CA VED JAIN
DIRECT TAXES
INTRODUCTION
The excitement over the Budget is usually high. Despite the fact that we have in India around 4 Crore tax payers out of a population of more than 120 Crore, still everyone has an interest in the Budget. The media, both print and electronic, and the financial sector add to this excitement. This time with the new Government headed by Shri Narender Modi Ji having assumed power on the slogan of good days to follow, the expectation from the Budget was exceptionally high. The entire election campaign having been driven with the slogan ‘Acche Din Aayenge’, the job of the Finance Minister was difficult so as to make everyone feel that, yes, ‘Acche Din Aa Gaye Hain’, may it be economists, industry, investors, tax payers, farmer and last but not the least, the common man.
In the above background, the Finance Minister, Mr. Arun Jaitley presented his maiden Budget on 10th of July, 2014 In this Budget he ensured to contain fiscal deficit at 4.1% so as to ensure that economists feel that ‘Acche Din Aa Gaye Hain’. He increased the threshold exemption, allowed enhanced deduction on account of long term savings and interest on capital borrowed for residential house for the tax payers to feel happy.
For agriculturist he announced setting of research centers. For common man he announced sanitation for all by 2018 and housing for all by 2022. He extended benefit of investment allowance, increased limit of FDI in insurance and defence. Besides this he announced setting up of eBiz platform to create a business and investor friendly ecosystem by making all business and investment related clearances and compliances available on 24 x 7 single portal to demonstrate that this new Government means business and will deliver ‘with minimum Government, maximum Governance’.
The Budget, besides addressing the expectation of all, has taken bold initiatives to boost economic growth and maintain fiscal discipline.
As is usual, Budget also gives an opportunity to the Government to make changes in the tax laws. This Budget is no exception. Keeping the tradition, this Finance (No.2) Bill, 2014 has proposed various amendments both in direct and indirect taxes. This Bill has 71 clauses amending various provisions of direct taxes. These amendments are analyzed below. Unless otherwise stated all these amendments are proposed to be effective from April 1, 2014 i.e. assessment year 2015-16 relevant to the income earned in the current financial year 2014-15.
A. TAX RATES
1. Increase in threshold limit – No change in tax rates
The Finance Minister has proposed to increase the threshold limit from Rs.2 Lakh to Rs.2.5 Lakh. However, there is no change in the tax rates. The tax rates applicable to an individual, HUF, association of persons, body of individual and every juridical person shall be as under:-
Income
Tax Rate
Upto Rs.2,50,000
Nil
Rs.2,50,001 – Rs.5,00,000
10%
Rs.5,00,001 to Rs.10,00,000
20%
Above Rs.10,00,000
30%
In the case of senior citizen (of 60 years to 80 years of age), the threshold limit has been increased from Rs.2,50,000 to Rs.3,00,000. There is no change in the threshold limit of Rs.5,00,000 in the case of very senior citizen i.e. above 80 years of age. The benefit of the rebate upto Rs.2,000 to individual resident whose total income does not exceed Rs.5 Lakh introduced in the last year by Finance Act, 2013, by way of Section 87A shall continue to be available. Further Surcharge at the rate of 10% where income exceeds Rs.1 Crore shall continue to be applicable.
In view of this increase in threshold limit and rebate of Rs.2,000 under section 87A there will be no tax liability on a person having total income upto Rs.2,70,000.
No change in tax rate for other tax payers
The Finance (No.2) Bill, 2014 has not proposed any change in the tax rates applicable to partnership firms and companies, both domestic as well as foreign companies. The tax rates applicable in the case of a partnership firm which includes LLP will be 30%. Surcharge at the rate of 10% shall be applicable in case total income exceeds Rs.1 Crore. The tax rate in the case of domestic companies shall be 30% with surcharge at the rate of 5% where the total income of the domestic company exceeds Rs.1 Crore but does not exceed Rs.10 Crore and surcharge at the rate of 10% where the total income of the domestic company exceeds Rs.10 Crore.
The tax rate in respect of companies other than domestic companies shall be 40% with surcharge of 2% where the total income exceeds Rs.1 Crore but does not exceed Rs.10 Crore and surcharge at the rate of 5% where the total income of such company exceed Rs.10 Crore.
Grossing up of Dividend for distribution tax – increase in effective Dividend Distribution tax rate of 3.47%
The Finance (No.2) Bill, 2014 proposes to levy dividend distribution tax by grossing up the dividend payable for the purpose of computing liability towards dividend distribution tax. As per the existing provision of Section 115-O dividend distribution tax at the rate of 15% is to be paid on the amount of the dividend paid to shareholders. Further under section 115R, tax at the rate of 15% is to be paid on the income distributed by the Mutual Fund to its investors. Presently the effective tax rate after levy of surcharge and education cess is 16.995% (15% tax + 10% surcharge + 3% education cess thereof) and tax at this effective rate of 16.995% is paid on the amount of dividend paid/income distributed. The Finance (No.2) Bill, 2014 proposes to gross up the dividend paid with the income distributed for computing the tax liability on account of dividend distribution tax. With the grossing up, the effective tax rate will be 20.47%, with the result, there will be an additional tax liability of 3.475%.
In the Memorandum explaining the provision of the Finance (No.2) Bill, 2014, it has been stated that prior to introduction of dividend distribution tax, the dividends were taxable in the hands of the shareholder. After introduction of dividend distribution tax, a lower rate of 15% is being applied on the amount paid as dividend after deduction of distribution tax by the company and hence tax is computed with reference to the net amount. Accordingly in order to ensure that tax is levied on a proper base, the dividend actually received need to be grossed up for the purpose of computing the dividend distribution tax. This explanation to the Memorandum is contrary to the reasoning given while introducing the dividend distribution tax way back in the year 1997. It may be relevant to refer to the Budget speech of the then Finance Minister, the relevant paras read as under:-
“100. Another area of vigorous debate over many years relates to the issue of tax on dividends. I wish to end this debate. Hence, I propose to abolish tax on dividends in the hands of the shareholder.
101. Some companies distribute exorbitant dividends. Ideally, they should retain bulk of their profits and plough them into fresh investments. I intend to reward companies who invest in future growth. Hence, I propose to levy a tax on distributed profits at the moderate rate of 10 per cent on the amount so distributed. This tax shall be incidence on the company and shall not be passed on the shareholder.”
On going through the above reasoning given way back in 1997, it is quite clear that tax on dividend was abolished and this dividend distribution tax was introduced to encourage companies to retain the income for the future growth. Thus to say that dividend distribution tax is a tax on the dividend income of the shareholder is not correct. Further in case the present Government is of the view that dividend income should be taxed, then there is no reason why company should bear the dividend distribution tax. The dividend may be taxed in the hands of the shareholder at the appropriate tax rate applicable as the case may be with benefit of old Section 80M to avoid cascading effect of this tax in the hands of corporate. It may also be important to note that the dividend distribution tax in the present form is being retained not because any concession is to be provided to the shareholder but by way of revenue compulsion as substantial amount of dividend distribution tax is paid by the public sector companies in respect of the dividend, these PSUs pay to the Government. In case dividend is taxed in the hands of the shareholder, substantive amount of this dividend paid by public sector companies and banks (estimated at Rs. 90229 crore in the receipts budget for 2014-15) to the Government will not be liable for taxation as income of the Government is not chargeable to tax and consequently collection on account of income tax will go down.
The reasoning given in the Memorandum also runs contrary to the provision of Section 14A of the Income Tax Act. As per provisions of Section 14A, no deduction is allowed of expenditure incurred in relation to the income which does not form part of the total income i.e. tax free income. Dividend income in the hands of the shareholder, for the purposes of this Section 14A, is considered to be tax free income and accordingly substantial amount of expenditure is disallowed in the hands of the shareholder being incurred towards earning dividend income under section 14A. If dividend distribution tax is considered to be a tax paid by the company for and on behalf of the shareholders, as is being explained in the Memorandum, there is no justification for considering dividend income as tax free income in the hands of the shareholder so as to attract disallowance under Section 14A.
The proposed grossing up provision shall be applicable from 1st October, 2014. Accordingly it will be advisable that corporates and mutual funds declare and pay dividend of the financial year 2013-14 including interim dividend of financial year 2014-15, if any, before 1st October, 2014 so as to save tax of 3.475%. Similarly it will be advisable to Mutual Funds to distribute its income before 1st October, 2014 to save burden of increased tax liability.
B. EXEMPTIONS/DEDUCTIONS
80C deduction being increased to Rs.1,50,000
The Finance (No.2) Bill, 2014 proposes to increase deduction available to an individual or HUF under section 80C in respect of life insurance premium, contribution to provident fund, etc. from Rs.1,00,000 to Rs.1,50,000. Corresponding amendment is being made to enhance the maximum contribution in a year to Public Provident Fund from Rs.1,00,000 to Rs.1,50,000. With this enhanced deduction under section 80C, a tax payer may have the benefit ranging from Rs.5150 in case the income is upto Rs.5 Lakh, Rs.10,300 in case the income is upto Rs.10 Lakh and Rs.15,450 in case the income is above Rs.10 Lakh but below Rs.1 Crore and Rs.16,995 in case the income is above Rs.1 Crore.
Amendment has also been proposed in Section 80CCD in respect of contribution to Pension Scheme. As per the existing provision of section 80CCD, an assessee being an individual employed on or after 1st January, 2014 by the Central Government or any other employer is entitled to a deduction in respect of the amount deposited by him under a pension scheme to the extent of 10% of his salary or 10% of his gross total income in the previous year. It has been proposed by the Finance (No.2) Bill, 2014 that contribution under this scheme shall not exceed Rs.1 Lakh per year. Further in the case of a person other than an employee of the Central Government, it will not be necessary that his employment should have started on or after 1st day of January, 2004.
The provisions of Section 80CCE are also being amended to provide that aggregate of the deductions under section 80C, 80CCC and 80CCD shall not exceed Rs.1,50,000.
C. INCOME FROM HOUSE PROPERTY
Deduction of interest on capital borrowed for self occupied property being increased to Rs.2,00,000
The Finance (No.2) Bill, 2014 proposes to amend clause (b) of Section 24 so as to enhance the deduction from Rs.1,50,000 to Rs.2,00,000 in respect of interest on the amount borrowed for the acquisition or construction of a self occupied property. As per clause (b) of Section 24, interest on the capital borrowed for the acquisition or construction, repair, renewal of property is allowed as deduction. This deduction is allowed in full in case the property is let out. However, in case the property is self occupied, the deduction is limited to Rs.1,50,000, if the same has been constructed out of the capital borrowed on or after 1st day of April, 1999. With the proposed amendment, the deduction under this clause in respect of self occupied property shall get increased to Rs.2 Lakh. In view of this proposed amendment, the tax benefit to a tax payer, in case he has borrowed capital for acquisition or construction or a residential house and paying interest thereon, will be of Rs.5,150 if the income is upto Rs.5 Lakh, Rs.10,300 if the income is upto Rs.10 Lakh and Rs.15,450 in case the income is above Rs.10 Lakh but below Rs.1 Crore and Rs.16,995 if the income is above Rs.1 Crore.
Effective exempt income now can be Rs.6,20,000
Taking into consideration all the three relaxations proposed in the Budget i.e. enhanced threshold limit, increased 80C deduction and increased deduction on account of interest on borrowed capital for self occupied property, the effective tax exempt income can be Rs.6,20,000 in the case of an individual resident in India, as explained below:
Rs.
Total income
6,20,000
Less: Deduction on account of interest on housing loan
2,00,000
Balance
4,20,000
Less: Deduction under Section 80C
1,50,000
Taxable income
2,70,000
Tax payable
2,000
Rebate under section 87A
2,000
Tax payable
Nil
In the case of a senior citizen the effective exempt income can be Rs.6,70,000 and in the case of very senior citizen Rs.8,50,000.
D. CHARITABLE TRUST
No depreciation to be allowed while computing income in respect of asset considered towards application of income
The Finance (No.2) Bill, 2014 proposes to amend the provision of section 10(23C) as well as section 11 by specifically providing that income required to be applied or accumulated for application in the case of a charitable trust or institution shall be determined without any deduction or allowance by way of depreciation in respect of any asset, the cost of which has been claimed as an application of income in the same year or in earlier years. This amendment is being made to overcome the decision of the Punjab & Haryana High Court in the case of CIT vs. Tiny Tots Pvt. Ltd. 330 ITR 21 (P&H) (2011) and Delhi High Court in the case of DIT vs Vishwa Jagriti Mission (2013) 262 CTR (Del) 558 where it has been held that depreciation need to be allowed even in respect of an asset, the cost of which has been claimed as application of income.
Deduction under Section 10 not to be allowed to trust registered under Section 12AA or approved under Section 10(23C)
The Finance (No.2) Bill, 2014 proposes to insert a new sub-section (7) under section 11 to not to allow the benefit of deduction under section 10 [other than 10(1) and 10(23C)] to a trust or institution which is registered under section 12AA of the Act and the said registration is in force in the said year. Similar provision is being introduced by way of eighteenth proviso under section 10(23C) to the effect that trust or institution approved under clause (iv), (v), (vi) and (via) of Section 10(23C) shall not be allowed benefit of section 10 (other than 10(1) regarding agriculture income) if such approval is in force.
As per provision of section 10, income of certain authorities/institutions is exempt as it is not considered to be income forming part of the total income such as income of a local authority, which is chargeable under section 10(20), income of a research foundation under section 10(21), income of a news agency under section 10(22B), income of an association or institution set up to control and regulate the profession of law, medicine, accountancy, engineering, architecture, etc. and various such type of associations. In view of the dispute arising in respect of the certain nature of income whether it is exempt or not under section 10, these trusts or institutions get registered under section 12AA of the Act and claim exemption under Section 11 or Section 12. In case of any dispute arising about their activities falling within the meaning of ‘charitable purposes’, the exemption is shifted to a specific provision of section 10. With the proposed amendment once such entity get registered under section 12AA, and such registration is in force, it will not be permissible for it to claim deduction under any provision of section 10. However, agricultural income which is exempt under section 10(1) shall still not be taxable. Similarly exemption under section 10(23C) can still be claimed despite being registered under section 12AA. Under section 10(23C), income of a university, educational institution, hospital, etc. are exempt on fulfillment of certain conditions specified therein. The educational institutions, hospitals, etc. by and large are also registered under section 12AA of the Act and at the same time eligible for claiming exemption under Section 10(23C). The proposed amendment will not hit the interplay between section 10(23C) and section 11 of the Act. Thus these educational institutions, hospitals can claim exemption under section 10(23C) even if such educational institutions or hospitals are registered under section 12AA of the Act or vice versa.
Scope of power for cancellation of registration by CIT under section 12AA being widened
At present registration of a trust or institution granted under section 12AA can be cancelled by the Commissioner if the activities of a trust or institution are not genuine or the activities are not being carried on in accordance with the object of the trust or institution. The scope of power of Commissioner to cancel the registration is being withdrawn. Now with the proposed amendment, the Commissioner can cancel the registration if the activities are being carried whereby its income does not enure for the benefit of general public or it is for the benefit of any particular religious community or caste or income is being applied for the benefit of specified persons or the funds are invested in prohibited modes. This proposed amendment will increase litigation. At present once the registration is granted, the assessing officer is empowered to make assessment and to ensure compliance of all the provisions of the Act including section 13. In case he is of the opinion that income has not been applied for the charitable purposes or there has been violation of any provision of this Act, he is well within his right to deny the benefit of section 11 while assessing the income of such trust or institution. These powers of the assessing officer can be exercised on year to year basis. Thus there is no reason for making this amendment empowering the Commissioner to cancel the registration. The registration of a trust or institution does not entitle the trust or institution to claim exemption automatically. The trust or institution are required to maintain accounts and get the same audited. In the audit report there are specific columns about mode of investment and application of income and violation, if any, of Sections 11(5), 13, etc. The assessing officer is also entitled to verify the same and in case there is violation, to deny benefit of Section 11 and 12. Thus there is no need to empower the Commissioner to cancel the registration for some defaults here or there.
This amendment is proposed to be effective from 1st October, 2014 and accordingly the Commissioner of Income Tax shall be empowered after 1st October, 2014 to cancel the registration by invoking the widened scope of this amendment.
Benefit of section 11 and section 12 can be claimed even for period when trust or institution was not registered
As per the provisions of section 12A of the Act, every trust or institution is required to make an application for registration under section 12AA. Further benefit of section 11 and section 12 can be claimed by such trust or institution from the financial year in which such application is made. In case of delay in making the application there is no provision for condonation of the delay with the result that benefit of section 11 and section 12 cannot be claimed for any financial year preceding the financial year in which application for registration is made.
The Finance (No.2) Bill, 2014 proposes to address this issue by allowing benefit of availing exemption under section 11 and section 12 to a trust or institution which has been granted registration subsequently in respect of preceding assessment years, the proceeding of which are pending before the assessing officer as on the date of such registration. The only condition is that the objects and activities of such trust or institution should be same on the basis of which such registration has been granted. It has been further provided that no action for reopening an assessment under section 147 shall be taken by the assessing officer in the case of such trust or institution, merely on the ground that such trust or institution has not obtained registration for the said assessment years.
This amendment will have a far reaching implication. At present there are many trusts or institutions which are not registered under section 12A of the Income Tax Act but are otherwise eligible for claiming exemption under section 11 and section 12 of the Act. These trusts or institutions do not apply for registration as on date though these are eligible to get registration for fear that in the absence of registration being applicable for past years, those assessments will get reopened and benefit of section 11 and section 12 will be denied to them in the absence of registration under section 12A of the Act. This proposed amendment will help these trust or institution to come forward and get registered without any fear of earlier year income being taxed for want of registration. Thus this proposed amendment in a way is better than the power of the Commissioner to condone the delay in applying registration. The benefit of this provision, however, shall not be allowed to such trusts or institutions which have applied for registration in the past and same was refused or such registration if granted was cancelled.
This provision shall be applicable from 1st October, 2014 and accordingly all such trusts or institutions which are otherwise eligible for exemption under section 11 and section 12 but are not registered, it will be a good opportunity to apply and obtain registration after 1st October, 2014 without any fear of reopening of the assessment of earlier assessment years merely on the ground that it was not registered during that period.
Income of a trust or institution receiving anonymous donations – anomaly in computation being addressed
Provisions of section 115BBC in respect of computation of income of a trust or institution in respect of anonymous donation are proposed to be amended to address the anomaly in the existing provision. As per the existing provision, tax at the rate of 30% is payable on anonymous donations exceeding 5% of the total donations received or Rs.1 Lakh whichever is higher and tax is payable on the total income other than the anonymous donations at the normal rate. In this process the anonymous donations to the extent of 5% of the total donation or Rs.1 Lakh which is higher gets neither taxed at 30% nor at the normal rate. The amendment proposes to address this anomaly by providing that the tax shall be payable on the total income of a trust or institution as reduced by the amount of anonymous donations on which tax at the rate of 30% has been paid. This amendment will bring to tax the 5% of the anonymous donation or Rs.1 Lakh whichever is higher at the normal rate of tax.
E. BUSINESS INCOME
Corporate Social Responsibility (CSR) Expenditure not eligible for deduction
The Companies Act, 2013 mandates that certain companies which have net worth of Rs.500 Crore or more, turnover of Rs.1000 Crore or more or a net profit of Rs.5 Crore or more during any financial year are required to spend 2% of their profit on activities relating to corporate social responsibility. Consequent to this there has been a debate whether the CSR expenditure so mandated to be incurred by the Companies Act, 2013, will be considered as an expenditure incurred for the purposes of the business or not. The Finance (No.2) Bill, 2014 proposes to insert an Explanation below section 37(1) to clarify that such expenditure shall not be deemed to be an expenditure incurred by the assessee for the purposes of business or profession. Accordingly deduction of CSR expenditure shall not be allowed under section 37(1) of the Income Tax Act while computing income of the business.
The memorandum explaining the provision of the Finance (No.2) Bill, 2014, however, clarifies that the CSR expenditure which is of the nature described in Sections 30 to 36 shall be eligible for deduction under these sections subject to fulfillment of condition, if any, provided in these sections. In this regard it may be relevant to note that as per the provision of section 35AC, the expenditure incurred on a project or scheme for promoting a social and economic welfare or uplift of the public, as approved by the National Committee set up for this purpose, is eligible for deduction while computing profit and gains of business or profession. Further expenditure incurred by way of payment to an institution for carrying out rural development programme is eligible for deduction under section 35CCA of the Act. Payment to an institution for carrying out programmes of conservation of natural resources is an eligible deduction under section 35CCB. Not only that expenditure incurred on agricultural extension project, as notified by the Board under Section 35CCC and expenditure incurred on skill development project, as notified by the Board, under Section 35CCD are eligible for weighted deduction of 150 per cent.
All the above activities stated in Section 35AC, 35CCA, 35CCB, 35CCC and 35CCD are eligible activities, permissible under the corporate social responsibility as specified in Schedule VII, in terms of Section 135 of the Companies Act, 2013. Accordingly, in case any corporate intends to claim expenditure incurred on corporate social responsibility while computing its business income it will be advisable that it obtains approval of the project or scheme under any of the above stated provisions of the Income Tax Act. This will ensure compliance of the obligation of CSR under the Companies Act and at the same time deduction of such expenditure while computing business income for tax purposes. In fact if approval is obtained under Section 35CCC for agricultural extension projects or under Section 35CCD for skill development project, the deduction will be one and one-half times i.e. 150 per cent of such CSR expenditure.
Still in case above projects or approvals are not found to be practically feasible by any corporate, the alternative option can be, to contribute the amount of the CSR to a trust or institution for carrying out the CSR activities and such trust or institution get registered with the income tax authorities under section 12AA so that the amount of contribution can be claimed as deduction by the corporate as eligible donation to the extent of 50% under section 80G of the Income Tax Act. It is to be noted that under the Companies Act, 2013 it is permissible that the CSR activities are either carried out by the corporate itself or through a trust or institution.
Failure to deduct tax at source – disallowance to be restricted to 30%
As per the existing provision of section 40(a)(ia), any payment made by way of interest, commission, brokerage, rent, royalty, fee for professional services, fee for technical services, payment to a contractor or sub-contractor on which tax is deductible at source but is not deducted is not allowed as deduction while computing profit of the business or profession. Thus the entire expenditure incurred on this account is disallowed and added back in the income on failure to deduct tax at source. An idea how draconian this section 40(a)(ia) is, can be had from the following example:-
An individual who is engaged in the business of export of readymade garments, assuming having a sales of Rs.5 crores, the exporter instead of having its own machineries and labour, gets the garments fabricated, printed, embroidery, etc. on job work basis, it buys cloth from the market and incurs expenditure on such purchase of Rs.1 crore. It incurs an expenditure of Rs.3 crore on account of fabrication, printing, embroidery, etc. as job charges. It incurs overhead expenditure of Rs.80 Lakh and earns a net profit of Rs.20 Lakh. The tax liability on the net income of Rs.20 Lakh is Rs.4.43 Lakh, where he pays before filing the return. Now visualize a situation that due to ignorance or inadvertence it has failed to deduct tax at source in respect of the job charges paid Rs.3 Crore on which tax at source is required to be deducted at the rate of 1% i.e. default of TDS of Rs.3 Lakh only. The income in such case, because of the operation of the Section 40(a)(ia) will be computed at Rs.3,20,00,000/- since Rs.3 Crore paid as job charges without TDS will be disallowed and added to the income. The additional tax payable on account of this disallowance will be Rs.1.02 Crore. Since the income of such person is just Rs.20 Lakh, it will be practically impossible for such person to pay this liability of Rupees more than one crore. Such person may pay the tax of Rs.3 Lakh which he has failed to deduct along with interest. In such a case he will be eligible to claim expenditure of Rs.3 Crore in the year in which TDS is deposited, with the result that his income for that year will be loss of Rs.2.80,00,000/- assuming the income of that year is also Rs.20 Lakh. This loss he could carry forward for next eight years. Considering that the income is around Rs.20 Lakh per year in subsequent years, this person need another 14 years to set off the carry forward loss which in view of provision of section72(3) can’t be carried forward for more than eight years. Just see the hardship. For a default to deduct and pay tax of Rs.3 Lakh, a tax liability of Rs.32 Lakh i.e. more than 10 times.
Considering this hardship, the Finance (No.2) Bill, 2014 proposes to reduce disallowance of such expenditure to 30% as against 100% at present. The explanatory note in this regard recognize the fact that disallowance of the whole of the amount of expenditure results into undue hardship. Further disallowance of 30% of the expenditure irrespective of the nature of such payment is not appropriate. In case of payment of interest, commission, rent, royalty, where tax is deductible at the rate of 10%, disallowance of 30% may be appropriate but in the case of payment to a contractor where tax is deductible at the rate of 2% or 1% the disallowance of 30% is not justified. The tax is deductible at the rate of 2% or 1% on payment to a contractor on the assumption that the income component in such payment is not very high. Considering this, the disallowance in respect of payment to a contractor should not be 30 per cent and need to be proportionately reduced. It will be more appropriate to link the percentage of disallowance with the rate at which tax is deducted at source.
This provision was introduced way back in the year 2005. Thereafter amendments are being made almost every year. There can’t be a denial to the fact that deterrence helps in ensuring compliance of the provisions of the Act. But deterrence has to be reasonable, not to the extent where in case of default, it becomes virtually impossible to pay the liabilities arising in consequence thereof. Accordingly the best way for achieving this TDS compliance is to disallow the expenditure in case of default and to allow such expenditure in the same year by way of rectification under Section 154 on payment of such tax with interest. To save the period of limitation for rectification suitable provision can be inserted in Section 155 to allow rectification from the date of deposit of such tax with interest. This will ensure realization of such tax and also save the undue hardship which at present is caused to such tax payers.
This amendment is proposed to be effective from 1st April, 2014 i.e. assessment year 2015-16 but considering the past history it may be possible to contend that this judgment is remedial and hence will have retrospective effect. To address the hardship caused by section 40(a)(ia) amendments were made in the past by the Finance Act, 2010 and Finance Act, 2012. All these amendments are stated in the Finance Act to be applicable prospectively. However, the Courts while interpreting these amendments have held that these are remedial and hence have retrospective effect. The Calcutta High Court in the case of CIT vs. Virgin Creations in ITA No. 302 of 2011 in GA No. 3200/2011, held that the amendments made to section 40(a)(ia) by the Finance Act, 2010 of allowing benefit of the payment made before the due date of filing return is retrospective in operation. Similarly Delhi High Court in the case of Commissioner of Income-tax –XIII v Naresh Kumar [2013] 262 CTR 389(Delhi HC) held that the amendment made by the Finance Act, 2010 is remedial and hence will have retrospective application. In the case of Rajiv Kumar Agarwal vs Addl. CIT, ITA No.337/Agra/2013 dated 29th May, 2013, Agra Bench of ITAT has held that amendment made by the Finance Act, 2012 of not treating the assessee in default in case the deductee has included such sum in its income and paid tax thereon as remedial and retrospective. In view of these judgments and particularly the explanation given in the memorandum explaining the provision of the Finance (No.2) Bill, 2014 that this amendment is being made to address the undue hardship, it can be contended that this amendment is also remedial and accordingly shall have retrospective application.
Scope of section 40(a)(ia) being widened to cover payment of salaries and directors fee
Scope of disallowance in respect of payment made to a resident without deduction of tax at source while computing business income is being widened to include payment made by way of salaries and directors fee. Accordingly if any payment is made by way of salaries and director’s fee on which tax is deductible but tax is not deducted from such payment to the extent of 30% will be disallowed and added back to the income.
Benefit of tax deducted at source paid before due date of filing return being extended in respect of non-resident
As per the existing provision of section 40(a)(i), in case of failure to deduct tax at source or failure to deposit such tax after deduction on the due date, in respect of any payment made to a non-resident, which is chargeable to tax such amount is not allowed as deduction while computing income of the business or profession. However, such amount is allowed as deduction in the year in which such payment is made. Thus there was a hardship even in those cases where payment of the tax got delayed beyond the financial year but such payment was deposited before the due date of filing return. Considering this hardship the Finance (No.2) Bill, 2014 proposes to amend section 40(a)(i) to not to disallow such expenditure in case such tax is paid before due date of filing of the return.
This amendment is also proposed to have prospective effect i.e. from 1st day of April, 2015 i.e. assessment year 2015-16. A similar amendment was made in the Finance Act, 2010 in respect of the payment to a resident. This amendment was also stated to apply prospectively. However, as explained hereinabove the Courts have held that such amendments are remedial and hence shall have retrospective application. Accordingly it may be contended that this amendment proposed by this Finance (No.2) Bill, 2014 is also remedial and hence will have retrospective application.
Business of trading in shares not to be treated as speculative business
As per the existing explanation to section 73, in the case of a company the business of purchase and sale of shares, irrespective of the fact that such purchase and sale of share is delivery based is deemed to be speculative business and consequently loss on such business is considered as a speculative loss except in the case of a company where gross total income consists mainly of income from house property, capital gain and income from other sources, or a company the principle business of which is the business of banking or the granting of loans and advances. This explanation has affected a lot of companies engaged in the business of share trading and share broking as losses suffered by such companies in the business of share trading are deemed to be speculative and hence not allowed to be set off against other income. Considering this hardship the Finance (No.2) Bill, 2014 proposes to exclude such companies from this explanation if the principle business of such company is trading in shares. Accordingly if a company which is in the business of trading in shares, losses suffered in such business will be eligible to be set off against other income provided the business of purchase and sale of shares is a principal business.
Trading in Commodity derivatives not to be speculative only if Commodity Transaction Tax (CTT) has been paid
As per the existing provision of section 43(5), a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity, is considered to be a speculative transaction. The loss arising on such speculative transaction is considered to be a speculative loss. Further in terms of Section 73, such speculative loss cannot be set off against any other income except speculative income. However, there are certain exceptions provided below sub-section 43(5), such as hedging by manufacturer etc. which are not considered speculative transactions despite being settled without actual delivery. The Finance Act, 2013 has added one such exception being a transaction in respect of trading in commodity derivatives carried out in a recognized association. The Finance (No.2) Bill, 2014 proposes to put an additional condition that not only such transaction in commodity derivatives should be carried out in a recognized association but such transaction should be chargeable to Commodity Transaction Tax. Accordingly the benefit of this exclusion from speculative transaction in respect of commodity derivative shall be available only when such transaction is carried out in a recognized association and also when CTT has been paid on such transaction.
This amendment is the only amendment which is being made retrospectively i.e. from assessment year 2014-15. It is to be noted that this amendment does not affect those commodity transactions which are delivery based as section 43(5) applies only in respect of a transaction which is ultimately settled otherwise than by actual delivery.
Investment allowance at the rate of 15% for plant or machinery exceeding Rs. 25 Crore acquired and installed during any previous year
Finance Act, 2013 has introduced a scheme of investment allowance in respect of any new plant or machinery acquired and installed by inserting Section 32AC. As per this provision, investment allowance at the rate of 15% of the actual cost of the new plant or machinery acquired and installed after 31st day of March, 2013 but before 1st day of April, 2015 will be allowed, if the aggregate of actual cost of such new plant or machinery exceeds Rs.100 Crore. The Finance (No.2) Bill, 2014 proposes to extend the benefit of this investment allowance where the actual cost of such new plant or machinery exceeds Rs.25 Crore in a year. This benefit will be available on year to year basis and for investment in new plant and machinery till 31st March, 2017. The assessees who are eligible to claim deduction under existing section 32AC, shall continue to have the same benefit. As per the amended provision, the benefit of 15% shall be available on year to year basis wherever the actual cost of the new plant and machinery in the year exceeds Rs.25 Crore. Accordingly the benefit of this investment allowance will not be allowed in case actual cost of the new plant and machinery during the year is Rs.25 Crore or less.
Scope of investment linked incentive under section 35AD being widened
As per the existing provision of section 35AD an assessee is allowed deduction in respect of the whole of the capital expenditure incurred for the purpose of any specified business during the year in which such expenditure is incurred. At present there are 11 specified businesses which are eligible to claim this incentive under this section. The scope of the same is being widened to include following businesses:-
Laying and operating slurry pipelines for the transportation of iron ore;
Setting up and operating a semiconductor wafer fabrication manufacturing notified unit;
Further the provisions of section 35AD are being amended by inserting sub-section (7A) in order to ensure that, any asset in respect of which a deduction has been claimed and allowed under section 35AD, such asset shall be used only for the specified business for a period of 8 years. It is being provided that in case such asset is used for any purpose other than specified business then the difference of the deduction claimed in respect of such asset under section 35AD and the depreciation in respect of such asset which would otherwise allowable under section 32 shall be deemed to be the income of the business in the year in which the asset is used for the purpose other than eligible business.
It is also being provided that where a deduction has been claimed under this section, no deduction shall be available in respect of such specified business under section 10AA in the same year or any assessment year.
It may be relevant to note that as per the provision of section 35AD, the entire expenditure of capital nature incurred for the purpose of specified business other than expenditure on land, goodwill or financial instrument is allowed as deduction during the year in which such expenditure is incurred. Such expenditure is not eligible for any further deduction under any other provision of the Act. The net implication of this section 35AD is, that one can claim the entire capital expenditure (of course other than on land, goodwill or financial instrument) which it would have otherwise claimed over a period by way of depreciation in very first year. Thus this section 35AD, in fact allows depreciation at the rate of 100% in the very first year with no additional benefit in future years. The claim of entire capital expenditure in the very first year under this Section 35AD can be counter-productive in many cases, as deduction of 100% expenditure in the very first year may result into carry forward of losses which cannot be carried forward for more than 8 years as against depreciation which can be claimed on year to year basis and unabsorbed depreciation, if any, can be carried forward for indefinite period.
Presumptive income of goods carriages being increased to Rs.7500 per month
As per the existing provisions of section 44AE income in respect of plying, hiring or leasing goods carriages is computed on presumptive basis. The income of a heavy goods vehicle is deemed to be Rs.5000 per month and income of a vehicle other than heavy goods vehicle is deemed to be Rs.4500 per month. The Finance (No.2) Bill, 2014 has proposed to remove the distinction between the heavy goods vehicle and the vehicle other than heavy goods vehicle. Further it proposes to enhance the presumptive income to Rs.7500 per month. The presumptive income in respect of goods carriages, irrespective of the fact, whether it is a heavy goods vehicle or not, shall deemed to be Rs.7500 every month or part of a month.
10 . Extension of sunset date (time limit for claiming exemption of income) for the Power Sector
The tax holiday available to the undertaking which is set up for generation, distribution, transmission including substantial renovation and modernization of existing network of transmission or distribution lines of power by 31st March, 2014 is being extended to undertakings which are set up upto 31st March, 2017. In view of this extension, the undertaking which begins to generate power or which lays network of new transmission and distribution lines or which undertakes substantial renovation and modernization of existing network of transmission or distribution lines upto 31st March, 2017 shall be eligible to claim exemption upto 100% of its profit and gains for a period of 10 consecutive assessment years within the 15 years beginning from the year in which the undertaking generates power, or commences transmission or distribution of power or undertake substantial renovation and modernization of the existing transmission or distribution lines.
11. Income of business and other sources to be computed in accordance with computation and disclosure standards
Section 145(1) of Income Tax Act provides that Income under the head ‘profit and gains of business or profession’ and ‘income from other sources’, shall be computed in accordance with the method of accounting regularly employed by the assessee. This section thus gives an option to the assessee to choose the method of accounting to be employed by it while computing business income or income from other sources with only one condition that such method should be regularly employed.
In order to bring consistency in the method of accounting, the Finance Act, 1995 inserted sub-section (2) empowering the Central Government to notify the accounting standards to be followed by any class of assessee in respect of any class of income. Section 211(3C) of the Companies Act, 1956 also empowers the Central Government to prescribe accounting standards to be followed by the Companies. Principle and objective of accounting standard for preparation of financial statement and disclosure under the Companies Act are different from the principle and objective of the accounting standards to be followed for computation of income. Thus there was a dilemma, how can a company be asked to maintain two sets of books of accounts. One set of books of accounts in accordance with accounting standards notified under the Companies Act and another set of books of accounts in accordance with accounting standards notified under the Income Tax Act. In view of this, the Central Government could not notify the accounting standard under the Income Tax Act, other than the two basic accounting standards, despite this enabling section 145(2) being in the Income Tax Act for almost 20 years.
The Finance (No.2) Bill, 2014 now has worked out a mechanism to address this issue. Accordingly it has been proposed that the Government shall notify the accounting standard under the Income Tax Act, the application of which shall be limited to the computation of taxable income and disclosure for tax purposes and the tax payer will not be required to maintain books of account on the basis of such standard notified by the Government under the Income Tax Act. Accordingly the provisions of Section 145(2) are being amended so as to rename the ‘accounting standards’ as ‘income computation and disclosure standards’. These standards will be notified by the Central Board of Direct Taxes and income of the business or profession and income from other sources wherever applicable has to be computed and disclosure made in accordance with these ‘income computation and disclosure standards’. The memorandum explaining the budget expressly clarifies that these ‘income computation and disclosure standards’ are not meant for maintenance of the books but are to be followed only for computation of income and disclosure.
This amendment is also proposed to be effective from assessment year 2015-16 i.e. current financial year 2014-15 and accordingly it will be important to understand the implication of these standards immediately and advance tax and other obligations for the current financial year have to be on the basis of the income computed in accordance with these income computation and disclosure standards.
12. International Financial reporting standards to be applicable from financial year 2015-16
The Finance Minister has made an announcement in his budget speech regarding applicability of International Financial Reporting Standards (IFRS) now known as new Indian Accounting Standard (IND AS) by the Indian companies from the financial year 2015-16 voluntarily and from financial year 2016-17 on mandatory basis. Consequent to this amendment, now companies will be required to switch over to Indian Accounting Standards (IND AS). The date of applicability of Indian Accounting Standard (IND AS) for the banks and insurance companies shall be from the date it will be notified by the regulators.
F. CAPITAL GAIN
Advance forfeited against sale of capital asset – to be treated as income from other sources
As per the existing provisions of section 45(1), tax is payable in respect of the capital gain in the year in which the capital asset is transferred. Further, as per provisions of section 51 where any capital asset was subject matter of negotiation for the transfer, any advance received at the time of such negotiation is not considered as income but is deducted from the cost of acquisition. The Finance (No.2) Bill, 2014 proposes to amend this provision. As per the proposal, any advance or other money received in the course of negotiation for transfer of a capital asset shall be considered as income from other sources and chargeable under section 56(2)(ix) if such sum is forfeited and negotiation do not result in any transfer of such capital asset. Corresponding amendment is being made to section 51 to provide that such forfeited advance having been taxed as income from other sources, will not be deducted from the cost of acquisition while computing capital gain at the time of actual transfer later on. In view of this amendment any advance received for transfer of a capital asset which include immovable property, and share held as investment, the moment such advance is forfeited without any transfer of such property or share, the same will be taxable as income under the head ‘income from other sources’ in the year in which forfeiture is made.
Benefit of section 54 and 54F – limited to one residential house and that too in India
As per the existing provisions of section 54 and Section 54F where a capital gain arises in the hands of an individual or HUF on the transfer of a long term capital asset including a residential house, the same is not chargeable to tax if it is invested in purchase or construction of a residential house within the prescribed period. There has been a dispute going on for many years about the meaning of the word ‘a residential house’ whether ‘a’ is an article or ‘a’ is a number meaning one. The dispute was also going on whether this new residential house has to be in India or it can be in any part of the world. The Finance (No.2) Bill, 2014 proposes to settle this controversy to rest by explicitly providing that the benefit under section 54 and section 54F will be available in respect of one residential house only and that such residential house should be in India. This is being done by substituting the words ‘a residential house’ with the words ‘one residential house in India’. This amendment is proposed to be effective from 1st April, 2015 i.e. assessment year 2015-16. It may be important to note that the memorandum explaining the provision of the Finance Bill clarifies that this benefit was intended for investment in one residential house within India. In view of this explanation, there is possibility that tax authorities may contend that this amendment is clarificatory in nature and hence shall be applicable retrospectively.
Exemption for investment in capital gain bonds – to be limited to Rs.50 Lakh
As per the existing provision of Section 54EC of the Act an exemption is provided in respect of the capital gain arising from long term assets if the same is invested in long term specified bonds, commonly known as Capital Gain Bonds, within a period of six months after the date of such transfer. The proviso to this section restricts the deduction in respect of such investment to a sum of Rs.50 Lakh during any financial year. In view of this restriction of investment of Rs.50 Lakh in a financial year, there has been a controversy whether this benefit of Rs.50 Lakh can be availed in two financial years by investing Rs.50 Lakh in one financial year and another Rs.50 Lakh in next financial year, if both investments fall within a period of six months from the date of transfer of long term capital asset. (This being possible if long term capital asset is transferred during October to March). The Finance (No.2) Bill, 2014 proposes to address this controversy by inserting a new proviso to the effect that investment made in such specified bonds from capital gains arising from transfer of one or more original assets during the financial year in which the original asset or assets are transferred and in the subsequent financial year should not exceed Rs.50 Lakh. The implication of the above proviso will be that the total eligible investment for specified bonds will be Rs.50 Lakh in the year in which one or more original assets are sold and also in the subsequent financial year. This proviso may have an unintended implication whereby any long term capital asset sold in the subsequent year may not be eligible for claiming exemption independently of investment in specified bonds in view of the overall limitation of Rs.50 Lakh in two financial years.
Compensation received by way of interim order on compulsory acquisition to be taxed in the year in which final order of the Court is made
As per the provision of Section 45 of the Income Tax Act, capital gain is chargeable to tax in the year in which the capital asset is transferred irrespective of the fact when consideration for such transfer is received. In view of the practical difficulties arising for making payment of taxes as compensation gets unduly delayed in respect of the transfer by way of compulsory acquisition, sub-section (5) was inserted in section 45 by the Finance Act, 1987 to provide that capital gain arising from the transfer of a capital asset by way of compulsory acquisition under any law including any enhancement or further enhancement shall be deemed to be the income chargeable of the previous year in which said compensation or the amount is received by the assessee.
Thereafter further issue arose about the compensation received and having been taxed in terms of the provision of section 45(5) in the year of receipt and later on such compensation getting reduced in subsequent years by the order of the Court or the Tribunal. In order to address this issue, the Finance Act, 2003 further inserted a clause (c) in Section 45(5), to provide that where such consideration or the enhanced compensation is reduced subsequently by any order of the Court or the Tribunal, then the assessed capital gain of that very year in which year the same was taxed will be recomputed by taking the compensation or consideration as so reduced by such Court. For enabling this re-computation amendment was also made to section 155 by inserting sub-section (15), allowing rectification of that assessed capital gain within a period of 4 years from the end of the previous year in which the order of the Court or the Appellate Tribunal for reducing the consideration or the enhanced compensation was passed. Thus a complete mechanism was provided to tax the capital gain and to re-compute the same in case of compensation getting reduced.
The Finance (No.2) Bill, 2014 surprisingly proposes to tax the compensation received in pursuance to an interim order of the Court/ Tribunal in the year in which the final order of such Court/ Tribunal or authority is made. The reasoning given in the memorandum explaining the provision of the Finance (No.2) Bill, 2014 is that there is an uncertainty in the year in which the amount of the compensation received in pursuance of an interim order of the Court is to be charged to tax. After the insertion of clause (c) to section 45(5) to re-compute the capital gain and enabling provision of allowing rectification for an extended period of 4 years from the date when the Court order is passed under section 155(15) there does not appear to be any uncertainty about the interim relief so as to postpone the tax on the capital gain on the compensation received in pursuance of an interim order. The person having received the amount, there is no reason to postpone the taxation of the same for an indefinite period which probably may lead to non-recovery of tax as compensation so received by way of an interim order may be spent or used irretrievably by the time final order of the Court or Tribunal is made. In case there was any issue on the interpretation of the meaning of interim order the better course would have been to clarify that compensation received in pursuance of an interim order shall be taxable in the year in which it is received.
Benefit of Long term capital gain on debt mutual fund after 3 years and to be taxed at the rate of 20 per cent
The Finance (No.2) Bill, 2014 proposes to make far-reaching amendment affecting the debt mutual fund. As per the existing provisions of the Act, debt mutual funds are treated at par by and large with the equity oriented mutual fund. In terms of provision of section 2(42A), debt mutual fund is considered as a long term capital asset if it is held for more than 12 months. Further in terms of provision of section 112 where capital gain arises on transfer of a long term capital asset which include listed securities or units (mutual fund), the amount of capital gain before allowing for indexation adjustment shall be 10%. In view of these two provisions, the debt mutual fund of Fixed Maturity Plan commonly known as FMP was being used for the purpose of tax arbitrage. In case of a