Exemptions and Deductions Part-I

Transcription

1 Exemptins and Deductins Part-I CA Paras K. Savla Exemptins and Deductins Part-I I) Sectin 10(10D) Taxability f receipts under Life insurance plicy A. Life Insurance n live s f persns with disability r persns suffering Current Prvisin Finance Act, 2012 has inserted sub-clause (d) t clause (10D) f sectin 10. It prvided that any receipts under life insurance prceeds in respect f plicy issued n r after wuld be exempt if premium payable fr any year n such plicy during the term des nt exceed 10% f the actual capital sum assured. Actual Capital Sum Assured means minimum amunt assured under the plicy n happening f the event during term f plicy but excluding value f any way f bnus r therwise ver and abve the sum actually assured. It is prpsed that life insurance plicies taken n the life f the persn with disability / severe disability as referred t in sectin 80U r wh in the rules made under sectin 80DDB limit f 10% f the actual capital sum has been raised t 15% f the actual capital sum. With the prpsed amendment, in rder t enjy f the life insurance plicy has been reduced t 6.67 years frm 10 years fr the persns with disability r persns suffering frm specified diseases. B) Keyman Insurance plicy Current prvisin: Sub-clause (d) t clause (10D) f sectin 10 prvided that any sum received under Keyman life insurance plicy wuld nt be entitled fr the exemptin under sectin 10(10D). There was anmaly whether receipt f life insurance plicy wuld be exempt r chargeable t tax in case such Keyman life insurance plicy is assigned t the Keyman. The Delhi High Curt in case f Rajan Nanda 1 has held that nce there is assignment f Keyman life insurance plicy by a cmpany / emplyer in favur f the individual, the character f the insurance plicy changes and it gets cnverted 1 CIT vs. Rajan Nanda [2012] 18 taxmann.cm 98 (Delhi) 64 SS-V-44

2 Special Stry Finance Bill, 2013 int an rdinary plicy and such persn in whse favur insurance plicy is assigned at the time f maturity can claim exemptin u/s 10(10D). Prpsed amendment It is prpsed t amend the Explanatin prviding that Keyman insurance plicy n assignment t Keyman, with r withut cnsideratin, wuld cntinue t remain keyman insurance and accrdingly, any receipt frm it wuld nt be exempt. Any receipt n Keyman life insurance plicy pst its assignment (with r withut cnsideratin) t the emplyee / Keyman wuld be nw chargeable t tax. Thugh this amendment is prspective, it may have retrspective effect in the sense that it applies t existing plicies t. Amended prvisins wuld apply in respect f any Keyman insurance plicy whether taken befre r after It wuld even apply t thse life insurance plicies which has assigned befre and whse maturity falls n r after Issue wuld arise as under which head sums wuld be taxable? Whether such maturity prceeds wuld be taxable as salaries r business incme r capital gain r incme frm ther surces? Whether whle maturity prceeds wuld be taxable r maturity prceeds less cnsideratin n transfer, respect f premium paid by assignr wuld be available r nt? Can assignee claim indexatin the assignr? What wuld be the implicatins if t rest abve issues needs t be intrduced. Otherwise change in tax treatment wuld invite undrawn litigatin. II) Securitisatin Trust A) Sectin 10(23DA) Incme f Securitisatin Trust Current prvisin New prvisin. It is prpsed t prvide that any incme f a securitizatin trust referred under sectin 115TC, arising ut f the activity f securitisatin is exempt frm tax. s Finance Bill has intrduced new Chapter XII- EA Special Prvisins Relating t tax n distributed incme by securitisatin trusts. It prvides that any incme earned by the Securitisatin Trust as regulated under SEBI (Public Offer and Listing f Securitised Debt Instruments) Regulatins, 2008 r under any regulatins f Securities Cntract (Regulatin) Act, 1956 r by Reserve Bank f India wuld be exempt frm tax. Hwever incme distributed by these trusts wuld be subject t additinal B) Sectin 10(35A) Incme received by investr frm Securitised Trust Current prvisin New prvisin. It is prpsed t prvide that any incme received by an investr (wh is liable t pay incme-tax) by way f distributin by a securitisatin trust n which distributin tax has been paid under sectin 115TA, is exempt frm tax. SS-V-45 65

3 Exemptins and Deductins Part-I s As per new Chapter XII-EA, distributin f incme by a securitisatin trust is subject t special rate f tax under sectin 115TA n similar lines as dividend distributin tax. In rder t avid duble taxatin, it is prvided that n tax wuld be paid by recipient when such incme is subject t distributin tax. But such exemptin wuld create varius issues in the hands f the recipient. Investr may nt be allwed deductin in respect f any expenditure incurred fr making cntributin t the securitisatin trust. In case lss is incurred by such investr, such lsses may nt be deductible. be hit by new exemptin prvisins. Hwever mt questin may be raised whether such distributin f incme can be subject t charge under Incme-tax Act, 1961? III) Sectin 10(23ED) Incme f Investr Prtectin Fund f depsitries Current Prvisins New prvisin. It is prpsed t intrduce clause (23ED) t sectin 10, prviding that any cntributin received by investr prtectin fund, set up as per the regulatin ntified by Central Gvernment, frm a depsitry wuld nt be subject t tax. It is als prvided that when any balance in fund, which is nt subject t incmetax, is shared amngst the depsitry, it wuld be included in the incme f the depsitry. Investrs Prtectin Funds in respect f the cntributin received frm depsitry. Hwever sharing ut f the credit balance (n which n tax has been paid) t the depsitry wuld be deemed t be incme f the previus year, in which amunt was shared. IV) Sectin 10(23FB) Venture Capital Entities Current Prvisins Incme f a venture capital cmpany r a venture capital fund setup t raise funds fr investment in a is Capital Undertaking. certificate f registratin as a venture capital fund befre Fund Regulatins) 1996 r certificate f registratin as a venture capital fund being a sub categry/alternative investment fund under the SEBI (Alternate Investment Funds Regulatins) 2012 it is nt listed n recgnised stck exchange, it has invested nt less than 2/3rd f its investible funds in unlisted equity shares r equity linked instruments r, there is n investment in any in which its directr / substantial investr has 66 SS-V-46

4 Special Stry Finance Bill, 2013 substantial interest f ver 10%, individually and cllectively 15%. registered under the prvisins f Registratin Act 1908 as a trust and certificate f registratin befre as venture capital fund Regulatin r Fund a sub categry/alternative investment fund under the SEBI (Alternate Investment Funds Regulatins) 2012 and fulfils fllwing cnditins: it has invested nt less than 2/3rd f its investible funds in unlisted equity shares r equity linked instruments r there is n investment in any in which its trustee / settlr has substantial interest f ver 10%, individually and cllectively 15%. Fund Regulatins r Investment Funds Regulatin Regulatins) 1996 has been replaced by SEBI (Alternate Investment Funds Regulatins) registered under new regulatins. At the same time these entities registered under erstwhile guidelines wuld c-exist. Hence in rder t recgnise entities in bth the regulatins, present amendment has been made. It nly alters the will nt affect the applicability f varius rulings/circulars n the subject. V) Sectin 10(34A) Receipt f buyback f shares Current prvisin Receipt n buy back f shares is subject t tax Prfessin r Capital Gains. It is prpsed t prvide that any incme arising t a sharehlder, n accunt f buyback f shares f an unlisted cmpany n which tax is paid under sectin 115QA, wuld be exempt. As per new Chapter XII-DA Special Prvisin Relating t Tax n Distributed Incme f Dmestic Cmpany fr Buy-back f Shares, incme arising ut f buy back f shares f unlisted cmpany is subject t special rate f tax under sectin 115QA n similar lines as dividend distributin tax. In rder t avid duble taxatin, it is prvided that n tax wuld be paid by recipient when such incme is subject t distributin tax. Hwever, prpsed prvisins try t nullify treaty benefits n accunt f capital gains. Authrity f Advance Ruling in Armstrng Wrld Industries Mauritius Multicnsult Ltd., in re 2, cnsidering the prvisin f India-Mauritius DTAA, has held 2 [2012] 24 taxmann.cm 213 (AAR - New Delhi) SS-V-47 67

5 Exemptins and Deductins Part-I that capital gain frm buy-back f shares is nt taxable in India. Authrity f Advance Ruling in RST in re 3, held that if a share hlder receives any cnsideratin frm any cmpany fr purchase f its wn shares, sectin 46A, special prvisins wuld be applicable and it wuld prevail ver the general prvisin f sectin 45 f the Act. It als held that prvisins f sectin 47 verrides sectin 45 and nt 46A. hwever n cnsequential amendment has been prpsed under sectin 46A. Incme n buy back wuld be exempt nly if buy back is subject t cmpliance f Sectin 77A f the Cmpanies Act, In case prvisin f sectin 77A are nt cmplied, distributin n buyback wuld nt be subject t tax under sectin 115QA and cnsequently nt exempt under new prvisins. Hwever in case a scenari issue may arise whether such prceed wuld be treated as dividend and prvisins f sectin 115-O triggered? If s, whether, cmpany wuld be liable t pay % instead f % and incme in the hands f share hlders wuld be exempt under sectin 10(34)? New exemptin wuld als create varius ther issues. Investrs wuld nt be allwed deductin f any expenditure incurred r cst f imprvement with respect t shares. In case lss is incurred by the investr, lss may nt be allwed fr set ff r carry frward. Issue may als arise whether credit f the tax s paid wuld be allwed t the nn-resident in his cuntry as per the prvisins f DTAA? Further mt questin may be raised whether such distributin f incme can be subject t charge under Incme-tax Act, 1961? VI) Sectin 10(49) Incme f Natinal Financial Hlding Cmpany Limited Current prvisin New Prvisin Prpsed prvisin Clause (49) has been inserted t prvide exemptin in respect f any incme earned by Natinal Financial Hlding Cmpany Limited (NFHCL). Unit Trust f India has been succeeded by Specified Undertaking f Unit Trust f India (SUUTI). Nw new cmpany NFHCL was incrprated t succeed SUUTI. Hence any incme earned by NFHCL is prpsed t be exempt. 3 [2012] 19 taxmann.cm 215 (AAR New Delhi) "We all agree that yur thery is crazy, but is it crazy enugh?" Niels Bhr "Wit is educated inslence." Aristtle 68 SS-V-48