the following sections :

     Section 13(7) – anonymous donations

     Section 13(8) – exemption not available on account of first proviso to section 2(15) becoming applicable to the institution.
7.2    The position vis-à-vis other sub-sections of sectio     13 is explained in the following paragraphs :

     Section 13(2)

The said sub-section provides for situations when the income or property of an institution is deemed to have been used or applied for the benefit of an interested party. This sub-section is an “extension of section 13(1)(c) / (d)” and hence a violation of section 13(2) could also trigger the proceedings for cancellation of registration u/s. 12AA(4).

     Section 13(4) and 13(6)

Section 13(4) provides that if the investment in a concern in which an interested person referred to in section 13(3) does not exceed 5% of the capital of that concern, then, subject to its provisions, the exemption u/s. 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment.

Section 13(6) provides that if a trust has provided educational or medical facilities to an interested person referred to in section 13(3), the exemption u/s. 11 or 12 shall not be denied in relation to any income other than the income referred to in section 12(2).

It appears that the above sections are not independent sections : both are in connection with violation u/s. 13(1)(c) or section 13(1)(d). They merely give a concession and relax the rigors of section 13(1)(c) and section 13(1)(d) apply. Income is not excluded from section 11 by reason of application of section 13(4) or (6), The breach would be only be on account of section 13(1)(c) or (d). Hence, it appears that, on a literal interpretation, the provision covers cases where section 13(4) and section 13(6) are applicable.

     8. General principles for interpretation of section 12AA(4)

Section 186 (1) of the Act, prior to its omission with effect from 01.04.1993, read as follows:
“(1) If, where a firm has been registered or is deemed to have been registered, or its registration has effect under sub-section (7) of section 184 for an assessment year, the Assessing Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard cancel the registration of the firm for that assessment year:”

It is noticed that both, section 186(1) and section 12AA(4), refer to cancellation of registration and both use the term ‘may’, that is, the Assessing Officer (in section 186) and the PCIT or CIT [in section 12AA(4)] may cancel the registration.

Hence, the principles laid down by Courts in section 186 could be applied for interpreting section 12AA(4), to the extent applicable. Now, in the context of section 186, it has been held that withdrawal of the benefit of registration in respect of an assessment year results in serious consequences; it is penal in nature in that the consequences are very serious to the assessee and that is why discretion is conferred on the authority by requiring him to give a second opportunity [CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP)]. Likewise, it is submitted that section 12AA(4) is also a penal provision and the principles applicable in interpretation of penal proceedings, including the following, could ordinarily apply in interpreting section 12AA(4):

    A penal provision must be interpreted strictly and in favour of the assessee [CIT vs. Sundaram Iyengar & Sons (P) Ltd. (TV), (1975) 101 ITR 764 (SC); Jain (NK) vs. Shah (CK), AIR 1991 SC 1289 and CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]

    If two views are possible, the benefit should go to the assessee. [CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) (in the context of section 271 of the Income-tax Act); CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]. In other words if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. A court is not competent to stretch the meaning of an expression used by the Legislature in order to carry out the intention of the Legislature. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742]
 

    9. Does a default u/s. 13 automatically lead to cancellation of registration?

For the following reasons, it appears that a mere default u/s. 13(1) would not automatically result in cancellation of registration:

    Section 12AA(4) provides that the PCIT/CIT may by an order in writing cancel the registration. The use of the word “may” shows that it is discretionary, and the PCIT/CIT has a discretion not to cancel registration even in spite of the default of the assessee. [see J. M. Sheth vs. CIT, (1965) 56 ITR 293 (Mad); CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (both in the context of section 186)].

    A similar term is used in section 271(1)(c), where the AO “may” levy penalty on an assessee upon the assessee furnishing inaccurate particulars of income or concealing income. Courts have held that in view of the word “may”, the penalty is not automatic [Dilip N. Shroff vs. JCIT, (2007) 161 Taxman 218 (SC), (2007) 191 ITR 519 (SC)]. Now, section 12AA(4) is also a penal provision. Hence, applying the same principle, the cancellation u/s. 12AA(4) is also not automatic.

    Section 12AA(3) provides that if the Commissioner is satisfied that the activities of trusts are not genuine, he shall pass an order in writing cancelling the registration. The use of the word “may” in section 12AA(4) as against “shall” in section 12AA(3) clearly shows that the power in section 12AA(4) is discretionary.

    The proviso to section 12AA(4) states that the registration shall not be cancelled if the charitable institution proves that there was a reasonable cause for the activities to be carried out in the manner provided in the section. Hence, a mere default does not trigger cancellation, if there is a reasonable cause for the default.

    The relevant passage in section 12AA(4) reads as follows:

“… it is noticed that the activities of the trust or the institution are being carried out in a manner that the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principle Commissioner or the Commissioner may by an order in writing cancel the registration …”

Suppose the expression “the activities of the trust or the institution are being carried out in a manner” (hereinafter referred to as “the relevant expression”) is removed from the language. In that case, the provision (hereinafter referred to as “modified provision”) would read as follows:

“It is noticed that … the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principal Commissioner or the Commissioner may by an order in writing cancel the registration.”

A plain reading of modified provision shows that if provisions of section 11 and 12 do not apply due to operation of section 13(1), then it could trigger cancellation of registration. Thus, if mere default in section 13(1) triggered cancellation, then the modified provision without the relevant expression would have been sufficient and the relevant expression would be superfluous!

It is now very well settled that redundancy should not be attributed to the legislature and no part of a statute should be read in a manner that it becomes superfluous. [CWT vs. Kripashankar Dayashanker Worah, (1971) 81 ITR 763 (SC)] If a mere default in section 13(1) could result in the CIT exercising his power, then the entire expression “the activities of the trust or the institution are being carried out in a manner ” would not have been required and it would have been sufficient if the section had been worded as “it is noticed that the provisions of section 11 and 12 …”. In view of this, some meaning has to be attributed to the relevant expression. The point for consideration is what meaning should be attributed to the said phrase? It is submitted as follows:

    i)“Activities”

The relevant expression refers to “activities”. Now ordinarily, section 13 of General Clauses Act, 1897, provides that singular includes plural and vice versa, unless the context otherwise requires. It could be argued that in this case, depending on facts, the expression “activities” in plural may not include singular “activity” especially because cancellation of registration is an onerous provision and a single default should not result in such harsh consequences.

    ii)“Are being carried out”

The relevant expression uses the phrase “are being carried out”. The terms ‘is’ (singular of ‘are’) and “being” have been judicially interpreted as follows:

    In F. S. Gandhi vs. CWT, (1990) 51 Taxman 15 (SC), (1990) 184 ITR 34 (SC), (1990) 84 CTR 35 (SC), the Supreme Court had to interpret the expression “any interest in property where the interest is available to an assesssee for a period not exceeding six years…” The Court observed as follows:

The word ‘available’ is preceded by the word ‘is’ and is followed by the words ‘for a period not exceeding six years’. The word ‘is’, although normally referring to the present often has a future meaning. It may also have a past signification as in the sense of ‘has been’ (See Black’s Law Dictionary, 5th edn., p. 745). We are of the view that in view of the words ‘for a period not exceeding six years’ which follow the word ‘available’ the word ‘is’ must be construed as referring to the present and the future. In that sense it would mean that the interest is presently available and is to be available in future for a period not exceeding six years.

    The term “being” has been interpreted as follows:

    “In Stroud’s Judicial Dictionary (fourth edition) the expression “being” is explained thus at page 267 of volume I:

“Being — ‘Being as used in a sense similar to that of the ablative absolute, has sometimes been translated as, ‘having been’; but it properly denotes a state or condition existent at the time when the conclusion of law or fact has to be ascertained.”

In other words, it is clear that the phrase “the business of such company is not being continued” must be interpreted to mean the company whose business is non-existent at a time when the requisite opinion contemplated by the section is formed by the Central Government and if at such time the business is not continued or has stopped, the case would fall within that phrase.”

[UOI vs. Seksaria Cotton Mills Ltd., (1975) 45 Comp. Cas 613 (Bom)] [for the purpose of: section 15A of the Industries (Development & Regulation) Act, 1951] In  Harbhajan  Singh  vs.  Press  Council  of India, AIR 2002 SC 135, the Supreme Court observed as follows :

“In Maradana Mosque (Board of Trustees) vs. Badi-ud-Din Mahmud and Anr.- (1966) 1 All ER 545, under the relevant Statute the Minister was empowered to declare that the school should cease to be an unaided school and that the Director should be the Manager of it, if the Minister was satisfied that an unaided school “is being administered” in contravention of any provisions of the Act. Their Lordships opined, “Before the Minister had jurisdiction to make the order he must be satisfied that ‘any school. is being so administered in contravention of any of the provisions of this Act’. The present tense is clear. It would have been easy to say ‘has been administered’ or ‘in the administration of the school any breach of any of the provisions of this Act has been committed’, if such was the intention of the legislature; but for reasons which common sense may easily supply, it was enacted that the Minister should concern himself with the present conduct of the school, not the past, when making the order.

This does not mean, of course, that a school may habitually misconduct itself and yet repeatedly save itself from any order of the Minister by correcting its faults as soon as they are called to its attention. Such behaviour might well bring it within the words ‘is being administered’ but in the present case no such situation arose. There was, therefore, no ground on which the Minister could be

‘satisfied’ at the time of making the order. As appears from the passages of his broadcast statement which are cited above, he failed to consider the right question. He considered
 

only whether a breach had been committed, and not whether the school was at the time of his order being carried on in contravention of any of the provisions of the Act. Thus he had no jurisdiction to make the order at the date on which he made it”.

On a combined reading of the term “are” as a plural of “is” and “being”, as interpreted above, it could be argued that the defaulting activities should continue to be carried out or at least they have been carried out in near past. The CIT cannot invoke the provision for a default committed before many years and especially in a re-assessment when the default u/s. 13 was completed much earlier and was not detected or was held as not being applicable in the original assessment.

    10. Proceedings before PCIT/CIT

10.1    Cancellation of the registration should only be after complying with the principles of natural justice, which necessarily implies that –

    if the PCIT/CIT is satisfied with the explanation offered by the assessee, he must drop the proposal to cancel the registration. [see CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 185)]

    a reasonable opportunity of being heard shall be given to the assessee;
    the PCIT/CIT shall not use any material without giving an opportunity to the assessee to rebut such material.

10.2    The PCIT/CIT should exercise his power not arbitrarily or capriciously but judicially in a manner consistent with judicial standards and after a consideration of all relevant circumstances. [see Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 11 (SC), (1972) 83 ITR 26 (SC); J.M Sheth vs. CIT, (1965) 56 ITR 293 (Mad) (in the context of section 186)].

10.3    For the purpose of section 271(1) it has been held that the regular assessment order is not the final word upon the pleas which can be taken at the penalty stage. The assessee is entitled to show-cause in penalty proceedings and to establish by the material and relevant facts which may go to affect his liability or the quantum of penalty. He cannot be debarred from taking appropriate pleas simply on the ground that such a plea was not taken in the regular assessment proceedings. [Jaidayal Pyarelal vs. CIT, (1973) Tax LR 880 (All)]

Applying the same principle an assessee cannot be debarred from taking appropriate pleas in the cancellation proceedings simply on the ground that such a plea was not taken in the regular assessment proceedings.

10.4    For the purpose of section 271 it has been held that the findings given in assessment proceedings, though relevant and admissible material in penalty proceedings, cannot operate as res judicata. [CIT vs. Gurudayalram Mukhlal, (1991) 95 CTR 198 (Gau), (1992) 60 Taxman 313 (Gau), (1991) 190 ITR 39 (Gau).] Similarly, the findings in respect of section 13(1) given in assessment proceedings cannot operate as res judicata.

10.5    It has been held that additional evidence is admissible in penalty proceedings and it is possible for the parties to bring on record additional material for determining if the penalty should be imposed. [CIT vs. Babu Ram Chander Bhan, (1973) 90 ITR 230 (All)]. Applying the same principle it appears that additional evidence is admissible in the cancellation proceedings.

    11. Order passed by CIT/PCIT

Section 12AA(4) requires the CIT/PCIT to pass an order ‘in writing’.

It is now well settled that a quasi-judicial order has to be a speaking order containing

    a) submissions of the assessee;

    b) detailed reasons why the submissions are not acceptable. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742; Travancore Rayons vs. UOI, AIR 1971 SC 862; Appropriate Authority  vs.  Hindumal  Balmukand  Investment Co. P. Ltd., (2001) 251 ITR 660 (SC)] or a mere statement that after hearing the assessee and perusing the record, he did not find any substance in the submissions is not enough [see Sanju Prasad Singh vs. Chotanagpur Regional Transport Authority, AIR 1970 Pat 288 explaining the meaning of “speaking order”].

    12. Reasonable cause

12.2    Institution to prove reasonable cause

The institution has to prove that a reasonable cause existed for the activities being carried out in the particular manner. The term “proved” is defined in section 3 of the Indian Evidence Act, 1872 as follows:

“A fact is said to be ‘proved’ when after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.”

In view of the above, the test of proof is that there is such a high degree of probability that a prudent man would act on the assumption that the thing is true. [Pyare Lal Bhargava vs. State of Rajasthan, AIR 1963 SC 1094, (1963) 1 SCR Supl. 689 (SC)]

12.3    Reasonable cause – meaning

Courts have explained the term “reasonable cause” as follows:

    ‘Reasonable cause’ as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow. [Woodward Governors India (P.) Ltd. vs. CIT, (2002) 253 ITR 745 (Del) (For the purpose of section 273B of the Income-tax Act, 1961)]

    In Oxford English Dictionary (first edn. published in 1933 and reprinted in 1961, Volume VIII), the expression ‘reasonable’ has been defined to mean ‘fair, not absurd, not irrational and not ridiculous’. Likewise, the expression ‘good’ has been defined in the said Dictionary in Volume IV to mean ‘adequate, reliable, sound’. Similarly, the expression ‘sufficient’ has been defined under the same very Dictionary in Volume X to mean ‘substantial, of a good standard’.

From the definitions referred to above, it would appear that reasonable cause or excuse is that which is fair, not absurd, not irrational and not ridiculous … if a reason is good and sufficient, the same would necessarily be a reasonable cause. [Banwarilal Satyanarain vs. State of Bihar, (1989) 46 TAXMAN 289 (Pat), (1989) 179 ITR 387 (Pat), (1989) 80 CTR 31 (Pat) (for the purpose of section 278AA of the Income-tax Act, 1961)]

    Reasonable cause, as correctly observed by the Administrative Tribunal, is a cause that a prudent man accepts as reasonable. The test to assess the reasonableness of the cause for default is, therefore, to find whether in the judgment of a common prudent man the cause is such that any normal man would, in the same or similar circumstances be also a defaulter. [Eknath Kira Akhadkar vs. Administrative Tribunal, AIR 1984 Bom 144 [for the purpose of section 22(2)(a) and section 32(4) of the Goa, Daman and Diu Buildings (Lease , Rent and Eviction) Control Act, 19968]]

The Bombay High Court has held that the expression ‘reasonable cause’ in section 273B for non-imposition of penalty u/s. 271E would have to be construed liberally depending upon the facts of each case. [CIT vs. Triumph International Finance (India) Ltd., (2012) 22 taxmann. com 138 (Bom), (2012) 208 TAXMAN 299 (Bom), (2012) 345 ITR 270 (Bom), (2012) 251 CTR 253 (Bom)]

12.4    Some illustrations/principles regarding reasonable cause

a)    Ignorance of law

It has been held that ignorance of law can constitute a reasonable cause [see ACIT vs. Vinman Finance & Leasing Ltd., (2008) 115 ITD 115 (Visk)(TM), para 13; Kaushal Diwan vs. ITO (1983) 3 ITD 432 (Del)(TM) (in the context of 285A of the Income-tax Act, 1961)]. Hence, in a given situation, the ignorance of the provisions of section 13(1) may constitute a reasonable cause.
 

    b) Bonafide belief

It has been held that penalty is not justified where the breach flows from a bonafide belief of the offender that he is not liable to act in the manner prescribed by the statute. [see

    Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC);
    DCIT vs. Dasari Narayana Rao, (2011) 15 taxmann.com 208 (Chennai Trib) (in the context of section 272A of the Income-tax Act, 1971);

    ACIT vs. Dargapandarinath Tuljayya & Co. (1977) 107 ITR 850 (AP) followed in Thomas Muthoot vs. ACIT, (2014) 52 taxmann.com 114 (Coch Trib) (in the context of section 271C of the Income-tax Act, 1961);

    IL & FS Maritime Infrastructure Co. Ltd. vs. ACIT, (2013) 37 taxmann.com 297 (Mum Trib), para 8 (in the context of section 271BA of the Income-tax Act, 1961)].

Applying the aforesaid principle, a mistaken bonafide belief that section 13(1) is not applicable can constitute a reasonable cause.

(c) Expert opinion

It has been held that if a particular action is bonafide taken on the basis of an opinion from a senior counsel, then, it constitutes a reasonable cause and merely because it turns out to be wrong, a penalty cannot be levied on the assessee. [CIT vs. Viswapriya Financial Services & Securities Ltd., (2008) 303 ITR 122 (Mad)] Applying the same principle, if a charitable institution has relied upon an expert opinion, then, merely because the expert had held a different view, it does not mean that there is no reasonable cause for the default.

(d) Bonafide mistake

It has been held that registration of an assessee firm cannot be cancelled upon a bonafide mistake which was not intentional.[see CIT vs. Pawan Sut Rice Mill, (2004) 136 Taxman 640 (Pat) (in the context of section 186 of the Act)]. Applying the principle, the registration may not be cancelled if there is unintentional, bonafide mistake as a result of which section 13(1) became applicable to an assessee.

    13. No penalty upon technical or venial breach

It has been held that the authority competent to impose the penalty will be justified in refusing to impose the penalty when there is a technical or venial breach of the provisions of the Act. [Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC)]. Applying the same principle, the registration may not be cancelled when there is technical or venial breach upon application of section 13(1).

    14. Whether registration can be cancelled in certain situations involving quantum assessment

For the purpose of section 271(1)(c), it has been held that penalty cannot be levied in the following situations :

    a. the assessee’s appeal against the quantum assessment has been admitted as substantial question of law (because this shows that the issue is debatable) [CIT vs. Liquid Investment and Trading Co., ITA No. 240/Del/2009, dated 05.10.2010].

    b. where two views are possible in respect of a particular addition in the quantum assessment and the issue is debatable.

    c. where the position adopted by the assessee is supported by a Tribunal or High Court judgment in another case.

Likewise, if the applicability of section 13(1) has been admitted by the High Court as a substantial question of law or if two views are possible regarding operation of section 13(1) or there is a case u/s. 13(1) supporting the view adopted by the assessee, it is a point for consideration as to whether the PCIT/CIT should not cancel the registration on the ground that the discretionary power u/s. 12AA(4) entails him to use the discretion in favour of the assessee in such matters and/or their exists a reasonable cause for the activity to be carried out by the assessee in the manner it has done.

    15. Wilful default

The registration can be cancelled if the default is a wilful default. [See CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (in the context of section 186)]
    
16. Cancellation – whether with retrospective effect?

16.2    There are two views on the issue :

    a. Registration cannot be cancelled retrospectively

    b. Registration can be cancelled retrospectively

16.3    Registration cannot be cancelled retrospectively

    For the purpose of section 35CC/CCA, Courts have held that an approval granted could not be withdrawn with retrospective effect.

[see B. P. Agarwalla & Sons Ltd. vs. CIT, (1993) 71 Taxman 361 (Cal), (1994) 208 ITR 863 (Cal)

CIT vs. Bachraj Dugar, (1998) 232 ITR 290 (Gau), (1999) 152 CTR 367 (Gau)

Jai Kumar Kankaria vs. CIT, (2002) 120 Taxman 810 (Cal)]

Applying the aforesaid principle, registration cannot be cancelled with retrospective effect.

    For the purpose of sales tax, it has been held that the registration certificate of a dealer could not be cancelled with retrospective effect. [M. C. Agarwal vs. STO, (1986) 11 TMI 372 (Ori), (1987) 64 STC 298 (Ori)]

    Section 12AA(4) does not refer to cancellation with retrospective effect. In the absence of such specific provision, registration cannot be cancelled with retrospective effect.

16.4    Registration can be cancelled retrospectively

    In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), the Tribunal held that registration of a charitable institution could be cancelled u/s. 12AA(3) with retrospective effect. Applying the same principle, registration could be cancelled u/s. 12AA(4) with retrospective effect.

    The judgments for section 35C/CCA and under sales tax are distinguishable since a retrospective cancellation in those cases prejudicially affected the counterparty. However, in retrospective cancellation of certificate u/s. 12AA(4), it is primarily the charitable institution which is affected.

16.5    Even if registration can be cancelled retrospectively it can not be before 1st October 2014

Even if registration could be cancelled with retrospective effect, it could not be retrospective before 1st October, 2014 being the date of insertion of section 12AA(4). This is supported by the following arguments:

    In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), it was held that the registration to a charitable institution could not be cancelled beyond 1st October, 2010, being the date on which the provision became applicable.

    It is now well settled that law that a person, who has complied with the law as it exists, cannot be penalised by reason of the amendment to the law effected subsequently, unless such intention is expressly stated and the imposition of such penalty is not contrary to any of the provisions of the Constitution.[CIT vs. Kumudam Endowments, (2001) 117 Taxman 716 (Mad)]

Again, it is now well settled that unless the terms of a statute expressly so provide or necessarily imply, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. [CED vs. Merchant (MA), (1989) 177 ITR 490 (SC); CWT vs. Hira Lal Mehra, (1994) 205 ITR 122 (P&H); A fiscal statute will not therefore be regarded as retrospective by implication, particularly a penal provision therein. [CWT vs. Ram Narain Agarwal, 1976 TLR 1074 (All); Thangalakshmi vs. ITO, (1994) 205 ITR 176 (Mad)]

16.6    Summary

The matter is not free from doubt. However, even if it is held that the registration can be cancelled with retrospective effect, the retrospectivity cannot be prior to 1.10.2014.

To illustrate, suppose an assessee commits a default in financial year 2013-14; the CIT notices the default in June 2015 and cancels the registration in July 2015. In this case, the cancellation can have effect from 1st October 2014, and not for the period prior to 1st October, 2014.
 

16.7    Impact of cancellation of registration upon past years if registration cannot be cancelled with retrospective effect. (view 1)

Suppose a charitable institution violates section 13(1) during financial year 2015-16 and its registration is cancelled in financial year 2018-19. If there is no default u/s. 13(1) in financial year 2016-17 and 2017-18, can it avail of the benefit of section 11 and 12 during these years?

Section 12A(1)(a)/(aa) provide that the provisions of section 11 and 12 shall not apply in relation to the income of a charitable institution unless such trust is registered u/s. 12AA. Thus, in order to avail of the benefit of exemption, an institution is required to be registered u/s. 12AA. It appears that if the registration is valid throughout the previous year and if it is cancelled after 31st March of the relevant previous year, then, so far as the said previous year is concerned, it ought to be regarded as registered u/s. 12AA for the purposes of aforesaid section 12A(1) (a)/(aa). Thus, in the aforesaid illustration, the institution should be regarded as registered for financial year 2016-17 and financial year 2017-18, that is, assessment years 2017-18 and 2018-19; the registration should be regarded as cancelled only from financial year 2018-19 onwards.

17    Writ

Like any other order, in an appropriate case, a writ under Article 226 of the Constitution would lie against the cancellation order before the jurisdictional High Court and the Court may stay the operation of the cancellation order; or quash the cancellation order; or set aside the order directing the PCIT/CIT to pass a fresh order after complying with the directions of the Court.

18    Appeal against the cancellation order

An assessee aggrieved by the order passed by PCIT or CIT, may appeal to the Appellate Tribunal against such order. [see section 253(1)(c)]

Dual appeal

An assessee whose registration has cancelled will now have to pursue two appeals, one against the assessment order with the CIT(A) and another against the cancellation order with the Tribunal.
    
19.On cancellation, whether the charitable institution is debarred from making fresh application for registration?

Suppose the registration is cancelled for a default which no longer exists. To illustrate, an institution made an investment contrary to the mode specified in section 11(5). It has liquidated the investment and there is no continuing default u/s. 11(5). In such circumstances, even if the CIT cancels the registration, it appears that the institution can immediately reapply for fresh registration and the CIT has to deal with such application in accordance with the provisions of section 12AA(1).

20. Impact on cancellation order upon deletion of operation of section 13(1) in merits

The Supreme Court has authoritatively laid down that where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled. [K. C. Builders vs. ACIT, (2004) 265 ITR 562 (SC)]

Likewise, if it is held in the appellate proceedings that there is no violation of section 13(1) then, the cancellation order cannot survive. Further, such reversal of the cancellation order should be regarded to have retrospective effect ab initio and all the actions taken on the basis of the cancellation order would no longer survive.

21    Implications under other sections

21.2    Section 56(2)(vii)

Section 56(2)(vii) provides that if an individual or HUF receives any sum of money or property without consideration, then, the sum of money so received or the value of property so received shall be regarded as income
of the individual. The proviso to the said section provides that the provision will not apply in respect of any sum of money or property received from a charitable institution registered u/s. 12AA. Hence, if the institution supports any individual after the cancellation of registration, then such donation or contribution/aid would be regarded as income of the individual and shall be taxable beyond the basic exemption of Rs.50,000.

21.3    Section 80G

Section 80G(5)(i) provides that an institution is eligible for approval u/s. 80G if its income is not liable to inclusion in its total income under the provisions of sections 11 and

    Now, if the registration is cancelled, the exemption u/s. 11 and 12 would not be available to the institution and the income would be liable to inclusion in total income. In such circumstances, the institution would not be eligible to obtain an approval u/s. 80G(5) or its existing approval would be liable for cancellation.

21.4    Exemption u/s. 10

Where an institution has been granted registration u/s. 12AA or 12A and the said registration is in force for any previous year, then the assessee is not eligible for exemption u/s. 10 except exemption in respect of agricultural income or u/s. 10(23C) [section 11(7)]. By implication once the registration is cancelled, the assessee would be entitled to claim exemption under section 10 e.g. dividend income u/s. 10(34) or long term gains u/s. 10(38).

22    Conclusion

Section 12AA(4) is another measure by the Government to tighten the law relating with charitable institutions. While the tax department may invoke it in many cases involving operation of section 13(1), it is felt that the ultimate cancellation of registration hinges on fulfilment of many conditions and restrictions and would lead to protracted litigation.

1.1 After the unique General Elections in May, 2014, the BJP led NDA Government, under the leadership of Shri Narendra Modi, presented its first Budget in the Parliament on 10th July, 2014. While presenting his first budget, the Finance Minister Shri Arun Jaitley, has stated as under in Para 2 of his Budget speech.

“The people of India have decisively voted for a change. The verdict represents the exasperation of the people with the status-quo. India unhesitatingly desires to grow. Those living below the poverty line are anxious to free themselves from the course of poverty. Those who have got an opportunity to emerge from the difficult challenges have become aspirational. They now want to be a part of the neo middle class. Their next generation has the hunger to use the opportunity that society provides for them. Slow decision making has resulted in a loss of opportunity. Two years of sub five per cent growth in the Indian economy has resulted in a challenging situation. We look forward to lower levels of inflation as compared to the days of double digit of food inflation in the last two years. The country is in no mood to suffer unemployment, inadequate basic amenities, lack of infrastructure and apathetic governance”.

1.2 T he Finance (No.2) Bill 2014 presented with the Budget, contained 71 sections dealing with amendments in the Income-tax Act and 41 sections dealing with amendments in Indirect Taxes and other matters. As is customary, the Finance Bills presented by the Governments elected in July after General Election are not referred to the standing committee on Finance and, therefore, there is no public debate on the amendments made in the Direct or Indirect Tax Laws. There was no serious debate on the amendments in the Parliament and the Bill, with minor modifications proposed by the Finance Minister in the Lok Sabha, was passed by the Lok Sabha on 25th July, 2014. This Bill was also passed by the Rajya Sabha on 30th July, 2014 and it has received the assent of the President on 6th August, 2014.

1.3 I t may be noted that in Para 4 of his Budget Speech, the Finance Minister stated his approach for economic growth as under:

“As Finance Minister I am duty bound to usher in a policy regime that will result in the desired macroeconomic outcome of higher growth, lower inflation, sustained level of external sector balance and a prudent policy stance. The Budget is the most comprehensive action plan in this regard. In the first Budget of this NDA government that I am presenting before the august House, my aim is to lay down a broad policy indicator of the direction in which we wish to take this country. The steps that I will announce in this Budget are only the beginning of a journey towards a sustained growth of 7-8 per cent or above within the next 3-4 years along with macro-economic stabilization that includes lower levels of inflation, lesser fiscal deficit and a manageable current account deficit. Therefore, it would not be wise to expect everything that can be done or must be done to be in the first Budget presented within forty five days of the formation of this Government”.

1.4 T he Finance Minister referred to the Retrospective Amendments made in the Income-tax Act in 2012 and gave the following assurance in Para 10 of his Budget speech.

“The sovereign right of the Government to undertake retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate. This Government will not ordinarily bring about any change retrospectively which creates a fresh liability. Hon’ble Members are aware that consequent upon certain retrospective amendments to the Income-tax Act 1961 undertaken through the Finance Act 2012, a few cases have come up in various courts and other legal fora. These cases are at different stages of pendency and will naturally reach their logical conclusion. At this juncture I would like to convey to this August House and also the investors community at large that we are committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth. Keeping this in mind, we have decided that henceforth, all fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of the Assessing Officers will be scrutinized by a High Level Committee to be constituted by the CBDT before any action is initiated in such cases. I hope the investor community both within India and abroad would repose confidence on our stated position and participate in the Indian growth story with renewed vigour.”

1.5 While concluding his Budget Speech he stated that he had given relief to individuals, HUF etc. and also given incentives to manufacturing sector which will result in Revenue Loss of Rs. 22,200 crore in Direct Taxes. As regards Indirect Taxes, his proposals would yield additional Revenue of Rs. 7,525 crore.

1.6 I n this Article some of the important amendments made in the Income-tax Act by the Finance (No.2) Act, 2014, have been discussed. It may be noted that this year, barring one or two, almost all amendments have prospective effect.

2. Rates of taxes:

2.1 T here are no major changes in the Rates of Taxes for A.Y. 2015-16. However, certain reliefs given to Individual Tax Payers are referred to in Para 192 of Budget Speech of the Finance Minister. These are explained in brief below.

2.2 Individual, HUF, AOP etc.: The Rates of Income Tax, Surcharge and Education Cess for Individuals, HUF, AOP, BOI and Artificial Juridical Person for A.Y. 2015-16 (Accounting Year ending 31.03.2015) will be as under.

Notes:
(i) Surcharge on Super Rich: In the Budget Speech of 2013 it was announced that surcharge of 10% of the tax on persons earning total income exceeding Rs. 1 crore will be levied for A.Y. 2014-15 only. In this year’s Budget, this surcharge is continued for A.Y. 2015-16
(ii) Rebate of Tax: A Resident Individual having total income not exceeding Rs. 5 lakh, will get rebate upto Rs. 2000/- or tax payable (whichever is less) u/s. 87A.
(iii) E ducation Cess: 3% (2+1) of the tax is payable as Education Cess by all assessees.

2.3 Other Assessees: The rates of taxes (including surcharge and education cess) for A.Y. 2015-16 are the same as in A.Y. 2014-15. In the case of domestic companies the surcharge of 5% of tax, if the total income exceeds Rs. 1 crore, but does not exceed Rs.10 crore will continue to be payable in A.Y.2015-16. Further, the rate of surcharge will be 10% of tax on the entire income in the case of domestic companies if the total income exceeds Rs.10 crore.

In the case of a foreign company, there is no change in the rates of taxes. The existing rate of surcharge will be 2% of tax if the total income is between Rs.1 crore and Rs.10 crore. If the total income exceeds Rs.10 crore, the rate of surcharge will be 5% of tax on the entire income, if the total income exceeds Rs.10 crore.

2.4 Tax On Book Profits: The rates of taxes on Book Profits u/s. 115JB and 115JC will continue to be the same in A.Y.2015-16 as in A.Y.2014-15.

2.5 Dividend Distribution Tax (DDT): (i) Section 115.0 and 115-R provide for payment of additional tax by domestic companies and mutual funds on distribution of dividend or income. These two sections have been amended w.e.f. 01-10-2014. The amendment provides that the amount of dividend or income so distributed should now be grossed up and the additional tax at the rates specified in these two sections should be paid by the domestic companies or mutual funds.

ii)the logic for making this amendment is given in the explanatory memorandum to the finance Bill as under:

“prior to introduction of dividend distribution tax (ddt), the dividends were taxable in the hands of  the  shareholder.  the  gross  amount  of  dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%. however,  after  the  introduction  of  the  ddt,  a  lower rate of 15% is currently applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company. therefore, the tax is computed with reference to the net amount. similar case is there when income is distributed by mutual funds.

Due to difference in the base of the income distributed or the dividend on which the distribution tax is calculated, the effective tax rate is lower than the rate provided in the respective sections.

In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax.

Therefore, it is proposed to amend section 115-o in order to provide that for the purposes of determining the tax on distributed profits payable in accordance with the section 115-o, any amount by way of dividends referred to in sub-section (1) of the said section, as reduced by the amount referred to in sub-section (1A) (referred to as net distributed profits), shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in s/s. (1), be equal to the net distributed profits.

Similarly,  it  is  proposed  to  amend  section  115r  to provide that for the purposes of determining the additional income-tax payable in accordance with sub-section (2) of the said section, the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increase amount at the rate specified in s/s. (2), be equal to be amount of income distributed by the mutual fund”.

iii)    On the above basis, the ddt on grossed up dividend distributed by a domestic company on or after 01-10-2014 shall be payable at 20.03% as against 17% as at present.

iv)    Similarly, the additional tax payable by the mutual funds on income distribution u/s115 r will work out as under:

v)    From the logic given in the explanatory memorandum it is evident that the additional that collected u/s. 115-0 and 115-R from domestic companies and mutual funds is nothing but tax payable by the shareholder/unit holder. instead of collecting such tax from the share holder/unit holder,  it  is  collected  from  the  company/mutual  fund. though  judicial  forums  have  taken  a  view  that  the  tax paid by the Companies/ mutual funds is not tax paid by the shareholder/unit holder, the rationale set out in the memorandum may give one further opportunity to the taxpayer to urge the proposition that this income is not ‘exempt’ and section 14a ought not to apply.

2.6    Rate    of    tax    on    dividends    from    foreign Companies:  the  concessional  rate  of  tax  at  15%  plus applicable surcharge and education cess which was applicable for only two years i.e., a.y. 2013-14 and
a.y. 2014-15 u/s. 115BBd has now been extended in respect of dividends received by an indian Company from a specified Foreign Company to A.Y. 2015-16 and subsequent years. For this purpose the indian Company should hold 26% or more of equity share capital in the foreign company.

3 Tax deduction at source (TDS):

the  following  amendments  are  made  in  some  of  the provisions relating to TDS w.e.f. 01-10-2014.

(i)    In section 194a it is provided that tax should not be deducted at source @ 10% from interest received by   a   Business   trust   from   special   purpose   Vehicle (i.e.,  the  indian  company  in  which  the  Business  trust holds controlling interest or  any  specified  percentage of shareholding or interest as provided in the relevant regulations).

(ii)    Section 194da has been inserted w.e.f. 01-10-2014 to provide for tds @2% from the taxable amount (including Bonus)  paid  under  a  life  insurance  policy.  in  such  a case, no tax will be deductible under this section from the payments which are exempt u/s. 10 (10d). it is also provided that this provision for tds will not apply where the aggregate of taxable payments is less than rs.1 lakh in any financial year.

(iii)    Section 194lBa has been inserted w.e.f. 01-10-2014 to provide for tds @10% from income referred to in the new section 115ua (i.e., interest income received by Business trust from spV) distributed to a resident unit holder of Business trust.

If such income is distributed to a non-resident unit holder the rate of tds will be 5% plus applicable surcharge and education cess.

(iv)    Section  194lC  which  provides  for  tds  in  respect of payment of interest on loans in foreign Currency by specified companies will also apply to payment made by Business trust. further, the time limit of loan agreement provided in the section from 01-07- 2012 to 01-07-2015 has now been extended up to 01-07-2017.

(v)    Section 200(3) provides for filing of Statement of TDS. By amendment of this section it is now provided that   the tax deductor can now file a correction statement for rectification of any mistake, or to add, delete or update information. Consequential amendment has been made in section 200A.

(vi)    At present u/s. 201(3) no order treating a person as an assessee in default for failure to comply with tds provisions can be passed after the expiry of 2 years from the end of the financial year in which statement of TDS in filed and after expiry of 6 years if statement of TDS in not filed. This provision is now amended w.e.f. 01-10-2014 to provide for a common time limit of 7 years from the end of the f.y. in which payment is made or credit is given to the payee. Thus, even if TDS statement is filed, the tax deductor can be treated as assessee in default at anytime within 7 years. in other words, the existing time limit of 2 years is extended to 7 years.

(vii)    Section 206aa provides for tds at higher rate where the payee does not furnish permanent account number the  section  is  not  applicable  to  interest  on  long  –term infrastructure Bonds referred to in section 194 lC. it is now provided, w.e.f. 01-10-2014, that this section shall not apply to interest on long-term Bonds referred to in section 194 lC.

4.    Exemptions and deductions

4.1    Section 10AA: under this section, newly established undertakings in SEZs can claim deduction in respect of profits and gains derived from export of articles or things or from providing services. Presently, deduction can be claimed even by such undertakings carrying on ‘Specified Business’ u/s. 35AD. This section is now amended w.e.f. a.y.2015-16 to provide that where deduction u/s. 10AA has been availed by any assessee in respect of the profit of the Specified Business for any assessment year, no deduction u/s. 35AD shall be allowed in relation to such Specified Business for the same or any other assessment year.  Similarly,  section 35 AD has, also been amended  to prohibit claim of deduction u/s. 10AA in respect of Specified Business where deduction u/s. 35AD has  been claimed and allowed for the same or any other assessment year. Effectively, the assessee will, therefore, have to choose between a deduction u/s. 10AA and a deduction u/s. 35AD in respect of Specified Business.

4.2    Section 24 (b): While computing income from self occupied property (sop) constructed on or after 01-04- 1999, the assessee is eligible for deduction on account of interest paid on amounts borrowed for acquisition or construction of the s.o.p provided such acquisition or construction is completed within a period of three years from the end of the financial year in which the capital is borrowed. the deduction is restricted to rs. 1.5 lakh at present.  from  a.y.  2015-16,  this  limit  of  deduction  for such interest has now been increased to rs. 2 lakh. it may be noted that if construction of property is not completed within 3 years, deduction of interest will be of rs. 30,000/- only. if property is let out deduction of interest will be of the entire amount without any limit subject to conditions in section 24.

4.3    Section 80C: This section provides for deduction upto rs.1 lakh in respect of investment by an individual or huf in ppf, lip, elss etc. this deduction is increased from a.y.2015-16 to investment upto rs.1.5 lakh. in para 138 of the Budget speech, it is stated by the finance minister that the Limit for investment in PPF in the financial year will now be increased to rs.1 .5 lakh.

4.4    Section 80 CCD: This section provides for deduction in respect of contribution to pension scheme of Central Govt. at present non-Govt. employees employed on or after 01-01-2004 are eligible for such deduction. now, from a.y. 2015-16 even non-Govt. employees employed before 01-01-2004 will be eligible to get the benefit of this section. further, this section is amended from a.y. 2015- 16 to provide that the deduction under this section shall not exceed rs.1 lakh in any year.
4.5    Section  80  CCE:  This  section  lays  down  limit  for deduction u/s. 80C, 80CCC and 80CCd to rs. 1 lakh in the aggregate. this limit is now increased from a.y. 2015 to rs.1.5 lakh.

4.6    Section 80 – IA(4) (iv): At present,  deduction  under this section is allowed to undertakings which commence their business of Generation or Generation and distribution of power, transmission or distribution of power, complete substantial renovation or modernisation of existing transmission or distribution lines if the same is completed on or before 31-03-2014. this time limit is now extended to 31-03-2017.

4.7    New Investment Opportunities for Small Savings :
The  finance  minister  has  announced  the  revival  of  the following investment opportunities for small savings.

(i)    Kissan Vikas patra : This will be reintroduced during the year.

(ii)    Varishta  pension  Bima  yojna:  This  scheme  will  be reintroduced for one year from 15-08-2014 to 14-08-2015 for benefit of senior citizens.

5 Business Trusts:

(i)    This  is  a  new  concept  introduced  in  this  year’s Budget. The term “Business Trust” is defined in section 2(13a) of the income tax act from 01-10-2014 to mean “a trust registered as an “infrastructure investment trust” (invits)  or  a  “real  estate  investment  trust”  (reit),  the units of which are required to be listed on a recognized stock exchange, in accordance with the seBi regulations and notified by the Central Govt”.

(ii)    In para 26 of the Budget speech, the finance minister has explained this new concept as under:

“Real Estate Investment Trusts (REITS) have been successfully used as instruments for pooling of investment in several countries. I intend to provide necessary incentives to REITs which will have pass through for purpose of the taxation. As an innovation, a modified REITs type structure for infrastructure projects is also being announced as Infrastructure Investment Trusts (invits), which would have a similar tax efficient pass through status, for PPP and other infrastructure projects. These structures would reduce the pressure on the banking system while also making available fresh equity. I am confident that these two instruments would attract long term finance from foreign and domestic sources including the NRIs.”

(iii)    In order to implement the above scheme for taxation of  Business  trusts,  its  sponsors  and  unit  holders  new sections are inserted in the income-tax act and some sections   are   amended.   these   sections   are   2(13A), 10(23FC),  10(23FD),  10(38),  47(xvii),  49  (2AC),  111A, 115A,  115UA,  139(4E),  194A(3)  (Xi),  194LBA,  194LC, and sec. 97 and 98 of finance (no.2) act, 2004 relating to stt. these sections come into force from a.y. 2015-16 and/or 01-10-2014.

(iv)    The  Business  trusts  have  the  following  distinctive elements:

(a)    The trust would raise capital by way of issue of units ( to be listed on a recognised stock exchange) and can also raise debts directly both from resident as well as non- resident investors:

(b)    The income bearing assets would be held by the trust by acquiring controlling or other specific interest in an indian company (spV) from the sponsor.

(v)    The amendments are made to put in place a specific taxation regime for providing the way the income in the hands of such trusts is to be taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts. These provisions, briefly stated, are as under:

(a)    The listed units of a business trust, when traded on a recognised stock exchange, will attract same levy of stt and will given the same tax benefits in respect of taxability of capital gains as equity shares of a company i.e., long term capital gains, will be exempt and short term capital gains will be taxable at the rate of 15%.

(b)    In case of capital gains arising to the sponsor at   the time of exchange of shares in spV with units of the business trust, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, the preferential capital gains tax (consequential to levy of stt) available in respect of units of business trust will not be available to the sponsor in respect of these units at the time of disposal of units. further, for the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor. The  holding  period  of  shares  shall  also  be  included  in the holding period of such units. Indexation benefit in the case of long term capital gain will be available. (sections 47(xvii) and 49(2AC)).

(c)    The income by way of interest received by the business trust from SPV is accorded pass through treatment i.e., there is no taxation of such interest income in the hands of the trust and no withholding tax at the level of SPV    as provided in section 194a w.e.f. 01-10-2014. however, withholding tax at the rate of 5 % in case of payment of interest component of income distributed to non-resident unit holders and at the rate of 10 % in respect of payment of interest component of distributed income to a resident unit holder shall be deducted by the trust. this is provided in section 194lBa w.e.f. 01-10-2014 (sections 10 (23FC), 194A and 194LBA)).

(d)    In case of external commercial borrowings by the business trust, the benefit of reduced rate of 5 % tax on interest payments to non-resident lenders shall be available on similar conditions, for such period as is provided in section 194lC of the act w.e.f. 01-10-2014.

(e)    The  dividend  received  by  the  trust  shall  be  subject to dividend distribution tax at the level of SPV but will    be exempt in the hands of the trust, and the dividend component of the income distributed by the trust to unit holders will also be exempt. (section 10(38)).

(f)    The  income  by  way  of  capital  gain  on  disposal  of assets by the trust shall be taxable in the hands of the trust at the applicable rate. however, if such capital gains are distributed, then the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder. any other income of the trust shall be taxable at the maximum marginal rate.

(section 115ua and 10(23fd)). (4e).

(g)    The business trust is required to furnish its return of income u/s139

(h)    The necessary forms to be filed and other reporting requirements  to  be  met  by  the  Business trust  shall  be prescribed to implement the above scheme.

6 Charitable Trusts :

In this finance act, sections 10(23C), 11, and 115 BBC have been amended from a.y. 2015-16 and sections 12a and 12 aa have been amended from 01-10-2014. all these amendments relate to taxation of Charitable trusts. These amendments are briefly discussed below :
6.1    Charitable   and   religious   trusts   cannot   claim exemption u/s. 10: a trust or institution which is registered or approved or notified as a charitable or religious Trust u/s. 12aa or 10(23C) (iv), (v),(vi) and (via) will not now be entitled to claim exemption under any of the general provisions of section 10. the intention is that such entities should be governed by the special provisions of sections 10(23C) 11,12 & 13, which are a code by themseves, and should not be entitled to claim exemption under other provisions  of  section  10. therefore,  such  entity  will  not now be able to claim that its income, like dividend income (exempt u/s. 10(34)) or income from mutual funds (exempt u/s. 10(35)), or interest on tax free bonds, is exempt u/s. 10 and hence, not liable to tax. such income continues to qualify for exemption u/s. 10(23C) or section 11, subject to the conditions contained therein.

Agricultural income of such an entity, however, will continue to enjoy exemption u/s. 10(1). Further, such an entity eligible for exemption u/s. 11 will not be barred from claiming exemption u/s. 10(23C).

6.2    Depreciation on Capital assets: (i) Hitherto, almost all courts in india while interpreting section 11 have held that income of a charitable trust u/s. 11 is to be computed on the basis of accounting method adopted by the trust following  commercial  principles.  (CIT  vs.  Trustees   of H.E.H. Nizam’s Supplemental Religious Endowment Trust 127 itr 378(ap), CIT vs. Estate of V.L.Ethiraj 136 itr  12  (mad)  and  CBdt  circular  no.5-p  (lxx-6)  dated 19-06-1968). on this basis, the courts have taken the view that depreciation on assets of the trust is to be deducted for the purpose of calculation of income of the trust in commercial sense u/s. 11 of the income-tax act. The well settled principle of law, as laid down by various courts, during the last more than 50 years is that under the scheme of section 11, there are two steps. in the first step, the income of the trust is to be “computed” on commercial principles and depreciation on capital assets is to be deducted for this purpose. In the second step, the income so computed is to be compared with “application” of this income to objects of the trust. For application of such income, Capital and revenue expenditure incurred during the year for the objects of the trust is be treated as application therefore, “depreciation” and outgoing for acquiring “Capital asset” are different and distinct claims and there is no double deduction of expenditure (refer CIT vs. Framjee Cawasjee Institute 109 Ctr 463 (Bom), CIT vs. Institute of Banking Personnnel Selection 264ITR – 110 (Bom), CIT vs. Society of Sister of St. Anne 146itr 28 (Kar), CIT vs. Seth Manilal Ramchhoddas Vishram Bhavan Trust 198 itr 598(Guj)).

(ii)    By amendment of section 10(23C) and 11, from a.y. 2015-16, it is now provided that depreciation will not be allowed in computing the income of the trust or institution in respect of an asset, where cost of acquisition has already been claimed as deduction by way of application of income in the current or any earlier year. It may be noted that this amendment will overrule all the above decisions of various high Courts.

(iii)    Logic  for  the  above  amendment  is  given  in  the explanatory memorandum as under:

“The  existing  scheme  of  section  11  as  well  as  section 10(23C) provides exemption in respect of income when it is applied to acquire a capital assets. subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. the provisions need to be rationalized to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose.”

It will be noticed that this logic is contraryto the well settled law as interpreted by various high Courts.

(iv)    The  effect  of  the  above  amendment  will  be  that  all the  trusts/institutions  which  will  be  affected  by  this amendment will have to maintain separate records of Capital assets as under:

(a)    WDV of Capital assets in respect of which depreciation as well as deduction by way of application of income is claimed upto a.y. 2014-15.

(b)    WDV of Capital assets in respect of which deduction by way application of income has not been claimed upto A.Y. 2014-15 but only depreciation is claimed and allowed.

It may be noted that from a.y. 2015-16, depreciation will not be allowed in respect of WdV of Capital assets as stated in (a) above. as regards WdV of Capital assets  as  stated  in  (b)  above,  it  appears  that  depreciation can be claimed in a.y. 2015-16 6 even after the above amendment, as the same is not retrospective

6.3    Section 10 (23C): The existing section 10(23C) (iiiab) and (iiiac) grant exemption to educational institutions, universities and hospitals that satisfy certain conditions and which are wholly or substantially financed by the Government. The term “substantially financed by the Government” is not defined and hence resulted in litigation (refer CIT vs. Indian Institute of Management 196 taxman 276 (Kar.)). It is now clarified that if the Government grant to such institutions exceeds the prescribed percentage of the total receipts, (including voluntary contributions), then it will be considered as being substantially financed by the Government.

6.4    Section 12A- Registration of trust: Section 12a has been amended w.e.f. 01-10-2014. at present a trust or an institution can claim exemption only from the year in which the application for registration u/s. 12aa has been made. as such, registration can be obtained only prospectively and this causes genuine hardship to several charitable organisations. It is now provided that the benefit of sections 11 and 12 will be available to such trusts for all pending assessments on the date of such registration, provided the objects and activities of such trusts in these earlier years are the same as those on the basis of which registration has been granted. it is also provided that no action for reopening assessment u/s. 147 shall be taken by the Assessing Officer merely on the ground of non- registration. accordingly, completed assessments in which benefit u/s. 11 has been granted, will not be adversely affected on account of non-registration. it may be noted that such benefit will not be available to trusts where the registration was earlier refused or was cancelled.

6.5    Section 12AA – Power to CIT to cancel registration: (i) the amendment made in section 12AA,
w.e.f. 01-10-2014, giving additional power to the CIT to cancel registration of a trust will create great hardships to the trusts. at present, for non-compliance with some of the requirements of section 11,12 or 13 a trust is liable to pay tax for that year. Now, the amendment in section 12aa empowering CIT to cancel registration of the trust for such non-compliance will mean that a trust which has been complying with these provisions for several years in the past and also in subsequent years will lose exemption in the year of non-compliance and also in subsequent years. this is a very harsh and uncharitable provision and will lead to unending litigation in which trustees will have to spend trust funds which they would have utilised for charitable purpose. Surprisingly, none of the public trusts or institutions have seriously opposed this amendment before it was passed in the parliament.
(ii)    Briefly stated, the amendment in section 12AA is as under:

At present, registration of a trust / institution once granted, can be cancelled only under the following two circumstances:

(a)    the activities of the trust are not genuine; or

(b)    the activities are not being carried out in accordance with the objects of the trust.

Now, the Commissioner has also been given power to cancel registration, if it is noticed that the trust has not complied with the provisions of sections 11,12 and 13 i.e.,

(a)    Income does not enure for the benefit of the public;

(b)    Income is applied for the benefit of any religious community or caste (in case of a trust established on or after 01-04-1962).

(c)    Income is applied for the benefit of persons specified
in section13(3)

(d)    funds are invested in prohibited modes i.e. there is non-compliance with sections 11(5) or 13.

It is however provided that registration will not be cancelled if the trust/institution proves that there was reasonable cause for breach of any of the above conditions.

(iii)    It is true that the Trustees can file an appeal against the order of Cit to itat when such registration is cancelled. But this will invite litigation in which trust money will have to be spent.

(iv)    it may be noted that this additional power given to Cit raises several issues which have not been considered while making the above amendments. some of these issues are as under:

(a)    Compliance with section 11,12 and 13 raise several issues of interpretation. therefore, the question will arise as to at what stage the Cit will exercise this additional power to cancel registration. in other words, whether he can cancel registration when any adverse assessment order for a particular year is passed by the a.o. or whe the entire appellate proceedings, in which the order is challenged, are completed.

(b)    Whether cancellation of registration as a result of this amendment will be for the year in which there is non- compliance with sections 11, 12 or 13. if this is not the case, the trust will not be able to claim exemption u/s.  11 in subsequent years although all the conditions of sections 11 to 13 are complied with.

(c)    If the registration is cancelled for non-compliance with sections 11 to 13 in one year, whether the Cit can consider granting registration in subsequent years when the trust is complying with these provisions.

(d)    If registration is cancelled in the case of trust holding certificate u/s. 80 G, what will be the position of persons who have given donations and claimed deduction u/s 80G, in that year and in subsequent years. it may be noted that there is no amendment in section 80G where by CIT can cancel certificate given under the section.

(v)    Considering all these issues, it appears that when the trust is required to pay tax in the year when provisions of sections 11 to 13 are not complied with, this additional power to Cit to cancel registration of the trust should not  have  been  given.  there  is  a  grave  danger  of unhealthy practices being adopted by those dealing with assessments of Charitable trusts.

6.6    Section   115-BBC-  anonymous   donations:     the existing provisions of section 115BBC provide for levy of tax at the rate of 30 % in the case of certain assessees, being university, hospital, charitable organisation,  etc. on the amount of aggregate anonymous donations exceeding 5% of the total donations received by the assessee or rs. 1 lakh, whichever is higher. the section is amended from a.y. 2015-16 to provide that the income- tax payable shall be the aggregate of the amount of income-tax calculated at the rate of 30 % on aggregate of anonymous donations received in excess of 5 % of the  total  donations  received  by  the  assessee  or  rs.  1 lakh, whichever is higher, and the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by such excess. this amendment is to rationalise the provisions of the section.

7    Income from business or profession:

7.1    Investment allowance – Section 32 aC: (i) in order to encourage manufacturing companies that investsubstantial amount in acquisition and installation of new plant and machinery, finance act, 2013 inserted section 32aC (1) in the act to provide that where a company engaged in the business of manufacture of an article or thing, invests a sum of more than rs.100 crore in new assets (plant and machinery) during the period 01-04- 2013 to 31-03-2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16.
(ii) as growth of the manufacturing sector is crucial for employment generation and development of an economy, this section is amended to extend the deduction available u/s. 32aC for investment made in plant and machinery up to 31-03-2017. further, in order to simplify the existing provisions of section 32aC of the act and also to make medium-size investments in plant and machinery eligible for deduction, it is now provided that the deduction u/s. 32aC (1a) shall be allowed if the company, on or after 1st april, 2014, invests more than rs. 25 crore in plant and machinery in the previous year. it is also provided that the assessee who is eligible to claim deduction under the existing combined threshold limit of rs.100 crore for investment made in previous years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under the existing provisions contained in section 32aC(1) even if its investment in the year 2014-15 is below the proposed new threshold limit of investment of rs. 25 crore during the previous year.

The deduction allowable under this section from a.y. 2015- 16 after the amendment in different cases of investment is given by way of illustration in the following table:

Specified business. Further, section 28(vii) taxes any sum received on account of demolition, destruction, discarding or transfer of such asset, the entire cost of which was allowed as a deduction u/s. 35ad.

(ii) section 35AD has been amended from a.y.2015-16 as under:

(a)    The benefit of the section is extended to the following two businesses, commencing operation on or after 1st april, 2014:

(i)    Laying   and   operating   a   slurry   pipeline   for   the transportation of iron ore;

(ii)    Setting up and operating a semi-conductor wafer fabrication manufacturing unit notified by the Board in accordance with the prescribed guidelines.

(b)    It is now provided that any asset in respect of which deduction has been claimed and allowed under this section shall be used only for the specified business for a period of at least 8 years, beginning with the previous year in which such asset is acquired or constructed;

(c)    Further, it is provided that where any asset, in respect of which a deduction is claimed and allowed under this section, is used for any other purpose during the specified period of 8 years, the total deduction so claimed and allowed in one or more previous years, as reduced by the depreciation allowable u/s. 32, (as if no deduction u/s. 35ad was allowed) shall be deemed to be the business income of the assessee of the previous year in which the asset  is so used. however, this provision will not apply to a BIFR Company (sick company) during the specified period of 8

Investment Linked Deductions – Section

7.3    Corporate    Social Responsibility    (CSR) Expenditure Section 37:  (i)  it  is very strange that  section  37 of the act has been amended from a.y. 2015-16 to provide that expenditure incurred by a company for CSR activities as provided u/s. 135 of the Companies 35aD: (i) section 35ad provides for a deduction in respect of any capital expenditure, other than on the acquisition of any land or goodwill or financial instrument, incurred wholly and exclusively for the purposes of any act, 2013 shall not be considered as expenditure incurred for   the   purpose   of   Business   or   profession.  this   is strange because one legislation made by the parliament i.e.  Companies  Act,  2013,  mandates  certain specified companies to spend upto 2% of its average profits of last 3 years for Csr activities. elaborate list of such expenditure is given in schedule Vii of the Companies act and elaborate rules and forms are prescribed under that act. Csr expenditure is treated as part of the business expenditure of the company under the Companies act and when it comes to income-tax act it is now provided that this is not an expenditure for the business or profession of the Company. such a provision in section 37 is contrary to the provisions of section 135 of the Companies act and requires to be reconsidered. at best, the deduction u/s. 37 could have been restricted to 2% of the Gross total income under the income-tax act.

(ii)    The  logic  for  this  provision  in  section  37  is explained in the explanatory memorandum as under:

“Under the Companies act, 2013 certain companies (which have  net  worth  of  Rs.500  crore  or  more,  or  turnover  of Rs.1,000 crore or more, or a net profit of Rs.5 crore or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate social responsibility (CSR). under the existing provisions of the act expenditure incurred wholly and exclusively for the purpose of the business is only allowed as a deduction for computing taxable business income. Csr expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. as the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on Csr cannot be allowed as deduction for computing the taxable income of the company. moreover, the objective of Csr is to share burden of the Government in providing social services by companies having net worth/ turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure”.

From the above, it will be noticed that for tax purposes the Government has taken the view that Csr expenditure is application of income whereas under the Companies act the same Government states that it is business expenditure. if it is only application of income how there can be compulsion under the Companies act on the Directors that 2% of average profits of previous 3 years should be spent for specified activities listed in schedule Vii of the Companies act.

(iii)    In the Explanatory Memorandum it is clarified that CSR expenditure which qualify for deduction u/s. 30 to 36 of the income-tax act will be allowed as deduction. if we refer to schedule Vii, most of the items of expenditure may not qualify for deduction under the above sections. in order to get deduction of the CSR expenditure most of the companies may prefer to contribute to (a) the prime minister’s national relief fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the sC, st, OBC, minorities and Women or for (b) contribution to approved rural development projects approved u/s. 35AC.

(iv)    It may be noted that CSR expenditure incurred by the Company will be allowable in computing Book profits u/s. 115jB. no such disallowance is required to be made u/s. 115JB.

7.4    Disallowance for non deduction of Tax Section 40(a): (i) section40 (a) (i) is amended from a.y. 2015- 16 to provide that if tax is deducted from payment made for specified expenditure to a Non-Resident in a previous year, no disallowance for the expenditure will be made if the tds amount is deposited by the deductor with the Government before the due date for filing return of income u/s. 139(1). At present, the time limit for such deposit of tax is as prescribed in section 200(1) (refer rule 30). if the tds amount is deposited after the due date, deduction for expenditure will allowed in the year in which tds amount is deposited.

(ii) Section 40(a)(ia) provides for disallowance of payment of specified expenditure to a Resident, if tax deductible has not been deducted or deposited with the Government before the due date for filing the Return of Income. This section is amended from a.y. 2015-16 as under:

(a)    At present, the section applies to payment under certain  specified  heads  viz.  interest,  rent,  professional fees, Brokerage, Commission etc. it is now provided, by this amendment, that the section will apply to all payments from which tax is to be deducted under Chapter XVii B. In other words, the assessee will suffer disallowance under this section if tax deductible in respect the above specified heads as well other payments viz. salaries, director’s fees,  purchase  of  immovable  property  as  stock-in- trade, non-compete fees etc. has not been deducted or deposited with the Govt.

(b)    At present, if the tds amount is not deducted and/or deposited with the Government, 100% of the expenditure is disallowed. By this amendment, it is provided that only 30% of the expenditure will be disallowed from a.y. 2015-16.
 
(c)    further,  the  amended  section  provides  that  if  the amount from which tax is deductible under chapter XViiB is deducted but paid after the due date as stated above, 30% deduction will be allowed in the year in which such tds amount is deposited with the Government. it may  be noted that this amendment does not take care of the following type of situations which will arise in many cases.

Illustration

•    ABC Ltd. has deducted tax of Rs. 2 lakh from payment of commission during the year ending 31-03-2013.
•    Due date for filing return for A.Y. 2013-14 is 30-09- 2013, but the company has deposited tds amount of Rs. 2 lakh in april, 2014.
•    100% of the Commission Amount will be disallowed u/s. 40(a)(ia) in a.y. 2013-14.
•    Under the amended section 40(a)(ia) since the TDS amount is deposited in april,  2014  i.e.  a.y. 2015-  16, only 30% of the commission will be allowed as deduction when 100% of the commission has been disallowed in a.y.2013-14.
•    To this extent, this amendment requires reconsideration.

(d)    The second proviso to section 40(a) (ia) inserted by the finance act, 2012 from a.y. 2013-14 provides that if the resident payee has paid tax on such income on the date of furnishing his return of income, no disallowance under the section will be made in the case of the payee. it may be noted that explanation below this second proviso refers to payments under specified heads viz. commission, Brokerage, professional fees, rent, royalty, technical service fees and payment to contractors. Since section 40(a) (ia) is now amended to provide for disallowance   in respect of non-deduction of tds from all sections under Chapter XVii B, including salaries, directors’ fees etc.,explanation below the second proviso of this section should have been similarly amended.

7.5    Commodity Derivatives Section 43 (5): Commodity derivative transactions were excluded from the purview of speculative transactions with effect from a.y.2014-15 u/s. 43(5)(e) by the Finance Act, 2013. It is now clarified from a.y. 2014-15, that in order to be eligible for such exclusion, such transactions should be chargeable to Commodities transaction tax (Ctt).

7.6    Goods Carriages Business – Section 44 aE: section 44ae (2) is amended to provide that the presumptive amount of profits and gains for any type of goods carriage shall be Rs. 7,500 per month or part of a month for which
each such goods carriage is owned by the assessee or the amount claimed to have been actually earned by the assessee, whichever is higher. the earlier amounts were rs.5,000 for each heavy goods carriage and rs. 4,500 for  each  other  goods  carriage. the  distinction  between goods carriages and heavy goods carriages has been done away with from the a.y. 2015-16.

7.7    Losses in Speculation Business –Section 73:
at present, section 73 provides that if any part of the business of a specified company consists of purchase and sale of shares of other Companies, loss in such business shall be treated as speculation loss. there is one exception in the case of a company whose principal business is of banking or granting of loans and advances. this  exception  is  now  widened  from  a.y.  2015-  16  to provide that in the case of a company whose principal business is of trading in shares, such loss in purchase and sale of shares will not be considered as a speculation loss. this is a welcome provision for companies which are share brokers and which are mainly dealing the shares of Companies.

8 Income from other sources

(i)    Sections 2(24), 51 and 56(2) have been amended from a.y. 2015-16. section 51 provides that where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received or retained by the taxpayer in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, while computing cost of acquisition.

(ii)    It is now provided in the newly inserted section 56(2)
(ix) That the amount received as advance or otherwise   in the course of negotiations for transfer of capital asset shall be chargeable to tax under the head “income from other sources” if:
(a)    such advance money is forfeited; and

(b)    the negotiations do not result in transfer of the capital asset.

(iii) Corresponding amendment is made in section 51 to provide that any such forfeited advance, taxed u/s. 56(2) (ix), Shall not be deducted from the cost or the written down value or the fair market value of capital  asset while computing the cost of acquisition. Consequential amendment is also made in section 2(24)(xvii).
 
9    Capital gains
9.1    Definition of Capital asset: Section 2 (14): section 2(14) defining the term “Capital Asset” has been amended from a.y.2015-16. it is now provided that any security held  by  a  foreign  institutional  investor  (fii)  which  has invested in such security as per seBi regulations shall be  considered  as  a  “Capital  asset”.  the  effect  of  this amendment will be that in the case of fii any gain from transfer of such investment in shares and securities as per seBi regulations will be treated as short/long term Capital Gain only. it will not be considered as Business income.  it  may  be  noted  that  fii  is  now  called  foreign portfolio investors (FPI) under SEBI regulations.

9.2    Short Term/Long – Term Capital asset and Tax rate-Section 2(42A) and 112:
(i)    By an amendment of section 2(42a)  from a.y.2015-16, the holding period for (a) unlisted shares of Companies and
(b) units of m.f. (other than units of equity – oriented funds) shall now be 36 months, instead of 12 months, as at present. accordingly, these assets will now be treated as short-term capital assets if they are held by the assessee for 36 months or less before the date of transfer, subject to applicable relaxation provided in the explanation (1) to section 2(42a).

(ii)    Presently, under the proviso to section 112, an option is available to a taxpayer to pay tax at 10% on un-indexed long-term capital gains or 20% on indexed long-term capital  gains  on  transfer  of  units  of  m.f.  this  option  in respect of such units has now been withdrawn and the same will now be taxed at 20% after indexing the cost.

(iii)    It  may  be  noted  that  the  finance  minister  has announced at the stage of passing the finance Bill that the above provision will not apply to shares of unlisted Companies or units of mf transferred during the period 01-04-2014  to  10-07-2014.  The  relevant  sections  have been amended for this purpose.

9.3    Enhanced Compensation received on Compulsory acquisition of Capital asset – Section 45(5): (i) at present, section 45(5)(b) provides that where enhanced compensation is awarded by any court, tribunal or other authority in case of compulsory acquisition of a capital asset, it shall be taxed in the year in which it is received. it is now provided that, if any amount of compensation   is received in pursuance of an interim order of a court, tribunal or any other authority, it shall be taxable as capital gains in the previous year in which the final order of such court, tribunal or other authority is made. This amendment is made from a.y. 2015-16.
 

(ii) it may be noted that the amendment does not clarify as to how capital gain will be computed if such enhanced compensation received under an interim order of the court passed in an earlier year was taxed in that year u/s. 45(5) (b). it is presumed that only the amount receivable as per the final order, after deducting the amount taxed in the earlier years, will be taxable in the year in which the final order is passed by the court, tribunal or other authority.

9.4    Section 47:
section 47 has been amended from a.y. 2015-16 to provide that transfer of a Government security carrying a periodic payment of interest made outside india through an intermediary dealing in settlement of securities, from one non-resident to another non-resident, will not be liable to Capital Gains tax.

9.5    Cost Inflation Index – Section 48:
At present, cost inflation index for a particular financial year means such index as may be notified by the Government having regard to 75% of the average rise in Consumer price index (Cpi) for urban non-manual employees for the immediately preceding year to such financial year. since this method of Cpi has been discontinued, it is now provided that cost inflation index shall mean such index as may be notified by the Government having regard to 75% of the average rise in Consumer price index (urban) for the immediately preceding previous year to such financial year. This provision will apply from A.Y. 2016-17.

9.6    Reinvestment in residential House – Section 54 and 54F

At present section 54 dealing with long term capital gains arising on transfer of a residential house, and section 54f dealing with long –term capital gain on transfer of a capital asset other than a residential house, provide for exemption from capital gains u/s. 45, subject to specified conditions. one of the conditions is that the taxpayer, within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer, constructs a residential house. There is a controversy as to whether the benefit of exemption is available in respect of purchase/construction of more than one residential house and whether such house has necessarily to be located in india. Both these sections are now amended from a.y. 2015 – 16 to provide that the exemption under the above section will be available only in respect of one residential house situated in India. It may be noted that if one or more adjacent flats are acquired and they satisfy the test of one residential
 
House  as  held  in  various tribunal  and  Court  decisions, the tax payer may still be entitled to claim the exemption in respect of such adjacent flats

9.7    Investment of Capital gains in Specified Bonds – Section 54 EC:

(i)Section 54eC provides that where capital gain arise from the transfer of a long-term capital asset and the assessee has, within a period of six months after the date of such transfer, invested the whole or part of capital gains in the long- term (specified bonds) such capital gains shall be proportionately exempt. Such investment in specified Bonds is Limited to Rs. 50 lakh in a financial Year.

(ii)    Some  assesses  invested  rs.  50  lakh  each  in  two successive years (while ensuring that both dates of investment fell within the specified time limit of six months)  and  claimed  exemption  of  up  to  rs.1  crore. this   interpretation   was   upheld   in   certain   tribunal orders. In order to set at rest this controversy, this section is amended from a.y. 2015-16 to  provide  that the investment made by an assessee in the long-term specified bonds in respect of capital gains arising from transfer of one or more capital assets during the financial year shall not exceed `50 lacs whether the investment is made in that year or in the subsequent financial year.

10    Transfer pricing – sections 92b, 92c, 92cc and 271g:

10.1    Section 92B: section 92B(2) extends the scope of the definition of ‘international transaction’ by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation   to the transaction  between  such  other  person  and  the associated enterprise or the terms of the relevant transaction are determined in substance between the other person and the associated enterprise.

There   was   a   doubt   as   to   whether   or   not,   for   the transaction to be treated as an international transaction, the unrelated person should be a non-resident. By amendment of this section from a.y. 2015-16 it is now provided that such transaction shall be deemed to be   an “international transaction” entered into between two associated enterprises, whether or not such other person is a resident or non-resident.

10.2    Section   92C:   at   present,   under   the   transfer
 

Pricing (tp) regulations, where more than one price is determined by most appropriate method, the arithmetic mean of all such prices is taken for determination of arm’s length price (alp) with a tolerable range of +/-3% or +/- 1%. the  application  of  this  methodology  has  been  one of the reasons for tp litigation. to reduce this litigation a third proviso is inserted in section 92C to provide that where more than one price is determined by the most appropriate method, the alp in relation to an international transaction or specified domestic transaction shall be computed in such manner as may be prescribed. With the introduction of the new mechanism from a.y. 2015-16 the existing methodology as stated above for determination of alp will not apply.

10.3    Section 92CC: section 92CC dealing with advance pricing agreements (apa) is amended w.e.f.10-10-2014 to provide for roll-back mechanism. accordingly, the apa may provide for determining the alp or specify the manner in which alp is to be determined in relation to an international transaction entered into, during any period not exceeding four previous years preceding the first of the previous year for which the apa applies in respect of  the  international  transaction  to  be  undertaken.  this roll-back provision would be subject to conditions, procedure and manner to be prescribed, providing for determining the alp or for specifying the manner in which alp is to be determined.

10.4    Section 271g: penalty u/s. 271G can be levied upon any person, who has entered into an international transaction or specified domestic transaction and fails to furnish any such document or information as required by section 92d(3). such penalty can now be levied not only by the Assessing Officer or Commissioner (Appeals) but also by the Transfer Pricing Officer w.e.f. 01-10-2014.

11    Alternate  minimum  tax  –  section  115jc  and 115 jee

(i)    The  provisions  relating  to  alternate  minimum  tax (amt) contained in section 115jC to 115jf apply to non- corporate assessees claiming deduction u/s. 10 aa or chapter Vi-a. section 115jee has been amended from
a.y. 2015-16 to provide that the provisions relating to amt will apply if deduction u/s. 35ad is claimed by the assessee.
(ii)    AMT is payable with respect to adjusted income. section 115JC has been amended from A.Y.2015-16 to provide  that  for  computing  the  adjusted  total  income, the total income shall be increased by deduction claimed
u/s. 35ad as reduced by the amount of depreciation that would have been allowable as if the deduction u/s. 35ad was not allowed. this adjustment will be in addition to the adjustments already specified in the section.

(iii)    section 115jee  is  amended   from  a.y.2015-16 to provide that even if provisions of the Chapter are otherwise not applicable in that year, either because non- corporate assessee’s (other than partnerships and llps) adjusted total income does not exceed rs. 20 lakh or it has not claimed deduction under Chapter Via, section 10aa or section 35ad, it will be entitled to claim credit for the amt paid in the earlier years u/s 115jd.

12    Survey – Section 133A:
(i)    At present the income-tax authorities can retain the custody of impounded books of account and documents for a period of 10 days without obtaining the approval of the Chief Commissioner or director General u/s 133a. this period is now increased to 15 days.
(ii)    further,  by  insertion  of  section  133a (2a)  additional powers have been granted to the income- tax authorities to carry out survey for the purpose of verification of compliance of provisions of deduction of tax at source and collection of tax at source. in such survey, the income-tax authorities cannot impound any books of accounts or any document nor make an inventory of cash, stock or other valuable article or thing. these amendments take effect from 1st october 2014.

13    Power to call for information – New Section 133C section 133C has been inserted with effect from 1st october, 2014 to empower prescribed income-tax authorities to call for information or documents from any person for the purpose of verification of information in its possession relating to any person, which may be useful for any inquiry or proceedings.

14    Assessment and Reassement
14.1    Return of Income – Section 139: it is now made mandatory  for  a  mutual  fund  referred  to  in  section 10(23d),   securitisation   trust   referred   to   in   section 10(23DA) and Venture Capital Company/fund referred to section 10(23FB) to file its return of income, if its income, without considering provisions of section 10, exceeds the non-taxable limit. every Business trust is also required to file its return of income. This amendment is made from a.y. 2015-16.

14.2    Reference to Valuation Officer – Section 142a, 153 – 153B: the existing section 142a has been replaced
by new section 142a from 01-10-2014 to provide that the Assessing Officer can make a reference to the Valuation Officer to estimate the value or  fair  market  value  of any asset, property or investment, whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. The Valuation Officer shall estimate the value based on the evidence gathered after giving an opportunity of being heard to the assessee.     If the assessee does not co-operate, the Valuation Officer may estimate the value based on his judgment. The Valuation Officer is required to send a copy of his report to the Assessing Officer and to the assessee within a period of six months from the end of the month in which reference is made by the Assessing Officer. The Assessing Officer will then complete the assessment after taking into account such report, after giving the assessee an opportunity of being heard. the period from the date of reference to the Valuation Officer to the date of receipt of the report by the Assessing Officer shall be excluded while computing the period of limitation for the purpose of sections 153 and 153B.

14.3    Method of accounting – Section 145: section 145 is amended from a.y. 2015-16 to provide that the Central Government may notify income Computation  and disclosure standards for computing income under the heads ‘Profits and gains of business of profession’ and ‘income from other sources’ . such standards are required to be regularly followed by the assessee and the income is required to be computed in accordance with such standards in order to avoid best judgment assessment u/s. 144.

14.4    Assessment in Search Cases – Section 153 C:  In cases of search, if the Assessing Officer is satisfied that the assets seized or books of account or other documents requisitioned belong to another person, then he has to hand over the same to the Assessing Officer having jurisdiction over such other person. Hitherto, it was mandatory for the other Assessing Officer to assess/ reassess income of such other person in accordance with the provisions of section 153A in such cases. the section is amended from 1st october, 2014 to provide that such other Assessing Officer shall proceed against such other person to assess/reassess his income in accordance with the provisions of section 153, only if he is satisfied that the books of account or documents or assets seized have a bearing on the determination of the total income of such other person for the relevant assessment year or years. 15 Settlement Commission – Section 245a and 245C:
 
(i) An assessee may apply to settlement Commission for settlement of cases at any stage of the case relating to him u/s. 245C. the term ‘case’ as per section 245a (b) means any proceeding for assessment which may be pending before an Assessing Officer on the date on which application is made before settlement Commission. At present a taxpayer is not able  to file an application  for  settlement  of cases in cases where reassessment is pending before the Assessing Officer. By an amendment the proviso to section 245a which restricts the scope of the term ‘case’ has been deleted. This amendment will enable an assessee to apply to settlement commission in those cases where reassessment proceedings are pending. the changes in the provisions shall take effect from 1st october, 2014.

Similar changes have been made in Wealth-tax act as well for settlement of cases.

16    Authority for advance ruling(aar) – sections 245 n and 245-O

(i)    Currently, an advance ruling can be obtained for determining the tax liability of a non-resident. this facility is not available to resident taxpayers, except public sector undertakings. section 245n(a) is amended to provided that the term ‘advance ruling’ shall mean a determination by the authority in relation to the tax liability of a resident applicant arising out of a transaction undertaken or proposed to be undertaken by him. further, the meaning of the applicant has been amended so that the Central Government may notify the class of resident persons for the purpose of obtaining the advance ruling.

(ii)    Following  amendments  have  been  made  in  section 245-O in order to strengthen the aar.

(a)    The  existing  provision  provides  that  the  aar  will consist of three members. the amendment provides for additional appointment of Vice- Chairmen as members of aar. Further, Central Government has been empowered to appoint such number of Vice-Chairmen, revenue members and law members as it deems fit.

(b)    The existing provision does not provide for constitution of benches of aar at various locations. it merely provides that office of AAR shall be located in Delhi. The amended provisions provide as under:

•    The office of AAR shall be located in Delhi and its benches shall be located at such places as Central Government may specify.
 

•    Further, benches of AAR have been given authority  to exercise power and functions of aar and it has been further provided that such benches will consist of Chairman or the Vice-Chairman and one revenue member and one law member.

17    Penalties and Prosecution:

(i)    section  271  FAA:  this  is  a  new  section  inserted from a.y.2015-16. it provides that if a person furnishes inaccurate   statement   of   financial   transactions   or reportable account u/s. 285 Ba, penalty of rs. 50,000/- can be imposed by the prescribed income tax authority.

(ii)    Section 271 H: at present this section does not specify the authority which can levy penalty u/s 271h for assessee’s failure to furnish or for furnishing inaccurate particulars for tds/tcs. it is now provided w.e.f. 01-10- 2014 that such penalty can be levied by the assessing officer

(iii). Section 276D: this section provides that if a person willfully fails to produce accounts and documents as required in any notice issued u/s.142(1) or willfully fails to comply with a direction issued to him u/s.142(2a), he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine equal to a sum calculated at a rate which shall not be less than Rs. 4  or more than Rs. 10 for every day during which the default continues, or with both. now in such a case, such person shall be punished with rigorous imprisonment for a term which may extend to one year and also with fine. This amendment is with effect from 01-10-2014.

18    Other Provisions

18.1    Income Tax authorities – Section 116: the following new income tax authorities are created w.e.f. 01-06-013. these are in addition to existing I.T. authorities.

(i)    principal directors General of income tax.
(ii)    principal Chief Commissioners of income-tax;
(iii)    principal directors of income-tax;
(iv)    principal Commissioners of income-tax.

18.2    Interest Payable by assessee–Section 220:
(i) s/s.(1A) Has been inserted to provide that when the notice of demand has been served upon the assessee and any appeal or other proceedings are filed or initiated in respect of the amount of such demand, then, such demand shall be valid till the disposal of the appeal by the last appellate authority or disposal of the proceedings and the same shall have effect as specified in section 3 of the taxation laws (continuation and validation of recovery proceedings) act, 1964.

(i)    Section 220(2) provides for payment of interest in respect of unpaid amount of demand. such interest is payable for the period commencing from the due date   of payment of demand to the date of payment. it is further provided that if as a result of any order passed subsequently u/s. 154, 250, 254 etc., the amount on which interest was payable is reduced, then the interest shall  also  be  reduced  accordingly.  This  section  is  now amended to provide that in such cases, subsequently,  as a result of any order under the aforesaid sections     or u/s. 263, the amount on which interest was payable   is increased, then the assessee shall be liable to pay interest u/s. 220(2) for the period from the original due date of payment of demand, up to the date of payment.

The above amendments are made from 01-10-2014.

18.3    Acceptance or repayment of Loans or Deposits – section 269ss and 269t: sections 269ss & 269t prohibit every person from taking/ accepting or repaying any loan or deposit otherwise than by an account payee cheque or account payee bank draft, if the amount of loan or deposit exceeds the specified threshold. The sections now permit from a/y:2015-16 taking/accepting or repaying such loan or deposit by use of electronic clearing system through a bank account (i.e., by way of internet banking facilities or by use of payment gateways).

18.4    Period for Provisional attachment of Properties
–Section 281B: under the provisions of section 281B, the Assessing Officer may provisionally attach the properties of the assessee during the pendency of the assessment proceedings. such order of provisional attachment can remain into operation for a maximum period of six months from the date of the order. However, the Chief Commissioner, Commissioner, director General or director are given the power to extend such period up to two years. Under the amended provisions, from 01-01- 2014, the above period is extended to 2 years and six months from the date of assessment or reassessment whichever is later.

18.5    Financial Transactions or reportable account
– Section 285Ba: (i) existing section 285 Ba has been replaced by a new section 285 Ba from 01-10-2014. The new section provides for furnishing of statement of Information by a prescribed reporting financial institution along with other persons as stated in existing section 285 BA in respect of any specified financial transaction or reportable account to the income tax authority or prescribed authority  or  agency.  The  statement  shall  be  furnished for such period, within such time, and in such form and manner as may be prescribed. The Central Government may notify the persons required to be registered with the prescribed income tax authority, the nature of information, the manner in which such information shall be maintained by the person and the due diligence to be carried out by the person for the purpose of identification of any reportable account. any person who furnishes a statement of information, or discovers any inaccuracy in the information provided in the statement, shall within a period of ten days of discovering the mistake, inform the income tax authority or any other prescribed authority of the inaccuracy and furnish the revised information. Thus, statement of financial transactions or reportable account will now replace ‘annual information return’.

(ii)    In line with the amendments u/s. 285Ba as stated above, provisions of  section 271fa have been suitably modified to provide for levy of penalty for failure in furnishing such new statement. Further, section 271faa has  been  inserted  which  provides  for  a  penalty  of  Rs. 50,000 which can be levied by the prescribed income- tax authority on concerned reporting financial institution which provides inaccurate information in such statement.

19    To sum up:

19.1    From the above discussion, it will be noticed that the Finance Minister in his first Budget of the new Government has made an honest attempt to reduce the burden of tax on individuals, huf etc., to give incentives for increasing savings, to encourage manufacturing activities with a view to create new jobs and encourage growth of economy, to reduce tax litigation and to make the tax laws taxpayer friendly. in this context, his following observations in para 209 and 210 of the Budget speech need to be noted

“209. Income tax Department is expected to function not only as an enforcement agency but also as a facilitator. A number of Aykar Seva Kendras (ASK) have been opened in different parts of the country.    I propose to extend this facility by opening 60 more such Seva Kendras during the current financial year to promote excellence in service delivery.

210. The focus of any tax administration is to broaden the tax base. Our policy thrust is to adopt non intrusive methods to achieve this objective. In this direction, I propose to make greater use of information technology techniques”.

19.2    The concept of Business trusts has been introduced for the first time with a view to encourage investment in infrastructure  projects.  Let  us  hope  that  this  becomes popular in the years to come. similarly, the transfer pricing provisions have been simplified to reduce tax Litigation. Again, the benefit of AAR is extended to Residents. This was the demand of the business community which has been  accepted  after  over  two  decades.  The  provisions for approaching settlement Commission  have  also been amended to enable assessees to approach the commission when reassessment proceedings are pending.

19.3    There  are  some  disturbing  provisions  which  will increase tax litigation in the coming years. One is about CSR expenditure for which specific provision is made that these expenses will be disallowed on the ground that these are not expenses incurred for business or profession.  The  logic  for  this  given  by  the  Government that this expenditure is application of income is not   at all convincing when the Companies act mandates that specified companies should spend at least 2% of average profits of earlier 3 years for CSR activities. This expenditure is treated as business expenditure under schedule iii of the Companies act and considered as application of income under the income-tax act. The other disturbing provision is about the additional power given to CIT to cancel registration of a charitable trust u/s. 12AA if the trust does not comply with requirements u/s. 10(23C), 11 or 13. for non-compliance with these provisions in any year, the existing act provides for levy of tax on the trust or institution for that year. If the registration of the trust/ institution is cancelled there will be unending litigation for which expenditure will have to be incurred out of funds of the trust/institution which would otherwise have been spent for charitable purposes. There is yet another area which relates to capital gains on transfer or redemption of units of mutual fund (other than equity oriented funds). This amendment will reduce the investment in such funds and affect the mutual fund industry.

19.4    In  para  208  of  the  Budget  speech,  the  finance minister  has  discussed  about  the  direct  taxes  Code (DTC) as under:
 

“The Direct Taxes Code Bill, 2010 has lapsed with the dissolution of the 15th Lok Sabha. Having considered the report of the Standing Committee on Finance and the views expressed by the stakeholders, my predecessor had placed a revised Code in the public domain in March, 2014. The Government shall consider the comments received from the stakeholders on the revised Code. The Government will also review the DTC in its present shape and take a view in the whole matter”.

The above observation shows that the new Government is determined to replace the existing 5 decade old income
-tax act by the DTC. We are hearing about Government intention about introducing DTC for the last about 10 years.  Let  us  hope  that  this  Government  is  able  to simplify the provisions of the direct tax laws by enacting a taxpayer friendly DTC. One wonders as to why the finance minister has made so many amendments in the existing income tax act if he is keen to bring the DTC into force in the near future.

19.5    GST is another area which is under public debate for over a decade now. In pare 9 of the Budget speech the finance minister has observed as under.

“9 The debate whether to introduce a Goods and Service Tax (GST) must now come to an end. We have discussed the issue for the past many years. Some States have been apprehensive about surrendering their taxation jurisdiction; others want to be adequately compensated. I have discussed the matter with the States both individually and collectively. I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST. This will streamline the tax administration, avoid harassment of the business and result in higher revenue collection both for the Centre and the States. I assure all States that government will be more than fair in dealing with them.”

Let us hope that the new Government is able to introduce GST during this year and get the necessary legislation passed. This will help all concerned and also simplify the levy of indirect taxes.