draft direct tax code bill - 2009 presentation by :ca. kapil goel, aca, llb chartered accountant...

Draft Direct Tax Code Bill - 2009

Presentation by : CA. Kapil Goel, ACA, LLBChartered Accountant9910272806New Delhicakapilgoel @gmail.com

OBJECT/SCOPE

To deliberate upon provisions proposed in new Code vis a vis Business Head Taxation & specfic Business & capital gains

Concept of Assessment Year done away with : Replaced with Financial year (as stated in Discussion Paper of New Code said change will not impact the existing system of TDS; Advance Tax; Self Assessment Tax etc and is aimed to reduce confusion in compliance and administration)

3

New Concept of Tax base

275.“tax bases” means-(a) income or total income, as the case may be, in relation to income-tax;(b) net wealth in relation to wealth-tax;(c) dividend distributed in relation to dividend distribution tax; and(d) the income or total income, net wealth, or dividend distributed referred to in sub-clauses (a) to (c) of any other person in respect of which the assessee is assessable under this Code

4

Revenue’s Objective in Discussion Paper towards new Code

The Code is not an attempt to amend the Income Tax Act, 1961; nor is it an attempt to "improve" upon the present Act. In drafting the Code, the Central Board of Direct Taxes(the Board) has, to the extent possible, started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. Tax policies that would promote growth with equity have been reflected in the new provisions. Hence, while reading the Code, it would be advisable to do so without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Income Tax Act, 1961 (Para 1.7)

5

Revenue’s Objective in Discussion Paper towards Business Taxation

The computation of income from business is the most important head of income having profound implications for the Revenue. Therefore, the Code has rationalized the provisions relating to computation of income from business.

Section 284 clause 40. “business” includes -(a) any trade, commerce or manufacture;(b) any adventure, or concern of that nature;(c) any profession;and(d) any vocation; (earlier provision in 1961 Act were sections 2(13) only business included and profession dealt separately in section 2(36))

6

Date of Setting up of Business Section 284

75. “date of setting up of a business” means -(a) in the case of business of manufacturing, production or processing of goods,the date on which the manufacture, production or processing of the goods begins after successful trial run of the plant; or(b) in any other case, the date on which it is ready to commence its commercial Operations

Earlier No specific definition- Judicial decisions analysed it – interalia in BHC in Vegetable Products; DHC in ESPN; Del ITAT in Whirlpool etc

7

Revenue’s Objective in Discussion Paper towards Business Taxation

There are two models for computation of income under this head. The first is the model where the taxable income is equal to business profits with specified adjustments. However, this model does not provide for items of receipts which form part of business profit and deductions to be made therefrom. As a result, there are frequent disputes about taxability of receipts and deductions for expenses. The second model is the income-expenses model which is now followed in countries like U.S.A., Canada, Australia and most Asian countries. The computation of income from business under the Code will be based on the income-expenses model where the taxable income under this head will be equal to gross income minus allowable deductions. To the extent possible, the items of receipts and deductions for expenses are enumerated to reduce the scope for litigation

8

Comparison at a glance

Provisions in new code bill Comparative provisions in old/present 1961 Act

Umbrella Expense Disallowance Provision Section 17 containing no of eventualities

Scattered Provisions Section 14A; Expl to Section 37; Section 69C Proviso; Part Picture of Section 37

Umbrella TDS Default Disallowance Provision Section 18: applicable for default of TDS in every caseSubsequently expense allowable if tax stands deposited by next 2 yrs

Section 40(a)(i); (ia); (iii)

Computation of income from Ordinary Sources to be classified head wise Section 14 which includes business head

Section 14

9


Provisions in new bill Comparative provisions in old 1961 Act

Business Head Charging Provision Section 28(1)- EACH BUSINESS SEPARATE

Section 28(i)

Taxability of income from business/profession discontinued section 28(3)- In year of receipt – under business head

Section 176(3A)/176(4)

Distinct and Separate Business Section 29 with deemed separate businessess u/s 29(2) and speculative separate business u/s 29(3)

No Provision except Expl 2 to Section 28 for speculative business

Profits of Business Taxable under Business HEAD = GROSS EARNIGS MINUS BUSINESS EXPENSE Sec 30

Section 28(i) and Section 29 business profits

10



GROSS EARNINGS FOR SECTION 30 DEFINED IN SECTION 31 (interalia) include Subsidy Receipts (other than to meet asset cost) Profits from Business Capital Asset Slump Sale Profits Remission/Cessation Long term leasing of business asset Reimbursement receipts Other than a/c payee payment

-SC Sawhney Steels/Ponni SUGARS & Expl to sec 43-Section 50/50B Capital Gains Head-Section 41

- Section 40A(3)

Section 104 Disallowance of expenditure having regard to Fair Market Value -wide

Section 40A(2)

11



GROSS EARNINGS FOR SECTION 30 DEFINED IN SECTION 31 (interalia/exclude)

letting income other than by hotel/convention centre/cold storage income from transfer of investment asset (NON BUSINESS TRADING & CAPITAL ASSET) remission ETC of loan ETC to individual by relative

Section 28/22 (SC Shambu Investments etc)Capital gains versus business head

12



DEDUCTION FOR BUSINESS EXPENSE SEC 32A) OPERATING EXPENSE- SEC 33B) PERMITTED FINANCIAL CHARGES –

SECTION 34C) CAPITAL ALLOWANCES – SEC 35

FOR BUSINESSS CARRIED ON DURING FINACIAL YEAR SEC 32(3) AO EMPOWERED TO RESTRICT AFORESAID EXPENSES TO PROPORTION DEEMED FIT

SECTION 37

SECTION 38 (1)& (2)

13

Some key clauses in section 33(2) allowable expenses

(ii) rent actually paid for any premises if it is occupied by the person and used by him

(vi) maintenance of computer software or hardware;

(xv) sales promotion incl. advertisement and publicity not exceeding the amount charged to profit and loss account

(section 33(2) subject to expense being wholly and exclusively for business purpose- subject to 33(4))

14

Some key clauses in section 33(2) allowable expenses

(xxvi) subscription, including entrance fee, to a club or a trade association or the use of their facilities

(xxxv) protecting or safeguarding the goodwill of the person, which has necessarily to be preserved for the purpose of his business;

(xxxvi) business reorganisation, dissolution or liquidation of the business

(xliii) the amount of any other expenditure.

15

Some key Losses allowable u/s 33(3)

(b) loss of inventory, or money, on account of theft, robbery, fraud or embezzlement, occurring in the course of the business, if the inventory, or the money, is written off in the books of account;

(e) trade debt or part thereof, if,- (i) the person is not a permitted financial institution; and(ii) the amount is written off as irrecoverable in the books of the person

16

Some key Disallowances u/s 33(4)

(a) personal expenses of the person;(b) capital expenditure including expenditure in respect of which capital allowance is allowable under section 35;(c) finance charges; (separately dealt in section 34)(d) any unascertained liability of the person;(e) remuneration payable to any sleeping participant;(f) any expenditure incurred by a person on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party;(g) wealth-tax; and(h) any rate or tax,-(i) levied on the profits of any business (ii) assessed at a proportion of , or otherwise on the basis of, the profits of any business; or (iii) paid which is eligible for relief of tax under section 206 or section 258, as the case may be; and(i) any dividend declared or distributed

Earlier provisions were separately contained in section 37; 40(a) etc.

17


(5) Any amount of expenditure or deduction referred to in sub-section (1) or subsection (2) or under section 34 or under section 35, which is not allowable by reason of the fact that the expenditure is in violation of the condition, if any, or is in excess of the amount, if any, specified therein, shall not be allowed as a deduction under clause (xliii) of sub-section (2) only on the reasoning that it is laid out or expended, wholly and exclusively, for the purposes of business.

Earlier on aforesaid principle in 1961 Act allowability of expense u/s 37 not allowable u/s 36, contrary rulings from High Court were there DHC In Sony case etc. in context of Gratuity Fund Contribution. However SC in context of allowability of Repairs to Plant not allowable u/s 30/31 held could be still allowed under residuary clause section 37

18


(6) The deduction in respect of the amount referred to in clause (xxx), and clauses (xxxvii) to (xl), of sub-section (2) shall, notwithstanding anything contained in sub-section (1), be allowed in the financial year in which the amount is actually paid or in the financial year in which the liability has arisen, whichever is later.

Refer on aforesaid principle contrary ruling in Chd ITAT Special Bench IN Glaxo case on Sectio 43B – Advance payment of listed expense allowable

19

Allowable Financial Charges u/s 34

(a) the amount of interest paid on any capital borrowed or debt incurred;(b) the amount of interest paid to trade creditors;(c) the amount of interest paid to any participant to the extent it is in accordance with the agreement of the association and relates to the period falling afterthe date of the agreement;

(d) the amount of any charge or fee paid in respect of any credit facility which has not been utilized;(e) the amount of any incidental financial charges;(f) the proportionate amount of discount or premium payable on any bond or debenture issued by the person, calculated in the manner as may be prescribed (refer SC in Madras Industrial etc)

Earlier allowances were made u/s 36(1)(iii) and section 37 – debenture issue expenses and section 40 for interest to partners.

20

Allowable Financial Charges u/s 34

Section 284 clause 127.“incidental financial charges” means any fee, commission, brokerage, premium, tax payable or any other similar expenditure incurred for the purposes of borrowing or raising capital or incurring any debt or in respect of any credit facility which has not been utilized

However as stated in sec 34(2):following is not included in section 34(1): ..(b) any amount of incidental financial charges for issue of debentures, bonds or share capitalRefer earlier jurisprudence in SC ruling in General Insurance- Bonus Share Issue expense allowable and Brooke Bond Share Capital issue expense CAPITAL in nature; SC in India Cements- Debenture issue expense revenue in nature etc under 1961 Act Section 37

21

Capital Allowance Section 35

On:42. “business capital asset” means,-(a) any capital asset self -generated in the course of business; (b) any intangible capital asset in the nature of,-(i) goodwill of a business, (ii) a trade mark or brand name associated with the business, (iii) a right to manufacture or produce any article or thing, (iv) right to carry on any business,(v) tenancy right in respect of premises occupied by the assessee and used by him for the purposes of his business, or (vi) licence, right or permit (by whatever name called) acquired in connection with, or in the course of, any business;(c) any tangible capital asset in the nature of a building, machinery, plant or furniture;or (d) any other capital asset connected with or used for the purposes of any business of the assessee; (section 55 of earlier law- capital cost deemed nil- submerged in business head taxation)

22


Earlier provision in section 32: INTANGIBLE ASSETS included:

Finance [No. 2] Act, 1998 brought in a major amendment with regard to the law regarding depreciation allowance.

Section 32 of the Income-Tax Act, 1961 was amended to grant depreciation allowance on knowhow, patents, copyrights, trademarks, licences, franchisee and other business or commercial rights of similar nature, being intangible assets acquired on or af ter April 1, 1998.

Explanation 3 defined tangible assets as buildings, machinery, plant or furniture and intangible assets as knowhow, patents, etc. Explanation 4 gives a separate meaning for knowhow as any industrial information or technique likely to assist in the manufacture or processing of goods. We can all understand that knowhow can depreciate with rapid advances being made in science and technology – NOW IN CLAUSE 157 OF SECTION 284

23

Capital Allowance Landmark change in Finance Lease Section 35

(4) A business capital asset shall be deemed to be owned by the person if he is a lessee in terms of a financial lease

Section 284 clause 108.“financial lease” and its grammatical variation, means a lease transaction where-(a) contract for lease is entered into between two parties for leasing of a specific asset;(b) such contract is for use and occupation of the asset by the lessee; (c) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and(d) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment;

In 1961 Act there has been litigation ongoing on what is financial lease & what is not – refer SC ruling in Asea Brown Boveri & Mumbai Special Bench ITAT pending in Industrial Bank;

24


(2) The depreciation, initial depreciation or terminal allowance, referred to in subsection (1), shall be allowed in respect of any business capital asset if the asset is,-(a) owned, wholly or partly, by the person; and(b) used for the purposes of the business of the person.(3) The condition referred to in clause (a) of sub-section (2) shall not apply in the case of a business capital asset being a capital expenditure on any building which is held by the person under a lease or other right of occupancy (in earlier law refer expl 1 in section 32- depreciation on leasehold improvements)

Also refer sch XV of new code Point V

25

Computation of Depreciation for Section 35- Dealt in Section 36

(2) The depreciation allowance on assets referred to in section 35 shall, regardless of the fact that all business capital assets in any block of assets have ceased to exist by reason of being demolished, destroyed, discarded or transferred, be allowed to a person in respect of the block of asset if the adjusted value of the block of assets is greater than zero- REFER XV TH SCHDULE TO NEW CODE

Above has been litigated in 1961 Act.

26

Computation of Depreciation for Section 35- Dealt in Section 36

(xiii)Loss on sale of business capital assets, which is treated as capital loss under the 1961 Act, will be treated as intangible asset and depreciation will be allowed at the same rates applicable to the relevant block of assets. Effectively, therefore, a taxpayer will be allowed to set off only a fraction of the loss every year. This will, accordingly, serve as a disincentive for asset stripping and loss manipulation. From Discussion Note

27

XV Schedule-Snapshot- Change etc

S.No Particulars Rate of Dep

1 Buildings used as -railway station -airport -sea port-bus terminalGeneral

15%

10

2 Books – Annual Publication for professional & other books-Books for library business-Other books

100 & 60 resp.

10025

3 Assets used for family planning by a company

25

4 Scientific research assets- all asset other than land

100

28



5 Animals 0

6 Intangible assets-Earlier specified in section 32-Prescribed preliminary exp- Enduring benefit non owned asset/project of which benefit exceeds 10 years- Enduring benefit non owned asset/project of benefit not exceeds 10 years

2525

15

20

29



7 Deferred revenue expense -Non compete fees-Lease hold premium-VRS Compensation-Business reorganization by Indian co.-Indian resident mineral prospecting expense

25252525

15

8 Computers incl computer software 60

30

Scientific Research Expense Provisions-Section 39

xii) Scientific research and development allowance will be allowed with reference to expenditure on scientific research and development since such expenditure generates positive externalities. The salient features of the allowance are:(a) 100 per cent deduction for any revenue expenditure laid out or expended on scientific research related to the business.(b) 100 per cent deduction for any capital expenditure, other than expenditure on land.(c) 150 per cent deduction for any expenditure (both revenue and capital) incurred on in-house research and development by a company, excluding expenditure on land.

- Inhouse facility must be approved from central govt on recommendation of prescribed authority

- Approval to predecessor – to apply to successor in business reorganization if transferred to successor

- Board to prescribe rules for approval procrdures

31

Scientific Research Expense Provisions – Definition

247.“scientific research and development” shall mean systemic investigation and search in a field of technology, natural or applied science (including agriculture, animal husbandry or fisheries) if,-(a) it is carried out by the assessee by means of experiment or analysis;(b) it is in the nature of,-(i) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view;(ii) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view; or(iii) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing materials, devices, products or processes, including incremental improvements thereto;and

32

Scientific Research Expense Provisions- Definition

..(c) it is not in the nature of ,-(i) market research or sales promotion;(ii) quality control or routine testing of materials, devices, products or processes;(iii) research in the social sciences or the humanities;(iv) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas;(v) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process;(vi) style changes; or(vii) routine data collection;

33

Other provisions- Snap Shot

Profit on transfer of business capital asset taxable under business head determined as per section 40 (only positive element)

Special provision for depreciation in case where business reorganization takes place – section 41 – similar to earlier IInd Proviso to section 32- proportionate distribution of capital allowance between successor and predeccesor on basis of days

34


Cases similar to actual cost in earlier section 43 are dealt in section 42 of new code Clause “5 of section 284:. “actual cost” in relation to a business capital asset shall be the cost computed under section 42;

35


Certain words used in business head/above slides explained in section 284 under clauses:

Agreement for non compete used in context of taxation u/s 31 on gross earnings : clause 10

Business capital asset : clause 42 (gross earnings section and section 35; 40 etc including business capital asset transfer receipts)

Slump sale : clause 254 (gross earning section including slump sale receipts etc)

234.“remission or cessation of any liability” shall include the remission or cessation of any liability,- (a) by a unilateral act by the assessee by way of writing off such liability in his account or creating a reserve(by whatever name called); or b) by virtue of there being no transaction with the creditor during the period of three years from the end of the financial year in which the last transaction took place;HIGHLY IMPACTFUL….

36



Long term leasing : clause 165 (in gross earning provision)

Business asset : clause 41 (in gross earning provision)

Computer software : clause 63 : used IN operating expense provision

Salary : Clause 244 used IN operating expense provision

Speculative transaction : Clause 262 : used in distinct/separate business provision

37



Participant and Working Participant and Sleeping Participant: 191; 314 & None terms used in operating expense and disallowable expense provisions

Head Office Expense: Clause 119 used in operating expense allowable provision

190.“paid” shall,-(a) in relation to “Income from business” or “Income from residuary sources”, mean incurred or actually paid, according to the method of accounting on thebasis of which the income under those heads are computed; and (b) in all other cases, mean actually paid

38



Owner clause 189 : phrase used in context of capital allowance

Transfer in relation to capital asset: clause 287 phrase used in context of GROSS EARNING including business capital asset transfer & section 40 etc

Tax : Clause 274 used in specific disallowable expenses

Predecessor and Successor in Clauses 213 & 271 resp used in business head

39


Maintenance of accounts and tax audit – provisions separately dealt in section 83; 84 & 85

Books to be maintained by non specified business in case Income from business exceeds 2 lakh rupees

Books of account u/s 83(4) read with clause 38/section 284 specifically includes “daily inventory of business trading asset” and stock register respectively

40

Capital Gains Taxation under New code Chapter III-E

Charging Provision: Section 44(1): The income from the transfer of any investment

asset shall be computed under thehead “Capital gains

41

Change in scheme of capital gains – transfer definition section 284 clause 287

New entrants in transfer definition and corresponding provisions in Code

Earlier scheme u/s 2(47) & other provisions in 1961 Act

The buy back of shares or other specified securities by the issuer of such shares/securities- Full value of consideration is amount recd u/s 48(2)(c)

Section 46A

Contribution of asset by capital/otherwise to company/firm etc- financial year of taxability- dealt in sec 46(1)-table2 (e) entry & full value of consideration is amount recorded in books of transferee company/firm etc

Section 45(3) did not included contribution to company

42




Distribution of asset on dissolution of firm etc- financial year of taxability- dealt in sec 46(1)-table 2- (e) entry & full value of consideration is fair market value on transfer date- section 48(2)(e)

Section 45(4)

Distribution of asset on distribution of asset on liquidation of company- full value of consideration is money/fair market value of asset recd from liquidating co. reduced by deemed dividend u/s 284(89)(iii)

Section 46

43




On Retirement – distribution of asset to partner/participant of firm/unincorporated body – Full value of consideration u/s 48(2)- (h)- is amount of money/fair market value of asset recd. – financial year of transfer u/s 46(1)- year in which money/asset is distributed

Litigated- Difference in High courts on Section 45(4) whether included retirement or not

Slump sale Separate section Section 50B

Damage to insured asset/or its destruction- financial year of transfer u/s 46(1)- year in which money/asset is RECD.

45(1A)

44




“ANY DISPOSITION.SETTLEMENT,TRUST,COVENANT,AGREEMENT,ARRANGEMENT”- APPARENTLY DIRECTIONLESS/TRAGETLESS

NO PROVISION

Transfer of securities by person having beneficial interest in securities held by depository

Section 45(2A)

45

FINANCIAL YEAR OF transfer Table 2 Section 46(1)

Change Earlier scheme & other provisions in 1961 Act

Transfer by part performance of a contract of nature of section 53A of T.P.Act- for real estate transactions etc – year of transfer – shall be – in which POSSESSION IS TAKEN/RETAINED

Litigated – Refera) SC ruling in Amit Shah

Jajgatib) AAR Jasbir Sarkaric) BHC Chatirbhuj Kapadia

260 ITR

Refer Clause 2(47)(v)

Compulsory acquisition- Year in which compensation/part is recd.

Section 45(5)

General The financial year in which transfer took place

Section 45(1)

46

Basic Computation Scheme- Section 47(1);48;49;50;51;52

Provision Section

Computation of income from transfer of any investment asset

47 Full value of consideration minus (expense for transfer & cost of acquisition & improvement – indexed if applicable)

Full value of Consideration 48(1)Deemed cases 48(2)

Deduction of cost of acquisition, inflation/adjustment

Section 49

Indexed cost of acquisition/improvement

Section 50

Cost of acquisition of an investment assetCost of Improvement

Section 51

Section 52

47

Basic Computation Scheme- Section 47(1);48;49;50;51;52


Now there is no short term/long term concept and an an investment asst transferred after one year from financial year end in which said asset was acquired qualifies for INDEXATION of cost of acquisition and improvement u/s 49(2)

No special treatment for Long term capital gains unlike earlier section 112 – STT proposed to be abolished

Short term capital asset:2(42A)/2(42B) & Long term Capital Asset 2(29A)/2(29B)

- Shares etc – 12 months limit

- Other assets- thirty six months

48

Basic Computation Scheme- Section 47(1);48;49; 50;51;52


Definition of Full value of consideration:

The full value of the consideration shall be the amount received by, or accruing to, the transferor, directly or indirectly, as a result of the transfer of the Investment asset.Deemed Full value…….

(j) the higher of the stamp duty value of the asset and the value of the asset

ascertained on reference, if any, to the Valuation Officer

Section 48(1)

No specific enumeration

SEC 50C(3) differed in as much as Stamp value if lesser than DVO value, former prevailed over later

49



Definition of Full value of Deemed Full value…….

(j) the higher of the stamp duty value of the asset and the value of the asset ascertained on reference, if any, to the Valuation Officer (3) The reference to the Valuation Officer referred to in sub-section (2) shall be made, at the option of the assessee, if- (i) the asset is land or building; and (ii) the consideration accrued, or received, as a result of the transfer of the asset is less than the stamp duty value of the asset

SEC 50C(3) differed in as much as Stamp value if lesser than DVO value, former prevailed over later

50



In cost of acquisition u/s 51: it is stated same shall be:(a) the purchase price of the asset, or(b) at the option of the person, the fair market value of the asset on the 1st day of April, 2000, if the asset is acquired by the person before such date.Special mode of acquisition -257 clause in section 284 where previous owner cost is taken

Section 48(1)

No specific enumeration: Judicial decisions enabled assessee to upload interest costs in acquisition cost if borrowing directly for relevant asset purchase- seems to be now diluted

Earlier base year was 1/4/1981

51

Basic Computation Scheme- Section 47(1);48;49; 50;51; XVII Sch


As transfer of immovable and other specified properties below market value is taxable in hands of individual for difference in market value and stated consideration – it is not clear whether or not fair market value earlier taxed will become deemed cost u/s 51 read with Sch XVII to new code as in Finance Bill 2009 there is a provision for the same

Refer Later Changes in Finance Bill No 2 2009

52



51(5) The cost of acquisition of an investment asset shall, regardless of anything to the contrary contained in this section, be nil, if,-(a) the asset is acquired by self-generation; or(b) the cost of acquisition of the asset to the person or previous owner, if any, is incapable of being determined or ascertained, for any reason.

Further specific provision u/s 51 (4) for determining cost in hands of retiring partner for assets recd on retirement

SC B.CShrinivassa Sheety

SC PNB FinanceSC DP Sandu Bros

If Cost indeterminate- charge will fail and no capital gains

53



52. (1) The cost of improvement of an investment asset shall be any expenditure of a capital nature incurred in making any additions or alterations to the asset ,-(a) by the person; or(b) by the previous owner, if the asset is acquired by any special modes of acquisition.

No specific enumeration

Whether amount of Mortgaged debt on asset inherited &created by deceased, now cleared by assessee, Same will form part of cost of improvement etc. earlier SC rulings to favor of assessee were there

54

Concept: Rollover for transfer of asset after one year of acquisition financial year end

(section 49(2) & 53(1))


-For agricultural land transfer reinvested in agricultural land, to Individual/HUF- -Any asset reinvested in residential house (no other residential house except new one) to Individual/HUF-Deposit in capital gains scheme within 60 days of transfer of original asset

Capital gains exemption

u/s 54; 54B; 54EC; 54F etc

55

Concept: Rollover for transfer of asset after one year of acquisition financial year end

(section 49(2) & 53(1))

Change

Benefit computations: A X (B+C+D)/EWhere A = the amount of capital gains arising from the transfer of the original asset;B = the amount invested for purchase or in construction of the new asset within one year before the beginning of the financial year in which the transfer of original investment asset is effected;C = the amount invested for purchase or in construction of the new asset during the financial year in which the transfer of original investment asset is effected;D = the amount deposited in an account in any post office in accordance with the Capital Gains Deposit Scheme framed bythe Central Government in this behalf, by the end of the financial year in which the transfer of original investment asset is effected;E = the net consideration received as a result of the transfer of the original asset.

56

Special Computation of profits of business of mineral oil and natural gas XI Schedule

57

Taxation scheme of Oil and Gas

Applicable to business of mineral oil and natural gas

Mineral oil means crude oil, being petroleum in its natural state before it is refined or otherwise treated but from which water and foreign substances have been extracted;

‘natural gas’ means any subsoil combustible gaseous fossil fuel;

‘oil and gas right’ means any reconnaissance permit, technical cooperation permit, exploration right, or production right assigned under the Oilfields (Regulation and Development) Act, 1948, or any right ornterest therein;

58


Profits = Gross income – business expense (-ve profit/loss allowed to be c/fwd)

Gross income includes accruals/receipts from subject business accruals/receipts from leasing/transfer of (or

part of) any interest in a) mineral oil/natural gas right and b) asset used in subject business

accruals/receipts from demolition/transfer of business capital asset for which depreciation is allowable/allowed

Deemed gross earnings in section 31(2)

59


Business expense includes Operating expense u/s 33 incurred by assessee Permitted financial charges u/s 34 Expense on license charges/ other charges if

actually paid Expense on lease/purchase of land/land

rights Any capital expense Expense on infructous/abortive exploration

of any area Above Expense if incurred prior to business

commencement Amount of –ve profit from preceding financial year

60

Special Computation of profits of business of SEZ Developers XII Schedule similar to oil

and gas excluding specifies to oil sector

61

XIII Schedule – Profits of Specified Business- Investment Based Incentive Section 35AD of 1961 Act by Finance Bill 2009 extended in

Code

62

Taxation scheme of Specified Business

Applicable to:(a) business of generation, transmission or distribution of power;

(b) business of developing, or operating and maintaining, any infrastructure facility (section 284 clause 146);

(c) business of operating and maintaining a hospital (section 284 clause 122) in any area, other than the excluded area;

(d) business of processing, preservation and packaging of fruits and vegetables.

(e) business of laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of the network;

(f) business of setting up and operating a cold chain facility (clause 55/section 284); and

(g) business of setting up and operating a warehousing facility for storage of agricultural produce

63


When: Notified by Central Govt Prescribed conditions fulfilled - inclusive

Not setup by splitting up/reconstruction of business in existence

Not set up by transfer of used plant and machinery Specially I context of natural gas pipeline business:

Business owned by Company formed under Companies Act 1956/consortium of such companies established under central act

Approved by Petroleum and NATURAL Gas Board Made not less than 1/3 of total pipeline capacity available for

use on common carrier basis Fulfills other prescribed conditions

The profits of every specified business shall be computed separately under this Schedule

64


Basic Objective Discussion paper …Since profit is the basis for exemption, there is no

incentive for investment and upgradation during the period of tax holiday. Such profit-linked incentives also lead to significant loss of revenue and encourage rent-seeking behaviour. Hence, the Code substitutes profit-linked incentives by a new scheme. Under the new scheme, a person would be allowed to recover all capital and revenue expenditure (except expenditure on land, goodwill and financial instrument) and he would be liable to income tax on profits made thereafter. The period consumed in recovering all capital and revenue expenditure will be the period of tax holiday

Thank YouCA.KAPIL GOEL

9910272806

[email protected]

draft direct tax code bill - 2009 presentation by :ca. kapil goel, aca, llb chartered accountant...

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business profits

business taxationthere

total income

taxable income