direct tax... · 2017-09-04 · 1 d irect tax laws amendments at a glance finance act, 20 16 s.no....

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DIRECT TAX LAWS

AMENDMENTS AT A GLANCE – FINANCE ACT, 2016

S.No. Particulars Section

Income-tax A. Basic Concepts

1. Rates of income-tax 2. Government grant or subsidy, for the purpose of the corpus

of a trust or institution established by the Central Government or State Government not to be included in the definition of income”

2(24)

3. Set-off of losses not permissible against unexplained income, investments, money etc. chargeable under sections 68/69/69A/69B/69C/69D

115BBE

4. Increase in quantum of rebate 87A B. Residential Status and Scope of Total Income

5. No income deemed to accrue or arise in India to a foreign mining company through or from the activities which are confined to display of uncut and unassorted diamonds in a Special Notified Zone

9(1)(i) [Explanation 1]

6. Deferral of applicability of POEM based residence test and incorporation of transition mechanism for a company incorporated outside India, which has not earlier been assessed to tax in India

6(3) & 115JH

7. Special Taxation Regime for offshore funds: Modification of certain conditions

9A

C. Incomes which do not form part of total income 8. Exemption under section 10(34) not to apply to dividend

chargeable to tax in accordance with section 115BBDA 10(34) &

115BBDA 9. Exemption of income accruing or arising to a foreign company

on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India

10(48A)

10. Exemption of interest on deposit certificates issued under the Gold Monetization Scheme, 2015

10(15)(vi) & 2(14)

11. Payment from NPS Trust to an employee on closure of his account or on his opting out of the pension scheme exempt to the extent of 40% of such payment

10(12A)

© The Institute of Chartered Accountants of India© The Institute of Chartered Accountants of India

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D. Income from house property 12. Extension of period for completion of construction from 3

years to 5 years, for claiming higher deduction of upto Rs.2 lakh in respect of interest on capital borrowed for construction of self-occupied house property

24

13. Special provision for arrears of rent and unrealized rent received subsequently

25A

E. Profits and gains of business or profession 14. Non-compete fee received/receivable for not carrying on a

profession chargeable under the head “Profits and gains of business or profession”

28(va) & 55

15. Assessees engaged in the business of transmission of power eligible for additional depreciation

32(1)(iia)

16. Deduction under section 32AC to be available in the year of installation in respect of actual cost of new plant and machinery acquired in the P.Y.2015-16 and P.Y.2016-17, if the actual cost of such new plant and machinery acquired in the relevant previous year exceeds Rs. 25 crores, even if the new plant and machinery has not been installed in the relevant previous year but has been installed on or before 31.3.2017

32AC

17. Phasing out of incentives under the Income-tax Act, 1961 35/35AC/35AD/ 35CCC/35CCD

18. Tax treatment for spectrum fee 35ABA 19. Scope of section 35AD expanded to include the business

of developing, maintaining and operating a new infrastructure facility

35AD & 80-IA

20. NBFCs eligible for claim of deduction for provision for bad and doubtful debts

36(1)(viia)

21. Sum payable to Indian Railways for use of railway assets allowable as deduction in the year in which the liability to pay such sum is incurred, only if payment is made on or before the due date of filing of return

43B

22. Increase in threshold limit of gross receipts/turnover under section 44AD of a business to be eligible for opting the presumptive taxation scheme

44AA, 44AB & 211

23. Presumptive Taxation Scheme for assessees engaged in eligible profession

44ADA & 44AB


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F. Capital Gains 24. Period of holding of unlisted shares to qualify as a long-

term capital asset to be reduced from “more than 36 months” to “more than 24 months”

2(42A)

25. Total value of assets of a private company or unlisted company not to exceed Rs.5 crore in any of the three preceding previous years for exemption of transfer of capital asset or intangible asset on conversion of such company into LLP

47(xiiib)

26. Transfer of units by unit holders on consolidation of plans within a mutual fund scheme not to be regarded as transfer

47(xix)

27. Redemption by an individual of sovereign gold bonds issued by RBI not to constitute transfer for the purpose of levy of capital gains tax

47(viic) & 48

28. Cost of acquisition of asset, whose fair market value has been taken into account for the Income Declaration Scheme, 2016

49(5)

29. Stamp duty value on the date of agreement may be adopted as full value of consideration of immovable property, being land or building or both, if whole or part of the consideration has been paid by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, on or before the date of the agreement for the transfer of such immovable property

50C

30. Exemption of long-term capital gains on investment in notified units of specified fund

54EE

31. Exemption of long-term capital gains on sale of residential property, where net consideration on sale is invested in shares of an eligible start-up

54GB

32. Long-term capital gains on shares of private companies to be subject to concessional rate of tax@10% in the hands of non-corporate non-residents and foreign companies

112(1)(c)

G. Income from Other Sources 33. Shares received by an individual or HUF as a consequence of

demerger or amalgamation of a company or a business reorganisation of a co-operative bank not to be subject to tax by virtue of section 56(2)(vii)

56(2)(vii)

H. Set-off and Carry Forward and Set-off of losses 34. Filing of return of loss on or before the due date under

section 139(1) mandatory for carry forward of loss from specified business under section 73A

80 & 139(3)


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I. Deductions from Gross Total Income 35. Additional deduction for interest on loan borrowed for

acquisition of self-occupied house property by an individual 80EE

36. Monetary limit for deduction under section 80GG increased 80GG 37. Tax incentives for new start-ups 80-IAC 38. Deductions in respect of profits and gains from housing

projects 80-IBA

39. Phasing out of profit-linked incentives 80-IA, 80-IAB, 80-IB, 35AD

40. Deduction in respect of employment of new employees 80JJAA J. Assessment of various entities

41. Concessional Taxation Regime for royalty income in respect of patent developed and registered in India

115BBF & 115JB

42. Non-applicability of MAT in respect of certain foreign companies

115JB

43. Tax incentives to International Financial Services Centres 10(38), 111A, 115JB & 115-O

44. Dividend distributed by SPV to business trust exempt from levy of DDT

115-O, 10(23FC), 10(23FD),

115UA& 194LBA 45. Rationalisation of the definitions of “buyback” and

“distributed income” for the purpose of levy of additional income-tax on income distributed by a company on buyback of unlisted shares from a shareholder

115QA

46. New Taxation Regime for Securitisation Trusts 115TCA, 115TA, 115TC & 10(35A)

47. Tax on accreted income of certain trusts and institutions 115TD K. Transfer Pricing and Other Provisions to check avoidance

of tax

48. Extension of time limit available to TPO for making an order 92CA(3A) 49. Furnishing of report in respect of international group in line

with BEPS action plan - Country-By-Country Report and Master file

286, 92D, 271AA, 271GB & 273B

L. Taxation of E-Commerce Transactions 50. Equalisation levy Chapter VIII of

Finance Act, 2016, 10(50),


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40(a)(ib) M. Income-tax Authorities

51. Time limit for calling in question jurisdiction of Assessing Officer where notice is served under section 153A(1) or 153C(2)

124(3)

N. Assessment Procedure 52. Rationalisation of provisions relating to filing of return of

income 139

53. Scope of permissible adjustments while processing a return expanded

143(1)(a)

54. Mandatory processing of return of income before issuance of assessment order

143(1D)

55. Time limits for completion of assessment, reassessment and recomputation revised

153

56. Time limit for completion of assessment under section 153A 153B 57. Deemed escapement of income on the basis information

obtained by the Income-tax authorities 147 & 133C

O. Appeals and Revision 58. Removal of reference to “Senior Vice President” 252 59. Provision for filing of appeal by the Assessing Officer

against the order of DRP done away with 253

60. Reduction in time limit for rectification of mistake apparent from the record by the Appellate Tribunal

254(2)

61. Raising the total income limit of the cases that may be decided by single member bench of Appellate Tribunal

255(3)

P. Penalties 62. Penalty leviable for under-reporting of income and mis-

reporting of income 270A, 119, 253,

271, 271A, 271AA, 271AAB,

273A & 279 63. Immunity from imposition of penalty and prosecution 270AA & 249 64. Time limit for passing an order for waiver of interest and

penalty 220(2A), 273A &

273AA 65. Levy of penalty at a flat rate of 60% on undisclosed

income, in search cases where assessee does not admit such income in the course of search nor discloses the same in the return of income for the specified previous year filed on or before the specified date

271AAB(1)(c)


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66. Penalty for failure to comply with notice under section 142(1) or 143(2) of failure to comply with a direction u/s 142(2A)

272A & 288

Q. Miscellaneous Provisions 67. Provision for bank guarantee in lieu of provisional

attachment of property for protecting interests of the revenue

281B

68. Provision of legal framework for automated processing and paperless assessment

282A, 143(2) & 2(23C)

R. Deduction, Collection & Recovery of Tax 69. Deduction of tax at source under section 194LBB at ‘rates

in force’ on income distributed by an Investment Fund to its non-resident unit-holders and enabling provision for obtaining certificate of nil deduction or lower deduction of tax at source under section 197

194LBB, 2(37) & 197

70. Increase in threshold limits and reduction of rates for deduction of tax at source in respect of certain payments [Chapter XVII-B]

192A, 194BB, 194C, 194D,

194DA, 194EE, 194G, 194H,

194LA 71. Advance tax payment scheme to be the same for

companies and other assessees 211 & 234C

72. Interest on refunds 244A 73. Expansion of scope of TCS 206C 74. Requirement to furnish PAN for avoiding higher tax

deduction not to apply to non-corporate non-residents and foreign companies subject to certain conditions

206AA

Note - In addition, significant notifications and circulars issued between the period 1.5.2015 and

30.4.2016 have been included under the respective chapters.

Students may note that certain amendments included in this Supplementary Study Paper –

2016, which are effective from A.Y.2018-19 or any subsequent assessment year, are not

relevant for May, 2017 and November, 2017 examinations.


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1 BASIC CONCEPTS

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Rates of Tax

Section 2 of the Finance Act, 2016 read with Part I of the First Schedule to the Finance Act,

2016, seeks to specify the rates at which income-tax is to be levied on income chargeable

to tax for the assessment year 2016-17. Part II lays down the rate at which tax is to be

deducted at source during the financial year 2016-17 from income subject to such

deduction under the Income-tax Act, 1961; Part III lays down the rates for charging income-

tax in certain cases, rates for deducting income-tax from income chargeable under the

head "salaries" and the rates for computing advance tax for the financial year 2016-17 i.e.,

A.Y.2017-18. Part III of the First Schedule to the Finance Act, 2016 will become Part I of

the First Schedule to the Finance Act, 2017 and so on.

Rates for deduction of tax at source for the F.Y.2016-17 from certain income

Part II of the First Schedule to the Finance Act, 2016 specifies the rates at which income-tax

is to be deducted at source under sections 193, 194, 194A, 194B, 194BB, 194D, 194LBA and

195 during the financial year 2016-17. These rates of tax deduction at source are the same

as were applicable for the F.Y.2015-16. However, the rate of tax deduction at source has

been decreased from 10% to 5% in respect of income by way of insurance commission

payable to a resident non-corporate assessee. Further, the scope of Part II of the First

Schedule has been expanded to include the “rates in force” for the purpose of tax deduction

at source under section 194LBB from income distributed to a non-resident unit holder of an

investment fund and under section 194LBC from income distributed to a non-resident investor

of a securitization trust.

Surcharge would be levied on income-tax deducted at source in case of non-corporate

non-residents and foreign companies. If the recipient is a non-resident individual or HUF

or AOP or BOI, whether incorporated or not, or artificial juridical person, surcharge@15%

would be levied on such income-tax if the income or aggregate of income paid or likely to

be paid and subject to deduction exceeds ` 1 crore. If the recipient is co-operative

society or a firm, being a non-resident, surcharge@12% would be levied on such income-

tax if the income or aggregate of income paid or likely to be paid and subject to deduction

exceeds ` 1 crore.

© The Institute of Chartered Accountants of India

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If the recipient is a foreign company, surcharge@ –

(i) 2% would be levied on such income-tax, where the income or aggregate of such

incomes paid or likely to be paid and subject to deduction exceeds ` 1 crore but

does not exceed ` 10 crore; and

(ii) 5% would be levied on such income-tax, where the income or aggregate of such

incomes paid or likely to be paid and subject to deduction exceeds ` 10 crore.

Surcharge would not be levied on deductions in all other cases. Also, education cess and

secondary and higher education cess would not be added to tax deducted or collected at

source in the case of a domestic company or a resident non-corporate assessee.

However, education cess @2% and secondary and higher education cess @1% on

income-tax plus surcharge, wherever applicable, would be added to tax deducted at

source in cases of non-corporate non-residents and foreign companies.

Rates for deduction of tax at source from "salaries", computation of "advance tax"

and charging of income-tax in certain cases during the financial year 2016-17

Part III of the First Schedule to the Finance Act, 2016 specifies the rate at which income-

tax is to be deducted at source from "salaries" and also the rate at which "advance tax" is

to be computed and income-tax is to be calculated or charged in certain cases for the

financial year 2016-17 i.e., A.Y. 2017-18.

It may be noted that education cess @2% and secondary and higher education cess

@1% would continue to apply on tax deducted at source in respect of salary payments.

The general basic exemption limit for individuals/HUFs/AOPs/BOIs and artificial juridical

persons remains unchanged (i.e., ` 2,50,000). The basic exemption limit of ` 3,00,000 for

senior citizens, being resident individuals of the age of 60 years or more but less than 80

years at any time during the previous year also remains the same. Resident individuals of the

age of 80 years or more at any time during the previous year would continue to be eligible for

the higher basic exemption limit of (i.e., ` 5,00,000). The tax slabs are shown hereunder -

(i) (a) Individual/ HUF/ AOP / BOI and every artificial juridical person

Level of total income Rate of income-tax

Where the total income does not exceed ` 2,50,000

Nil

Where the total income exceeds ` 2,50,000 but does not exceed ` 5,00,000

10% of the amount by which the total income exceeds ` 2,50,000


` 25,000 plus 20% of the amount by which the total income exceeds ` 5,00,000

Where the total income exceeds ` 10,00,000

` 1,25,000 plus 30% of the amount by which the total income exceeds ` 10,00,000


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(b) For resident individuals of the age of 60 years or more but less than 80

years at any time during the previous year



Nil




` 20,000 plus 20% of the amount by which the total income exceeds ` 5,00,000



(c) For resident individuals of the age of 80 years or more at any time during

the previous year



Nil





(ii) Co-operative society

There is no change in the rate structure as compared to A.Y.2016-17.


(1) Where the total income does not exceed ` 10,000

10% of the total income

(2) Where the total income exceeds ` 10,000 but does not exceed ` 20,000

` 1,000 plus 20% of the amount by which the total income exceeds ` 10,000

(3) Where the total income exceeds ` 20,000

` 3,000 plus 30% of the amount by which the total income exceeds ` 20,000


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(iii) Firm/Limited Liability Partnership (LLP)

The rate of tax for a firm for A.Y.2017-18 is the same as that for A.Y.2016-17 i.e., 30%

on the whole of the total income of the firm. This rate would apply to an LLP also.

(iv) Local authority

The rate of tax for a local authority for A.Y.2017-18 is the same as that for

A.Y.2016-17 i.e., 30% on the whole of the total income of the local authority.

(v) Company

The rates of tax for A.Y.2017-18 are as follows:

(1) In the case of a domestic company

(i) Where the total turnover or gross receipt in the previous year 2014-15 does not exceed ` 5 crore


(ii) In case of other domestic companies 30% of the total income

New section 115BA has been inserted to provide that the income-tax payable in respect of the total income of a domestic company for any previous year relevant to A.Y.2017-18 and thereafter, shall be computed @25%, at the option of the company, if, -

(i) the company has been setup and registered on or after 1st March, 2016;

(ii) the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and

(iii) the company while computing its total income has not claimed any benefit under any of the provisions of the Act listed hereunder -

Section Incentive under the Income-tax Act, 1961

(1) 10AA Exemption of profits and gains derived from export of articles or things or from services by a assessee, being an entrepreneur from his Unit in SEZ.

(2) 32(1)(iia) Additional depreciation@20% of actual cost of new plant and machinery acquired and installed by manufacturing and power sector undertakings.

(3) 32AC Deduction@15% of actual cost of new plant and machinery acquired and installed by manufacturing companies, making substantial investment (i.e., exceeding ` 25 crores) in new plant and machinery during the previous year.

(4) 32AD Deduction@15% of actual cost of new plant and machinery acquired and installed by an assessee in a manufacturing undertaking located in the notified backward areas of specified States.


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(5) 33AB Deduction of 40% of profits and gains of business of growing and manufacturing tea, coffee or rubber in India, to the extent deposited with NABARD in accordance with scheme approved by the Tea/Coffee/Rubber Board.

(6) 33ABA Deduction of 20% of the profits of a business of prospecting for, or extraction or production of, petroleum or natural gas or both in India, to the extent deposited with SBI in an approved scheme or deposited in Site Restoration Account.

(7) 35(1)(ii)/ (iia)/(iii)

Weighted deduction for payment to any research association, company, university etc. for undertaking scientific research or social science or statistical research.

(8) 35(2AA) Weighted deduction for payment to a National Laboratory or University or IIT for scientific research

(9) 35(2AB) Weighted deduction for in-house scientific research expenditure incurred by a company engaged in the business of bio-technology or in the business of manufacture or production of an article or thing.

(10) 35AC Deduction of expenditure by way of payment to a public sector company or local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme.

(11) 35AD Investment-linked tax deduction for specified businesses.

(12) 35CCC Weighted deduction in respect of expenditure incurred on notified agricultural extension project

(13) 35CCD Weighted deduction in respect of expenditure incurred by a company on notified skill development project.

(iv) the company has also not claimed benefit of any deduction in respect of certain income under Part-C of Chapter-VI-A, other than the provisions of section 80JJAA, while computing its total income;

(v) the company has also not claimed set-off of any loss carried forward from any earlier assessment year, if such loss is attributable to the deductions specified in (iii) and (iv) above [such loss shall be deemed to have been already given full effect to and no further deduction for such loss shall be allowed for any subsequent year];

(vi) normal depreciation under section 32 [i.e., depreciation other than


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additional depreciation under section 32(1)(iia)] is determined in the prescribed manner;

(vii) the option is exercised in the prescribed manner on or before the due date specified under section 139(1) for furnishing the first of the returns of income which the person is required to furnish under the provisions of the Income-tax Act, 1961. However, once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

(2) In the case of a company other than a domestic company


However, specified royalties and fees for rendering technical services (FTS) received from Government or an Indian concern in pursuance of an approved agreement made by the company with the Government or Indian concern between 1.4.1961 and 31.3.1976 (in case of royalties) and between 1.3.1964 and 31.3.1976 (in case of FTS) would be chargeable to tax @50%.

Surcharge

The rates of surcharge applicable for A.Y.2017-18 are as follows -

(i) Individual/HUF/AOP/BOI/Artificial juridical person

Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 15%

of income-tax computed in accordance with the provisions of para (i)(a)/(b)/(c)

above or section 111A or section 112.

Marginal relief is available in case of such persons having a total income exceeding ` 1

crore i.e., the additional amount of income-tax payable (together with surcharge) on the

excess of income over ` 1 crore should not be more than the amount of income

exceeding ` 1 crore.

(ii) Co-operative societies/Local Authorities/Firms/LLPs

Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 12%

of income-tax computed in accordance with the provisions of para (ii)/(iii)/(iv) above

or section 111A or section 112.

Marginal relief is available in case of such persons having a total income exceeding ` 1

crore i.e., the additional amount of income-tax payable (together with surcharge) on the

excess of income over ` 1 crore should not be more than the amount of income

exceeding ` 1 crore.

(iii) Domestic company

(a) In case of a domestic company, whose total income is > ` 1 crore but ≤ ` 10 crore

Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable at the rate of 7% of income-tax computed in accordance with


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the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore.

Example

Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is ` 1,01,00,000 for A.Y.2017-18 and the total income does not include any income in the nature of capital gains

[Note - The gross receipts of X Ltd. for the P.Y.2014-15 is ` 7,00,00,000]

Answer

The tax payable on total income of ` 1,01,00,000 of X Ltd. computed@ 32.1% (including surcharge@7%) is ` 32,42,100. However, the tax cannot exceed ` 31,00,000 (i.e., the tax of ` 30,00,000 payable on total income of ` 1 crore plus ` 1,00,000, being the amount of total income exceeding ` 1 crore). Therefore, the tax payable on ` 1,01,00,000 would be ` 31,00,000. The marginal relief is` 1,42,100 (i.e., ` 32,42,100 - ` 31,00,000).

(b) In case of a domestic company, whose total income is > ` 10 crore

Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 12% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112.

Marginal relief is available in case of such companies i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 10 crore should not be more than the amount of income exceeding ` 10 crore.

Example

Compute the tax liability of Y Ltd., a domestic company, assuming that the total income of Y Ltd. for A.Y.2017-18 is ` 10,01,00,000 and the total income does not include any income in the nature of capital gains.

[Note - The gross receipts of Y Ltd. for the P.Y.2014-15 is ` 9,00,00,000]

Answer

The tax payable on total income of ` 10,01,00,000 of Y Ltd. computed@ 33.6% (including surcharge@12%) is ` 3,36,33,600. However, the tax cannot exceed ` 3,22,00,000 [i.e., the tax of ` 3,21,00,000 (32.1% of ` 10 crore) payable on total income of ` 10 crore plus ` 1,00,000, being the amount of total income exceeding ` 10 crore]. Therefore, the tax payable on ` 10,01,00,000 would be ` 3,22,00,000. The marginal relief is ` 14,33,600 (i.e., ` 3,36,33,600 - ` 3,22,00,000).


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Rates of Surcharge

A.Y. 2017-18

Individual/HUF/AOP/ BOI/AJP

If TI ≤ ` 1

crore

Nil

If TI > ` 1

crore

15%

Co-operative Society/ Local Authority/Firm/LLP

If TI ≤ `1

crore

Nil

If TI > ` 1

crore

12%

Domestic Company

If TI ≤ ` 1

crore

Nil

If TI > ` 1 crore but ≤ `

10 crore.

7%

If TI > ` 10 crore

12%

Foreign Company

If TI ≤ ` 1

crore

Nil

If TI > ` 1 crore but ≤ `

10 crore.

2%

If TI > ` 10 crore

5%


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(iv) Foreign company

(a) In case of a foreign company, whose total income is > ` 1 crore but ≤ ` 10 crore

Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable at the rate of 2% of income-tax computed in accordance with the provisions of paragraph (v)(2) above or section 111A or section 112. Marginal relief is available in case of such companies i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore.

(b) In case of a foreign company, whose total income is > ` 10 crore

Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 5% of income-tax computed in accordance with the provisions of para (v)(2) above or section 111A or section 112.

Marginal relief is available in case of such companies i.e. , the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 10 crore should not be more than the amount of income exceeding ` 10 crore.

Note – Marginal relief would also be available to those companies which are subject to minimum alternate tax under section 115JB, in cases where the book profit (i.e. deemed total income) exceeds ` 1 crore and ` 10 crore, respectively.

Education cess / Secondary and higher education cess on income-tax

The amount of income-tax as increased by the union surcharge, if applicable, should further be increased by an “Education cess on income-tax”, calculated at the rate of 2% of such income-tax plus surcharge, wherever applicable. Further, “Secondary and higher education cess on income-tax” (SHEC) @1% of income-tax and surcharge, wherever applicable, is leviable to fulfill the commitment of the Government to provide and finance secondary and higher education. Education cess, including SHEC, is leviable in the case of all assessees i.e., individuals, HUFs, AOP/BOIs, artificial juridical persons, co -operative societies, firms, LLPs, local authorities and companies. No marginal reli ef would be available in respect of such cess.

Applicability of surcharge and cess on distribution tax

Surcharge@12% would be leviable on distribution tax levied under sections 115-O, 115-QA, 115R, 115TA and 115TD. Further, education cess@2% and secondary and higher education cess@1% would be leviable on the distribution tax inclusive of surcharge.

(1) (2) (3) (4)

Section Particulars Rate of tax

Effective rate of tax

115-O Tax on distributed income of domestic companies by way of dividend

15% 17.304%

115QA Tax on distributed income of domestic company for buyback of shares

20% 23.072%


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115R Tax on distributed income of mutual funds

Distribution by debt funds to individuals and HUFs

25% 28.84%

Distribution by debt funds to other persons 30% 34.608%

Distribution by infrastructure debt funds to non- corporate non-residents and foreign companies

5% 5.768%

115TA Tax on income distributed by securitization trusts (upto 31.5.2016)

Distribution to persons exempt from tax Nil Nil

Distribution to individuals and HUFs 25% 28.84%

Distribution to other persons 30% 34.608%

115TD Tax on accreted income of certain trusts and institutions

30% 34.608%

Note – The dividend and income referred to in section 115-O and 115R, respectively, have to be first grossed up by applying the rates of tax mentioned in column (3) above. Thereafter, the effective rates of tax under section 115-O and 115R mentioned in column (4) above have to be applied on gross dividend/income to compute the additional income-tax payable by domestic companies and mutual funds, respectively, under section 115-O and 115R.

(B) Government grant or subsidy, for the purpose of the corpus of a trust or institution established by the Central Government or State Government not to be included in the definition of income [Section 2(24)]

Effective from: A.Y.2017-18

(i) The Central Government had, vide Notification dated 31.3.2015, in exercise of the powers conferred under section 145(2), notified ten income computation and disclosure standards (ICDSs) to be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “Income from other sources”.

(ii) ICDS VII deals with the treatment of government grants. It recognizes that government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks etc.

(1) This ICDS requires Government grants relatable to depreciable fixed assets to be reduced from actual cost/WDV.

(2) Where the Government grant is not directly relatable to the asset acquired, then, a pro-rata reduction of the amount of grant should be made in the same proportion as such asset bears to all assets with reference to which the Government grant is so received.


17

(3) Grants relating to non-depreciable fixed assets have to be recognized as income over the same period over which the cost of meeting such obligations is charged to income.

(4) Government grants receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial support to the person with no further related costs to be recognized as income of the period in which it is receivable.

(5) All other Government Grants have to be recognized as income over the periods necessary to match them with the related costs which they are intended to compensate.

(iii) Thus, except in case of government grant relating to a depreciable fixed asset,

which has to be reduced from written down value or actual cost, all other grants ha d

to be recognized as upfront income or as income over the periods necessary to

match them with the related costs which they are intended to compensate.

(iv) Further, in line with the requirement in ICDS VII, the Finance Act, 2015 had included

sub-clause (xviii) in the definition of income under section 2(24). Accordingly,

assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver

or concession or reimbursement, by whatever name called, by the Central Government

or a State Government or any authority or body or agency in cash or kind to the

assessee is included in the definition of income. The only exclusion was the subsidy or

grant or reimbursement which has been taken into account for determination of the

actual cost of the asset in accordance with Explanation 10 to section 43(1).

(v) Consequently, grant or cash assistance or subsidy etc. provided by the Central

Government for budgetary support of a trust or any other entity formed specifically for

operationalizing certain government schemes would become taxable in the hands of

trust or any other entity.

(vi) In order to avoid genuine hardship in such cases, section 2(24) has been amended to

provide that subsidy or grant by the Central Government for the purpose of the corpus of

a trust or institution established by the Central Government or State Government shall

not be included in the definition of income.

Subsidy or Grant which are not included in the definition of income u/s 2(24)

Subsidy or grant or reimbursement taken into account for determination of actual cost of depreciable asset

Subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by a Central

Govt. or State Govt., as the case may be.


18

(C) Set-off of losses not permissible against unexplained income, investments, money etc.

chargeable under sections 68/69/69A/69B/69C/69D [Section 115BBE]


(i) Under section 115BBE, unexplained cash credits under section 68, unexplained investments under section 69, unexplained money under section 69A, undisclosed investments under section 69B, unexplained expenditure under section 69C and amount borrowed or repaid on hundi under section 69D are taxable at the rate of 30%.

(ii) Further, no deduction in respect of any expenditure or allowance in relation to income referred to in the said sections shall be allowable under any provision of the Income-tax Act, 1961.

(iii) However, there is no specific provision prohibiting set-off of losses against income referred in section 115BBE. This issue was, therefore, the subject matter of litigation, and many Courts have taken a view that losses shall not be allowed to be set-off against income referred to in section 115BBE.

(iv) In order to avoid further litigation and clarify the real intent of law, section 115BBE(2) has been amended to expressly provide that no set off of any loss shall be allowable against income brought to tax under sections 68 or section 69 or section 69A or section 69B or section 69C or section 69D.

(D) Increase in rebate under section 87A


(i) Under section 87A, a rebate of an amount equal to 100% of income-tax or an amount

of ` 2,000, whichever is less, is allowed from the amount of income-tax payable by an

individual resident in India whose total income does not exceed ` 5 lakh.

(ii) In order to provide further relief to resident individuals in the lower income slab,

section 87A has been amended to increase the maximum amount of rebate

available under this provision from existing ` 2,000 to ` 5,000 from A.Y.2017-18.

` 2,000 (upto A.Y.2016-17)

` 5,000(from A.Y.2017-18)

Rebate under section 87A


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2 RESIDENCE AND SCOPE OF TOTAL INCOME


(A) No income deemed to accrue or arise in India to a foreign mining company through or

from the activities which are confined to display of uncut and unassorted diamonds in

a Special Notified Zone [Explanation 1 to section 9(1)(i)]

Effective from: A.Y. 2016-17

(i) Scope of total income of a non-resident

The scope of total income of a non-resident is provided under section 5(2). It includes

all income which accrues or arises in India or which is deemed to accrue or arise in

India or is received or is deemed to be received in India.

(ii) Income accruing through business connection: Deemed to accrue or arise in

India

Section 9 provides circumstances under which income is deemed to accrue or arise in

India. As per section 9(1)(i), all income accruing, whether directly or indirectly, through

or from a business connection in India is deemed to accrue or arise in India.

(iii) Possible creation of business connection on account of display of rough

diamonds by foreign mining companies (FMCs) to India : A matter of concern for

FMCs

In order to ease shifting of operations by FMCs to India and to allow the trading of rough

diamonds in India by the leading diamond mining companies of the world, a “Special

Notified Zone” (SNZ) has been created. Since the activity of mere display of rough

diamonds even with no actual sale taking place in India may lead to creation of business

connection in India of the FMC, the probable tax consequence has been a matter of

concern for the mining companies contemplating to undertake these activities in India.

(iv) No income shall be deemed to accrue or arise in India from activities confined to

display of rough diamonds in SNZs: Insertion of new clause (e) in Explanation 1

to section 9(1)(i)

In order to facilitate the FMCs to undertake activity of display of uncut diamond (without

any sorting or sale) in the SNZ, clause (e) has been inserted in Explanation 1 to section

9(1)(i) to provide that in the case of a foreign company engaged in the business of


20

mining of diamonds, no income shall be deemed to accrue or arise in India to it through

or from the activities which are confined to display of uncut and unassorted diamonds in

any special zone notified by the Central Government in the Official Gazette in this

behalf.

(B) Deferral of applicability of POEM based residence test and incorporation of transition

mechanism for a company incorporated outside India and which has not earlier been

assessed to tax in India [Section 6(3)]

Related amendment in section: 115JH


(i) Determination of residential status of a company, other than an Indian company:

Certain concerns:

(1) Under section 6(3), conditions to be satisfied by a company, to be a resident in

India for a previous year are provided.

(2) A company is said to be resident in India in any previous year, if-

(a) it is an Indian company; or

(b) during that year, the control and management of its affairs is situated wholly

in India.

(3) Since the condition for a company to be resident was that the whole of control and

management should be situated in India and that too for whole of the year, a

company could easily avoid becoming a resident by simply holding a board

meeting outside India. The existing provision gave scope for creation of shell

companies which were incorporated outside but controlled from India.

(ii) Place of effective management: Globally recognized concept for determination of

residence of a foreign company

(1) 'Place of effective management' (POEM) is a globally recognized concept for

determination of residence of a company incorporated in a foreign jurisdiction. The

concept of 'place of effective management' for determination of residence of a

company as a tie-breaker rule for avoidance of double taxation is recognised by

many of the tax treaties entered into by India. The Organisation of Economic

Cooperation and Development (OECD) also recognises the principle of POEM.

(2) The place of effective management has been defined in the OECD commentary on

model convention to mean a place where key management and commercial

decisions that are necessary for the conduct of the entity's business as a whole, are,

in substance, made.

(iii) Incorporation of concept of POEM in the Income-tax Act, 1961

(1) Incorporation of the concept of POEM in the Income-tax Act, 1961 to determine the

residence of a company would be in line with international standards. It would also


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The company is

a non-resident

for the relevant

P.Y.

The company

is a resident in

India for the

relevant P.Y.

Is the company an

Indian company?

Whether POEM of the company is in India in the relevant

P.Y

No No

Yes Yes

help in aligning the provisions of the Act with the Double Taxation Avoidance

Agreements (DTAAs) entered into by India with other countries.

(2) This requirement would also discourage the creation of shell companies outside

India but being controlled and managed from India.

(3) Accordingly, section 6(3) was substituted by the Finance Act, 2015 with effect from

A.Y.2016-17 to provide that a company would be resident in India in any previous

year, if-

(i) it is an Indian company; or

(ii) its place of effective management, in that year, is in India .

Explanation to section 6(3) defines “place of effective management” to mean a

place where key management and commercial decisions that are necessary for

the conduct of the business of an entity as a whole are, in substance made.

Determination of residential status of a company

(iv) Implementation of concept of POEM for determining residential status of foreign

companies: Certain concerns

(1) In order to address the concerns regarding the applicability of provisions of the

Income-tax Act, 1961 to a company which is incorporated outside India and has

not earlier been assessed to tax in India, the applicability of POEM has been

deferred by one year i.e., from A.Y.2016-17 to A.Y.2017-18. Particularly, the

issues concerning the applicability of specific provisions of the Income-tax Act,

1961 on advance tax payment, TDS provisions, computation of total income, set

off of losses and manner of application of transfer pricing regime have to be

addressed, since they are in the nature of compliance requirements which would


22

not have been undertaken by the company at the relevant point of time on account

of absence of any such requirement under tax laws of country of incorporation of

such company. Likewise, issues relating to depreciation computation also arise

when in earlier years it has not been subject to computation under the Income-tax

Act, 1961.

(2) It is also possible that a company may be claiming to be a foreign company not

resident in India. However, in the course of assessment, it may be held to be

resident based on POEM being in fact in India. This assessment would be well

after closure of the previous year and it may not be possible for company to

undertake many of procedural requirements.

(v) Deferral of applicability of POEM-based residence test by one year and putting in

place requisite transition mechanism

Therefore, so as to ensure clarity in respect of implementation of POEM based rule of

residence and to address concerns of the stakeholders, the Finance Act, 2016 has

provided the following : -

(1) Deferral of applicability of POEM-based residence test by one year [Section

6(3)]

The applicability of POEM based residence test has been deferred by one year

and the determination of residence based on POEM shall be applicable from

A.Y.2017-18.

(2) Transition Mechanism for a company incorporated outside India and has not

been assessed to tax earlier [New Chapter XII-BC – Section 115JH]

A transition mechanism for a company which is incorporated outside India and has

not earlier been assessed to tax in India has been provided by insertion of Chapter

XII-BC comprising of section 115JH.

(a) Accordingly, the Central Government is empowered to notify exception,

modification and adaptation subject to which, the provisions of the Act

relating to computation of income, treatment of unabsorbed depreciation, set-

off or carry forward and set off of losses, special provision relating to

avoidance of tax and the collection and recovery of taxes shall apply in a

case where a foreign company is said to be resident in India due to its POEM

being in India for the first time and the said company has never been resident

in India before.

(b) In a case where the determination regarding foreign company to be resident

in India has been made in the assessment proceedings relevant to any

previous year, then, these transition provisions would also cover any

subsequent previous year, if the foreign company is resident in India in that

previous year and the previous year ends on or before the date on which

such assessment proceeding is completed. In effect, the transition provisions

would also cover any subsequent amendment upto the date of determination


23

of POEM in an assessment proceeding. However, once the transition is

complete, then, normal provisions of the Act would apply.

(c) In the notification issued by the Central Government, certain conditions

including procedural conditions subject to which these adaptations shall apply

can be provided for and in case of failure to comply with the conditions, the

benefit of such notification would not be available to the foreign company.

Accordingly, where in a previous year, any benefit, exemption or relief has

been claimed and granted to the foreign company in accordance with the

notification, and subsequently, there is failure to comply with any of the

conditions specified therein, then –

(i) the benefit, exemption or relief shall be deemed to have been wrongly

allowed;

(ii) the Assessing Officer may re-compute the total income of the assessee

for the said previous year and make the necessary amendment as if the

exceptions, modifications and adaptations as per the notification does

not apply; and

(iii) the provisions of section 154 shall, so far as may be, apply thereto and

the period of four years for rectification of mistake apparent from the

record has to be reckoned from the end of the previous year in which

the failure to comply with the condition stipulated in the notification

takes place.

(d) Every notification issued in exercise of this power by the Central Government

shall be laid before each house of the Parliament.

Example

ABC Inc., a Swedish company headquartered at Stockholm, not having a permanent

establishment in India, has set up a liaison office in Mumbai in April, 2016 in compliance with

RBI guidelines to look after its day to day business operations in India, spread awareness

about the company’s products and explore further opportunities. The liaison office takes

decisions relating to day to day routine operations and performs support functions that are

preparatory and auxiliary in nature. The significant management and commercial decisions

are, however, in substance made by the Board of Directors at Sweden. Determine the

residential status of ABC Inc. for A.Y.2017-18.

Answer

Section 6(3) has been substituted by the Finance Act, 2016 with effect from A.Y.2017-18

to provide that a company would be resident in India in any previous year, if -

(i) it is an Indian company; or

(ii) its place of effective management, in that year, is in India .

In this case, ABC Inc. is a foreign company. Therefore, it would be resident in India for

P.Y.2016-17 only if its place of effective management, in that year, is in India.


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Explanation to section 6(3) defines “place of effective management” to mean a place

where key management and commercial decisions that are necessary for the conduct of

the business of an entity as a whole are, in substance made. In the case of ABC Inc., its

place of effective management for P.Y.2016-17 is not in India, since the significant

management and commercial decisions are, in substance, made by the Board of

Directors outside India in Sweden.

ABC Inc. has only a liaison office in India through which it looks after its routine day to

day business operations in India. The place where decisions relating to day to day

routine operations are taken and support functions that are prepara tory or auxiliary in

nature are performed are not relevant in determining the place of effective management.

Hence, ABC Inc., being a foreign company is a non-resident for A.Y.2017-18, since its

place of effective management is outside India in the P.Y.2016-17.

(C) Special Taxation Regime for offshore funds: Modification of certain conditions

[Section 9A]


(i) Under section 9A, a special regime has been provided in respect of offshore funds.

(ii) In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund.

(iii) Further, an eligible investment fund shall not be said to be resident in India merely because the eligible fund manager undertaking fund management activities on its behalf is located in India.

(iv) The benefit under section 9A is available subject to satisfaction of the conditions provided in, inter-alia, section 9A(3), for the eligibility of the fund. These conditions relate to residence of fund, corpus size, investor base, investment diversification and payment of remuneration to fund manager at arm's length.

(v) However, there are instances where a fund may not qualify as a tax resident of a country on account of domestic tax laws or legal framework of the country. The legal and regulatory framework of the country of incorporation of funds forms the basis for their global structure and the same cannot be modified in respect of any investment made in a specific country. For example, large pension funds or mutual funds from USA or SICAVs (open ended collective investment schemes) from Luxembourg. India would still be able to collect information regarding fund under the applicable DTAA or TIEA as under the agreements with many of the countries, information can be exchanged in respect of persons who may not be resident of the country. Further, the conditions relating to restriction on fund carrying on business or controlling fund managing business in India or from India restricts the flexibility of operation for funds and focus should be on nature of activities undertaken in India.

Accordingly, the following amendments have been made in section 9A by the Finance Act, 2016:


25

Condition Existing Provision Amendment by the Finance Act, 2016

(1) Residence

[Clause (b) of section 9A(3)]

The Eligible Investment Fund has to be resident of a country or specified territory with which India has entered into a Double Taxation Avoidance Agreement (DTAA) or Tax Information Exchange Agreement (TIEA).

The Eligible Investment Fund shall also mean a fund established or incorporated or registered outside India in a country or a specified territory notified by the Central Government in this behalf.

(2) Activities

[Clause (k) of section 9A(3)]

The fund shall not carry on or control and manage, directly or indirectly, any business in India or from India.

Note – Further, the Fund shall neither engage in any activity which constitutes a business connection in India nor have any person acting on its behalf whose activities constitute a business connection in India other than the activities undertaken by the eligible fund manager on its behalf. This is provided in clause (l) of section 9A(3).

The condition of fund not controlling and managing any business in India or from India shall be restricted only in the context of activities in India and will not apply in respect of activities from India. Accordingly, clause (k) of section 9A(3) has been amended to provide that the fund shall not carry on or control and manage, directly or indirectly, any business in India.

SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Basis for determining the period of stay in India for an Indian citizen, being a

member of the crew of a foreign bound ship leaving India [Notification No. 70/2015,

dated 17.8.2015]

Section 6(1) of the Income-tax Act, 1961 provides that an individual is said to be resident

in India in any previous year, if he—

(a) is in India in that year for a period or periods amounting in all to 182 days or more; or

(b) having within the four years preceding that year been in India for a period or periods

amounting in all to 365 days or more, is in India for a period or periods amounting in

all to 60 days or more in that year.


26

However, where an Indian citizen leaves India as a member of crew of an Indian ship or

for the purpose of employment outside India, he will be resident only if he stayed in India

for 182 days during the previous year.

Thus, under section 6(1), the conditions to be satisfied by an individual to be a resident in

India are provided. The residential status is determined on the basis of the number of

days of his stay in India during a previous year.

However, in case of foreign bound ships where the destination of the voyage is

outside India, there is uncertainty regarding the manner and the basis of determining

the period of stay in India for an Indian citizen, being a crew member .

To remove this uncertainty, Explanation 2 has been inserted to section 6(1) to provide that

in the case of an individual, being a citizen of India and a member of the crew of a foreign

bound ship leaving India, the period or periods of stay in India shall, in respect of such

voyage, be determined in the prescribed manner and subject to the prescribed conditions.

Accordingly, the CBDT has, in exercise of the powers conferred by Explanation 2 to

section 6(1) read with section 295, vide this notification, with retrospective effect from 1st

April, 2015, inserted Rule 126 in the Income-tax Rules, 1962 to compute the period of

stay in such cases.

According to Rule 126, in case of an individual, being a citizen of India and a member of

the crew of a ship, the period or periods of stay in India shall, in respect of an eligible

voyage, not include the period commencing from the date entered into the Continuous

Discharge Certificate in respect of joining the ship by the said individual for the eligible

voyage and ending on the date entered into the Continuous Discharge Certificate in

respect of signing off by that individual from the ship in respect of such voyage.

The Explanation to this Rule defines the meaning of the following terms:

Terms Meaning

Continuous Discharge Certificate

This term has the meaning assigned to it in the Merchant Shipping (Continuous Discharge Certificate-cum-Seafarer's Identity Document) Rules, 2001 made under the Merchant Shipping Act, 1958.

Eligible voyage A voyage undertaken by a ship engaged in the carriage of passengers or freight in international traffic where-

(i) for the voyage having originated from any port in India, has as its destination any port outside India; and

(ii) for the voyage having originated from any port outside India, has as its destination any port in India.

Example

Mr. Anand is an Indian citizen and a member of the crew of a Singapore bound Indian

ship engaged in carriage of passengers in international traffic departing from Chennai

port on 6th June, 2016. From the following details for the P.Y.2016-17, determine the


27

residential status of Mr. Anand for A.Y.2017-18, assuming that his stay in India in the last

4 previous years (preceding P.Y.2016-17) is 400 days and last seven previous years

(preceding P.Y.2016-17) is 750 days:

Particulars Date

Date entered into the Continuous Discharge Certificate in respect of joining the ship by Mr. Anand

6th June, 2016

Date entered into the Continuous Discharge Certificate in respect of signing off the ship by Mr. Anand

9th December, 2016

Answer

In this case, the voyage is undertaken by an Indian ship engaged in the carriage of passengers in international traffic, originating from a port in India (i.e., the Chennai port) and having its destination at a port outside India (i.e., the Singapore port). Hence, the voyage is an eligible voyage for the purposes of section 6(1). Therefore, the period beginning from 6th June, 2016 and ending on 9 th December, 2016, being the dates entered into the Continuous Discharge Certificate in respect of joining the ship and signing off from the ship by Mr. Anand, an Indian citizen who is a member of the crew of the ship, has to be excluded for computing the period of his stay in India. Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded from the period of his stay in India. Consequently, Mr. Anand’s period of stay in India during the P.Y.2016 -17 would be 178 days [i.e., 365 days – 187 days]. Since his period of stay in India during the P.Y.2016-17 is less than 182 days, he is a non-resident for A.Y.2017-18.

Note - Since the residential status of Mr. Anand is “non-resident” for A.Y.2017-18 consequent to his number of days of stay in P.Y.2016-17 being less than 182 days, his period of stay in the earlier previous years become irrelevant.


28

3 INCOMES WHICH DO NOT FORM PART OF

TOTAL INCOME


(A) Exemption under section 10(34) not to apply to dividend chargeable to tax in

accordance with section 115BBDA


(i) Section 10(34) exempts dividend received by a shareholder of a domestic company, since the same is subject to dividend distribution tax (DDT) under section 115-O.

(ii) Under section 115-O, dividends distributed by a domestic company are subject to tax@ 15% at the time of distribution in the hands of company declaring dividend. This may result in vertical inequity amongst the tax payers since dividend distributed to those shareholders (who receive high dividend) are subject to tax only at the rate of 15% whereas had such income been taxable in their hands directly, the same would have been subject to tax at the rate of 30%.

(iii) In order to remove this vertical inequity, section 115BBDA has been inserted to provide that any income by way of aggregate dividend in excess of ` 10 lakh shall be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm who is resident in India, at the rate of 10%.

(iv) Further, the taxation of dividend income in excess ` 10 lakh shall be on gross basis i.e., no deduction in respect of any expenditure or allowance or set -off of loss shall be allowed to the assessee in computing the income by way of dividends.

(v) Accordingly, a proviso has been inserted in section 10(34) to provide that the exemption available thereunder in respect of dividend received by a shareholder from a domestic company would not apply to income by way of dividend chargeable to tax under section 115BBDA.

Example

A Ltd., a domestic company, declared dividend of ` 170 lakh for the year F.Y.2015-16 and distributed the same on 10.7.2016. Mr. X, holding 10% shares in A Ltd., receives dividend of ` 17 lakh in July, 2016. Mr. Y, holding 5% shares in A Ltd., receives dividend of ` 8.50 lakh. Discuss the tax implications in the hands of A Ltd., Mr.X and Mr.Y,


29

assuming that Mr.X and Mr.Y have not received dividend from any other domestic company during the year.

Solution

(i) The dividend of ` 170 lakh declared and distributed in the P.Y.2016-17 is subject to dividend distribution tax under section 115-O in the hands of A Ltd. First of all, the dividend received has to be grossed up by applying the rate of 15%. The gross dividend is ` 200 lakh [` 170 lakh × 100/85]. Dividend distribution tax @17.304% is ` 34.608 lakh.

(ii) In the hands of Mr. X, dividend received upto ` 10 lakh would be exempt under section 10(34). ` 7 lakh, being dividend received in excess of ` 10 lakh, would be taxable@10% as per section 115BBDA. Such dividend would not be exempt under section 10(34). Therefore, tax payable by Mr. X on dividend of ` 7 lakh under section 115BBDA would be ` 72,100 [i.e., 10% of ` 7 lakh + cess@3%].

(iii) In the hands of Mr. Y, the entire dividend of ` 8.50 lakh received would be exempt under section 10(34), since only dividend received in excess of ` 10 lakh would be taxable under section 115BBDA.

(B) Exemption of income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India [Section 10(48A)]


(i) As per section 5(2), the scope of total income of a non-resident includes only the income which accrues or arises in India or is deemed to accrue or arise in India or is received in India or is deemed to be received in India.

(ii) Section 9 lists the circumstances in which the income is deemed to accrue or arise in India. Section 9(1)(i) provides that income would be deemed to accrue or arise in India if any income accrues or arises, directly or indirectly, through or from a business connection in India.

(iii) An underground storage facility is being set up by the Indian Strategic Petroleum Reserves Limited for storage of crude oil as part of strategic reserves. It is in the country’s national interest to maintain the strategic reserves. Further, it also guarantees price stability for Indian oil companies. However, heavy financial burden arises on account of the filling cost of such facility.

(iv) In order to address this concern, the Government is considering meeting a significant portion of the financial burden through participation of private players including foreign national oil companies (NOCs) and multinational companies (MNCs). However, the activities of storage of crude oil by such foreign companies and its sale in India would result in business connection and hence, such income would be deemed to accrue or arise in India. Resultantly, these entities would be subject to tax in India.

(v) For achieving tax neutrality to encourage the NOCs & MNCs to store their crude oil in India and to build up strategic oil reserves, clause (48A) has been inserted in


mailto:[email protected]%25

30

section 10 to exempt any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil therefrom to any person resident in India, if, -

(1) such storage and sale by the foreign company is pursuant to an agreement or an arrangement entered into by the Central Government or approved by the Central Government; and

(2) having regard to the national interest, the foreign company and the agreement or arrangement are notified by the Central Government in this behalf.

(C) Exemption of interest on deposit certificates issued under the Gold Monetization Scheme, 2015 [Section 10(15)(vi)]

Related amendment in section: 2(14)


(i) Sub-clause (vi) of section 10(15) exempts interest on Gold Deposit Bonds issued under Gold Deposit Scheme, 1999 notified by the Central Government. These bonds are also excluded from the definition of capital asset under section 2(14) and therefore, transfer of such bonds is exempt from capital gains tax.

(ii) The Government of India has now introduced the Gold Monetization Scheme, 2015.

(iii) For the purpose of extending the tax benefits available under the Gold Deposit Scheme, 1999 to this scheme –

(1) Section 10(15)(vi) has been amended to provide that the interest on Deposit Certificates issued under the Scheme, shall be exempt from income-tax.

(2) Section 2(14) has been amended to specifically exclude Deposit Certificates issued under Gold Monetisation Scheme, 2015 notified by the Central Government from the definition of capital asset. Consequently, transfer of the same would be exempt from capital gains tax.

(D) Payment from NPS Trust to an employee on closure of his account or on his opting out of the pension scheme exempt to the extent of 40% of such payment [Section 10(12A)]


(i) Currently, under the Income-tax Act, 1961, the tax treatment for the National Pension System (NPS) referred to in section 80CCD is Exempt, Exempt and Tax (EET). This implies that –

(1) the monthly/periodic contributions during the pension accumulation phase are allowed as deduction from income for tax purposes;

(2) the returns generated on these contributions during the accumulation phase are also exempt from tax;

(3) However, the terminal benefits on exit or superannuation, in the form of lump sum withdrawals, are taxable in the hands of the individual subscriber or his nominee in the year of receipt of such amounts.


31

(ii) As per section 80CCD, any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme is chargeable to tax.

(iii) New clause (12A) has been inserted in section 10 to provide that any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed 40% of the total amount payable to him at the time of closure or his opting out of the scheme, shall be exempt from tax.

(iv) However, the whole amount received by the nominee, on death of the assessee shall be exempt from tax.


1. Investment in Stock Certificate as defined in the Sovereign Gold Bonds Scheme,

2015 notified as eligible form of investment by a charitable trust [Notification No.

21/2016, dated 23-03-2016]

Section 11(2)(b) provides that where 85% of the income is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided, inter alia, the money so accumulated or set apart is invested or deposited in the forms or modes as specified in section 11(5).

Rule 17C provides for the various forms or modes of investment or deposits by a charitable or religious trust or institution. The CBDT has, vide this notification, amended Rule 17C to insert clause (ix) to include Investment in “Stock Certificate” [as defined in clause (c) of paragraph 2 of the Sovereign Gold Bonds Scheme, 2015, published in the Official Gazette vide notification number G.S.R. 827(E), dated 30th October, 2015] as an eligible form/mode of investment.

2. News agency notified for the purpose of section 10(22B) [Notification No. 72/2015,

dated 24.8.2015]

Section 10(22B) provides that any income of a news agency set up in India solely for collection and distribution of news as the Central Government may notify shall be exempt, subject to the condition that such news agency applies its income or accumulates it for application solely for collection and distribution of news and does not distribute its income in any manner to its members.

Accordingly, the Central Government has, through this notification, specified the Press Trust of India Limited, New Delhi as a news agency set up in India solely for collection and distribution of news, for the purpose of section 10(22B) for three assessment years 2016-17 to 2018-19. The income of such news agency will not be included in computing the total income of a previous year of such agency for these three years, provided it applies its income or accumulates it for application solely for collection and distribution of news and does not distribute its income in any manner to its members.


32

5 INCOME FROM HOUSE PROPERTY


(A) Extension of period for completion of construction from 3 years to 5 years, for

claiming higher deduction of upto ` 2 lakh in respect of interest on capital borrowed

for construction of self-occupied house property


(i) Section 24(b) provides that interest payable on capital borrowed for acquisition or

construction of a house property shall be deducted while computing income from

house property.

(ii) In case of self-occupied house property, the annual value is Nil as per section 23(2).

(iii) However, a deduction of an amount of upto ` 2 lakh is allowed under section 24 in

respect of interest on capital borrowed on or after 1st April, 1999 for acquisition or

construction of a house property for the purpose of self-occupation, where such

acquisition or construction is completed within three years from the end of the

financial year in which capital was borrowed.

(iv) Since housing projects are taking a longer time for completion, a higher deduction

of upto ` 2 lakh on account of interest paid on capital borrowed for acquisition or

construction of a self-occupied house property shall be available if the acquisition or

construction is completed within five years from the end of the financial year in

which capital was borrowed.

Time period for completion of construction (from the end of the financial year

in which capital was borrowed)

5 years

(from A.Y.2017-18)

3 years

(upto A.Y.2016-17)


33

(B) Special provision for arrears of rent and unrealized rent received subsequently [New Section 25A]


(i) At present, section 25AA contains the special provisions on taxation of unrealised rent allowed as deduction when realised subsequently and section 25B contains the tax treatment of arrears of rent received.

(ii) These two provisions are now merged in new section 25A, in order to ensure uniformity in tax treatment of arrears of rent and unrealised rent. Thus, new section 25A substitutes erstwhile sections 25A, 25AA and 25B.

(iii) As per new section 25A(1), the amount of rent received in arrears from a tenant or the amount of unrealised rent realised subsequently from a tenant by an assessee shall be deemed to be income from house property in the financial year in which such rent is received or realised, and shall be included in the total income of the assessee under the head “Income from house property”, whether the assessee is the owner of the property or not in that financial year.

(iv) Summary:

New section 25A(2) provides a deduction of 30% of arrears of rent or unrealised rent realised subsequently by the assessee.

New Section 25A

Arrears of Rent / Unrealised Rent

(i) Taxable in the year of receipt/realisation

(ii) Deduction@30% of rent received/realised

(iii) Taxable even if assessee is not the owner of the property in the financial year of receipt/realisation.

Example

Mr. Anand sold his residential house property in March, 2016.

In June, 2016, he recovered rent of ` 10,000 from Mr. Gaurav, to whom he had let out his house for two years from April 2010 to March 2012. He could not realise two months rent of ` 20,000 from him and to that extent his actual rent was reduced while computing income from house property for A.Y.2012-13.

Further, he had let out his property from April, 2012 to February, 2016 to Mr. Satish. In April, 2014, he had increased the rent from ` 12,000 to ` 15,000 per month and the same was a subject matter of dispute. In September, 2016, the matter was finally settled and Mr. Anand received ` 69,000 as arrears of rent for the period April 2014 to February, 2016.

Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr. Anand, and if so in which year?


34

Solution

Since the unrealised rent was recovered in the P.Y.2016-17, the same would be taxable in the A.Y.2017-18 under section 25A, irrespective of the fact that Mr. Anand was not the owner of the house in that year. Further, the arrears of rent was also received in the P.Y.2016-17, and hence the same would be taxable in the A.Y.2017-18 under section 25A, even though Mr. Anand was not the owner of the house in that year. A deduction of 30% of unrealised rent recovered and arrears of rent would be allowed while computing income from house property of Mr. Anand for A.Y.2017-18.

Computation of income from house property of Mr. Anand for A.Y.2017-18

Particulars `

(i) Unrealised rent recovered 10,000

(ii) Arrears of rent received 69,000

79,000

Less: Deduction@30% 23,700

Income from house property 55,300


35

6 PROFITS AND GAINS OF BUSINESS OR

PROFESSION


(A) Non-compete fee received/receivable for not carrying on a profession chargeable

under the head “Profits and gains of business or profession” [Section 28(va)]

Related amendment in section: 55


(i) Section 28(va) brings to tax any sum received or receivable, in cash or in kind,

under an agreement for not carrying out any activity in relation to any business; or

not sharing any know-how, patent, copyright, trade mark, licence, franchise or any

other business or commercial right of similar nature or information or technique

likely to assist in the manufacture or processing of goods or provision for services

as business income.

(ii) The proviso to section 28(va) clarifies that receipts for transfer of right to

manufacture, produce or process any article or thing or right to carry on any

business, which are chargeable to tax under the head "Capital gains", would not be

taxable as profits and gains of business or profession.

(iii) However, so far, non-compete fee received/receivable for not carrying on a

profession was not covered under these provisions.

(iv) Clause (va) of section 28 has been amended to bring the non-compete fee

received/receivable (which are recurring in nature) in relation to not carrying out any

profession, within the scope of profits and gains of business or profession.

(v) Further, the proviso to section 28(va) has been amended to clarify that receipts for

transfer of right to carry on any profession, which are chargeable to tax under the

head "Capital gains", would not be taxable as profits and gains of business or

profession.

(vi) Any receipt arising out of transfer of any business or commercial rights is taxable

under the head "Capital gains". The amount of capital gains chargeable to tax is


36

computed according to section 48. For this purpose, 'cost of acquisition' and 'cost of

improvement' are defined under section 55.

(vii) Section 55 has also been amended to provide that, for the purposes of sections 48

and 49, the cost of acquisition and cost of improvement in relation to a capital asset,

being right to carry on any profession, shall also be taken as Nil. However, in the

case of acquisition of such asset by the assessee by purchase from a previous

owner, the amount of purchase price would be the cost of acquisition for the

purpose of section 48 and 49.

(B) Assessees engaged in the business of transmission of power eligible for additional depreciation [Section 32(1)(iia)]


(i) Section 32(1)(iia) allows additional depreciation@20% in respect of the cost of new plant or machinery acquired and installed by certain assessees engaged in , inter alia, the business of generation and distribution of power .

(ii) This additional depreciation available under section 32(1)(iia) is over and above the deduction allowed for normal depreciation under section 32(1)(ii) at the rates specified in new Appendix 1A read with Rule 5.

(iii) This incentive was so far not available in respect of new machinery or plant installed by an assessee engaged in the business of transmission of power.

(iv) The benefit of additional depreciation@20% of actual cost of new machinery or plant acquired and installed in a previous year under section 32(1)(iia) has now been extended to an assessee engaged in the business of transmission of power also.

Businesses eligible for claim of additional depreciation under section 32(1)(iia)


37

(C) Deduction under section 32AC to be available in the year of installation in respect

of actual cost of new plant and machinery acquired in the P.Y.2015-16 and

P.Y.2016-17, if the actual cost of such new plant and machinery acquired in the

relevant previous year exceeds ` 25 crores, even if the new plant and machinery

has not been installed in the relevant previous year but has been installed on or

before 31.3.2017


(i) Section 32AC(1A) provides for deduction@15% of actual cost of new plant and

machinery acquired and installed in a previous year by a company engaged in

manufacturing or production of any article or thing, if the actual cost exceeds ` 25

crore. However, for claim of deduction, the acquisition and installation had to be

done in the same previous year.

(ii) This tax benefit is available in respect of new plant and machinery acquired and

installed in the P.Y.2014-15, P.Y.2015-16 and P.Y.2016-17, provided the actual cost

of plant and machinery acquired and installed in the relevant previous year exceeds

` 25 crore.

(iii) The requirement of acquisition and installation in the year causes genuine hardship

in cases in which assets having been acquired could not be installed in same

previous year.

(iv) Therefore, section 32AC(1A) has been amended to provide that acquisition of the

plant and machinery, the actual cost of which exceeds ` 25 crore, has to be made

in the relevant previous year. However, installation may be made by 31.03.2017 in

order to avail the benefit of deduction of 15%.

Upto A.Y.2016-17

Manufacture or production of an article or thing

Generation or generation and distribution of

power

From A.Y.2017-18

Manufacture or production of an article

or thing

Generation, transmission or

distribution of power


38

(v) Where the installation of the new asset is in a year other than the year of

acquisition, the deduction under this sub-section shall be allowed in the year in

which the new asset is installed, provided the installation is on or before 31.3.2017.

Example

Co

mp

an

y Actual cost

of new plant and

machinery (` )

Previous year of

acquisition

Previous Year of

installation

Assessment Year in which deduction u/s 32AC can be

claimed

Deduction u/s 32AC

(` )

B Ltd. 40 crores P.Y.2015-16 P.Y.2016-17 A.Y.2017-18 6 crores

C Ltd. 50 crores P.Y.2016-17 P.Y.2016-17 A.Y.2017-18 7.50 crores

D Ltd. 60 crores P.Y.2016-17 P.Y.2017-18 - -

(D) Phasing out of incentives under the Income-tax Act, 1961

Effective from : A.Y. 2017-18

(i) The Finance Minister in his Budget Speech, 2015 has indicated that the rate of

corporate tax will be reduced from 30% to 25% over the next four years along with

corresponding phasing out of exemptions and deductions. The Government

proposed to implement this decision in a phased manner.

(ii) Accordingly, the following incentives under the Act are to be phased out in the

manner given hereunder:

Section Incentive under the

Income-tax Act, 1961

Amendment by the Finance Act, 2016

restricting/phasing out the incentive

35 Expenditure on/Contribution for scientific research

35(1)(ii) 175% of sum paid to:

(i) an approved scientific research association which has the object of undertaking scientific research.

(ii) an approved univer-sity, college or other institution, if such sum is used for scientific research.

Weighted deduction to be restricted to –

Rate Period

(i) 150% from P.Y.2017-18 to P.Y.2019-20

(i.e., from A.Y.2018-19 to A.Y.2020-21)

(ii) 100% from P.Y.2020-21 onwards

(i.e., from A.Y.2021-22 onwards)


39

35(1)(iia) 125% of any sum paid as contribution to an Indian company for approved scientific research

Deduction to be restricted to 100% from P.Y.2017-18 (i.e., A.Y.2018-19)

35(1)(iii) 125% of any sum paid as contribution to an approved research association or university or college or other institution to be used for research in social science or statistical research

Deduction to be restricted to 100% from P.Y.2017-18 (i.e., A.Y.2018-19)

35(2AA) 200% of any sum paid to a National Laboratory or a University or an IIT or a specified person for the purpose of approved scientific research programme.


Rate Period

(i) 150% from P.Y.2017-18 to P.Y.2019-20

(i.e., from A.Y.2018-19 to A.Y.2020-21)



35(2AB) 200% of the expenditure (not being expenditure in the nature of cost of any land or building) on scientific research on approved in-house research and development facility incurred by a company, engaged in the business of bio-technology or in the business of manufacture or production of any article or thing with the exceptions of items


Rate Period

(i) 150% from P.Y.2017-18 to P.Y.2019-20

(i.e., from A.Y.2018-19 to A.Y.2020-21)




40

specified in the Eleventh Schedule.

35AC Expenditure on eligible projects or schemes

Deduction for expenditure incurred by way of payment of any sum to a public sector company or a local authority or to an approved association or institution, etc. on certain eligible social development project or a scheme.

No deduction under this section shall be available from P.Y.2017-18 (i.e., from A.Y.2018-19)

35AD Deduction in respect of specified business

In case of specified business of setting up and operating a cold chain facility or warehousing facility for storage of agricultural produce or building and operating a hospital with atleast 100 beds for patients or developing and building an affordable housing project or production of fertiliser in India, weighted deduction@150% of capital expenditure (other than expenditure on land, goodwill and financial assets) is allowed, if the operations are commenced on or after 1.4.2012.

The deduction shall be restricted to 100% of capital expenditure from P.Y.2017-18 onwards (i.e., from A.Y.2018-19 onwards). This is effected by omission of sub-section (1A) providing for such weighted deduction.

35CCC Expenditure on notified agricultural extension project

Weighted deduction of 150% of expenditure incurred on notified agricultural extension project is allowed.

Deduction to be restricted to 100% from P.Y.2020-21 onwards (i.e., from A.Y.2021-22 onwards).


41

35CCD Expenditure on skill development project

Weighted deduction of 150% of any expenditure incurred (not being expenditure in the nature of cost of any land or building) by a company on any notified skill development project is allowed.

Deduction shall be restricted to 100% from P.Y.2020-21 onwards (i.e., from A.Y.2021-22 onwards).

(E) Tax treatment for spectrum fee [New section 35ABA]


(i) Section 32 allows depreciation in respect of assets including certain intangible assets. Section 35ABB provides for amortisation of licence fee in case of telecommunication service.

(ii) The Government has newly introduced spectrum fee for auction of airwaves.

(iii) In order to resolve the uncertainty in tax treatment of payments in respect of spectrum i.e., whether spectrum is an intangible asset and the spectrum fees paid is eligible for depreciation under section 32 or whether it is in the nature of a 'license to operate telecommunication business' and eligible for deduction under section 35ABB, new section 35ABA has been inserted to provide for tax treatment of spectrum fee.

(iv) Tax treatment of spectrum fee [New section 35ABA]

Transaction Manner of deduction

(1) Acquisition of right to use spectrum

Any capital

expenditure incurred

for acquisition of any

right to use spectrum

for telecommunication

services either before

the commencement of

the business or

thereafter at any time

during any previous

year and for which

payment has actually

been made (actual

Appropriate fraction of the amount of such

expenditure [1/total number of relevant previous

years]

Meaning of relevant previous years:

Case Meaning

Where the spectrum

fee is actually paid

before the

commencement of

business to operate

telecommunication

services

The previous years beginning

with the P.Y. in which such

business commenced and the

subsequent P.Y. or P.Y.s

during which the spectrum,

for which the fee is paid, shall

be in force.


42

payment of

expenditure or payable

in the prescribed

manner) to obtain a

right to use spectrum.

In any other case The previous years beginning

with the P.Y. in which the

spectrum fee is actually paid

and the subsequent P.Y. or

years during which the

spectrum, for which the fee is

paid, shall be in force.

(2) Transfer of the spectrum

Case 1: Where the

proceeds of the

transfer are less than

the expenditure

incurred remaining

unallowed

The expenditure remaining unallowed as reduced by

the proceeds of transfer shall be allowed in the

previous year in which the spectrum has been

transferred.

Case 2: Where the

proceeds of the

transfer exceed the

amount of expenditure

remaining unallowed

The excess amount shall be chargeable to tax as

profits and gains of business in the previous year in

which the spectrum has been transferred. However,

the excess should not exceed the difference

between the expenditure incurred to obtain the

spectrum and the amount of expenditure remaining

unallowed.

If the spectrum is transferred in a previous year in

which the business is no longer in existence, the

taxability would arise in the above manner as

though the business is in existence in that previous

year.

Case 3: Where the

proceeds of the

transfer are not less

than the amount of

expenditure incurred

remaining unallowed.

No deduction for such expenditure shall be allowed

in the previous year in which spectrum is transferred

or in respect of any subsequent previous year or

years.

Case 4: Where a part

of the spectrum is

transferred (and the

case is not covered

under Case 2 above)

Unallowed expenses would be amortised in the

following manner –

(i) subtracting the proceeds of transfer from the

expenditure remaining unallowed; and

(ii) dividing the remainder by the number of relevant


43

previous years which have not expired at the

beginning of the previous year during which the

licence is transferred.

(3) Transfer of spectrum in a scheme of amalgamation

If the amalgamating

company sells or

transfers the spectrum

to the amalgamated

company, being an

Indian company under

the scheme of

amalgamation

The provisions of section 35ABA will apply to

amalgamated company as they would have applied

to amalgamating company as if the latter has not

transferred the spectrum.

The tax treatment in cases 1,2 & 3 given in (2)

above will not apply to the amalgamating company.

(4) Transfer of spectrum in a scheme of demerger

If the demerged

company sells or

transfers the spectrum

to the resulting

company, being an

Indian company under

the scheme of

demerger

The provisions of section 35ABA will apply to

resulting company as they would have applied to

demerged company as if the latter has not

transferred the spectrum.

The tax treatment in cases 1,2 & 3 given in (2)

above will not apply to the demerged company.

(v) Consequences of failure to comply with the conditions after grant of deduction:

Where, in a previous year, any deduction has been claimed and granted to an assessee and subsequently, there is failure to comply with any of the provisions of this section, then –

(1) the deduction shall be deemed to have been wrongly allowed;

(2) the Assessing Officer may recompute the total income of the assessee for the said previous year and make the necessary rectification. This is notwithstanding anything contained in the Income-tax Act, 1961;

(3) the provisions under section 154 for rectification of mistake apparent from the record would apply. The period of four years would be reckoned from the end of the previous year in which the failure to comply with the prov isions of section 154 takes place.

(F) Scope of section 35AD expanded to include the business of developing,

maintaining and operating a new infrastructure facility

Related amendment in section: 80-IA


44


(i) The Finance Minister in his Budget Speech, 2015 has indicated that the rate of

corporate tax will be reduced from 30% to 25% over the next four years along with

corresponding phasing out of exemptions and deductions. The Government

proposed to implement this decision in a phased manner.

(ii) The profit-linked deduction under section 80-IA(4)(i) available to any enterprise

which develops or operates and maintains a new infrastructure facility is also being

phased out. Accordingly, this deduction would not be available in respect of any

enterprise which starts the development or operation and maintenance of the

infrastructure facility on or after 1st April, 2017.

(iii) However, such enterprise would be eligible for investment-linked tax deduction

under section 35AD –

Section Particulars Provision

(i) 35AD(8)(c) Definition of “Specified business”

The business of developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility has been included in the definition of “specified business”.

(ii) 35AD(8)(ba) Definition of “infrastructure facility”

(i) A road including toll road, a bridge or a rail system.

(ii) A highway project including housing or other activities being an integral part of the highway project.

(iii) A water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system.

(iv) A port, airport, inland waterway, inland port or navigational channel in the sea.

(iii) 35AD(5) Date of commencement of such specified business

On or after 1.4.2017, where the specified business is in the nature of developing or operating and maintaining or developing, operating and maintaining, any infrastructure facility.

(iv) 35AD(2) Conditions to (i) The business should be owned by a


45

be satisfied by such specified business

company registered in India or by a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act.

(ii) The entity should have entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for developing or operating and maintaining or developing, operating and maintaining, a new infrastructure facility.

(G) NBFCs eligible for claim of deduction for provision for bad and doubtful debts [Section 36(1)(viia)]


(i) Under sub-clause (c) of section 36(1)(viia), in computing the profits of public financial institutions, State financial corporations and State industrial investment corporations, deduction of an amount not exceeding 5% of total income, computed before making any deduction under section 36(1)(viia) and Chapter VI-A, is allowed in respect of any provision for bad and doubtful debt.

(ii) Since Non-Banking Financial Companies (NBFCs) are also engaged in financial lending to different sectors of society, sub-clause (d) has been inserted in section 36(1)(viia) to provide deduction on account of provision for bad and doubtful debts of an amount not exceeding 5% of total income (before making any deduction under section 36(1)(viia) and Chapter VI-A) in the case of NBFCs also.

(iii) Meaning of “Non-Banking Financial Company” [Section 45-I (f) of the Reserve

Bank of India Act, 1934]:

(i) a financial institution which is a company

(ii) a non-banking institution which is a company and which has as its principal

business the receiving of deposits, under any scheme or arrangement or in

any other manner, or lending in any manner

(iii) such other non-banking institution or class of such institutions, as the Bank

may, with the previous approval of the Central Government and by

notification in the Official Gazette, specify.

(H) Sum payable to Indian Railways for use of railway assets allowable as deduction in

the year in which the liability to pay such sum is incurred, only if payment is made

on or before the due date of filing of return [Section 43B]


46


(i) Under section 43B, any sum payable by the assessee by way of tax, cess, duty or fee, employer contribution to Provident Fund, etc., is allowable as deduction of the previous year in which the liability to pay such sum was incurred (relevant previous year) if the same is actually paid on or before the due date of furnishing of the return of income irrespective of method of accounting followed by a person.

(ii) In effect, section 43B requires actual payment of tax, cess, duty or fee on or before the due date of filing return of income for claim of deduction in the previous year in which the liability to pay such sum was incurred.

(iii) In order to encourage timely payment of dues to Railways for use of the Railway assets, clause (g) has been inserted in section 43B to expand its scope to include any sum payable by the assessee to the Indian Railways for use of Railway assets, within its ambit.

(I) Increase in threshold limit of gross receipts/turnover under section 44AD of a

business to be eligible for opting the presumptive taxation scheme

Related amendments in sections: 44AA, 44AB and 211


(i) Section 44AD contains the presumptive taxation scheme for an eligible business.

(ii) As per this scheme, where in the case of an eligible assessee engaged in eligible

business having total turnover or gross receipts not exceeding rupees one crore, a sum

equal to 8% of the total turnover or gross receipts, or as the case may be, a sum higher

than the aforesaid sum shall be deemed to be profits and gains of such business

chargeable to tax under the head "Profits and gains of business or profession" [Section

44AD(1)]

(iii) Under the scheme, the assessee will be deemed to have been allowed the

deductions under sections 30 to 38.

(iv) Further, if an eligible assessee claims that the income earned by him is less than

the deemed income of 8% of the total turnover or gross receipts, he has to maintain

books of accounts as per section 44AA and get the same audited as per 44AB.

(v) Also, an eligible assessee, as far as eligible business is concerned, is not required

to pay advance tax. It would be sufficient compliance if they pay their tax while filing

their return of income before the due date.

(vi) For the purpose of reducing the compliance burden of the small tax payers and

facilitating the ease of doing business, the threshold limit specified in the definition

of "eligible business" has been increased from ` 1 crore to ` 2 crore.

(vii) Further, expenditure in the nature of salary, remuneration, interest etc. paid to the

partner as per section 40(b) shall not be deductible while computing the income

under section 44AD since section 40 does not mandate for allowance of any


47

expenditure; it merely places a restriction on deduction of amounts, otherwise

allowable under section 30 to 38. Therefore, the proviso to section 44AD(2) has

been omitted.

(viii) Where an eligible assessee declares profit for any previous year in accordance with

the provisions of this section and he declares profit for any of the five consecutive

assessment years relevant to the previous year succeeding such previous year not

in accordance with the provisions of sub-section (1), he shall not be eligible to claim

the benefit of the provisions of this section for five assessment years subsequent to

the assessment year relevant to the previous year in which the profit has not been

declared in accordance with the provisions of sub-section (1). This is provided in

new sub-section (4) of section 44AD.

(ix) An eligible assessee to whom the provisions of sub-section (4) are applicable and

whose total income exceeds the basic exemption limit has to maintain books of

account under section 44AA and get them audited and furnish a report of such audit

under section 44AB. This is provided in new sub-section (5) of section 44AD.

(x) Consequential amendments have been made in sections 44AA and 44AB to require

maintenance of books of account and audit of the same in the case of an eligible

assessee, where the provisions of section 44AD(4) are applicable and his income

exceeds the basic exemption limit.

(xi) Further, since the threshold limit of presumptive taxation scheme has been

enhanced to ` 2 crore, the eligible assessee is now required to pay advance tax by

15th March of the financial year.

(xii) Summary of amendments in section 44AD

Increase in treshold limit of eligible business from Rs.1 crore to Rs.2 crore

Salary, interest, remuneration paid to partner as per section 40(b) not deductible

Advance tax to be paid on or before 15th March of the financial year

In case of non-offering of income as per section 44AD for five continuous years, eligible assessee cannot opt for

section 44AD for the next five AYs after the assessment year of first non-option


48

(xiii) Example:

Let us consider the following particulars relating to a resident individual, Mr. A, being an eligible assessee whose gross receipts do not exceed ` 2 crore in any of the assessment years between A.Y.2017-18 to A.Y.2019-20 -

Particulars A.Y.2017-18 A.Y.2018-19 A.Y.2019-20

Gross receipts (` ) 1,80,00,000 1,90,00,000 2,00,00,000

Income offered for taxation (` ) 14,40,000 15,20,000 12,00,000

% of gross receipts 8% 8% 6%

Offered income as per presumptive taxation scheme u/s 44AD

Yes Yes No

In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under

section 44AD for A.Y.2017-18 and A.Y.2018-19 and offers income of ` 14.40 lakh and

` 15.20 lakh on gross receipts of ` 1.80 crore and ` 1.90 crore, respectively.

However, for A.Y.2019-20, he offers income of only ` 12 lakh on turnover of ` 2

crore, which amounts to 6% of his gross receipts. He maintains books of account

under section 44AA and gets the same audited under section 44AB. S ince he has

not offered income in accordance with the provisions of section 44AD(1) for five

consecutive assessment years, after A.Y.2017-18, he will not be eligible to claim the

benefit of section 44AD for next five assessment years succeeding A.Y.2019-20 i.e.,

from A.Y.2020-21 to 2024-25.

Note – Section 44AB makes it obligatory for every person carrying on business to

get his accounts of any previous year audited if his total sales, turnover or gross

receipts exceed ` 1 crore. However, if an eligible person opts for presumptive

taxation scheme as per section 44AD(1), he shall not be required to get his

accounts audited if the total turnover or gross receipts of the relevant previous year

does not exceed ` 2 crore. The CBDT, has vide its Press Release dated 20th June,

2016, clarified that the higher threshold for non-audit of accounts has been given

only to assessees opting for presumptive taxation scheme under section 44AD.

(J) Presumptive Taxation Scheme for assessees engaged in eligible profession [Section 44ADA]

Related amendment in section: 44AB


(i) Section 44AD provides for a presumptive taxation scheme for eligible persons engaged in eligible business in order to reduce compliance burden of small tax payers.

(ii) For reducing the compliance burden of small tax payers having income from profession, the Finance Act, 2016 has introduced a presumptive taxation regime for professionals.


49

(iii) In this regard, new section 44ADA has been inserted in the Income-tax Act, 1961

providing a presumptive taxation scheme for estimating the income of an assessee:

who is engaged in any profession referred to in section 44AA(1) such as legal,

medical, engineering or architectural profession or the profession of accountancy

or technical consultancy or interior decoration or any other profession as is notified

by the Board in the Official Gazette; and

whose total gross receipts does not exceed fifty lakh rupees in a previous year,

at a sum equal to 50% of the total gross receipts, or, as the case may be , a sum

higher than the aforesaid sum claimed to have been earned by the assessee.

(iv) Meaning of Eligible Assessee:

(v) Under the scheme, the assessee will be deemed to have been allowed the deductions under section 30 to 38. Accordingly, no further deduction under those sections shall be allowed.

(vi) Further, the written down value of any asset used for the purpose of the profession of the assessee will be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of depreciation for the relevant assessment years.

(vii) The eligible assessee opting for presumptive taxation scheme will not be required to keep and maintain books of account under section 44AA(1) and get the accounts audited and furnish a report of such audit as required under section 44AB in respect of such income unless the assessee claims that:

(a) the profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under section 44ADA(1); and

(b) his income exceeds the maximum amount which is not chargeable to income-tax.

(viii) Consequential amendment has been made in section 44AB requiring every person carrying on profession to have his accounts audited by an accountant before the specified date and furnish audit report by that date if such person has claimed lower profits and gains than the deemed profits under section 44ADA and his income exceeds the basic exemption limit.


Eligible Assessees

Resident assessee engaged in notified profession u/s 44AA(1)

Total gross receipts ≤ `50 lakhs


50

1. Certain districts of Bihar notified as backward areas under the first proviso to

section 32(1)(iia) and section 32AD(1) [Notification No. 71/2015, dated 17.8.2015]

In order to encourage the setting up of industrial undertakings in the backward areas of the States of Andhra Pradesh, Bihar, Telangana and West Bengal, section 32AD(1) provides for a deduction of an amount equal to 15% of the actual cost of new plant and machinery acquired and installed in the assessment year relevant to the previous year in which such plant and machinery is installed, if the following conditions are satisfied by the assessee–

(a) the assessee sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1st April, 2015 in any backward area notified by the Central Government in the State of Andhra Pradesh or Bihar or Telangana or West Bengal; and

(b) the assessee acquires and installs new plant and machinery for the purposes of the said undertaking or enterprise during the period between 1st April, 2015 and 31st March, 2020 in the said backward areas.

Further, in order to encourage acquisition and installation of plant and machinery for setting up of manufacturing units in the notified backward areas of the States of Andhra Pradesh, Bihar, Telangana and West Bengal, first proviso has been inserted to section 32(1)(iia) to allow higher additional depreciation at the rate of 35% (instead of 20%) in respect of the actual cost of new machinery or plant (other than a ship and aircraf t) acquired and installed during the period between 1st April, 2015 and 31st March, 2020 by a manufacturing undertaking or enterprise which is set up in the notified backward areas of these specified States on or after 1st April, 2015.

Accordingly, the Central Government has, vide this notification, notified the following 21 districts of the State of Bihar as backward areas under the first proviso to section 32(1)(iia) and section 32AD(1): -

S. No. District S. No. District

1. Patna 12. Samastipur

2. Nalanda 13. Darbhanga

3. Bhojpur 14. Madhubani

4. Rohtas 15. Purnea

5. Kaimur 16. Katihar

6. Gaya 17. Araria

7. Jehanabad 18. Jamui

8. Aurangabad 19. Lakhisarai

9. Nawada 20. Supaul

10. Vaishali 21. Muzaffarpur

11. Sheohar


51

2. Oil wells included in New Appendix I under Mineral Oil concerns under “III. Plant

and Machinery” to be eligible for depreciation@15% [Notification No. 13/2016 dated

03-03-2016]

The CBDT has, vide this notification, included Oil wells as entry (c) under sub-item (xii)

“Mineral Oil concerns” under item (8) of sub-heading III “Plant and Machinery” in new

Appendix I.

The rate of depreciation for oil-wells included as entry (c) is 15%.

The amendment shall come into force on 1st April, 2016.

3. Deduction in respect of cost of production allowable under section 37 in the case

of Abandoned Feature Films [Circular No. 16, dated 6.10.2015]

The deduction in respect of the cost of production of a feature film certified for release by the Board of Film Censors in a previous year is provided in Rule 9A.

In the case of abandoned films, however, since certificate of Board of Film Censors is not received, in some cases no deduction was allowed by applying Rule 9A of the Rules or by treating the expenditure as capital expenditure.

The CBDT has examined the matter in light of judicial decisions on this subject. The order of the Hon’ble Bombay High Court dated 28.1.2015 in ITA 310 of 2013 in the case of Venus Records and Tapes Pvt. Ltd. on this issue has been accepted and the aforesaid disputed issue has not been further contested.

Consequently, it is clarified that Rule 9A does not apply to abandoned feature films and that

the expenditure incurred on such abandoned feature films is not to be treated as a capital

expenditure. The cost of production of an abandoned feature film is to be treated as revenue

expenditure and allowed as per the provisions of section 37 of the Income-tax Act, 1961.

4. Interest from non-SLR Securities of Banks: Whether chargeable under the head

“Profits and gains of business or profession” or “Income from other sources”?

[Circular No. 18, dated 2.11.2015]

The issue addressed by this circular is whether in the case of banks, expenses relatable to investment in non-SLR securities need to be disallowed under section 57(i), by considering interest on non-SLR securities as “Income from other sources."

Section 56(1)(id) provides that income by way of interest on securities shall be chargeable to income-tax under the head "Income from Other Sources", if the income is not chargeable to income-tax under the head "Profits and Gains of Business and Profession".

The CBDT has examined the matter in light of the judicial decisions on this issue. In the

case of CIT v. Nawanshahar Central Cooperative Bank Ltd. (2007) 160 Taxman 48 (SC), the Apex Court held that the investments made by a banking concern are part

of the business of banking. Therefore, the income arising from such investments is

attributable to the business of banking falling under the head "Profits and Gains of

Business and Profession".

5. Allowability of Employer's Contribution to funds for welfare of employees paid


52

after the due date under the relevant Act but before the due date of filing of return

of income under section 139(1) [Circular No.22/2015 dated 17-12-2015]

Under section 43B of the Income-tax Act, 1961, certain deductions are admissible only

on payment basis. The CBDT has observed that some field officers disallow employer's

contributions to provident fund or superannuation fund or gratuity fund or any other fund

for the welfare of employees, by invoking the provisions of section 43B, if it has been

paid after the 'due dates' as per the relevant Acts.

The CBDT has examined the matter in light of the judicial decisions on this i ssue. In the

case of Commissioner vs. Alom Extrusions Ltd, [2009] 185 Taxman 416, the Apex Court

held that the deduction is allowable to the employer assessee if he deposits the

contributions to welfare funds on or before the 'due date' of filing of return of income.

Accordingly, the settled position is that if the assessee deposits any sum payable by it by

way of tax, duty, cess or fee, by whatever name called, under any law for the time being

in force, or any sum payable by the assessee as an employer by way of contribution to

any provident fund or superannuation fund or gratuity fund or any other fund for the

welfare of employees, on or before the 'due date' applicable in his case for furnishing the

return of income under section 139(1), no disallowance can be made under section 43B.

It is further clarified that this Circular does not apply to claim of deduction relating to

employee's contribution to welfare funds which are governed by section 36(1)(va) of the

Income-tax Act, 1961.


53

7 CAPITAL GAINS


(A) Period of holding of unlisted shares to qualify as a long-term capital asset to be reduced from “more than 36 months” to “more than 24 months” [Section 2(42A)]


(i) Section 2(42A) defines a short-term capital asset to mean a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer.

(ii) Section 2(29A) defines a long-term capital asset to mean a capital asset which is not a short-term capital asset. Therefore, a capital asset held by an assessee for more than 36 months immediately preceding the date of its transfer would be a long-term capital asset.

(iii) Third proviso has been inserted in section 2(42A) with effect from A.Y.2017-18 to provide that a share of a company (not being a share listed in a recognized stock exchange in India) would be treated as a short-term capital asset if it was held by an assessee for not more than 24 months immediately preceding the date of its transfer.

(iv) Thus, the period of holding of unlisted shares for being treated as a long-term capital asset has been reduced from “more than 36 months” to “more than 24 months” from A.Y.2017-18.

(B) Total value of assets of a private company or unlisted company not to exceed ` 5 crore in any of the three preceding previous years for exemption of transfer of capital asset or intangible asset on conversion of such company into LLP [Section 47(xiiib)]


(i) Under section 47(xiiib), any transfer of a capital asset or intangible asset on conversion of a private company or unlisted public company to a Limited Liability Partnership (LLP) shall not be regarded as transfer for levy of capital gains tax, on fulfilment of certain conditions.

(ii) The proviso to section 47(xiiib) stipulates the various conditions to be fulfilled for the transaction to not constitute a transfer for the purpose of capital gains. One of the conditions is that the company's gross receipts, turnover or total sales in any of the preceding three previous years should not exceed ` 60 lakh


54

(iii) Clause (ea) has been inserted in the said proviso to stipulate an additional condition for claim of exemption under section 47(xiiib). Accordingly, the total value of assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place, should not exceed ` 5 crore.

(C) Transfer of units by unit holders on consolidation of plans within a mutual fund scheme not to be regarded as transfer [Section 47(xix)]


(i) Exemption for consolidation of mutual fund schemes:

Under section 47(xviii), any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund is not regarded as a transfer and is, hence, not subject to capital gains tax.

(ii) Consolidation of mutual fund plans within a scheme: SEBI guidelines

SEBI has also issued guidelines for consolidation of mutual fund plans within a scheme, on account of which, the tax exemption under section 47, available on merger or consolidation of mutual fund schemes has been extended to the merger or consolidation of different plans in a mutual fund scheme.

(iii) Exemption of transfer of units in the consolidation of Plans within a Mutual Fund scheme: For the purpose of facilitating consolidation of mutual fund plans within a scheme in the interest of the investors and to provide tax neutrality to unit holders upon consolidation or merger of mutual fund plans within a scheme, new clause (xix) has been inserted in section 47.

Accordingly, any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund shall not be considered transfer for capital gain tax purposes.

(iv) Meaning of the following terms:

Term Meaning

Consolidating Plan

The plan within a scheme of a mutual fund which merges under the process of consolidation of the plans within a scheme of mutual fund in accordance with the SEBI (Mutual Funds) Regulations, 1996 made under SEBI Act, 1992.

Consolidated Plan

The plan with which the consolidating plan merges or which is formed as a result of such merger.

Mutual Fund

A mutual fund specified under section 10(23D), i.e.,

(i) a Mutual Fund registered under the SEBI Act, 1992 or regulations made thereunder;


55

(ii) such other Mutual Fund set up by a public sector bank or a public financial institution or authorised by the RBI and subject to conditions notified by the Central Government.

(D) Redemption by an individual of sovereign gold bonds issued by RBI not to constitute transfer for the purpose of levy of capital gains tax [Section 47(viic)]



(i) Sovereign Gold Bond Scheme, 2015

This scheme has been introduced by the Government of India to reduce the demand for physical gold and consequently, reduce the foreign exchange outflow due to import of gold. The two-fold benefit of this scheme are:

(1) The gold bond would serve as a substitute for physical gold; and

(2) The gold bond would provide security to the individual investor investing in gold for meeting their social obligation.

(ii) Redemption by an individual of sovereign gold bonds (SGBs) not to constitute transfer

Section 47 enlists transactions which are not considered as transfer for levy of capital gains.

New clause (viic) has been inserted in section 47 with effect from A.Y.2017-18 to provide that any transfer of sovereign gold bonds issued by RBI under Sovereign Gold Bonds Scheme, 2015, by way of redemption, by an assessee being an individual would not constitute a transfer for the purpose of levy of capital gains tax.

(iii) Benefit of indexation available on LTCG on transfer of SGBs [Third proviso to section 48]

Further, benefit of indexation would be available in respect of long-term capital gains arising from transfer of such sovereign gold bonds.

(iv) Rupee Denominated Bonds (RDBs)

Also, as a measure to enable Indian companies to raise funds from outside India, the RBI has permitted them to issue rupee denominated bonds outside India.

(v) Rupee appreciation gains on redemption of RDBs not to be included in full value of consideration [Fourth proviso to section 48]

Accordingly, in case of non-resident assessees, any gains arising on account of rupee appreciation against foreign currency at the time of redemption of rupee denominated bond of an Indian company subscribed by him shall not be included in computation of full value of consideration. This would provide relief to the non-resident investor who bears the risk of currency fluctuation.


56

(E) Cost of acquisition of asset, whose fair market value has been taken into account for the Income Declaration Scheme, 2016 [Section 49(5)]

Relevant from: A.Y.2017-18

(i) Income Declaration Scheme, 2016: Significant Features

(1) The Income Declaration Scheme, 2016 is contained in the Finance Act, 2016, which received the assent of the President on 14th May 2016. The Scheme provides an opportunity to persons who have paid not full taxes in the past to come forward and declare the undisclosed income and pay tax, surcharge and penalty totalling in all to 45% of such undisclosed income declared.

(2) A declaration under the aforesaid Scheme may be made in respect of any income or income in the form of investment in any asset located in India and acquired from income chargeable to tax under the Income-tax Act, 1961 for any assessment year prior to the assessment year 2017-18 for which the declarant had failed to furnish a return under section 139; or failed to disclose such income in a return furnished before the date of commencement of the Scheme or such income had escaped assessment by reason of the omission or failure on the part of such person to make a return under the Income-tax Act or to disclose fully and truly all material facts necessary for the assessment or otherwise. Where the income chargeable to tax is declared in the form of investment in any asset, the fair market value of such asset as on 1st June, 2016 computed in accordance with Rule 3 of the Income Declaration Scheme Rules, 2016 shall be deemed to be the undisclosed income.

(3) The person making a declaration under the Scheme would be liable to pay tax at the rate of 30% of the value of such undisclosed income as increased by surcharge at the rate of 25% of such tax. In addition, he would also be liable to pay penalty at the rate of 25% of such tax. Therefore, the declarant would be liable to pay a total of 45% of the value of the undisclosed income declared by him. This special rate of tax, surcharge and penalty specified in the Scheme will override any rate or rates specified under the provisions of the Income-tax Act or the annual Finance Acts.

(4) A declaration under the Scheme can be made anytime on or after 1st June, 2016 but before a date to be notified by the Central Government. The Central Government has notified 30th September, 2016 as the last date for making a declaration under the Scheme and 30th November, 2016 as the last date by which the tax, surcharge and penalty mentioned above shall be paid .

(ii) Cost of acquisition of an asset declared under Income Declaration Scheme, 2016

(1) Section 49 of the Income-tax Act, 1961 provides for determination of cost with reference to certain modes of acquisition.

(2) Sub-section (5) has been inserted with effect from A.Y.2017-18 to provide that where capital gain arises from the transfer of asset declared under the Income Declaration Scheme, 2016 and the tax, surcharge and penalty have been paid


http://www.incometaxindia.gov.in/communications/notification/notification33_2016.pdf

http://www.incometaxindia.gov.in/communications/notification/notification33_2016.pdf

57

in accordance with the provisions of the Scheme on the fair market value of the asset as on the date of commencement of the Scheme, the cost of acquisition of the asset shall be deemed to be the fair market value of the asset which has been taken into account for the purposes of the said scheme.

(F) Stamp duty value on the date of agreement may be adopted as full value of consideration of immovable property, being land or building or both, if whole or part of the consideration has been paid by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, on or before the date of the agreement for the transfer of such immovable property [Section 50C]


(i) Adoption of stamp duty value on the date of transfer as full value of consideration under section 50C

Under section 50C, in case of transfer of a capital asset being land or building o r both, the value adopted or assessed by the stamp valuation authority for the purpose of payment of stamp duty shall be taken as the full va lue of consideration for the purposes of computation of capital gains, where the actual consideration is less than such value.

The stamp duty value on the date of transfer has to be considered for the purpose of section 50C.

(ii) Adoption of stamp duty value on the date of agreement as full value of consideration under section 43CA

Section 43CA, which contains a similar provision in case of transfer of land or building or both constituting stock-in-trade of the assessee, permits adoption of stamp duty value on the date of agreement instead of the date of registration, if the date of agreement and the date of registration are not the same and amount of consideration or part thereof has been received by any mode other than cash on or before the date of agreement for transfer of the asset.

(iii) Absence of provision in section 50C to adopt stamp duty value on the date of agreement

The Income Tax Simplification Committee under the chairmanship of Justice Easwar has, in its first report, pointed out that section 50C does not provide any relief where the seller has entered into an agreement to sell the property much before the actual date of transfer of the immovable property and the sale consideration is fixed in such agreement in line with section 43CA.

(iv) Amendment in section 50C to ensure parity in tax treatment vis-a-vis section 43CA

Accordingly, in order to ensure parity in tax treatment, provisos have been inserted in section 50C(1) so as to provide that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purposes of computing the full value of consideration.


58

(v) Condition for adoption of stamp duty value on the date of agreement

However, the stamp duty value on the date of agreement can be adopted only in a case where the amount of consideration, or a part thereof, has been paid by way of an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, on or before the date of the agreement for the transfer of such immovable property.

(G) Exemption of long-term capital gains on investment in notified units of specified fund [New Section 54EE]


(i) Objective:

For incentivising the start-up ecosystem in India, the 'start-up India Action Plan' envisages establishment of a Fund of Funds which intends to raise ` 2,500 crores annually for four years to finance the start-ups.

(ii) Exemption of LTCG invested in units of specified fund:

In order to achieve this objective, new section 54EE has been inserted to provide exemption from capital gains tax if the long term capital gains proceeds are invested by an assessee in units issued before 1st April, 2019 of such fund, as may be

Section 43CA

Transfer of an asset, being land or building or both, held as stock-in-

trade

Stamp duty value on the date of agreement may be adopted as

consideration

Whole or part of consideration should be paid by any mode other than

cash on or before the date of agreement

Section 50C

Transfer of capital asset, being land or building or both.

Stamp duty value on the date of agreement may be adopted as

consideration

Whole or part of consideration should be paid by A/c payee cheque/bank draft or ECS

through a bank A/c on or before the date of agreement


59

notified by the Central Government in this behalf. The lower of the capital gains or the amount so invested would be exempt under section 54EE.

(iii) Quantum of Exemption:

Case Amount exempted

If amount invested in notified units of specified fund ≥ Capital gains

Entire capital gains is exempt

If amount invested in notified units of specified fund < Capital gains

Capital gains to the extent of cost of amount invested in notified units is exempt

(iv) Time limit for investment:

The investment has to be made within 6 months after the date of transfer.

(v) Ceiling limit for investment in units of the specified fund:

The maximum investment in units of the specified fund in any financial year is ` 50 lakh. Further, the investment made by an assessee in the units of specified fund out of capital gains arising from the transfer of one or more capital assets, cannot exceed ` 50 lakh, whether the investment is made in the same financial year or subsequent financial year or partly in the same financial year and partly in the subsequent financial year.

(vi) Conditions for availing exemption:

Conditions

Investment of LTCG in

units of specified

fund

Investment within 6

months from the date of

transfer

Maximum investment is

` 50 lakhs

Units should not be

transferred for a period

of 3 years


60

(vii) Consequence of transfer of units before 3 years :

Where the units are transferred at any time within a period of three years from its acquisition, the capital gains, to the extent exempt earlier, would be chargeable as capital gains in the year of transfer.

(viii) Deemed transfer of notified units:

Further, if the assessee takes any loan or advance on the security of such units, he shall be deemed to have transferred such units on the date on which such loan or advance is taken.

(H) Exemption of long-term capital gains on sale of residential property, where net consideration on sale is invested in shares of an eligible start-up [Section 54GB]


(i) Exemption available under section 54GB so far

Under section 54GB, exemption is available from tax on long term capital gains arising on account of transfer of a residential property, if such capital gains are invested in subscription of shares of a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 , and such subscription is used in purchase of new plant and machinery, which excludes, inter alia, office appliances including computer and computer software.

(ii) Scope of exemption under section 54GB expanded to cover LTCG on sale of residential property invested in shares of eligible start-up company:

In order to encourage individuals/HUF to setup a start-up company by selling a residential property and investing in the shares of such company, section 54GB has been amended to provide that long term capital gains arising on account of transfer of a residential property shall not be charged to tax, if:

(1) the net consideration is invested in subscription of equity shares of a company which qualifies to be an eligible start-up on or before the due date of filing return of income under section 139(1);

(2) the individual or HUF holds more than 50% shares of the company or 50% voting rights after the subscription in shares by such individual or HUF; and

(3) such company utilises the amount invested in shares to purchase new plant and machinery within one year from the date of subscription in equity shares.

(iii) Quantum of exemption:

If the cost of new plant and machinery ≥ Net sale consideration of residential

house, entire capital gains is exempt.

If the cost of new plant and machinery < Net sale consideration of residential house,

only proportionate capital gains is exempt i.e.

Cost of new plant and machineryLTCG ×

Net sale consideration


61

(iv) Purchase of computers or computer software out of amount invested in shares of an technology driven start-up permitted

In case of an eligible start-up, being a technology driven start-up so certified by the notified Inter-Ministerial Board of Certification (IMBC), the company can also utilise the amount invested in shares to purchase computers or computer software. This is because computers or computer software form the core asset base of such technology driven start-ups.

(v) Meaning of eligible start-up:

(vi) Meaning of eligible business :

A business which involves -

innovation

development

deployment

of new products, processes or

services

driven by technology or intellectual property

commercialization

(i) Long-term capital gains on shares of private companies to be subject to concessional rate of tax@10% in the hands of non-corporate non-residents and foreign companies [Section 112(1)(c)]


(i) Section 112(1)(c) prescribes a concessional tax rate of 10% (without indexation

benefit) for long-term capital gain arising from transfer of unlisted securities in the

hands of non-corporate non-residents and foreign companies.

(ii) For the purposes of this provision, the expression "securities" has the same

meaning as in section 2(h) of the Securities Contracts (Regulations) Act, 1956.

(iii) Since some courts have opined that shares of a private company are not

"securities", section 112(1)(c) has been amended to provide that long-term capital

gains arising to a non-corporate non-resident or a foreign company from the transfer

Company engaged in eligible business

Incorporated during the period 1.4.2016-31.3.2019

Total turnover ≤ ` 25 crores

in any P.Y. from P.Y.2016-17 to P.Y.2020-21

Holds a certificate of eligible business from the notified

IMBC


62

of a capital asset, being shares of a company not being a company in which the

public are substantially interested, shall also be chargeable to tax at the

concessional rate of 10%, without indexation benefit, in the hands of non-corporate

non-residents and foreign companies.


1. Notification of Cost Inflation Index for Financial Year 2016-17 [Notification No.

42/2016, dated 2.6.2016]

Clause (v) of Explanation to section 48 defines "Cost Inflation Index", in relation to a previous

year, to mean such Index as the Central Government may, by notification in the Official

Gazette, specify in this behalf, having regard to 75% of average rise in the Consumer Price

Index (Urban) for the immediately preceding previous year to such previous year.

Accordingly, the Central Government has, in exercise of the powers conferred by clause

(v) of Explanation to section 48, specified the Cost Inflation Index for the financial year

2016-17 as 1125.

S. No.

Financial Year

Cost Inflation Index

S. No. Financial Year

Cost Inflation

Index

1. 1981-82 100 19. 1999-2000 389

2. 1982-83 109 20. 2000-01 406

3. 1983-84 116 21. 2001-02 426

4. 1984-85 125 22. 2002-03 447

5. 1985-86 133 23. 2003-04 463

6. 1986-87 140 24. 2004-05 480

7. 1987-88 150 25. 2005-06 497

8. 1988-89 161 26. 2006-07 519

9. 1989-90 172 27. 2007-08 551

10. 1990-91 182 28. 2008-09 582

11. 1991-92 199 29. 2009-10 632

12. 1992-93 223 30. 2010-11 711

13. 1993-94 244 31. 2011-12 785

14. 1994-95 259 32. 2012-13 852

15. 1995-96 281 33. 2013-14 939

16. 1996-97 305 34. 2014-15 1024

17. 1997-98 331 35. 2015-16 1081

18. 1998-99 351 36. 2016-17 1125


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2. Method of determination of period of holding of capital assets in certain cases

[Notification No. 18/2016, dated 17-03-2016]

Section 2(42A) provides for the meaning of the term "short -term capital asset" as a

capital asset held by an assessee for not more than thirty-six months immediately

preceding the date of its transfer. Clause (i) of Explanation 1 to section 2(42A) provides

for inclusion/ exclusion of certain periods in respect of specified transactions listed

thereunder for the purpose of determination of the period of holding of asset. Clause (ii)

of Explanation 1 to section 2(42A) provides that in respect of capital assets, other than

those mentioned in clause (i), the period for which the capital asset is held by the

assessee shall be determined subject to rules made in this behalf by the CBDT.

Accordingly, the CBDT has inserted new Rule 8AA in the Income-tax Rules, 1962 to

provide for method of determination of period of holding of capital assets, other than the

capital assets mentioned in clause (i) of the Explanation 1 to section 2(42A). Specifically,

in the case of a capital asset, being a share or debenture of a company, which becomes

the property of the assessee in the circumstances mentioned in section 47(x), there shall

be included the period for which the bond, debenture, debenture-stock or deposit

certificate, as the case may be, was held by the assessee prior to the conversion. The

said rule shall come into force with effect from 01-04-2016.

Note: Section 47(x) provides that any transfer by way of conversion of bonds or

debentures, debenture-stock or deposit certificates in any form, of a company into shares

or debentures of that company shall not be regarded as transfer for the purposes of levy

of capital gains tax.

3. Surplus on sale of shares and securities - whether taxable as capital gains or

business income? [Circular No. 06/2016, dated 29-2-2016]

Section 2(14) defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock -in-trade/trading assets or both.

Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.

Parameters laid down by CBDT and Courts to distinguish shares held as investments and shares held as stock in trade

Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The CBDT has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.

Principles to determine whether gains on sale of listed shares and other securities would constitute capital gains or business income

Disputes, however, continue to exist on the application of these principles to the facts of


64

an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principle in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs the Assessing Officers to take into account the following while deciding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income —

a) Where assessee opts to treat such shares and securities as stock-in-trade: Where

the assessee itself, irrespective of the period of holding the listed shares and securities,

opts to treat them as stock-in-trade, the income arising from transfer of such

shares/securities would be treated as its business income,

b) Listed shares and securities held for a period of more than 12 months: In respect

of listed shares and securities held for a period of more than 12 months immediately

preceding the date of its transfer, if the assessee desires to treat the income arising

from the transfer thereof as Capital Gain, the same shall not be put to dispute by the

Assessing Officer. However, this stand, once taken by the assessee in a particular

Assessment Year, shall remain applicable in subsequent Assessment Years also and

the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in

subsequent years;

c) Other cases: In all other cases, the nature of transaction (i.e. whether the same is

in the nature of capital gain or business income) shall continue to be decided

keeping in view the aforesaid Circulars issued by the CBDT.

Principles listed above not to apply in case of sham transactions

It is, however, clarified that the above shall not apply in respect of such transactions in

shares/securities where the genuineness of the transaction itself is questionable, such as

bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham

transactions.

Objective of formulation of principles: Reducing litigation and ensuring

consistency

It is reiterated that the above principles have been formulated with the sole objective of

reducing litigation and maintaining consistency in approach on the issue of treatment of

income derived from transfer of shares and securities. All the relevant provisions of the

Act shall continue to apply on the transactions involving transfer of shares and securities.


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8 INCOME FROM OTHER SOURCES

AMENDMENT BY THE FINANCE ACT, 2016

(A) Shares received by an individual or HUF as a consequence of demerger or amalgamation of a company or a business reorganisation of a co-operative bank not to be subject to tax by virtue of section 56(2)(vii)


(i) Under section 56(2)(vii), any money, immovable property or other property received

without consideration is chargeable to tax, if aggregate sum received by an

assessee, being an individual or an Hindu undivided family (HUF), is in excess of

` 50,000. Likewise, if immovable or other property is received by an individual or

HUF for inadequate consideration, and the difference between the stamp duty value

(in case of immovable property) or the fair market value (in case of other property)

exceeds ` 50,000, such difference is chargeable to tax under section 56(2)(vii).

(ii) Since the definition of “property” for the purpose of section 56(2)(vii) includes capital

asset being shares and securities, the taxability provisions thereunder are attracted

in a case where shares of a company are received as a consequence of demerger

or amalgamation of a company.

(iii) Such a transaction is not regarded as transfer where the recipient is a firm or a

company, not being a company in which public are substantially interested, on

account of a specific exemption provided in the proviso to section 56(2)(viia), where

shares are received as a consequence of demerger or amalgamation of a company.

(iv) In order to ensure uniformity in tax treatment, it is proposed to amend the second

proviso of section 56(2)(vii) which provides for cases where the taxability provisions

under the section would not be attracted.

(v) Accordingly, clause (h) has been inserted in the second proviso to section 56(2)(vii)

to provide that any shares received by an individual or HUF as a consequence of

demerger or amalgamation of a company or business reorganisation of a co-

operative bank shall not be subject to tax by virtue of the provisions contained in

section 56(2)(vii).


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10 SET-OFF AND CARRY FORWARD AND

SET-OFF OF LOSSES


(A) Filing of return of loss on or before the due date under section 139(1) mandatory for carry forward of loss from specified business under section 73A [Section 80]

Related amendment in section: 139(3)


(i) Under section 73A, any loss, computed in respect of any specified business referred

to in section 35AD shall not be set off except against profits and gains, if any, of any

other specified business. Such loss can, however, be carried forward indefinitely for

set-off against profits of the same or any another specified business.

(ii) Section 80 requires mandatory filing of return of loss under section 139(3) on or before

the due date specified under section 139(1) for carry forward of the following losses –

(1) Business loss under section 72(1)

(2) Speculation business loss under section 73(2)

(3) Loss under the head “Capital Gains” under section 74(1)

(4) Loss from the activity of owning and maintaining race horses under section

74A(3)

(iii) However, there was no such stipulation for carry forward of loss from specified

business under section 73A.

(iv) Accordingly, section 80 has been amended so as to provide that the loss

determined as per section 73A shall not be allowed to be carried forward and set off

if such loss has not been determined in pursuance of a return filed in accordance

with the provisions of section 139(3).

(v) Correspondingly, section 139(3) requiring filing of return of loss mandatorily within

the time allowed under section 139(1) for claiming carry forward of losses under

sections 72(1), 73(2), 74(1) and 74A(3) has been amended to include reference to

section 73A(2).


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11 DEDUCTIONS FROM GROSS TOTAL

INCOME


(A) Additional deduction for interest on loan borrowed for acquisition of self -occupied

house property by an individual [Section 80EE]


(i) Under section 80EE, a deduction of upto ` 1 lakh in respect of interest paid on loan

by an individual for acquisition of a residential house property was allowed for

A.Y.2014-15 and A.Y.2015-16.

(ii) As a step towards achieving the Government’s aim of providing ‘housing for all’,

first-home buyers availing home loans are encouraged, by providing additional

deduction under section 80EE from A.Y.2017-18 in respect of interest on loan taken

by an individual for acquisition of residential house property from any financial

institution. The maximum deduction allowable is ` 50,000.

(iii) The conditions to be satisfied for availing this deduction are as follows –

Conditions

Value of house ≤

` 50 lakhs

Loan should be sanctioned during the

P.Y.2016-17

Loan sanctioned

≤ ` 35 lakhs

The assessee should not own any residential house on the

date of sanction of

loan


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(iv) The benefit of deduction under this section would be available till the repayment of

loan continues.

(v) The deduction of upto ` 50,000 under section 80EE is over and above the

deduction of upto ` 2,00,000 available under section 24 for interest paid in respect

of loan borrowed for acquisition of a self-occupied property.

(vi) Meaning of certain terms:

Term Meaning

(a) Financial institution A banking company to which the Banking Regulation Act, 1949 applies ; or

Any bank or banking institution referred to in section 51 of the Banking Regulation Act, 1949; or

A housing finance company. (b) Housing finance

company

A public company formed or registered in India with the

main object of carrying on the business of providing

long-term finance for construction or purchase of

houses in India for residential purposes.

Example

Mr. A purchased a residential house property for self-occupation at a cost of ` 45 lakh on 1.6.2016, in respect of which he took a housing loan of ` 35 lakh from Bank of India@11% p.a. on the same date. Compute the eligible deduction in respect of interest on housing loan for A.Y.2017-18 under the provisions of the Income-tax Act, 1961, assuming that the entire loan was outstanding as on 31.3.2017 and he does not own any other house property.

Answer

Particulars `

Interest deduction for A.Y.2017-18

(i) Deduction allowable while computing income under the head “Income from house property”

Deduction under section 24(b) ` 3,20,833

[` 35,00,000 × 11% × 10/12]

Restricted to 2,00,000

(ii) Deduction under Chapter VIA from Gross Total Income

Deduction under section 80EE ` 1,20,833

(` 3,20,833 – ` 2,00,000)

Restricted to

50,000


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(B) Monetary limit for maximum deduction under section 80GG increased

Effective from: A.Y 2017-18

(i) Under section 80GG, a deduction of any expenditure incurred by an individual (who is not in receipt of house rent allowance from his employer) on payment of rent in respect of any furnished or unfurnished accommodation occupied by him for the purposes of his own residence is allowed, provided he or his spouse or minor child or the HUF of which he is a member does not own a residential house at the place where he ordinarily resides or performs his duties of office or carries on his business or profession.

(ii) The deduction is allowable up to the least of the three limits –

(1) 25% of total income;

(2) Rent paid - 10% of total income;

(3) ` 2,000 per month.

(iii) With a view to provide relief to the individual tax payers who pay rent for the purpose of their own residence, section 80GG has been amended to increase the maximum limit of deduction [third limit given in (ii) above] from ` 2000 per month to ` 5000 per month.

Example

Mr. Ganesh, a businessman, whose total income (before allowing deduction under

section 80GG) for A.Y.2017-18 is ` 4,60,000, paid house rent at ` 12,000 p.m. in

respect of residential accommodation occupied by him at Mumbai. Compute the deduction allowable to him under section 80GG for A.Y.2017-18.

Solution

The deduction under section 80GG will be computed as follows:

(i) Actual rent paid less 10% of total income

1,44,000 (-) (10 4,60,000)

100 = ` 98,000 (A)

` 2,000 p.m.

(upto A.Y.2016-17)

` 5,000 p.m.

(from A.Y.2017-18)

Maximum limit of deduction u/s 80GG


70

(ii) 25% of total income

25 4,60,000

100 = ` 1,15,000 (B)

(iii) Amount calculated at ` 5,000 p.m.= ` 60,000 (C)

Deduction allowable (least of A, B and C) = ` 60,000

(C) Tax incentives for new start-ups [Section 80-IAC]


(i) Objective:

In order to provide an incentive to start-ups and aid their growth in the early phase of their business, new section 80-IAC has been inserted.

(ii) Quantum of deduction:

Accordingly, a deduction of 100% of the profits and gains derived by an eligible start-up from an eligible business is allowed for any three consecutive assessment years out of five years beginning from the year in which the eligible start up is incorporated.

(iii) Meaning of eligible start-up:

(iv) Meaning of eligible business :

A business which involves -

innovation

development

deployment

of new products, processes or

services

driven by technology or intellectual property

commercialization

Company or LLP engaged in eligible business

Incorporated during the period 1.4.2016-31.3.2019

Total turnover ≤ Rs.25 crores in any P.Y. from

P.Y.2016-17 to P.Y.2020-21

Holds a certificate of eligible business from the notified

IMBC


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(v) Conditions to be fulfilled:

This incentive is available to an eligible start-up which fulfils the following conditions:

(1) It is not formed by splitting up, or the reconstruction, of a business already in

existence.

However, this condition shall not apply in respect of a start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to in section 33B, in the circumstances and within the period specified in that section;

(2) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

However, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if all the following conditions are fulfilled, namely:—

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India;

(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of the Income-tax Act, 1961 in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Further, where in the case of a start-up, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed 20% of the total value of the machinery or plant used in the business, then, the condition specified that it should not be formed by transfer to a new business of plant and machinery used for any purpose shall be deemed to have been complied with.

(vi) Eligible business to be considered as the only source of income :

For the purpose of computing deduction under this section, the profits and gains of

the eligible business shall be computed as if such eligible business were the only

source of income of the assessee during the relevant previous years.

(vii) Audit of Accounts:

The deduction shall be allowed only if the accounts of the start-up for the relevant previous year have been audited by a chartered accountant and the assessee furnishes the audit report in the prescribed form, duly signed and verified by such accountant along with his return of income.


72

(viii) Transfer of goods/services between eligible business and other business of the assessee:

Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or vice versa, and if the consideration for such transfer does not correspond with the market value of the goods or services, then, the profits and gains of the eligible business shall be computed as if the transfer was made at market value. However, if, in the opinion of the Assessing Officer, such computation presents exceptional difficulties, the Assessing Officer may compute the profits on such reasonable basis as he may deem fit.

(ix) Deduction not to exceed profits of eligible business:

The deduction claimed and allowed under this section shall not exceed the profits and gains of the eligible business. Further, where deduction is claimed and allowed under this section for any assessment year no deduction in respect of such profits will be allowed under any other section under this chapter.

(x) Assessing Officer empowered to make adjustment in case any transaction produces excessive profits to eligible business:

The Assessing Officer is empowered to make an adjustment while computing the profit and gains of the eligible business on the basis of the reasonable profit that can be derived from the transaction, in case the transaction between the assessee carrying on the eligible business under section 80-IAC and any other person is so arranged that the transaction produces excessive profits to the eligible business.

However, if the arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to the arm’s length price.

(xi) Central Government empowered to deny deduction to any class of start -up:

The section empowers the Central Government to declare any class of start-up as not being entitled to deduction under this section. The denial of exemption shall be with effect from such date as may be specified in the notification issued in Official Gazette.

Example

A Ltd. was incorporated on 1.4.2016 to carry on the business of innovation, development, deployment and commercialization of new processes driven by technology. It holds a certificate of eligible business from the notified IMBC1.

Its total turnover and profits and gains from such business for the P.Y.2016-17 to P.Y.2020-21 are as follows:

Particulars P.Y.2016-17 P.Y.2017-18 P.Y.2018-19 P.Y.2019-20 P.Y.2020-21

(Rupees in crores)

Total turnover

15.42 18.36 20.21 22.72 24.95

1 Inter-Ministerial Board of Certification


73

Profits/ Losses

(2.52) (1.37) 6.52 8.13 9.87

Is A Ltd. eligble for any tax benefit under the provisions of the Income-tax Act, 1961? If yes, what is the benefit available?

Answer

A Ltd. is an eligible start-up, since –

(1) it is a company engaged in eligible business of innovation, development, deployment and commercialization of new processes driven by technology. It holds a certificate of eligible business from the notif ied IMBC.

(2) it is incorporated during the period 1.4.2016 to 31.3.2019.

(3) its total turnover does not exceed Rs.25 crores in any previous year from P.Y.2016-17 to P.Y.2020-21.

(4) it holds a certificate of eligible business from the notified IMBC

Therefore, A Ltd., being an eligible start-up, is eligible for deduction under section 80-IAC of 100% of the profits and gains derived by it from an eligible business for any three consecutive assessment years out of five years beginning from the year in which the eligible start up is incorporated i.e. P.Y.2016-17.

In the first two years i.e., P.Y.2016-17 and P.Y.2017-18, A Ltd. has incurred a loss. In the subsequent three years i.e., P.Y.2018-19, P.Y.2019-20 and P.Y.2020-21, A Ltd. has earned profits from eligible business and can hence, claim 100% of its profits as deduction under section 80-IAC from the P.Y.2018-19 to P.Y.2020-21. However, for P.Y.2018-19, the profits eligible for deduction would be the profits after set-off of brought forward losses of P.Y.2016-17 and P.Y.2017-18.

(D) Deductions in respect of profits and gains from housing projects [New Section 80-IBA]


(i) Objective:

In order to provide impetus to affordable housing sector to achieve the larger

objective of 'Housing for All', new section 80-IBA has been inserted.

(ii) Quantum of deduction:

Where the gross total income of an assessee includes any profits and gains derived

from the business of developing and building housing projects, an amount equal to

100% of the profits and gains derived from such business is allowable as deduction

under new section 80-IBA, subject to fulfilment of certain conditions.

(iii) Conditions to be fulfilled for claim of deduction :

(a) the project is approved by the competent authority between 1st June, 2016

and 31st March, 2019;


74

(b) the project is completed within a period of three years from the date of

approval by the competent authority:

However, in a case where the approval in respect of a housing project is obtained more than once, the project shall be deemed to have been approved on the date on which the building plant of such housing project was first approved by the competent authority and the project shall be deemed to have been completed when a certificate of completion of project as a whole is obtained in writing from the competent authority.

(c) the built-up area of the shops and other commercial establishments included in the housing project does not exceed 3% of the aggregate built-up area;

(d) where a residential unit in the housing project is allotted to an individual, no other residential unit in the housing project shall be allotted to the individual or the spouse or the minor children of such individual;

(e) Conditions relating to size of plot of land, residential units etc.

Location of the housing

project

Size on plot of land on

which the project is located

Built-up area of the

residential unit

comprised in the housing

project

Percentage of floor area ratio to be utilised by the

project

(1) (2) (3) (4) (5)

(i) Within the cities of Chennai, Delhi, Kolkata or Mumbai or within the distance, measured aerially, of 25 kms from the municipal limits of these cities

Not less than 1,000 sq. m.

Not more than 30 sq.m.

Not less than 90% of the floor area ratio permissible in respect of the plot of land under the rules to be made by the Central Government or the State Government or the local authority, as the case may be.

(ii) In any other place

Not less than 2,000 sq.m.

Not more than 60 sq.m.

not less than 80% of such floor area ratio

(f) The project is the only housing project on the plot of land [referred to in column (3)].

(g) the assessee maintains separate books of account in respect of the housing

project.


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(iv) No deduction for person executing the housing project as a works contract:

An assessee who merely executes the housing project as a works-contract awarded by any person (including the Central Government or the State Government) would not be eligible for deduction under this section.

(v) Consequence of non-completion of housing project within 3 years :

In a case where the housing project is not completed within the period of three years from the date of approval by the competent authority and in respect of which a deduction has been claimed and allowed under this section, the total amount of deduction so claimed and allowed in one or more previous years, shall be deemed to be the income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the period for completion so expires.

(vi) No deduction under any other provision of the Act in respect of such profits :

Where any amount of profits and gains derived from the business of developing and building housing projects is claimed and allowed under this section for any assessment year, deduction to the extent of such profit and gains shall not be allowed under any other provision of this Act.

(vii) Meaning of certain terms:

Term Meaning

(a) Built-up area The inner measurements of the residential unit at the floor

level,

including –

projections and balconies,

as increased by –

the thickness of the walls,

However, built-up area does not include –

the common areas shared with other residential units, and

any open terrace so shared

(b) Competent

authority

The authority empowered by the Central Government to

approve the building plan by or under any law for the time

being in force.

(c) Floor area

ratio

The quotient obtained by dividing the total covered area of

plinth area on all the floors by the area of the plot of land

(d) Housing

project

A project consisting predominantly of residential units with

such other facilities and amenities as the competent authority

may approve subject to the provisions of this section

(e) Residential

unit

An independent housing unit with separate facilities for living,

cooking and sanitary requirements, distinctly separated from


76

other residential units within the building, which is directly

accessible from an outer door or through an interior door in a

shared hallway and not by walking through the living space

of another household.

(E) Phasing out of profit-linked incentives [Sections 80-IA, 80-IAB, 80-IB]

Related amendment in section: 35AD


(i) The Finance Minister in his Budget Speech, 2015 has indicated that the rate of corporate tax will be reduced from 30% to 25% over the next few years along with corresponding phasing out of exemptions and deductions. The Government proposes to implement this decision in a phased manner.

(ii) Accordingly, the following incentives under the Act are to be phased out in the manner given hereunder:

Section Incentive under the Income-tax

Act, 1961

Amendment by the Finance

Act, 2016 restricting/phasing

out the incentive

80-IA(4) Deduction of 100% of profits derived by an enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility which fulfils the conditions stated thereunder. Deduction would be allowed for any ten consecutive assessment years out of fifteen years beginning from the year in which the enterprise develops and begins to operate any infrastructure facility.

Any enterprise which starts the development or operation and maintenance of the infrastructure facility on or after 1.4.2017 will not be allowed deduction under section 80-IA.

Instead, they would be eligible for investment-linked tax deduction under section 35AD.

80-IAB Deduction of 100% of profits derived by an undertaking or enterprise from any business of developing a SEZ which fulfils the conditions stated thereunder. Deduction would be allowed for any ten consecutive assessment years out of fifteen years beginning from the year in which the SEZ has been notified by the Central Government.

No deduction would be available to an assessee, being a developer, where the development of SEZ begins on or after 1st April, 2017.


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80-IB(9) Deduction of 100% of profits for a

period of seven consecutive

assessment years, if the

undertaking fulfils the following

conditions –

(i) it is located in any part of India

and has begun or begins

commercial production of

mineral oil on or after 1.4.1997;

(ii) it is engaged in commercial

production of natural gas in

licensed blocks [NELP-VIII] and

begins commercial production

of natural gas on or after

1.4.2009;

(iii) it is engaged in commercial

production of natural gas in

licensed blocks [IV Round of

bidding] and begins


natural gas on or after

1.4.2009.

Sunset clause has been

inserted and commercial

production of mineral oil and

natural gas in licensed blocks

should have commenced on or

before 31.3.2017, for availing

benefit of deduction under

section 80-IB. No deduction

would be available under

section 80-IB where the


mineral oil and natural gas

commences on or after

1.4.2017.

(F) Deduction in respect of employment of new employees [New Section 80JJAA]


(i) Existing incentive under section 80JJAA:

Under section 80JJAA, a deduction of 30% of additional wages paid to new regular

workmen in a factory is allowed. The section applies to an assessee, whose gross

total income includes any profits and gains derived from the manufacture of goods

in a factory. The deduction is allowable for three assessment years, including the

assessment year relevant to the previous year in which such employment is

provided. The 'workmen' should be employed for not less than 300 days in a

previous year. Further, in case of an existing factory, benefits are allowed only if

there is an increase of atleast 10% in the total number of workmen employed on the

last day of the preceding year.

(ii) Objective of substitution of new section:

In order to extend this employment generation incentive to all sectors, section

80JJAA has been substituted.


78

(iii) Quantum of deduction:

Accordingly, where the gross total income of an assessee to whom section 44AB

applies, includes any profits and gains derived from business, a deduction of an

amount equal to 30% of additional employee cost incurred in the course of such

business in the previous year, would be allowed for three assessment years

including the assessment year relevant to the previous year in which such

employment is provided.

(iv) Conditions to be fulfilled:

The deduction would be allowed only subject to fulfilment of the following conditions:

(v) Meaning of certain terms:

Term Meaning

(a) Additional employee

cost

Total emoluments paid or payable to additional employees employed during the previous year.

In the case of

an existing

business

The additional employee cost shall be

Nil, if—

(a) there is no increase in the number

of employees from the total

number of employees employed

as on the last day of the preceding

year;

(b) emoluments are paid otherwise

than by an account payee cheque

or account payee bank draft or by

use of electronic clearing system

through a bank account

The business should not be formed by splitting up, or the reconstruction, of an existing business

The business is not acquired by the assessee by way of transfer from any other person or as a result of any

business reorganisation

The report of the accountant, giving the prescribed particulars, has to be furnished along with ROI


79

In the first year of a new business

The emoluments paid or payable to

employees employed during that

previous year shall be deemed to be

the additional employee cost.

(b) Additional employee An employee who has been employed during the

previous year and whose employment has the effect

of increasing the total number of employees employed

by the employer as on the last day of the preceding

year.

Exclusions from the definition:

(a) an employee whose total emoluments are more

than ` 25,000 per month; or

(b) an employee for whom the entire contribution is

paid by the Government under the Employees’

Pension Scheme notified in accordance with the

provisions of the Employees’ Provident Funds

and Miscellaneous Provisions Act, 1952; or

(c) an employee employed for a period of less than

240 days during the previous year; or

(d) an employee who does not participate in the

recognised provident fund.

(c) Emoluments any sum paid or payable to an employee in lieu of his

employment by whatever name called.

Exclusions from the definition:

(a) any contribution paid or payable by the employer

to any pension fund or provident fund or any

other fund for the benefit of the employee under

any law for the time being in force; and

(b) any lump-sum payment paid or payable to an

employee at the time of termination of his service

or superannuation or voluntary retirement, such

as gratuity, severance pay, leave encashment,

voluntary retrenchment benefits, commutation of

pension and the like.

(vi) The provisions of this section, as they stood immediately prior to their amendment by

the Finance Act, 2016, shall apply to an assessee eligible to claim any deduction for

A.Y.2016-17 or earlier assessment year.


80

Example

Mr. A has commenced the business of of manufacture of computers on 1.4.2016. He

employed 350 new employees during the P.Y.2016-17, the details of whom are as follows -

No. of

employees

Date of

employment

Regular/

Casual

Total monthly emoluments

per employee (`)

(i) 75 1.4.2016 Regular 24,000

(ii) 125 1.5.2016 Regular 26,000

(iii) 50 1.8.2016 Casual 17,000

(iv) 100 1.9.2016 Regular 24,000

The regular employees participate in recognized provident fund while the casual

employees do not. Further, out of 75, 50 and 100 regular employees employed on

1.4.2016, 1.5.2016 and 1.9.2016, only 40, 30 and 60 qualify as a “workman” under the

Industrial Disputes Act, 1947.

Compute the deduction, if any, available to Mr. A for A.Y.2017-18, if the profits and gains

derived from manufacture of computers that year is ` 75 lakhs and his total turnover is

2.16 crores.

Solution

Mr. A is eligible for deduction under section 80JJAA since he is subject to tax audit under

section 44AB for A.Y.2017-18, as his total turnover from business exceeds ` 1 crore and

he has employed “additional employees” during the P.Y.2016 -17.

Additional employee cost = ` 24,000 × 12 × 75 [See Working Note below] =

` 2,16,00,000

Deduction under section 80JJAA = 30% of ` 2,16,00,000 = ` 64,80,000.

Working Note:

Number of additional employees

Particulars No. of workmen

Total number of employees employed during the year 350

Less: Casual employees employed on 1.8.2016 who do not participate in recognized provident fund

50

Regular employees employed on 1.5.2016, since their total monthly emoluments exceed Rs.25,000

125

Regular employees employed on 1.9.2016 since they have been employed for less than 240 days in the P.Y.2016-17.

_100

_275

Number of “additional employees” __75


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Note - Since casual employees do not participate in recognized provident fund, they do

not qualify as additional employees. Further, 125 regular employees employed on

1.5.2016 also do not qualify as additional employees since their monthly emoluments

exceed Rs.25,000. Also, 100 regular employees employed on 1.9.2016 do not qualify as

additional employees for the P.Y.2016-17, since they are employed for less than 240

days in that year.

Therefore, only 75 employees employed on 1.4.2016 qualify as additional employees,

and the total emoluments paid or payable to them during the P.Y.2016-17 is deemed to

be the additional employee cost. From A.Y.2017-18, it is not necessary that the

employee should qualify as a “workman” under the Industrial Disputes Act, 1947 for the

employer to avail benefit under section 80JJAA.


1. ‘Atal Pension Yojna’ notified under section 80CCD(1) [Notification No. 7/2016 dated

19-02-2016]

Section 80CCD(1) empowers the Central Government to notify a pension scheme,

contribution to which would qualify for deduction in the hands of an individual assessee.

Accordingly, in exercise of the powers conferred by section 80CCD(1), the Central

Government has notified the ‘Atal Pension Yojana (APY)’ as published in the Gazette of

India, Extraordinary, Part I, Section 1, vide number F. No. 16/1/2015-PR dated 16th

October, 2015 as a pension scheme, contribution to which would qualify for deduction

under section 80CCD in the hands of the individual.


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13 ASSESSMENT OF VARIOUS ENTITIES


(A) Concessional Taxation Regime for royalty income in respect of patent developed and registered in India [Section 115BBF]

Related amendment in section: 115JB


(i) The Finance Act, 2016 has introduced a concessional taxation regime for royalty income from patents for the purpose of promoting indigenous research and development and making India a global hub for research and development.

(ii) The purpose of the concessional taxation regime is for encouraging entities to retain and commercialise existing patents and for developing new innovative patented products.

(iii) Further, this beneficial taxation regime will incentivise entities to locate the high-value jobs associated with the development, manufacture and exploitation of patents in India.

(iv) The nexus approach has been recommended by the OECD under Action Plan 5 in Base Erosion and Profit Shifting (BEPS) project. This approach requires attribution and taxation of income arising from exploitation of Intellectual property (IP) in the jurisdiction where substantial research and development (R & D) activities are undertaken instead of the jurisdiction of legal ownership.

(v) Accordingly, new section 115BBF has been inserted to provide that where the total income of the eligible assessee includes any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the rate of 10% (plus applicable surcharge and cess). For this purpose, developed means atleast 75% of the expenditure should be incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970.

(vi) No deduction for any expenditure or allowance in respect of such royalty income shall be allowed under the Act.

(vii) The eligible assessee has to exercise the option for taxation of income by way of royalty in respect of a patent developed and registered in India in accordance with the provisions of section 115BBF in the prescribed manner, on or before the due


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date specified under section 139(1) for furnishing the return of income for the relevant previous year.

(viii) Where an eligible assessee opts for taxation of income by way of royalty in respect of a patent developed and registered in India for any previous year in accordance with section 115BBF, and the assessee offers the income for taxation for any of the five assessment years relevant to the previous year succeeding the previous year not in accordance with section 115BBF(1), then the assessee shall not be eligible to claim the benefit of section 115BBF for five assessment years subsequent to the assessment year relevant to the previous year in which such income has not been offered to tax in accordance with section 115BBF(1).

(ix) Further, the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF would not be subject to MAT under section 115JB . The same would be reduced while arriving at the book profit. Consequently, the related expenditure would be added back for arriving at the book profit.

(x) Meaning of eligible assessee:

Eligible assessee means:

A person resident in India,

who is the true and first inventor of the invention and

whose name is entered on the patent register as the patentee in accordance with

Patents Act, 1970.

Eligible assessee includes:

every such person, being the true and the first inventor of the invention, where more than one person is registered as patentee under Patents Act, 1970 in respect of that patent.

(xi) Meaning of royalty:

“Royalty”, in respect of a patent, means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains” or consideration for sale of product manufactured with the use of patented process or the patented article for commercial use) for the—

(1) transfer of all or any rights (including the granting of a licence) in respect of a patent; or

(2) imparting of any information concerning the working of, or the use of, a patent; or

(3) use of any patent; or

(4) rendering of any services in connection with the activities referred to in (1) to (3) above.

(xii) Meaning of lumpsum:

“Lump sum” includes an advance payment on account of such royalties which is not returnable.


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(B) Non-applicability of MAT in respect of certain foreign companies [Section 115JB]

Effective retrospectively from: A.Y.2001-02

(i) Section 115JB(1) provides for levy of minimum alternate tax (MAT) in case of a

company, if the tax payable on the total income as computed under the Income-tax Act,

1961, is less than 18.5% of its book profit. In such a case, the book profit shall be

deemed to be the total income of the assessee-company and the tax payable by the

assessee-company for the relevant previous year shall be 18.5% of its book profit.

(ii) In order to address the issue relating to the applicability of section 115JB(1) to

Foreign Institutional Investors (FIIs) who do not have a permanent establishment

(PE) in India, the Finance Act, 2015 amended this section to provide that in case of

a foreign company, any income by way of capital gains on transactions in securities

or interest, royalty or fees for technical services chargeable to tax at the rates

specified in Chapter XII, is credited to profit and loss account and income-tax

payable thereon is at a rate lower than the rate specified in section 115JB, the same

shall be reduced from the book profits; and the corresponding expenditure will be

added back, if the same is debited to profit and loss account.

(iii) However, this amendment was prospective w.e.f. A.Y.2016-17. Therefore, the issue

related to applicability for assessment year prior to A.Y.2016-17 remained to be

addressed.

(iv) A Committee on Direct Tax matters headed by Justice A.P. Shah, set up by the

Government to look into the matter, suggested that section 115JB be amended to

clarify the applicability of Minimum Alternate Tax (MAT) provisions to Foreign

Institutional Investors/ Foreign Portfolio Investors (FIIs/FPIs) in view of the fact that

FIIs and FPIs normally do not have a place of business in India.

(v) Keeping in mind the suggestions of the Committee and in order to ensure certainty

in taxation of foreign companies, Explanation 4 has been inserted in section 115JB

with retrospective effect from 01.04.2001 to provide for non-applicability of levy of

MAT under section 115JB in the following cases:

Existence of DTAA with the country of residence of the foreign company

Additional condition to be satisfied for non-applicability of MAT

(i) The foreign company is a resident of a country or a specified territory with which India has a DTAA under section 90(1) or the Central Government has adopted any agreement between specified associations for double taxation relief under section 90A(1)

It should not have a permanent establishment in India in accordance with the provisions of such Agreement

(ii) The foreign company is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above

It is not required to seek registration under any law for the time being in force relating to companies.


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(C) Tax incentives to International Financial Services Centres [Sections 10(38), 111A,

115JB & 115-O]


In order to encourage the growth of International Financial Services Centres (IFSCs) into a

world class financial services hub, it is necessary to ensure a competitive tax regime to

International Financial Services Centre. Accordingly, the following incentives have been

provided to units set up in the IFSC under the Income-tax Act, 1961:

Section Exemption/Levy Incentive to IFSCs

(i) - Levy of STT and CTT

The provisions of Chapter VII of the Finance (No.2) Act, 2004 provides for levy of securities transaction tax (STT) on transactions in taxable securities.

The provisions of Chapter VII of the Finance Act, 2013 provides for levy of commodities transaction tax (CTT) on transactions in taxable commodities.

Exemption from levy of STT and CTT

Provisions of Chapter VII of the Finance (No.2) Act, 2004 providing for levy of STT, not to apply to taxable securities transactions entered into by any person on a recognised stock exchange located in IFSC where the consideration for such transaction is paid or payable in foreign currency, thereby exempting such transactions from STT with effect from 1st June, 2016.

The provisions of Chapter VII of the Finance Act, 2013 providing for levy of CTT, not to apply to taxable commodities transactions entered into by any person on a recognised association located in unit of IFSC where the consideration for such transaction is paid or payable in foreign currency, thereby exempting such transaction from CTT with effect from 1st June, 2016.

(ii) 10(38) Exemption of LTCG only if STT is paid:

Exemption of income by way of long term capital gains arising from transfer of listed equity shares or listed units of an equity oriented fund or business trust provided securities transaction tax is paid.

Exemption of LTCG even if STT not paid:

Second proviso has been inserted in section 10(38) to exempt tax on long-term capital gains in respect of income arising from transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre even when securities transaction tax is not paid in respect of such transaction.


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(iii) 111A Levy of STCG@15% if STT is paid

Short term capital gains arising from transfer of listed equity shares or listed units of an equity oriented fund or business trust is taxable at a concessional rate of 15% provided securities transaction tax is paid.

Levy of STCG@15% even if STT is not paid

Second proviso has been inserted in section 111A(1) to provide that short term capital gains arising from transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre would be taxable at a concessional rate of 15% even when securities transaction tax is not paid in respect of such transaction.

(iv) 115JB MAT levy @18.5%:

In case of a company, if the tax payable on the total income as computed under the Income-tax Act, is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of the company and the Minimum Alternate Tax (MAT) payable by the company for the relevant previous year shall be 18.5% of such book profit.

Concessional rate of MAT@9%:

Sub-section (7) has been inserted in section 115JB to provide that in case of a company, being a unit located in International Financial Services Centre and deriving its income solely in convertible foreign exchange, the minimum alternate tax shall be chargeable at the rate of 9% instead of 18.5%.

(v) 115-O Levy of DDT@15%:

Additional income-tax@15% is attracted on any amount declared, distributed or paid by a domestic company by way of dividends.

Exemption from levy of DDT:

Sub-section (8) has been inserted in section 115-O to provide that no tax on distributed profits shall be chargeable in respect of the total income of a company being a unit located in International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after 1st April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend.


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(D) Dividend distributed by SPV to business trust exempt from levy of DDT [Section 115-O]

Related amendment in sections: 10(23FC), 10(23FD), 115UA& 194LBA

(i) The Finance (No.2) Act, 2014 had inserted Chapter XII-FA providing for a special taxation regime in respect of business trusts, comprising of Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (Invits) regulated by SEBI.

(ii) Under the SEBI regulation, these business trusts can hold the income generating asset either directly or through a Special Purpose Vehicle (SPV). SPV is defined to mean any company in which REIT holds or proposes to hold controlling interest which is not less than 50% of the shareholding. The other conditions are that the SPV should hold at least 80% of the assets in properties and it should not invest in other SPVs.

(iii) Under this regime, there is no multiple taxation, i.e., only the income in respect of which the business trust enjoys a pass through status, is subject to tax in the hands of the unit holder, namely, interest income from SPV and rental income ar ising to REIT from real estate property directly held by it. An income which is subject to tax in the hands of the business trust is not charged to tax once again in the hands of the unit-holder, for example, capital gains on sale of developmental properti es.

(iv) In respect of assets held through an SPV, being an Indian company, the company pays normal corporate tax and thereafter, when the income is distributed to the REIT being a shareholder, it pays dividend distribution tax. Therefore, the income distributed is exempt both in the hands of REIT [by virtue of section 10(34)] and also its investors [by virtue of section 10(23FD)].

(v) There is a similar regime in case of Invits, with the only exception being that there is no pass through for Invits holding income generating assets directly as normally, such large infrastructure projects are not held directly in the trust but are held through an SPV.

(vi) The levy of dividend distribution tax on the SPV at the time when its distributes dividend to the business trust makes the business trust structure tax inefficient and has an adverse impact on the rate of return for the unit-holder. This problem is critical since as per SEBI regulations, both the SPV and business trust have to distribute 90% of their operating income to the investors, whereas in case of normal real estate company, there is no requirement of such annual distribution of dividends. Consequent to the additional levy of DDT and associated tax inefficiency, the REITs and Invits are yet to take off.

(vii) For addressing this concern, the taxation regime for business trusts (REITs and Invits) and their investors has been further rationalised by providing for a special dispensation and exemption from levy of dividend distribution tax.

(viii) The key amendments in the special taxation regime for business trusts are :

(a) Dividend distributed by SPV to the business trust would be exempt from levy of DDT.


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(b) Such dividend received by the business trust and its investor shall not be taxable in the hands of business trust or the unit holders;

(c) Exemption from levy of DDT would be applicable only in cases where the business trust either holds 100% of the share capital of the SPV or holds all of the share capital other than that which is required to be held by any other entity as part of any direction of any Government or specific requirement of any law to this effect or which is held by Government or Government bodies;

(d) Exemption from levy of DDT would be applicable only in respect of dividends paid out of current income after the date when the business trust acquires the shareholding referred in (c) above in the SPV. The dividends paid out of accumulated and current profits upto this date shall be liable for levy of DDT as and when any dividend out of these profits is distributed by the company either to the business trust or any other shareholder.

(e) Summary of amendments:

Section Provision

(1) 115-O(7) (w.e.f. 1.6.2016)

Exemption from levy of DDT on distributions by a SPV to a business trust

Non-levy of DDT on distributed profits in respect of any amount declared, distributed or paid by way of dividends (whether interim or otherwise) out of its current income –

(a) By a domestic company in which a business trust has become a holder of the whole of the nominal value of equity share capital of the company (excluding the equity share capital required to be held mandatorily by any other person in accordance with any law for the time being in force or any directions of Government or any regulatory authority or equity share capital held by any Government or Government body).

(b) On or after the date of acquisition of such holding referred to in (a) above by the business trust.

However, this exemption would not be applicable in respect of any amount declared, distributed or paid at any time by the domestic company out of its accumulated profits or current profits upto the date of acquisition by the business trust of the specified holding [as per (a) above] in the SPV.

(2) 10(23FC) (w.e.f. A.Y.2017-18)

Exemption of dividend referred to in section 115-O(7) in the hands of the business trust. This is provided for in new sub-clause (b) of section 10(23FC).


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(3) 10(23FD) (w.e.f. A.Y.2017-18)

Exemption of dividend referred to in section 115-O(7) in the hands of the unit-holders.

This section exempts any distributed income, referred to in section 115UA, received by a unit holder from the business trust, other than that proportion of the income which is of the same nature as the income referred to in –

(i) Sub-clause (a) of Clause (23FC) i.e., income of a business trust by way of interest received or receivable from a SPV;

(ii) Clause (23FCA) i.e., rental income from real estate asset directly owned by the REIT.

Consequently, dividend income, which is covered in sub-clause (b) of clause (23FC), is exempt in the hands of the unit holders.

(4) 115UA(3)

(w.e.f. A.Y.2017-18)

This section provides for taxability of distributed income or any part thereof, which is in the nature of interest income received by the business trust from the SPV [referred to in sub-clause (a) of section 10(23FC)] or rental income from real estate assets owned directly by the REIT [referred to in section 10(23FCA)], in the hands of the unit holders.

Consequently, dividend income referred to in sub-clause (b) of section 10(23FC), which is exempt in the hands of the business trust would not also be taxable in the hands of the unit holders on distribution.

(5) 194LBA

(w.e.f. 1.6.2016)

This section requires deduction of tax at source by the business trust on distribution to the unit holders, of income which is in the nature of interest income received by the business trust from the SPV [referred to in sub-clause (a) of section 10(23FC)] or rental income from real estate assets owned directly by the REIT [referred to in section 10(23FCA)].

Consequently, no tax is required to be deducted at source on distribution of income which is in the nature of dividend referred to in sub-clause (b) of section 10(23FC), by the business trust to the unit-holders, since the same is exempt in the hands of the unit holders.

Example

A business trust, registered under SEBI (Real Estate Investment Trusts)

Regulations, 2014, gives particulars of its income for the P.Y.2016-17:


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(1) Interest income from Beta Ltd. – ` 4 crore;

(2) Dividend income from Beta Ltd. – ` 2 crore (received on 1st October, 2016);

(3) Short-term capital gains on sale of listed shares of Beta Ltd. – ` 1.5 crore;

(4) Short-term capital gains on sale of developmental properties – ` 1 crore

(5) Interest received from investments in unlisted debentures of real estate

companies – ` 10 lakh;

(6) Rental income from directly owned real estate assets – ` 2.50 crore

Beta Ltd. is an Indian company in which the business trust holds controlling interest.

The business trust holds 100% of the shareholding of Beta Ltd.

Discuss the tax consequences of the above income earned by the business trust in

the hands of the business trust and the unit holders, assuming that the business

trust has distributed ` 10 crore to the unit holders in the P.Y.2016-17.

Answer

Tax consequences in the hands of the business trust and its unit holders

(1) Interest income of ` 4 crore from Beta Ltd.: There would be no tax liability

in the hands of business trust due to pass-through status enjoyed by it under

sub-clause (a) of section 10(23FC) in respect of interest income from Beta

Ltd., being the special purpose vehicle. Therefore, Beta Ltd. is not required to

deduct tax at source on interest payment to the business trust.

However, the business trust has to deduct tax at source under section 194LBA –

@ 10%, on interest component of income distributed to resident unit

holders; and

@ 5%, on interest component of income distributed to non-corporate non-

resident unit holders and foreign companies.

Interest component of income distributed to unit holders is taxable in the hands

of the unit holders – @ 5%, in case of unit holders, being non-corporate non-

residents or foreign companies; and at normal rates of tax, in case of resident

unit holders.

The interest component of income received from the business trust in the

hands of each unit-holder would be determined in the proportion of 4/11.1, by

virtue of section 115UA(1).

(2) Dividend income of ` 2 crore from Beta Ltd.: The dividend distributed by

the SPV to the business trust is exempt by virtue of section 115-O(7), since the

SPV is a specified domestic company in which the business trust has become

the holder of whole of the nominal value of equity share capital of the

company. Further, there would be no tax liability in the hands of the business

trust, due to specific exemption provided under sub-clause (b) of section

10(23FC).


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Any distributed income referred to in section 115UA, to the extent it does not

comprise of interest [referred to in sub-clause (a) of section 10(23FC)] and

rental income from real estate assets owned directly by the business trust

[referred to in section 10(23FCA)] received by unit holders, is exempt in their

hands under section 10(23FD). Therefore, by virtue of section 10(23FD), there

would be no tax liability on the dividend component [referred to in sub-clause

(b) of section 10(23FC)] of income distributed to unit holders in their hands.

(3) Short-term capital gains of ` 1.50 crore on sale of listed shares of Beta Ltd.: As per section 115UA(2), the business trust is liable to pay tax@15% under section 111A in respect of short-term capital gains on sale of listed shares of special purpose vehicle. There would, however, be no tax liability on the capital gain component of income distributed to unit holders, by virtue of the exemption contained in section 10(23FD).

(4) Short-term capital gains of ` 1 crore on sale of developmental properties: It is taxable at maximum marginal rate of 35.535% in the hands of the business trust as per section 115UA(2). There would be no tax liability in the hands of the unit holders on the capital gain component of income distributed to them, by virtue of the exemption contained in section 10(23FD).

(5) Interest of ` 10 lakh received in respect of investment in unlisted debentures of real estate companies: Such interest is [email protected]%, being the maximum marginal rate, in the hands of the business trust, as per section 115UA(2). However, there would be no tax liability in the hands of the unit holders on the interest component of income distributed to them, by virtue of section 10(23FD).

(6) Rental income of ` 2.50 crore from directly owned real estate assets: Any income of a business trust, being a REIT, by way of renting or leasing or letting out any real estate asset owned directly by such business trust is exempt in the hands of the trust as per section 10(23FCA).

Where the income by way of rent is credited or paid to a business trust, being

a REIT, in respect of any real estate asset held directly by such REIT, no tax is

deductible at source under section 194-I.

The distributed income or any part thereof, received by a unit holder from the

REIT, which is in the nature of income by way of renting or leasing or letting

out any real estate asset owned directly by such REIT is deemed income of

the unit holder as per section 115UA(3). The business trust has to deduct tax

at source@10% under section 194LBA in case of distribution to a resident unit

holder and at rates in force in case of distribution to a non-resident unit holder.

The rental income component received from the business trust in the hands of

each unit-holder would be determined in the proportion of 2.5/11.1, by virtue of

section 115UA(1).


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Notes:

(1) New Chapter XII-FA contains the special provisions relating to business trusts. Section 115UA(1) provides that any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder, as it had been received by, or accrued to the business trust.

(2) Sub-clause (a) of section 10(23FC) exempts any income of a business trust by way of interest received or receivable from a Special Purpose Vehicle (SPV). Thus, the business trust enjoys a pass-through status in respect of interest received or receivable from a SPV.

(3) Sub-clause (b) of section 10(23FC) exempts any income of a business trust by way of dividend received from SPV, being a specified domestic company in which a business trust has become the holder of the whole of the nominal value of equity share capital of the company. Such dividend income is also exempt in the hands of the unit-holder.

(4) SPV means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding, as may be required by the regulations under which such trust is granted registration [not less than 50% as per the current SEBI (Real Estate Investment Trusts) Regulations, 2014].

Such company should hold not less than 80% of its assets directly in properties and should not invest in other SPVs and should not be engaged in any activity other than holding and developing property and any other activity incidental to such holding or development.

Since Beta Ltd. is an Indian company in which the business trust holds controlling interest and 100% of shareholding, it is a special purpose vehicle. It is presumed that Beta Ltd. fulfills the other conditions specified in the regulations to qualify as an SPV.

(5) The distributed income of the business trust, to the extent it comprises of interest referred to in sub-clause (a) of section 10(23FC) and rental income referred to in section 10(23FCA), is deemed to be the income of the unit holder in the previous year of distribution and subject to tax in the hands of the unit holder in that year. Accordingly, the business trust is required to deduct tax at source on the interest component and rental component of income distributed to its unit holders.

(6) Any distributed income referred to in section 115UA, to the extent it does not comprise of interest referred to in sub-clause (a) of section 10(23FC) and rental income referred to in section 10(23FCA), received by unit holders is exempt in their hands under section 10(23FD).

(7) Section 115UA(2) provides that subject to the provisions of sections 111A and 112, the total income of a business trust shall be chargeable to tax at the maximum marginal rate.


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(E) Rationalisation of the definitions of “buyback” and “distributed income” for the purpose of levy of additional income-tax on income distributed by a company on buyback of unlisted shares from a shareholder[Section 115QA]

Effective from: 1st June, 2016

(i) Section 115QA provides for the levy of additional income-tax@20% of the distributed income on account of buy back of unlisted shares by a company.

(ii) Clause (i) of the Explanation to section 115QA defines “buyback” to mean the purchase of a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956.

(iii) Clause (ii) of the Explanation to section 115QA defines “distributed income” to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company for issue of such shares.

(iv) Since the definition of buyback makes reference to section 77A of the Companies Act, 1956, the effect of buybacks undertaken by the company under different provisions of the Companies Act, 2013 and applicability of provisions of section 115QA to such transactions is an issue requiring clarification.

(v) Further, another issue relates to the lack of clarity in determination of consideration received by the company at the time of issue of shares being bought back by the company. There are situations where shares may have been issued by the company in tranches, for different considerations, at different point of time or may have been issued in lieu of existing shares of another company under amalgamation, merger or demerger.

(vi) For ensuring clarity and removing any ambiguity in relation to these issues, section 115QA has been amended to provide that the provisions of this section shall apply to any buy back of unlisted share undertaken by the company in accordance with the provisions of the law relating to the Companies and not necessarily restricted to section 77A of the Companies Act, 1956.

(vii) Further, for the purpose of computing distributed income, the amount received by the company for issue of shares being bought back shall be determined in the prescribed manner. The Rules to be framed would provide for manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganisations and in different tranches.

(viii) Definitions:

Term Upto 31.5.2016 With effect from 1.6.2016

Buy-back Purchase by a company of its

own shares in accordance

with the provisions of

section 77A of the

Companies Act, 1956.

Purchase by a company of its

own shares in accordance with

any law for the time being in

force relating to companies .

Distributed

income

The consideration paid by the

company on buy-back of

The consideration paid by the

company on buy-back of shares


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shares as reduced by the

amount which was received

by the company for issue of

such shares.

as reduced by the amount which

was received by the company for

issue of such shares,

determined in the manner as

may be prescribed.

(F) New Taxation Regime for Securitisation Trusts [Section 115TCA]

Related amendment in sections: 115TA, 115TC & 10(35A)

(i) Chapter-XII-EA of the Income-tax Act, 1961 comprising of sections 115TA, 115TB and 115TC provides for a special taxation regime in respect of income of the securitisation trusts and the investors of such trusts.

(ii) As per the special taxation regime, the income distributed by the securitisation trust to its investors would be subject to a levy of additional tax to be paid by the securitisation trust within 14 days of distribution of income.

(iii) The rate of additional income-tax is 25%, if the distribution is made to an individual or a Hindu undivided family (HUF) and @30%, if the distribution is to others. However, no distribution tax is to be levied, if the distribution is made to an exempt entity. Consequent to the levy of additional income-tax, the income of the investor, received from the securitisation trust, is exempt under section 10(35A) and the income of securitisation trust itself is exempt under section 10(23DA).

(iv) Under this special taxation regime, the trusts set up by reconstruction companies or the securitisation companies were not covered although such trusts are also engaged in securitisation activity. These companies are established for the purposes of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and their activities are regulated by the RBI.

(v) Also, under this regime, the final levy in the form of distribution tax is tax inefficient for the investors, specially the banks and financial institutions. Disallowance of expenditure in respect of income received from securitisation trust increases the effective rate of taxation for these investors. Further, the non-resident and resident investors could not take benefits of their specific tax status.

(vi) In order to rationalise the tax regime for securitisation trust and its investors, and to provide tax pass through treatment, a new taxation regime has been introduced by insertion of section 115TCA with effect from A.Y.2017-18 and the earlier regime of distribution tax under section 115TA shall cease to apply in case of distribution made by securitisation trusts with effect from 1st June, 2016.

(vii) Salient Features of the New Taxation Regime for Securitisation Trust and its investors [New Section 115TCA]:

(1) Applicability of New Taxation Regime [Clause (d) of Explanation below section 115TCA]:

The new regime shall apply to a securitisation trust being:


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Form Regulation

(i) A special purpose

distinct entity

SEBI (Public Offer and Listing of Securitised

Debt Instrument) Regulations, 2008

(ii) A special purpose

vehicle

The guidelines on securitisation of standard

assets issued by RBI

(iii) A trust setup by a

securitisation company

or a reconstruction

company

Securitisation and Reconstruction of

Financial Assets and Enforcement of

Security Interest Act, 2002 (SARFAESI Act)

(or)

The RBI directions/guidelines.

(2) Exemption of income of securitisation trust from the activity of

securitisation:

The income of securitisation trust from the activity of securitisation shall continue to

be exempt under section 10(23DA).

(3) No exemption under section 10(35A) to investor:

However, exemption in respect of income of investor from securitisation trust

under section 10(35A) would not be available in respect of distributed income

received by them on or after 1.6.2016. Thereafter (i.e., on or after 1.6.2016), any

income received from securitisation trust would be taxable in the hands of

investors.

(4) Taxability of income from securitisation trust in the hands of the investor

[Section 115TCA(1)]:

New section 115TCA(1) provides that the income accruing or arising to, or

received by, a person, being an investor from the securitisation trust, out of

investments made in the securitisation trust, shall be taxable in the hands of

investor in the same manner and to the same extent as if the investor had made

investment directly in the underlying assets and not through the trust.

(5) Nature of income paid or credited by securitisation trust in the hands of the

investor [Section 115TCA(2)]:

The income paid or credited by the securitisation trust shall be deemed to be of the

same nature and in the same proportion in the hands of the investor of the

securitisation trust, as if it had been received by, or had accrued and arisen to, the

securitisation trust during the previous year.

(6) Deemed credit to investor [Section 115TCA(3)]:

If the income accruing or arising to, or received by, the securitisation trust, during a

previous year has not been paid or credited to the investor, the same shall be

deemed to have been credited to the account of the said person on the last day of


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the previous year in the same proportion in which such person would have been

entitled to receive the income had it been paid in the previous year.

(7) Statement specifying the details of nature of income to be furnished to

investor and prescribed income-tax authority [Section 115TCA(4)]:

The securitisation trust shall provide breakup regarding nature and proportion of its

income and such other relevant details to the investors and also to the prescribed

income-tax authority in the prescribed form and verified in the prescribed manner,

within the prescribed period.

(8) Income taxed in the year of accrual not taxable again in the year of payment

[Section 115TCA(5)]:

Where income has been included in the total income of the investor in a previous

year, on account of it having accrued or arisen in the said previous year, the same

shall not be included in the total income of such person in the previous year in

which such income is actually paid to him by the securitisation trust.

(9) Deduction of tax at source in respect of income payable to investor [New

Section 194LBC effective from 1.6.2016]:

Tax deduction at source under section 194LBC shall be effected by the

securitisation trust at the time of payment or credit of income to the account of the

investor, whichever is earlier.

Payee Rate of TDS

(i) Resident individuals and HUFs 25%

(ii) Resident payees, other than individuals and HUFs 30%

(iii) Non-corporate non-residents and foreign companies Rates in force

(10) The facility for the investors to obtain low or nil deduction of tax certificate would be

available; the investor can make an application to the Assessing Officer, and he

can, on an application made by the assessee in this behalf, issue a certificate

under section 197 in this behalf for no deduction of income-tax or deduction of

income-tax at a lower rate.

(G) Tax on accreted income of certain trusts and institutions [Chapter XII-EB]


(i) As per section 2(24), "income" includes any voluntary contribution received by a

charitable trust or institution or a fund.

(ii) Sections 11 and 12 provide exemption to trusts or institutions in respect of income

derived from property held under trust and voluntary contributions, subject to the

conditions stipulated thereunder.


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(iii) The exemption is subject to the condition that the income derived from property held under trust should be applied for charitable purposes; and where such income cannot be applied during the previous year, it has to be accumulated and invested in the modes prescribed and applied for such purposes in accordance with specified conditions.

(iv) If the accumulated income is not applied in accordance with the conditions provided in the said section within a specified time, then such income is deemed to be taxable income of the trust or the institution. Section 12AA provides for registration of the trust or institution which entitles them to be able to get the benefit of sections 11 and 12. It also provides the circumstances under which the registration can be cancelled. Section 13 of the Act provides for the circumstances under which exemption under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution.

(v) A society or a company or a trust or an institution carrying on charitable activity may –

(1) voluntarily wind up its activities and dissolve; or

(2) merge with any other charitable or non-charitable institution; or

(3) convert into a non-charitable organization.

There is, however, no specific provision in the income-tax law as to how the assets of such a charitable institution should be dealt with.

(vi) Under section 11, certain amount of income of prior period can be brought to tax on failure of certain conditions. However, there is no provision in the Income-tax Act, 1961, which ensure that the corpus and asset base of the trust accreted over a period of time, with promise of it being used for charitable purpose, continues to be utilised for charitable purposes and is not used for any other purpose.

(vii) Consequently, it is always possible for charitable institutions to transfer assets to a non-charitable institution.

(viii) In order to ensure that the benefit conferred over a period of time by way of exemption is not misused and to plug the gap in law that allows the charitable trusts having built up corpus/wealth through exemptions being converted into non-charitable organisation with no tax consequences, new Chapter XII-EB has been inserted for imposing additional income-tax in the nature of an exit tax when the organization is converted into a non-charitable organization or gets merged with a non-charitable organization or does not transfer the assets to another charitable organisation.

Salient Features:

Section Provision

(i) 115TD(1) Circumstances where levy of tax on accreted income is attracted:

The accreted income of a trust or institution registered under section 12AA shall be taxable at the maximum marginal rate (@34.608%) on –

(1) conversion of the trust or institution into a form not eligible for grant of registration under section 12AA; or


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(2) merger with an entity not having similar objects and registered under section 12AA; or

(3) non-distribution of assets on dissolution to any charitable institution registered under section 12AA or approved under section 10(23C) within a period of 12 months from the end of the month in which the dissolution takes place.

This levy of exit tax shall be in addition to income chargeable in the hands of the entity.

(ii) 115TD(3) Deemed conversion into non-eligible form - Circumstances:

A trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA in a previous year, if,—

(i) the registration granted to it under section 12AA has been cancelled; or

(ii) it has adopted or undertaken modification of its objects which do not conform to the conditions of registration and,—

(a) it has not applied for fresh registration under section 12AA in the said previous year; or

(b) it has filed application for fresh registration under section 12AA but the said application has been rejected.

(iii) 115TD(2) Meaning of Accreted Income :

Aggregate FMV of total assets as on the specified date

Less

Total liability computed in accordance with the prescribed method of valuation

Notes –

(1) Accreted income attributable to any asset which is established to have been directly acquired by the trust or institution out of its agricultural income exempt under section 10(1) would be ignored. Liability, in relation to such asset, also has to be ignored.

(2) Accreted income attributable to any asset acquired by the trust or institution during the period beginning from the date of its creation or establishment and ending on the date from which the registration under section 12AA became effective2, if the trust or institution has not been allowed any benefit of sections 11 and

2 Where the benefit under sections 11 and 12 have been allowed to the trust or institution in respect of any previous year or years beginning prior to the date from which the registration under section 12AA became effective, then, the registration shall be deemed to have become effective fr om the first day of the earliest previous year. Thus, registration under section 12AA shall include any registration obtained under section 12A as it stood before its amendment by the Finance (No.2) Act, 1996.


99

12 during the said period, would be ignored. Liability, in relation to such asset, also has to be ignored.

(3) The asset and the liability of the charitable organisation which have been transferred on dissolution to another charitable trust or institution registered under section 12AA or a fund/institution/trust/ university/educational institution/hospital/medical institution approved under section 10(23C) within specified time have to be ignored while calculating accreted income.

Meaning of specified date [Explanation below section 115TD(7)]:

Case Specified Date

(i) conversion of the trust or institution registered u/s 12AA into a form not eligible for registration u/s 12AA

The date of conversion

(ii) merger with an entity not having similar objects and registered u/s 12AA

The date of merger

(iii) non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved u/s 10(23C) within a period twelve months from dissolution

The date of dissolution

Date of conversion [Explanation below section 115TD(7)]:

Case Specified Date

(i) Where the registration granted to it u/s 12AA has been cancelled

The date of the order cancelling registration u/s 12AA

(ii) Where it has adopted or undertaken modification of its objects which do not conform to the conditions of registration and has not made an application for fresh registration or the application made has been rejected.

The date of adoption or modification of any object.

(iv) 115TD(4) Exit tax payable even if no income-tax is payable by the Trust/Institution:

Even if no income-tax is payable by the trust or institution on its total income, tax on accreted income shall be payable by the trust or institution, like any other additional income-tax.


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(v) 115TD(5) Period within which tax on accreted income has to be paid to the credit of the Central Government:

The principal officer or the trustee of the trust or the institution, as the case may be, and the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from,—

Circumstance Relevant date

(1) Where the registration granted under section 12AA has been cancelled

the date on which –

(a) the period for filing appeal under section 253 against the order rejecting the application expires and no appeal has been filed by the trust or the institution; or

(b) the order in any appeal, confirming the cancellation of the application, is received by the trust or the institution

(2) Where the trust has modified its objects and has not applied for fresh registration u/s 12AA

the end of the previous year

(3) Where the trust has modified its objects and has filed application for fresh registration u/s 12AA, but the same was rejected

the date on which –

(a) the period for filing appeal under section 253 against the order rejecting the application expires an no appeal has been filed by the trust or institution; or

(b) the order in any appeal, confirming the cancellation of the application, is received by the trust or the institution

(4) Where trust has merged with an entity not having similar objects and registered u/s 12AA

the date of merger


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(5) Where the trust fails to transfer upon dissolution all its assets to another registered trust or institution or approved fund or institution within 12 months from the end of the month in which the dissolution takes place

The date on which the period of 12 months expires.

(vi) 115TD(6) No credit available for tax paid on accreted income:

The tax on accreted income shall be final tax for which no credit can be taken by the trust or institution or any other person.

(vii) 115TD(7) Non-availability of deduction under any other provision of the Act:

No deduction is allowable under any other provision of the Act to the trust or institution or any other person in respect of the income which has been charged to tax or the tax thereon.

(viii) 115TE Interest for non-payment of tax within prescribed time:

In case of failure of payment of tax within the prescribed time, a simple interest @ 1% per month or part of it shall be applicable for the period of non-payment.

Period of non-payment:

Beginning from Ending with

The date immediately after the last date on which such tax was payable

The date on which the tax is actually paid.

(ix) 115TF Circumstance when trust or institution is deemed to be assessee-in-default:

The principal officer or the trustee and the trust or the institution shall be deemed to be assessee-in-default for non-payment of tax and all provisions related to the recovery of taxes shall apply. Further, in the case of transfer of assets upon dissolution of the trust or institution to a recipient, which is not a charitable organisation, the recipient of assets of the trust shall also be liable to be held as assessee-in-default in case of non-payment of tax and interest. However, in such a case, the recipient's liability shall be limited to the extent to which the assets received by him is capable of meeting the liability.


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1. Does a consortium of contractors formed to implement large infra projects

necessarily constitute an AOP? [Circular No. 07/2016, dated 07-03-2016]

A consortium of contractors is often formed to implement large infrastructure projects,

particularly in Engineering Procurement and Construction ('EPC') contracts and Turnkey

Projects. The tax authorities, in many cases have taken a position that such a consortium

constitutes an Association of Persons ('AOP') i.e., a separate entity for charging tax. The

claim of taxpayers, on the other hand, is contrary to this view. This has led to tax disputes

particularly in those cases where each member of the consortium, although jointly and

severally liable to the contractee, has a clear distinction and role in scope of work,

responsibilities and liabilities of the consortium members.

Existence of AOP: Determined by facts and circumstances of a case and no

formula for universal application exists

The term AOP has not been specifically defined in the Income-tax Act, 1961. The issue as to

what would constitute an AOP was considered by the Apex Court in some cases. Although

certain guidelines were prescribed in this regard, the Court opined that there is no formula of

universal application so as to conclusively decide the existence of an AOP and it would rather

depend upon the particular facts and circumstances of a case. In the specific context of the

EPC contracts/Turnkey projects, there are several contrary ruling of various Courts on what

constitutes an AOP.

Consortium arrangement for executing EPC/Turnkey contracts – Necessary

attributes for not being treated as an AOP

With a view to avoid tax-disputes and to have consistency in approach while handling these cases,

the CBDT has decided that a consortium arrangement for executing EPC/Turnkey contracts which

has the following attributes may not be treated as an AOP:

(a) each member is independently responsible for executing its part of work through its

own resources and also bears the risk of its scope of work i.e., there is a clear

demarcation in the work and costs between the consortium members and each

member incurs expenditure only in its specified area of work;

(b) each member earns profit or incurs losses, based on performance of the contract

falling strictly within its scope of work. However, consortium members may share

contract price at gross level only to facilitate convenience in billing;

(c) the men and materials used for any area of work are under the risk and control of

respective consortium members;

(d) the control and management of the consortium it not unified and common

management is only for the inter-se co-ordination between the consortium members

for administrative convenience;

There may be other additional factors also which may justify that consortium is not an


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AOP and the same shall depend upon the specific facts and circumstances of a particular

case, which need to be taken into consideration while taking a view in the matter.

Non-applicability of Circular where consortium members are Associated Enterprises

This Circular shall not be applicable in cases where all or some of the members of the

consortium are Associated Enterprises within the meaning of section 92A of the Act. In

such cases, the Assessing Officer will decide whether an AOP is formed or not keeping in

view the relevant provisions of the Act and judicial jurisprudence on this issue.


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16 TRANSFER PRICING AND OTHER PROVISIONS

TO CHECK AVOIDANCE OF TAX


(1) Extension of time limit available to TPO for making an order [Section 92CA(3A)]


(i) As per section 92CA(3A), the Transfer Pricing Officer (TPO) has to pass his order

60 days prior to the date on which the limitation for making assessment expires.

(ii) In many cases, it becomes necessary to seek information from foreign jurisdictions

for the purpose of determining the arm's length price by the TPO. At times,

proceedings before the TPO may also be stayed by a court order.

(iii) Taking into consideration such cases, a proviso has been inserted in section

92CA(3A) to provide that where assessment proceedings are stayed by any court or

where a reference for exchange of information has been made by the competent

authority under an agreement referred to in section 90 or 90A, the time available to

the Transfer Pricing Officer for making an order after excluding the time for which

assessment proceedings were stayed or the time taken for receipt of information, as

the case may be, is less than 60 days, then such remaining period shall be

extended to 60 days.

(2) Furnishing of report in respect of international group in line with BEPS action plan

- Country-By-Country Report and Master file [New Section 286]

Related amendment in sections: 92D, 271AA, 271GB & 273B


(i) Transfer Pricing provisions under the Income-tax Act, 1961:

Chapter X of the Income-tax Act, 1961 comprising sections 92 to 92F contain

provisions relating to transfer pricing regime.

Section 92D requires maintenance of prescribed information and document relating

to the international transaction and specified domestic transaction.


105

(ii) Requirements as per OECD report on Action 13 of BEPS Action Plan:

The report provides for:

(1) revised standards for transfer pricing documentation; and

(2) a template for country-by-country reporting of income, earnings, taxes paid and

certain measure of economic activity.

(iii) Three-tier structure mandated by BEPS:

The BEPS report recommends that countries adopt a standardised approach to

transfer pricing documentation; it mandates the following three-tier structure:-

Document Information

(1) Master File Standardised information relevant for all multinational

enterprises (MNE) group members

(2) Local file Specific reference to material transactions of the local

taxpayer

(3) Country-by-

country report

Information relating to the global allocation of the MNE's

income and taxes paid; and

Indicators of the location of economic activity within the

MNE group.

(iv) Advantages of the three tier structure [as per BEPS Report] :

(1) Taxpayers will be required to articulate consistent transfer pricing positions;

(2) Tax administrations would get useful information to assess transfer pricing

risks;

(3) Tax administrations would be able to make determinations about where their

resources can most effectively be deployed, and, in the event audits are called

for, provide information to commence and target audit enquiries.

(v) Country-by-country Report : Reporting Requirements of MNEs

The Country-by-Country (CbC) report has to be submitted by parent entity of an

international group to the prescribed authority in its country of residence. This report

is to be based on consolidated financial statement of the group.

(1) MNEs have to report annually and for each tax jurisdiction in which they do

business:

(a) the amount of revenue;

(b) profit before income tax; and

(c) income tax paid and accrued.


106

(2) MNEs have to report their total employment, capital, accumulated earnings

and tangible assets in each tax jurisdiction.

(3) MNEs have to identify each entity within the group doing business in a

particular tax jurisdiction and provide an indication of the business activities

each entity engages in.

(vi) Master File: Objective & Features

(1) The master file would provide an overview of the MNE groups business,

including:

(a) the nature of its global business operations,

(b) its overall transfer pricing policies, and

(c) its global allocation of income and economic activity

in order to assist tax administrations in evaluating the presence of significant

transfer pricing risk.

(2) The master file is intended to provide a high-level overview in order to place

the MNE group's transfer pricing practices in their global economic, legal,

financial and tax context.

(3) The master file shall contain information which may not be restricted to

transaction undertaken by a particular entity situated in particular country.

(4) Thus, information in master file would be more comprehensive than the

existing regular transfer pricing documentation.

(5) The master file shall be furnished by each entity to the tax authority of the

country in which it operates.

(vii) Implementation of international consensus in India :

India is one of the active members of BEPS initiative and part of international

consensus. For the purpose of implementing the international consensus, a specific

reporting regime in respect of CbC reporting and also the master file has been

incorporated in the Income-tax Act, 1961. The essential elements have been

incorporated in the Income-tax Act, 1961 while remaining aspects would be dealt

with in detail in the Income-tax Rules, 1962.

(viii) Elements relating to CbC reporting requirement and related matters which

have been incorporated in the Income-tax Act, 1961 [New Section 286]:—

(1) the reporting provision shall apply in respect of an international group for an

accounting year, if the total consolidated group revenue as reflected in the

consolidated financial statement (CFS) for the accounting year preceding such

accounting year is above a threshold to be prescribed [Sub-section (7)].


107

(2) the parent entity of an international group or the alternate reporting entity, if it

is resident in India shall be required to furnish the report in respect of the

group to the prescribed authority for every reporting accounting year, on or

before the due date of furnishing of return of income under section 139(1) for

the relevant accounting year for which the report is being furnished, in the

prescribed form and manner [Sub-section (2)];

(3) the parent entity shall be an entity which is required to prepare consolidated

financial statement under the applicable laws or would have been required to

prepare such a statement, had equity share of any entity of the group been

listed on a recognized stock exchange in India;

(4) every constituent entity resident in India, of an international group having

parent entity that is not resident in India, shall notify the prescribed income-tax

authority on or before the prescribed date –

(i) whether it is the alternate reporting entity of the international group; or

(ii) the details of the parent entity or the alternate reporting entity, if any of

the international group, and the country of territory of which the said

entities are resident [Sub-section (1)].

(5) the report shall be furnished in prescribed manner and in the prescribed form.

(6) It should contain aggregate information in respect of:

(i) the amount of revenue,

(ii) profit and loss before income-tax,

(iii) amount of income-tax paid and accrued,

(iv) details of stated capital, accumulated earnings, number of employees,

tangible assets other than cash or cash equivalent in respect of each

country or territory along with details of each constituent's residential

status, nature and detail of main business activity and any other

information as may be prescribed.

This shall be based on the template provided in the OECD BEPS report on

Action Plan 13 [Sub-section (3)];

(7) A constituent entity of an international group resident in India, shall be required

to furnish CbC report to the prescribed authority if the parent entity of the

group is resident ;-

(a) in a country with which India does not have an arrangement for exchange

of the CbC report; or

(b) there has been a systemic failure of the country or territory i.e., such

country is not exchanging information with India even though there is an

agreement; and


108

(c) this fact has been intimated to the entity by the prescribed authority [Sub-

section (4)].

(8) If there are more than one such constituent entity of the same group in India,

then the group can nominate (under intimation in writing on behalf of the group

to the prescribed authority), then, one constituent entity that shall furnish the

report on behalf of the group. This entity would then furn ish the report

[Proviso to sub-section (4)];

(9) If an international group, having parent entity which is not resident in India, had

designated an alternate entity for filing its report with the tax jurisdiction in

which the alternate entity is resident, then the entities of such group operating

in India would not be obliged to furnish report if the report can be obtained

under the agreement of exchange of such reports by Indian tax authorities

[Sub-section (5)];

(10) The prescribed authority may call for such document and information from the

entity furnishing the report as it may specify in notice for the purpose of

verifying the accuracy. The entity shall be required to make submission within

thirty days of receipt of notice or further period if extended by the prescribed

authority, but extension shall not be beyond a further period of 30 days [Sub-

section (6)];

(ix) Penalty for non-furnishing of the report by any reporting entity which is

obligated to furnish such report [Section 271GB(1) & (3)]:-

Period of delay/default Penalty

(a) Not more than a month ` 5,000 per day

(b) beyond one month ` 15,000 per day for the period exceeding one month

(c) Continuing default even after service of order levying penalty either under (a) or under (b)

` 50,000 per day of continuing failure beginning from the date of service of order

(x) Penalty for failure to produce information and documents within prescribed

time [Section 271GB(2) & (3)]:-

Default Penalty

(a) Failure to produce information

before prescribed authority

within the period allowed u/s

286(6)

` 5,000 per day of continuing failure,

from the day immediately following the

day on which the period for furnishing

the information and document expires.

(b) Continuing default even after

service of penalty order

` 50,000 per day for the period of

default beyond the date of service of

penalty order.


109

(xi) Penalty for submission of inaccurate information in the CBC report [Section

271GB(4)]:

If the reporting entity has provided any inaccurate information in the report, the penalty would be ` 5,00,000 if ,-

(a) the entity has knowledge of the inaccuracy at the time of furnishing the report but does not inform the prescribed authority; or

(b) the entity discovers the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish correct report within a period of fifteen days of such discovery; or

(c) the entity furnishes inaccurate information or document in response to notice of the prescribed authority under section 286(6).

(xii) Non-levy of penalty if reasonable cause for failure is proved [Section 273B] :

Section 273B provides for non-levy of penalty under various sections if the assessee proves that there was reasonable cause for such failure. Section 271GB has been included within the scope of section 273B. Therefore, the entity can offer reasonable cause defence for non-levy of penalties mentioned above.

(xiii) Maintenance and furnishing of Master file: Consequent amendments in the

Income-tax Act, 1961:

Section Provision

(1) Proviso to section 92D(1)

A person being constituent of an international group shall, in addition to the information related to the international transaction required under section 92D(1), also keep and maintain such information and document in respect of the international group to be prescribed by way of rules.

The rules shall, thereafter, prescribe the information and document as mandated for master file under OECD BEPS Action 13 report;

(2) 92D(4) The information and document shall also be furnished to the prescribed authority u/s 286(1) within such period as may be prescribed and the manner of furnishing may also be provided for in the rules

(3) 271AA(2) For non-furnishing of the information and document to the prescribed authority, a penalty of ` 5 lakh shall be leviable.

(4) 273B Reasonable cause defence against levy of penalty shall be available to the entity.

(xiv) Threshold limit of consolidated group revenue for applicability of CbC

reporting requirement:

As indicated above, the CbC reporting requirement for a reporting year does not apply unless the consolidated revenues of the preceding accounting year of the


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group, based on consolidated financial statement, exceeds a threshold to be prescribed. The current international consensus is for a threshold of € 750 million equivalent in local currency. This threshold in Indian currency would be equivalent to ` 5395 crores (at current rates). Therefore, CbC reporting for an international group having Indian parent, for the previous year 2016-17, shall apply only if the consolidated revenue of the international group in previous year 2015-16 exceeds ` 5395 crore (the equivalent would be determinable based on exchange rate as on the last day of previous year 2015-16).

(xv) Meaning of certain terms [Section 286(9)]:

Term Meaning

(1) Accounting

year Case Accounting year

In a case where the

parent entity or

alternate reporting

entity is resident in

India; or

A previous year

In any other case An annual accounting period, with

respect to which the parent entity of

the international group prepares its

financial statements under any law

for the time being in force or the

applicable accounting standards of

the country or territory of which

such entity is resident

(b) Agreement (i) an agreement referred to in section 90(1) or section

90A(1); or

(ii) any agreement as may be notified by the Central

Government in this behalf.

(c) Alternate

reporting

entity

Any constituent entity of the international group that has

been designated by such group, in the place of the parent

entity, to furnish the CbC report in the country or territory in

which the said constituent entity is resident on behalf of such

group.

(d) Constituent

entity

(i) any separate entity of an international group that is

included in the consolidated financial statement of the

said group for financial reporting purposes, or may be

so included for the said purpose, if the equity share of

any entity of the international group were to be listed on

a stock exchange;


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(ii) any such entity that is excluded from the consolidated

financial statement of the international group solely on

the basis of size or materiality; or

(iii) any permanent establishment of any separate business

entity of the international group included in clause (i) or

clause (ii), if such business unit prepares a separate

financial statement for such permanent establishment

for financial reporting, regulatory, tax reporting or

internal management control purposes

(e) Group This includes a parent entity and all the entities in respect of

which, for the reason of ownership or control, a consolidated

financial statement for financial reporting purposes,—

(i) is required to be prepared under any law for the time

being in force or the accounting standards of the country

or territory of which the parent entity is resident; or

(ii) would have been required to be prepared had the equity

shares of any of the enterprises were listed on a stock

exchange in the country or territory of which the parent

entity is resident.

(f) Consolidated

financial

statement

The financial statement of an international group in which the

assets, liabilities, income, expenses and cash flows of the

parent entity and the constituent entities are presented as

those of a single economic entity

(g) International

group

Any group that includes,—

(i) two or more enterprises which are resident of different

countries or territories; or

(ii) an enterprise, being a resident of one country or

territory, which carries on any business through a

permanent establishment in other countries or

territories;

(h) Parent entity A constituent entity, of an international group holding, directly

or indirectly, an interest in one or more of the other

constituent entities of the international group, such that,—

(i) it is required to prepare a consolidated financial

statement under any law for the time being in force or

the accounting standards of the country or territory of

which the entity is resident; or

(ii) it would have been required to prepare a consolidated

financial statement had the equity shares of any of the


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enterprises were listed on a stock exchange,

and, there is no other constituent entity of such group which,

due to ownership of any interest, directly or indirectly, in the first

mentioned constituent entity, is required to prepare a

consolidated financial statement, under the circumstances

referred to in clause (i) or clause (ii), that includes the separate

financial statement of the first mentioned constituent entity.

(i) Permanent

establishment

Meaning assigned to it in clause (iiia) of section 92F i.e.,

includes a fixed place of business through which the

business of the enterprise is wholly or partly carried on.

(j) Reporting accounting year

The accounting year in respect of which the financial and operational results are required to be reflected in the report to be furnished by the parent entity or the alternate reporting entity in respect of the international group of which it is a constituent, every year, on or before the due date specified under section 139(1).

(k) Reporting entity

The constituent entity including the parent entity or the alternate reporting entity, that is required to furnish a report in respect of the international group of which it is a constituent, for every reporting accounting year on or before the due date mentioned under section 139(1).

(l) Systemic failure

Systemic failure, with respect to a country or territory, means that the country or territory has an agreement with India providing for exchange of report of the nature referred to in section 286(2), but—

(i) in violation of the said agreement, it has suspended automatic exchange; or

(ii) has persistently failed to automatically provide to India the report in its possession in respect of any international group having a constituent entity resident in India


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1. Transfer Pricing Rules amended to incorporate “range concept” and “use of multi-

year data” [Notification No. 83/2015, dated 19.10.2015]

Section 92C(2) provides that the arm’s length price (ALP) in relation to an international transaction or specified domestic transaction has to be determined by applying the most appropriate method.

As per the first proviso to section 92C(2), where more than one price is determined by applying the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices.

However, if the variation between the ALP so determined and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage, not exceeding 3%, as may be notified by the Central Government, the price at which the transaction has actually been undertaken would be deemed to be the ALP.

In the year 2014, the Finance Minister, in his budget speech, had proposed to introduce the “range concept” for determination of ALP, for aligning Transfer Pricing Regulations in India with the best practices.

Accordingly, a third proviso was inserted in section 92C(2) to provide that in case of an international transaction or specified domestic transaction undertaken on or after 1.4.2014, where more than one price is determined by the most appropriate method, the ALP shall be computed in the prescribed manner (based on “range concept” to be specified by way of Rules) and the computation methodology given in the first and second proviso, based on arithmetic mean, shall be ignored.

The CBDT has, in exercise of the powers conferred by section 92C read with section 295 prescribed the manner of computation of arm’s length price applicable for international transactions and specified domestic transactions undertaken on or after 1.4.2014.

Incorporation of “Range Concept” in Transfer Pricing Rules

In case of an international transaction or specified domestic transaction undertaken on or after 1.4.2014, where more than one price is determined by the most appropriate method, the arm’s length price shall be computed in the prescribed manner specified in Rule 10CA.

Rule 10CA(1) provides that where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in section 92C(1) results in determination of more than one price, then, the arm’s length price in respect of such international transaction or specified domestic transaction has to be computed on the basis of the dataset constructed by placing such prices in an ascending order as provided in Rule 10CA(2).

However, where the most appropriate method is the resale price method or cost plus method or transactional net margin method and the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the


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international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current yea r undertaken the same or similar comparable uncontrolled transaction then, -

(i) the most appropriate method used to determine the price of the comparable

uncontrolled transaction undertaken in the current year shall be applied in similar

manner to the comparable uncontrolled transaction or transactions undertaken in

the aforesaid period and the price in respect of such uncontrolled transactions shall

be determined; and

(ii) the weighted average of the prices, computed in accordance with the manner

provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in

the current year and in the aforesaid period preceding it shall be included in the

dataset instead of the price referred to in sub-rule (1).

Further, where the most appropriate method is the resale price method or cost plus method or transactional net margin method where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then, -

(i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; and

(ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1).

Also, in such cases, where the use of data relating to the current year for determination of ALP subsequently at the time of assessment establishes that, -

(i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or

(ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction,

then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the dataset.

Rule 10CA(3) provides that where an enterprise has undertaken comparable uncontrolled


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transactions in more than one financial year, then for the purposes of sub-rule (2) the

weighted average of the prices of such transactions shall be computed in the following

manner, namely:-

Method used to determine the prices

Manner of computation of weighted average of the prices

(i) The resale price method

By assigning weights to the quantum of sales which has been considered for arriving at the respective prices

(ii) The cost plus method By assigning weights to the quantum of costs which has been considered for arriving at the respective prices

(iii) The transactional net margin method

By assigning weights to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices.

Rule 10CA(4) provides that where the most appropriate method applied is –

(i) a method other than the profit split method or a method prescribed by the CBDT

under section 92C(1)(f); and

(ii) the dataset constructed in accordance with sub-rule (2) consists of six or more

entries,

an arm’s length range beginning from the thirty-fifth percentile of the dataset and ending

on the sixty-fifth percentile of the dataset shall be constructed.

If the price at which the international transaction or the specified domestic transaction

has actually been undertaken is within the said range, then, the price at which such

international transaction or the specified domestic transaction has actually been

undertaken shall be deemed to be the arm’s length price [Rule 10CA(5)].

If the price at which the international transaction or the specified domestic transaction

has actually been undertaken is outside the said arm's length range, the arm’s length

price shall be taken to be the median of the dataset [Rule 10CA(6)].

In a case where the provisions of Rule 10CA(4) are not applicable, the arm's length price

shall be the arithmetical mean of all the values included in the dataset. However, if the

variation between the arm's length price so determined and price at which the

international transaction or specified domestic transaction has ac tually been undertaken

does not exceed such percentage not exceeding three percent. of the latter, as may be

notified3 by the Central Government in the Official Gazette in this behalf, the price at

3 1% in respect of wholesale trading and 3% in respect of all other cases (for A.Y.2015-16) [Notification

No.86/2015 dated 29.10.2015]. Wholesale trading, for this purpose, means an international transaction or specified domestic transaction of trading in goods, which fulfils the following conditions , namely:- (i) purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities; and (ii) average monthly closing inventory of such goods is 10% or less of sales pertaining to such trading activities.


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which the international transaction or specified domestic transaction has actually been

undertaken shall be deemed to be the arm's length price [Rule 10CA(7)].

Meaning of certain terms [Rule 10CA(8)]

Term Meaning

(a) the thirty-fifth percentile of a dataset (having values arranged in an ascending order)

The lowest value in the dataset such that at least 35% of the values included in the dataset are equal to or less than such value.

However, if the number of values that are equal to or less than the aforesaid value is a whole number, then the thirty-fifth percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset.

(b) the sixth-fifth percentile of a dataset (having values arranged in an ascending order)


However, if the number of values that are equal to or less than the aforesaid value is a whole number, then, the sixty-fifth percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset.

(c) the median of the dataset (having values arranged in an ascending order)


However, if the number of values that are equal to or less than the aforesaid value is a whole number, then, the median shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset.

Use of multiple year data:

Sub-rule (5) has been inserted in Rule 10B to provide that in case the most appropriate

method for determination of ALP of a transaction entered into on or after 1.4.2014 is the

resale price method or cost plus method or the transactional net margin method , then,

the data to be used for analyzing the comparability of an uncontrolled transaction with an

international transaction shall be –

(a) the data relating to the current year; or

(b) the data relating to the financial year immediately preceding the current year, if the

data relating to the current year is not available at the time of furnishing the return

of income by the assessee, for the assessment year relevant to the current year.

However, where the data relating to the current year is subsequently available at the time

of determination of arm’s length price of an international transaction or a specified


117

domestic transaction during the course of any assessment proceeding for the

assessment year relevant to the current year, then, such data shall be used for such

determination irrespective of the fact that the data was not available at the time of

furnishing the return of income of the relevant assessment year.

2. Co-operative Societies procuring and marketing milk eligible to opt for Safe

Harbour Rules [Notification No 90/2015, dated 8-12-2015]

Under section 92CB(2), the CBDT is empowered to make rules for safe harbour. Further,

section 92D empowers the CBDT to make rules regarding keeping and maintenance of

specified information and document for assessees entering into an international

transaction or specified domestic transaction as well as to prescribe the period for which

information and documents shall be kept and maintained. Accordingly, in exercise of the

powers conferred under such sections, the CBDT has amended Rules 10D, 10THA,

10THB, 10THC and 10THD.

(1) Eligible assessee to include a co-operative society engaged in the business of

procuring and marketing milk and milk products [Rule 10THA] : The scope of

eligible assessee under Rule 10THA has been extended and it now also includes a

person who has exercised a valid option for application of safe harbor rules in

accordance with the provisions of Rule 10THC and is a co-operative society

engaged in the business of procuring and marketing milk and milk products.

(2) Eligible specified domestic transaction to include purchase of milk or milk

products by a co-operative society from its members [Rule 10THB] :

Accordingly, Rule 10THB now includes purchase of milk or milk products by a co -

operative society from its members as an eligible specified domestic transaction.

(3) Specified circumstance in which transfer price declared by the co-operative

society can be accepted by the income-tax authorities [Rule 10THC]: In effect,

where a co-operative society engaged in the business of procuring and marketing

milk and milk products has entered into an eligible transaction of purchase of milk or

milk products from its members in any previous year relevant to an assessment

year and the option exercised by the co-operative society is treated to be validly

exercised under Rule 10THD, the transfer price declared by the co-operative society

will be accepted by the income-tax authorities, if it is in accordance with the

specified circumstance [as per Rule 10THC] given below:

The price of milk or milk products is determined at a rate which is fixed on the basis of

the quality of milk, namely, fat content and Solid Not Fat (SNF) content of milk; and -

(a) the said rate is irrespective of,-

(i) the quantity of milk procured;

(ii) the percentage of shares held by the members in the co-operative

society;

(iii) the voting power held by the members in the society; and


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(b) such prices are routinely declared by the co-operative society in a transparent

manner and are available in public domain.”

(4) Information and documents to be kept and maintained under section 92D in

case of an eligible assessee referred to in Rule 10THA [Rule 10D(2A)]:

Rule Eligible Assessee Information and documents to be kept and

maintained

10THA(i) A government

company engaged

in the business of

generation, supply,

transmission or

distribution of

electricity

(i) a description of the ownership structure

of the assessee enterprise with details of

shares or other ownership interest held

therein by other enterprises;

(ii) a broad description of the business of

the assessee and the industry in which

the assessee operates, and of the

business of the associated enterprises

with whom the assessee has transacted;

(iii) the nature and terms (including prices) of

specified domestic transactions entered

into with each associated enterprise and

the quantum and value of each such

transaction or class of such transaction;

(iv) a record of proceedings, if any, before

the regulatory commission and orders of

such commission relating to the specified

domestic transaction;

(v) a record of the actual working carried out

for determining the transfer price of the

specified domestic transaction;

(vi) the assumptions, policies and price

negotiations, if any, which have critically

affected the determination of the transfer

price; and

(vii) any other information, data or document,

including information or data relating to

the associated enterprise, which may be

relevant for determination of the transfer

price.

10THA(ii) A co-operative

society engaged in

the business of

procuring and

marketing milk and

(i) a description of the ownership structure

of the assessee co-operative society with

details of shares or other ownership

interest held therein by the members;

(ii) description of members including their


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milk products addresses and period of membership;

(iii) the nature and terms (including prices) of

specified domestic transactions entered

into with each member and the quantum

and value of each such transaction or

class of such transaction;

(iv) a record of the actual working carried out

for determining the transfer price of the

specified domestic transaction;

(v) the assumptions, policies and price

negotiations, if any, which have critically

affected the determination of the transfer

price;

(vi) the documentation regarding price being

routinely declared in transparent manner

and being available in public domain; and

(vii) any other information, data or document

which may be relevant for determination

of the transfer price.

3. Scope of Safe Harbour Rules expanded [Notification No.5/2016 dated 17-2-2016]

Under section 92CB(2), the CBDT is empowered to make rules for safe harbour. Accordingly, in exercise of the powers conferred under the said section read with section 295, the CBDT has amended Rules 10THA, 10THB and 10THC:

Rule Particulars Existing Provision Amendment

10THA Meaning of “Eligible assessee”

A person who has exercised a valid option for application of safe harbor rules and is a Government company engaged in the business of generation, transmission or distribution of electricity.

The scope of eligible assessee under Rule 10THA has been expanded to include a person who has exercised a valid option for application of safe harbor rules in accordance with the provisions of Rule 10THC and is Government company engaged in the business of

supply of electricity.

10THB Eligible specified domestic transaction

A specified domestic transaction undertaken by an eligible assessee and which comprises of, inter alia, supply of

Rule 10THB has been amended to provide that an eligible specified domestic transaction would include a specified domestic transaction


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electricity by a generating company.

undertaken by an eligible assessee and which comprises of, inter alia, supply

of electricity. The

requirement that supply of

electricity should be by a

generating company has

been removed.

4. Clarifications on Rollback Provisions of Advance Pricing Agreement Scheme

[Circular No. 10/2015, dated 10-06-2015]

An Advance Pricing Agreement (APA) is an agreement between a taxpayer and a taxing

authority on an appropriate transfer pricing methodology for a set of transactions over a

fixed period of time in future. They offer better assurance on transfer pricing methods and

provide certainty and unanimity of approach.

Keeping in mind the benefits offered by the APAs, sections 92CC and section 92CD were

introduced in the transfer pricing regime by the Finance Act, 2012 to provide a framework

for formulation of APAs between the tax payer and the income-tax authorities.

Subsequently, the Advance Pricing Agreement Scheme was notified vide Notification No.

36/2012, dated 30/8/2012, thereby inserting Rules 10F to 10T and Rule 44GA in the

Income-tax Rules, 1962.

In order to reduce current pending as well as future litigation in respect of the transfer

pricing matters, the Finance (No. 2) Act, 2014 has inserted sub-section (9A) in section

92CC to provide for a roll back mechanism in the APA scheme.

Accordingly, the APA may, subject to such prescribed conditions, procedure and manner,

provide for determining the ALP or for specifying the manner in which ALP is to be

determined in relation to an international transaction entered into by a person during any

period not exceeding four previous years preceding the first of the previous years for

which the APA applies in respect of the international transaction to be undertaken.

The CBDT has, vide Notification No.23/2015 dated 14.3.2015, in exercise of the powers

conferred by section 92CC(9) and 92CC(9A) read with section 295, prescribed the

conditions, procedure and manner for determining the arm’s length price or for specifying

the manner in which arm’s length price is to be determined in relation to an international

transaction in which the roll back provisions have to be given effect to.

Subsequent to this notification of the rules, the CBDT has issued Circular No.10/2015

dated 10.6.2015 adopting a Question and Answer format to clarify certain issues arising

out of the said Rules. The questions raised and answers to such questions as per the

said Circular are given hereunder:


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Question 1

Under rule 10MA(2)(ii) there is a condition that the return of income for the relevant roll

back year has been or is furnished by the applicant before the due date specified in

Explanation 2 to section 139(1). It is not clear as to whether applicants who have filed

returns under section 139(4) or 139(5) of the Act would be eligible for roll back.

Answer

The return of income under section 139(5) can be filed only when a return under section

139(1) has already been filed. Therefore, the return of income filed under section 139(5)

of the Act, replaces the original return of income filed under section 139(1). Hence, if

there is a return which is filed under section 139(5) to revise the original return filed

before the due date specified in Explanation 2 to sub-section (1) of section 139, the

applicant would be entitled for rollback on this revised return of income.

However, rollback provisions will not be available in case of a return of income filed

under section 139(4) because it is a return which is not filed before the due date.

Question 2

Rule 10MA(2)(i) mandates that the rollback provision shall apply in respect of an

international transaction that is same as the international transaction to which the

agreement (other than the rollback provision) applies. It is not clear what is the meaning

of the word “same”. Further, it is not clear whether this restriction also applies to the

Functions, Assets, Risks (FAR) analysis.

Answer

The international transaction for which a rollback provision is to be allowed should be the

same as the one proposed to be undertaken in the future years and in respect of which

the agreement has been reached. There cannot be a situation where rollback is finalised

for a transaction which is not covered in the agreement for future years. The term same

international transaction implies that the transaction in the rollback year has to be of

same nature and undertaken with the same associated enterprise(s), as proposed to be

undertaken in the future years and in respect of which agreement has been reached. In the

context of FAR analysis, the restriction would operate to ensure that rollback provisions

would apply only if the FAR analysis of the rollback year does not differ materially from the

FAR validated for the purpose of reaching an agreement in respect of international

transactions to be undertaken in the future years for which the agreement applies.

The word “materially” is generally being defined in the Advance Pricing Agreements being

entered into by CBDT. According to this definition, the word “materially” will be interpreted

consistently with its ordinary definition and in a manner that a material change of facts and

circumstances would be understood as a change which could reasonably have resulted in

an agreement with significantly different terms and conditions.

Question 3

Rule 10MA(2)(iv) requires that the application for rollback provision, in respect of an

international transaction, has to be made by the applicant for all the rollback years in


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which the said international transaction has been undertaken by the applicant.

Clarification is required as to whether rollback has to be requested for all four years or

applicant can choose the years out of the block of four years.

Answer

The applicant does not have the option to choose the years for which it wants to apply for

rollback. The applicant has to either apply for all the four years or not apply at all.

However, if the covered international transaction(s) did not exist in a rollback year or

there is some disqualification in a rollback year, then the applicant can apply for rollback

for less than four years. Accordingly, if the covered international transaction(s) were not

in existence during any of the rollback years, the applicant can apply for rollback for the

remaining years. Similarly, if in any of the rollback years for the covered international

transaction(s), the applicant fails the test of the rollback conditions contained in various

provisions, then it would be denied the benefit of rollback for that rollback year. However,

for other rollback years, it can still apply for rollback.

Question 4

Rule 10MA(3) states that the rollback provision shall not be provided in respect of an

international transaction for a rollback year if the determination of arm’s length price of

the said international transaction for the said year has been the subject matter of an

appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order

disposing of such appeal at any time before signing of the agreement . Further, Rule 10

RA(4) provides that if any appeal filed by the applicant is pending before the

Commissioner (Appeals), Appellate Tribunal or the High Court for a rollback year, on the

issue which is subject matter of the rollback provision for that year, the said appeal to the

extent of the subject covered under the agreement shall be withdrawn by the applicant.

There is a need to clarify the phrase “Tribunal has passed an order disposing of such

appeal” and on the mismatch, if any, between Rule 10MA(3) and Rule 10RA(4).

Answer

The reason for not allowing rollback for the international transaction for which Appellate

Tribunal has passed an order disposing of an appeal is that the ITAT is the final fact

finding authority and hence, on factual issues, the matter has already reached finality in

that year. However, if the ITAT has not decided the matter and has only set aside the

order for fresh consideration of the matter by the lower authorities with full discretion at

their disposal, the matter shall not be treated as one having reached finality and hence,

benefit of rollback can still be given.

There is no mismatch between Rule 10MA(3) and Rule 10RA(4).

Question 5

Rule 10MA(3)(ii) provides that rollback provision shall not be provided in respect of an

international transaction for a rollback year if the application of rollback provision has the

effect of reducing the total income or increasing the loss, as the case may be, of the

applicant as declared in the return of income of the said year. It may be clarified whether


123

the rollback provisions in such situations can be applied in a manner so as to ensure that

the returned income or loss is accepted as the final income or loss after applying the

rollback provisions.

Answer

It is clarified that in case the terms of rollback provisions contain specific agreement between the Board and the applicant that the agreed determination of ALP or the agreed manner of determination of ALP is subject to the condition that the ALP would get modified to the extent that it does not result in reducing the total income or increasing the total loss, as the case may be, of the applicant as declared in the return of income of the said year, the rollback provisions could be applied. For example, if the declared income is ` 100, the income as adjusted by the TPO is ` 120, and the application of the rollback provisions results in reducing the income to ` 90, then the rollback for that year would be determined in a manner that the declared income ` 100 would be treated as the final income for that year.

Question 6

Rule 10RA(7) states that in case effect cannot be given to the rollback provision of an agreement in accordance with this rule, for any rollback year to which it applies, on account of failure on the part of applicant, the agreement shall be cancelled. It is to be clarified as to whether the entire agreement is to be cancelled or only that year for which roll back fails.

Answer

The procedure for giving effect to a rollback provision is laid down in Rule 10RA. Sub -rules (2), (3), (4) and (6) of the Rule specify the actions to be taken by the applicant in order that effect may be given to the rollback provision. If the applicant does not ca rry out such actions for any of the rollback years, the entire agreement shall be cancelled.

This is because the rollback provision has been introduced for the benefit of the applicant and is applicable at its option. Accordingly, if the rollback provision cannot be given effect to for any of the rollback years on account of the applicant not taking the actions specified in sub-rules (2), (3), (4) or (6), the entire agreement gets vitiated and will have to be cancelled.

Question 7

If there is a Mutual Agreement Procedure (MAP) application already pending for a rollback year, what would be the stand of the APA authorities? Further, what would be the view of the APA Authorities, if MAP has already been concluded for a rollback year?

Answer

If MAP has been already concluded for any of the international transactions in any of the rollback year under APA, rollback provisions would not be allowed for those international transactions for that year but could be allowed for other years or for other international transactions for that year, subject to fulfilment of specified conditions in Rules 10MA and 10RA. However, if MAP request is pending for any of the rollback year under APA, upon


124

the option exercised by the applicant, either MAP or application for roll back sha ll be proceeded with for such year.

Question 8

Rule 10MA(1) provides that the agreement may provide for determining ALP or manner of determination of ALP. However, Rule 10MA(4) only specifies that the manner of determination of ALP should be the same as in the APA term. Does that mean the ALP could be different?

Answer

Yes, the ALP could be different for different years. However, the manner of determination of

ALP (including choice of Method, comparability analysis and Tested Party) would be same.

Question 9

Will there be compliance audit for roll back? Would critical assumptions have to be

validated during compliance audit?

Answer

Since rollback provisions are for past years, ALP for the rollback years would be agreed

after full examination of all the facts, including validation of critical assumptions. Hence,

compliance audit for the rollback years would primarily be to check if the agreed price or

methodology has been applied in the modified return.

Question 10

Whether applicant has an option to withdraw its rollback application? Can the applicant

accept the rollback results without accepting the APA for the future years?

Answer

The applicant has an option to withdraw its roll back application even while maintaining the

APA application for the future years. However, it is not possible to accept the rollback results

without accepting the APA for the future years. It may also be noted that the fee specified in

Rule 10MA(5) shall not be refunded even where a rollback application is withdrawn.

Question 11

For already concluded APAs, will new APAs be signed for rollback or earlier APAs could

be revised?

Answer

The second proviso to Rule 10MA(5) provides for revision of APAs already concluded to

include rollback provisions.

Question 12

For already concluded APAs, where the modified return has already been filed for the

first year of the APA term, how will the time-limit for filing modified return for rollback

years be determined?


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Answer

The time to file modified return for rollback years will start from the date of signing the

revised APA incorporating the rollback provisions.

Question 13

In case of merger of companies, where one or more of those companies are APA

applicants, how would the rollback provisions be allowed and to which company or

companies would it be allowed?

Answer

The agreement is between the Board and a person. The principle to be followed in case

of merger is that the person (company) who makes the APA application would only be

entitled to enter into the agreement and be entitled for the rollback provisions in respect

of international transactions undertaken by it in rollback years. Other persons

(companies) who have merged with this person (company) would not be eligible for the

rollback provisions.

To illustrate, if A, B and C merge to form C and C is the APA applicant, then the agreement

can only be entered into with C and only C would be eligible for the rollback provisions. A

and B would not be eligible for the rollback provisions. To illustrate further, if A and B

merge to form a new company C and C is the APA applicant, then nobody would be eligible

for rollback provisions.

Question 14

In case of a demerger of an APA applicant or signatory into two or more companies

(persons), who would be eligible for the rollback provisions?

Answer

The same principle as mentioned in the previous answer, i.e., the person (company) who

makes an APA application or enters into an APA would only be entitled for the rollback

provisions, would continue to apply. To illustrate, if A has applied for or entered into an

APA and, subsequently, demerges into A and B, then only A will be eligible for rollback

for international transactions covered under the APA. As B was not in existence in

rollback years, availing or grant of rollback to B does not arise.


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19 TAXATION OF E-COMMERCE TRANSACTIONS

(A) Equalisation levy [Chapter VIII of the Finance Act, 2016]

Related amendment in sections: 10 & 40(a)

(i) Growth of e-commerce and concerns emerging therefrom:

(1) The rapid growth of information and communication technology has resulted in

substantial expansion of the supply and procurement of digital goods and

services everywhere, including India. The digital economy is growing at 10%

per year, significantly faster than the global economy as a whole.

(2) At present, in the digital domain, business may be conducted without regard to

national boundaries and may dissolve the link between an income-producing

activity and a specific location. Hence, business in digital domain doesn’t

actually occur in any physical location but instead takes place in "cyberspace."

Persons carrying business in digital domain could be located anywhere in the

world. Entrepreneurs across the world have been quick to evolve their

business to take advantage of these changes. It has also made it possible for

the businesses to conduct themselves in ways that did not exist earlier, and

given rise to new business models that rely more on digital and

telecommunication network, do not require physical presence, and derives

substantial value from data collected and transmitted from such networks.

(ii) Taxation issues relating to e-commerce:

These new business models have created new tax challenges. The typical taxation

issues relating to e-commerce are:

(1) the difficulty in characterizing the nature of payment and establishing a nexus

or link between a taxable transaction, activity and a taxing jurisdiction,

(2) the difficulty of locating the transaction, activity and identifying the taxpayer for

income tax purposes.

The digital business, thus, challenges physical presence-based permanent

establishment rules. If permanent establishment (PE) principles are to remain

effective in the new economy, the fundamental PE components developed for the

old economy i.e. place of business, location, and permanency must be reconciled

with the new digital reality.


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(iii) OECD Recommendations under Action Plan 1 of the BEPS project :

The OECD has recommended several options to tackle the direct tax challenges

which include:

(1) Modifying the existing Permanent Establishment (PE) rule to provide that

whether an enterprise engaged in fully de-materialized digital activities would

constitute a PE, if it maintained a significant digital presence in another

country's economy.

(2) A virtual fixed place of business PE in the concept of PE i.e., creation of a PE

when the enterprise maintains a website on a server of another enterprise

located in a jurisdiction and carries on business through that website.

(3) Imposition of a final withholding tax on certain payments for digital goods or

services provided by a foreign e-commerce provider or imposition of a

equalisation levy on consideration for certain digital transactions received by a

non-resident from a resident or from a non-resident having permanent

establishment in other contracting state.

Taking into consideration the potential of new digital economy and the rapidly

evolving nature of business operations, it becomes necessary to address the

challenges in terms of taxation of such digital transactions.

(iv) Equalisation Levy - Insertion of Chapter VIII in the Finance Act, 2016 :

In order to address these challenges, Chapter VIII of the Finance Act, 2016, titled

"Equalisation Levy", provides for an equalisation levy of 6% of the amount of

consideration for specified services received or receivable by a non-resident not having

permanent establishment in India, from a resident in India who carries out business or

profession, or from a non-resident having permanent establishment in India.

(v) Meaning of “Specified Service”:

(1) Online advertisement;

(2) Any provision for digital advertising space or any other facility or service for the

purpose of online advertisement;

Note - Specified Service also includes any other service as may be notified by the

Central Government.

(vi) Relief to small players in the digital domain :

Further, in order to reduce burden of small players in the digital domain, it is also

provided that no such levy shall be made if the aggregate amount of consideration

for specified services received or receivable by a non-resident from a person

resident in India or from a non-resident having a permanent establishment in India

does not exceed ` 1 lakh in any previous year.


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(vii) Provisions of new Chapter on Equalisation Levy :

To provide certainty and to avoid interpretational issues, certain terms and

expressions used therein have been defined. Further, the procedure to be adopted

for collection and recovery of equalisation levy has been provided.

In order to provide for the administrative mechanism of the equalisation levy, the

new Chapter provides for statutory authorities and also prescribes the duties and

powers of the authorities to administer the equalisation levy. In order to ensure

effective compliance, interest, penalty and prosecution in case of defaults have

been included with sufficient safeguards.

(viii) Central Government empowered to make rules:

Further, the Central Government is empowered to make rules for the purposes of

carrying out the provisions of this Chapter. Also, every Rule made under this

Chapter shall be laid before each House of Parliament.

Accordingly, vide Notification No.38/2016 dated 27.5.2016, Equalisation Levy Rules,

2016 were notified, which come into force on 1st June, 2016.

(ix) Consequential amendments in the Income-tax Act, 1961:

Section Provision

(1) 10(50) In order to avoid double taxation, new clause (50) has been inserted in section 10 to exempt any income arising from providing any specified service on or after the date on which the provisions of Chapter VIII of the Finance Act, 2016 comes into force, and chargeable to equalisation levy under that Chapter.

(2) 40(a)(ib) In order to ensure compliance with the provisions this Chapter, clause (ib) has been inserted in section 40(a) to provide that if any consideration is paid or payable to a non-resident for a specified service on which equalisation levy is deductible, and such levy has not been deducted or after deduction, has not been paid on or before the due date under section 139(1), then, such expenses incurred by the assessee towards consideration for specified service shall not be allowed as deduction.

However, where in respect of such consideration, if the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified under section 139(1), such sum shall be allowed as deduction in computing the income of the previous year in which such levy has been paid.


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20 INCOME TAX AUTHORITIES

(A) Time limit for calling in question jurisdiction of Assessing Officer where notice is

served under section 153A(1) or 153C(2) [Section 124(3)]


(i) Section 124(3)(a) provides that no person shall be entitled to call in question the

jurisdiction of an Assessing Officer in a case where return is filed under section 139(1),

after the expiry of one month from the date on which he was served with a notice issued

under section 142(1) or section 143(2) or after the completion of the assessment,

whichever is earlier.

(ii) This provision does not, however, specifically refer to notices issued under section 153A

or section 153C which relate to assessment in cases where a search and seizure action

has been taken or cases connected to such cases.

(iii) Consequently, at the appellate stages, the jurisdiction of an Assessing Officer in such

cases have been called into question, inspite of the fact that order passed under section

153A or 153C has to be read with section 143(3).

(iv) For the purpose of conveying the real intent of law in such cases, clause(c) has been

inserted in section 124(3) to specifically provide that in cases where search is initiated

under section 132 or books of accounts, other documents or any assets are

requisitioned under section 132A, no person shall be entitled to call into question the

jurisdiction of an Assessing Officer after the expiry of one month from the date on

which he was served with a notice under section 153A(1) or section 153C(2) or

after the completion of the assessment, whichever is earlier.


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21 ASSESSMENT PROCEDURE


(A) Rationalisation of provisions relating to filing of return of income [Section 139]


For the purposes of rationalising the time allowed for filing of returns, completion of proceedings, and realization of revenue without undue compliance burden on the taxpayer, and to encourage due compliance, the following amendments have been effected in section 139:

Section Provision Amendment by the Finance Act, 2016

(i) 139(1) [Sixth proviso]

Mandatory filing of return if total income before giving effect to deductions under Chapter VIA exceed basic exemption limit

Every person, being an individual or HUF or an AOP or a BOI, whether incorporated or not or any artificial juridical person, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year, without giving effect to provisions of Chapter VI-A, exceeds the basic exemption limit shall be liable to furnish return on or before the due date.

Mandatory filing of return if total income before giving effect to exemption u/s 10(38) in respect of long-term capital gains exceed basic exemption limit

If such a person earns income by way of long-term capital gains in the previous year, which is exempt under section 10(38), and income of such person without giving effect to section 10(38) exceeds the basic exemption limit, then also such person shall be liable to mandatorily file return of income for the previous year on or before the due date.

(ii) 139(4) Time limit for filing belated return:

A person who has not furnished a return within the time allowed to him under section 139(1), or

Reduction of time limit for filing belated return:

Any person who has not furnished a return within the time allowed to him under section 139(1), may


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within the time allowed under a notice issued under section section 142(1), may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

furnish the return for any previous year at any time before the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

Thus, belated return can be filed only in case a person has not furnished his return within the time allowed under section 139(1). Also, the belated return cannot be furnished after the end of the relevant assessment year.

(iii) 139(5) Belated return cannot be revised:

If any person, having furnished the return under section 139(1), or in pursuance of a notice issued under section 142(1), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before one year from the end of the relevant assessment year or completion of assessment, whichever is earlier.

Belated return can be revised:

If any person, having furnished a return under section 139(1) or belated return under section 139(4), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

An enabling provision for revision of belated return has been introduced. However, a return furnished in pursuance of a notice issued under section 142(1) cannot be revised.

(iv) Clause (aa) – Expln to 139(9)

Return deemed to be defective if self-assessment tax is not paid before furnishing the return

A return of income shall be regarded as defective unless the self-assessment tax together with interest, if any, payable in accordance with the provisions of section 140A, has been paid on or before the date of furnishing of return.

Return not deemed to be defective if self-assessment tax is not paid before furnishing the return

A return which is otherwise valid would not be treated defective merely because self-assessment tax and interest payable in accordance with the provisions of section 140A has not been paid on or before the date of furnishing of the return.


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(B) Scope of permissible adjustments while processing a return under section 143(1)(a)

expanded


(i) As per section 143(1)(a), a return filed is to be processed and total income or loss is to be computed after making the adjustments on account of any arithmetical error in the return or on account of an incorrect claim, if such incorrect claim is apparent from any information in the return.

(ii) For the purpose of facilitating removal of mismatch between the return of income and the information available with the Department, the scope of adjustments that can be made at the time of processing of returns under section 143(1) has been expanded.

(iii) Accordingly, with effect from 1st April, 2017, the following adjustments can also be made at the time of processing of returns u/s 143(1):

(iv) Thus, adjustments can be made on the basis of data available with the Department in

the form of audit report filed by the assessee, returns of earlier years of the assessee,

Form 26AS, Form 16, and Form 16A.

(v) However, before making any such adjustments, in the interest of natural justice, an

intimation has to be given to the assessee requiring him to respond to such

adjustments. Such intimation may be in writing or through electronic mode. The

response received, if any, has to be duly considered before effecting any adjustment.

However, if no response is received within 30 days of issue of such intimation, the

processing shall be carried out incorporating the adjustments.

Disallowance of loss claimed, if return is filed beyond due date u/s 139(1)

Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return

Disallowance of deduction u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if return

is filed beyond due date u/s 139(1)

addition of income appearing in Form 26AS or Form 16A/16 which has not been included in

computing the total income in the return


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(C) Mandatory processing of return of income before issuance of assessment order

[Section 143(1D)]


(i) Section 143(1) requires processing of return of income filed under section 139(1) or

in response to a notice issued under section 142(1).

(ii) An intimation has to be prepared or generated and sent to the assessee specifying

the sum payable or the refund due, to the assessee.

(iii) No intimation can be sent after the expiry of one year from the end of the financial

year in which the return is made. This is provided in the second proviso to section

143(1).

(iv) Section 143(1D) provides that processing of a return is not necessary where a

notice has been issued to the assessee under section 143(2).

(v) Section 143(1D) has now been substituted to provide that the processing of a return

is not necessary before the expiry of the one year from the end of the financial year

in which the return is made, where notice has been issued to the assessee under

section 143(2).

(vi) However, the return has to be processed before the issuance of an order under

section 143(3).

(D) Time limits for completion of assessment, reassessment and recomputation

[Section 153]


(i) The time limit for completion of assessment proceedings is 2 years from the end of

the assessment year in which the income was first assessable. Further, no order of

assessment, reassessment or recomputation could be made under section 147 after

the expiry of one year from the end of the financial year in which notice under

section 148 was served.

Since digitisation of processes within the Department has enhanced its efficiency in

handling workload, the time limit has been accordingly reduced, so that the

assessment proceedings are finalised more expeditiously.

(ii) In order to simplify the provisions of section 153 by retaining only those provisions

that are relevant to the current provisions of the Act, section 153 has been

substituted with effect from 1st June, 2016 to provide for the new time limits for

completion of assessment in the following cases:

Section Proceeding New Time limit for completion of assessment or reassessment

153(1) Order of assessment u/s 143 or 144

21 months from the end of the assessment year in which the income was first assessable


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153(2) Order of assessment, reassessment or recomputation u/s 147

9 months from the end of the financial year in which the notice u/s 148 was served

153(3) Fresh assessment u/s 143/144/147 where the original assessment has been set aside, cancelled and referred back to the Assessing Officer by an order u/s 254/263/264

9 months from the end of the financial year in which the said order u/s 254 is received by the PCC/CC/PC/CIT4 or the order u/s 263 or u/s 264 is passed by the PC/CIT

153(4) Where a reference is made to the TPO u/s 92CA(1) during the course of proceeding for assessment or reassessment:

An additional time period of 12 months is available for completion of assessment/reassessment in such cases:

Completion of assessment u/s 143 or u/s 144.

33 months from the end of the assessment year in which the income was first assessable.

Completion of assessment/ reassessment/re-computation u/s 147

21 months from the end of the financial year in which notice u/s 148 is served.

Completion of fresh assessment in pursuance of an order u/s 254 (received by the PCC or CC/PC or CIT) or an order passed by the PC or CIT u/s 263 or u/s 264.

21 months from the end of the financial year in which such order u/s 254 is received by the PCC or CC/PC or CIT or such order u/s 263 or 264 is passed by the PC or CIT, as the case may be.

153(5) Effect to be given by the Assessing Officer, to an order u/s 250/254/260/262/263/264, wholly or partly, otherwise than by making a fresh assessment or reassessment

3 months from the end of the month in which the order u/s 250/254/260/262 is received by the PCC/CC/PC/CIT or the order u/s 263/264 is passed by the PC/CIT.

Note – Additional period of 6 months may be allowed to the A.O. to give effect to order if the PC/CIT is satisfied, on an application from the A.O., that the order could not be given effect to within 3 months due to reasons beyond the control of the

4 Principal Chief Commissioner (PCC) / Chief Commissioner (CC) / Principal Commissioner (PC) / Commissioner

of Income-tax (CIT).


135

A.O.

However, in respect of cases pending as on 1st June 2016, the time limit for passing such order is extended to 31.3.2017. This is provided under section 153(7).

153(6)(i) Where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order u/s 250/254/260/262/263/264 or in an order of any court in a proceeding otherwise than by way of appeal or reference.

12 months from the end of the month in which the order is received or passed by the PC or CIT.

Note – However, for cases pending as on 1.6.2016, the time limit for taking requisite action by the AO in respect of the assessee would be 31.3.2017. This is provided under section 153(7).

153(6)(ii) Where, in the case of a firm, an assessment is made on a partner of the firm in consequence of an assessment made on the firm under section 147

12 months from the end of the month in which the assessment order in the case of the firm is passed.

Note – However, for cases pending as on 1.6.2016, the time limit for taking requisite action would be 31.3.2017. This is provided under section 153(7).

153(8) The order of assessment or reassessment, relating to any assessment year, which stands revived under section 153A(2)

1 year from the end of the month of such revival or within the period specified in section 153 or section 153B(1), whichever is later.

Note - This is notwithstanding anything contained in the foregoing provisions of section 153, section 153A(2) or section 153B(1).

Note - The provisions of section 153, as they stood immediately before their amendment

by the Finance Act, 2016, shall apply to and in relation to any order of assessment,

reassessment or recomputation made before 1st June, 2016.

(iii) Exclusion of period [Explanation 1 to section 153] - In computing the period of

limitation for the purposes of section 153 the following time periods shall be excluded :


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Case Exclusion of Period

Commencing from Ending with

(1) Contravention of the provisions of section 10(21)/(22B)/(23A)/ (23B)/(23C)(iv)/(v)/ (vi)/(via)

the date on which the A.O. intimates the Central Government or the prescribed authority, the said contravention as required under clause (i) of the proviso to section 143(3)

the date on which the copy of the order withdrawing the approval or rescinding the notification, as the case may be, is received by the A.O.

(2) Direction to get accounts audited under section 142(2A)

the date on which the A.O. directs the assessee to get his accounts audited under section 142(2A)

the last date on which the assessee is required to furnish a report of such audit

(or)

the date on which the order setting aside such direction is received by the PC/CIT, if such direction is challenged before a Court.

(3) Reference to the Valuation Officer under section 142A(1)

the date on which the Assessing Officer makes a reference to the Valuation Officer

the date on which the report of the Valuation Officer is received by the Assessing Officer.

(4) Where the assessee furnishes declaration claiming that any question of law arising in his case for an assessment year which is pending before the A.O. or any appellate authority is identical with a question of law arising in his case for another A.Y. which is pending before the

the date on which the Assessing Officer received the declaration under section 158A(1)

the date on which the order under section 158A(3) is made by him

Note – However, such period cannot exceed 60 days.


137

High Court or Supreme Court.

(5) Where an application made before the Income-tax Settlement Commission is rejected by it or is not allowed to be proceeded with by it

the date on which an application is made before the Settlement Commission under section 245C

the date on which the order u/s 245D(1) is received by the PC or CIT u/s 245D(2)

(6) Where an application is made before the AAR u/s 245Q(1)

the date on which an application is made before the AAR u/s 245Q(1)

the date on which the order rejecting the application is received by the PC/CIT u/s 245R(3)

(or)

the date on which the advance ruling pronounced by it is received by the PC/CIT u/s 245R(7)

(7) Where reference(s) for exchange of information is made by a competent authority

the date on which a reference or first of the references for exchange of information is made by an authority competent under an agreement referred to in section 90 or section 90A

the date on which the information requested is last received by the PC/CIT

(or)

a period of one year,

whichever is less

(8) the time taken in reopening the whole or any part of the proceeding or in giving an opportunity to the assessee to be re-heard under the proviso to section 129; or

(9) the period during which the assessment proceeding is stayed by an order or injunction of any court.

(iv) However, where immediately after the exclusion of the aforesaid period, the period of

limitation referred to in section 153(1)/(2)/(3)/(8) available to the Assessing Officer for

making an order of assessment, reassessment or recomputation, as the case may be, is

less than 60 days, such remaining period shall be extended to 60 days and the aforesaid

period of limitation shall be deemed to be extended accordingly.

(v) Further, where the period available to the Transfer Pricing Officer is extended to 60 days

in accordance with the proviso to section 92CA(3A) and the period of limitation available

to the Assessing Officer for making an order of assessment, reassessment or


138

recomputation, as the case may be, is less than 60 days, such remaining period shall be

extended to 60 days and the aforesaid period of limitation shall be deemed to be

accordingly extended.

(vi) (a) Where a proceeding before the Settlement Commission abates under section

245HA, the period of limitation available under this section to the Assessing Officer

for making an order of assessment, reassessment or recomputation, as the case

may be, after the exclusion of the period under section 245HA(4), would be not less

than one year; and

(b) where such period of limitation is less than 1 year, it shall be deemed to have been

extended to 1 year;

(c) This would apply for the purposes of determining the period of limitation under

sections 149, 153B, 154, 155 and 158BE and for the purposes of payment of

interest under section 244A.

(vii) For the purposes of this section, ,—

Case Consequence

(a) Where, by an order referred to in section 153(6)(i), any income is excluded from the total income of the assessee for an assessment year

An assessment of such income for another assessment year shall, for the purposes of sections 150 and 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order

(b) Where, by an order referred to in section 153(6)(i), any income is excluded from the total income of one person and held to be the income of another person

An assessment of such income on such other person shall, for the purposes of section 150 and section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order, provided such other person was given an opportunity of being heard before the said order was passed.

(E) Time limit for completion of assessment under section 153A [New Section 153B]


(i) The time limit for completion of assessments made under section 153A or section

153C cases have been amended to align the same with the new time limits provided

under new section 153. Further, in order to simplify the provisions of section 153B

by retaining only those provisions that are relevant to the current provisions of the

Act, section 153B has been substituted.


139

(ii) The time limit for assessment or reassessment under section 153B with effect from 1st

June, 2016 is as follows -

Section Proceeding under section Time limit for completion of assessment or reassessment

153B(1) 153A – for the assessment year relevant to the previous year in which search is conducted u/s 132 or requisition is made u/s 132A and for each of the 6 assessment years immediately preceding the assessment year relevant to the previous year in which search was conducted

21 months from the end of the financial year in which the last of the authorizations for search under section 132 or for requisition under section 132A was executed

153B(1) – First Proviso

In case of a person assessed under section 153C – for the assessment year relevant to the previous year in which search is conducted and for each of the 6 assessment years immediately preceding the assessment year relevant to the previous year in which search was conducted

21 months from the end of the financial year in which last of the authorizations for search under section 132 or for requisition under section 132A was executed

(or)

9 months from the end of the financial year in which books of account or documents or assets seized or requisitioned are handed over to the jurisdictional Assessing Officer under section 153C,

whichever is later

153B(1) – Second Proviso

Completion of assessment in cases where the last of the authorizations for search under section 132 or for requisition under section 132A was executed and during the course of assessment or reassessment proceedings, reference u/s 92CA(1) is made.

33 months from the end of the financial year in which the last of the authorizations for search under section 132 or requisition under section 132A was executed.


140

Completion of assessment/ reassessment in case of other person referred to in section 153C in cases where the last of the authorizations for search under section 132 or for requisition under section 132A was executed and during the course of assessment or reassessment proceedings, reference u/s 92CA(1) is made.

33 months from the end of the financial year in which the last of the authorizations for search under section 132 or for requisition under section 132A was executed

(or)

21 months from the end of the financial year in which the books of account or documents or assets seized or requisitioned are handed over under section 153C to the Assessing Officer having jurisdiction over such other person,

whichever is later.

(iii) Time of deemed execution of authorization in case of search and requisition :

Case Time when authorization is deemed to have been executed

(a) Search u/s 132 On the conclusion of search as recorded in the last panchnama drawn in relation to any person in whose case the warrant of authorisation has been issued

(b) Requisition u/s 132A

On the actual receipt of books of account or other documents or assets by the Authorised Officer.

(iv) The provisions of section 153B as they stood immediately before their amendment

by the Finance Act, 2016, shall apply to and in relation to any order of assessment,

reassessment or recomputation made before 1st June, 2016.

(v) Exclusion of period [Explanation to section 153B] - In computing the period of

limitation for the purposes of section 153B, the following time periods shall be excluded:

Case

Exclusion of Period

Commencing from Ending with

(1) Direction to get accounts audited under section 142(2A)

the date on which the A.O. directs the assessee to get his accounts audited under section 142(2A)

the last date on which the assessee is required to furnish a report of such audit

(or)

the date on which


141

the order setting aside such direction is received by the PC/CIT, if such direction is challenged before a Court.

(2) Reference to the Valuation Officer under section 142A(1)

the date on which the Assessing Officer makes a reference to the Valuation Officer

the date on which the report of the Valuation Officer is received by the Assessing Officer

(3) Where an application made before the Income-tax Settlement Commission is rejected by it or is not allowed to be proceeded with by it

the date on which an application is made before the Settlement Commission under section 245C

the date on which the order u/s 245D(1) is received by the PC/CIT u/s 245D(2)

(4) Where an application is made before the AAR u/s 245Q(1)

the date on which an application is made before the AAR u/s 245Q(1)

the date on which the order rejecting the application is received by the PC/CIT u/s 245R(3)

(or)

the date on which the advance ruling pronounced by it is received by the PC/CIT u/s 245R(7),

as the case may be.

(5) Where a proceeding or assessment order or reassessment order referred to in section 153A(2) is annulled

The date of annulment of the proceeding or assessment order or reassessment order

The date of receipt of order setting aside the order of such annulment, by the PC/CIT.

(6) Where reference(s) for exchange of information is made by a competent authority

the date on which a reference or first of the references for exchange of information is made by

the date on which the information requested is last received by the


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an authority competent under an agreement referred to in section 90 or section 90A

PC/CIT

(or)

a period of one year,

whichever is less

(7) the time taken in reopening the whole or any part of the proceeding or in

giving an opportunity to the assessee to be re-heard under the proviso to

section 129; or

(8) the period during which the assessment proceeding is stayed by an order

or injunction of any court.

(vi) However, where immediately after the exclusion of the aforesaid period, the period of

limitation referred to in section 153B(1)(a) and (b) available to the Assessing Officer

for making an order of assessment or reassessment, as the case may be, is less than

60 days, such remaining period shall be extended to 60 days. Consequently, the

aforesaid period of limitation shall be deemed to be extended accordingly.

(vii) Further, where the period available to the Transfer Pricing Officer is extended to 60

days in accordance with the proviso to section 92CA(3A) and the period of limitation

available to the Assessing Officer for making an order of assessment, reassessment

or recomputation, as the case may be, is less than 60 days, such remaining period

shall be extended to 60 days. Consequently, the aforesaid period of limitation shall

be deemed to be accordingly extended.

(F) Deemed escapement of income on the basis information obtained by the Income-tax

authorities [Section 147]

Related amendment is section: 133C


(i) Section 133C empowers the prescribed income-tax authority to issue notice calling for

information and documents for the purpose of verification of information in its

possession.

(ii) For the purpose of expediting verification and analysis of the information and documents

so received, sub-section (2) has been inserted in section 133C to provide that where

any information or document has been received in response to a notice issued under

section 133C(1), the prescribed income-tax authority may process such information or

document so obtained and make the outcome thereof available to the Assessing Officer,

for necessary action, if any.

(iii) Thus, this amendment provides sufficient legislative backing for processing of

information and documents so obtained and making the outcome thereof available to

the Assessing Officer for necessary action, if any.


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(iv) Explanation 2 to section 147 specifies certain cases where income chargeable to tax is

deemed to have escaped assessment. Clause (ca) has been inserted in Explanation 2

to provide the circumstances where income shall be deemed to have escaped

assessment in the cases mentioned in (1) and (2) hereunder:

Case Deemed escapement of income

(1) Where a return of income has not been furnished by the assessee

On the basis of information or document received from the prescribed income-tax authority, under section 133C(2), it is noticed by the Assessing Officer that the income of the assessee exceeds the basic exemption limit

(2) Where a return of income has been furnished by the assessee

On the basis of information or document received from the prescribed income-tax authority, under section 133C(2), it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return

Since income is deemed to have escaped assessment in such cases, the Assessing

Officer can reopen the assessment on the basis of the information so received.


1. Monetary limits of specified transactions which require quoting of PAN enhanced

with effect from 1stJanuary, 2016 [Notification No. 95/2015, dated 30-12-2015]

The Government is committed to curbing the circulation of black money and widening of

tax base. To collect information of certain types of transactions from third parties in a

non-intrusive manner, it is mandatory under Rule 114B of the Income-tax Rules, 1962 to

quote PAN where the transactions exceed a specified limit. To bring a balance between

burden of compliance on legitimate transactions and the need to capture information

relating to transactions of higher value, Rule 114B has been substituted to enhance the

monetary limits of certain transactions which require quoting of PAN.

S. No.

Nature of transaction Value of transaction

1. Sale or purchase of a motor vehicle or vehicle, as defined in the Motor Vehicles Act, 1988 which requires registration by a registering authority under that Act, other than two wheeled vehicles.

All such transactions

2. Opening an account [other than a time-deposit referred to at Sl. No.12 and a Basic Savings Bank Deposit Account] with a banking company or a co-operative bank to which the Banking



144

Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act).

3. Making an application to any banking company or a co-operative bank to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in section 51 of that Act) or to any other company or institution, for issue of a credit or debit card.


4. Opening of a demat account with a depository, participant, custodian of securities or any other person registered under section 12(1A) of the Securities and Exchange Board of India Act, 1992.


5. Payment to a hotel or restaurant against a bill or bills at any one time.

Payment in cash of an amount exceeding ` 50,000.

6. Payment in connection with travel to any foreign country or payment for purchase of any foreign currency at any one time.

Payment in cash of an amount exceeding ` 50,000.

7. Payment to a Mutual Fund for purchase of its units

Amount exceeding ` 50,000.

8. Payment to a company or an institution for acquiring debentures or bonds issued by it.


9. Payment to the Reserve Bank of India for acquiring bonds issued by it.


10. Deposit with a banking company or a co-operative bank to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in section 51 of that Act).

Deposits in cash exceeding ` 50,000 during any one day.

11. Purchase of bank drafts or pay orders or banker’s cheques from a banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act).

Payment in cash of an amount exceeding ` 50,000 during any one day.

12. A time deposit with, -

(i) a banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) a Post Office;

(iii) a Nidhi referred to in section 406 of the Companies Act, 2013; or

Amount exceeding ` 50,000 or aggregating to more than ` 5 lakh during a financial year.


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(iv) a non-banking financial company which holds a certificate of registration under section 45-IA of the Reserve Bank of India Act, 1934, to hold or accept deposit from public.

13. Payment for one or more pre-paid payment instruments, as defined in the policy guidelines for issuance and operation of pre-paid payment instruments issued by Reserve Bank of India under the Payment and Settlement Systems Act, 2007, to a banking company or a co-operative bank to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in section 51 of that Act) or to any other company or institution.

Payment in cash or by way of a bank draft or pay order or banker’s cheque of an amount aggregating to more than ` 50,000 in a financial year.

14. Payment as life insurance premium to an insurer as defined in the Insurance Act, 1938.

Amount aggregating to more than ` 50,000 in a financial year.

15. A contract for sale or purchase of securities (other than shares) as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956.

Amount exceeding ` 1 lakh per transaction

16. Sale or purchase, by any person, of shares of a company not listed in a recognised stock exchange.

Amount exceeding ` 1 lakh per transaction.

17. Sale or purchase of any immovable property. Amount exceeding ` 10 lakh or valued by stamp valuation authority referred to in section 50C at an amount exceeding ` 10 lakh

18. Sale or purchase, by any person, of goods or services of any nature other than those specified at Sl. No. 1 to 17 of this Table, if any.

Amount exceeding ` 2 lakh per transaction:

Minor to quote PAN of parent or guardian

Where a person, entering into any transaction referred to in this rule, is a minor and who does

not have any income chargeable to income-tax, he shall quote the PAN of his father or

mother or guardian, as the case may be, in the document pertaining to the said transaction.

Declaration by a person not having PAN

Further, any person who does not have a PAN and who enters into any transaction

specified in this rule, shall make a declaration in Form No.60 giving therein the

particulars of such transaction.

Non-applicability of Rule 114B

Also, the provisions of this rule shall not apply to the following class or classes of


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persons, namely:-

(i) the Central Government, the State Governments and the Consular Offices;

(ii) the non-residents referred to in section 2(30) in respect of the transactions other

than a transaction referred to at Sl. No. 1 or 2 or 4 or 7 or 8 or 10 or 12 or 14 or 15

or 16 or 17 of the Table.

Meaning of certain phrases:

Phrase Inclusion

(1) Payment in connection with travel

Payment towards fare, or to a travel agent or a tour operator, or to an authorized person as defined in section 2(c) of the Foreign Exchange Management Act, 1999

(2) Travel agent or tour operator

A person who makes arrangements for air, surface or maritime travel or provides services relating to accommodation, tours, entertainment, passport, visa, foreign exchange, travel related insurance or other travel related services either severally or in package

(3) Time deposit Any deposit which is repayable on the expiry of a fixed period.

2. Applicability of Supreme Court Guidelines on recording of satisfaction note under

section 158BD to apply to proceedings under section 153C for the purposes of

assessment of income of a person other than the person in respect of whom

search is initiated under section 132 or books of account are requisitioned under

section 132A [Circular No.24/2015, dated 31-12-2015]

The issue of recording of satisfaction for the purposes of section 158BD/153C has been subject matter of litigation.

The Hon'ble Supreme Court in the case of M/s Calcutta Knitwears in its detailed judgment in Civil Appeal No. 3958 of 2014 dated 12-3-2014 (available in NJRS at 2014-LL-0312-51) has laid down that for the purpose of section 158BD of the Act, recording of a satisfaction note is a pre-requisite and the satisfaction note must be prepared by the Assessing Officer before he transmits the record to the other Assessing Officer who has jurisdiction over such other person under section 158BD5. The Supreme Court held that "the satisfaction note could be prepared at any of the following stages:

5 Section 158BC lays down the procedure for block assessment dealt with in Chapter XIV -B of the Income-tax Act,

1961, which applies where search is initiated under section 132 or books of account are requisitioned under section 132A on or before 31.5.2003. Section 158BD provides that where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person wi th respect to whom search is made under section 132 or books of account are requisitioned under section 132A, then, the books of account, other documents seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed under section 158BC against such other person and the provisions of Chapter XIV-B shall apply accordingly.


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a. at the time of or along with the initiation of proceedings against the searched person under section 158BC; or

b. in the course of the assessment proceedings under section 158BC; or

c. immediately after the assessment proceedings are completed under section 158BC of the searched person.

Several High Courts have held that the provisions of section 153C are substantially similar/ pari-materia to the provisions of section 158BD and therefore, the above guidelines of the Supreme Court, apply to proceedings under section 153C, for the purposes of assessment of income of other than the searched person. This view has been accepted by CBDT.

It is further clarified that even if the Assessing Officer of the searched person and the "other person" is one and the same, then also he is required to record his satisfaction as has been held by the Courts.


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24 APPEALS & REVISION


(A) Removal of reference to “Senior Vice President”[Section 252]


(i) Section 252(3)(b), 252(4A) and 252(5) provide for the appointment and powers of Senior Vice-President of the Appellate Tribunal.

(ii) Considering the fact that there are no extra-judicial or administrative duties or difference in the pay scale attached with the post of Senior Vice-President in the Tribunal, the reference of "Senior Vice-President" in this section has been omitted.

(B) Provision for filing of appeal by the Assessing Officer against the order of DRP done away with [Section 253]


(i) Under section 253(2A), the Principal Commissioner or Commissioner may, if he objects to any direction issued by the Dispute Resolution Panel (DRP) under section 144C(5) in pursuance of which the Assessing Officer has passed an order completing the assessment or reassessment, direct the Assessing Officer to appeal to the Appellate Tribunal against such order.

(ii) Further, section 253(3A) provides that every appeal under section 253(2A) shall be filed within 60 days of the date on which the order sought to be appealed against is passed by the Assessing Officer in pursuance of the directions of the DRP under section 144C(5).

(iii) In order to minimise litigation, sub-sections (2A) and (3A) of section 253 have been omitted. Thus, the provision for filing of appeal by the Assessing Officer against the order of the DRP has been done away with.

(iv) In cases where Department is already in appeal against the directions of DRP under section 253(2A), no fee shall be payable. This amendment will take effect retrospectively from 1st July, 2012.

(v) Further, the existing sub-section (4) has been substituted with new sub-section (4). Accordingly, on receipt of notice that appeal against order of Commissioner (Appeals) has been preferred by the Assessing Officer or the assessee, as the case may be, the other party can file memorandum of cross objections within 30 days of


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receipt of notice against any part of the order of Commissioner (Appeals). The Appellate Tribunal has to dispose of the memorandum of cross objections as if it were an appeal filed within the given time limit.

(C) Reduction in time limit for rectification of mistake apparent from the record by the Appellate Tribunal [Section 254(2)]

(i) Section 254(2) provides that the Appellate Tribunal may rectify any mistake apparent from the record in its order at any time within four years from the date of the order.

(ii) For bringing in certainty to the order of Appellate Tribunal, section 254(2) has been amended to provide that the Appellate Tribunal may rectify any mistake apparent

from the record in its order at any time within six months from the end of the

month in which the order was passed.

(D) Raising the total income limit of the cases that may be decided by single member bench of Appellate Tribunal [Section 255(3)]


(i) Section 255(1) provides that the powers and functions of the Appellate Tribunal may be exercised and discharged by Benches constituted by the President of the Appellate Tribunal among the members thereof.

(ii) As per section 255(2), a Bench should normally consist of one judicial member and one accountant member.

(iii) However, section 255(3) provides for constitution of a single member bench and a Special Bench.

(iv) Section 255(3) provides that a single member bench may dispose of any case which pertains to an assessee whose total income as computed by the Assessing Officer

in the said case does not exceed ` 15 lakh.

(v) The limit for a single member bench was revised last year from ` 5 lakh to ` 15 lakh.

(vi) In order to further expedite the process of dispute resolution at the appellate tribunal level, section 255(3) has been amended to provide that a bench comprising of a single member may dispose of a case where the total income as computed by the

Assessing Officer in the said case does not exceed ` 50 lakh.


1. Revision of monetary limits for filing of appeals by the Department before Income

Tax Appellate Tribunal and High Courts and SLP before Supreme Court – A

significant measure for reducing litigation [Circular No. 21/2015, dated 10‐12‐2015]

The CBDT has, through this circular, revised the monetary limits for filing of appeals by

the Department with the objective of reducing litigation as a part of its initiatives to

reduce grievances of the tax payers.


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Accordingly, henceforth, appeals/ SLPs shall not be filed in cases where the tax effect

does not exceed the monetary limits given hereunder -

S. No. Appeals in income-tax matters Monetary limit (` )

1. Before Appellate Tribunal 10,00,000

2. Before High Court 20,00,000

3. Before Supreme Court 25,00,000

It is also clarified that an appeal should not be filed merely because the tax effect in a

case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to

be decided on merits of the case.

Meaning of Tax Effect:

Case Tax effect

(i) In cases not covered in (ii), (iii) and (iv) below

The tax on the total income assessed

( - )

The tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed ("disputed issues").

Note - However, the tax will not include any interest thereon, except where chargeability of interest itself is in dispute.

(ii) In case the chargeability of interest is the issue under dispute

The amount of interest

(iii) In cases where returned loss is reduced or assessed as income

The tax effect would include notional tax on disputed additions

(iv) In case of penalty orders

Quantum of penalty deleted or reduced in the order to be appealed against

Manner of calculation of tax effect of different assessment years :

The Assessing Officer has to calculate the tax effect separately for every· assessment year in respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the specified monetary limit. No appeal shall be filed in respect of an assessment year or years in which the·tax effect is less than the monetary limit specified. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any


151

High Court or appellate authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the 'tax effect' is less than the prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of the year(s) in which ‘tax effect’ exceeds·the monetary limit· prescribed. In case where a composite order/judgement involves more than one assessee, each assessee shall be dealt with separately.

Department not precluded from filing an appeal against disputed issues for subsequent assessment years if the tax effect exceeds the specified monetary limits in those years

In a case where appeal before a Tribunal or a Court is not filed only on account of the tax effect being less than the monetary limit specified above, the Commissioner of Income-tax shall specifically record that "even though the decision is not acceptable, appeal is not being filed only on the consideration that the tax effect is less than the monetary limit specified in this instruction". Further, in such cases, there will be no presumption that the Income-tax Department has acquiesced in the decision on the disputed issues. The Income-tax Department shall not be precluded from filing an appeal against the disputed issues in the case of the same assessee for any other assessment year, or in the case of any other assessee for the same or any other assessment year, if the tax effect exceeds the specified monetary limits.

Cases in respect of which appeal is not filed due to tax effect being less than specified monetary limit not to have any precedent value

In the past, a number of instances have come to the notice of the Board, whereby an assessee has claimed relief from the Tribunal or the Court only on the ground that the Department has implicitly accepted the decision of the Tribunal or Court in the case of the assessee for any other assessment year or in the case of any other assessee for the same or any other assessment year, by not filing an appeal on the same disputed issues. The Departmental representatives/counsels must make every effort to bring to the notice of the Tribunal or the Court that the appeal in such cases was not filed or not admitted only for the reason of the tax effect being less than the specified monetary limit and, therefore, no inference should be drawn that the decisions rendered therein were acceptable to the Department. Accordingly, they should impress upon the Tribunal or the Court that such cases do not have any precedent value. As the evidence of not filing appeal due to this instruction may have to be produced in courts, the judicial folders in the office of Cs IT must be maintained in a systemic manner for easy retrieval.

Circumstances when appeal can be filed even if tax effect is less than the specified monetary limit

Adverse judgments relating to the following issues should be contested on merits notwithstanding that the tax effect entailed is less than the specified monetary limits or there is no tax effect:

(a) Where the Constitutional validity of the provisions of an Act or Rule are under challenge, or

(b) Where Board's order, Notification, Instruction or Circular has been held to be illegal or ultra vires, or


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(c) Where Revenue Audit objection in the case has been accepted by the Department, or

(d) Where the addition relates to undisclosed foreign assets/bank accounts.

Specified monetary limit not to apply to writ matters and direct tax matters other

than income-tax

Filing of appeals in other direct tax matters shall continue to be governed by the relevant

provisions of statute and rules. Further, filing of appeal in cases of income-tax, where the

tax effect is not quantifiable or not involved, such as the case of registration of trusts or

institutions under section 12A, shall not be governed by the specified monetary limits and

decision to file appeal in such cases may be taken on merits of a particular case.

Clarification on applicability of Circular No 21/2015, dated 10-12-2105 [Letter F. No.

279/Misc./M-142/2007 - ITJ (Part), dated 08-03-2016]

The monetary limits for filing appeals before the Income Tax Appellate Tribunals and

High Courts were raised to ` 10 lakhs and ` 20 lakhs, respectively, by Circular 21/2015

dated 10.12.2015.

The issue under consideration is whether such circular would be applicable to cross

objections filed by the Department before the Income-tax Appellate Tribunal under

section 253(4) and to references to the High Court under sections 256(1) and 256(2) .

The CBDT has examined the matter and clarified that the monetary limit of ` 10 lakhs for

filing appeals before the ITAT would apply equally to cross objections under section

253(4). Cross objections below this monetary limit, already filed, should be pursued for

dismissal as withdrawn/not pressed. Filing of cross objections below the monetary limit

may not be considered henceforth.

Similarly, references to High Courts below the monetary limit of ` 20 lakhs should be

pursued for dismissal as withdrawn/not pressed. References below this limit may not be

considered henceforth.


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25 PENALTIES


(A) Penalty leviable for under-reporting of income and mis-reporting of income [New

section 270A]

Related amendment in sections: 119, 253, 271, 271A, 271AA, 271AAB, 273A and 279


(i) Section 271(1)(c) provides for penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income.

(ii) For the purpose of ensuring objectivity, certainty and clarity in the penalty provisions, new section 270A has been inserted with effect from A.Y.2017-18 providing for levy of penalty in cases of under reporting and misreporting of income. Consequently, the penal provisions under section 271 shall not apply in relation to A.Y.2017-18 and onwards.

(iii) Section 270A(1) empowers the Assessing Officer, Commissioner (Appeals) or the Principal Commissioner or Commissioner to direct levy of penalty, during the course of proceedings under the Income-tax Act, 1961, if a person has under reported his income. Such penalty shall be imposed by an order in writing by such authority.

(iv) Cases of under-reporting of income [Section 270A(2)]:

A person shall be considered to have under reported his income if, A>B in the cases

given hereunder –

Case (A) (B)

(1) Return of income has been filed

Income assessed Income determined in the return processed under section 143(1)(a);

(2) No return of income has been filed

Income assessed Basic exemption limit

(3) Reassessment Income reassessed Income assessed or reassessed immediately before such re-assessment

is greater than


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(4) Return of income has been filed and assessment/ reassessment is made on the basis of MAT/AMT provisions

The amount of deemed total income assessed or reassessed as per the provisions of section 115JB or 115JC

The deemed total income determined in the return processed u/s 143(1)(a)

(5) No return of income is filed and assessment/ reassessment is made on the basis of MAT/AMT provisions

the amount of deemed total income assessed as per the provisions of section 115JB or 115JC

The basic exemption limit, in case of an assessee being an individual, HUF, AOP, BOI, in respect of whom the provisions of AMT are applicable.

(6) Reassessment as per the provisions of sections 115JB or 115JC

The amount of deemed total income reassessed as per the provisions of sections 115JB or 115JC

The deemed total income assessed or reassessed immediately before such reassessment.

Further, a person would be considered to have under-reported his income if the income assessed or reassessed has the effect of reducing the loss or converting such loss into income

(v) Calculation of under-reported income in different scenarios [Section 270A(3)]:

Case Manner of computation of under-reported income

(1) Where return is furnished and assessment is made for the first time.

Assessed income

(-)

Income determined under section 143(1)(a)

[in case of all persons]

(2)

Where no return has been furnished and the assessment is made for the first time

Person Under-reported income

Company, firm or local authority

Assessed income

Other persons Assessed income

(-)

Basic exemption limit

(3) Where income is not assessed for the first time

Income reassessed or recomputed

(-)

Income assessed or reassessed or recomputed in the order immediately preceding the order during the course of which penalty u/s 270A(1) has been initiated.


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(4) Where under reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC

(A - B) + (C - D)

where,

A = Total income assessed as per the general provisions i.e., provisions other than the provisions contained in section 115JB or section 115JC;

B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under reported income;

C = the total income assessed as per the provisions contained in section 115JB or section 115JC;

D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under reported income.

However, where the amount of under reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

(5) Where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income

The loss claimed

(-)

The income or loss, as the case may be, assessed or reassessed.

(vi) Meaning of Under-reported income in a case where the source of any receipt,

deposit or investment is linked to an earlier year [Section 270A(4) & (5)] :

In a case where the source of any receipt, deposit or investment appearing in the

current assessment year is claimed to be an amount added to income or deducted

while computing loss, as the case may be, in the assessment of such person in any

earlier assessment year and no penalty was levied for such preceding year, under -

reported income shall include such amount as is sufficient to cover such receipt,

deposit or investment.

Note – Such amount shall be deemed to be the amount of income under-reported

for the preceding year in the following order –


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(i) The preceding year immediately before the year in which the receipt,

deposit or investment appears, being the first preceding year; and

(ii) Where the amount added or deducted in the first preceding year is not

sufficient to cover the receipt, deposit or investment, the year immediately

preceding the first preceding year and so on.

(vii) Cases not included within the scope of under-reported income under section

270A [Section 270A(6)]:

Case Condition

(1) The amount of income in respect of which the assessee offers an explanation

The Assessing Officer/CIT/PC/ Commissioner (Appeals) is satisfied that the explanation is bona fide and all the material facts have been disclosed to substantiate the explanation.

(2) The amount of under-reported income determined on the basis of an estimate

If the accounts are correct and complete to the satisfaction of the income-tax authority but the method employed is such that the income cannot properly be deduced therefrom

(3) The amount of under-reported income determined on the basis of an estimate

If the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance

(4) The amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer

Where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X and disclosed all the material facts relating to the transaction

(5) The amount of undisclosed income on account of a search operation

Where penalty is leviable under section 271AAB in respect of such undisclosed income.

(viii) Cases of misreporting of income [Section 270A(9)]:

(1) misrepresentation or suppression of facts;

(2) failure to record investments in books of account;

(3) claim of expenditure not substantiated by any evidence;


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(4) recording of any false entry in books of account;

(5) failure to record any receipt in books of account having a bearing on total

income; and

(6) failure to report any international transaction or deemed international

transaction or specified domestic transaction under Chapter X.

(ix) Quantum of penalty leviable

Section Case Penalty

(1) 270A(7) Under reporting of income 50% of tax payable on

under-reported income

(2) 270A(8) Where under reporting of income

results from misreporting of

income by any person.

200% of tax payable on

such under-reported

income

(x) Manner of computation of tax payable on under-reported income [Section

270A(10)]:

Case Manner of computation of tax payable on

under-reported income

(1) Where no return of

income has been

furnished and the income

has been assessed for

the first time

The tax payable on under-reported income

shall be the amount of tax calculated on the

under-reported income as increased by the

basic exemption limit as if it were the total

income.

(2) Where the total income

determined u/s 143(1)(a)

or assessed or

reassessed or

recomputed in a

preceding order is a loss

The tax payable in respect of the under-

reported income shall be the amount of tax

calculated on the under-reported income as

if it were the total income.

(3) In any other case The amount of tax calculated on the under-reported income as increased by the total income determined under section 143(1)(a) or total income assessed, reassessed or recomputed in a preceding order as if it were the total income

Minus

The amount of tax calculated on the total


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income determined under section 143(1)(a) or total income assessed, reassessed or recomputed in a preceding order.

(xi) No addition or disallowance of an amount shall form the basis for imposition of

penalty, if such addition or disallowance has formed the basis of imposition of

penalty in the case of the person for the same or any other assessment year

[Section 270A(11)].

(xii) Consequential amendments in other provisions:

Consequential amendments have been made in sections 119, 253, 271A, 271AA,

271AAB, 273A and 279 to provide reference to new section 270A.

Section Provision Amendment

(1) 119(2)(a) Power of CBDT to relax certain

provisions, by way of a general

or special order, for the

purpose of proper and efficient

management of the work of

assessment and collection of

revenue.

The CBDT has now been

empowered to relax the

provisions for levy of penalty

section 270A also.

(2) 253(1) Enlists the orders appealable

to the Appellate Tribunal.

The order passed by the

Commissioner (Appeals),

Principal Commissioner or

Commissioner under section

270A would also be

appealable to the Appellate

Tribunal.

(3) 271A Levy of penalty of ` 25,000

for failure to keep, maintain

or retain books of account as

required under section 44AA.

The penalty under this

section would be without

prejudice to the provisions

of new section 270A.

(4) 271AA Levy of penalty of 2% of

value of international

transaction or specified

domestic transaction, where

the person fails to maintain

information and documents

required u/s 92D or report

such transaction or maintains

or furnishes an incorrect

information or document.

The penalty under this

section would be without

prejudice to the provisions

of new section 270A.


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(5) 271AAB Levy of penalty where search

is initiated under section 132

on or after 1.7.2012.

No penalty under section

270A would be imposable in

respect of undisclosed

income on which penalty

has been levied under

section 271AAB(1).

(6) 273A(1) Power of Principal

Commissioner or

Commissioner to reduce or

waive penalty in certain

cases.

Reduction or waiver of

penalty imposable on a

person u/s 270A, if prior to

detection by the Assessing

Officer, the person has

voluntarily and in good faith

made full and true

disclosure of particulars of

income i.e., where the

excess of income assessed

over the income returned is

of such a nature as not to

attract the penal provisions

u/s 270A.

(7) 273A(2) Order reducing or waiving

penalty under section

273A(1) to be made by the

PC/CIT only with the previous

approval of the

PCC/CC/PDG/DG, as the

case may be.

Previous approval of higher

authorities also required if,

in a case falling u/s 270A,

the amount of income in

respect of which the penalty

is imposed or imposable for

the relevant A.Y., or where

such disclosure relates to

more than one A.Y., the

aggregate amount of such

income for those years

exceed ` 5 lakh.

(8) 276C Prosecution to be instituted if

a person willfully attempts in

any manner to evade any tax,

penalty or interest chargeable

or imposable under the

Income-tax Act, 1961.

Prosecution to also be

instituted if a person under-

reports his income under the

Income-tax Act, 1961

Rigorous imprisonment for a

period of 6 months to 7 years

and fine would be attracted in

a case where the amount

Rigorous imprisonment for a

period of 6 months to 7

years and fine would also be

attracted in a case where


160

sought to be evaded exceeds

` 25 lakhs.

the tax on under-reported

income exceeds ` 25 lakhs.

(9) 279(1A) Prosecution not to be

instituted against a person

u/s 276C or 277 in relation to

the assessment for an

assessment year in respect

of which penalty imposed or

imposable u/s 271(1)(iii) has

been reduced or waived by

an order u/s 273A.

Prosecution not to be

instituted against a person u/s

276C or 277 in relation to the

assessment for an AY in

respect of which penalty

imposed or imposable u/s

270A or u/s 271(1)(iii) has

been reduced or waived by

an order u/s 273A.

(xiv) Examples:

(1) M/s. XYZ is a firm liable to tax@30%. The following are the particulars furnished by the firm for A.Y.2017-18:

Particulars of total income `

(1) As per the return of income furnished u/s 139(1) 50,00,000

(2) Determined under section 143(1)(a) 60,00,000

(3) Assessed under section 143(3) 75,00,000

(4) Reassessed under section 147 95,00,000

Can penalty be levied under section 270A on M/s. XYZ? If the answer is in the

affirmative, compute the penalty leviable under section 270A.

Solution

M/s. XYZ is deemed to have under-reported its income since:

(1) its income assessed under 143(3) exceeds its income determined in a return

processed under section 143(1)(a); and

(2) the income reassessed under section 147 exceeds the income assessed

under section 143(3).

Therefore, penalty is leviable under section 270A for under-reporting of

income.

Computation of penalty leviable under section 270A

Particulars ` `

Assessment under section 143(3)

Under-reported income:

Total income assessed under section 143(3) 75,00,000

(-) Total income determined u/s 143(1)(a) 60,00,000

15,00,000


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Tax payable on under-reported income:

Tax on under-reported income of ` 15 lakhs plus tax on total income of ` 60 lakhs determined u/s 143(1)(a) [30% of ` 75 lakh + EC & SHEC@3%]

Less: Tax on total income determined u/s 143(1)(a) [30% of ` 60 lakh + EC & SHEC@3%]

23,17,500

18,54,000

Penalty leviable@50% of tax payable

_4,63,500

2,31,750

Reassessment under section 147


Total income reassessed under section 147 95,00,000

(-) Total income assessed under section 143(3)

75,00,000

20,00,000

Tax payable on under-reported income:

Tax on under-reported income of ` 20 lakhs plus tax on total income of ` 75 lakhs assessed u/s 143(3) [30% of ` 95 lakh + EC & SHEC@3%]

Less: Tax on total income assessed u/s 143(3) [30% of ` 75 lakh + EC & SHEC@3%]

29,35,500

23,17,500

6,18,000

Penalty leviable@50% of tax payable 3,09,000

Note – The following assumptions have been made -

(1) None of the additions or disallowances made in assessment or

reassessment qualifies under section 270A(6); and

(2) The under-reported income is not on account of misreporting.

(2) Mr. Ram, a resident individual of the age of 55 years, has not furnished his return of

income for A.Y.2017-18. However, the total income assessed in respect of such

year under section 143(3) is ` 12 lakh. Is penalty under section 270A attracted in

this case, and if so, what is the quantum of penalty leviable?

Solution

Mr. Ram is deemed to have under-reported his income since he has not filed his

return of income and his assessed income exceeds the basic exemption limit of

` 2,50,000. Hence, penalty under section 270A is leviable in his case.


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Particulars ` `



Total income assessed under section 143(3) 12,00,000

(-) Basic exemption limit 2,50,000

9,50,000

Tax payable on under-reported income as increased by the basic exemption limit [30% of ` 2 lakhs + ` 1,25,000]

1,85,000

Add: EC & SHEC@3% __5,550

1,90,550

Penalty leviable@50% of tax payable 95,275

Note – It is assumed that the under-reported income is not on account of

misreporting.

(3) ABC Ltd. is a domestic company liable to tax@30%. The following are the

particulars furnished by the company for A.Y.2017-18:

Particulars of total income `

(1) As per the return of income furnished u/s 139(1) (15,00,000)

(2) Determined under section 143(1)(a) (8,00,000)

(3) Assessed under section 143(3) (5,00,000)

(4) Reassessed under section 147 4,00,000

Is penalty leviable under section 270A on ABC Ltd., and if so, what is the quantum

of penalty?

Solution

ABC Ltd. is deemed to have under-reported its income since:

(1) the assessment under 143(3) has the effect of reducing the loss determined in a return processed under section 143(1)(a); and

(2) the reassessment under section 147 has the effect of converting the loss assessed under section 143(3) into income.

Therefore, penalty is leviable under section 270A for under-reporting of income.


Particulars ` `



Loss assessed u/s 143(3) (5,00,000)


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(-) Loss determined under section 143(1)(a) (8,00,000)

3,00,000

Tax payable on under-reported income@30% 90,000

Add: EC & SHEC@3% 2,700

92,700

Penalty leviable@50% of tax payable 46,350

Reassessment under section 147


Total income reassessed under section 147 4,00,000

(-) Loss assessed under section 143(3) (5,00,000)

9,00,000

Tax payable on under-reported income@30% 2,70,000

Add: EC & SHEC@3% 8,100

2,78,100

Penalty leviable@50% of tax payable 1,39,050

Note – The following assumptions have been made -

(1) None of the additions or disallowances made in assessment or reassessment

qualifies under section 270A(6); and

(2) The under-reported income is not on account of misreporting.

(B) Immunity from imposition of penalty and prosecution [New section 270AA]



(i) Application to be made by the assessee to Assessing Officer for grant of

immunity from penalty and prosecution [Section 270AA(1)]

An assessee may make an application to the Assessing Officer for grant of

immunity from imposition of penalty under section 270A and initiation of

proceedings under section 276C or section 276CC, if he -

(1) pays the tax and interest payable as per the order of assessment under

section 143(3) or reassessment under section 147, within the period specified

in such notice of demand; and

(2) does not prefer an appeal against such assessment/reassessment order.

(ii) Time limit for making application [Section 270AA(2)]

The assessee can make such application in the prescribed form and verified in the

prescribed manner within one month from the end of the month in which the order

of assessment or reassessment is received


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(iii) Circumstances in which the Assessing Officer cannot grant immunity from

penalty and prosecution [Section 270AA(3)]

The Assessing Officer shall grant immunity from initiation of penalty under section 270A and prosecution under section 276C or section 276CC, on fulfilment of the conditions specified in (1) and (2) of (i) above, and after the expiry of period of filing appeal as specified in section 249(2).

However, immunity shall be granted by the Assessing Officer only if the penalty proceedings under section 270A have not been initiated on account of the following, namely:—

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(c) claim of expenditure not substantiated by any evidence;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; or

(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction to which the provisions of Chapter X apply.

(iv) Time limit for passing order accepting or rejecting application for immunity

from penalty and prosecution [Section 270AA(4)]

The Assessing Officer shall pass an order accepting or rejecting the application for immunity from penalty under section 270A or prosecution under section 276C or

section 276CC within a period of one month from the end of the month in which

such application is received. However, in the interest of natural justice, no order

rejecting the application shall be passed by the Assessing Officer unless the

assessee has been given an opportunity of being heard.

(v) Finality of order passed by the Assessing Officer under section 270AA(4) [Section 270AA(5)]

The order of the Assessing Officer passed under section 270AA(4) accepting or rejecting the application made by the assessee for immunity from penalty under section 270A or prosecution under section 276C or section 276CC shall be final.

(vi) Order of assessment/reassessment, in respect of which application for immunity is accepted, is neither appealable before Commissioner (Appeals) nor can the same be admitted by Commissioner for revision under section 264 [Section 270AA(6)]

No appeal under section 246A or an application for revision under section 264 shall be admissible against the order of assessment or reassessment referred to in section 270A(1)(a), in a case where an order under section 270AA(4) has been made accepting the application.


165

(vii) Exclusion of period when application for immunity is pending before

Assessing Officer from the time limit for filing of appeal before Commissioner

(Appeals), in a case where such application is rejected [Second Proviso to

section 249(2)(b)]

As per section 249(2)(b), an appeal before the Commissioner (Appeals) is to be

made within 30 days of the receipt of the notice of demand relating to an

assessment or penalty, where the appeal relates to such assessment or penalty.

In a case where the assessee makes an application under section 270AA seeking

immunity from penalty, then, the following period has to be excluded for calculation

of the aforesaid thirty days period –

Exclusion of period

beginning from ending with

the date on which application under

section 270AA for immunity from

penalty under section 270A is made

the date on which the order rejecting

the application is served on the

assessee.

(C) Time limit for passing an order for waiver of interest and penalty [Sections 220(2A),

273A, 273AA]


(i) No time limit has been provided within which orders under section 220 or sections

273A or 273AA have to be passed. Further, there is no requirement under these

provisions that the assessee be given an opportunity of being heard in case such

application is rejected by an authority.

(ii) Accordingly, the Finance Act, 2016 has amended these provisions to provide for a time

limit within which the order for waiver of interest and penalty have to be passed by the

Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or

Commissioner of Income-tax, as the case may be. Further, no order rejecting the

application of the assessee, either in full or in part, under section 220 or 273A, 273AA

shall be passed without giving the assessee an opportunity of being heard.

Section Powers of Principal

Commissioner/CIT

Time limit

(1) 220(2A) To reduce or waive the amount of

interest paid or payable section

220(2).

Note – Section 220(1) requires

payment of amount specified in the

notice of demand under section 156

within 30 days of service of notice.

An order accepting

or rejecting

application of an

assessee in full or

part has to be

passed within a


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In case of default, interest is leviable

@1% per month or part of the month

under section 220(2) for the period

during which the default continues.

period of 12

months from the

end of the month

in which such

application is

received by the

PC or CIT.

In respect of

applications

pending as on 1st

June, 2016, the

order under said

sections has to be

passed on or

before 31st May,

2017.

(2) 273A(4A) To reduce or waive the amount of

any penalty payable by an assessee

or stay or compound any proceeding

for recovery of the penalty amount in

certain circumstances, on an

application made by the assessee in

this behalf.

(3) 273AA To grant immunity from penalty, if

penalty proceedings have been

initiated in case of a person who has

made application for settlement

before the Settlement Commission

and the proceedings for settlement

had abated under the circumstances

contained in section 245HA.

(D) Levy of penalty at a flat rate of 60% on undisclosed income, in search cases where

assessee does not admit such income in the course of search nor discloses the

same in the return of income for the specified previous year filed on or before the

specified date [Section 271AAB(1)(c)]

Relevant from: A.Y.2017-18

(i) Section 271AAB(1)(c) provides for levy of penalty ranging between 30% to 90% of

the undisclosed income, in a case where search has been initiated under section

132 on or after 1st July, 2012, and the assessee neither admits, in a statement

under section 132(4), undisclosed income in the course of search nor declares

such income in the return of income furnished for the specified previous year and

pays tax and interest on such undisclosed income.

(ii) For the purpose of reducing discretionary powers in levy of penalty and rationalizing

the rate of penalty, section 271AAB(1)(c) has been amended to provide for levy of

penalty on such undisclosed income at a flat rate of 60% of such undisclosed income.


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(e) Penalty for failure to comply with notice under section 142(1) or 143(2) of

failure to comply with a direction u/s 142(2A) [Section 272A]



(i) Under section 272A(1), penalty of ` 10,000 is leviable in each of the following

cases:

(a) for failure or default to answer the questions raised by an income-tax

authority under the Income-tax Act, 1961;

(b) for refusal to sign any statement legally required during the proceedings

under the Income-tax Act, 1961; or

(c) failure to attend to give evidence or produce books or documents as

required under section 131(1).

(ii) New clause (d) has been included in section 272A(1) to levy penalty of `

10,000 for each default or failure to comply with a notice issued under section

142(1) or section 143(2) or failure to comply with a direction issued under

section 142(2A).

(iii) Accordingly, section 272A(3) has been amended to provide that penalty in

case of failure referred to above shall be levied by the income tax authority

issuing such notice or direction.

(iv) Section 288(4) has been consequentially amended to provide that no person,

inter alia, on whom penalty has been imposed under this Act [other than

penalty imposed under section 272A(1)(d)] shall be qualified to represent an

assessee before any income-tax authority or the Appellate Tribunal in

connection with any proceeding under the Income-tax Act, 1961, for such time

as the Principal Chief Commissioner or Chief Commissioner or Principal

Commissioner or Commissioner may by order determine.

Penalty u/s 271AAB(1)(c)

Upto A.Y.2016-17

30% to 90%

of

undisclosed income

From A.Y.2017-18

60%

of

undisclosed income


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In effect, a person on whom penalty has been imposed under section

272A(1)(d) is not disqualified from representing an assessee before any

income-tax authority or the Appellate Tribunal.


1. Commencement of limitation for penalty proceedings under sections 271D and

271E [Circular No.9/2016 dated 26.4.2016]

There are conflicting interpretations of various High Courts on the issue whether the

limitation for imposition of penalty under sections 271D and 271E commences at the

level of the Assessing Officer (below the rank of Joint Commissioner of lncome-tax) or at

level of the Range authority i.e., the Joint Commissioner of Income-tax/Additional

Commissioner of lncome-tax.

Some High Courts have held that the limitation commences at the level of the authority

competent to impose the penalty i.e., Range Head, while others have held that even

though the Assessing Officer is not competent to impose the penalty, the limitation

commences at the level of the Assessing Officer, where the Assessing Officer has issued

show cause notice or referred to the initiation of proceedings in assessment order.

The CBDT is of the view that for the sake of clarity and uniformity, the conflict needs to

be resolved by way of a "Departmental View".

The Kerala High Court, in Grihalaxmi Vision v. Addl. CIT, observed that the question to

be considered is whether proceedings for levy of penalty are initiated with the passing of

the order of assessment by the Assessing Officer or whether such proceedings have

commenced with the issuance of the notice by the Joint Commissioner. From the

statutory provisions, it is clear that the competent authority to levy penalty is the Joint

Commissioner. Therefore, only the Joint Commissioner can initiate proceedings for levy

of penalty. Such initiation of proceedings could not have been done by the Assessing

Officer. The statement in the assessment order that the proceedings under Section 271D

and 271E are initiated is inconsequential. On the other hand, if the assessment order is

taken as the initiation of penalty proceedings, such initiation is by an authority who is

incompetent and the proceedings thereafter would be proceedings without jurisdiction. If

that be so, the initiation of the penalty proceedings is only with the issuance of the notice

by the Joint Commissioner to the assessee to which he has filed his reply.

The CBDT Circular clarifies that the above judgement reflects the "Departmental View".

Accordingly, the Assessing Officers (below the rank of Joint Commissioner of income-

tax) have to make a reference to the Range Head, regarding any violation of the

provisions of section 269SS and section 269T, as the case may be, in the course of the

assessment proceedings (or any other proceedings under the Act). The Assessing

Officer (below the rank of Joint Commissioner of lncome-tax) shall not issue the notice in

this regard. The Range Head will issue the penalty notice and shall dispose/complete

the proceedings within the limitation prescribed under section 275(1)(c).


169

The Circular further clarifies that where any High Court decides this issue contrary to the

"Departmental View", the "Departmental View" thereon shall not be operative in the area

falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should

immediately bring the judgment to the notice of the Central Technical Committee (CTC).

The CTC shall examine the said judgment on priority to decide as to whether filing of SLP

to the Supreme Court will be adequate response for the time being or some legislative

amendment is called for.

2. Limitation for penalty proceedings under section 271D and 271E – whether to be

determined u/s 275(1)(a) or u/s 275(1)(c) [Circular No.10/2016 dated 26.4.2016]

The issue whether the limitation for imposition of penalty under sections 271D and 271E,

is determined under section 275(1)(a) or section 275(1)(c), has given rise to considerable

litigation.

The Delhi High Court, in CIT v. Worldwide Township Projects Ltd., has considered this

issue and observed that is well settled that a penalty under this provision is independent

of the assessment. The action inviting imposition of penalty is granting of loans above

the prescribed limit otherwise than through banking channels and as such infringement of

section 269SS is not related to the income that may be assessed or finally adjudicated.

In this view, section 275(1)(a) would not be applicable and the provisions of section

275(1)(c) would be attracted. The judgment has been accepted by the CBDT.

In view of the above, it is a settled position that the period of lim itation of penalty

proceedings under section 271D and section 271E of the Act is governed by the

provisions of section 275(1)(c). Therefore, the limitation period for the imposition of

penalty under these provisions would be the expiry of the financial yea r in which the

proceedings, in the course of which action for the imposition of penalty has been

initiated, are completed, or six months from the end of the month in which action for

imposition of penalty is initiated, whichever period expires later. The l imitation period is

not dependent on the pendency of appeal against the assessment or other order referred

to in section 275(1)(a).


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27 MISCELLANEOUS PROVISIONS


(A) Provision for bank guarantee under section 281B


(i) Assessing Officer’s power to provisionally attach property for protecting interests of the revenue :

Under section 281B, the Assessing Officer is empowered to provisionally attach any property of the assessee, by an order in writing, during the pendency of assessment or reassessment proceedings, with the prior approval of the income-tax authorities specified therein, if he is of the opinion that it is necessary to do so for the purpose of protecting the interests of the revenue. Such provisional attachment has to be made in the manner provided in the Second Schedule.

(ii) Validity of provisional attachment :

The provisional attachment shall be valid for a period of 6 months from the date of the order. However, such attachment of property is extendable to a maximum period of two years or sixty days after the date of order of assessment or reassessment, whichever is later.

(iii) Recommendation of Income Tax Simplification Committee:

The Income Tax Simplification Committee under the chairmanship of Justice R.V. Easwar (Retd.) has recommended that provisional attachment of property could be substituted by a bank guarantee subject to fulfilment of certain conditions.

(iv) Furnishing bank guarantee in lieu of provisional attachment of property - Enabling provisions inserted:

Accordingly, sub-sections (3) to (9) have been inserted in section 281B providing for furnishing of bank guarantee in lieu of provisional attachment of property. Further Explanation to section 281B(1), providing that proceedings under section 132(5) would be deemed to be proceedings for the assessment of any income or for the assessment or reassessment of any income which has escaped assessment, has been consequently omitted.


171

(v) Furnishing of bank guarantee in lieu of provisional attachment [Section 281B(3)]

The Assessing Officer shall, by an order in writing, revoke provisional attachment of property made under section 281B(1) in a case where the assessee furnishes a guarantee from a scheduled bank, for an amount not less than the fair market value of such provisionally attached property or for an amount which is sufficient to protect the interests of the revenue.

(vi) Reference to Valuation Officer [Section 281B(4)]

For enabling determination of the fair market value of the property provisionally attached, the Assessing Officer may, make a reference to the Valuation Officer, who is required to estimate of the fair market value of the property and submit the report of such estimation to the Assessing Officer within a period of 30 days from the date of receipt of such reference.

(vii) Time limit for passing order revoking the attachment of property [Section 281B(5)]

For ensuring revocation of attachment of property in lieu of bank guarantee in a time bound manner, an order revoking the attachment has to be made by the Assessing Officer within the following time period:

Case Time period for revoking attachment

(i) in a case where a reference is made to the Valuation Officer

within 45 days from the date of receipt of such guarantee

(ii) in any other case within 15 days from the date of receipt of such guarantee

(viii) Assessing Officer empowered to invoke bank guarantee for failure to pay sum specified in notice of demand [Section 281B(6)]

Where a notice of demand specifying a sum payable is served upon the assessee and the assessee fails to pay such sum within the time specified in the notice of demand, the Assessing Officer may invoke the bank guarantee, wholly or partly, to recover the said amount.

(ix) Power to invoke bank guarantee on assessee’s failure to renew or furnish new guarantee [Section 281B(7)]

In a case where the assessee fails to renew the bank guarantee or fails to furnish a new guarantee from a scheduled bank for an equal amount fifteen days before the expiry of such guarantee, the Assessing Officer shall, in the interests of the revenue, invoke the bank guarantee.

(x) Manner of adjustment of amount realized by invoking bank guarantee [Section 281B(8)]

(1) The amount realised by invoking the bank guarantee shall be adjusted against the existing demand which is payable by the assessee;

(2) The balance amount, if any, has to be deposited in the Personal Deposit Account of the Principal Commissioner or Commissioner in the branch of


172

Reserve Bank of India or the State Bank of India or of its subsidiaries or any bank as may be appointed by the Reserve Bank of India as its agent at the place where the office of the Principal Commissioner or Commissioner is situated.

(xi) Release of bank guarantee [Section 281B(9)]

In a case where the Assessing Officer is satisfied that the bank guarantee is not required anymore to protect the interests of the revenue, he shall release that guarantee forthwith.

(B) Provision of legal framework for automated processing and paperless assessment [Section 282A]

Related amendment in sections: 143(2) & 2(23C)


Requirement Amendment Purpose of

amendment

282A(1) Where a notice or other document is required to be issued by any income-tax authority under the Act, such notice or document should be signed by that authority in manuscript

Notices and documents required to be issued by any income-tax authority under the Act shall be signed and issued by such

authority in paper form or

communicated in

electronic form in

accordance with such

procedure as may be

prescribed.

In order to provide adequate legal framework for paperless assessment for improving efficiency and reducing the compliance burden

143(2) Where an assessee has furnished his return u/s 139 or in response to a notice u/s 142(1) and the Assessing Officer considers it necessary and expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, he shall serve on the assessee a notice requiring him to

Such notice may be served on the assessee by the Assessing Officer

or the prescribed

income-tax authority,

requiring the assessee to attend the office of the Assessing Officer on the specified date or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return.

Such notice has to be served on the assessee within 6 months from the end of the F.Y. in which the return is furnished. For the purpose of ensuring timely service of such notice to the assessee, the prescribed income-tax authority has also been empowered to serve such notice.


173

produce, or cause to be produced on a specified date, any evidence on which the assessee may rely in support of the return.

2(23C) - The term “hearing” has been defined to include communication of data and documents through electronic mode.

New clause (23C) has been inserted in section 2 to define the term "hearing" to clarify that the same can be through electronic mode also.


1. Nature of Business Relationship, for the purpose of clause (b)(viii) of Explanation

below section 288(2), prescribed [Notification No. 50/2015, dated 24.6.2015]

Explanation below section 288(2) defines an “accountant” to mean a “Chartered Accountant” as defined in section 2(1)(b) of the Chartered Accountants Act, 1949, holding a valid certificate of practice under section 6(1) of the said Act, but does not include [except for appearing as an authorized representative under section 288(1)] in case of a non-corporate assessee, inter alia a person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed.

Consequently, the CBDT has, in exercise of the powers conferred by section 295 read with sub-clause (b) (viii) of Explanation below section 288(2), inserted Rule 51A prescribing the nature of business relationship. Accordingly, the term "business relationship" shall be construed as any transaction entered into for a commercial purpose, other than,—

(i) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;

(ii) commercial transactions which are in the ordinary course of business of the entity at arm's length price - like sale of products or services to the auditor, as customer, in the ordinary course of business, by entities engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses."6

6Section 141(3) of the Companies Act, 2013 contains a similar disqualification in case of a company; for which purpose

“business relationship” has been defined in the like manner in Rule 10(4) of the Companies (Audit & Auditors) Rules, 2014. It may be noted that in case of a company, a person who is not eligible for appointment as an auditor of the said company in accordance with section 141(3) of the Companies Act, 2013 is not included in the definition of “accountant” [except for appearing as an authorised representative under section 288(1)]


174

2. Furnishing of statement of financial transaction [Rule 114E] [Notification No.

95/2015, dated 30-12-2015]

The statement of financial transaction required to be furnished under section 285BA(1) of the Income-tax Act, 1961 shall be furnished by every person mentioned in column (3) of the Table below in respect of all the transactions of the nature and value specified in the corresponding entry in column (2) of the said Table, which are registered and recorded by him on or after 1st April, 2016.

S. No.

Nature and value of transaction Class of person (reporting person)

1. (a) Payment made in cash for purchase of bank drafts or pay orders or banker’s cheque of an amount aggregating to ` 10 lakh or more in a financial year.

(b) Payments made in cash aggregating to ` 10 lakh or more during the financial year for purchase of pre-paid instruments issued by Reserve Bank of India under the Payment and Settlement Systems Act, 2007.

(c) Cash deposits or cash withdrawals (including through bearer’s cheque) aggregating to ` 50 lakhs or more in a financial year, in or from one or more current account of a person.

A banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act)

2. Cash deposits aggregating to ` 10 lakhs or more in a financial year, in one or more accounts (other than a current account and time deposit) of a person.

(i) A banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) Post Master General as referred to in the Indian Post Office Act, 1898.

3. One or more time deposits (other than a time deposit made through renewal of another time deposit) of a person aggregating to ` 10 lakhs or more in a financial year of a person.

(i) A banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of


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that Act);

(ii) Post Master General as referred to in the Indian Post Office Act, 1898;

(iii) Nidhi referred to in section 406 of the Companies Act, 2013;

(iv) NBFC which holds a certificate of registration under section 45-IA of the Reserve Bank of India Act, 1934, to hold or accept deposit from public.

4. Payments made by any person of an amount aggregating to-

(i) ` 1 lakh or more in cash; or

(ii) ` 10 lakh or more by any other mode,

against bills raised in respect of one or more credit cards issued to that person, in a financial year.

A banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act) or any other company or institution issuing credit card.

5. Receipt from any person of an amount aggregating to ` 10 lakh or more in a financial year for acquiring bonds or debentures issued by the company or institution (other than the amount received on account of renewal of the bond or debenture issued by that company).

A company or institution issuing bonds or debentures.

6. Receipt from any person of an amount aggregating to ` 10 lakh or more in a financial year for acquiring shares (including share application money) issued by the company.

A company issuing shares

7. Buy back of shares from any person (other than the shares bought in the open market) for an amount or value aggregating to ` 10 lakh or more in a financial year.

A company listed on a recognised stock exchange purchasing its own securities under section 68 of the Companies Act, 2013.

8. Receipt from any person of an amount aggregating to ` 10 lakh or more in a financial year for acquiring units of one

A trustee of a Mutual Fund or such other person managing the affairs of the Mutual Fund as may be duly


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or more schemes of a Mutual Fund (other than the amount received on account of transfer from one scheme to another scheme of that Mutual Fund).

authorised by the trustee in this behalf.

9. Receipt from any person for sale of foreign currency including any credit of such currency to foreign exchange card or expense in such currency through a debit or credit card or through issue of travellers cheque or draft or any other instrument of an amount aggregating to ` 10 lakh or more during a financial year

Authorised person as referred to in section 2(c) of the Foreign Exchange Management Act, 1999.

10. Purchase or sale by any person of immovable property for an amount of ` 30 lakhs or more or valued by the stamp valuation authority referred to in section 50C at ` 30 lakhs or more

Inspector-General appointed under the Registration Act, 1908 or Registrar or Sub-Registrar appointed under that Act

11. Receipt of cash payment exceeding ` 2 lakh for sale, by any person, of goods or services of any nature (other than those specified at Sl. Nos. 1 to 10 of this rule, if any).

Any person who is liable for audit under section 44AB of the Act.

Manner of application of threshold limit: The reporting person mentioned in column

(3) of the Table under sub-rule (2) [other than the person at Sl.No.9] shall, while

aggregating the amounts for determining the threshold amount for reporting in respect of

any person as specified in column (2) of the said Table,-

(a) take into account all the accounts of the same nature as specified in column (2) of the said Table maintained in respect of that person during the financial year;

(b) aggregate all the transactions of the same nature as specified in column (2) of the said Table recorded in respect of that person during the financial year;

(c) attribute the entire value of the transaction or the aggregated value of all the transactions to all the persons, in a case where the account is maintained or transaction is recorded in the name of more than one person;

(d) apply the threshold limit separately to deposits and withdrawals in respect of transaction specified in item (c) under column (2), against Sl. No. 1 of the said Table.


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28 DEDUCTION, COLLECTION & RECOVERY OF TAX


(A) Deduction of tax at source under section 194LBB at ‘rates in force’ on income

distributed by an Investment Fund to its non-resident unit-holders and enabling

provision for obtaining certificate of nil deduction or lower deduction of tax at

source under section 197

Related amendment in section: 2(37) & 197


(i) Special taxation regime for Investment Funds:

(1) A special taxation regime, contained in sections 10(23FBA), 10(23FBB), 115UB and 194LBB, was introduced by the Finance Act, 2015 for Category-I and II Alternative Investment Funds registered with SEBI, in order to ensure tax pass through status for these investment funds which are collective investment vehicles.

(2) Under this regime, the income of the investment fund (other than business income) is exempt in the hands of investment fund. Such income received by the unit-holder from the investment fund (other than business income which is taxed at the level of investment fund) is taxable in the hands of unit-holder.

(3) The taxation in the hands of unit-holders is in the same manner and in the same proportion as it would have been, had the unit-holder received such income directly and not through the investment fund.

(ii) Deduction of tax under section 194LBB@10% without facility for application of

relief under section 197 – Resultant hardship to non-resident investors

eligible for concessional rate of tax/exemption under the DTAA :

(1) Under section 194LBB, tax is deductible@10% in respect of any income

credited or paid by the investment fund to its unit-holder. Section 197 enables

an assessee to file an application to the Assessing Officer for issue of

certificate of deduction of tax at lower rate or no deduction of tax under certain

sections specified thereunder. If the Assessing Officer is satisfied that total

income of the recipient justifies issue of such certificate, he may give to him

such certificate for non-deduction of tax or deduction of tax at a lower rate.


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(2) However, section 194LBB is not included in the sections specified under section 197, in respect of which an application can be filed for issue of certificate for deduction of tax at a lower rate or for non-deduction of tax. This has created genuine hardship for a non-resident unit-holder entitled to exemption of such income under the relevant Double Taxation Avoidance Agreement (DTAA). In such a case also, tax would be deducted at source@10%under section 194LBB, since there is no provision under section 197 for such unit-holder to approach the Assessing Officer for seeking certificate of tax deduction at a lower or Nil rate under section 194LBB.

(iii) Rationalisation of TDS Regime in respect of payments made by the investment

funds to its investors:

Section 194LBB has been amended by the Finance Act, 2016 to provide that the

person responsible for making the payment to the unit-holder shall deduct income-

tax under section 194LBB as given hereunder -

Category of Payee Rate of tax deduction at source

(1) Residents 10%

(2) Non-corporate non-residents or foreign

companies

Rates in force

However, in case of a payee being a non-corporate non-resident or a foreign

company, no deduction of tax at source shall be made in respect of any income that

is not chargeable to tax under the provisions of the Income-tax Act, 1961.

(iv) Consequential amendments:

Section Amendment

(1) 197 Inclusion of section 194LBB in the list of sections u/s 197(1) for which a certificate for deduction of tax at lower rate or no deduction of tax can be obtained, if the Assessing Officer is satisfied on an application made in this behalf that the total income of the recipient justifies deduction of income-tax at lower rates or no deduction of income-tax.

(2) 2(37A)(iii) ‘Rate or rates in force’, in relation to an assessment year or financial year, means, for the purpose of, inter alia, tax deduction under sections 194LBA, 194LBB, 194LBC or 195 –

(i) the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year; or

(ii) the rate or rates of income-tax specified in an agreement –

(a) entered into by the Central Government u/s 90, or

(b) notified by the Central Government u/s 90A,

whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be.


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(B) Enabling provision for filing of self-declaration in Form 15G/15H by recipient of rental

income, for non-deduction of tax at source under section 194-I [Section 197A]

(i) Tax deductible under section 194-I on rental payments exceeding ` 1,80,000:

Under 194-I, tax is deductible at source for payments in the nature of rent

exceeding the specified threshold of ` 1,80,000 in a financial year.

In spite of the threshold for deduction tax under this section, there still may be

cases where the tax payable on recipient's total income, including rental payments,

will be nil.

(ii) Enabling provisions contained in the Act for furnishing self-declaration by

recipients of income referred to in section 192A/193/194/194A/194DA :

Section 197A provides for furnishing of self-declaration in writing in duplicate in the

prescribed form, declaring that the tax on his estimated total income of the relevant

previous year would be nil. The prescribed form is Form No.15G in case of a

person, other than a company or firm, and Form No. 15H, in case of a resident

individual of the age of 60 years or more at any time during the previous year. If

declaration is so furnished to the person responsible for paying tax, no deduction of

tax shall be made by such person.

However, there was no such enabling provision for furnishing self-declaration by the

recipient of rent, which is subject to tax deduction under section 194-I.

(iii) Enabling provision introduced for furnishing self-declaration by recipient of

rent for non-deduction of tax at source under section 194-I:

In order to reduce compliance burden in such cases, section 197A has been

amended for enabling persons, other than companies and firms, in receipt of rent,

on which tax is deductible under section 194-I, to file self-declaration in Form No.

15G for non-deduction of tax at source to the person responsible for paying rent.

Likewise, resident senior citizens in receipt of rent can file declaration in Form No.

15H for non-deduction of tax at source to the person responsible for paying rent.

(C) Increase in threshold limits and reduction of rates for deduction of tax at source in

respect of certain payments [Chapter XVII-B]


(i) Requirement of deduction of tax at source under Chapter XVII -B if payments

exceed the specified threshold:

Every person responsible for payment of any specified sum on which tax is

deductible at source under Chapter XVII-B to any person is required to deduct tax at

source at the prescribed rate and remit the same to the Central Government within

specified time.

However, no deduction is required to be made if the payments do not exceed

prescribed threshold limit specified under the relevant section.


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(ii) In order to rationalise the rates and base for TDS provisions, the existing threshold

limits for deduction of tax at source and the rates of deduction of tax at source have

been revised with effect from 1st June, 2016.

Revision in threshold limits for deduction of tax at source from certain payments:

Section Nature of payment Threshold limit (` )

Upto 31.5.2016

From 1.6.2016

(1) 192A Payment of accumulated balance due to an employee participating in recognized provident fund

30,000

50,000

(2) 194BB Winnings from horse race 5,000 10,000

(3) 194C Payment to contractors (revision of threshold of aggregate payment in a year)

75,000 1,00,000

(4) 194D Insurance commission 20,000 15,0007

(5) 194G Commission on sale of lottery tickets 1,000 15,000

(6) 194H Commission or brokerage 5,000 15,000

(7) 194LA Payment of compensation or enhanced compensation on compulsory acquisition of immovable property

2,00,000

2,50,000

Reduction in rate of tax to be deducted at source in respect of certain

payments:

Section Nature of payment

Rate of TDS

Upto

31.5.2016

From

1.6.2016

(1) 194DA Payment in respect of life insurance policy 2% 1%

(2) 194EE Payments in respect of deposits under

National Savings Scheme

20% 10%

(3) 194G Commission on sale of lottery tickets 10% 5%

(4) 194H Commission or brokerage 10% 5%

In addition, the rate of TDS under section 194D in respect of insurance commission

has been reduced from 10% to 5%8.

7 In this case, there is a decrease in threshold limit. 8 Refer Part II of the First Schedule to the Finance Act, 2016 providing for the rates in force


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(iii) Omission of non-operational provisions for TDS u/s 194K and 194L:

Further, the non-operational provisions for deduction of tax at source under section

194K in respect of income from units of a mutual fund or UTI (which ceased to be in

force since 1st April, 2003) and section 194L in respect of payment of compensation

on compulsory acquisition of a capital asset (which ceased to be in force since 1st

June, 2000) have been omitted with effect from 1 st June, 2016.

(D) Advance tax payment scheme to be the same for companies and other assessees

[Section 211]

Related amendment in section: 234C


(i) Differential advance tax payment schedule for companies and other

assessees under section 211(1) [upto 31.5.2016]

Advance tax payment schedule for companies (4 installments) :

Due date of installment Amount payable

On or before 15th June Not less than 15% of advance tax liability

On or before 15th

September

Not less than 45% of advance tax liability, as

reduced by the amount, if any, paid in the

earlier installment.

On or before 15th December Not less than 75% of advance tax liability, as

reduced by the amount or amounts, if any, paid

in the earlier installment or installments.

On or before 15th March The whole amount of advance tax liability as



Advance tax payment schedule for non-corporate assessees (3 installments) :


On or before 15th

September

Not less than 30% of advance tax liability

On or before 15th December Not less than 60% of advance tax liability, as

reduced by the amount, if any, paid in the

earlier installment.

On or before 15th March The whole amount of advance tax liability as




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(ii) Common advance tax payment schedule for both corporates and non-

corporates (other than an eligible assessee in respect of eligible business

referred to in section 44AD) from 1st June 2016:


On or before 15th June Not less than 15% of advance tax liability

On or before 15th September

Not less than 45% of advance tax liability, as reduced by the amount, if any, paid in the earlier installment.

On or before 15th December Not less than 75% of advance tax liability, as reduced by the amount or amounts, if any, paid in the earlier installment or installments.

On or before 15th March The whole amount of advance tax liability as reduced by the amount or amounts, if any, paid in the earlier installment or installments.

Note - Any amount paid by way of advance tax on or before 31 st March shall also be treated as advance tax paid during each financial year on or before 15 th March.

(iii) Eligible assessee computing profits on presumptive basis under section 44AD

to pay advance tax by 15th March

An eligible assessee, opting for computation of profits or gains of business on presumptive basis in respect of eligible business referred to in section 44AD, shall be required to pay advance tax of the whole amount in one instalment on or before the 15th March of the financial year.

However, any amount paid by way of advance tax on or before 31st March shall also be treated as advance tax paid during each financial year on or before 15 th March.

(iv) Consequential amendments in section 234C

(a) Manner of computation of interest under section 234C for deferment of advance tax by corporate and non-corporate assessees:

In case an assessee, other than an eligible assessee in respect of the eligible business referred to in section 44AD, who is liable to pay advance tax under section 208 has failed to pay such tax or the advance tax paid by such assessee on its current income on or before the dates specified in column (1) is less than the specified percentage [given in column (2)] of tax due on returned income, then simple interest@1% per month for the period specified in column (4) on the amount of shortfall, as per column (3) is leviable under section 234C.

Specified date

Specified %

Shortfall in advance tax Period

(1) (2) (3) (4)

15th June 15% 15% of tax due on returned income (-) advance tax paid up to 15th June

3 months


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15th September

45% 45% of tax due on returned income (-) advance tax paid up to 15th September

3 months

15th December

75% 75% of tax due on returned income (-) advance tax paid up to 15 th December

3 months

15th March 100% 100% of tax due on returned income (-) advance tax paid up to 15th March

1 month

Note – However, if the advance tax paid by the assessee on the current income, on or before 15th June or 15th September, is not less than 12% or, as the case may be, 36% of the tax due on the returned income, then, the assessee shall not be liable to pay any interest on the amount of the shortfall on those dates.

(b) Computation of interest under section 234C in case of an eligible assessee in respect of eligible business referred to in section 44AD :

In case an eligible assessee in respect of the eligible business referred to in section 44AD, who is liable to pay advance tax under section 208 has failed to pay such tax or the advance tax paid by the assessee on its current income on or before 15th March is less than the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of 1% on the amount of the shortfall from the tax due on the returned income.

(c) Non-applicability of interest under section 234C in certain cases :

Interest under section 234C shall not be leviable in respect of any shortfall in payment of tax due on returned income, where such shortfall is on account of under-estimate or failure to estimate –

(i) the amount of capital gains;

(ii) income of nature referred to in section 2(24)(ix) i.e., winnings from lotteries, crossword puzzles etc.;

(iii) income under the head “Profits and gains of business or profession” in cases where the income accrues or arises under the said head for the first time.

However, the assessee should have paid the whole of the amount of tax payable in respect of such income referred to in (i), (ii) and (iii), as the case may be, had such income been a part of the total income, as part of the remaining instalments of advance tax which are due or where no such instalments are due, by 31st March of the financial year.

(e) Interest on refunds [Section 244A]


(i) Period for which interest on refund is payable:

An assessee is entitled to interest on refund arising out of excess payment of

advance tax, tax deducted or collected at source, for the period beginning from


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1st April of the assessment year and ending on the date on which refund is

granted.

(ii) Differential period for interest on refund in cases where return is filed

beyond the due date under section 139(1)

For ensuring filing of return on or before the due date under section 139(1),

section 244A has been amended to provide for [email protected]% for every month

or part of a month for the period specified in the following table for each of the

cases mentioned in column (2) hereunder –

Case

Period for grant of interest on refund

Beginning from Ending with

(1) (2) (3) (4)

(a) Where the refund is out of TCS u/s 206C or paid by way of advance tax or treated as paid u/s 199, during the financial year immediately preceding the assessment year:

(1) Where the return is filed on or before the due date u/s 139(1)

1st April of the assessment year

Date of grant of refund

(2) Where the return is filed after the due date

the date of filing of return

(b) Where the refund is out of self-assessment tax paid u/s 140A

Date of furnishing return of income or payment of tax, whichever is later

Date of grant of refund

Note – However, if the amount of refund is less than 10% of tax determined under section 143(1) or on regular assessment, no interest is payable under either of the cases [(a) or (b)] mentioned above.

(iii) Additional interest on refund arising out of appeal effect being delayed

beyond the time prescribed under section 153(5):

Where a refund arises as a result of giving effect to an order under section

250/254/260/262/264, wholly or partly, otherwise than by making a fresh

assessment or reassessment, the assessee shall be entitled to receive, in

addition to the interest payable under section 244A(1), an additional interest on

such refund amount calculated at the rate of 3% p.a., for the period beginning

from the date following the date of expiry of the time allowed under section

153(5) to the date on which the refund is granted. Further, in cases where

extension is granted by the Principal Commissioner or Commissioner by


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invoking proviso to section 153(5), the period of additional interest, if any, shall

begin from the expiry of such extended period.

Circumstance Period9

Where a refund arises as a result of giving effect to an order under section 250/254/260/262/264, wholly or partly, otherwise than by making a fresh assessment or reassessment

From the expiry of 3 months from the end of the month in which the order u/s 250/254/260/262 is received, or order u/s 263 or 264 is passed, by the PCC/CC/PC/CIT.

Where extension is granted by the Principal Commissioner or Commissioner by invoking proviso to section 153(5)

From the expiry of 9 months from the end of the month in which the order u/s 250/254/260/262 is received, or order u/s 263 or 264 is passed, by the PCC/CC/PC/CIT.

(f) Expansion of scope of TCS under section 206C


(i) Expansion of scope of TCS under section 206C:

Section 206C(1D) requires collection of tax at source, at the time of receipt of consideration, on cash sale of bullion or jewellery. Tax has to be collected@1% of sale consideration, if such consideration exceeds ` 2 lakh for bullion and ` 5 lakh for jewellery.

The scope of tax collection at source under section 206C has been expanded to provide that every person, being the seller shall, at the time of receipt of consideration, collect tax at the rate of 1% from the purchaser on sale of goods or provision of services specified in column (2) exceeding the corresponding value specified in column (3) :

(1) (2) (3)

Section Sale / Service Transaction Threshold limit

206C(1D) Sale in cash of any goods (other than bullion and jewellery), or providing of any services (other than amounts on which tax is deducted at source by the payer under Chapter XVII-B), consideration for which is received in cash.

` 2 lakhs

206C(1F) Sale of motor vehicle ` 10 lakhs

9 Period for which assessee would be entitled to receive additional interest on refund


186

(ii) Reasons for expansion of scope of section 206C:

(1) To reduce the quantum of cash transaction in sale of any goods and

services;

(2) To curb the flow of unaccounted money in the trading system; and

(3) To bring high value transactions within the tax net.

(iii) Requirement to collect tax at source under section 206C(1D) on sale of

goods (other than bullion and jewellery) and provision of services not to

apply to certain class of buyers fulfilling prescribed conditions :

New sub-section (1E) has been inserted in section 206C to provide that the

requirement to collect tax at source under section 206C(1D) in relation to sale

of any goods (other than bullion and jewellery) or provision of any service,

consideration for which is received in cash, shall not apply to certain class of

buyers who fulfil the prescribed conditions.

(iv) Definition of buyer with respect to sections 206C(1D) and 206C(1F) :

Consequent to insertion of sub-section (1F) in section 206C, the definition of

buyer with respect to section 206C(1D) and 206C(1F) would mean a person

who obtains in any sale, good of the nature specified under thereunder.

(v) Definition of seller expanded:

Consequent to expansion of scope of TCS to include transaction of provision

of services, the definition of seller under clause (c) of Explanation to section

206C has been amended to include individuals/HUFs whose gross receipts

from business or profession exceed the monetary limits specified in section

44AB during the financial year immediately preceding the financial year in

which such services are provided.

Note - These amendments in section 206C have given rise to certain issues relating

to the scope and applicability of the provisions. Accordingly, the CBDT has, vide

Circular No. 22/2016 dated 8.6.2016 and Circular No.23/2016 dated 24.6.2016,

clarified the following issues in “Question & Answer (Q&A)” format .

Q.1 Whether TCS@1% is on sale of motor vehicle at retail level or also on

sale of motor vehicles by manufacturers to dealers/ distributors?

A. To bring high value transactions within the tax net, section 206C has been

amended to provide that the seller shall collect the tax @ 1% from the

purchaser on sale of motor vehicle of the value exceeding ` 10 lakhs. This is

brought to cover all transactions of retail sales and accordingly, it will not

apply on sale of motor vehicles by manufacturers to dealers/distributors.

Q.2 Whether TCS@1% on sale of motor vehicle is applicable only to luxury

cars?


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A. No, as per section 206C(1F), the seller shall collect tax@1% from the

purchaser on sale of any motor vehicle of the value exceeding ` 10 lakhs.

Q.3 Whether TCS@1% is applicable in the case of sale to Government

Departments, Embassies, Consulates and United Nation Institutions, of

motor vehicle or any other goods or provision of services?

A. Government, institutions notified under United Nations (Privileges and

Immunities) Act 1947, and Embassies, Consulates, High Commission,

Legation, Commission and trade representation of a foreign State shall not be

liable to levy of TCS@1% under sub-section (1D) and (IF) of section 206C.

Q.4 Whether TCS is applicable on each sale of motor vehicle or on aggregate

value of sale during the year?

A. Tax is to be collected at source@1% on sale consideration of a motor vehicle

exceeding ` 10 lakhs. It is applicable to each sale and not to aggregate value

of sale made during the year.

Q.5 Whether TCS@1% on sale of motor vehicle is applicable in case of an

individual?

A. The definition of "Seller" as given in clause (c) of the Explanation below sub-

section (11) of section 206C shall be applicable in the case of sale of motor

vehicles also.

Accordingly, an individual who is liable to audit as per the provisions of section

44AB during the financial year immediately preceding the financial year in

which the motor vehicle is sold shall be liable for collection of tax at source on

sale of motor vehicle by him.

Q.6 How would the provisions of TCS on sale of motor vehicle be applicable

in a case where part of the payment is made in cash and part is made by

cheque?

A. The provisions of TCS on sale of motor vehicle exceeding ` 10 lakhs is not

dependent on mode of payment. Any sale of motor vehicle exceeding ` 10

lakhs would attract TCS@1%.

Q.7 As per section 206C(1D), tax is to be collected at source@1% if sale

consideration received in cash exceeds ` 2 lakhs whereas as per section

206C(1F), tax is to be collected at source@1% of the sale consideration of

a motor vehicle exceeding 10 lakh rupees. Whether TCS will be made

under both sub-section (lD) and (IF) of section 206C@2%, where part of

the payment for purchase of motor vehicle exceeds ` 2 lakhs in cash?

A. Sub-section (1F) section 206C provides for TCS at the rate of 1% on sale of

motor vehicle of value exceeding ` 10 lakhs. This is irrespective of the mode

of payment. Thus, if the value of motor vehicle is ` 20 lakhs, out of which ` 5

lakhs has been paid in cash and balance amount by way of cheque, the tax


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shall be collected at source@1% on total sale consideration of ` 20 lakhs only

under sub-section (1F) of section 206C. However, if a vehicle is sold for ` 8

lakhs and the consideration is paid in cash, tax shall be collected at

source@1% on ` 8 lakhs as per sub-section (1D) of section 206C.

Q.8 Whether tax collection at source@1% under section 206C(1D) will apply

in cases where the sale consideration received is partly in cash and

partly by cheque and the cash receipt is less than ` 2 lakh?

A. No, TCS will not be levied if the cash receipt does not exceed ` 2 lakhs, even

if the sale consideration exceeds ` 2 lakhs.

Q.9 Whether tax collection at source under section 206C(1D) will apply only

to cash component or in respect of whole of sales consideration?

A. Under section 206C(1D), tax is required to be collected at source on the cash

component of the sale consideration and not on the whole of the sales

consideration.

(g) Requirement to furnish PAN for avoiding higher tax deduction not to apply to

non-corporate non-residents and foreign companies subject to certain

conditions [Section 206AA]


(i) Higher rate of tax deduction in respect of persons who fail to furnish PAN

to the person responsible for deducting tax at source :

Under section 206AA, any person who is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB shall furnish his Permanent Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be deducted at –

(1) the rate mentioned in the relevant provisions of the Act or

(2) the rate or rates in force or

(3) the rate of 20%

whichever is higher.

(ii) Applicability of section 206AA to non-residents and consequent

compliance burden:

The provisions of section 206AA also apply to non-residents, on account of which they have to obtain and furnish PAN. Otherwise, higher rate of tax deduction is attracted even if tax on such income is payable at a lower rate on account of applicability special provisions of the Act or the relevant double taxation avoidance agreement.

The benefit of non-applicability of the provisions of section 206AA is currently available only in respect of payment of interest on long-term bonds by an Indian company or a business trust as referred to in section 194LC to non-corporate non-residents or foreign companies.


189

(iii) Non-applicability of section 206AA to non-residents subject to fulfilment

of certain conditions:

For the purpose of reducing the compliance burden, section 206AA has been

amended to provide for non-applicability of the requirements contained therein to a

non-corporate non-resident or to a foreign company, also in respect of any other

payment subject to such conditions as may be prescribed.


1. No tax to be deducted in respect of the income specified under section 10(23FBA)

received by an Investment Fund [Notification No. 51/2015, dated 24.6.2015]

Section 197A(1F) provides that no deduction of tax shall be made from such specified

payment to such institution, association or body or class of institutions, associations or

bodies as may be notified by the Central Government.

Accordingly, the Central Government has, vide this notification, notified that no tax has to

be deducted in respect of payments of the nature specified in section 10(23FBA) [i.e.,

any income other than the income chargeable under the head “Profits and gains of

business or profession”] received by any investment fund.10

2. Simplification of format and procedure for self-declaration in Form No.15G & 15H

[Notification No. 76/2015, dated 29.09.2015]

Tax payers seeking non-deduction of tax from certain incomes are required to file a self -

declaration in Form No. 15G or Form No.15H as per section 197A. In order to reduce the

cost of compliance and ease the compliance burden for both the tax payer and the tax

deductor, the CBDT has simplified the format and procedure for self -declaration of Form

No.15G or 15H. The procedure for submission of the forms by the deductor has also

been simplified.

Under the simplified procedure contained in new Rule 29C, a payee can submit the self-

declaration either in paper form or electronically. The deductor will not deduct tax and will

allot a Unique Identification Number (UIN) to all self -declarations in accordance with the

procedure as specified by the Principal Director General of Income-tax (Systems) under

sub-rule (7) of new Rule 29C. The particulars of self-declarations will have to be

furnished by the deductor along with UIN in the quarterly TDS statements. The

requirement of submitting physical copy of Form 15G and 15H by the deductor to the

income-tax authorities has been dispensed with. The deductor will, however be required

to retain Form No.15G and 15H for seven years. The revised procedure shall be effective

from 1st October, 2015.

10 “Investment Fund” means any fund established or incorporated in India in the form of a trust or a company or a LLP or

a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the SEBI (AIF) Regulations, 2012, made under the SEBI Act, 1992.


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3. Furnishing of evidence of claims by employee for deduction of tax under

section 192 [Notification No.30/2016 dated 29.4.2016]

New Rule 26C has been inserted in the Income-tax Rules, 1962, with effect from 1st June, 2016, to require furnishing of evidence of the following claims by an employee to the person responsible for making payment under section 192(1) in Form No.12BB for the purpose of estimating his income or computing the tax deduction of tax at source:

S.No. Nature of Claim Evidence or particulars

1. House Rent Allowance Name, address and PAN of the landlord(s) where the aggregate rent paid during the previous year exceeds ` 1 lakh.

2. Leave Travel Concession or Assistance

Evidence of expenditure

3. Deduction of interest under the head “Income from house property”

Name, address and PAN of the lender

4. Deduction under Chapter VI-A Evidence of investment or expenditure.

4. Time and mode of payment of TDS and TCS to Government account – Amendments

in Rule 30, 31 & 37A [Notification No.30/2016 dated 29.4.2016]

(i) Increase in time limit for payment of TDS under section 194-IA to Government

Account [Rule 30(2A)]:

Rule 30(2A) has been amended to increase the time limit for payment of tax

deduction under section 194-IA to Government account from 7 days to 30 days

from the end of the month in which deduction is made.

(ii) Common due date for filing of statement of TDS under section 200(3) in case

of Government deductors and other deductors [Rule 31A(2)] :

Rule 31A requires every person responsible for deduction of tax under Chapter

XVII-B to deliver, or cause to be delivered, quarterly statements to the Director

General of Income-tax (Systems) or the person authorised by him within the due

date for each quarter specified in Rule 31A(2). Rule 31A(2) prescribed differential

due dates for Government deductors and other deductors. In order to ensure equity

and give more time for other deductors, common due dates are now prescribed

thereunder for Government deductors and other deductors. Accordingly, quarterly


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statements of TDS have to be furnished by the due dates specified in column (3)

against the corresponding quarter -

Sl.No. Date of ending of the quarter of the financial

year

Due date

1. 30th June 31st July of the financial year

2. 30th September 31st October of the financial year

3. 31st December 31st January of the financial year

4. 31st March 31st May of the financial year immediately following the financial year in which the deduction is made.

(iii) Mode of payment in the case of an office of the Government, where tax has

been paid to the credit of the Central Government without production of a

challan [Rules 30 & 37C]:

Rule 30(4) and 37CA(3) have been amended to remove the time limit of 10 days specified thereunder for submission of Form No.24G in respect of tax deducted/collected by deductors/collectors (in the case of an office of the Government, where tax has been paid to the credit of the Central Government without the production of a challan) and reported to the agency authorised by the Director General of Income-tax (Systems). In effect, in the case of an office of the Government, where tax has been paid to the credit of the Central Government, without production of challan, Rule 30(4) and 37CA(3) now simply require submission of statement in Form 24G to the agency authorised by the Principal Director General of Income-tax (Systems) in respect of tax deducted/collected by the deductors/collectors and reported to him

Time limit for submission of statement in Form 24G in such cases [New sub-rule (4A) of Rule 30 & Sub-rule (3A) of Rule 37CA]:

Month to which the statement relates Time limit

(i) In a case where the statement relates to the month of March

On or before 30th April

(ii) In any other case On or before 15 days from the end of the relevant month

Manner of submission of statement in Form 24G [New sub-rule (4B) of Rule 30 & sub-rule (3B) of Rule 37CA]:

(i) Electronically under digital signature; or

(ii) Electronically along with the verification of the statement in Form 27A or verified though an electronic process


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in accordance with the procedures, formats and standards specified under Rule 30(5) .

Intimation of book identification number to deductors [New sub-rule (4C) of Rule 30]:

The Pay and Accounts Officer or the Treasury Officer or the Cheque Drawing and Disbursing Officer or any other person by whatever name called to whom the deductor reports the tax so deducted has to intimate the book identification number generated by the agency to each of the deductors in respect of whom the sum deducted has been credited.

Specification of procedures, formats and standards for the purpose of furnishing and verification of the statements [New sub-rule (5) of Rule 30 & sub-rule (4) of Rule 37CA]:

The procedures, formats and standards shall be specified by the Principal Director General of Income-tax (Systems) for the purposes of furnishing and verification of the statements. He shall also be responsible for the day-to-day administration in relation to the furnishing of the information and verification of the statements.

5. Tax not to be deducted from payments made to Corporations whose income is

exempt under section 10(26BBB) [Circular No. 7/2015, dated 23-04-2015]

The CBDT had earlier issued Circular No. 4/2002 dated 16.07.2002 which laid down that there would be no requirement for tax deduction at source from payments made to such entities, whose income is unconditionally exempt under section 10 and who are statutorily not required to file return of income as per the section 139.

Section 10(26BBB), inserted by the Finance Act, 2003 w.e.f. 01.04.2004, exempts any income of a corporation established by a Central, State or Provincial Act for the welfare and economic up liftment of ex-service-men being the citizen of India. The corporations covered under section 10(26BBB) are also statutorily not required to file return of income as per the section 139.

Now, the CBDT has, vide this circular, clarified that since corporations covered under section 10(26BBB) satisfy the two conditions of Circular No. 4/2002 i.e., unconditional exemption of income under section 10 and no statutory liability to file return of income under section 139, they would also be entitled for the benefit of the said circular.

6. Applicability of provisions for deduction of tax at source under section 194A on

interest on fixed deposit made in the name of the Registrar General of Court or the

depositor of the Fund on directions of Courts [Circular No.23/2015, dated 28-12-

2015]

Section 194A stipulates deduction of tax at source (TDS) on interest other than interest on securities if the aggregate of amount of such interest credited or paid to the account of the payee during the financial year exceeds the specified amount.

In the case of UCO Bank in Writ Petition No. 3563 of 2012 and CM No. 7517/2012 vide judgment dated 11/11/2014, the Hon'ble Delhi High Court has held that the provisions of section 194A do not apply to fixed deposits made in the name of Registrar General of


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the Court on the directions of the Court during the pendency of proceedings before the Court. In such cases, till the Court passes the appropriate orders in the matter, it is not known who the beneficiary of the fixed deposits will be. Amount and year of receipt is also unascertainable. The Delhi High Court, thus, held that the person who is ultimately granted the funds would be determined by orders that are passed subsequently. At that stage, undisputedly, tax would be required to be deducted at source to the credit of the recipient. The High Court has also quashed Circular No.8/2011.

The CBDT has accepted the aforesaid judgment. Accordingly, it is clarified that interest on FDRs made in the name of Registrar General of the Court or the depositor of the fund on the directions of the Court, will not be subject to TDS till the matter is decided by the Court. However, once the Court decides the ownership of the money lying in the fixed deposit, the provisions of section 194A will apply to the recipient of the income.

7. Applicability of TDS provisions on payments by broadcasters or Television

Channels to production houses for production of content or programme for

telecasting [Circular No. 04/2016, dated 29-2-2016]

The issue of applicability of TDS provisions on payments made by broadcasters/ telecasters to production houses for production of content or programme for broadcasting/telecasting has been examined by CBDT.

The issue under consideration is whether payments made by the broadcaster/telecaster to production houses for production of content/programme are payments under a ‘work contract’ liable for tax deduction at source under section 194C or a contract for ‘professional or technical services’ liable for tax deduction at source under section 194J of the Income-tax Act, 1961.

In this regard, the CBDT has clarified that while applying the relevant provisions of TDS on a contract for content production, a distinction is required to be made between:

(i) a payment for production of content/programme as per the specifications of the broadcaster/telecaster; and

(ii) a payment for acquisition of broadcasting/ telecasting rights of the content already produced by the production house.

In the first situation where the content is produced as per the specifications provided by the broadcaster/ telecaster and the copyright of the content/programme also gets transferred to the telecaster/ broadcaster, such contract is covered by the definition of the term `work’ in section 194C and, therefore, subject to TDS under that section. This position clearly flows from the definition of `work’ given in clause (iv)(b) of the Explanation to section 194C and the same has also been clarified vide Q. No. 3 of Circular No. 715 dated 8.8.1995.

However, in a case where the telecaster/broadcaster acquires only the telecasting/ broadcasting rights of the content already produced by the production house, there is no contract for ‘’carrying out any work”, as required in section 194C(1). Therefore, such payments are not liable for TDS under section 194C. However, payments of this nature may be liable for TDS under other sections of Chapter XVII -B of the Act.


194

8. Applicability of TDS provisions on payments by television channels and publishing

houses to advertisement companies for procuring or canvassing for

advertisements [Circular No. 05/2016, dated 29-2-2016]

The issue of applicability of TDS provisions on payments made by television channels or media houses publishing newspapers or magazines to advertising agencies for procuring and canvassing for advertisements has been examined by the CBDT.

The CBDT noted that there are two types of payments involved in the advertising business:

(i) Payment by client to the advertising agency, and

(ii) Payment by advertising agency to the television channel/newspaper company

The applicability of TDS on these payments has already been dealt with in Circular No. 715 dated 8-8-1995, where it has been clarified in Question Nos. 1 & 2 that while TDS under section 194C (as work contract) will be applicable on the first type of payment, there will be no TDS under section 194C on the second type of payment e.g. payment by advertising agency to the media company.

However, another issue has been raised in various cases as to whether the fees/charges taken or retained by advertising companies from media companies for canvasing/booking advertisements (typically 15% of the billing) is 'commission' or 'discount'. It has been argued by the assessees that since the relationship between the media company and the advertising company is on a principal-to-principal basis, such payments are in the nature of trade discount and not commission and, therefore, outside the purview of TDS under section 194H. The Department, on the other hand, has taken a stand in some cases that since the advertising agencies act on behalf of the media companies for procuring advertisements, the margin retained by the former amounts to constructive payment of commission and, accordingly, TDS under section 194H is attracted.

The issue has been examined by the Allahabad High Court in the case of Jagran Prakashan Ltd. and Delhi High Court in the matter of Living Media Limited and it was held in both the cases that the relationship between the media company and the advertising agency is that of a 'principal-to-principal' and, therefore, not liable for TDS under section 194H. The SLPs filed by the Department in the matter of Living Media Ltd. and Jagran Prakashan Ltd. have been dismissed by the Supreme Court vide order dated 11-12-2009 and order dated 5-5-2014, respectively. Though these decisions are in respect of print media, the ratio is also applicable to electronic media/television advertising as the broad nature of the activities involved is similar.

In view of the above, the CBDT has clarified that no TDS is attracted on payments made by television channels/newspaper companies to the advertising agency for booking or procuring of or canvassing for advertisements. It is also further clarified that 'commission' referred to in Question No.27 of the CBDT's Circular No. 715 dated 8-8-1995 does not refer to payments by media companies to advertising companies for booking of advertisements but to payments for engagement of models, artists, photographers, sportspersons, etc. and, therefore, is not relevant to the issue of TDS referred to in this Circular.


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Example

Discuss the following issues in the context of the provisions of the Income-tax Act, 1961, with specific reference to clarification given by the Central Board of Direct Taxes -

(i) Moon TV, a television channel, made payment of ` 50 lakhs to a production house for production of programme for telecasting as per the specifications given by the channel. The copyright of the programme is also transferred to Moon TV. Would such payment be liable for tax deduction at source under section 194C? Discuss.

Also, examine whether the provisions of tax deduction at source under section 194C would be attracted if the payment was made by Moon TV for acquisition of telecasting rights of the content already produced by the production house.

(ii) Mudra Adco Ltd., an advertising company, has retained a sum of ` 15 lakhs, towards charges for procuring and canvassing advertisements, from payment of ` 1 crore due to Cloud TV, a television channel, and remitted the balance amount of ` 85 lakhs to the television channel. Would the provisions of tax deduction at source under section 194H be attracted on the sum of ` 15 lakhs retained by the advertising company?

Answer

(i) In this case, since the programme is produced by the production house as per the specifications given by Moon TV, a television channel, and the copyright is also transferred to the television channel, the same falls within the scope of definition of the term ‘work’ under section 194C. Therefore, the payment of ` 50 lakhs made by Moon TV to the production house would be subject to tax deduction at source under section 194C.

If, however, the payment was made by Moon TV for acquisition of telecasting rights of the content already produced by the production house, there is no contract for ‘’carrying out any work”, as required in section 194C(1). Therefore, such payment would not be liable for tax deduction at source under section 194C.

(ii) The issue of whether fees/charges taken or retained by advertising companies from media companies for canvasing/booking advertisements (typically 15% of the billing) is 'commission' or 'discount' to attract the provisions of tax deduction at source has been clarified by the CBDT vide its Circular No.5/2016 dated 29.2.2016.

The Circular draws reference to the Allahabad High Court ruling in the case of Jagran Prakashan Ltd. and the Delhi High Court ruling in the matter of Living Media Limited. In both the cases, the Courts have held that the relationship between the media company and the advertising agency is that of a 'principal -to-principal' and, therefore, not liable for TDS under section 194H. Though these decisions are in respect of print media, the ratio is also applicable to electronic media/television advertising as the broad nature of the activities involved is similar.

In view of the above, the CBDT has clarified that no liability to deduct tax is attracted on payments made by television channels to the advertising agency for booking or procuring of or canvassing for advertisements.


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Accordingly, in view of the clarification given by CBDT, no tax is deductible at source on the amount of ` 15 lakhs retained by Mudra Adco Ltd., the advertising company, from payment due to Cloud TV, a television channel.

9. Payment of interest on refund under section 244A of excess TDS deposited under

section 195 [Circular No.11/2016 dated 26.4.2016]

The procedure for refund of tax deducted at source under section 195 to the person deducting the tax is set out in CBDT Circular No.7 /2007 dated 23.10.2007. Circular No.7/2007 states that no interest under section 244A is admissible on refunds to be granted in accordance with the circular or on the refunds already granted in accordance with Circular No.769 or Circular No.790 dated 20.4.2000.

The issue of eligibility for interest on refund of excess TDS to a tax deductor has been a subject matter of controversy and litigation. The Supreme Court of I ndia, in Tata Chemical Limited 1, Civil Appeal No. 6301 of 2011 vide order dated 26.02.2014, held that refund due and payable to the assessee is debt-owed and payable by the Revenue. Though there is no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, the Government cannot shrug off i ts apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest."

In view of the above judgment of the Apex Court, it is settled that if a resident deductor is entitled for the refund of tax deposited under section 195, then it has to be refunded with interest under section 244A from the date of payment of such tax.


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