PREFACE. An Analytical Overview

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3 PREFACE As soon as the Budget proposals are announced by the Finance Minister, the entire country goes into overdrive for analysing the proposals and the impact they would have on the economy, stock markets, industry, trade and the common man. Our profession is no exception. Therefore, at WIRC we have always strived to provide the most lucid analysis as soon as possible for the benefit of our fraternity, their clients and the people at large. This year the Budget proposals have been kept limited considering the economic situation, political compulsions, etc. The Finance Minister has done some tight manoeuvring to rein in the fiscal deficit, harness inflation and give some impetus to industry and investments. We are pleased to give an analytical overview of the Budget proposals and would like to thank all the contributors for their painstaking efforts in giving us their analysis in such a short time. We trust that you will find the publication useful as a handy guide for better understanding of the Budget proposals. CA. Shruti Shah Chairperson, Direct Tax Committee of WIRC of ICAI CA. Hardik Shah Chairman, Indirect Tax Committee of WIRC of ICAI ii

4 FOREWORD The last one year has featured internal as well as external influences having affected the economy and hampered the growth. Amidst the slowdown, high inflation and ballooning current account deficit, the Finance Minister has had to tread very carefully to lighten the economic burden of the country while painting an encouraging and balanced picture to attract investors, both domestic & foreign. Economic activity is expected to be given a boost through higher allocation (29.4%) towards plan expenditure and increased outlays for social infrastructure, education, rural development, health and urban development. The Finance Minister has also emphasized on the development of the youth and empowerment of women, feeling it to be the need of the hour. The Finance Minister has tried to adopt a carrot and stick approach while trying to get the economy back on track. Taking on the challenge of fiscal deficit headlong the budget aims for fiscal consolidation by curtailing Government expenditure, limiting fuel subsidy, re-looking at disinvestment opportunities apart from other measures. Certain direct tax proposals are intended to be methods of increasing the tax-gdp ratio by augmenting tax revenues. The imposition of surcharge on the super-rich, increase in surcharge for the corporate sector, imposition of Commodities Transaction Tax on non-agri commodities are some such measures. However, incentive for the manufacturing sector in the form of an investment allowance of 15% for new plant and machinery exceeding Rs 100 crore is a welcome move. Proposal for continuation of concession on Dividend Distribution Tax for dividends from foreign subsidiaries and onward removal of cascading effect of tax thereon may help to promote repatriation of more funds to India. On the one hand, The Finance Minister has seemed to show a softer stance by introducing the Service Tax Voluntary Compliance Encouragement Scheme, where as on the other hand, the stringent provisions of increased penalty and imprisonment gives the message that non-compliances will be seen very seriously. I sincerely thank Chairperson of Direct Tax Committee, CA. Shruti Shah and Chairman of Indirect Tax Committee, CA. Hardik Shah for their efforts in compiling this publication in a short time. I also thank and acknowledge the untiring commitment and immense contribution made by CA. A. R. Krishnan, CA. S. S. Gupta, CA. Ketan Ved, CA. Paras Savla, CA. N. C. Hegde and CA. Sanjeev Lalan in preparing this publication. I wish all the members a successful and prosperous new financial year! CA. Mangesh Kinare Chairman, WIRC of ICAI i

5 INDEX Sr. No. Particulars Page Nos. Foreword Preface... i... ii DIRECT TAXES I. Rates of Tax...1 II. Individual Taxation...9 III. Corporate Taxation...12 IV. Anti Avoidance Provisions...18 V. Procedural Provisions...22 VI. Agricultural Income & Land...27 VII. Other Major Amendments...28 INDIRECT TAXES I. CUSTOMS DUTY II. CENTRAL EXCISE & CENVAT CREDIT RULES III. SERVICE TAX iii

6 FINANCE BILL, 2013 Unless otherwise specifically mentioned, the amendments proposed are effective from the Assessment Year ( A.Y. ) and are, therefore, applicable to income arising on or after 1st April, Specific mention is made at the relevant places, when the effective date of the proposed amendment is other than A.Y Reference to the existing provisions means the provisions of the Income-tax Act, 1961 ( Act ) prior to the amendments proposed in the Finance Bill, 2013 ( Bill ). Any reference to sections, unless otherwise stated, is to the sections of the Act. I. RATES OF TAX 1. The following changes have been proposed in the Bill in the rates of tax. No change in individual tax slab rates. However individual earning gross total income up to ` 5,00,000 is entitled for rebate of ` 2,000 or tax amount, whichever is lower. Surcharge has been introduced applicable to Individual, HUF, AOP, BOI, AJP, Firm, Local Authority, Co-operative society earning gross income exceeding ` 10 crores. Surcharge on companies raised Domestic Company DIRECT TAX a. Total Income upto ` 1 crore Nil b. Total Income exceeding ` 1 crore but upto ` 10 crore 5% c. Total Income exceeding ` 10 Crore 10% Other than Domestic Company Total Income up to ` 1 crore Nil Total Income exceeding `1 crore but upto ` 10 crore 2% Total Income exceeding ` 10 Crore 5% 1

7 DIRECT TAXES Basic exemption limit for each kind of assessee is as under: Sr. Persons Amount (`) No. 1. Individuals, including women (other 2,00,000 than Senior Citizen / Very Senior Citizen) HUF, BOI, AOP, Artificial juridical person (other than society, local Authority) 2. Senior Citizen (Age from 60 but 2,50,000 less than 80 years) 3. Very Senior Citizen (Age 80 years 5,00,000 and above) As a relief to marginal tax payer, it is proposed to introduce new section 87A providing rebate of ` 2,000 or tax amount, whichever is lower. Relief is available to the tax payer whose total income is not exceeding ` 5,00,000. There is no change in tax rates for Firms, Domestic Companies, Company other than Domestic Company and Co-operative Societies (other than due to levy of surcharge); educational cess, secondary and higher secondary cess and its applicability; the rate of Dividend Distribution Tax ( DDT ) (other than due to levy of surcharge); the rate of Minimum Alternate Tax ( MAT ) (other than due to levy of surcharge). Concessional rate of tax of 15% levied on dividend income received from a foreign subsidiary company extended for dividends received upto 31st March, There is no change in Wealth Tax threshold limit and rate of tax. 2

8 DIRECT TAXES Rate of Securities Transaction Tax in sale of a unit of equity oriented fund reduced to 0.001% from 0.1% and sale of futures from 0.017% to 0.01%. Commodity Transaction Tax has been 0.01% on sale of Commodity Derivative, other than on agricultural commodity derivative. 2. The proposed income-tax rates (including surcharge at the rate applicable, educational 2% and secondary and higher secondary 1%) for A.Y have been given in Table 1. These rates are applicable on income earned during the period 1 April 2013 to 31st March, The rates of Dividend Distribution Tax, Securities Transaction Tax, Commodities Transaction Tax and Wealth Tax are given in Table 2. TABLE 1 Threshold Tax Rates Particulars Limit for Surcharge Without With Surcharge Surcharge Individuals, HUF, AOP & BOI ` 1,00,00,000 Up to ` 2,00,000 NIL NIL ` 2,00,001 ` 2,50,000* % % ` 2,50,001 ` 5,00,000** % % ` 5,00,001 ` 10,00, % % ` 10,00,001 ` 1,00,00, % % ` 1,00,00,000 and above N.A % Alternate Minimum Tax # ` 1,00,00, % % * Nil Tax Rate in case the assessee is resident aged 60 years and above but below age of 80 years. ** Nil Tax Rate in case the assessee is resident and above the age of 80 years. Resident individual is entitle to claim rebate up to ` 2,000 or tax amount, whichever is lower. # Applicable in case of individuals, HUF, AOP and BOI having adjusted total income equal to or exceeding ` 20,00,000 and where a deduction is claimed under sections 80H to 80TTA (except 80P) and section 10AA. 3

9 DIRECT TAXES TABLE 1 Limited Liability Partnership Normal tax ` 1,00,00, % % Alternate Minimum Tax # ` 1,00,00, % % # Applicable in case of partnership firms where a deduction is claimed under sections 80H to 80TTA (except 80P) and section 10AA. Domestic company Normal Tax ` 1,00,00, % % ` 10,00,00,000 N.A % Minimum Alternate Tax ` 1,00,00, % % ` 10,00,00,000 N.A % Company other than Domestic company Normal Tax ` 1,00,00, % % ` 10,00,00,000 N.A % Minimum Alternate Tax ` 1,00,00, % % ` 10,00,00,000 N.A % Local Authority ` 1,00,00, % % Co-operative Society ` 1,00,00,000 Up to ` 10, % % ` 10,001 ` 20, % % ` 20,001 ` 1,00,00, % % ` 1,00,00,000 onwards N.A % STCG on listed Security Individuals, HUF, ` 1,00,00, % % AOP & BOI Partnership Firm ` 1,00,00, % % Domestic Company ` 1,00,00, % % ` 10,00,00,000 N.A % Company other than ` 1,00,00, % % Domestic Company ` 10,00,00,000 N.A % 4

10 LTCG* DIRECT TAXES Individuals, HUF, AOP, & BOI ` 1,00,00, % % Partnership Firm ` 1,00,00, % % Domestic company ` 1,00,00, % % ` 10,00,00,000 N.A % Company other than ` 1,00,00, % % Domestic Company ` 10,00,00,000 N.A % *Other than LTCG arising on sale of listed securities (which are sold otherwise then on stock exchange) which, at the option of the tax payer, can be taxed at a concessional tax rate of 10% (ignoring the indexation benefit). Particulars TABLE 1 TABLE 2 Tax Rates Dividend Distribution Tax By Domestic Company % By Money Market Mutual Fund or Liquid fund For income distributed to Individual/HUF % For income distributed to others % By other Money Market Mutual Fund or Liquid fund For income distributed to % & individuals / HUF % - w.e.f. 1 st June, 2013 For income distributed to others % By a Mutual Fund under Infrastructure Debt Fund Scheme For income distributed to non-residents / % - w.e.f Foreign Company 1 st June, 2013 Note: Equity Linked Mutual Fund continues to be exempt from DDT Buy Back of Shares % w.e.f. 1 st June,

11 DIRECT TAXES Securities Transaction Tax Up to 31st From STT to be May st June 2013 paid by Delivery based purchase of 0.1% N.A. Purchaser an Equity Share in Company or Unit of an equity oriented fund Delivery based purchase N.A. 0.1% Purchaser of an Equity Share in Company Delivery based sale of 0.1% N.A. Seller an Equity Share in Company or Unit of an equity oriented fund Delivery based sale N.A. 0.1% Seller of an Equity Share in Company Delivery based sale 0.1% 0.001% Seller of Unit of an Equity Oriented Fund Non-Delivery based 0.025% 0.025% Seller sale of an Equity Share in Company or Unit of an Equity Oriented Fund Derivatives-Options 0.017% 0.017% Seller Sale of an option in 0.125% 0.125% Purchaser securities where option is exercised Derivatives - Futures 0.017% 0.010% Seller Repurchase of Units 0.250% 0.001% Seller of an Equity Oriented Fund by a Mutual Fund Sale of an unlisted 0.2% 0.2% Seller Equity Shares under an offer for sale 6

12 DIRECT TAXES Commodities Transaction Rate of Tax To be paid Tax by Sale of commodity 0.01% (applicable from Seller derivatives, traded in the date to be recognised associations notified) (Other than Agricultural commodity derivatives) Wealth Tax Rate of Tax Threshold limit For every individual, HUF 1% ` 30,00,000 and Company (other than Section 25 Companies) Tax on income distributed to unit holders 4. Rate of tax on an income distributed to individual & HUF by a fund other than money market mutual fund or a liquid fund has been raised to 25% from existing 12.5%. 5. Income received by the non-resident from infrastructural debt fund is chargeable to tax at the concessional rate of tax of 5%. It is now proposed to extend concessional rate to income distributed by a mutual fund under an Infrastructure debt scheme. Currently rate of tax on income distributed by a mutual fund under an Infrastructure debt scheme is 12.5% or 30% as the case may be. However, the new proviso states that when any income is distributed by the Mutual Fund under an Infrastructure debt scheme, the mutual fund would be liable to pay additional income 5% on such distribution. The above amendment is proposed to take effect from 1st June, Taxability of royalty or fees for technical services 6. In terms of section 115A of the Act, royalty or fees for technical services received by a non-resident pursuant to an agreement entered in to on or after 1st June, 2005 is taxable at the rate of 10%. 7. The Bill proposes to amend the said section 115A to provide that any amount in the nature of royalty or fees for technical services received by a non-resident on or after 1st April, 2014 in pursuance of 7

13 DIRECT TAXES an agreement entered in to after 31st March, 1976 will be taxable at the rate of 25%. 8. It may, however, be noted that in spite of this proposed amendment, if the rate for taxation of royalty or fees for technical services under the relevant DTAA is lower than 25% then the applicable rate will be that lower rate. Commodity Transaction Tax 9. Chapter VII of the Finance Bill 2013 introduces new levy in the form of Commodity Transaction Tax (CTT). Brief features of CTT are Taxable Transaction: Sale of commodity derivatives in respect of commodities other than agricultural commodities on recognised association. No tax is levied on sale of agricultural commodity derivative and currency derivative. CTT rate: 0.01% on sale value of commodity derivative (nonagricultural commodity) CTT paid by: Seller Collection and payment of STT: It is provided that CTT would be collected by the recognised association from the seller and paid to the credit of Central Government within 7 days from end of calendar month in which it is collected. Other procedure: Chapter also provides for other procedural requirements like furnishing of return, assessment, rectification of mistake, levy of interest & penalty on delayed payments, penalty for non-filing of return, non-compliance of notice, applicability of certain provisions of Income-tax Act, 1961, appeals, prosecution etc. Date of Applicability: From the date of notification It has been also provided that CTT would be allowed as deduction u/s 36(xvi) while computing income arising out of commodity derivative transactions under the head Profits and gains of business and profession. Similar provisions were also sought to be introduced by Finance Bill, 2008, but were dropped at the time of passage of the Bill. Then rate of CTT proposed was 0.017%. 8

14 DIRECT TAXES II. INDIVIDUAL TAXATION Assigned Keyman Insurance Policies 10. As per clause (10D) of section 10 amount received under a life insurance policy, other than Keyman insurance cover, is exempt on fulfilment of certain conditions. There was an anomaly in the provisions in respect of sums received on maturity of such assigned Keyman insurance policies by the Keyman concerned. It is now proposed to amend the Explanation-1 to the said clause w.e.f. 1st April, 2013, to provide that even a policy which is assigned, with or without consideration, shall continue to mean Keyman insurance policy. Thus, any sum received by an assignee in respect of such assigned Keyman insurance policy, whether for consideration or not, shall not be exempt from tax. In effect the Delhi High Court decisions in CIT vs. Rajan Nanda [(2012) 349 ITR 8 (Del)] and Escort Heart Institute & Research Centre vs. CIT [(2013) 30 taxmann.com 4] are proposed to be overruled by the amendment. Immovable property received for inadequate consideration 11. Presently as per the provisions of section 56(2)(vii)(b) any immovable property, the stamp duty value of which is less than fifty thousand rupees, which is received without consideration is taxable. However, if the property is received for inadequate consideration, same has held to be not coming within the purview of this provision. In order to bring the immovable property received for inadequate consideration within the purview of this section, it is proposed to replace clause (b) by a new clause. The effect of proposed amendment shall be that receipt of any immovable property for a consideration which is less than the stamp duty value by an amount exceeding fifty thousand rupees, then the difference in stamp duty value and consideration paid shall be considered to be income under section 56(2)(vii). 12. It is also proposed to provide that where the date of an agreement fixing the value of consideration for the transfer of the asset and date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of the registration of such transfer. This exception shall apply only in those cases where amount of consideration or part thereof for the transfer has been received by 9

15 DIRECT TAXES any mode other than cash on or before the date of the agreement for transfer of asset. These provisions are similar to that introduced in Section 43CA. 13. It is surprising to note that adequate safeguards as contained in sub-sections (2) and (3) of section 50C are not provided in case of this provision. Premium on life lnsurance policies for persons with disabilities or disease 14. Under the existing provisions of clause (10D) of section 10, any sum received under a life insurance policy is exempt if the premium for any of years during the term of the policy does not exceed ten per cent of the capital sum assured. However, in respect of policies for persons with disabilities or suffering from disease, the annual premium amount is generally higher. Thus, in respect of following class of persons the said limit of premium being ten per cent of capital sum assured is being proposed to be increased to fifteen per cent for policies issued on or after 1st April, 2013 (i) (ii) persons with disabilities or a person with severe disabilities as referred to in section 80U or suffering from disease or ailment specified in rule 11DD made under section 80DDB. The premium on such policy was also not eligible for deduction under section 80C. Now, as per amendment proposed in sub-section (3A) to section 80C, on similar lines such policies issued after 1st April, 2013 shall also be eligible for deduction under section 80C. Extension of benefit for contributions made to health schemes 15. It is proposed to amend section 80D so as to allow the benefit of deduction of amount not exceeding ` 15,000/- in respect of any payment or contribution made by the assessee to such other schemes as may be notified by the Central Government. Deduction in respect of interest on loan for acquiring residential house property 16. A new section 80EE is proposed to be inserted with a view to provide additional benefit for first time home buyers in respect of interest payment on loan taken from any financial institution for residential house property. 10

16 DIRECT TAXES 17. It is proposed to provide a deduction of not more than ` 1 lakh in respect of interest payable on loan taken (sanctioned amount not to exceed ` 25 lakhs) by an individual from any financial institution for the purpose of acquisition of a residential house property, the value of which does not exceed ` 40 lakhs. Further, in case, where such interest payment is less than ` 1 lakh in the previous year ending on 31st March, 2014, i.e. A.Y , the balance amount shall be allowed as deduction in A.Y In order to avail the above deduction, the individual assessee should not own any residential house on the date of sanction of loan. 19. Sub-section (4) of section 80EE provides that, where a deduction for any interest is allowed under section 80EE(1), deduction shall not be allowed on such interest under any other provisions of the Act for the same or subsequent assessment year. In the explanatory memorandum it is clarified that Keeping in view the need for affordable housing, an additional benefit for first-home buyers is proposed. Before this clarification the background of deduction available under section 24 is also given. Thus, it would mean that to the extent of deduction available under section 80EE, no deduction can be claimed under section 24 and not that benefit of section 24 shall be lost in respect of balance portion of interest over and above one lakh rupees. 20. While under sub-section (5) defines the terms financial institution and housing finance company are defined, there is no reference to housing finance company in any of the preceding sub-sections! Rajiv Gandhi Equity Savings Scheme 21. As per the present provisions of section 80CCG, a resident individual, being a first time retail investor and whose total income during the previous year does not exceed ten lakh rupees, is eligible to claim a deduction of fifty per cent up to maximum of twenty five thousand rupees in the year of investment, subject to satisfaction of other conditions. This deduction is available only once, i.e. in the year in which investment is made for the first time. 22. As per amendments proposed, the benefit under the said section is proposed to be extended to investment in listed units of an equity oriented fund defined in section 10(38). Further, the benefit 11

17 DIRECT TAXES of this section is proposed to be extended over a period of three consecutive assessment years beginning with assessment year in which investment is first made. Also, the condition as to limit of total income of the individual investor in the year in which investment is made is proposed to be enhanced to twelve lakh rupees from ten lakh rupees, by amending clause (i) of sub-section (3). III. CORPORATE TAXATION Investment in new assets by manufacturing company 23. A new section 32AC is proposed to be inserted to allow deduction of a sum equal to fifteen per cent of the actual cost of new assets acquired and installed after the 31st March, 2013 but before 1st April, 2015 if the aggregate amount of actual cost of such new assets exceeds one hundred crore. This deduction is available to an assessee which is a company and engaged in manufacture or production of any article or thing. This deduction is available for two years as under (a) for assessment year commencing on 1st April, 2014, of a sum equal to fifteen per cent of the actual cost of assets acquired and installed after 31st March, 2013 but before 1st April, 2014, if the aggregate investment exceeds rupees one hundred crore; and (b) for assessment year commencing on 1st April, 2015, of a sum equal to fifteen per cent of the actual cost of assets acquired and installed after 31st March, 2013 but before 1st April, 2014, as reduced by deduction allowed, if any, as per (a) above. 24. If any new asset is sold or otherwise transferred within a period of five years after installation, then deduction allowed on such new asset shall be deemed to the income of the year in which such new asset is sold or otherwise transferred as per the proposed sub-section (2) to section 32AC. The issues that would arise here is whether the whole of deduction will be withdrawn or deduction allowed in respect of new asset that is sold or transferred shall only be withdrawn, especially in a case where the actual cost of new asset sold or transferred leads to a situation that the actual cost of new assets in aggregate in the year of acquisition and installation falls below the threshold limit of rupees one hundred crore. It is also interesting to note that the section does not specify the condition of put to use for claim of deduction and it would suffice if the new assets are acquired and installed. 12

18 DIRECT TAXES 25. The deduction shall not be withdrawn under section 32AC(2) where the new asset is sold or otherwise transferred in connection with the amalgamation or demerger within a period of five years. However, the conditions of sub-section (2) shall apply to the amalgamated or resulting company, as the case may be, as it would have applied to the amalgamating company or demerged company as specified in section 32AC(3). 26. This deduction would be available even if such assets are acquired and installed in more than one manufacturing business by the same company assessee if the aggregate value of actual cost of investment exceeds one hundred crore rupees. 27. As per sub-section (4) for the purpose of section 32AC, the new assets shall mean any new plant and machinery (other than ship or aircraft), other than the following (i) (ii) (iii) (iv) (v) any plant or machinery which was earlier used either within or outside India by any other person; any plant or machinery installed in any office premises or any residential accommodation including guest house; any office appliances including computers or computer softwares; any vehicle; or any plant or machinery in respect of which hundred per cent deduction is allowed, whether by way of depreciation or otherwise, in computing income under the head Profits and gains of business or profession of any previous year. 28. It should be noted that actual cost has been defined under sub-section (1) to section 43 and therefore actual cost of new assets would have to be computed in accordance with the said provision. Disallowances in case of State Government Undertaking 29. There have been disputes in respect of assessments of some State Government Undertakings regarding deductibility of certain privilege fee, licence fee, royalty, etc., levied or charged by State Government exclusively on its undertakings. In some cases orders have been issued to the effect that surplus arising to such undertakings shall 13

19 DIRECT TAXES vest with State Government. As a result it has been claimed that such income by way of surplus is not subject to tax. 30. Section 40 is proposed to be amended, to disallow certain payments made by State Government Undertakings to State Government, by inserting a new sub-clause (iib) in clause (a). Thus, payment of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is exclusively levied on or which appropriated, directly or indirectly from a State Government Undertaking by the State Government will be now disallowable. 31. An explanation is also proposed to be inserted to the said sub-clause to define a State Government Undertaking. Extension of the sunset date under section 80IA for the power sector 32. Presently under section 80IA(4)(iv), a deduction of profits and gains is allowed to an undertaking, if it (a) (b) (c) is set up in any part of India for the generation or generation and distribution of power, if it begins to generate power at any time between 1st April, 1993 to 31st March, 2013; starts transmission or distribution by laying a network of new transmission or distribution lines at any time between 1st April, 1999 to 31st March, 2013; undertakes substantial renovation and modernisation of existing network of transmission or distribution lines at any time between 1st April, 2004 to 31st March, It is proposed to provide further time to the undertakings to commence the above activity, to avail the deduction. Accordingly the terminal date for availing benefit is extended upto 31st March, 2014 for the above entities. Deduction of additional wages 33. Under the existing provisions of section 80JJAA a deduction of amount equal to thirty per cent of additional wages paid to the new regular workmen employed in any previous year by an Indian company in its industrial undertaking engaged in manufacture of production of article or thing. This deduction is available for three 14

20 DIRECT TAXES assessment years, including the assessment year in which such employment is provided. Also, no deduction is available if the industrial undertaking is formed by splitting up or reconstruction of an existing undertaking or amalgamation with another industrial undertaking. 34. It is now proposed to substitute sub-section (1) of the said section to restrict the benefit of deduction to profits and gains derived from the manufacture of goods in a factory instead of any industrial undertaking engaged in manufacture or production of article or thing. Further, the computation of additional wages will be reckoned with employment provided in factory only and not all the workmen employed by the assessee company. 35. Further, clause (a) of sub-section (2) is also proposed to be amended and the deduction shall not be allowed if the factory is hived off or transferred from another existing entity or acquired by assessee company as a result of amalgamation with another company. 36. The reference to the word undertaking wherever it occurs in the explanation, is proposed to be substituted by factory and it is also proposed to insert clause (iv) to the explanation to define factory as per section 2(m) of the Factories Act, The proposed amendment is to overcome decision of Bangalore Bench of ITAT in ACIT vs. Texas Instruments (India) (P.) Ltd. [(2008) 115 TTJ 976 (URO)]. Additional Income-tax on buy-back of unlisted shares 38. Under the existing provisions of Income-tax Act, gains on buy-back of shares are chargeable to tax under the head capital gains under section 46A. In the explanatory memorandum it is stated that unlisted companies, as part of tax avoidance scheme, are resorting to buy-back of shares instead of payment of dividends in order to avoid payment of tax by way of dividend distribution tax (DDT), particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate. To curb such practice, a new Chapter XII-DA is proposed to be inserted w.e.f. 1st June, 2013 to provide for taxation of any amount of distributed income by a domestic company on buy-back of shares, which are not listed on a recognised stock exchange, from a shareholder. The 15

21 DIRECT TAXES 16 company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income. 39. As per the explanation to sub-section (1) it is proposed to define buy-back to mean purchase by a company of its own shares in accordance with provisions of section 72A of the Companies Act, The term distributed income is proposed to be defined to mean the consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company on issue of such shares. Thus, a company shall have to compute distributed income in respect of such shares, which are offered for buy-back, by taking in to account the amount which was received for every issue, if shares that are offered for buy-back were issued at different point of time at different issue price. 40. The additional income-tax on such buy-back of shares shall have to be deposited within fourteen days from the date of payment of any consideration to the shareholder. In case of delay in deposit of tax, simple interest at the rate of one per cent shall be payable for every month or part thereof on amount of tax not deposited till the time such tax is deposited as per proposed section 115QB. Section 115QC proposes to treat any principal officer, of a domestic company, as an officer in default for failure to deposit the tax as per provisions of section 115QA and all the provisions relating to collection of recovery of tax shall apply accordingly. 41. Further, it is also proposed to insert clause (34A) in section 10 to exempt any income received by a shareholder on account of buy-back of unlisted shares which have been taxed under the provisions of section 115QA. This provision shall come into effect from 1st April, TDS on payment of interest to non-resident by Indian Company 42. The section 194LC provides concessional rate of deduction of tax at 5%. Concessional rate is available in respect of interest on money borrowed by an Indian company in foreign currency and such borrowing is either under a loan agreement or by way of issue of long-term infrastructure bonds, as approved by the Central Government. 43. It is now proposed to extend the same benefit to investment made through a designated bank account in rupee denominated long term infrastructure bonds. Designated account means an account in a

22 DIRECT TAXES bank where foreign currency is deposited for subscribing long term infrastructure bonds of specified company. The above amendment is proposed to take effect from 1 st June Tax on dividends received from a foreign subsidiary 44. Concessional rate of tax of 15% levied on dividend income received from a foreign subsidiary company extended for dividends received upto 31st March, Removal of cascading effect of DDT 45. Section 115-O of the Act provides that dividend declared distributed or paid by a domestic company will be subjected to a Dividend Distribution Tax [ DDT ] at the rate of 15%. It also provides that DDT will not be payable by a company on the dividends received by it from its domestic subsidiary company [wherein the 1 st mentioned company holds more than half in the nominal value of equity shares] if the subsidiary has paid DDT, thereby removing cascading effect of DDT in case of a domestic subsidiary company. 46. The Bill proposes to remove the cascading effect in respect of dividends received by a domestic company from its foreign subsidiary [where the domestic company holds more than half in the nominal value of equity shares] by providing that dividends received by a domestic company from its foreign subsidiary, which has been subjected to tax at the rate of 15% under section 115BBD, shall not be subjected to DDT under Section 115-O of the Act. Amount eligible for deduction as bad debts in case of banks 47. As per clause (a) of section 36(1)(viia) in computing business income, of certain categories of banks specified therein, deduction is available for provision of bad and doubtful debts up to the limit of 7.5 per cent of the gross total income (before deduction under this clause or chapter VIA) and 10 per cent of aggregate average advance made by the rural branches of such banks. The limit, in case of banks incorporated outside India referred to in section 36(1)(viia)(b) and financial institution referred to in section 36(1)(viia)(c), is 5 per cent of the total income (before claiming deduction under this clause or chapter VIA). 48. The courts have accepted the proposition that where two separate provisions for bad debts are maintained for rural and urban advances 17

23 DIRECT TAXES 18 and if the actual write-off relates to urban advances then same cannot be set-off against provision for bad debts of rural advances. It has been held that provisions of sections 36(1)(vii) and 36(1)(viia) are distinct and independent items of deductions and operate in their respective fields [Catholic Syrian Bank Ltd. vs. CIT (2012) 343 ITR 270 (SC)]. 49. To overcome the above judicial interpretation explanation 2 is proposed to be inserted to clarify that for the purposes of proviso to clause (vii) of section 36(1) and clause (v) of section 36(2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches. Exemption to National Financial Holdings Company Limited 50. National Financial Holdings Company Limited (NFHCL) is a company wholly owned by the Central Government and was incorporated to succeed the Specified Undertaking of Unit Trust of India, which itself was a successor to erstwhile Unit Trust of India. In section 10 a new clause (49) is proposed to be inserted to grant exemption in respect of any income of NFHCL. IV. ANTI-AVOIDANCE PROVISIONS Taxation of immovable properties held as stock-in-trade 51. Presently full value of consideration on transfer of any asset, being land or building or both, is taken as per the value adopted for such transfer by any authority of State Government for purpose of payment of stamp duty, as per section 50C. The said section has no applicability in respect of transfer of immovable property which is held as stock-in-trade by an assessee [K.R. Palanisamy vs. UOI (2008) 306 ITR 61 (Mad), CIT-II vs. Kan Construction and Colonizers (P.) Ltd. (2012) 208 Taxman 478 (All)]. 52. A new section 43CA is being proposed to be inserted in Chapter IV-D Profits and gains of business or profession. As per the proposed section where the consideration received or accruing as a result of an asset (other than a capital asset), being land or building or both, is less than the value adopted for stamp duty purpose by an authority of State Government, then the value so adopted for stamp

24 DIRECT TAXES duty purpose shall be deemed to be the value of the consideration received or accruing as a result of such transfer for computing profits and gains. 53. As per section 43CA(2), the remedies provided for reference to Valuation Officer and treatment of value of stamp duty authority as final, where Valuation Officer s value exceeds the stamp duty valuation, as contained in sub-sections (2) and (3) section 50C, can also be availed in matters falling within the purview of proposed section 43CA. 54. It is also proposed to provide that where the date of an agreement fixing the value of consideration for the transfer of the asset and date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of the registration of such transfer. This exception shall apply only in those cases where amount of consideration or part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement for transfer of asset. TDS on payment for transfer of immovable property 55. It is proposed to introduce a new section 194IA to provide for deduction of tax at source on payment of consideration for transfer of immovable property (excluding agricultural land) by resident in cases other than compulsory acquisition. The proposed new section provides that every transferee, at the time of making payment or crediting any sum by way of consideration for transfer of immovable property, shall deduct tax at the rate of 1% of such sum, if the consideration paid or payable for the transfer of such property is ` 50,00,000 or more. Immovable property means land other than agricultural land or whole / part of the building. 56. Similar provision were also sought to be introduced by Finance Bill 2012, but was dropped at the time of passage of the Bill. The above amendment is proposed to take effect from 1 st June Cash contribution to any political party or electoral trust ineligible for deduction 57. Presently deduction is available for any contribution made, to any political party or electoral trust, by an Indian company or any person (other than local authority or artificial juridical person wholly or 19

25 DIRECT TAXES partly funded by the Government) under sections 80GGB or 80GGC respectively. A proviso is being proposed to be inserted in both the sections to deny the benefit of deduction in respect of any contribution made by way of cash to a political party or electoral trust. General Anti Avoidance Rule 58. The General Anti Avoidance Rule (GAAR) was introduced in the Income-tax Act by the Finance Act, These provisions were to come in to force with effect from 1st April, A number of representations were received against the provisions relating to GAAR. Accordingly, an Expert Committee was constituted with broad terms of reference for finalising the GAAR guidelines and to prepare a road map for implementation thereof. The major recommendations of the Expert Committee have been accepted. Necessary amendments have been proposed in the GAAR provisions to give effect to the recommendations. Some of these are It is proposed to make the GAAR provisions effective from the Assessment Year It is proposed that the arrangement will be held to be an impermissible avoidance arrangement only if the main purpose of the arrangement is to obtain a tax benefit. This is against the current provision providing that it should be the main purpose or one of the main purposes. The factors like, period or time for which the arrangement had existed, the fact of payment of taxes by the assessee, and the fact that an exit route was provided by the arrangement, would be relevant but not sufficient to determine whether the arrangement is an impermissible avoidance arrangement. The current provisions which provided that these factors would not be relevant is proposed to be amended accordingly. An additional condition has been proposed to be incorporated to provide that an arrangement shall also be deemed to be lacking commercial substance, if it does not have a significant effect upon the business risks, or net cash flows of any party to the arrangement apart from any effect attributable to the 20

26 DIRECT TAXES tax benefit that would be obtained but for the application of Chapter X-A. The Approving Panel shall consist of a Chairperson who is or has been a Judge of a High Court; one Member of the Indian Revenue Service not below the rank of Chief Commissioner of Income-tax; and one Member who shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices. The current provision that the Approving Panel shall consist of not less than three members being income-tax authorities and an officer of the Indian Legal Service is proposed to be amended accordingly. The directions issued by the Approving Panel shall be binding on the assessee as well as the income-tax authorities and no appeal against such directions can be made under the provisions of the Act. The current provisions providing that the direction of the Approving Panel will be binding only on the Assessing Officer have been proposed to be amended accordingly. The Central Government may constitute one or more Approving Panels as may be necessary and the term of the Approving Panel shall be ordinarily for one year and may be extended from time to time up to a period of three years. The two separate definitions in the current provisions, namely, associated person and connected person will be combined and there will be only one inclusive provision defining a connected person. 59. Consequential amendments are also proposed in other sections relating to procedural matters of implementing GAAR. These changes were made by the Finance Act, 2012 and were to be made effective from 1st April, 2013, however, the same are now proposed to be made effective from 1st April, Some important recommendations of the Committee which have not found a place in the GAAR Regime proposed are While determining whether an arrangement is an impermissible avoidance arrangement, it shall be ensured that 21

27 DIRECT TAXES the same income is not taxed twice in the hands of the same tax payer in the same year or in different assessment years. Investments made before 30st August, 2010, the date of introduction of the Direct Taxes Code, Bill, 2010 shall be grandfathered. GAAR will not apply to such FIIs that choose not to take any benefit under the Treaty. GAAR will also not apply to non-resident investors in FIIs. A monetary threshold of ` 3 crore of tax benefits in the arrangement will be provided. Where a part of the arrangement is an impermissible avoidance arrangement, GAAR will be restricted to the tax consequence of that part which is impermissible and not to the whole arrangement. Where GAAR and Specific Anti-Avoidance Rules are both in force, only one of them will apply to a given case, and guidelines will be made regarding the applicability of one or the other. V. PROCEDURAL PROVISIONS Defective return 61. Explanation to Section 139(9) provides list of case when return of income shall be regarded as defective. It is now proposed that return of income would be treated as defective in case assesse does not pay self-assessment tax along with interest on or before due date of furnishing the return of income. The above amendment is proposed to take effect from 1st June, Special Audit 62. During the course of assessment, Assessing Officer having regard to the nature and complexity of the accounts of the assesse can direct assessee to get its accounts audited. Special audit can be ordered by the Assessing Officer irrespective of the fact whether accounts are previously audited or not. 63. There has been long drawn litigation when accounts are subject to special audit. In majority of the cases Courts have ruled in favour 22

28 DIRECT TAXES of the assesse. It is now proposed that besides complexity of the accounts and interest of revenue, special audit can be initiated having regard to following: a. Volume of the accounts, b. Doubts about correctness of the accounts, c. Multiplicity of transactions in accounts, d. Specialised nature of business. The above amendment is proposed to take effect from 1st June, Electronic filing of Wealth-tax returns 64. Return of wealth till date is mandatorily required to be filed in paper form, along with specified documents. It is now proposed to introduce new section 14A empowering Board to notify class or classes of persons who can file return of wealth which is not accompanied by statements, receipts, certificates, audit reports, reports of registered valuer or any other documents, which are otherwise under any other provisions of Wealth-tax Act. It is also proposed to introduce new section 14B empowering Board to notify class or classes of persons who would be mandatorily required to file return of wealth electronically without any documents. 65. It also provided that such assessee would be required to submit the documents on demand made by the Assessing Officer. Consequential amendments in the section 46 power to make rules by the Board, are also proposed. The above amendment is proposed to take effect from 1st June, Tax due for the purpose of recovery 66. Sections 167C and 179 provide that, where tax due from a limited liability partnership (LLP)/private company cannot be recovered, then the partner/director (who was the partner/director of such LLP/ private company during the previous year to which tax due relates) shall be jointly and severally liable for payment of such tax, unless he proves that the non-recovery of tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. These provisions are intended to recover outstanding demand under the Act from a LLP/private company from the partners/directors of such LLP/private 23

29 DIRECT TAXES company in certain cases. The Delhi High Court in the case of Sanjay Ghai [(2012) 26 taxmann.com 203] has interpreted the phrase tax due used in section 179 to hold that it does not include penalty, interest and other sum payable under the Act. Similar view has also been taken by Gujarat High Court in Maganbhai Hansrajbhai Patel vs. ACIT [(2012) 211 Taxman 386]. 67. Explanation is proposed to be inserted in sections 167C and 179 to bring within the ambit of expression tax due penalty, interest or any other sum payable under the Act. These amendments will take effect from 1st June, Extension of time for approval of recognised provident fund 68. Rule 4 in Part A of Schedule IV to the Act lays down conditions which are required to be fulfilled by the provident fund to receive or retain the status of Recognised Provident Fund. Clause (ea) requires provident fund to apply to the Employees Provident Fund Organisation to obtain exemption under section 17 of the Employees Provident Funds and Miscellaneous Provisions Act, Rule 3 of Part A of Schedule IV provides that in a case where recognition to any provident fund has been accorded on or before the 31st March, 2006 and such provident fund does not satisfy the conditions set out in clause (ea) of rule 4, the recognition to such fund shall be withdrawn, if such fund does not satisfy, on or before the 31st March, 2013, the conditions set out in the said clause and any other condition as specified by the Board. 70. In order to provide time to Employees Provident Fund Organisation for processing the application, due date of 31st March, 2013 has been extended to 31st March,

30 Annual Information Return DIRECT TAXES 71. Under section 285BA specified person are required to furnish Annual Information Return (AIR) in respect of specified transactions. Section 271FA provide for penalty in case of non-filing of AIR returns. It is proposed to replace existing section to provide penalty as under Event Failure to furnish return within prescribed time limit u/s. 285BA(2) Failure to furnish return within period specified in notice issued u/s 285BA(5) Penalty ` 100 per day ` 500 per day (from the date of expiry of the period specified in the notice) Tax Residency Certificate 72. The Finance Act, 2012 amended the provisions of section 90 and section 90A of the Act to make the submission of a Tax Residency Certificate [ TRC ] containing prescribed particulars compulsory for non-residents assessee s to avail benefits under the applicable Double Tax Avoidance Agreement [ DTAA ]. 73. It is now proposed to amend the said section 90 and section 90A of the Act to provide that the submission of the TRC is a necessary but not a sufficient condition for claiming benefits under the applicable DTAA. 74. This position was mentioned in the memorandum explaining the provisions in the Finance Bill, 2012 but has now been given statutory force by incorporating it in the section 90 and section 90 of the Act. This amendment is proposed to be made retrospectively and will apply from the Assessment Year This particular amendment has created a great furore amongst stakeholders and apprehensions have been cast that it will give huge discretion in the hands of the tax authorities who can simply ignore the TRC and deny DTAA benefits to the tax payers. 25