Category: Direct Taxes

1.2 While concluding his Budget Speech, the Finance Minister has, in Para 188, made some predictions as under:

“Any economist will tell us what India can become. We are the tenth-largest economy in the World. We can become the eighth, or perhaps the seventh largest by 2017. By 2015, we could become a $5 trillion economy, and among the [top] five in the world. What we will become depends on us and on the choices that we make. Swami Vivekananda, whose 150th birth anniversary we celebrate this year, told the people: “All the strength and succour you want is within yourself. Therefore, make your own future.”

1.3 In Para 185 of the Budget Speech, it is stated that the effect of changes in Direct Tax Laws this year will bring additional revenue of Rs. 13,300 crore. So far as Indirect Taxes are concerned, the additional revenue will be Rs 4,700 crore.

1.4 In this Article, the amendments made in the Income-tax Act, the Wealth Tax Act and Securities Transaction Tax (STT) are discussed. A new tax viz. “Commodities Transaction Tax” (CTT) is now levied u/s. 105 to 124 of the Finance Act, 2013. This is on the same lines as the STT. The important features of this new tax are also discussed in this Article.

2 Rates of income tax, surcharge and education cess:
2.1 Surcharge on Super-Rich:

There are no changes in the tax slabs, rates of income tax, or rates of Education Cess. In Para 126 of the Budget Speech, the Finance Minister has stated that “Fiscal consolidation cannot be effected only by cutting expenditure. Wherever possible, revenues must also be augmented. When I need to raise resources, who can I go to except those who are relatively well placed in society? There are 42,800 persons — let me repeat, only 42,800 persons — who admitted to a taxable income exceeding Rs. 1 crore per year. I propose to impose a surcharge of 10 percent on persons whose taxable income exceeds Rs. 1 crore per year. This will apply to individuals, HUFs, firms and entities with similar tax status.” In Para 127, he has stated that in the cases of domestic companies, the existing surcharge is 5% if the taxable income exceeds Rs. 1 crore. This will now be 10% if the taxable income exceeds Rs. 10 crore. Similarly, in the case of a foreign company the existing surcharge of 2% will increase to 5% — if the income exceeds Rs. 10 crore. In Para 128, the Finance Minister has stated that the existing surcharge of 5% will increase to 10% in case of tax on dividend distribution. Further, in Para 129 of his speech, he has stated that this additional surcharge will be in force only for one year i.e. financial year 2013-14 (A.Y. 2014-15).

2.2 Rebate from Tax:

In order to give a small relief to Resident Individual Tax Payers, a new Section 87A is inserted in the Income-tax Act (IT Act) w.e.f. A.Y. 2014-15. Under this section, a resident individual whose total income does not exceed Rs. 5 lakh, will be entitled to receive a rebate of Rs. 2,000/- or the income tax payable (whichever is less) from the income tax payable by him. It may be noted that this rebate cannot be claimed by an HUF.

2.3 Rates of Income-tax and Surcharge:

(i) For Resident Individuals, HUF, AOP, BOI and Artificial Juridical Person, as stated above, there are no changes in the tax slabs, rates of Income tax or rates of Education Cess. The only change is about levy of 10% surcharge on tax if the income exceeds Rs. 1 crore. The rates of tax for A.Y. 2013-14 and A.Y. 2014-15 (Accounting years ending on 31-03-2013 and 31-03-2014) are the same as stated below):

•    In A.Y. 2014-15 Surcharge @ 10% of the tax will be payable if income of the assessee exceeds Rs. 1 crore.
•    An Individual having gross total income below Rs 5 lakh will get rebate upto Rs. 2,000/- from tax in A.Y. 2014-15 u/s. 87A.
•    Education Cess of 3% (2%+1%) of the tax is payable for both the years.

(ii)    The following table gives figures of tax payable by Resident Individual, HUF, AOP, BOI etc. in A.Y. 2013-14 and A.Y. 2014-15.

(a)    Tax payable in A.Y. 2013-14 (Accounting year ending on 31-03-2013)

•    In the first two items (Rs. 3 lakh and Rs. 5 lakh) in the case of an Individual having income below Rs. 5 lakh, the tax payable will be reduced by Rebate of Rs. 2,000/- u/s. 87A.
•    The last item (Rs. 125 lakh) includes surcharge of 10%.
•    The above tax is to be increased by 3% of tax for Education Cess.

(iii)    Other Assessees (excluding companies)

The rates of taxes (including rate of Education Cess) for the other assesses (excluding companies) for A.Y. 2013-14 and A.Y. 2014-15 are the same. No surcharge on tax was payable by Co-operative Societies, Firms, LLP or Local Authority in A.Y. 2013-14. However, in A.Y. 2014-15, if the income of the above entities exceed Rs. 1 crore, Surcharge @ 10% of tax will be payable.

(iv)    For Companies:

The rates of Income tax for Companies for A.Y. 2013-14 and A.Y. 2014-15 are the same. For domestic companies, surcharge of 5% of tax is payable in A.Y. 2013-14 if the total income exceeds Rs. 1 crore. In A.Y. 2014-15, the rate of surcharge will be 5% if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore. If the total income exceeds Rs. 10 crore, the rate of surcharge will be 10% of the tax payable on the entire income.

In the case of a foreign company there is no change in the rates of income tax in A.Y. 2013- 14 and A.Y. 2014-15. As regards surcharge, the rate is 2% of the tax if the total income exceeds Rs. 1 crore in A.Y. 2013-14. In A.Y. 2014-15, the rate of surcharge will be 2% if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore. If the total income exceed Rs 10 crore the rate of surcharge will be 5% of the tax payable on the entire income.

In both the above cases, Education Cess @ 3% of tax is payable in A.Y. 2013-14 and A.Y. 2014-15.

(v)    Rate of Tax u/s. 115JB (MAT)

The rate of tax (i.e. 18.5%) will be payable on the book profits of a company computed u/s. 115JB (MAT) in A.Y. 2013-14 and A.Y. 2014-15. The surcharge will be payable on this tax as stated in (iv) above. Education Cess @ 3% of the tax plus applicable surcharge will be payable as at present.

(vi)    Rate of Tax u/s. 115JC (AMT)

The rate of tax (i.e. 18.5%) will be payable on the adjusted total income of non-corporate assesses u/s. 115JC (AMT) in A.Y. 2013 -14 and A.Y. 2014-15. The surcharge and Education Cess will be payable on this tax as stated in (iii) above.

(vii)    Dividend Distribution Tax:

Dividend Distribution Tax or Income Distribution Tax payable u/s. 115O, 115QA, 115R or 115TA shall be pay-able as provided in these section. The surcharge at 10% of tax will be payable in respect of the above tax for A.Y. 2014-15. The Education Cess @ 3% of the tax shall also be payable on the above tax. It may be noted that surcharge @ 10% of tax will be payable irrespective of the amount distributed under these sections.

(viii)    Rate of Tax on Dividends from Specified Foreign Companies:

The concessional rate of 15% plus applicable surcharge and Education Cess which was applicable for A.Y. 2013-14 u/s. 115BBD has been extended for one more year i.e. for A.Y. 2014-15.

2.4 Education Cess:

As in the earlier years, Education Cess of 3% (including 1% Higher Education Cess) of the income tax and applicable surcharge is payable by all resident assessees and non-resident assessees. No Education Cess or surcharge is applicable on TDS and TCS from payments to all resident corporate and non-corporate assesses. However, if tax is deducted from

(a)    payments to foreign companies, (b) payments to non-residents or (c) salary to residents or non-residents, Education Cess at 3% of the tax and applicable surcharge is to be deducted.

3.    Tax deduction and collection at source (TDS and TCS)

3.1 In the case of a resident assessee or a domestic company, where tax is required to be deducted or collected at source, no surcharge or Education Cess of the applicable rate of tax is to be considered. However, in the case of a non -resident or a foreign company while deducting or collecting tax at source, under the provisions of the Income-tax Act during the period commencing from 01-04-2013, the applicable rate of tax is to be increased by the applicable rate of surcharge and Education Cess. As stated earlier, in the case of non-residents (other than foreign companies), if the total income exceeds Rs. 1 crore, the rate of surcharge is 10% of the tax. In the case of a foreign company, if the total income is more than Rs. 1 crore but less than Rs. 10 crore, the rate of surcharge is 2% of the tax. If the income is more than Rs. 10 crore, this rate is 5% of the tax on total income. In all cases, the rate of Education Cess is 3% of the tax (including applicable surcharge).

3.2 TDS on transfer of immovable property:

(i)    Section 194-1A – This new section is inserted in the Income-tax Act w.e.f. 01-06-2013. It provides that any person (transferee) who purchases any immovable property (whether residential or commercial) for a consideration, shall now deduct tax at source at the rate of 1% of the amount paid to a resident seller (transferor) if the said consideration exceeds Rs. 50 lakh. For this purpose, the term “Immovable Property”, is defined to mean any land (other than Agricultural Land) or any building or part of a building. It may be noted that the section will apply in both cases i.e. when the purchaser is purchasing the property as a capital asset or as stock-in-trade.

(ii)    This section will apply to all assessees, whether resident or non-resident, who purchase any immovable property in India from a resident. In other words, the obligation for deduction of tax is on every purchaser of immovable property, whether he is required to get his books of accounts audited u/s. 44AB or not. It will not be necessary for the purchaser to obtain Tax Deduction Account Number (TAN) u/s. 203A.

However, the purchaser will have to file TDS Return and deposit TDS amount with the Government as provided in Section 200. The seller of the property must provide his PAN to the purchaser. If this is not done, tax on the sale consideration will have to be deducted at 20% as provided in section 206AA. It may be noted that the option of obtaining certificate from the A.O. u/s. 197 prescribing NIL rate or lower rate of TDS is not available in the above case.

(iii)    If the purchase of the immovable property is from a non-resident, the tax will be deductible by the purchaser at the applicable rate u/s. 195 as at present. This new section will not apply to such a purchase. Similarly, this new section will not apply to payment of compensation on acquisition of immovable property to which the provisions of TDS u/s. 194LA are applicable.

(iv)    It may be noted that a similar provision for TDS was proposed to be introduced by the insertion of section 194LAA in the Income-tax Act by the Finance Bill, 2012. Under this provision, it was proposed that the purchaser of an immovable property for a consideration exceeding Rs. 50 lakh in the specified area and Rs. 20 lakh in other areas shall deduct tax at source @ 1% of the consideration. For this purpose, the consideration was to be considered as specified in the Sale Deed or stamp duty valuation u/s. 50C whichever was higher. The registering authority was directed not to register the document unless the evidence for payment of TDS amount was produced before him. There was a lot of protest against the introduction of such a provision last year. Therefore, this provision was dropped before passing the Finance Act, 2012. A similar provision is again introduced this year and in the absence of any serious debate the same has been now brought into force from 01-06-2013.

(v)    This new provision is likely to raise some issues as under:

(a) The definition of immovable property only covers land (other than agricultural land) or building or part of the building. This will mean that any right in a building such as tenancy right, leasehold right etc. will not be subject to this TDS provision. [Refer: Atul G Puranik vs. ITO 132 ITD 499 (Mum)]

(b)    If a person has booked a flat in a building under construction, either the flat is booked before 01-06-
2013 or after that date, and makes payment for the same, a question will arise whether he is required to deduct tax at source under this section. It is possible to take the view that by the agreement with the builder the purchaser gets a right to get the flat when constructed. Therefore, when the instalment payments are made to the builder there is no transfer of immovable property. [Refer: ITO vs. Yasin Moosa Godil 147 TTJ 94 (Ahd)] The transfer of flat will take place only when possession is given.

Therefore, the obligation to deduct tax will arise under this section only when the last instalment is paid against possession of the flat. However, TDS @ 1% will have to be deducted on the entire consideration for the flat at that time.

(c)    Since there is no specific mention in this section that if the amount of stamp duty valuation u/s. 50C is more than the actual consideration, the stamp duty valuation will be considered as consideration for TDS purposes, it can be concluded that tax is to be deducted from the actual consideration payable as per the sale deed. As stated earlier, in the Finance Bill, 2012 the proposed section 194LAA specifically provided for considering stamp duty valuation if that was more than the consideration stated in the Sale Deed. There is no such provision in this new section 194-1A.

(d)    Section 199 of the Income-tax Act provides that credit for TDS amount will be given against the income in respect of which such tax is deducted. In a transaction of sale of immovable property, the seller will be showing income from such sale under the head “Capital Gains” or “Income from Business or Profession”. It may so happen that an individual selling his immovable property may claim exemption u/s. 54 or 54F due to reinvestment in another property or u/s. 54EC by reinvestment in Bonds. In all such cases, credit for TDS under this new section will be available even if the income computed under the head “Capital Gains” is NIL.

(e)    If the property is purchased by two or more persons as co-owners, the tax will be deductible by each co-owner in respect of his/her share of the consideration paid if the total consideration for the property exceeds Rs. 50 lakh. This section also applies in respect of purchase of property from a relative.

(f)    It may be noted that there is no provision for disallowance of purchase price of the property u/s. 40(a)(ia) in the case of a purchaser who has purchased the property as stock-in-trade.

3.3    tds from interest income of FII or qfi:

Section 194LD: This is a new Section inserted in the Income-tax Act w.e.f. 01-06-2013. This Section provides that any person paying interest to a Foreign Institutional Investor (FII) or a Qualified Foreign Investor (QFI) in respect of the following investment shall deduct tax at source at the rate of 5% plus applicable surcharge and Education Cess.

(a)    Interest on a Government Security

(b)    Interest on a rupee denominated bond of an Indian Company, provided that the rate of interest does not exceed the rate notified by the Central Government.

It may be noted that consequential amendments have been made in Sections 115A, 115AD, 195 and 196D. However, no consequential amendment is made in Section 206AA and, therefore, in the case of any FII or QFI, if PAN is not furnished tax will be deductible @ 20% plus applicable surcharge and Education Cess.

3.4 Section 206AA: This section is amended w.e.f. 01-06-2013. By this amendment, it is now clarified that in respect of interest paid to a non-resident or a foreign company on long term infrastructure bonds issued by an Indian Company in foreign currency as provided in section 194LC, the provisions of section 206AA will not apply from 01-06 -2013. Therefore, if such foreigner lender does not furnish PAN, the tax will be deducted at 5% plus applicable surcharge and Education Cess u/s. 194LC and not at the rate of 20% as provided in section 206AA.

It is surprising that similar concession is not given u/s. 206AA to tax deductible u/s. 194LD as discussed in Para 3.3 above.

3.5    Section 206C – Tax collection at source (TCS)

This section was amended last year w.e.f. 01-07-2012 by inserting s/s. (1D) in section 206C providing for TCS @ 1% of the sale consideration for bullion purchased by a buyer if the consideration exceeded Rs. 2 lakh and was paid in cash by the buyer. It was provided that for this purpose, the term “Bullion” shall not include any coin or any other article weighing 10 grams or less. This provision is now amended by the Finance Act, 2013, and it is provided that w.e.f. 01-06-2013, the exemption given from TCS provision to a coin or other article of bullion weighing 10 grams or less shall not be available. Therefore, tax will have to be collected @ 1% if the buyer of bullion (including any coin or other article) pays amount exceeding Rs. 2 lakh in cash.

4.    Exemptions and Deductions:

4.1    Agricultural Land Section 2(1A) and 2(14):

These two sections of the Income tax Act have been amended w.e.f. A.Y. 2014-15.

(i)    Section 2(14) defines the term “Capital Asset”.
As per the provisions of the section before the amendment, agricultural land situated within the jurisdiction of a Municipality, Cantonment Board etc. having population of more than 10,000 was considered as a Capital Asset. Similarly, agricultural land situated within the distance (not exceeding 8 kms) from the local limits of a Municipality, Cantonment Board etc. as notified was also considered as Capital Asset.

(ii)    Section 2(14) has now been amended to provide that the agricultural land situated in any area within the following distance, measured aerially, from the local limits of any Municipality, Cantonment etc. shall be considered as a Capital Asset.

(a)    Within 2 kms having population of more than 10,000 but less than 1 lakh;
(b)    Within 6 kms having population of more than 1 lac but less than 10 lakh;
(c)    Within 8 kms having population of more than 10    lakh.

In other words, agricultural land situated outside the above territory will not be considered as Capital Asset u/s. 2(14).

(iii)    The population for the above purpose is defined to mean population according to the last preceding census of which the relevant figures have been published before the first day of the Financial Year. The distance for the above purpose is to be measured “aerially”. This provision appears to have been made to settle the controversy about the method of measurement. In the case of CIT vs. Satinder Pal Singh 188 Taxman 54 (P&H) it was held that the distance should be measured by approach road and not by a straight line distance on a horizontal plane.

(iv)    Section 2(1A) has similarly been amended w.e.f. A.Y. 2014-15.

Income derived from any building and situated in the immediate vicinity of the agricultural land is presently exempt as agricultural income, subject to certain conditions u/s. 2(1A). By amendment of this section, it is now provided that income from such building falling within the area specified in (ii) above will not qualify for exemption as agricultural income.

4.2    Keyman Insurance Policy – Section 10(10D)

(i)    Section 10(10D) grants exemption to any sum received under a life insurance policy, subject to certain conditions. Amount received on maturity of Keyman Insurance Policy is not exempt u/s. 10(10D). There was a controversy whether the Keyman Insurance Policy assigned to the beneficiary continues to be a Keyman Insurance Policy. Delhi High Court held in the case of CIT vs. Rajan Nanda 349 ITR 8 that the Keyman Insurance Policy becomes an ordinary policy on the life of the beneficiary on assignment and therefore the amount received under this policy will be exempt if other conditions of section 10(10D) are complied with. To overcome this decision, Explanation 1 to the section is now amended w.e.f. A.Y. 2014-15 to provide that the Keyman Insurance Policy which has been assigned to the beneficiary during its term, with or without consideration, will be considered to be a Keyman Insurance Policy u/s. 10(10D) and exemption under that section will not be available in respect of the amount received on maturity. It may be noted that for A.Y. 2013-14 and earlier years the exemption can be claimed on the basis of Delhi High Court decision in the case of CIT vs. Rajan Nanda 349 ITR 8.

(ii)    One of the conditions for granting exemption provided in section 10(10D)(d) is that the annual premium payable in respect to a life insurance policy should not exceed 10% of capital sum insured. This percentage of the premium is increased to 15% in the case of insurance policy issued on or after 01-04-2013 on the life of (a) a person with disability stated in section 80U or (b) a person who is suffering from a disease or ailment specified u/s. 80DDB. Consequential amendment is made in section 80C also.

4.3    Securitisation Trusts: New Sections 10(23DA), 10(35A), 115TA to 115TC

(i)    New Scheme for taxation of Income of Securitisation Trust (Trust) has been introduced from A.Y. 2014-15. For this purpose, new sections 10(23D), 10(35A), 115TA, 115TB and 115TC have been added. The terms “Securitisation Trust”, “Securities”, “Securitised Debt Instrument”, “Instruments” “Investor” and “Special Purpose Vehicle” are defined in section 115TC. These terms have the same meaning as given to them in SEBI (Public Offer and

Listing of Securitised Debt Instruments) Regulations, 2008 or the Guidelines on the securitisation of standard assets issued by RBI.

(ii)    Under the new scheme the provisions can be summarised as under:

(a)    Any income of the Trust from the activity of securitisation will be exempt from tax u/s. 10(23DA);

(b)    Income received by the Investor holding any securitised debt instrument or securities issued by the Trust will be exempt in the hands of the Investor u/s. 10(35A);

(c)    Trust will be liable to pay at the following rates on the income distributed to the investor u/s. 115TA.

•    In the case of Individual or HUF – 25% Income tax plus applicable surcharge and Education Cess;

•    In the case of others – 30% Income tax plus applicable surcharge and Education Cess;

•    In the case of a person who is not liable to pay tax on such income – No tax is payable by the Trust.

The provisions for payment of the above tax on income distributed to Investors are contained in section 115TA to 115TC. These provisions are similar to tax payable on distribution of dividend by a company and tax payable on distribution of income by a Mutual Fund.

(iii)    Section 115TA also provides for filing of Statement of income distributed and tax paid thereon, charging of interest for the delayed payment of tax and treating a person responsible for compliance with these provisions as an assessee in default for the non-compliance with provisions of sections 115TA to 115TC.

(iv)    If one compares the existing provisions with the above new scheme, it will noticed that under the above scheme the total tax liability of the trust and Investors, put together, will be more.

4.4    Investor Protection Fund:    New Section 10(23ED)

This is a new section inserted w.e.f. A.Y. 2014-15. This section grants exemption to any income, by way of contribution received from a Depository by an Investor Protection Fund (Fund) set up in accordance with the regulations notified by the Central Government. It may be noted that Depositories (NSDL or CDSL) are required to set up Investor Protection Fund as provided in SEBI (Depositories and Participants) Regulations, 1996. The above exemption is now provided to the Fund in respect of contribution by the Depository. It is also provides that if the Fund shares any amount with the Depository in any year, out of such exempt income, the amount so shared will be taxable in its hands. This section is on the same lines as section 10(23EA) which grants exemption to amount contributed by a recognised Stock Exchange to its approved Investor Protection Fund.

4.5    Venture Capital Fund: Section 10(23FB):

This section provides for exemption to any income of Venture Capital Company (VCC) and Venture Capital Fund (VCF) from investment in Venture Capital Undertaking (VCU). Essentially, this section treats VCC and VCF as pass-through entities. U/s. 10(23FB), the income of VCC and VCF is exempt but is taxable directly in the hands of investors in these entities u/s. 115U. The SEBI (VCF) Regulations, 1996, have been replaced by the SEBI (Alternative Investment Funds) Regulations, 2012 w.e.f. 12-05-2012. By amendment of Section 10(23FB), w.e.f. A.Y. 2013-14, the existing explanation has been substituted to provide as under:

(i)    The pass-through status can be enjoyed by VCC and VCF that has been granted registration as category I Alternative Investment Fund;

(ii)    VCC and VCF registered and governed by old VCF Regulations will continue to enjoy the pass through status;

(iii)    VCC/VCF will have to comply with the conditions stated in the Explanation. Shares of the VCC and Units of the VCF should not be listed on any recognised stock exchange. 2/3rd of the investible funds should be invested in unlisted equity shares or equity linked instruments of a VCU. Further, the VCC should not invest any funds in a VCU in which its directors and substantial shareholders (10% or more holding) hold more than 15% of paid-up equity share capital of the VCU. Similar conditions are provided for VCF also.

4.6    Section 10(48):

Under this section, any income received in India in Indian currency by a foreign company on account of sale of crude oil to any person in India is exempt from tax, subject to certain conditions. The scope of this exemption is now expanded w.e.f. A.Y. 2014-15 and it is now provided that this exemption can be claimed by a foreign company in respect of income from sale to any person in India of crude oil, any other goods or rendering of services as may be notified by the Central Government.

4.7    New Section 10(49):

This new Section is inserted in the Income -tax Act to provide for exemption from tax to any income of the National Financial Holding Company Ltd., a company set up by the Central Government on 07-06-2012. This exemption is granted for A.Y. 2013-14 and for subsequent years.

4.8    Recognised Provident Fund:

One of the conditions in Schedule IV – Proviso to Rule 3 of Part A is that a Provident Fund will be considered as recognised under the Income tax Act only if the establishment for which the Provident Fund is set up is also exempted u/s. 17 of the P.F. Act. The date for obtaining such exemption under the P.F. Act which expired on 31-03-2013 under Rule 3 has now been extended by amendment of Rule 3 to 31-03-2014.

4.9    Rajiv    Gandhi    Equity    Savings    Scheme (RGESS):    Section 80CCG:

At present, a resident individual, who is a first time retail investor, investing in listed equity shares under RGESS Scheme, is allowed a one time deduction of 50% of the eligible investment upto Rs. 50,000/- in the A.Y. 2013-14. Thus, the maximum deduction allowable under this section is Rs. 25,000/- if the gross total income of such individual does not exceed Rs. 10 lakh.

Now this section is amended w.e.f. A.Y. 2014-15 to provide as under:

(i)    Limit of gross total income of the individual is increased from Rs. 10 lakh to Rs 12 lakh.

(ii)    The scope of investment in eligible investment is extended to include listed units of an equity fund specified in RGESS. This includes investment in eligible shares, ETFs and Mutual Fund Units which has such eligible shares as the underlying assets.

(iii)    The deduction upto Rs. 25,000/- (50% of investment upto Rs. 50,000/-) will now be available for each of the 3 consecutive assessment years beginning with the year in which such investment was first made.

(iv)    There is a lock-in period of 3 years for such investment.

(v)    If the prescribed conditions of RGESS are violated, the deduction originally granted will be deemed to be the income of the year in which such violation takes place.

4.10 Contribution to Health Scheme: Section 80D:

At present deduction u/s. 80D can be claimed in respect of premium on Mediclaim Policy upto Rs. 15,000/- (Rs. 20,000/- for Senior Citizens) by an individual or an HUF. Such deduction is also allowable for any contribution made to the Central Government Health Scheme or for preventive health check-up subject to the above limit. By amendment of this section the above benefit is now extended w.e.f. A.Y. 2014 -15 to contribution to such other Health Schemes as may be notified by the Central Government.

4.11  Additional Deduction for Interest on Housing Loans: Section 80EE:

This is a new section inserted in the Income tax Act w.e.f. A.Y. 2014-15. Under this section, one time deduction upto Rs. 1,00,000/- will be allowed to an individual for interest paid on Housing Loan taken for acquiring a residential house. This deduction will be over and above the deduction allowed for interest paid for the housing loan u/s. 24(b) of the Income-tax Act. This deduction can be claimed subject to following conditions.

(i)    Housing Loan should be taken from a Bank, Financial Institution or a Housing Finance Company as defined in Section 80EE (5);

(ii)    Housing Loan should have been sanctioned between 01-04-2013 to 31-03-2014;

(iii)    Housing Loan sanctioned should not exceed Rs. 25 lakh;

(iv)    The value of the residential house should not exceed Rs. 40 lakh;

(v)    The individual claiming this deduction should not own any residential house on the date of sanction of the housing loan;

(vi)    If the interest payable on the above loan, in A.Y. 2014-15, is less than Rs. 1,00,000/-, the assessee can claim deduction for the balance amount paid in A.Y. 2015-16. In other words, deduction allowable for interest on the housing loan in the A.Y. 2014-15 and 2015-16 cannot exceed Rs. 1,00,000/-.

It may be noted that this deduction cannot be claimed by an HUF. Further, there is no condition that the residential house should be self occupied. The assessee can let out the residential house. It also appears that if a residential house is purchased by two or more co-owners, each co-owner can claim the deduction for interest under this section against his share of income from the joint property.

4.12 Donation u/s. 80G:

This section is amended w.e.f. A.Y. 2014-15. At present, donation to National Children’s Fund is eligible for deduction u/s. 80G at the rate of 50% of the amount of the donation. This section is now amended to provide that 100% of the donation to National Children’s Fund made on or after 01-04-2013 will be eligible for deduction u/s. 80G.

4.13 Donation to Political Parties: Sections 80GGB and 80GGC.

These two sections provide for deduction from gross total income of 100% of the amount donated by any company, individual, HUF, firm, LLP or other specified persons to recognised Political Parties or Electoral Trusts. Now, it is provided, by amendment of these sections, that no such deduction will be allowed if such donation is made in cash on or after 01-04-2013. It may be noted that in sections 80G and 80GGA donation to approved trusts can be made in cash upto Rs. 10,000/-. So far as Political Donations are concerned, it is now provided that no cash donations will be eligible for deduction under the above sections.

4.14 Power Sector undertakings: Deduction u/s. 80IA.

This section provides for deduction of income of certain undertakings. This includes undertaking which commences its business of generation and/or distribution, transmission or distribution of power, or substantial renovation and modernisation of the existing transmission or distribution lines on or before 31-03-2013. By amendment of this section, the above time limit for commencement of business by such an undertaking is extended upto 31-03-2014.

4.15 Additional deduction for wages paid to New Workmen: Section 80JJAA:

Under the existing section, deduction is allowed to an Indian Company of an additional amount equal to 30% of the wages paid to new regular workmen employed by the Company in an industrial undertaking engaged in the manufacture or production of an article or thing, subject to certain conditions specified in this section.

This section is amended w.e.f. A.Y. 2014-15 to provide as under:

(i)    Now the above deduction can be claimed by an Indian company only if it is deriving income from the manufacture of goods in a factory. For this purpose, the word “Factory” shall have the same meaning as in section 2(m) of the Factories Act, 1948;

(ii)    The new regular workmen should be employed by the company in such factory;

(iii)    This deduction can be claimed by the company in the year in which appointment is made and for two subsequent assessment years;

(iv)    Such deduction is not allowable to the company in case the factory is hived off, transferred from another existing entity or acquired as a result of an amalgamation.

5.    Income from Business or Profession:

5.1 Investment Allowance: New Section 32AC: This is a new section inserted in the Income tax Act w.e.f. A.Y. 2014- 15. The section provides for a one time deduction (Investment Allowance) to a company. This deduction can be claimed if the following conditions are complied with:

(i)    This deduction can be claimed by a company engaged in the business of manufacture or production of any article or thing.

(ii)    Such a company should acquire and install specified new asset between 1-4-2013 to 31-3-2015 for an aggregate cost exceeding Rs. 100 crore. If the specified new asset is acquired before 1-4-2013, this deduction cannot be claimed.

(iii)    The above deduction is allowable at the rate of 15% of the actual cost of the specified new asset acquired and installed during the accounting year 2013-14 (A.Y. 2014-15) if the actual cost of such asset exceeds Rs. 100 crore. If such actual cost is less than Rs. 100 crore no deduction will be allowed in A.Y. 2014-15.

(iv)The company can claim deduction of 15% of the actual cost of such new asset acquired and installed during accounting year 2014-15 (A.Y. 2015-16) if the aggregate cost of the new asset during the period 1-4-2013 to 31-3-2015 exceeds Rs. 100 crore.

  In other words, deduction of 15% can be claimed as under:

(vi)   This being a special incentive for encouraging industrial companies which invest more than Rs. 100 crore in specified new assets, the amount of deduction allowed is not to be deducted from W.D.V. of the block of assets.

(vii)   Further, this deduction is not for depreciation and, therefore, for the purpose of carry forward of losses, it will form part of business loss and not “unabsorbed depreciation”.

(viii)   Since no provision for this deduction of 15% (investment allowance) is required to be made in the books of the company, deduction for this amount cannot be claimed for computation of Book Profits u/s. 115 JB.

(ix)   For the purpose of this section, specified new asset means new plant and machinery. This will not include (a) ship or aircraft, (b) second hand plant and machinery (whether imported or not), (c) plant and machinery installed in office premises or residential premises (including guest house), (d) office appliances, (including computers or computer software), (e) vehicles, and (f) plant and machinery in respect of which 100% deduction by way of depreciation or otherwise is allowed in any previous year.  It may be noted that intangible assets are not excluded from the definition of specified new asset.  Therefore, any intangible asset attached to a plant and machinery can be considered as a specified new asset.

(x)    It may be noted that this deduction will not be allowable to companies engaged in the business of hotel, hospital, road, bridge and other construction businesses.

(xi)  There is a lock-in period of 5 years for the above specified new assets.  If such asset is sold or transferred within 5 years of the date of installation, then the amount allowed as deduction in the earlier years will be taxable as profit or gain from business in the year of such sale or transfer.  This will be in addition to the taxability of capital gains (if any) arising on such sale or transfer of such assets.

(xii)  The above provision of lock-in period as stated in (xi) above, will not apply if the transfer of such asset is as a result of an amalgamation or a demerger.  However, the Amalgamated Company or the Resulting Company will have to ensure that such new asset is not sold or transferred by it within 5 years from the date of installation by the Amalgamating Company or the Demerged Company.

5.2 Deduction of Bad/Doubtful Debts to Indian Banks: Section 36(1)(vii) and 36(1)(viia) – (i) Under the existing provisions of section 36(1)(viia), banks and financial institutions, depending upon their categories, are entitled to claim deduction for provision for bad and doubtful debts made for Urban and Rural Branches at specified rates. Similarly, a bank/financial institution is also entitled to claim deduction for bad debts actually written off u/s. 36(1)(vii) to the extent it is in excess of the credit balance in Provision for Bad and Doubtful Debts A/c made u/s. 36(1)(viia).  Some doubts had arisen about the interpretation of the provisions of these two sections.  In the case of Catholic Syrian Bank Ltd v/s CIT 343 ITR 270 the Supreme Court held that banks are entitled to full benefit of write off  bad debts, written off u/s. 36(1)(vii) in addition to the deduction for the provision for bad and doubtful debts made u/s. 36(1)(viia). It is also held that, in the case of rural advances, there will be no double deduction for provision made u/s. 36(1)(viia). The proviso to section 36(1)(vii) limits its application to the bank which has made such provision u/s.6(1)(viia). The provision of section 36(1)(vii) and 36(1)(viia) and 36(2)(V) should be construed together.  Thus, they form a complete scheme for deduction and prescribe the extent to which deduction is available to banks.

(II)    For removal of doubts, section 36(1)(vii) has been amended from A.Y. 2014-15 by adding an Explanation that for the purpose of proviso to this section, the account referred to therein shall be only one account in respect of provision for doubtful debts u/s. 36(1)(viia). In other words, no distinction will be made for provision for urban and rural advances made u/s. 36(1)(viia). Therefore, in such cases, the amount of deduction in respect of bad debts u/s. 36(1)(vii) shall be limited to the amount by which the same exceeds the credit balance of the provision made u/s. 36(1)(viia).

5.3 Commodities Transaction Tax (CTT): Section 36(1) has been amended from A.Y. 2014-15 and it is now provided in section 36(1)(xvi) that the amount equal to CTT paid by the assessee in respect of the taxable commodities transactions entered by it in the course of its business will be allowed as its business expenditure.

5.4 Disallowance of certain payments by State Government Undertakings: Section 40(a)(iib) -This new clause has been added in section 40(a) from A.Y. 2014-15. Disputes had arisen in income tax assessments of some State Government Undertakings (SGU) as to whether any amount paid by SGU to the State Government by way of Royalty, Licence Fees, Service Fee, Privilege Fee, Service charges or any similar Fee/charge is deductible as business expenditure. It is now provided by this amendment that any such fee or charge which is levied exclusively on the SGU or is directly or indirectly appropriated from the SGU by the State Government will not be allowed as business expenditure to SGU. For this purpose, Explanation to the section defines SGU. (It includes a company in which the State Government has more than 50% of equity).

5.5  Commodity Derivative Transactions:
Section 43(5) – This section defines a “Speculative Transaction”. At present, it excludes from this definition certain transactions, including eligible transactions in respect of derivative transactions carried out in a recognised Stock Exchange. In view of introduction of MCX as a recognised association for commodities transactions, this section is now amended from A.Y. 2014-15 to provide that eligible transactions in Commodity Derivatives entered into through a recognised association will not be considered as speculative transactions.

5.6 Full value of consideration of Immovable Property held as Stock-in-Trade: New section 43CA

–    (i) This new section is inserted from A.Y. 2014-15. Therefore, it will apply to real estate transactions entered into on or after 1st April, 2013. U/s. 50C, in the case of transfer of an immovable property (land, building or both) which is held by the seller as a capital asset, if the consideration is less than the market value adopted (assessed or assessable) for the purpose of payment of stamp duty, such stamp duty valuation is considered as the full value of the consideration u/s. 50C. Thus, the capital gain in the hands of the seller is computed on that basis as provided u/s. 50C. This provision was not applicable to immovable property held by the seller as stock-in-trade.

(ii)    By introduction of this new section 43CA, it is now provided that the above concept of section 50C of adopting stamp duty valuation as full value of consideration will apply for computation of business income in the hands of seller who holds such property as stock-in-trade. The provisions of section 50C are made applicable w.e.f. 01-04-2013, to the extent applicable, to such transactions. This new provision will apply to Builders, Developers and Dealers engaged in real estate transactions. The provision will apply according to the method of accounting followed by the assessee. It may be noted that this new provision will not apply when the assessee makes a slump sale of the business as a going concern.

(iii)    It is also provided in this Section that if there is a time gap between the date of the agreement of sale and the date of registration. The full value of the consideration will be determined with reference to the stamp duty valuation assessable on the date of the agreement of sale provided that full or part of the consideration stated in the agreement was paid, otherwise than in cash.

(iv)    It may be noted that the definition of immovable property for the purpose of this section or section 50C does not include any right in the immovable property such as leasehold or tenancy right etc. If the assessee has booked a flat in a property under construction, the right to get possession of the flat is not covered under the section. However, when the property is constructed and the possession of the flat is taken, the section will apply with reference to the Agreement for sale when executed.

(v)    It may be noted that section 56(2)(vii)(b) has been amended as discussed in Para 6 below. Effect of this amendment is that w.e.f. 01-04-2013, in the case of a purchaser of an immovable property, if the difference between the stamp duty valuation and the actual consideration paid as per the agreement of sale is more than Rs. 50,000/-, such difference will be considered as “income from other sources” in the hands of such purchaser. However, this provision will not apply if the purchase is from a relative as defined in Explanation to section 56(2)(vii). From this provision, it will be noticed the difference between the stamp duty valuation and actual consideration will be taxable in the hands of the seller as well as the purchaser if such difference exceeds Rs. 50,000/-.

6.    Income from other sources: Section 56(2)(vii)(b) – (i) This section is amended from A.Y. 2014-15. This section provides for levy of tax on certain gifts received from non-relatives. This amendment comes into force in respect of transactions relating to purchase of immovable property i.e. land, building or both made on or after 01-04-2013. Prior to 31-03-2013, if an immovable property was received by an Individual or HUF from a non-relative, without consideration, the market value (based on the stamp duty valuation) on the date of the gift, if it exceeds Rs. 50,000/-, was treated as income from other sources in the hands of the assessee. There is no change in this provision. However, it is now provided, w.e.f. 01-04-2013, that if the purchase of an immovable property by an Individual or HUF is made for consideration which is less than the stamp duty valuation assessed or assessable by the stamp duty authorities, the difference will be taxable as income in the hands of the purchaser. This provision will apply only if such difference is more than Rs. 50,000/-.

(ii)    It is now also provided by this amendment that if there is a time gap between the date of the agreement for purchase of the property and date of registration of the agreement, the stamp duty valuation assessable on the date of the agreement will be considered for this purpose. This concession will apply only if the full or part of the consideration stated in the agreement is paid by the purchaser by any mode other than cash before the date of registration.

(iii)    For this purpose, the term “Immovable Property” is defined to mean “Land, Building or Both”. This will mean that any right in the immovable property will not be covered by this provision. Therefore, any tenancy right, leasehold right or similar right will not be considered as Immovable Property. If a flat in a building under construction is booked by the individual or HUF, the right to get possession of the flat will not be considered as purchase of immovable property under this section. Therefore, the consideration paid for this right as per the agreement will not be covered by this section.

(iv)    If the stamp duty valuation is disputed, the provisions of section 50C for reference to Valuation
Officer will apply.

(v)    It may be noted that if the difference between the stamp duty valuation and actual consideration exceeds Rs. 50,000/- tax will be payable on such notional amount by the seller as well as the purchaser under the following sections:

(a)    In the case of the seller who is holding the immovable property as stock-in-trade as business income under new section 43CA – w.e.f. 01-04-2013.

(b)    In the case of the seller who is holding the property as a capital asset, as capital gain u/s. 50C.

(c)    In the case of Individual or HUF purchaser, under amended section 56(2)(vii)(b) – w.e.f. 01-04-2013 as income from other sources.

(vi)    It may be noted that in the hands of the individual or HUF, if such property is held as “Capital Asset”, then such an assessee will be entitled to claim that the stamp duty valuation of the property adopted for taxation u/s. 56(2)(vii)(b) should be deemed to be the cost of acquisition of such property. To this extent there will be some deferred benefit to such individual or HUF. This benefit is provided u/s. 49(4). This benefit will not be available to a person who purchases an immovable property and treats it as stock-in-trade of his business.

(vii)    It may be noted that amendment similar to what has been made, as stated above, in section 56(2)(vii)(b) was made in section 50(2)(vii)(b) by the Finance (no.2) Act, 2009, w.e.f. 01-10-2009. When it was pointed out to the Government that such a provision is unjust as both the seller and the purchaser of the immovable property will have to pay tax on this same notional addition, it was realised by the Government and in the Finance Act, 2010, this provision for levying tax on the purchaser was deleted with retrospective effect from 01-10-2009. This year the same amendment is made to tax the purchaser w.e.f. 01-04-2013, which has the effect of levying tax on the seller as well as the purchaser on the same notional addition. No reasons are given in the Explanatory Statement issued with the Finance Bill, 2013, for reintroducing this provision.

7.    Buy-back of shares and Dividend Distribution Tax: Sections 10 (34A), 115-O, 115 QA to 115QC and 115R:

7.1 (i) At present, when a company buys back its shares from shareholders u/s. 77A of the Companies Act the shareholder is liable to pay tax u/s. 46A on the difference between the amount received from the company and the cost of acquisition of shares as provided u/s. 48 under the head “Capital Gains”. This provision will continue to apply in the case of shares which are listed if such buy back is not through a Recognised Stock Exchange.

(ii)    A new section 115QA is inserted w.e.f. 01-06-2013 which provides as under.

(a)    This section applies to buy back of shares which are not listed by a domestic company (whether public or private) u/s. 77A of the Companies Act on or after 01-06-2013.

(b)    The consideration paid by the company to its shareholders for such buy-back of shares will now be liable to additional tax in the hands of the company at the rate of 20% plus 10% surcharge on tax (i.e. 2%) and 3% Education Cess on the tax (i.e. 0.66%) (Aggregate 22.66%). This tax is to be paid on the amount of such consideration after deduction of the amount received on the issue of such shares.

(c)    The shareholder receiving this consideration on buy back of shares will not be liable to pay capital gains tax u/s. 46A as provided in the new section 10(34A) introduced w.e.f. A.Y. 2014-15.

(d)    The above tax is to be deposited with the Government within 14 days of the payment of the consideration by the company to the shareholders.

(e)    No credit for such tax can be claimed by the shareholder or the company against any tax liability.

(f)    The above provision is on the same lines as Dividend Distribution Tax payable u/s. 115-0.

(iii)    New section 115QB is also inserted to provide that interest at the rate of 1% p.m. for each month or part of the month shall be payable for the delay in payment of tax as required u/s. 115QA. Further, under new section 115QC provision is made for considering the company as assessee in default if it does not comply with the provisions of section 115QA. These provisions are similar to existing sections 115P and 115Q.

(iv)    In section 115QA, it is stated that from the consideration paid by the company for buy-back of shares, the amount received on issue of shares should be deducted and the tax @ 20% is to be paid on this net amount. The question for consideration is as to how the amount received on issue of shares will be worked out in the following cases:

(a)    When shares are issued at a Premium.

(b)    When shares are issued as Bonus shares.

(c)    When shares are issued on conversion of debentures.

(d)    When shares are issued to employees at concessional rate under ESOP scheme.

(e)    When shares are issued at a discount or there is reduction in face value of shares to write off losses under a High Court Order.

(f)    When shares are issued on amalgamation or on demerger.

In all the above cases, it will not be possible to determine the exact amount received on the issue of a particular share which the shareholder has offered for buy-back. This practical difficulty will have to be resolved by the tax authorities by a issuing a clarification.

(v)    In the above scheme of taxation of the net consideration paid on buy-back of shares, it will be noticed that the tax is payable by the company. However, at present, the shareholder holding shares as a Capital Asset, is pays tax on such buy-back on the surplus, after the following deductions, under the head capital gains, at applicable rate.

(a)    Actual cost of shares or Indexed cost (if long term asset) is deductible from the consideration.

(b)    Set off of other capital loss or brought forward loss can be claimed against such capital gain.

(c)    Benefit of deduction u/s. 54EC or 54F is available if the consideration is invested in Bonds or purchase of a residential house.

Taking into consideration the above, it will be noticed that incidence of tax under the new section 115QA will be higher as compared to the present provisions. In the case of a person holding such shares as stock-in-trade he will not get benefit of deduction of actual cost or set off of business losses or set off of carried forward losses.

7.2 Section 115-0: This section deals with Dividend Distribution Tax (DDT) payable by a Domestic company on dividend distributed by it. Section 115-0 (1A) has now been amended w.e.f. 01- 06-2013 to provide that no DDT will be payable on the amount relatable to dividend received from a foreign subsidiary company on which tax is paid by the domestic company at 15% u/s 115 BBD.

7.3 Section 115R: (i) This section deals with the payment of additional tax by a Mutual Fund (other than an equity oriented mutual fund) on the income distributed to the unit holders. This section is amended w.e.f. 01-06-2013. Hitherto such additional tax payable in respect of income distribution to Individual or HUF unit holders (excluding Money Market Fund or liquid fund) was 12.5%. Now from 1-6-2013 such tax will be payable by Mutual Fund at the rate of 25%. This will mean that the amount to be distributed to such unit holders will be reduced.

(ii)    There is also an amendment in the section from 1-6-2013 to the effect that the rate of tax payable in the case of income distribution by an Infrastructure Debt Fund Scheme to a Non-Resident (including foreign company) unit holder shall be 5% only.

(iii)    Surcharge at the rate of 10% of tax and Education Cess at the rate of 3% of tax will also be payable on the above tax.

8.    Tax Residency Certificate for Non-Residents(TRC):  Sections 90 and 90A

(i)These two sections empower the Central Government to enter into Agreements with any foreign country, Specified Territory or certain specified/Notified Associations in Specified Territories for avoidance of double taxation (DTAA). The Finance Act, 2012, had amended section 90 by insertion of sub- section (2A) w.e.f. 01-04-2013 to provide that the provisions of new sections 95 to 102 dealing with General Anti Avoidance Rule (GAAR) will be applicable even if the provisions of DTAA are more favourable to the assessee. In other words, where GAAR is invoked the assessee cannot seek protection of beneficial provision of DTAA. Similar amendment was also made in section 90A.

(ii)    These two sections have now been amended to provide that section 90(2A) as well as 90A(2A) will now apply w.e.f. A.Y. 2016-17 because applicability of the provisions of sections 95 to 102 dealing with GAAR has now been postponed to A.Y. 2016-17.

(iii)    (a) In section 90(4) as well as 90A(4), last year an amendment was made to provide that a Non Resident cannot claim benefit of DTAA unless Tax Residency Certificate in the form prescribed is obtained from the foreign country/specified territory with which India has entered into DTAA. In this certificate, such Foreign Country/Territory was required to certify the place of residence and such other particulars which the Indian Tax Department may require to decide where the benefit claimed under a particular DTAA is available to the Non Resident assessee.

(b)    Some doubts were expressed about the effect of the amendment on the evidential value of TRC. Subsequently, the CBDT issued a press release clarifying the issue as under. “The Tax Residency Certificate produced by resident of contracting state will be accepted as evidence that he is a resident of that contracting state and the Income tax Authorities in India will not go behind the TRC and question his residential status.”

(c)    To give effect to the above assurance section 90(4) as well as 90A(4) have been amended and the requirements about the Tax Residency Certificate containing the prescribed particulars about the assessee being resident of the contracting foreign country/specified territory has now been removed with retrospective effect i.e. A.Y. 2013-14. After removal of the above requirements s/s. (5) has been added in section 90 as well as 90A to provide that the Non-Resident which has obtained TRC from the foreign country/specified territory shall provide such other documents and information as may be prescribed. This amendment is made w.e.f. A.Y. 2013-14.

9.    Taxation of Non-Residents: Sections 115A and 115AD

9.1 Section 115A: This section deals with tax on Dividends, Royalty and Technical Service Fees in the case of a Non-Resident. This section is amended w.e.f. A.Y. 2014-15 as under :

(i)    It is now provided that the tax on interest referred to in section 194LD from Rupee Denominated Bonds of Indian Company as discussed in para 3.3 above will be payable @ 5% plus applicable surcharge and the Education Cess.

(ii)    Under the existing section 115A(i)(b), the rate of tax on Royalty and Fees for Technical services is 10%. With effect from 1-4-2013 (A.Y. 2014-15) that rate is increased to 25% plus applicable surcharge and the Education Cess.

9.2 Section 115AD : This section deals with taxation of Foreign Institutional Investors. By an amendment of this section, w.e.f. A.Y. 2014-15, it is now provided that the tax on interest referred to in section 194LD from Rupee Denominated Bonds of an Indian company, as discussed in para 3.3 above, will be payable @ 5% plus applicable surcharge and the Education Cess.

10.    General Anti-Avoidance Rule (GAAR)

10.1 This was a new concept introduced in the Income tax Act by the Finance Act, 2012. Very wide powers were given to the tax authorities by these provisions. In new Chapter X–A, sections 95 to 102 were inserted. In para 154 of the Budget Speech, while introducing the Finance Bill, 2012, the Finance Minister had stated that “I propose to introduce a General Anti-Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, enabling review by a GAAR panel.”

10.2 The reasons for introducing GAAR provisions in the Income tax Act were explained in the Explanatory Notes attached to the Finance Bill, 2012 as under:

“The question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, judicial decisions have varied. While some courts in certain circumstances had held that legal form of transactions can be dispensed with and the real substance of the transaction can be considered while applying the taxation laws, others have held that the form is to be given sanctity. The existence of anti-avoidance principles are based on various judicial pronouncements. There are some specific anti-avoidance provisions but general anti-avoidance has been dealt only through judicial decisions in specific cases.

In an environment of moderate rate of tax, it is necessary that the correct tax base be subject to tax in the face of aggressive tax planning and use of opaque law tax jurisdictions for residence as well as for sourcing capital. Most countries have codified the “substance over form” doctrine in the form of General Anti Avoidance Rule (GAAR).

In the above background and keeping in view of the aggressive tax planning with the use of sophisticated structures, there is a need for statutory provisions so as to codify the doctrine of “substance over form” where the real intention of the parties and effect of transaction and purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure that has been superimposed to camouflage the real intent and purpose. Internationally several countries have introduced, and are administering statutory General Anti Avoidance Provisions. It is, therefore, important that Indian taxation law also incorporates a statutory General Anti Avoidance Provisions to deal with aggressive tax planning. The basic criticism of statutory GAAR which is raised worldwide is that it provides a wide discretion and authority to the tax administration which at times is prone to be misused. This vital aspect, therefore, needs to be kept in mind while formulating any GAAR regime.”

10.3 There was large scale opposition to the introduction of this provision in the form suggested in the Finance Bill, 2012, and the DTC Bill, 2010, pending consideration of the Parliament. This opposition was voiced by various Trade and Industry bodies in India and abroad. The Finance Minister responded to the various suggestions made by members of the Parliament and various Trade and Industry bodies while replying to the debate in the Parliament on 7th May 2012, in the following words.

“Certain provisions relating to a General Anti-Avoidance Rules (GAAR) have also been proposed in the Finance Bill, 2012. After examining the recommendations of the Standing Committee on GAAR provisions in the DTC Bill, 2010, I propose to amend the GAAR provisions as follows:

(i)    Remove the onus of proof entirely from the tax payer to the Revenue Department before any action can be initiated under GAAR.

(ii)    Introduce an independent member in the GAAR approving panel to ensure objectivity and transparency. One member of the panel now would be an officer of the level of Joint Secretary or above from the Ministry of Law.

(iii)    Provide that any tax payer (resident or non-resident) can approach the Authority for Advances Ruling (AAR) for a ruling as to whether an arrangement to be undertaken by the assessee is permissible or not under the GAAR provisions.

To provide greater clarity and certainty in the matters relating to GAAR, a Committee has been constituted under the Chairmanship of the Director General of Income Tax (International Taxation) to give recommendations for formulating the rules and guidelines for implementation of the GAAR provisions and to suggest safeguards so that these provisions are not applied indiscriminately. The Committee has already held several rounds of discussion with various stakeholders including the Foreign Institutional Investors. The Committee will submit its recommendations by 31st May, 2012.

To provide more time to both tax payers and the tax administration to address all related issues. I propose to defer the applicability of the GAAR provisions by one year. The GAAR provisions will now apply to Income of Financial Year 2013-14 and subsequent years.”

10.4 For the reasons stated above, special provisions relating to GAAR were made in sections 95 to 102 in the Income tax Act from A.Y. 2014-15 (Accounting Year ending 31-3- 2014) and onwards. These provisions applied to all assesses (Residents or Non-Residents) in respect of their transactions in India as well as abroad. Wide powers were given to the tax authorities to disregard any agreement, arrangement or any claim for expenditure, deduction or relief.

10.5 The GAAR provisions contained in sections 95 to 102 (chapter X-A) and in section 144-BA which were introduced by the Finance Act, 2012, w.e.f. A.Y. 2014-15 have now been withdrawn and replaced by another set of provisions in new chapter X-A (sections 95 to 102) and new section 144-BA by the Finance Act, 2013, w.e.f. A.Y. 2016-17 (Accounting year 01-04-2015 to 31-03-2016).

10.6 In para 150 of the Budget Speech while introducing the Finance Bill, 2013, the Finance Minister has stated as under:

“150. Hon’ble Members are aware that the Finance Act, 2012 introduced the General Anti Avoidance Rules, for short, GAAR. A number of representations were received against the new provisions. An expert committee was constituted to consult stakeholders and finalise the GAAR guidelines. After careful consideration of the report, Government announced certain decisions on 14-01-2013 which were widely welcomed. I propose to incorporate those decisions in the Income tax Act. The modified provisions preserve the basic thrust and purpose of GAAR. Impermissible tax avoidance arrangements will be subjected to tax after a determination is made through a well laid out procedure involving an assessing officer and an Approving Panel headed by the Judge. I propose to bring the modified provisions into effect from 01-04-2016.”

10.7 In the Explanatory Statement presented with the Finance Bill, 2013, the reasons for introducing the new provisions are explained as under:

“The General Anti Avoidance Rule (GAAR) was introduced in the Income tax Act by the Finance Act, 2012. The substantive provisions relating to GAAR are contained in Chapter X-A (consisting of section 95 to 102) of the Income tax Act. The procedural provisions relating to mechanism for invocation of GAAR and passing of the assessment order in consequence thereof are contained to section 144 BA. The provisions of Chapter X-A as well as section 144 BA would have come into force with effect from 1st April, 2014.

A number of representations were received against the provisions relating to GAAR. An Expert Committee was constituted by the Government with broad terms of reference including consultation with stakeholders and finalizing the GAAR guidelines and a road map for implementation. The Expert Committee’s recommendations included suggestions for legislative amendments, formulation of rules and prescribing guidelines for implementations of GAAR. The major recommendations of the Expert Committee have been accepted by the Government, with some modifications. Some of the recommendations accepted by the Government require amendment in the provisions of Chapter X-A and section 144 BA.”

GaarProvisions

10.8 In view of the above discussion, the existing sections 95 to 102 and 144BA have been now deleted. New set of Sections 95 to 102 and 144BA have been inserted in the Income tax Act w.e.f. F.Y.: 2015-16 (A.Y. 2016-17). These new provisions are discussed below broadly.

10.9 Section 95 : This section provides that an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement. The tax arising from such declaration by the tax authorities, will be determined subject to provisions of sections 96 to 102. It is also stated in this section that the provisions of sections 96 to 102 may be applied to any step or a part of the arrangement as they are applicable to the entire arrangement.

10.10 Impermissible Avoidance Arrangement (Section 96) :

(i)    Section 96 explains the meaning of Impermissible Avoidance Arrangement to mean an arrangement, the main purpose of which is to obtain a tax benefit and it –

(a)    Creates rights or obligations which would not ordinarily be created between persons dealing at arm’s length.

(b)    Results, directly or indirectly, in misuse or abuse of the provisions of the Income-tax Act.

(c)    Lacks commercial substance, or is deemed to lack commercial substance u/s. 97, in whole or in part, or

(d)    is entered into or carried out, by means, or in a manner, which are not ordinarily employed for bonafide purposes.

(ii)    An arrangement whereby there is any tax benefit to the assessee shall be presumed to have been entered into or carried out for the main purpose of obtaining tax benefits, unless the assessee proved otherwise. It will be noticed that this was a very heavy burden cast on the assessee. The Finance Minister has, however, declared on 07-05-2012 that the onus of proof will be on the department who has to establish that the arrangement is to avoid tax before initiating the proceedings under these provisions.

10.11 Lack of Commercial Substance (Section 97) :

(i)    Section 97 explains the concept of Lack of Commercial Substance in an arrangement entered into by the assessee. It states that an arrangement shall be deemed to lack commercial substance if:

(a)    The substance or effect of the arrangement, as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part of such steps; or

(b)    It involves or includes:

–    Round Trip Financing
–    An accommodating party.
–    Elements that have the effect of offsetting Or cancelling each other; or
–    A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction.

(ii)    It involves the location of an asset or a transaction or the place of residence of any party which is without any substantial commercial purpose. In other words, the particular location is disclosed only to obtain tax benefit for a party, or

(iii)    It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.

(iv)    For the above purpose, it is provided that round trip financing includes any arrangement in which through a series of transactions –

(a)    Funds are transferred among the parties to the arrangement, and,

(b)    Such transactions do not have any substantial commercial purpose other than obtaining tax benefit.

(iii)    It is further stated that the above view will be taken by the tax authorities without having regard to the following:

(a)    Whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement.

(b)    The time or sequence in which the funds involved in the round trip financing are transferred or received, or

(c)    The means by, manner in, or mode through which funds involved in the round trip financing are transferred or received.

(iv)    The party to such an arrangement shall be treated as “Accommodating Party” whether or not such party is connected with the other parties to the arrangement, if the main purpose of, direct or indirect tax benefit under the Income tax Act.

(v)    It is clarified in the section that the following factors may be relevant but shall not be sufficient for determining whether the arrangement lacks commercial substance.

(a)    The period or the time for which the arrangement exists

(b)The fact of payment of taxes, directly or indirectly, under the arrangement.

(c)    The fact that an exit route, including transfer of any activity, business or operations, is provided by the arrangement.

10.12 Consequence of Impermissible Avoidance Arrangement (Section 98) :

Under the newly inserted section 144BA, the Commissioner has been empowered to declare any arrangement as an impermissible avoidance arrangement. Section 98 states that if an arrangement is declared as impermissible, then the consequences, in relation to tax or the arrangement shall be determined in such manner as is deemed appropriate in the circumstances of the case. This will include denial of tax benefit or any benefit under applicable DTAA. The following is the illustrative list of consequences and it is provided that the same will not be limited to the list.

(i)    Disregarding, combining or re-characterising any step in, or part or whole of the impermissible avoidance arrangement;

(ii)    Treating, the impermissible avoidance arrangement as if it had not been entered into or carried out;

(iii)    Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

(iv)    Deeming persons who are connected persons in relation to each other to be one and the same person;

(v)    Re-allocating between the parties to the arrangement, (a) any accrual or receipt of a capital or revenue nature or (b) any expenditure, deduction, relief or rebate;

(vi)    Treating (a) the place of residence of any party to the arrangement or (b) situs of an asset or of a transaction at a place other than the place or location of the transaction stated under the arrangement.

(vii)    Considering or looking through any arrangement by disregarding any corporate structure.

(viii)    It is also clarified that for the above purpose that tax authorities may re-characterise (a) any equity into debt or any debt into equity, (b) any accrual or receipt of Capital nature may be treated as of revenue nature or vice versa or (c) any expenditure, deduction, relief or rebate may be recharacterised.

10.13 Section 99 : This section provides for treatment of connected persons and accommodating party.

The section provides that for the purposes of sections 95 to 102, for determining whether a tax benefit exists –

(i)    The parties who are connected persons, in relation to each other, may be treated as one and same person.

(ii)    Any accommodating party may be disregarded.

(iii)    Such accommodating party and any other party may be treated as one and same person.

(iv)    The arrangement may be considered or looked through by disregarding any corporate structure.

10.14 It is further provided in section 100 that the provisions of sections 95 to 102 shall apply in addition to, or in lieu of, any other basis for determination of tax liability. Section 101 gives power to CBDT to prescribe the guidelines and lay down conditions for application of sections 95 to 102 relating to General Anti-Avoidance Rules (GAAR). Let us hope that these guidelines will specify the type of arrangements and transactions in relation to which alone the tax authorities have to invoke the provision of GAAR. Further, it is necessary to specify that if the tax benefit sought to be obtained by any arrangement is, say Rs. 5 crore or more in a year, then only the tax authorities will invoke these powers.

10.15 Section 102 : This section defines words or expressions used in sections 95 to 102 as stated above. Some of these definitions are as under:

(i)    “Arrangement” means any step in, a part or whole of any transaction, operations, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding.

(ii)    “Connected Person”, in relation to a person who is an Individual, Company, HUF, Firm, LLP, AOP or BOI is defined in more or less the same manner as the term “Related Person” is defined in section 40A(2). It may be noted that, for this purpose, the definition of the word “Relative” is wider in as much as the definition of “Relative” given in Explanation to section 56(2)(vi) is adopted, whereas in section 40A(2) the narrower definition of “Relative” given in section 2(41) is adopted.

(iii)    “Fund” includes (a) any cash, (b) cash equivalents and (c) any right or obligation to receive or pay in cash or cash equivalent.

(iv)    “Party” means any person, including Permanent Establishment which participates or takes part in an arrangement.

(v)    “Relative” has the same meaning as given in section 56(2)(vi) – Explanation. It may be noted that this definition is very wide as compared to the definition given in section 2 (41) which is adopted for the purpose of explaining related person in section 40 A (2).

(vi)    The definition of a person having substantial interest in the company and other non-corporate bodies is the same as given in section 40A (2).

(vii)    “Tax Benefit” includes (a) a reduction, avoidance or deferral of tax or other amount payable under the Income tax Act, (b) an increase in a refund of tax or other amount under the Act, (c) a reduction, avoidance or deferral of tax or other amount that would be payable under the Act, as a result of tax treaty, (d) an increase in a refund of tax or other amounts under the Act as a result of tax treaty, (e) a reduction in total income or (f) increase in loss in the relevant accounting year or any other accounting year.

(viii)    “Tax Treaty” means Agreements entered into by the Government with any foreign country, territory or Association u/s. 90 or 90A.

10.16 Section 144 BA : Procedure for declaring an arrangement as impressible u/s. 95 to 102 is given in this section. This section will come into force from A.Y. 2016-17.

(i)    The Assessing Officer can, at any stage of assessment or reassessment, make a reference to the Commissioner for invoking GAAR. On receipt of reference the Commissioner has to hear the tax payer. If he is not satisfied by the submissions of the taxpayer and is of the opinion that GAAR provisions are to be invoked, he has to refer the matter to an “Approving Panel”. In case the assessee does not object or reply, the Commissioner can issue such directions as he deems fit in respect of declaration as to whether the arrangement is an impermissible avoidance arrangement or not.

(ii)    The Approving Panel has to dispose of the reference within a period of six months from the end of the month in which the reference was received from the Commissioner.

(iii)    The Approving Panel can either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made. It can issue such directions as it thinks fit. It can also decide the year or years for which such an arrangement will considered as impermissible. It has to give hearing to the assessee before taking any decision in the matter.

(iv)    The Assessing Officer (AO) can determine consequences of such a positive declaration of arrangement as impermissible avoidance arrangement.

(v)    The final order, in case any consequences of GAAR are determined, shall be passed by the AO only after approval by Commissioner and, thereafter, first appeal against such order shall lie to the Appellate Tribunal.

(vi)    The period taken by the proceedings before Commissioner and the Approving Panel shall be excluded from time limitation for completion of assessment.

(vii)    The Central Government has to constitute one or more Approving Panels. Each Panel shall consist of 3 members, including a chairperson. The constitution of the Panel shall be as under.

(a)    Chairperson – He shall be a sitting or retired judge of a High Court.

(b)    Members – One member shall be IRS of the rank of CCIT or above.

–    One member shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices.

The term of the Panel shall ordinarily be for one year and may be extended from time to time upto 3 years. The Panel shall have power similar to those vested in AAR u/s. 245U. CBDT has to provide office infrastructure, manpower and other facilities to the Approving Panel’s members. The remuneration payable to Panel members shall be decided by the Central Government.

(viii)    In addition to the above, it is provided that the CBDT has to prescribe a scheme for efficient functioning of the Approving Panel and expeditious disposal of the references made to it.

(ix)    Appeal against order of assessment passed under the GAAR provisions, after approval by the appropriate authority, is to be filed directly with the ITA Tribunal and not before CIT(A). Section 144C relating to reference before DRT does not apply to such assessment order and, therefore, no reference can be made to DRT when GAAR provisions are invoked.

10.17 The above GAAR provisions will have far reaching consequences for assessees engaged in the business with Indian or Foreign parties. GAAR is not restricted to only business transactions. Therefore, all assessees who are engaged in business or profession or who have no income from business or profession will be affected by these provisions. It appears that any assessee having any arrangement, agreement, or transaction with a connected person will have to take care that the same is at Arm’s Length Consideration. In particular, an assessee will have to consider the implications of GAAR while (a) executing a WILL or Trust, (b) entering into a partnership or forming an LLP, (c) taking controlling interest in a company, (f) entering into amalgamation of two or more companies, (c) effecting demerger of a company, (f) entering into a consortium or joint venture, (g) entering into foreign collaboration, or (h) acquiring an Indian or Foreign company. It may be noted that this is only an illustrative list and there may be other transactions which may attract GAAR provisions.

10.18 From the wording of the above provisions of sections 95 to 102 and 144BA it appears that the provisions of GAAR can be invoked even in respect of an arrangement made prior to 01-04-2015. The CIT or the Approving Panel can hold any such arrangement entered into prior to 01-04-2015 as impermissible and direct the AO to make adjustments in the computation of income or tax in the assessment year 2016-17 or any year thereafter. As stated in para 15.15 of the report of the Standing Committee on Finance on the DTC Bill, 2010 it would be fair to apply GAAR provisions prospectively so that it is not made applicable to existing arrangements/transactions. Even in the Press Note issued by the Central Government on 14-01-2013 it was stated that transactions entered into prior to 30-08-2010 will not made subject to GAAR provisions. This has not been provided in the above sections and, therefore, the above GAAR provisions will have a retrospective effect.

10.19 In section 101, it is stated that CBDT will issue guidelines to provide for the circumstances under which GAAR should be invoked. Let us hope that these guidelines will specify that GAAR provisions will apply to all arrangements or transactions entered into after 01-04-2015 and also the type of arrangements or transactions to which GAAR will apply. It is also necessary to specify that GAAR provisions will be invoked only if the tax sought to be avoided is more than Rs. 5 crore, in any one year. This is also suggested by the Standing Committee on Finance in their report on the DTC Bill, 2010. Even in the Press Note dated 14-01-2013, the Government had stated that there will be monetary threshold of Rs. 3 crore of tax benefit in a year for invocation of GAAR.

10.20 It may be noted that the above revised set of provisions for invoking of GAAR which will come into force on 01-04-2015 do not contain provisions relating to following decisions of the Government announced in the Government Press Note dated 14-1-2013.

(i)    GAAR will not apply to an FII which does not avail treaty benefit.

(ii)    GAAR will not apply to Non-Resident Investors in FII.

(iii)    Where GAAR and SAAR are both in force, only one of them will apply subject to prescribed guidelines.

(iv)    GAAR will be restricted to only “PART” of the arrangement which is impermissible and not to the whole arrangement.

Let us hope that these issues will be considered when CBDT issues the Guidelines for invocation of GAAR.

11.    Assessments, Reassessments and Appeals:

11.1 Section 132B : This section, which deals with application of seized or requisioned assets, is amended w.e.f. 01 -06-2013. This section provides that the “existing liability” under the Income tax Act, Wealth tax Act, etc. and the amount of liability determined on completion of assessment under 153A and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of assessment for the block period (including any penalty levied or interest payable in connection with such assessment) may be recovered out of assets seized u/s. 132 or requisitioned u/s. 132A if such person is in default or is deemed to be in default. It was debatable as to whether the assets seized or requisitioned could be adjusted against advance tax payable. With effect from 01-06-2013, an Explanation 2 is inserted to this section to provide that the “existing liability” does not include advance tax payable in accordance with the provisions of the Income-tax Act.

11.2 Section 139(9) : This section explains when the return of income filed by the assessee u/s. 139 will be considered as defective. If these defects are not removed within the prescribed time, the A.O. will consider that the assessee has not filed the return. This section is now amended w.e.f. 01- 06- 2013. As per section 140A of the Act tax payable on the basis of return of income i.e. self assessment tax, along with interest payable, if any, is required to be paid by the assessee before furnishing the return of income. With effect from 1st June, 2013, non-payment of self assessment tax together with interest, if any, payable in accordance with the provisions of section 140A, before furnishing the return of income, shall make the return of income a defective return. This defect will have to be rectified on receipt of defect notice u/s. 139(9) within the prescribed time.

11.3 Section 142(2A) : This section empowers the CIT to order a Special Tax Audit of Accounts of the assessee in specified circumstances. At present, order for such audit can be passed having regard to the nature and complexity of the accounts of the assessee and taking into consideration the interest of the revenue. The scope of this section is now expanded w.e.f. 01-06-2013. By amendment of this section such order for Special Audit can be passed by the CIT having regard to –

(i)    Volume of the accounts,

(ii)    Doubts about the correctness of the accounts,

(iii)    Multiplicity of transactions in the accounts and

(iv)    Specialised nature of business activity of the assessee.

This new provision will cover a large number of assessees and although the accounts of large companies are audited by Statutory Auditors as well as Tax Auditors, they can be subjected to this Special Audit.

It may be noted that the CIT has to fix fees of the Chartered Accountant for such special audit on the basis of guidelines contained in Rule 14B and the same is payable by the Central Government.

11.4 Section 153 : This section deals with the time limit for the completion of Assessments and Reassessments. Some issues were arising in computation of this time limit. To resolve these issues the following amendments are made in this section with effect from different dates as stated below.

(i)    If income of the assessee was first assessable in A.Y. 2009-10 or any subsequent year, and the matter is referred to the Transfer Pricing Officer (TPO) u/s. 92 CA, the time limit for completion of assessment will be 3 years from the end of the assessment year instead of 2 years. This amendment is effective from 01-07-2012.

(ii)    In the case of reassessment where notice u/s. 148 is issued on or after 1-4-2010 and the case is referred to TPO u/s. 92CA, the time limit for completion of reassessment will be two years instead of 1 year. This is effective from 01-07-2012.

(iii)    Where order of ITA Tribunal is received by CIT or where CIT has passed order u/s. 263 or 264 on or after 01-04-2010, and while passing the fresh assessment order, a reference is made to TPO u/s. 92CA, the time limit for completion of the fresh assessment will be two years instead of 1 year. This is effective from 01-07-2012.

(iv)    Explanation 1(iii) to this section is amended from 01-06-2013. At present, in computing time limit for completion of assessment in a case in which AO has issued direction for special Audit u/s. 142(2A), the period from the date on which such direction is issued to the date on which the assessee is required to furnish report of the special Audit is to be excluded. It is now provided that, if the above direction is challenged in any court, the period upto the date on which such order is set aside by the court will also be excluded.

(v)    Explanation 1(viii) to this section is amended w.e.f. 01-06-2013. It is now provided that while computing the time limit for completion of assessment the time taken for obtaining information from a foreign country/territory of foreign specified Association u/s. 90 or 90A will be excluded. This will be subject to a maximum of one year.

(vi)    A new clause (ix) is added to Explanation 1 to the above section, effective from 01-04-2016. This relates to GAAR provisions as discussed in para 10 above. It is provided in this clause that the period from the date on which reference for declaration of an arrangement to be an impermissible avoidance arrangement is received by CIT u/s. 144BA and the date when direction from the CIT or the Approving Panel is received by the A.O. will be excluded for computing the period for completion of the assessment.

11.5 Section 153B : This section provides for time limit for completion of assessment in cases of Search and Seizure u/s. 153A. The section is amended from 01-07-2012, 01-04-2013 and from 01-04-2016 as stated in para 11.4 above. These amendments for computation of time limit for completion of the assessment or the reassessment are on the same lines as amendments in section 153 discussed in para 11.4 above.

11.6 Section 153D : This section provides for prior approval for assessment in cases of search or Requisition. This section is amended w.e.f. 01-04-2016. It is now provided that in cases of assessments or reassessments in respect of any of the years mentioned in section 153(1)(b) or the assessment year referred to in section 153B(1)(b), where the Assessing Officer has made a reference to the Commissioner to declare an arrangement as an impermissible avoidance arrangement and to determine the consequence of such an arrangement within the meaning of Chapter X- A, dealing with GAAR, the Assessing Officer shall pass the order of assessment or reassessment with the prior approval of the Commissioner. In such cases, the prior approval of the Joint Commissioner shall not be required.

11.7 Sections 167C and 179 : These sections deal with recovery of taxes due from partners of an LLP in liquidation and directors of a private limited company in liquidation respectively. These sections are amended w.e.f. 01-06-2013. Section 167C allows recovery from the partners of any tax due from an LLP in certain cases. Similarly, section 179 allows recovery from the directors of any tax due from a private company in certain cases. In certain decisions [e.g. Dinesh T. Tailor vs. TRO 326 ITR 85 (Bom.)] it has been held that the “Tax due” will not comprehend within its ambit a penalty or interest. Now, an Explanation is added to both these sections to provide that the expression “Tax due” shall include penalty, interest or any other sum payable under the Act. It would, therefore, be possible for tax authorities to recover not only the tax but also the penalty and the interest dues of an LLP or private company from its partners or directors respectively.

11.8 Sections 245N and 245R :(i) Section 245N(a) defines “Advance Ruling”. In view of the amendments relating to GAAR as discussed in para 10 above, section 245N(a)(iv) has been amended w.e.f. 01-04-2015 (A.Y.: 2016-17). It provides that a Non-Resident can obtain Advance Ruling under XIX-B in respect of determination or decision by Authority for Advance Ruling (AAR) whether an arrangement, which is proposed to be undertaken by a Resident or Non-Resident, is an impermissible avoidance arrangement as referred to in GAAR provisions. Consequential amendment is made in section 245N(b) also.

(ii)    Section 245R is also amended effective 01-04-2015 to provide that AAR will not allow an application where it finds that the transaction is designed prime facie as arrangement which is impermissible avoidance arrangement.

11.9 Section 246A: This section provides for appeal to CIT(A). Clauses (1)(a)(b)(ba) and (c) of section 246A have been amended w.e.f. 01-04-2016 to provide that an assessment or reassessment order passed u/s. 143(3), 147 or 153A with the approval of CIT u/s. 144BA(12) or any order passed u/s. 154 or 155 in relation to such an order shall not be appealable before CIT(A). In all such cases, direct appeal before ITA Tribunal can be filed.

11.10 Section 252: This section deals with the constitution and appointment of the ITA Tribunal Members. This section is amended w.e.f. 01-06-2013. After this amendment, it is provided that the Central Government shall appoint a President of ITA Tribunal out of the following persons.

(i)    A sitting or retired High Court Judge who has completed 7 years or more of service as such High
Court Judge.

(ii)    Senior Vice President or one of the Vice Presidents of ITA Tribunal.

11.11 Section 253: This section provides for the list of orders against which appeal can be filed before the ITA Tribunal. Effective from A.Y. 2016 -17, it is now provided that such appeal can be filed directly before the ITA Tribunal against an assessment order passed u/s. 143(3) in regular case, in reassessment proceedings u/s. 147 or in search proceedings u/s. 153A with the approval of CIT u/s. 144BA. Even orders passed u/s. 154 or 155 to rectify mistakes in such proceedings u/s. 144BA will be subject to such appeals before ITA Tribunal u/s. 253.

11.12 Section 271FA: This section provides for levy of penalty for failure to furnish “Annual Information Return” (AIR). This section is amended effective from 01-04-2013 (A.Y. 2014-15). As per the existing provisions, in case of failure in furnishing AIR a penalty of Rs. 100 is leviable for each of day of default after the prescribed date. i.e. 31st August. If the Income tax authority issues notice requiring any person, who has failed to furnish an AIR to submit such return and such person does not furnish such return within the time provided in the notice then the enhanced penalty of Rs. 500 per day is now leviable for the period of such default after the expiry of time provided to furnish the return in the notice issued by AO.

12.    Wealth tax act :

12.1 Section 2(ea): Explanation 1(b) defines “Urban land”. The existing definition is modified w.e.f. A.Y. 2014-15 in such a manner that Urban Land within the area as stated in the amended section 2(1A) of the Income tax Act (as discussed in para 4.1 above) will be included in the definition of Urban Land.

The Finance Minister has stated in his speech while replying to Budget discussion that no wealth tax will be levied on Agricultural Land as at present.

12.2 Sections 14A, 14B and 46 : These sections are amended w.e.f. 01-06-2013. So far provision for electronic filing of returns are applicable to returns filed under the Income tax Act.p Now, sections 14A, 14B & 46 of WT Act are inserted to facilitate electronic filing of annexure – less return of net wealth. Under these provisions, rules will be made for the following:

(i)    The class of person who shall be required to furnish the return electronically.

(ii)    The form and manner in which returns can be filed electronically.

(iii)    The computer resource or the electronic record to which the return may be transmitted electronically.

(iv)    The exemption from furnishing the documents, statements, reports, etc. along with the return filed in an electronic form.

13.    Commodities transaction tax (ctt)

(i)    The Finance Act, 2013 has introduced a new tax called Commodities Transaction Tax (CTT) to be levied on Taxable Commodities Transactions entered into in a recognised association. A transaction of sale of commodity derivatives in respect of commodities, other than agricultural commodities, traded in recognised associations is considered as Taxable Commodities Transaction.

(ii)    CTT is leviable on sale of Commodities Derivatives at the rate of 0.01 per cent and the same is payable by the seller.

(iii)    Section 36 of the Income-tax Act is amended to provide that CTT paid in the course of business shall be allowable as deduction if the income arising from such taxable commodities transactions is included in the income computed under the head “Profits and gains of business of profession”.

(iv)    This tax is to be levied from the date on which Chapter VII of the Finance Act, 2013 relating to CTT comes in to force by way of notification by the Central Government.

(v)    Sections 105 to 124 (Chapter VII) of the Finance Act, 2013, make detailed provisions for the levy of CTT, collection, filing of returns, assessments, appeals, rectifications, penalties etc. on the same lines as chapter VII of the Finance (No.2) Act, 2004 relating to STT.

14.    Securities Transactions Tax (stt)

With effect from 1st June, 2013, the rates of STT have been revised as under:

15.1 This year’s budget being the last effective budget of the present Government can be considered as a soft budget. The provisions relating to GAAR which were to come into force from the current year have been postponed by two years. The provisions relating to the constitution of the Approving Panel and resolution of GAAR disputes have been strengthened. However, unless the mindset of the persons administering these provisions is changed, the tax payers will have to face hardships and they will face unending litigation. For implementing such complex provisions, the tax authorities have to implement these provisions by taking into consideration the ground realities of business and industry in our country. In implementing such provisions the tax authorities should not only consider the letter of the law but should consider the spirit behind this legislation. For this purpose, the CBDT will have to consider the business realities while framing the tax payer friendly guidelines for implementing these provisions.

15.2 As stated above, the Finance Minister has addressed the issue relating to GAAR to some extent. However, the provisions relating to taxation of Non-Residents introduced last year with retrospective effect have not been addressed. These provisions have affected our relationship with many foreign countries. This will affect our global trade in the long term. Disputes have arisen in some cases of large Multinationals and the Government is trying to resolve these disputes by enactment of separate legislation. When the Government has recognised that these disputes have arisen due to these retrospective amendments, it should have amended these provisions and given them only prospective effect.

15.3 One disturbing feature relates to the amendments made this year relating to TDS from consideration paid or payable on purchase of an Immovable Property under new section 194-IA. This will put tax payers and those who are not liable to pay tax into many practical difficulties of collecting 1% tax at source, depositing the same with the Government and filing return of TDS. There will be some issues relating to the date on which such tax is to be deducted when a flat is booked prior to 01-06-2013 or after that date in a building under construction and payments are made in instalments.

15.4 Amendment made in section 56(2)(vii)(b) levying tax on the notional amount of difference between stamp duty valuation of an immovable property sold and the actual consideration paid by an Individual or HUF (Purchaser). This will mean levying tax on the same notional amount in the hands of the seller as well as purchaser. It may be noted that such tax is not payable if the purchaser is a firm, LLP, company or persons other than individual or HUF. Similar tax was levied in 2009 but was withdrawn in 2010 with retrospective effect. It is unfortunate that the Government has again levied this type of tax which is payable by individual/HUF purchaser and seller of the property on the same notional amount. This is a very harsh and unjust provision in the Income-tax Act.

15.5 Provision made last year, effective from 01-04-2012 relating to “Specified Domestic Transactions” has increased the compliance cost of assessees. Transfer Pricing provisions have been made applicable to some domestic transactions. Although one year has passed since these provisions have come into force, there is no clarity about the type of transactions to which these provision will apply. No adequate data about comparable prices is available. In particular, there is no clarity as to how the assessing officers will compare the managerial remuneration paid to connected persons while making disallowance u/s. 40A(2). CBDT has not framed any separate Rule prescribing the information or documents required to be maintained by the assessee to whom this provision is applicable. No separate Form of Audit Report to be obtained u/s. 92E by the assessee to whom these provisions apply has been prescribed. We are informed that the provisions of Rule 10D and 10E and Form 3CEB of Audit Report prescribed for International Transactions can be used. If we refer to these Rules and the Form it will be noticed that there is no mention about Specified Domestic Transactions in these Rules or Form. It is not clear as to how specific requirements of these Domestic Transactions are to be reported in the Audit Report.

15.6 It may be noted that the present Finance Minister mooted the idea of replacing the present Income-tax Act and the Wealth Tax Act by Direct Taxes Code (DTC) in 2006-07. The DTC Bill, 2009 was circulated on 12.08.2009 for public debate. After considering the suggestions from various quarters, the DTC Bill, 2010, was introduced in the Lok Sabha and was to come into force w.e.f. 01.04.2012. The Bill was referred to the Standing Committee of the Finance. Since its report was delayed, DTC could not be passed in 2011 and hence its implementation was delayed. In Para 154 of the Budget Speech the Finance Minister has stated that DTC is work-in-progress. He has also stated that the report of the Standing Committee is received. The same is being examined and the revised Bill will be introduced in the budget session of the Parliament. This has not happened and it appears that this important legislation may not be passed during the present term of the UPA II Government.

15.7 Another legislation viz. Goods and Service Tax (GST) in the field of Indirect Taxes, was announced by the Finance Minister in 2007-08. He has referred to this in Para 186 of the Budget Speech this year. Due to differences in the views of various States, the required legislation has not been introduced in the Parliament. The Prime Minister has admitted that GST, which is to replace Excise Duty, Customs Duty, Service Tax and VAT laws in our Country may be enacted in 2014 after the elections by the new Government which may come to power.

15.8 Another major reform measure in the field of Corporate legislation relates to replacement of the Companies Act, 1956 by the Companies Bill, 2011. This Bill has been passed by the Lok Sabha in December, 2012. It is pending in the Rajya Sabha. The impression given to us was that this Bill will be passed in this year’s Budget Session and will come into force soon. This Bill is pending before the Rajya Sabha and this important legislation is also delayed.

15.9 The above three legislations are being discussed for the last more than five years but our Parliament is not able to legislate the same. We are assured that these new legislations will simplify our tax and Corporate Legislation and make the life of all stakeholders hassle free. Let us hope the Parliament in its wisdom legislates these provisions before the end of the current Financial Year.

(Acknowledgement: S.M. Jhaveri, Chartered Accountant and Dalpat H Shah, Chartered Accountant have assisted the Author in the preparation of this Article)