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THE FINANCE ACT, 2016 (CA P. N. SHAH AND (Ms.) ARTI SHAH)

1. BACK GROUND:

The Finance Minister, Shri Arun Jaitley, presented his third Budget with the

Finance Bill, 2016, in the Lok Sabha on 29th February, 2016. After some

discussions, the Parliament has passed the Budget with some amendments in

the Finance Bill, 2016. The President has given his assent to the Finance Act,

2016, on 14th May, 2016. There are in all 241 Sections in the Finance Act, 2016,

which include 115 sections which deal with amendments in the Income tax Act,

1961. While presenting his proposals relating to Direct and Indirect Taxes, he

has stated in Para 117 of his Budget Speech as under:

“117. The Government acknowledges the role of taxpayers in nation

building. Each rupee of tax contributes towards the Government’s efforts

to provide better infrastructure, rural revival and social well-being.

Taxation is a major tool available to Government for removing poverty and

inequality from the society. The posterity will not forgive us if we do not

use this opportunity in this perspective.

The thrust of my tax proposals this year falls in nine categories.

(1) Relief to small tax payers.

(2) Measures to boost growth and employment generation

(3) Incentivising domestic value addition to help Make in India.

(4) Measures for moving towards a pensioned society

(5) Measures for promoting affordable housing

(6) Additional resource mobilization for agriculture, rural economy and clean environment.

(7) Reducing litigation and providing certainty in taxation

(8) Simplification and rationalization of taxation

(9) Use of Technology for creating accountability.”

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1.1 It will be noticed that one of the objectives stated above is “Reducing

Litigation and providing certainty in taxation.” In this contest, Paragraphs 163 to

165 of the Budget Speech outlines “Dispute Resolution Scheme” as under:

“163. A taxpayer who has an appeal pending as of today before the

Commissioner (Appeals) can settle his case by paying the disputed tax

and interest up to the date of assessment. No penalty in respect of

Income-tax cases with disputed tax up to `10 Lakh will be levied. Cases

with disputed tax exceeding `10 Lakh will be subjected to only 25% of the

minimum of the imposable penalty for both direct and indirect taxes. Any

pending appeal against a penalty order can also be settled by paying 25%

of the minimum of the imposable penalty. Certain categories of persons

including those who are charged with criminal offences under specific Acts

are proposed to be barred from availing this scheme.

164. I had in my Budget speech of July, 2014 assured that this

Government would not retrospectively create a fresh tax liability. I had

also hoped then that the cases pending in various courts and other legal

fora relating to certain retrospective amendments undertaken to the

Income tax Act, 1961, through the Finance Act, 2012 will soon reach their

logical conclusion. I would like to reiterate that we are committed to

provide a stable and predictable taxation regime. We will not resort to

such amendments in future. I had also announced constitution of a High

Level Committee which would oversee any fresh case where the assessing

officer proposes to assess or reassess the income in respect of indirect

transfers by applying the retrospective amendment. In order to allay any

fears of tax adventurism, this Committee will now be chaired by the

Revenue Secretary and consist of Chairman, CBDT and an expert from

outside. This Committee will effectively oversee the implementation of

the assurances.

165. In order to give an opportunity to the past cases which are

ongoing under the retrospective amendment, I propose a one-time

scheme of Dispute Resolution for them, in which, subject to their agreeing

to withdraw any pending case lying in any Court or Tribunal or any

proceeding for arbitration, mediation etc., under BIPA, they can settle the

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case by paying only the tax arrears in which case liability of the interest

and penalty shall be waived.”

1.2 One of the important features of this year’s Budget is that “Income

Declaration Scheme, 2016,” has been announced in Sections 181 to 199 of the

Finance Act, 2016. Outline of this Scheme is stated in Paragraphs 159 to 161 of

the Budget Speech as under:

“159. We are moving towards a lower tax regime with non-litigious

approach. Thus, while compliant taxpayers can expect a supportive

interface with the department, tax evasion will be countered strongly.

Capability of the tax department to detect tax evasion has improved

because of enhanced access to information and availability of technology

driven analytical tools to process such information. I want to give an

opportunity to the earlier non-compliant to move to the category of

compliant.

160. I propose a limited period Compliance Window for domestic

taxpayers to declare undisclosed income or income represented in the

form of any asset and clear up their past tax transgressions by paying tax

at 30%, and surcharge at 7.5% and penalty at 7.5%, which is total of 45%

of the undisclosed income. There will be no scrutiny or enquiry regarding

income declared in these declarations under the Income Tax Act or the

Wealth Tax Act and the declarants will have immunity from prosecution.

Immunity from Benami Transaction (Prohibition) Act, 1988 is also

proposed subject to certain conditions. The surcharge levied at 7.5% of

undisclosed income will be called Krishi Kalyan surcharge to be used for

agriculture and rural economy. We plan to open the window under this

Income Disclosure Scheme from 1st June to 30th September, 2016 with an

option to pay amount due within two months of declaration.

161. Our Government is fully committed to remove black money

from the economy. Having given one opportunity for evaded income to be

declared once, we would then like to focus all our resources for bringing

people with black money to books.”

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1.3 In Para 187 of the Budget Speech he has stated that the Direct Tax

Proposals will result in revenue loss of `1,060 Cr., and Indirect Tax Proposals will

yield additional revenue of `20,670 Cr. Thus the net revenue gain from this

year’s proposals will be of `19,610 Cr.

1.4 In this article some of the important amendments made in the Income tax

Act by the Finance Act, 2016, have been discussed. These amendments have

only prospective effect.

2. RATES OF TAXES:

2.1 There are no changes in the tax slabs, rates of Income tax or rates of

education cess for all categories of assesses, other than companies. As per the

announcement made earlier, in this Budget a beginning to reduce the corporate

rates in a phased manner has been made. In the case of an Individual, HUF, AOP

and BOI whose total income is more than ` 1 Cr., the surcharge has been

increased from 12% to 15%. This has been done to tax the super rich

Individuals, HUF etc. There is no change in rate of surcharge in other cases.

2.2 Therefore, in the case of an Individual, HUF, AOP and BOI the rates of

Income tax for A.Y. 2016-17 and A.Y. 2017-18 shall be as under:

Income Slab

(` in Lacs)

Very Senior Citizens

(80 Years and

above)

Senior Citizens

(60 Years and

above)

Others

Up to 2.50 Nil Nil Nil

2.50 to 3.00 Nil Nil 10%

3.00 tp 5.00 Nil 10% 10%

5.00 to 10.00 20% 20% 20%

Above 10 30% 30% 30%

Note: In the case of a Resident Individual having total income not

exceeding `5 Lacs Rebate Upto `2,000/- or tax payable whichever is less is

allowable upto A.Y. 2016-17. This Rebate in now increased upto `5,000/- or tax

payable, whichever is less, in A.Y. 2017-18.

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2.3 The surcharge on income tax will be as under in A.Y. 2016-17 and 2017-18:

Status If total Income is more than ` One Crore

If total Income is more than ` 10 Crores

A.Y. 2016-17 A.Y. 2017-18 A.Y. 2016-17 A.Y. 2017-18 (i) Individual,

HUF, AOP, BOI

12%

15%

12%

15% (ii) Firm, LLP

Co-op. Society Local Authority

12%

12%

12%

12% (ii) Domestic

Company

7%

7%

12%

12% (iv) Foreign

Company

2%

2%

5%

5%

Note: The rate of surcharge on Dividend Distribution Tax u/s 115-0, Tax payable

on Buy-back of Shares u/s 115-QA and Income Distribution tax payable by M.F

u/s 115R is 12% as in the earlier years.

The existing rate of 3% of Education Cess (including Secondary and Higher

Secondary Education Cess) on Income tax and Surcharge will continue in A.Y.

2017-18.

2.4 In view of the above, the effective maximum marginal rate of tax

(including Surcharge and Education Cess) will be as under in A.Y. 2017 – 18:

Assessee Total Income Upto ` 1 Cr. Above ` 1 Cr.

Upto ` 10 Cr. Above ` 10 Cr.

(i) Individual, HUF, AOP and BOI

30.90% 35.535% 35.535%

(ii) Firm and LLP 30.90% 34.608% 34.608% (iii) Domestic Company

Gross Receipts in F.Y. 2014-15 not Exceeding ` 5 Cr.

29.89%

31.961%

33.454%

(iv) Other Domestic Companies

30.90%

33.063%

34.608%

(v) Foreign Company 41.20% 42.024% 43.260%

2.5 In the case of a Domestic Company, which is newly set up on or after

1.3.2016, engaged in the business of Manufacture or Production and Research in

relation to, or distribution of articles manufactured or produced by it, the rate of

Income tax for A.Y. 2017-18 will be 25% plus applicable surcharge and education

cess. This will be subject to following conditions stated in new section 115 BA

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(i) Such company shall not be entitled to claim deduction u/s 10AA,

32(1)(iia), 32 AC, 32AD, 33AB, 33ABA, 35(1)(ii), (iia), (iii), (2AA), 2(AB), 35AC,

35AD, 35CCC, 35CCD as well as under Chapter VIA Part C i.e. sections 80H, to

80RRB (excluding section 80 JJAA).

(ii) Such company will not be entitled to claim set off of loss carried

forward from earlier years if the same is attributed to the above deductions.

Such carried forward loss shall be deemed to have been allowed and will not be

allowed in any subsequent year.

(iii) Depreciation u/s 32 {other than u/s 32(1)(iia)} shall be deducted in

the manner as may be prescribed.

(iv) The above concessional rate u/s 115 BA will be available at the

option of the assessee company. Such option is to be exercised before the due

date for filing Return of Income for the first year after incorporation of the

company. Further, such option once exercised, cannot be withdrawn by the

company in any subsequent year.

2.6 A new section 115 BBDA has been inserted w.e.f. A.Y. 2017-18 (F.Y 2016-

17). This section provides that in the case of any resident individual, HUF or a

Firm (including LLP) if the total income for A.Y. 2017-18 and onwards includes

Dividend from domestic company or companies, in excess of `10 Lacs, the

dividend upto `10 Lacs will be exempt u/s 10(34) but the excess over `10 Lcas

will be chargeable to tax at the rate of 10% plus applicable surcharge and

education cess. It is also provided that no deduction in respect of any

expenditure or allowance or set off of loss shall be allowed under any provision of

the Income tax Act against such dividend.

2.7 Section 115JB is amended from A/Y:2017-18 to provide that in the case of

a Company located in International Financial Services Centre and deriving its

income solely in convertible Foreign Exchange, the MAT u/s 115JB shall be

chargeable at the rate of 9% instead of 18.5%.

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3. TAX DEDUCTION AT SOURCE:

3.1 The Income tax Simplification Committee, under the Chairmanship of

Justice R.V. Easwar, has suggested in its Interim Report that the provisions

relating to tax deduction at source (TDS) should be simplified. In Para 12.1 of

this Report it is stated as under:

“With nearly 65% of the personal income tax collection in India being

raised through tax deducted at source (TDS), the onerous task of which

has been cast on tax deductors, the TDS provisions need to be made more

tax friendly and not as “tedious” as they have remained over the years”.

The committee has further stated as under:

“Considering the fact that more than 80% of the tax payers in the

Individual or HUF categories come under the bracket of an average tax

rate of less than 5%, the committee is of the firm view that the TDS rates

in case of interest and commission in the case of these two categories

needs to be rationalized and accordingly it is recommended that the TDS

rates for them be reduced from the existing 10% to 5%. This important

change should go a long way to avoid a lot of unproductive work and

waste of time, and money”.

The committee has suggested higher threshold limits and lower rates for

TDS in respect of payment u/s 193 to 194 LD. The Finance Minister has accepted

this recommendation only partially and amended various sections of the Income

tax Act for TDS w.e.f. 1.6.2016 as under:

(i) REVISION IN THRESHOLD LIMIT FOR TDS UNDER VARIOUS SECTIONS.

Section Nature of Payment Threshold Limit

At Present (`)

Revised (`)

192A Payment of accumulated P.F balance due to

an employee

30,000 50,000

194BB Winnings from Horse Race 5,000 10,000

194C Payments to Contractors (Aggregate Annual

Limit)

75,000 1,00,000

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194LA Payment of compensation on acquisition of

certain Immovable Property

2,00,000 2,50,000

194D Insurance Commission 20,000 15,000

194G Commission on sale of Lottery Tickets 1,000 15,000

194H Commission or Brokerage 5,000 15,000

(ii) REVISION IN RATES OF TDS UNDER VARIOUS SECTIONS

Section Nature of Payment TDS Rates

At Present

Revised

194DA Payment in respect of Life Insurance Policy 2% 1%

194EE Payment in respect of NSS Deposits 20% 10%

194D Insurance Commission 10% 5%

194G Commission on Sale of Lottery Tickets 10% 5%

194H Commission or Brokerage 10% 5%

(iii) Provision for TDS under Section 194 K (Income in respect of Units) and

section 194L (Payment of compensation on acquisition of capital Asset)

deleted w.e.f. 1.6.2016.

3.2 The provisions for issue of certificates for lower or non-deduction of tax at

source by an assessing officer u/s 197 have been extended with effect from 1st

June, 2016, to cover income payable to a unit holder in respect of units of

alternate investment funds (AIFs Category I or II), which is subject to TDS u/s

194LBB, and income payable to a resident investor in respect of investment in a

securitization trust, which is subject to TDS u/s 194LBC.

3.3 The provision for non- deduction of TDS on issue of a declaration u/s 197A,

has been extended to cover payments of rent, on which tax is deductible u/s

194-I, with effect from 1st June, 2016.

3.4 Section 206AA provides for higher rate of TDS at either the prescribed rate

or at the rate of 20%, whichever is higher, if the payee does not furnish his

Permanent Account Number to the payer. There has been litigation as to

whether this provision applies to foreign companies and non-residents. With

effect from 1st June, 2016, the provisions of this section will not apply to a foreign

company or to a non-resident in respect of payment of interest on long-term

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bonds referred to in Section 194 LC or any other payment subject to prescribed

conditions. The Finance Minister has announced that any payment to Non-

Resident will not attract the higher rate of TDS (i.e 20%) u/s 206AA if any

alternate document, as may be prescribed, is furnished.

3.5 TAX COLLECTION AT SOURCE (TCS): Section 206C has been amended w.e.f.

1.6.2016 to provide as under:

(i) u/s 206C (1D), at present, tax is to be collected by seller of bullion

or jewellery at 1% if the payment is made by the purchaser of bullion (exceeding

` 2 Lacs) or Jewellery (exceeding ` 5 Lacs).

(ii) The above requirement of TCS is now enlarged from 1.6.2016 to the

effect that the seller will have to collect tax @ 1% if purchase of any other goods

or services for amount exceeding ` 2,00,000/- is made and the purchaser /

service receiver makes payment for the same in cash. It may be noted that this

provision will not apply to payments by such class of buyers who comply with the

conditions as may be prescribed. It is also provided that the above requirement

of TCS will not apply where tax is required to be deducted at source by the payer

under chapter XVII-B of the Income tax Act.

(iii) New clause (IF) added in this section provides that w.e.f. 1.6.2016

seller of a Motor Vehicle of the value exceeding `10 Lacs will have to collect from

the buyer tax @ 1% of the sale consideration. This provision for TCS will apply

even if payment for purchase of Motor vehicle is made by cheque.

(iv) The above provisions have been made to enable the Government to

bring high value transactions in the tax net.

4. EXEMPTIONS AND DEDUCTIONS:

In order to give benefit to assessees certain amendments are made in the

Income tax Act as under:

4.1 SECTION 10 – INCOME NOT INCLUDED IN TOTAL INCOME: This section is

amended from A.Y. 2017-18 (F.Y. 2016-17) as under:

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(i) SECTION 10(12A) - This is a new provision. At present

deduction is available for contribution made to National Pension Scheme (NPS)

u/s 80 CCD. Withdrawal of such contribution along with the accumulated

income from the NPS on account of closure or opting out of NPS is taxable in the

year of withdrawal if deduction was claimed in the earlier years.

It is now provided that out of any such withdrawal from NPS, 40% of the

amount will be exempt u/s 10(12A). However, the whole amount received by the

nominee on death of the assessee under the circumstances referred to in section

80CCD (3) (a) shall be exempt from tax. Section 80CCD (3) is also amended for

this purpose.

(ii) SECTION 10(13) - At present, any payment from an

approved superannuation fund to an employee on his retirement is exempt from

tax. The scope of this exemption is now extended by new sub-clause (v) to

transfer of an amount to the account of the assessee under NPS as referred to in

section 80CCD and notified by the Government.

(iii) SECTION 10(15) – At present, interest on Gold Deposit Bonds

issued under Gold Deposit Scheme 1999 is exempt. It is now provided that

interest on Deposit Certificates issued under the Gold Monetization Scheme,

2015, will also be exempt from tax.

A consequential amendment is made in section 2(14) that such Deposit

Certificates issued under the above scheme will not be considered as a Capital

Asset. Therefore, any gain on transfer of such Deposit Certificates will also be

exempt from Capital Gains tax.

(iv) SECTION 10(23FC) – At present interest received by a Business Trust

from a Special Purpose Vehicle is exempt from tax. It is now provided that

Dividend received by such Trust from a Specified Domestic Company as referred

to in the newly inserted clause (7) of section 115-0 will also be exempt from tax.

(v) SECTION 10(38) – This section grants exemption from tax in respect

of long – term capital gain from transfer of equity share where STT is paid. It is

now provided that in respect of long term capital gain arising from transfer of

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equity shares through a recognized Stock Exchange Located in International

Financial Service Centre (IFSC), where consideration is received in Foreign

Currency, the condition for payment of STT will not apply.

(vi) SECTION 10(48A) – This is a new provision. It is now provided that

income of a Foreign Company on account of storage of Crude Oil in India and

sale of such Crude Oil to any person resident in India will not be taxable. This is

subject to terms and conditions of the agreement entered into with the Central

Government.

(vii) SECTION 10(50) – This is a new provision. It provides that income

arising from specified services as stated in chapter VIII (Sections 160 to 177) of

the Finance Act, 2016, shall be exempt from tax. Chapter VIII deals with

“Equalization Levy”. This provision will be applicable after the above Chapter

VIII of the Finance Act, 2016 comes into force.

4.2 SECTION 10AA – DEDUCTION TO SEZ UNITS: This section grants 100%

deduction to income of newly established units in SEZ (i.e eligible business)

which begin activity of manufacture, production or rendering services on or after

1.4.2006. This is subject to conditions provided in section 10AA. Now a sun-set

clause is added in this section whereby such Units which commence such eligible

business on or after 1.4.2021 will not be able to claim deduction under section

10AA.

4.3 SECTION 17 – PERQUISITES: At present, u/s 17(2)(vii) contribution to

approved Superannuation Fund by the employee upto `1 Lac is exempt from tax.

This limit is now increased to `1.5 Lacs from A.Y. 2017 – 18.

4.4 SECTION 80EE – DEDUCTION FOR INTEREST ON LOAN FOR RESIDENTIAL HOUSE:

The existing section 80EE granted deduction for interest on housing loan to a

limited extent. This section is replaced w.e.f. A.Y. 2017-18 to provide for

deduction upto `50,000/- in respect of interest on Housing Loan taken by an

individual from the Financial Institution or Housing Finance Company if the

following conditions are complied with.

(i) Loan should be sanctioned during 1.4.2016 to 31.3.2017.

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(ii) Loan amount should not exceed `35 Lacs and the value of the

Residential House should not exceed `50 Lac.

(iii) The assessee should not own any other Residential House on the

date of sanction of the Loan.

(iv) The above deduction can be claimed in A.Y. 2017-18 and in

subsequent years.

It may be noted that the above deduction can be claimed even if the

Residential House is not for self occupation and is let out. Further, the above

deduction can be claimed in addition to deduction of interest upto `30,000/- (` 2

Lacs in specified cases) allowable for interest on housing loan for self-occupied

residential house property.

4.5 SECTION 80GG – DEDUCTION FOR RENT: At present, an assessee can claim

deduction for expenditure incurred on Rent for Residential House occupied by

himself if he is not in receipt of House Rent Allowance from his employer subject

to certain conditions. This deduction is limited to `2,000/- P.M. or 25% of total

income or actual rent paid in excess of 10% of total income whichever is less.

The above limit of `2,000/- P.M. is now increased to `5,000/- P.M. effective from

A.Y. 2017-18.

4.6 SECTION 80 -IA – DEDUCTION TO INFRASTRUCTURE UNDERTAKINGS: Section 80 –

1A(4) grants exemption to infrastructure undertakings subject to certain

conditions. It is now provided that this exemption will not be available to an

undertaking which starts the development or operation and maintenance of the

infrastructure facility on or after 1.4.2017.

4.7 SECTION 80 – IAB – DEDUCTION TO INDUSTRIAL UNDERTAKING: By amendment

of this section it is provided that the provisions of Section 80-IAB shall not apply

to an assessee, being a Developer, where the development of SEZ begins on or

after 1.4.2017.

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4.8 SECTION 80 – IAC – THE INCENTIVES FOR START UPS:

(i) With a view to providing an impetus to start-ups and facilitate their

growth in the initial phase of their business, this new section is inserted w.e.f.

A.Y. 2017-18. It provides for 100% deduction of the profits and gains derived by

an Eligible Start-UP (Company or LLP) from a business involving Innovation,

Development, Deployment or Commercialization of new products, processes or

services driven by technology or intellectual property. This deduction is

available at the option of the assessee for any three consecutive assessment

years out of five years starting from the date of incorporation.

(ii) Eligible start-up means a company or LLP incorporated between

1.4.2016 to 31.3.2019. The turnover of the business should be less than ` 25

Crores in any of the years between 1.4.2016 to 31.3.2021. Further, such

company / LLP should hold a certificate for eligible business from the Inter

Ministerial Board of Certification.

(iii) It is necessary to ensure that such start-up is not formed by splitting

up or reconstruction of a business already in existence or by transfer of

machinery or plant previously used for any other purpose, subject to certain

exceptions provided in the section.

(iv) With a view to encourage an Individual or HUF to invest in such a

start-up company or LLP, section 50 GB has been amended to grant exemption

from Capital Gain Tax if the capital gain on sale of Residential House is invested

in such a company or LLP. Similarly, a new section 54 EE has been inserted to

grant deduction upto `50 Lacs if investment is made in such a company or LLP

out of capital gain arising on transfer of long term specified asset.

4.9 SECTION 80 – IB – DEDUCTION TO CERTAIN INDUSTRIAL UNDERTAKINGS :

The deduction granted to certain specified Industrial Undertakings stated

in Section 80 – 1B(9)(ii),(iv) and (v) will be discontinued in respect of Industrial

undertakings started on or after 1.4.2017.

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4.10 SECTION 80 – IBA – DEDUCTION TO CERTAIN HOUSING PROJECTS

This is a new section which provides for 100% deduction in respect of

profits and gains of eligible Housing Projects of Affordable Residential Units from

A.Y. 2017-18. The section applies to assessee engaged in developing and

building Housing Projects approved by the competent Authority after 1.6. 2016

but before 1.4.2019. This deduction is subject to following conditions:

(i) The project is completed within a period of three years from the

date on which the building plan of such project is first approved and it shall be

deemed to have been completed only when certificate of completion of project is

obtained from the Competent Authority.

(ii) The built-up area of the shops and commercial establishments does

not exceed 3% of the aggregate built up area.

(iii) If the project is located in Delhi, Mumbai, Chennai or Kolkata or

within 25 km from the municipal limits of these cities:

(a) It is on a plot of land measuring not less than 1000 sq. meters.

(b) The residential unit does not exceed 30 square meters and

(c) The project utilizes not less than 90% of the floor area ratio

permissible in respect of the plot of land.

(iv) If the project is located in any other area:

(a) It is on a plot of land measuring not less than 2,000 sq.

meters

(b) The residential unit does not exceed 60 square meters and

(c) The project utilizes not less than 80% of the floor area ratio

permissible in respect of the plot of land.

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(v) In both above cases the project is the only project on the land

specified above.

(vi) The assessee maintains separate books of account.

(vii) If the housing project is not completed within the specified period of

three years, deduction availed in the earlier years will be taxed in the year in

which the period of completion expires. The definitions, of certain terms such as

‘housing project’, ’ built-up area’ etc. are also given in section 80-IBA(6)

(viii) The benefit under this section is not available to a person who

executes the Housing Project as a works contract awarded by any other person

(including any state or Central Government)

4.11 SECTION 80JJAA – INCENTIVE FOR EMPLOYMENT GENERATION:

At present, an assessee engaged in manufacture of goods in a factory can

claim deduction of 30% of additional wages paid to new regular workmen for 3

assessment years. This deduction can be claimed in respect of additional wages

paid to a workman employed for 300 days or more in the relevant year. Further,

there should be an increase of at least 10% in the existing workforce employed

on the last date of the preceding year. The existing section will apply in A.Y.

2016-17 and earlier years. New Section 80JJAA has been inserted w.e.f. AY 2017-

18.

This new section applies to all assesses who are required to get their

accounts audited u/s 44AB. The deduction allowable is 30% of additional

employee cost for a period of 3 assessment years from the year in which such

additional employment is provided. This deduction is subject to the following

conditions:

(i) The business should not be formed by splitting up, or the

reconstruction of an existing business.

(ii) The business should not be acquired by the assessee by way of

transfer from any other business or as a result of any business reorganization.

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(iii) Additional employee cost means total emoluments paid to

additional employees employed during the year. However, in the first year of a

new business, emoluments paid or payable to employees employed during the

previous year shall be deemed to be the additional employee cost. Accordingly,

deduction will be allowed on that basis in such a case.

(iv) No deduction will be available in case of existing business, if there is

no increase in number of employees during the year as compared to number of

employees employed on the last day of the preceding year or the emoluments

are paid otherwise than by an account payee cheque or account payee bank

draft or by use of electronic clearing system.

(v) Additional employee would not include employee whose total

emoluments are more than `25,000 per month or an employee whose entire

contribution under Employees’ Pension Scheme notified in accordance with

Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, is paid by

the Government or if an employee has been employed for less than 240 days in

a year or the employee does not participate in recognized provident fund.

(vi) Emoluments means all payments made to the regular employees.

This does not include contribution to P.F., Pension Fund or other statutory funds.

Similarly, it does not include lump-sum payable to employee on termination of

service, Superannuation, Voluntary Retirement etc.

(vii) The assessee will have to furnish Audit Report from a Chartered

Accountant in the prescribed form.

4.12 FOURTH SCHEDULE – PART A: Rule 8 of this Schedule is amended

from A/Y:2017-18 to grant exemption to the employee if the entire balance

standing to the credit of the employee in a recognized Provident Fund is

transferred to his account in the National Pension Scheme referred to in Section

80CCD.

5. CHARITABLE TRUSTS:

5.1 A new chapter XII – EB (Sections115 TD, 115 TE and 115TF) has been

inserted in the Income tax Act effective from 1.6.2016. The provisions of these

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sections are very harsh and are likely to create great hardship to trustees of

charitable trusts. In the Explanatory Memorandum to Finance Bill, 2016, it is

explained that “there is no provision in the Income tax Act which ensure that the

corpus and asset base of a trust accreted over a period of time, with promise of

it being used for charitable purpose, continues to be utilized for charitable

purposes. In the absence of a clear provision, it is always possible for charitable

trusts to transfer assets to a non-charitable trust. In order to ensure that the

intended purpose of exemption availed by the trust or institution is achieved, a

specific provision in the Act is required for imposing a levy in the nature of an

Exist Tax which is attracted when the charitable organization is converted into a

non-charitable organization”. It appears that the stringent provisions in section

115TD to 115 TF have been inserted to achieve this objective. This is another

blow to charitable trusts. Since these sections apply to all trusts and institutions

registered u/s 12A/12AA which claim exemption u/s 10(23C) or 11, they will

apply to all charitable or religious trusts claiming exemption u/s 11 and

education institutions, hospitals etc., claiming exemption u/s 10(23C).

5.2 Broadly stated these sections provide as under:

(i) A trust or an institution shall be deemed to have been converted

into any form not eligible for registration u/s 12AA in a previous year, if,

(a) The registration granted to it u/s 12AA has been cancelled; or

(b) It has adopted or undertaken modification of its objects which

do not conform to the conditions of registration and it has not applied for fresh

registration u/s 12AA in the said previous year; or has filed application for fresh

registration u/s 12AA but the said application has been rejected.

(ii) Under the Section 115TD, it has been provided that the accretion in

income (accreted income) of the trust or institution will be taxable on

(a) Conversion of trust or institution into a form not eligible for

registration u/s 12 AA, or

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(b) On merger into an entity not having similar objects and

registered u/s 12AA, or

(c) On non-distribution of assets on dissolution to any charitable

institution registered u/s 12AA or approved u/s 10(23C) within a period of twelve

months from end of month of dissolution. The accreted income will be the

amount of aggregate of total assets as reduced by the liability as on the

specified date.

(iii) The assets and the liability of the charitable organization which has

been transferred to another charitable organization within specified time would

be excluded while calculating the accreted income. Similarly, any asset which

is directly acquired out of Agricultural Income of the Trust or institution will be

excluded while computing accreted income. It is not clear whether Agricultural

Land Settled in Trust or received by the Trust by way of Donation will be

excluded from such computation.

(iv) Any asset acquired by the Trust or Institution during the period

before registration is granted u/s 12A / 12AA and no benefit u/s 11 has been

enjoyed during this period, will be excluded from the above computation of

accreted income.

(v) The method of valuation of such assets / liability will be prescribed

by Rules.

(vi) The accreted income will be taxable at the maximum marginal rate

(i.e. 30% plus applicable surcharge and education cess) in addition to any

income chargeable to tax in the hands of the entity. This tax will be the final tax

for which no credit can be taken by the trust or institution or any other person,

and like any other additional tax, it will be leviable even if the trust or institution

does not have any other income chargeable to tax in the relevant previous year.

(vii) The principal officer or trustee of the trust has to deposit the above

tax within 14 days of the due date as under:

(a) Date on which the time limit to file appeal to the Tribunal u/s

253 against order cancelling Registration u/s 12AA expires if no appeal is filed.

19  

(b) If such appeal is filed but Tribunal confirms such cancellation,

the date on which Tribunal order is received.

(c) Date of merger of the trust with an entity which is not

registered u/s 12A / 12 AA

(d) When the period of 12 months end from the date of

dissolution of trust if the assets are not transferred to an entity registered u/s

12A / 12AA.

(viii) Section 115 TE provides that if there is delay in payment of the

above Exist Tax, the person responsible for payment of such tax will have to pay

interest at the rate of 1% P.M. or part of the month.

5.3 Section 115TF provides that the principal officer or any trustee of the trust

will considered as assessee in default if the above tax and interest is not paid

before the due date. In other words, they can be made personally responsible

for payment of such tax and interest. It is also provided that the non-charitable

entity with which the trust has merged or to whom the assets of the trust are

transferred will also be liable to pay the above exist tax and interest. However,

the liability of such an entity will be limited to the value of the assets of the trust

transferred to such entity.

6. INCOME FROM HOUSE PROPERTY:

6.1 Under Section 24 (b) interest paid on loan taken on or after 1-4-1999 for

acquiring or constructing a residential house for self occupation is allowed as

deduction subject to the limit of `2 Lacs. This deduction is available provided the

acquisition or construction is completed within 3 years from the end of the

financial year in which loan was taken. By amendment of this section this period

is now extended to 5 years from A.Y. 2017-18.

6.2 Existing Sections 25A, 25AA and 25B dealing with taxation of unrealized

rent are now consolidated into a new section 25A from A.Y. 2017-18. The new

section provides that arrears of rent or amount of unrealized rent which is

received by the assessee in subsequent years shall be chargeable to tax as

20  

income of the financial year in which such rent is received. This amount will be

taxable in the year of receipt whether the assessee is owner of the property or

not. The assessee will be entitled to claim deduction of 30% of such arrears of

rent which is taxable on receipt basis.

7. INCOME FROM BUSINESS OR PROFESSION:

7.1 INCOME-SECTION 2(24)(XVIII): The definition of “income” u/s 2(24) was

widened by insertion of clause (xviii) last year. Under this definition any receipt

from the Government or any authority, body or agency in the form of subsidy,

grant etc., is considered as income. However, if any subsidy, grant etc., is

required to be deducted from the cost of any asset under Explanation (10) of

Section 43(1) is not considered as income. Amendment in the Section, effective

from A.Y.2017-18, now provides that any subsidy or grant by the Central

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

the Central Government or the State Government will not be considered as

income. It may be noted that u/s 2(24) (xviii) no distinction is made between

Government Grants of a capital nature and revenue grants. From the wording of

the section it is not clear as to whether subsidy or grant received to set up any

business or to complete a project will be exempt as held by the Supreme Court

in the case of Sahney Steel and Press Works Ltd V/s CIT (228 ITR 253). Further,

from the amendment made this year, it is not clear whether subsidy or grant by

a State Government for the purpose of corpus of a trust or Institution established

by the Government will be exempt.

7.2 NON-COMPETE FEES RECEIVABLE BY A PROFESSIONAL – SECTION 28(VA): At

present a Non-compete Fees receivable in cash or kind is chargeable to tax in

the case of a person carrying on a Business u/s 28(va). This section is amended

w.e.f. A.Y. 2017-18 to extend this provision to a person carrying on a profession.

Consequential amendment is also made in section 55 to treat cost of acquisition

or cost of improvement as ‘NIL’ in the case of right to carry on any profession. In

view of this, any amount received on account of transfer of right to carry on any

profession will be taxable as capital gains.

7.3 ADDITIONAL DEPRECIATION – SECTION 32(1)(IIA): At present benefit of

Additional Depreciation at 20% of actual cost of new plant and machinery is

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available to the assessee engaged in generation or generation and distribution

of power. It is now provided that from A.Y. 2017-18 the benefit can be claimed

also by an assessee engaged in Generation, Transmission or Distribution of

power.

7.4 INVESTMENT ALLOWANCE – SECTION 32 AC: This section was amended by the

Finance (No.2) Act, 2014 w.e.f. A.Y 2015-16. At present it provides for deduction

of 15% of cost of new plant and machinery acquired and installed during the

year if the total cost of such plant & machinery is more than `25 Cr. From

reading the section it was not clear whether the benefit of the section can be

claimed only if the plant or machinery is purchased and installed in the same

year. By amendment of this section, effective from A.Y. 2016-17, it is now

provided that even if the plant or machinery is acquired in one yare but installed

in a subsequent year, the benefit of deduction can be claimed in the year of

installation. Therefore, if the new plant or machinery is acquired in an earlier

year but installed on or before 31.3.2017, deduction can be claimed in the year

of installation.

7.5 WEIGHTED DEDUCTION FOR SPECIFIED PURPOSES:

In line with the Government policy for reduction of rates of taxes in a

phased manner and reduction of incentives provided in the Income tax Act,

section 35,35AC, 35AD, 35CCC and 35CCD have been amended w.e.f. A.Y 2018-

19 as under:

Deduction

S.No: Section Expenditure Weighted Deduction at present

From A.Y 2018-19

From A.Y 2021-22

(i) 35(1)(ii) Contribution for Scientific Research to Scientific Research Association, University College or other institutions

175% of Contribution

150% of Contribution

100% of Contribution

(ii) 35(1)(iia) Payment to a company For Scientific Research

125% of Amount paid

100% of Amount paid

100% of Amount paid

(iii) 35(1)(iii) Contribution for research in Social Science or Statistical Science to Research Association, University, College or other Institution

125% of Contribution

100% of Contribution

100% of Contribution

22  

(iv) 35(2AA) Payment to a National Laboratory, University, IIT or specified person for approved scientific research programme

200% of Amount paid

150% of Amount Paid

100% of Amount paid.

(v) 35(2AB) Expenditure incurred by a company engaged in Bio-technology, Manufacture or production of Articles for in-house Scientific Research

200% of expenditure

150% of Expenditure

100% of Expenditure

(vi) 35AC Expenditure on eligible projects or schemes and Donations to approved thrusts

100% of Expenditure or donation

NIL NIL

(vii) 35AD Capital Expenditure for Specified Business

100% or 150% of capital expenditure

100% of Capital expenditure

100% of Capital expenditure

(viii) 35CCC Expenditure on notified Agricultural Extension Project

150% of Expenditure

150% of Expenditure

100% of Expenditure

(ix) 35CCD Expenditure on notified Skill Development Programme.

150% of Expenditure

150% of Expenditure

100% of Expenditure

7.6 EXPENDITURE FOR OBTAINING RIGHT TO USE SPECTRUM – SECTION 35ABA: (i)

This is a new section inserted w.e.f. A.Y. 2017-18. It provides for deduction for

capital expenditure incurred for acquiring any right to use spectrum for

telecommunication services. The actual amount paid will be allowed to be

spread over the period of right to use the license and allowed as a deduction in

each year. This deduction will be allowed starting from the year in which the

spectrum fee is paid. If such fee is paid before the business to operate

telecommunication services is started, deduction will be allowed from the year in

which business commences. It is also provided that provisions of section

35ABB(2) to (8) relating to transfer of licence, amalgamation and demerger will

apply to spectrum also.

(ii) It is also provided that if deduction is claimed and granted for part of the

capital expenditure, as stated above, in any year, the same will be withdrawn in

any subsequent year if there is failure to comply with any of the provisions of this

section. Such withdrawal can be made by rectification of the earlier assessments

u/s 154.

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7.7 DEDUCTION FOR EXPENDITURE ON SPECIFIED BUSINESS – SECTION 35AD: (i) At

present, deduction of 100% of capital expenditure is allowed in the case of an

assessee engaged in certain specified business listed in section 35AD(8). In

respect of business listed in section 35AD (i),(ii),(v), (vii) and (viii) such deduction

is allowed at 150% of the capital expenditure. From A.Y. 2018-19 such

expenditure will be allowed at 100% only.

(ii) Further, the list of specified business in section 35AD(8) has been

expanded. By this amendment, effective from A.Y. 2018-19, capital expenditure

in the business of “Developing or Maintaining and Operating or Developing,

Maintaining and Operating a new Infrastructure facility” which commences

operation on or after 1.4.2017 will be entitled to the benefit u/s 35AD. This is

subject to the condition that such business is owned by (i) an Indian Company or

a consortium of such companies or by an authority or a board or corporation or

any other body established or constituted under any Central or State Act and (ii)

such entity has entered into an agreement with the Central or State Government

or Local authority or any Statutory body Developing, Maintaining etc., of the new

Infrastructure facility.

7.8 NBFC – DEDUCTION FOR PROVISION FOR DOUBTFUL DEBTS – SECTION 36(1),(VIIIA)

Deduction for provision for Bad and Doubtful Debts is allowed at present

to Banks u/s 36(1)(viiia) subject to certain conditions. This benefit is now

extended to a NBFC also. This amendment is effective from A.Y. 2017-18. This

deduction cannot exceed 5% of the total income computed before making

deduction under this section and deduction under Chapter VI A.

7.9 DISALLOWANCE OF EQUALISATION LEVY – SECTION 40(a): This is a new

provision which is effective from 1.6.2016. Chapter VIII of the Finance Act, 2016,

provides for payment of Equalisation Levy on certain payments to Non-Residents

for specified services. Now, section 40(a)(ib) provides that if this Levy is not

deposited with the Government before the due date for filing Return of Income

u/s 139(1), deduction for the payment to Non-Resident will not be allowed to the

assessee. If the above Levy is deposited after the such due date for filing Return

of Income, the deduction for the payment to Non-Resident will be allowed in the

year of deposit of this Levy with the Government.

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7.10 DEDUCTION ON ACTUAL PAYMENT – SECTION 43B: This section is amended

w.e.f. A.Y. 2017-18 to provide that any amount payable to Indian Railways for use

of Railway Assets will be allowed only in the year in which actual payment is

made. However, if such actual payment is made before the due date for filing

the Return of Income u/s 139(1), for the year in which it was payable, deduction

will be allowed in the year in which the amount was payable. This provision will

apply to rent payable in premises of Indian Railways taken on rent or such similar

transactions.

7.11 TAX AUDIT – SECTION 44AB: At present a person carrying a profession is

required to get his accounts audited if his gross receipts exceed `25 Lacs in any

Financial Year. This limit is increased to `50 Lacs from A.Y. 2017-18. In a case

where the profits are not declared in accordance with provisions of section 44AD

(Business) or 44ADA (Profession) the assessee will have to get the accounts

audited u/s 44AB irrespective of the amount of turnover or gross receipts.

7.12 PRESUMPTIVE BASIS OF COMPUTING BUSINESS INCOME – SECTION 44AD:

(i) This section provides for computation of Business Income in the

case of an eligible assessee engaged in eligible business at 8% of total turnover

or gross receipts in any financial year. For this purpose the limit for turnover or

gross receipts was `1 Cr. This has now been increased to `2 Cr., from A.Y. 2017-

18.

(ii) Section 44AD (2) provides that in the case of a Firm declaring profit

on presumptive basis, deduction for salary and interest paid by the Firm to its

partners is allowable. This provision is deleted w.e.f. AY. 2017-18. Hence no such

deduction will be allowed. It may be noted that the partner will have to pay tax

on such salary or interest received from the Firm.

(iii) Section 44AD(4) is replaced by another section 44AD(4) from A.Y.

2017-18. It is now provided that any eligible person who carries on eligible

business and declares profit at 8% or more of total turnover or gross receipts for

any year in accordance with this section, but does not declare profit on such

presumptive basis in any of the five subsequent years, shall not be eligible to

claim the benefit of taxation on presumptive basis under this section for 5

25  

subsequent assessment years. In view of this, such assessee will be required to

maintain books as provided in section 44AA and get the accounts audited u/s

44AB.

7.13 PRESUMPTIVE BASIS OF COMPUTING INCOME FROM PROFESSION – SECTION 44ADA:

(i) This is a new provision which will come into force from A.Y. 2017-18.

This provision will benefit resident professionals who carry on the profession on a

small scale and the yearly gross receipts are less than ` 50 Lacs. Broadly stated

the provisions of the new section 44ADA are as under:

a) The section is applicable to every resident assessee who is

engaged in any profession covered by section 44AA(1) i.e. legal, medical,

engineering, architectural, accountancy, technical consultancy, interior

decoration or any other profession as is notified by the Board in the Official

Gazette. The Explanatory Memorandum states that this section is applicable

only to individuals, HUF and partnership firms (excluding LLPs). However the

wording of the Section makes it clear that it applies to all resident assesses.

b) Presumptive profit shall be 50% of the total gross receipts or

sum claimed to have been earned from such profession, whichever is higher.

c) Deductions under sections 30 to 38 shall be deemed to have

been allowed and no further deduction under these sections will be allowed.

d) The written down value of any asset used for the purpose of

profession shall be deemed to have been calculated as if the depreciation is

claimed and allowed as a deduction.

e) The assessee is required to maintain books of account and

also get them audited if he declares profit below 50% of the gross receipts.

(ii) It may be noted from the above that there is no provision in Section

44ADA for deduction of salary and interest paid by a Firm or LLP to its partners.

Therefore, if a professional Firm/LLP offers 50% of its gross receipts for tax under

26  

this section, the partners will have to pay tax on salary and interest received by

the partners.

(iii) It may be noted that Justice Easwar Committee has suggested in its

report that taxation of income on presumptive basis is popular with small

business entities as they are not required to maintain books or get their accounts

audited. The committee has, therefore, suggested that this scheme should be

extended to persons engaged in the profession. In para 5.1 of their report it is

stated that “the committee recommends the introduction of a presumptive

income scheme whereby income from profession will be estimated to be thirty

three and one-third (33 1/3%) of the total receipts in the previous year. The

benefit of this scheme will be restricted to professionals whose total receipts do

not exceed one crore rupees during the financial year”. From the provisions of

new section 44ADA it will be noticed that the above recommendation has been

partly implemented.

(iv) A question for consideration is whether remuneration and interest

on capital received by a partner of a firm or LLP engaged in any profession can

be considered as income from the profession within the meaning of section 44

ADA. It is possible to take a view that this is income from profession as section

28(v) provides that “any interest, salary, bonus, commission or remuneration,

by whatever name called, due to, or received by, a partner of a firm from such

firm” shall be chargeable under the head “Profits and gains of Business or

Profession”. Even in the Income tax Return Form such Interest and

Remuneration received by a partner from the firm is to be shown under the head

profits and gains from business or profession. Therefore, if a professional has

received total interest and remuneration of `25 Lacs and `15 lacs as share of

profit from the professional firm in which he is a partner and he has no other

income under the head profits and gains from business or profession, he can

offer `12.5 Lacs for tax u/s 44ADA.

7.14 INCOME FROM PATENTS – SECTION 115BBF:

This is a new section which provides for taxation of Royalty from Patents

at a concessional rate of 10% from A.Y. 2017-18. The new section provides as

under:

27  

(i) If the total income of the eligible assessee includes any income by

way of Royalty in respect of Patent developed and registered in India, tax on

such Royalty shall be payable at the Rate of 10% plus applicable surcharge and

education cess.

(ii) Such tax will be payable on the gross amount of Royalty. No

expenditure incurred for this purpose shall be allowed against the Royalty

Income or any other income.

(iii) For this purpose the Eligible Assessee is defined to mean a person

resident in India who is the true and first Inventor of the invention and whose

name is entered on the Patent Register as a Patentee in accordance with the

Patents Act. Further, a person being the true and first Inventor of the invention

will be considered as an eligible assessee, where more than one persons are

registered as Patentees under the Patents Act in respect of the Patent.

(iv) Explanation to the section defines the expressions Developed,

Patent, Patentee, Patented Article, Royalty etc.

(v) The eligible assessee has to exercise option, if he wants to take

benefit of this section, in the prescribed manner before the due date for filing

Return of Income u/s 139(1) for the relevant year.

(vi) If the eligible assessee who has opted to claim the benefit of this

section does not offer for taxation such Royalty income in accordance with this

section, he will not be able to take benefit of this section in subsequent 5

assessment years.

(vii) The above Royalty Income shall not be included in the “Book Profit”

computation u/s 115JB. Similarly, any expenditure relatable to Royalty income

will not be deductible from such “Book Profit”.

7.15 CARRY FORWARD OF LOSS – SECTIONS 73A(2) AND 80: At present

Section 73A (2) provides that carry forward of Loss incurred in any business

specified in section 35AD(8)(C) is allowable for set-off against income of any

specified business in subsequent year. Section 80 is amended w.e.f. A.Y. 2016-

28  

17 to provide that such carry forward of Loss u/s 73A(2) will be allowed only if

the Return of Income for the year in which loss is incurred is filed before the due

date u/s 139(1).

8. INCOME FROM OTHER SOURCES – SECTION 56(2)(VII): Section 56(2)(vii)

provides for levy of tax an Individual or HUF in respect of any asset received

without consideration or for inadequate consideration. Second Proviso to this

section provides for certain exceptions whereby the said section does not apply

to certain transactions. The scope of this proviso is now extended w.e.f. A.Y.

2017-18 to receipt by individual or HUF of shares of-

(i) A successor Co-op. Bank in a business reorganization in lieu of

shares of a predecessor co-op. Bank (Section 47(vicb).

(ii) A resulting company pursuant to a scheme of Demerger (Section

47(vid).

(iii) An amalgamated company pursuant to a scheme of amalgamation

(Section 47 (vii).

9 CAPITAL GAINS:

9.1 DEFINITIONS – SECTION 2 (14) AND 2(42A):

(i) Section 2(14) defining “Capital Asset” is amended from A.Y. 2016-17

to state that Deposit Certificates issued under Gold Monetization Scheme, 2015,

will not be considered as Capital Asset for fax purposes.

(ii) Section 2(42A) defines the term “Short-term Capital Asset”. This

definition is amended from A.Y. 2017-18 to provided that shares (equity or

preference) of a non-listed company will be treated as short-term capital asset if

they are held for less than 24 Months. It may be noted that prior to 10.7.2014,

this period was 12 months. It was increased to 36 months by the Finance (No.2)

Act, 2014 w.e.f. 11.7.2014. Now, this period is reduced to 24 Months from

1.4.2016.

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9.2 SOVEREIGN GOLD BONDS – SECTION 47 (VIIC): It is now provided from A.Y.

2017-18 that any gain made by an Individual on redemption of Sovereign Gold

Bonds issued by RBI shall not be chargeable as capital gains.

9.3 CONVERSION OF A COMPANY INTO LLP – SECTION 47(XIIIB): The exemption

from capital gains given to a private or a public unlisted company u/s 47 (xiiib) is

subject to several conditions. One of the conditions, at present, is that the total

sales, turnover or gross receipts in a business of the company in any of the three

preceding years does not exceed `60 Lacs. Instead of removing this condition or

increasing the limit of turnover, a new condition is now added from A.Y. 2017-18.

It is now provided that total value of the assets, as appearing in the books of

account of the company, in any of the three preceding years, does not exceed

`5 Crores. This will prevent many small investment or property companies from

converting themselves into LLP.

9.4 UNITS OF MUTUAL FUNDS – SECTION 47(XIX): Capital Gain arising on transfer

of units in a consolidated plan of a M.F. Scheme in consideration of allotment of

units in consolidated plan of that scheme will not be chargeable to tax from A.Y.

2017-18.

9.5 MODE OF COMPUTATION OF CAPITAL GAIN – SECTION 48: This section which

deals with computation of capital gain is amended from A-Y 2017-18 as under:

(i) For computing long term capital gain on transfer of Sovereign Gold

Bonds issued by RBI it will now be possible to consider indexed cost as cost of

acquisition.

(ii) In the case of a non-resident assessee, for computing capital gain

on redemption of Rupee Denominated Bond of an Indian company subscribed by

him, the gain arising on account of appreciation of Rupee against a Foreign

Currency shall be ignored.

9.6 COST OF CERTAIN ASSETS – SECTION 49: Section 49 provides for

determination of cost of acquisition of certain Assets. By amendment of this

section it is provided, from A.Y. 2017-18, that in respect of any asset declared

under the “Income Declaration Scheme, 2016” Under Chapter IX of the Finance

30  

Act, 2016, the fair market value of the Asset as on 1.6.2016 shall be deemed to

be the cost of acquisition for the purpose of computing capital gain on transfer of

that asset.

9.7 FULL VALUE OF CONSIDERATION – SECTION 50C: This section is amended from

A.Y.2017-18 to bring it in line with the provisions of section 43CA. This

amendment is based on the recommendation of Justice R. Easwar Committee

Report (Prara 6.2). At present, Stamp Duty valuation as on the date of transfer of

immovable property is compared with the consideration recorded in the transfer

document. It is now provided that if the date of the agreement for sale and the

date of actual transfer of the property is different, the stamp duty valuation on

the date of Agreement for sale will be considered for the purpose of section. This

is subject to the condition that the amount of the consideration or a part there of

has been received by the seller by way of an account payee cheque or draft or

by use of electronic clearing system through a bank on or before the date of the

Agreement for sale.

9.8 EXEMPTION ON REINVESTMENT OF CAPITAL GAIN – SECTION 54 EE AND 54 GB: As

discussed in Para 4.8 above, new section 54EE and amendment in section 54GB

provides for exemption upto `50 Lacs if the capital gain on transfer of specified

assets are invested in startup company or LLP. These provisions come into force

from A.Y. 2017-18. Broadly stated these provisions are as under:

(i) Section 54EE provides that if whole or part of capital gain arising

from transfer of a long term capital asset (original asset) is invested within 6

months, from the date of such transfer, in a long-term Specified Asset, the

assessee can claim exemption in respect of such capital gain. For this purpose

the “Specified Asset” is defined to mean unit or units issued before 1.4.2109 by

such Fund as may be notified by the Central Government. The Explanatory

Memorandum to Finance Bill, 2016, states that it is proposed to establish a Fund

of Funds to finance the start-ups. The following are certain conditions for

claiming this exemption.

(a) Investment in long term specified asset should not exceed

`50 lakh during a financial year. In case where the investment is made in two

31  

financial years, for the capital gains of the same year, the aggregate investment

which qualifies for exemption from capital gain will not exceed `50 lakh.

(b) The long term specified asset is not transferred by the

assessee for a period of three years from the date of its acquisition. The

assessee does not take any loan or advance against the security of such long

term specified asset. In a case where the assessee takes a loan or an advance

against security of long term specified asset, it shall be deemed that the

assessee has transferred the long term specified asset on the date of taking the

loan or an advance.

(e) If the assessee, within a period of three years from the date

of its acquisition, transfers that long term specified asset or takes a loan or an

advance against security of such long term specified asset, the amount of capital

gain which is allowed as exempt u/s 54EE will be charged to tax under the head

“Capital Gains” as gain relating to long term capital asset of the previous year in

which the long term capital asset was transferred.

(ii) Section 54GB, at present, grants exemption to an Individual or HUF

in respect of long term capital gain arising on transfer of a Residential property

(House or a Plot of Land) if the net consideration is utilized for subscription in

equity shares of an eligible company. This provision will not apply to transfer of

a residential property after 31.3.2017. By amendment of this section it is now

provided that this exemption will be available to an Individual or HUF if net

consideration on transfer of Residential property (Land, Building or both) is

invested in an “Eligible Start Up” company or LLP. The term “Eligible Start-up”

has been given the same meaning as in Explanation below section 80-IAC(4).

(Refer Para 4.8 above). The above investment is to be made before the due date

for filing the Return of Income. The above concession is not available if the

transfer of Residential property is made after 31.3.2019. It may be noted that

other conditions in existing section 54GB will apply to the above Investment also.

(iii) It may be noted that an Individual or HUF who is claiming exemption

u/s 54 or 54F on transfer of a long term Capital Asset (including a Residential

House) can claim deduction u/s 54EC (Investment in Bonds upto `50 Lacs) as

well as u/s 54EE Investment in specified units (upto ` 50 Lacs) and u/s 54GB

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(Investment in eligible start up without any limit). If we read sections 54EC,

54EE and 54GB it will be noticed that no restriction is put in any of these sections

that claim for deduction on reinvestment can be made under any one section

only. Therefore, if an individual / HUF sells his Residential House, he can claim

deduction u/s 54EC (upto `50 Lacs), u/s 54EE (up to `50 Lacs), u/s 54GB (without

limit) as well as u/s 54 for purchase of another Residential House.

9.9 TAX ON SHORT-TERM CAPITAL GAIN – SECTION 111A: At present, this section

provides for levy of tax on short-term Capital Gain at 15% from transfer of equity

shares where STT is paid. By amendment of this section from A.Y. 2017-18 it is

provided that in respect of short-term capital gain arising from transfer of equity

shares through a Recognized Stock Exchange located in International Financial

Service Centre (IFSC) where consideration is received in Foreign Currency, the

condition for payment of STT will not apply.

9.10 TAX ON LONG – TERM CAPITAL GAIN – SECTION 112: At present, the tax on long

– term capital gain on transfer of unlisted securities in the case of non-resident

u/s 112 (1)(a) (iii) is chargeable at the rate of 10% if benefit of first and second

proviso to section 48 is not taken. There was a doubt whether the word

“Securities” include shares in a company. In order to clarify the position this

section is amended from A.Y. 2017-18 to provide that long term Capital Gain

from transfer of shares of a closely held company (whether public or private)

shall be chargeable to tax at 10% if benefit of first and second proviso to section

48 is not claimed.

10. MINIMUM ALTERNATE TAX (MAT) – SECTION 115JB:

Applicability of MAT to foreign companies has been a burning issue. In line

with the recommendations of the Justice A.P. Shah Committee, section 115JB is

amended to provide that the provisions of section 115JB shall not be applicable

to a foreign company if

(i) The assessee is a resident of a country or a specified territory with

which India has an agreement referred to in section 90(1) or an agreement u/s

90A(1) and the assessee does not have a permanent establishment in India in

accordance with the provisions of the relevant Agreement; or

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(ii) The assessee is a resident of a country with which India does not

have an agreement under the above referred sections and is not required to

seek registration under any law for the time being in force relating to companies.

This amendment is made effective retrospectively from A.Y. 2001-02.

11. DIVIDEND DISTRIBUTION TAX (DDT) – SECTION 115-O:

(i) At present, under the specific taxation regime for business trusts, a

tax pass through status is given to Real Estate Investment Trust (REITs) and

Infrastructure Investment Trust (INVITS). However, a Special Purpose Vehicle,

being a company, which is held by these business trusts, pays normal corporate

tax and also suffers dividend distribution tax (DDT) while distributing the income

to the business trusts being a shareholder.

(ii) It is now provided by amendment of section 115-0 w.e.f. 1.6.2016

that no DDT will be levied in respect of distribution of dividend by an SPV to the

business trust. The exemption from levy of DDT will only be in the cases where

the business trust holds 100% of the share capital of the SPV excluding the share

capital other than that which is required to be held by any other person as part

of any direction of the Government or any regulatory authority or specific

requirement of any law to this effect or which is held by Government or

Government bodies. The exemption from the levy of DDT will only be in respect

of dividends paid out of current income after the date when the business trust

acquires the shareholding of the SPV as referred to above. Such dividend

received by the business trust and its investor will not be taxable in the hands of

trust or investors as provided in the amended sections 10(23FC) & 10(23FD).

The dividends paid out of accumulated and current profits upto this date will be

liable for levy of DDT as and when any dividend out of these profits is distributed

by the company either to the business trust or any other shareholder.

(iii) It is further provided in section 115-0(8) that no DDT will be levied

on a company, being a unit located in an International Financial Services Centre,

deriving income solely in convertible foreign exchange, for any assessment year

on any amount of dividend declared, or paid by such company on or after 1 April,

34  

2017 out of its current income, either in the hands of the company or the person

receiving such dividend.

12. TAX ON BUY BACK OF SHARES:

(i) At present section 115QA of the Act provides that income

distributed on account of buy back of unlisted shares by a company is subject to

the levy of additional Income-tax at 20%. The distributed income has been

defined in the section to mean the consideration paid by the company on buy

back of shares as reduced by the amount which was received by the company,

for issue of such shares. Buy-back has been defined to mean the purchase by a

company of its own shares in accordance with the provisions of section 77A of

the Companies Act, 1956.

(ii) It is now provided w.e.f. 1.6.2016 that section 115QA will apply to

any buy back of unlisted shares undertaken by the company in accordance with

the law in force relating to companies. Accordingly, it will also cover buy-back of

shares under any of the provisions of the Companies Act, 1956 and the

Companies Act, 2013. It is further provided that for the purpose of computing

distributed income, the amount received by a company in respect of the shares

being bought back shall be determined in the prescribed manner. These Rules

may provide the manner of determination of the amount in various

circumstances including shares being issued under tax neutral reorganizations

and in different tranches as stated in the Explanatory Memorandum.

13. SECURITIZATION TRUSTS – CHAPTER XII EA :

(i) Chapter XII EA was added by the Finance Act, 2013, effective

from A.Y. 2014-15. Under these provisions it was provided that: (a) Any

income of Securitisation Trust will be exempt u/s 10 (23DA), (b) Income received

by the Investor any securitized debt instrument or securities issed by such trust

will be exempt u/s 10(35A), and (c) The Trust was required to pay additional

Income tax on distributed income u/s 115TA (25% in the case of Individual / HUF

and 30% in case of others). There were other procedural provisions in sections

115TA to 115TC.

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(ii) Section 115 TA is amended w.e.f 1.6.2016. New Section 115TCA

has been inserted from A.Y. 2017-18. It is now provided that the current tax

regime for Securitization Trust and its investors, will be discontinued for the

distribution made by Securitisation Trust with effect from 1 June, 2016, and will

be substituted by a new regime with effective from A.Y 2017-18. This effectively

grants pass through status to the Securitisation Trust. The new regime will apply

to a Securitisation Trust being an SPV defined under SEBI (Public Offer and

Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in

the guidelines on securitization of standard assets issued by RBI or a trust setup

by a securitization company or a reconstruction company in accordance with the

Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 or guidelines or directions issued by the RBI

(SARFAESI Act).

(iii) The income of Securitisation Trust will continue to be exempt

section under 10(23DA) which is also amended to effectively define the term

securitization. The income accrued or received from the Securitisation Trust will

be taxable in the hands of investor in the same manner and to the same extent

as it would have happened had the investor made investment directly in the

underlying assets and not through the trust. Consequential amendment is made

in section 10(35A). The payment made by Securitisation Trust will be subject to

tax deduction at source u/s 194LBC at the rate of 25% in case of payment to

resident investors who are individual or HUF and @ 30% in case of others. In

case of payments to non-resident investors, the deduction of tax will be at rates

in force. The facility for the investors to obtain lower or nil deduction of tax

certificate will be available. The trust will also provide breakup regarding nature

and proportion of its income to the investors and also to the prescribed income-

tax authority.

14. TAXATION OF NON-RESIDENTS:

(i) PLACE OF EFFECTIVE MANAGEMENT (POEM) – SECTION 6:

(a) The concept of treating a foreign company as resident in

India if its place of effective management is in India was introduced by the

Finance Act, 2015 and was to become effective from Assessment Year 2016-17.

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Under this concept, foreign companies will be considered as resident in India if

its POEM is in India. The Finance Minister has now recognized that before

introducing this concept, its ramifications need to be analyzed in detail.

Accordingly, the implementation of concept of POEM has been deferred by one

year and the same will now be applicable from Assessment year 2017-18.

(b) A new section115JH is inserted to empower the Government

to issue notification to provide detailed transition mechanism for companies

incorporated outside India, which due to implementation of POEM, will be

assessed for the first time as resident in India. The notification will be issued to

bring clarity on issues relating to computation of income, treatment of

unabsorbed depreciation, set off or carry forward of losses, applicability of

transfer pricing provisions, etc., applicable to such foreign companies

considered to be resident in India.

(ii) INCOME DEEMED TO ACCRUE OR ARISE IN INDIA – SECTION 9(1)(I)

A new clause has been inserted in Explanation 1, providing that no income

shall be deemed to accrue or arise in India to a foreign company engaged in

mining of diamonds, through or from activities confined to display of uncut and

unassorted diamonds in any notified special zone. This amendment is effective

from Assessment Year 2016-17.

(iii) FUND MANAGER’S ACTIVITIES – SECTION 9A:

(a) This section lays down the conditions under which a fund

manager based in India does not constitute a business connection of the foreign

investment fund. One of the conditions is that the fund is a resident of a

country or a specified territory with which India has entered into a double

taxation avoidance agreement. This condition is now modified effective from

A.Y. 2017-18 by extending it to funds established, incorporated or registered in

a notified specified territory.

(b) Another condition is that the fund should not carry on or

control and manage, directly or indirectly, any business in India or from India.

This condition is now modified to apply only to a fund carrying on, or controlling

and managing, any business in India.

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(iv) REFERENCE TO TRANSFER PRICING OFFICER (TPO) – SECTION 92CA: At

present where a reference has been made by the A.O. to a TPO, the TPO has to

pass the order at least 60 days prior to the date of limitation u/s 153/153 B for

passing the assessment or reassessment order. Section 92CA has been

amended w.e.f. 1.6.2016 to extend this period in cases where the period of

limitation available to the TPO for passing the order is less than 60 days, to a

period of 60 days, if the assessment proceedings were stayed by an order or

injunction of any court, or a reference was made for exchange of information by

the Competent Authority under a double taxation avoidance agreement.

(v) MAINTENANCE OF RECORDS – SECTION 92D: This section requires every

person who has entered into an international transaction to keep and maintain

such information and documents in respect thereof as may be prescribed. A

requirement is now introduced for a constituent entity of an International Group

to keep and maintain such information and documents in respect of an

international group as may be prescribed, and to furnish such information and

documents in such a manner, on or before the date, as may be prescribed.

Failure to furnish such information and documents will attract a penalty of

`5,00,000 u/s 271AA unless reasonable cause is shown u/s 273B.

15. REPORT RELATING TO INTERNATIONAL GROUP :

(i) Section 286 is a new section inserted from A.Y. 2017-18. The OECD

in Action Plan 13 of the BEPS Project has recommended a standardized

approach to transfer pricing documentation to be adopted by various Countries.

Pursuant to this recommendation, this section is inserted to provide for a

specific reporting system in respect of country- by country (CbC) reporting. This

system is a three-tier structure with (i) a master file containing standardized

information relevant for all members of an International Group; (ii) a local file

referring specifically to material transactions of the local taxpayer; and (iii) a

CbC report containing certain information relating to the global allocation of the

International Group’s income and taxes paid together with certain indicators of

the location of economic activity within the group.

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(ii) This section provides that every Constituent Entity, resident in India

if it is constituent of an International Group and every parent entity or the

alternate reporting entity, resident in India, has to furnish report in the

prescribed form to the prescribed authority before the due date for filing return

of Income u/s 139(1). The manner in which report is to be submitted in

provided in the section.

(iii) Penalties are prescribed in section 271GB for non-furnishing of the

information by an entity which is obligated to furnish as also for knowingly

providing inaccurate information in the report.

16. EQUALIZATION LEVY:

Chapter VIII (Sections 163 to 180) of the Finance Act, 2016, provides for

Equalization Levy on Non-Residents. This Chapter will come into force on the

date to be notified by the Central Government. In order to overcome the

challenges of typical direct tax issues relating to e-commerce i.e characterization

of nature of payments, establishing a nexus between a taxable transaction,

activity and a taxing jurisdiction and keeping in view the recommendations of

OECD in respect of Action 1 – Addressing the Tax Challenges of Digital Economy,

of the BEPS Project, this new chapter is inserted. The chapter is a complete

code for charge of Equalisation Levy, its collection, recovery, furnishing

statements, processing Statements, Rectification of Mistakes, charge of interest

for delayed payment, penalty for non-compliance with the provisions, Appeals to

CIT(A) and ITA Tribunal, Prosecution, Power of Government to frame Rules etc.

The provisions for Equalisation Levy can be briefly stated as under:

(i) The Equalisation Levy is at 6% of the amount of consideration for

specified services received or receivable b y a non-resident (not having a PE in

India) from a resident carrying on a business or profession or from a non-resident

having a PE in India (Payer).

(ii) The specified services are (a) Online advertisement; (b) Any

provision for digital advertising space; (c) Any other facility or service for the

purpose of online advertisement; and (d) Any other services as may be

notified.

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(iii) Simultaneously with the introduction of this chapter for Equalisation

levy, section 10(50) has been inserted to provide exemption to income arising

from the above-mentioned specified services chargeable to Equalisation Levy.

(iv) The payer is obligated to deduct the Equalisation Levy from the

amount paid or payable to a non-resident in respect of such specified services at

6% if the aggregate amount of consideration for the same in a previous year

exceeds `1 lakh.

(v) In addition, section 40(a)(ib) is inserted to provide that the

expenses incurred by a payer towards specified services chargeable to

Equalisation Levy shall not be allowed as deduction in case of failure to deduct

and deposit the same to the credit of Central Government before the due date as

explained in Para 7.9 above.

(vi) This Chapter extends to the whole of India except the State of

Jammu and Kashmir.

17. ASSESSMENTS AND REASSESSMENTS:

(i) JURISDICTION OF ASSESSING OFFICER – SECTION 124: This section is

amended from 1.6.2016. It is now provided that u/s 124(3) no person will be

entitled to call into question the jurisdiction of A.O. after the expiry of one

month from the date on which notice u/s 153A(1) or 153C(2) is served or after

completion of assessment whichever is earlier. This provision is in line with the

existing provision in section 124(3) which applies to objection to jurisdiction of

A.O. when return u/s 139 is filed or notice u/s 142(1) or 143(2) is issued.

(ii) POWER TO CALL FOR INFORMATION – SECTION 133C: This section is

amended from 1.6.2016. It is now provided that when information or document

is received in response to any notice u/s 133C(1) the prescribed authority can

process the same and available outcome will be forwarded to A.O.

(iii) HEARING BY A.O. – SECTION 2 (23C): This clause is inserted from

1.6.2016 to provide that notices for hearing can be given by electronic mode and

communication of data and Documents can be made by electronic mode.

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(iv) FILING INCOME TAX RETURN – SECTION 139: At present an Individual,

HUF, AOP and BOI is required to file return of income before the due date if the

total income, without considering deductions under Chapter VI-A, exceeds the

maximum amount which is not chargeable to tax. It is now provided in the sixth

proviso to section 139 (1) that income from long term capital gains exempt u/s

10(38) shall also be added to the total income for determining the threshold

limit for determining whether the assessee is required to file the return of

income.

(v) BELATED FILING OF RETURN OF INCOME – SECTION 139(4): The existing

section 139(4) is replaced by new section 139(4) from A.Y. 2017-18 . It is now

provided that if an assessee has not furnished his Return of Income before due

date u/s 139(1), he can file the same at any time before the end of the relevant

assessment year or before completion of assessment whichever is earlier.

(vi) REVISED RETURN – SECTION 139(5): The existing Section 139(5) is

replaced by new section 139(5) from A.Y. 2017-18. At present a revised return

can be filed u/s 139(5), only if the return originally filed is before the due date u/s

139(1). Such a revised return can be filed before the expiry of one year from the

end of the relevant assessment year or completion of assessment, whichever is

earlier. It is now provided that a belated return filed pursuant to section 139(4),

can also be similarly revised within the time limit given above.

(vii) DEFECTIVE RETURN – SECTION 139(9): This section is amended from

A.Y. 2017 – 18. At present a return of income will be treated as defective if self-

assessment tax and interest payable u/s 140A is not paid before the date of

furnishing the return. Now clause (aa) of the Explanation to section 139(9) has

been deleted and hence a return will now not be treated as defective merely

because self-assessment tax and interest thereon is not paid before the date of

furnishing the return.

(viii) ADJUSTMENT TO RETURNED INCOME – SECTION 143(1): This section is

now amended from A.Y. 2017-18. The scope of adjustments that can be made

at the time of processing the Return of Income u/s 143(1) has been expanded to

cover the following items:

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(a) Disallowance of loss claimed, if return for the year for which

loss has been claimed was furnished beyond the due date specified in section

139(1).

(b) Disallowance of expenditure indicated in tax audit report but

not considered in the Return of Income

(c) Disallowance of deduction claimed u/s 10AA, 80-IA, 80-IAB,

80-IB, 80-IC, 80-ID or 80-IE, if the return has been filed beyond the due date

specified in section 139(1).

(d) Addition of income due to mismatch in income as reflected in

the return of income and as appearing in Form 26AS or Form 16A or Form 16.

The above adjustments will be made based on information available on

the record of the tax department either physically or electronically. However, no

adjustment will be made without intimating the assessee about such adjustment

in writing or in electronic mode and giving him a time of 30 days to respond. The

adjustment will be made only after considering the response received or after

the lapse of 30 days in case no response is received.

(ix) PROCESSING OF RETURN OF INCOME – SECTION 143(ID): This section is

amended w.e.f. A.Y. 2017-18. It is now provided that the processing of the

Return of Income u/s 143(1) will not be necessary within one year if notice u/s

143(2) is issued. However, such Return of Income shall be processed u/s 143(1)

before assessment order u/s 143(3) is passed.

(x) INCOME ESCAPING ASSESSMENT – SECTION 147: This section has been

amended from 1.6.2016. New clause (ca) has been added in Explanation 2 to

section 147. The amendment provides that income shall be deemed to have

escaped assessment if, on the basis of the information received u/s 133C(2), it is

noticed by the A.O that the income exceeds the maximum amount not

chargeable to tax or where the assessee had understated the income or has

claimed excessive loss, deduction, allowance or relief in the return.

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(xi) LIMITATION FOR COMPLETING ASSESSMENT OR REASSESSMENT – SECTION

153

The existing section 153 has been replaced by a new section 153 from

1.6.2016. This new section provides as under:

(a) The time limit for completion of assessment has now been

reduced as under:

• For order u/s 143 and section 144 – from the existing two

years to twenty one months from the end of the assessment year in which the

income was first assessable.

• For order u/s 147 – from the existing one year to nine

months from the end of the financial year in which the notice u/s 148 was

served.

• For giving effect to order passed u/ss 254, 263, 264, setting

aside or cancelling an assessment – from the existing one year to nine months from

the end of the financial year in which the order is received or passed by the

designated Commissioner.

(b) The period for completing the assessment shall be extended

by one year where reference has been made to the Transfer pricing Officer u/s

92CA,

(c) At present, there is no time limit for giving effect to an order

passed u/s 250 or 254 or 260 or 262 or 263 or 264. Now it is provided that

action under the above section shall be completed within three months from the

end of the month in which order is received or passed by the designated

Commissioner. Additional time of six months may be granted to the Assessing

Officer by the Principal Commissioner or the Commissioner, based on reasons

submitted in writing, if the Commissioner is satisfied that the delay is for

reasons beyond the control of the Assessing Officer.

(d) At present there is no time limit for completion of

assessment, reassessment or re-computation in consequence of or to give

43  

effect to any finding or direction contained in an order under the above

mentioned sections or in an order of any court in a proceeding otherwise than

by way of appeal or reference under the Act. Now such order giving effect

should be passed on or before the expiry of twelve months from the end of the

month in which such order is received by the designated Commissioner.

(e) Similarly, in case of assessment made on a partner of a firm

in consequence of an assessment made on the firm u/s 147, the time limit is now

introduced. Accordingly, the assessment of the partner shall be completed

within twelve months from the end of the month in which the assessment order

in case of the firm is passed.

In calculating the above time limit, the time or the period referred to in

Explanation 1 of section 153(9) shall be excluded.

(f) For cases pending on 1st June, 2016, the time limit for taking

requisite action (in case of (c), (d) and (e) above will be 31st March, 2017 or

twelve months from the end of the month in which such order is received,

whichever is later.

(g) The existing Section 153 shall aply to any order of

assessment, reassessment or recomputation made before 1/6/2016.

(xii) LIMITATION FOR COMPLETION OF ASSESSMENT IN SEARCH CASES – SECTION

153B:

The existing Section 153B is replaced by new Section 153B w.e.f.

1.6.2016. The old section 153B shall apply in relation to any order of

assessment, reassessment or re-computation is made on or before 31.5.2016.

The new section 153B provides for reduction in time limit for completion of

assessment, reassessment etc., in case of a search u/s 153 A or 153C as under:

(a) In each assessment year falling within the six years referred

to in section 153A(1)(b) or assessment year in which search is conducted u/s

132 or requisition is made u/s 132A – from two years to twenty one months from

the end of the financial year in which the last of the authorization for search or

requisition was executed:

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(b) In case of other persons referred to in section 153C, to

twenty one months (from the existing two years) from the end of the financial

year in which the last of the authorization for search or requisition was executed

or nine months (from the existing one year) from the end of the financial year in

which the books of account or documents or assets seized or requisitioned are

handed over u/s 153C to the Assessing Office having jurisdiction over such

person, whichever is later.

(c) In case where reference is made to the Transfer Pricing

Officer u/s 92CA, the period of limitation as given above will be extended by a

period of twelve months.

(d) In calculating the above time limit, the time or the period

referred to in Explanation 1 of section 153B(3) shall be excluded.

18. PAYMENT OF TAXES AND INTEREST:

18.1 ADVANCE TAX PAYMENT – SECTION 211: (i) The provisions of Section 211 have

been amended from 1.6.2016. Now, all non-corporate assesses, who are liable to

pay advance tax, will have to pay such tax in 4 installments as applicable to

corporate assesses instead of 3 installments. The installments for advance tax

payment are as follows:

Due Date of Installment

Position upto F.Y.2015-16 For Non-Corporate Assessees (Cumulative Advance Tax)

Position from F.Y. 2016-17 For all assessees (Cumulative Advance Tax)

15th June NIL 15%

15th September 30% 45%

15th December 60% 75%

15th March 100% 100%

(i) Eligible assesses referred to in section 44AD opting for computation

of profits and gains of business on presumptive basis are required to pay the

entire advance tax in one installment on or before 15th March of the financial

year. No similar exception has been given for eligible professionals covered

under presumptive taxation u/s 44ADA.

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(ii) The provisions of section 234C in respect of interest payable for

deferment of advance tax have been amended to bring them in line with the

provisions of section 211 of the Act. Interest u/s 234C will be levied at 1% p.m.

for 3 months on shortfall of advance tax paid as compared with the amount

payable as per the above installments in case of all assesses (except the eligible

assesses u/s 44AD). However, no interest will be levied if the advance tax paid is

more than 12% (For 15th June instalment) and more than 36% (For 15th

September instalment).

(iii) A new exception is now provided that interest u/s 234C will not be

levied in case of assesses having income chargeable under the head ‘profits and

Gains of business or Profession’ for the first time. These assesses will be

required to pay the whole amount of tax payable in the remaining installments of

advance tax which are due after they commence business or by 31st March of the

financial year if no installments are due.

18.2 INTEREST ON REFUNDS – SECTION 244A:

(i) Section 244A granting interest on refunds to assesses has been

amended w.e.f. 1.6.2016 to provide that in case where the return of income is

filed after the due date as per section 139(1), then interest on refund out of TDS,

TCS and advance-tax will be granted only from the date of filing the return and

not from 1st April of the assessment year.

(ii) It is further provided that an assessee will be entitled to interest on

refund of self-assessment tax paid u/s 140A of the Act from the date of payment

to tax or date of filing the return, whichever is later up to the date on which the

refund is granted.

(iii) It is also provided that an assessee will be entitled to additional

interest on refund arising on giving effect to an appellate / revisionary order

which has been passed beyond a time limit of 3 months from the end of the

month of receipt of the appellate / revisionary order by the Commissioner. It is

further clarified that if an extension is granted by the Principal Commissioner /

Commissioner for giving effect to the appellate/ revisionary order, then the

46  

additional interest will be granted from the expiry of the extended period. The

Principal Commissioner / Commissioner may extend the period for giving effect

to the appellate / revisionary order up to 6 months. The additional interest on

such refunds will be calculated at the rate of 3% p.a. from the date following the

date of expiry of the specified time limit upto the date of granting the refund.

Effectively, the assessee will be entitled to interest in such cases at the rate of

9% p.a. against the normal rate of 6% p.a for delay in giving effect to an

appellate order beyond the specified time limit.

18.3 RECOMMENDATION OF JUSTIC R. EASHWAR COMMITTEE: It may be noted that

this committee had made two recommendations as under:

(i) The tax payer should be allowed automatic stay on payment of

7.5% of disputed taxes till the first appeal is decided. In cases of High-Pitched

assessments, it may be difficult for the assessee to pay even 7.5% of the

disputed demand. In such cases he can approach the CIT(A) and request stay of

the entire demand. No such amendment is made in the Act. However, CBDT has

modified the Instruction No. 1914 of 21.3.1996 on 29.2.2016 directing

assessing officers to grant stay till the disposed of first appeal on payment of

15% of disputed tax subject to certain conditions.

(ii) As regards interest on delayed refunds the committee has

suggested that section 244A may be amended to provide that interest of 1% P.M.

should be paid if the refund is delayed up to 3 months and interest at 1.5% P.M.

should be paid if the delay is more than 3 months. It will be noticed that this

recommendation is only partly accepted while amending section 244A.

19. APPEALS AND REVISION:

19.1 APPEAL BY DEPARTMENT – SECTION 253(2A): Section 253(2A) has been

amended from 1.6.2016. Now, it will not be possible for the Department to file

appeal before ITA Tribunal against the order passed pursuant to the directions of

Dispute Resolution panel (DRP).

19.2 RECTIFICATION OF ORDER OF ITA TRIBUNAL – SECTION 254: At present the ITA

Tribunal can rectify any mistake in its order which is apparent from the records

47  

within 4 years of the date of the order. This period is now reduced to 6 months

from the end of the month in which the order is passed. This amendment is

effective from 1.6.2016. Although it is not clarified in the Finance Act, 2016, it is

presumed that this amendment will apply to orders passed on or after 1.6.2016.

19.3 SINGLE MEMBER CASES – SECTION 255(3): This section is amended from

1.6.2016 to provide that a Single Member Bench of ITA Tribunal may dispose of

any case where assessed income does not exceed `50 Lacs. At present, this

limit is `15 Lacs which has now been increased to `50 Lacs.

20. DISPUTED TAX SETTLEMENT SCHEME – SECTIONS 200 TO 211 OF THE

FINANCE ACT, 2016:

20.1 The Finance Minister has, in his Budget speech on 29th February 2016,

stated that the tax litigation in our country is a scourge for a tax friendly regime

and creates an environment of distrust in addition to increasing the compliance

cost of the tax payer and administrative cost of the Government. He has also

stated that there are over 3 Lac tax cases pending with the commissioner of

Income tax (Appeals) with disputed amount of tax of about 5.5 Lac Crores. In

order to reduce these appeals before the first appellate authority he has

announced a new scheme called “ Dispute Resolution Scheme -2016” Two

separate Schemes are announced in this Budget, one for settlement of disputed

taxes under Income tax and wealth tax Act and the other for disputed taxes

under Indirect Tax Laws.

20.2 In chapter X of the Finance Act, 2016, (Act), Sections 200 to 211 Provide

for “The Direct Tax Dispute Resolution Scheme – 2016”. Similarly, Chapter XI

(Sections 212 to 218) of the Act provides for “The Indirect Tax Dispute Resolution

Scheme – 2016”.

20.3 THE SCHEME:

(i) The Direct Tax Dispute Resolution Scheme 2016 (Scheme) will come into

force on 1st June, 2016. This scheme will enable all assesses whose assessments

under the Income tax Act or the wealth tax have been completed for any

assessment year and whose appeals are pending before the Commissioners of

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Income tax (Appeals) as on 29.2.2016 to settle the tax dispute. The scheme also

applies to those assesses in whose case any disputed additions are made as a

result of retrospective amendments made in the Income tax or wealth tax Act

and whose appeals are pending before the CIT(A), ITA Tribunal, High Court,

Supreme Court or before any other authority.

(ii) Section 212 of the Finance Act provides that the assessee who wants to

settle the tax dispute pending before the concerned appellate authority as on

29.02.2016, can make a declaration in the prescribed Form on or after

01.06.2016 but before 31st day of December, 2016. In the case of an

assessee in whose case the assessment or reassessment is made in the normal

course and not due to any retrospective amendment, and the appeal is pending

before CIT (A) as on 29.02.2016, the tax dispute can be settled as under:-

(a) If the disputed tax does not exceed `10 Lacs for the relevant

assessment year, the assessee can settle the same on payment of such tax and

interest due upto the date of assessment or reassessment.

(b) If the disputed tax exceeds ` 10 Lacs for the relevant assessment

year, the dispute can be settled on payment of such tax with 25% of minimum

penalty leviable and interest upto the date of assessment or reassessment. It is

difficult to understand why minimum penalty is required to be paid when the

disputed addition may not be for concealment or inaccurate furnishing of

particulars of income.

(c) In the case of appeal against the levy of penalty, the assessee can

settle the dispute by payment of 25% of minimum penalty leviable on the

income as finally determined.

(iii) In a case where the disputed tax demand relates to addition made in the

assessment or reassessment order made as a result of any retrospective

amendment in the Income tax or wealth tax Act, the dispute can be settled at

the level of any appellate proceedings (i.e. CIT(A), ITA Tribunal, High Court etc.)

by payment of disputed tax. No interest or penalty will be payable in such a

case.

20.4 PROCEDURE FOR DECLARATION:

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(i) The declaration for settlement of disputed tax for which appeal is pending

before CIT(A) is to be filed in the prescribed form with the particulars as may be

prescribed to the Designated Authority. The Principal Commissioner will notify

the Designated Authority who shall not be below the rank of commissioner of

Income tax. Once this declaration is filed for settlement of a tax dispute for a

particular year, the appeal pending before the CIT (A) for that year will be

treated as withdrawn.

(ii) In the case where the tax dispute is in respect of any addition made as a

result of retrospective amendment, the assessee can file the declaration in the

prescribed form with the designated authority. The assessee will have to

withdraw the pending appeal for that year before CIT (A), ITA Tribunal, High

Court, Supreme Court or other Authority after obtaining leave of the Court or

Authority whereever required. If any proceedings for the disputed tax are

initiated for arbitration, conciliation or mediation or under an agreement entered

into by India with any other country for protection of Investment or otherwise,

the assessee will have to withdraw the same. Proof of withdrawal of such appeal

or such other proceedings will have to be furnished by the assessee with the

declaration. Further, the declarant will have to furnish an undertaking in the

prescribed form waiving his right to seek or pursue any remedy or any claim for

the disputed tax under any agreement.

(iii) It is also provided that if (a) any material particulars furnished by the

declarant are found to be false at any stage, (b) the declarant violates any of the

conditions of the scheme or (c) the declarant acts in a manner which is not in

accordance with the undertaking given by him as stated above, the declaration

made under the scheme will be considered as void. In this event all proceedings

including appeals, will be deemed to be revived.

20.5 PAYMENT OF DISPUTED TAX:

(i) On receipt of the declaration from the assessee the Designated Authority

will determine the amount payable by the declarant under the scheme within 60

days. He will have to issue a certificate in the prescribed form giving particulars

of tax, interest, penalty etc., payable by the Declarant.

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(ii) The Declarant will have to pay the amount determined by the Designated

Authority within 30 days of the receipt of the Certificate. He will have to send

the intimation about the payment and produce proof of payment of the above

amount. Upon receipt of this intimation and proof of payment, the Designated

Authority will have to pass an order that the declarant has paid the disputed tax

under the scheme. Once this order is passed it will be conclusive about the

settlement of disputed tax and such matter cannot be re-opened in any

proceedings under the Income tax or Wealth tax Act or under any other law or

agreement.

(iii) Once this order is passed, the Designated Authority shall grant immunity

to the declarant as under:

(a) Immunity from instituting any proceedings for offence under the

Income tax or Wealth tax Act.

(b) Immunity from imposition or waiver of any penalty or interest under

the income tax or wealth tax Act. In other words, the difference between

interest or penalty chargeable under the normal provisions of the Income tax or

wealth tax Act and the interest or penalty charged under the scheme cannot be

recovered from the declarant.

It is also provided that any amount of tax, interest or penalty paid under

the Scheme will not be refundable under any circumstances.

20.6 WHO CAN MAKE DECLARATION:

(i) Section 208 of the Finance Act provides that in the following cases

declaration under the Scheme for settlement of disputed taxes cannot be made.

(a) In relation to assessment year for which assessment or

reassessment under Section 153A or 153C of the Income tax Act or Section 37A

or 37B of the Wealth tax Act is made.

(b) In relation to assessment year for which assessment or

reassessment has been made after a survey has been conducted under section

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133A of the Income tax Act or 38A of the Wealth tax Act and the disputed tax

has a bearing on findings in such survey.

(c) In relation to assessment year in respect of which prosecution has

been instituted on or before the date of making the declaration under the

scheme.

(d) If the disputed tax relates to undisclosed income from any source

located outside India or undisclosed asset located outside India.

(e) In relation to assessment year where assessment or reassessment

is made on the basis of information received by the Government under the

Agreements under section 90 or 90A of the Income tax Act.

(f) Declaration cannot be made by following persons.

• If an order of detention has been made under the

Conservation of Foreign Exchange and Prevention of Smuggling Activities Act,

1974.

• If prosecution has been initiated under the Indian Penal Code,

The Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and

Psychotropic Substances Act, 1985. The Prevention of Corruption Act, 1988 or

for purposes of enforcement of any civil liability.

(g) Declaration cannot be made by a person who is notified under

section 3 of the Special Court (Trial or Offences Relating to Transactions in

Securities) Act, 1992.

20.7 GENERAL:

(i) The Act authorizes the Central Government to issue directions or orders to

the authorities for the proper administration of the scheme. The Act also

provides that if any difficulty arises in giving effect to any of the provisions of the

scheme, the Central Government can pass an order to remove such difficulty.

Such order cannot be passed after expiry of 2 years i.e after 31.5.2018. Central

52  

Government is also authorized to notify the Rules for carrying out the provisions

of the scheme and also prescribe the Forms for making Declaration, for

certificate to be granted by the Designated Authority and for such other matters

for which the rules are required to be made under the scheme.

(ii) In 1998 similar attempt was made to reduce tax litigation through “Kar

Vivad Samadhan Scheme” which was introduced by the Finance (No:2) Act, 1998.

This year, similar attempt is made to reduce tax litigation through this Scheme.

One objection that can be raised is with regard to levy of penalty when the

disputed tax is more than ` 10 Lacs. There is no logic in levying such a penalty.

Even if the assessee is not successful in the appeal before CIT(A), his liability will

be for payment of disputed tax and interest. Penalty is not automatic. The

disputed addition or disallowance may be due to interpretation of some provision

in the tax law for which no penalty is leviable. Therefore, in case where disputed

tax is more than `10 Lacs, the assessee will not like to take benefit of the

scheme and to that extent litigation will not be reduced.

(iii) As stated earlier, section 202 of the Finance Act provides that declaration

can be filed for settlement of disputed taxes only in respect of an appeal pending

before CIT (A). There is no reason for restricting this benefit to appeal pending

before the first appellate authority. This scheme should have been made

applicable to appeals filed by the assessee before ITA Tribunal, High Court or the

Supreme Court which are pending on or before 29.02.2016. If this provision had

been extended to all such appeals, pending litigation before all such judicial

authorities would have been reduced.

(iv) The provision in section 202 of the Finance Act relating to settlement of

disputed taxes levied due to retrospective amendment in the Income tax and

Wealth tax Act is very fair and reasonable. In such cases only tax is payable and

no interest or penalty is payable. This provision is made with a view to settle the

disputed taxes levied due to retrospective amendment made in section 9 by the

Finance Act, 2012. This related to taxation as a result of acquisition of interest

by a Non-Resident in a company owning assets in India. (Cases like VODAFONE,

CAIRN and others). However, there are some other sections such as sections

14A, 37, 40 etc., where retrospective amendments have been made. It appears

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that it will be possible to take advantage of the scheme if appeals on these

issues are pending before any Appellate Authority or Court as on 29.2.2016.

(v) It may be noted that last year the CBDT had made one attempt to reduce

the tax litigation by issue of Circular No. 21/2015 dated 10/12/2015 whereby

appeals filed by the Income tax Department where disputed taxes were below

certain level were withdrawn with retrospective effect. This year the

Government has issued this scheme whereby assesses can settle the demand for

disputed taxes and thus reduce the tax litigation.

21. PENALTIES AND PROSECUTION:

21.1 Sections 98 to 110 of the Finance Act, 2016, make major amendments in

Penalty provisions under the Income tax Act. In Para 166 of his Budget Speech

the Finance Minister has stated as under:-

“166 Levy of heavy penalty for concealment of Income has over the years

resulted in large number of disputes despite a number of decisions of the Apex

Court on interpretation of statutory provisions and principles guiding imposition

of penalty. At present the Income tax Officer has discretion to levy penalty at

the rate of 100% to 300% of tax sought to be evaded. I propose to modify the

entire scheme of penalty by providing different categories of misdemeanor with

graded penalty and thereby substantially reducing the discretionary power of the

tax officer. The penalty rates will now be 50% of tax in case of under reporting

of income and 200% of tax where there is misreporting of facts. Remission of

penalty is also proposed in certain circumstances where taxes are paid and

appeal is not filed”.

On first impression, from the above paragraph of the Budget Speech, one

gets an idea that the penalty provisions in the Income tax are now simplified.

However, if we consider the amendments in Penalty provisions made by the

Finance Act the assessing officer will try to levy penalty in almost all cases where

assessed income is more than the declared income on the ground of “Under

Reporting” or “Misreporting” of Income. The penalty for under reporting is 50%

of tax and for misreporting it is 200% of tax.

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21.2 EXISTING PENALTY PROVISIONS FOR CONCEALMENT.

(i) At present, Section 271 of the Income tax Act (Act) provides for levy of

penalty for concealment of income or for furnishing inaccurate particulars of

income at the rate of 100% of tax which may extend to 300%. The Assessing

Officer (AO) has discretion in the matter of levy of penalty. There are 8

Explanations in the Section to explain the circumstances under which a particular

income will be considered as concealment of income or when the assessee will

be deemed to have furnished inaccurate particulars of Income. Various clauses

of this section have been considered and interpreted by the various High Courts

and the Supreme Court in various judgements. The law relating to levy of

penalty appeared to be more or less settled by now. How far these judgements

will apply to the new Scheme for levy of penalty will depend on the manner in

which officers administer the new provisions.

(ii) Recently, Income tax Simplification Committee (Justice Eshwar

Committee) has submitted its Report. In para 26.1 of its Report the committee

has considered the provisions of sections 271 and 273B and made the following

recommendation.

“In the larger interests of the assessees and the Income tax Department,

the Committee recommends that the scope of 273 B should be suitably enlarged

to provide that penalty for concealment of Income or furnishing inaccurate

particulars thereof will not be imposed where any addition or disallowance is

made without any evidence or in a routine manner or on estimate and in cases

where the Assessing Officer takes a view which is different from the bona fide

view adopted by the assessee on any issue involving the interpretation of any

provision of the Income tax Act or any other law in force and is supported by any

judicial ruling”

The above suggestion has been made with a view to reduce tax litigation.

If we consider the amendments made by the Finance Act, 2016, it will become

evident that this recommendation is only partly implemented.

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21.3 NEW SECTION 270A (UNDER REPORTING OF INCOME)

(i) It is now provided that existing Section 271 shall apply upto Assessment

Year 2016-17. For A.Y. 2017-18 and onwards new sections 270A and 270AA have

been added. The provisions of these sections are as under.

(ii) Section 270A authorizes an Assessing Officer, CIT (A), Commissioner or

Principal Commissioner to levy penalty at the rate of 50% of tax in case where

the assessee has “Under Reported” his income. In cases where the assessee has

“Misreported” his income the penalty of 200% of tax will be levied. It may be

noted that u/s 271, although the minimum penalty was 100% of tax and

maximum penalty was 300% of tax, in most of the cases only minimum penalty

of 100% was levied.

(iii) Section 270A(2) provides that in the following cases the assessee will be

considered to have “Under Reported” his income.

(a) If Income assessed is greater than income determined under

section 143(1) (a) i.e Income as per Return of Income, or if Income assessed is

greater than the maximum amount not chargeable to tax, if Return of Income is

not filed by the assessee;

(b) If Income assessed or deemed book profit u/s 115JB/115JC is greater

than the income assessed or reassessed immediately before such assessment;

(c) If Book Profit assessed u/s 115JB / 115 JC is greater than Book Profit

determined u/s 143(1)(a) or Book Profit assessed u/s 115JB/115JC, if no return of

income is filed by the assessee.

(d) If Income assessed or reassessed has the effect of reducing loss

declared or such loss is converted into income.

(iv) In all the above cases the difference between the income assessed or

reassessed and the income computed u/s 143(1)(a) will be considered as Under

Reported income and penalty at 50% of tax will be levied. If the loss declared

by the assessee is reduced or converted into income the difference will be liable

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to penalty @ 50% of tax. The concept of income concealed or furnishing of

inaccurate particulars of income, which existed u/s 271, is now given up under

the new section 270A.

(v) In a case where Section 115JB / 115JC is applicable the amount of Under

Reported income will be worked out by applying the formula given in the section.

This can be explained by the following illustration.

Income Under normal

Provisions

Book Profit u/s 115JB

Income declared and accepted u/s 143(1)(a) 7,00,000 18,00,000 Income Assessed 9,00,000 19,00,000 Addition / Disallowance 2,00,000 1,00,000

In the above case Under Reported Income u/s 270A will be `3,00,000/-

(`2,00,000+`1,00,000/-)

Thus the penalty will be leviable on the addition / disallowance made

under general provisions of the Act i.e. ` 2,00,000/- as well as u/s 115JB `

1,00,000/-although total income finally assessed is `19 Lacs under section 115JB.

This provision is on the same lines as contained in Explanation (4) of section 271

which was added by the finance Act 2015 w.e.f. A.Y. 2016-17 with a view to

overrule the decision of Delhi High Court in the case of CIT V/s Nalwa Sons

Investments Ltd (327 ITR 543).

(vi) Section 270A(4) provides that where any addition was made in the

computation of total income in any earlier year and no penalty was levied on

such addition in that year, and the assessee contends that any receipt, deposit

or investment made in a subsequent year has come out of such addition made

in earlier year, the assessing officer can consider such receipt, deposit or

investment as under reported income. This provision is on the same lines as

existing Explanation (2) of Section 271.

(vii) Section 270A (6) provides that no penalty will be levied in respect of any

Under Reported Income in the following cases:-

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(a) Where the assessee offers an explanation and the Income tax

Authority is satisfied that the explanation is bona fide and all material facts have

been disclosed.

(b) Where such Under Reported income is determined on the basis of

an estimate, if the accounts are correct and complete but the method employed

is such that the income cannot be properly deduced there from.

(c) Where the addition is on the basis of estimate and the assessee

has, on his own, estimated a lower amount of addition or disallowance on the

same issue and has included such amount in the computation of his income and

disclosed all the facts material to the addition or disallowance.

(d) Where addition is made under Transfer pricing provisions but the

assessee had maintained information and documents as prescribed under

section 92D, declared the international transaction under Chapter X and

disclosed all material facts relating to the transaction.

(e) Where the undisclosed income is on account of a search operation

and penalty is leviable under section 271 AAB.

21.4 NEW SECTION 270A (MISREPORTING OF INCOME):

(i) As stated earlier, the penalty on Unreported Income in consequence of

Misreporting of Income will be 200% of the tax on such Misreported Income.

Section 270A (9) provides that following shall constitute Misreporting of Income.

(a) Misrepresentation or suppression of facts;

(b) Failure to record investments in the books of account,

(c) Claim of expenditure not substantiated by any evidence;

(d) Recording of any false entry in the books of account;

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(e) Failure to record any receipt in books of account having a bearing

on total income, and

(f) Failure to report any International transaction or any transaction

deemed to be an International transaction or any specified domestic transaction,

to which provisions of Chapter X apply.

(ii) It may be noted that disputes may arise due to the wording of the above

clauses in Section 270A(9). Clause (b) refers to Investments not recorded in

books of account. In the case of an Individual or HUF it may so happen that

certain genuine Investments may have been debited to personal Capital Account

and may not appear separately in the books of account. If the assessee is

declaring income from such Investments regularly, there is no reason to consider

cost of Investments not recorded in books as Misreporting of Income. If the

income from such Investment is declared, there is no Under Reporting much less

Misreporting of Income. Moreover, when the Investment is debited to Capital

Account it cannot be said that the same is not recorded in the books.

(iii) Similarly, clause (c) above states that expenditure claimed for which there

is no evidence will be treated as Misreporting of Income. It is not clear as to

what will be considered as an adequate evidence for this purpose. Disputes will

arise on the question about adequacy of the evidence for this purpose.

(iv) Section 270A (10) provides that for the purpose of levy of penalty as a

result of Under Reporting or Misreporting of income amount of tax on such

income will be calculated on notional basis according to the Formula given in

that Section.

(v) It is pertinent to note that there is no provision similar to Section 270A(6),

as discussed in Para 21.3 (vii) above, whereby the assessee can offer an

explanation about his bona fides for omission to disclose any amount of income

which the tax authority wants to consider as Misreporting of Income . In other

words, before the A.O. comes to the conclusion that there is misreporting of

income on any of the grounds stated in Para (i) above, there is no provision to

give an opportunity to the assessee to offer explanation as provided in section

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270A(6). The assesses will have to litigate on such matters as absence of such

a provision is against principles of the natural justice.

21.5 IMMUNITY FROM PENALTY AND PROSECUTION (SECTION 270AA):

(i) New Section 270AA has been inserted in the Income tax Act w.e.f.

assessment year 2017-18 to grant immunity from imposition of penalty and

initiation of prosecution in certain circumstances. Under this section an assessee

can make an application to the A.O. to grant immunity from imposition of penalty

under Section 270A and initiation of prosecution proceedings under Section

276C. or 276CC. For this purpose the following conditions will have to be

complied with by the assessee:-

(a) Tax and Interest payable as per the assessment order u/s 143(3) or

reassessment order u/s 147 should be paid before the period specified in the

Notice of Demand.

(b) No Appeal against the above order should be filed before CIT(A).

(c) The application for immunity should be filed within one month of the

end of the month in which the above assessment order is received. This

application is to be made in the prescribed form.

(ii) It may be noted that the power to grant immunity under this section is

given to the AO only with reference to penalty leviable u/s 270A (7) @ 50% of

Tax for Under Reporting of Income. If the addition or disallowance is made in the

assessment or reassessment order on the ground of Misreporting of Income as

explained u/s 270A(9) and where penalty is @ 200% of Tax, no such immunity

u/s 270AA can be granted. To this extent this provision in section 270AA is very

unfair.

(iii) After the A.O. receives the application for grant of immunity, he will have

to pass an order accepting or rejecting the application within one month from the

end of the month when such application is received. If he accepts the

application, no penalty u/s 270A will be levied and no prosecution u/s 276C or

276CC will be initiated. If the A.O. wants to reject the application he will have to

give an opportunity to the assessee of being heard. If the A.O. rejects the

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application, the assessee can file an appeal before CIT(A) against the assessment

/ reassessment order. For this purpose the time taken for making the application

to the AO and the time taken by A.O. in passing the order for rejection of the

application will be excluded in computing the period of limitation u/s 249 for

filing appeal to CIT(A).

(iv) The order passed by the A.O. accepting or rejecting the application shall

be treated as final. If the A.O. has accepted the application by his order u/s

270AA(4), no appeal before CIT(A) or revision application before CIT can be filed

against the assessment or reassessment order.

(v) It may be noted that the A.O. is given discretion to accept or reject the

application. This appears to be an absolute power given to the same officer who

has passed the assessment order. There are no guidelines as to when the

application can be rejected. There is no provision for appeal against the order

rejecting the application for immunity. To this extent this provision is unfair.

(vi) As stated in (ii) above the above application for immunity can be filed only

in respect of additions / disallowances made due to Under Reporting of Income

where penalty is of 50% of Tax. No such application can be made if the

additions/ disallowances are for Misreporting of Income where penalty is of 200%

of Tax. There is no clarity in Section 270AA about a situation where in any

assessment / reassessment order some additions / disallowances are for Under

Reporting of Income and some additions / disallowances are for Misreporting of

Income. Question arises whether the application for immunity u/s 270AA can be

made in such a case for getting immunity. If so, whether such application will

be for items added/disallowed for Under Reported Income only and whether the

assessee can file appeal to CIT(A) only with reference to items added /

disallowed on the ground of Misreporting of Income. If this is the position, then a

question will arise whether the assessee will have to revise the appeal petition

later on in respect of addition / disallowance made for items of Under Reported

Income if the application for immunity is rejected. If the intention of the

Government is to reduce litigation and grant immunity from penalty and

prosecution the benefit of Section 270 AA should have been given to all assessee

where additions / disallowances are made for Under Reporting or Misreporting of

Income.

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21.6 PENALTY FOR FAILURE TO MAINTAIN INFORMATION AND DOCUMENTS (SECTION 271

AA): This section has been amended w.e.f. A/Y: 2017-18 to provide that if the

assessee fails to furnish the information and documents as required under

Section 92D(4), the prescribed authority can levy penalty of ` 5 Lacs. It may be

noted that Under Section 92D(4) a constituent entity of an International Group is

required to maintain certain information and documents in the prescribed

manner and furnish the same to the prescribed authority before the due date as

provided in that section.

21.7 PENALTY WHERE SEARCH HAS BEEN INITIATED (SECTION 271AAB):

Section 271AAB provides for levy of penalty in which search has been

conducted on or after 1.7.2012. Specific rates are provided u/s 271AAB(1) (a),(b)

and (c). Amendment made in this section, effective from A.Y. 2017-18, is in

clause (c). Here the rate of minimum penalty is 30% and maximum penalty is

90% of the Undisclosed Income. This will now be a flat rate of 60% of

Undisclosed Income from A.Y. 2017-18. Further, it is also provided that no

penalty u/s 270 A shall be levied on undisclosed income where penalty u/s 271

AAB (1) is leviable.

21.8 PENALTY FOR FAILURE TO FURNISH REPORT UNDER SECTION 286 (NEW SECTION

271 GB): A new Section 286 has been added from A.Y 2017-18 providing for

furnishing of report in respect of International Group. New 271 GB has been

added effective from A.Y. 2017-18 to provide for penalty for non compliance of

Section 286 as under.

(i) If any Reporting Entity referred to in section 286 fails to furnish

report referred to in Section 286(2) before the due date, the Prescribed Authority

can levy penalty at `5,000/- per day if the delay in upto one month and at `

15,000/- per day if the failure continues beyond one month.

(ii) If any Reporting Entity fails to produce the information or

documents within the period allowed u/s 286(6), the prescribed authority can

levy penalty at `5,000/- per every day when the default continues. If this default

62  

continues even after the above order levying penalty is passed, the prescribed

authority can levy penalty at the rate of `50,000/- per day if the default

continues even after service of the first penalty orders.

(iii) If any Reporting Entity Knowingly furnishes inaccurate information

in the Report required to be furnished u/s 286(2) the prescribed authority can

levy penalty of ` 5 Lacs.

21.9 PENALTY FOR FAILURE TO FURNISH INFORMATION, STATEMENTS ETC (SECTION

272A): Section 272 A provides for levy of penalty of `10,000/- for each

failure or default to answer the questions raised by an Income tax Authority,

refusal to sign any statement or failure to attend and give evidence or produce

books or documents as required u/s 131(1). The scope of this section is now

extended by amendment of the section from A.Y. 2017-18. It is now provided

that penalty of `10,000/- for each default or failure to comply with a notice

issued u/s 142(1), 143(2) or 142(2A) can be levied by the Income tax Authority.

21.10 POWER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES (SECTION 273A):

This section empowers the Principal Commissioner or the commissioner of

Income tax to reduce or waive penalty levied u/s 271 of the Income tax Act. This

power is extended to penalty levied u/s 270A also w.e.f. A.Y. 2017-18. Further,

new subsection (4A) has been added in this section from 1/6/2016 to provide that

the Principal Commissioner or Commissioner shall pass the order accepting or

rejecting the application for waiver or reduction of penalty within a period of one

year from the end of the month when application is made by the assessee. As

regards all applications for waiver or reduction of penalty pending as on

1.6.2016, the Principal Commissioner or Commissioner shall pass the order

accepting or rejecting the application on or before 31.5.2017. The Principal

Commissioner or the Commissioner shall have to give hearing to the assessee

before passing the above order.

21.11 POWER TO GRANT IMMUNITY FROM PENALTY BY PRINCIPAL COMMISSIONER

OR COMMISSIONER (SECTION 273 AA):

This section has been amended w.e.f. 1.6.2016. As in section 273A, the Principal

Commissioner or the Commissioner is now required to pass the order accepting

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or rejecting the application for grant of immunity from levy of penalty within one

year from the end of the month in which the assessee has made the application

for such immunity. As regards pending applications as on 1.6.2016, the Principal

Commissioner or the Commissioner has to pass orders accepting or rejecting the

application on or before 31.5.2017.

21.12 GENERAL:

(i) From the above discussion it is evident that the existing concept of levying

penalty u/s 271 for concealment of income or furnishing of inaccurate particulars

of income is now given up. New Section 270A, which will replace Section 271

from 1.4.2016, introduces a new concept of “Under Reporting of Income” and

“Misreporting of Income”. Considering the way these two terms are explained in

the new Section 270A, it appears that there will be a thin line of distinction

between the two in respect some of the items of additions and disallowances.

Since the penalty with respect to Under Reporting of Income is 50% and the

penalty with respect of Misreporting of income is 200%, the A.O. will try to bring

as many items of additions / disallowances under the head Misreporting of

Income. Questions of interpretation will arise and tax litigation on this issue may

increase.

(ii) As stated earlier, the recommendation of Justice Eshwar Committee has

not been fully implemented while drafting the new Section 270A. The committee

has specifically stated that no penalty should be levied where the A.O. takes a

view which is different from the bona fide view adopted by the assessee on any

issue involving the interpretation of any provision and is supported by any

judicial ruling. It is unfortunate that this concept is not introduced in the new

section 270A.

22. OTHER PROVISONS:

22.1 TAX ON DEEMED INCOME U/S 68 – SEC 115 BBE:

Section 115 BBE is amended w.e.f. A.Y 2017-18. At present this section

provides that deemed income u/s 68, 69, 69A, 69B, 69C and 69D is taxable at

the rate of 30%. Further, no deduction for any expenditure or allowance

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relatable to such income is allowed. It is now provided that no set off of any loss

shall be allowable from such deemed income u/s 68, 69, 69A to 69D.

22.2 ASSESSEE DEEMED TO BE IN DEFAULT – SECTION 220:

Section 220 provides that an assessee shall be deemed to be in default if

the taxes due are not paid. Interest is payable u/s 220(2) for the delay in

payment of tax. If the assessee applies for waiver or reduction of interest to the

Commissioner u/s 220(2A), the same can be waived or reduced. Section 220(2A)

is now amended, effective from 1.6.2016, to provide that the commissioner

should pass the order accepting or rejecting such application within a period of

12 months of the end of the month when application for waiver or reduction of

interest is made. In respect of all pending applications, the order will have to be

passed by the commissioner on or before 31.5.2017.

22.3 PROVISION TO GIVE BANK GUARANTEE – SECTION 281B:

(i) At present, the AO may provisionally attach an assessee’s property

if he considers it necessary for protecting revenue’s interest during the pendency

of assessment or reassessment proceedings. Section 281B is amended w.e.f.

1.6.2016.

(ii) Based on Justice Easwar Committee’s recommendation, this

amendment provides that the assessee may provide bank guarantee of sufficient

amount. In such a case the AO has to revoke the provisional attachment if the

guarantee is for more than the fair market value of the property attached or it is

sufficient to meet the revenue’s interest. The AO may refer to the Valuation

Officer for valuing the property. The AO should pass an order revoking

provisional attachment within 15 days from the date of receipt of the bank

guarantee or within 45 days if reference is made to Valuation Officer. The AO

may invoke the bank guarantee if the assessee fails to pay tax demand or if he

fails to renew or furnish new bank guarantee at least 15 days prior to the expiry

of the bank guarantee.

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22.4 AUTHENTICATION OF NOTICE – SECTION 282A:

To facilitate e-assessment, it has now been provided from 1.6.2016 that

the notice and other documents issued by the department can be either in paper

form or in electronic form. The detailed procedures for this purpose will be

prescribed.

22.5 SECURITIES TRANSACTION TAX (STT): Section 98 of the Finance (No.2) Act,

2004 has been amended w.e.f. 1.6.2016. The present rate of 0.017% STT on sale

of option on securities, where option is not exercised, is increased to 0.05%. It

is also provided that STT will not be payable on securities transactions entered

into on a recognized Stock Exchange located in International Financial Service

Centre.

23. VOLUNTARY DISCLOSURE SCHEME – 2016:

23.1 As stated by the Finance Minister in Para 159 to 161 of his Budget Speech,

in Chapter IX (Sections 181 to 199) of the Finance Act, 2016, “The Income

Declaration Scheme, 2016”, has been announced. This scheme is akin to a

Voluntary Disclosure Scheme. The scheme will come into force on 1st June, 2016.

The declaration for undisclosed domestic income or assets can be made in the

prescribed form within 4 months i.e on or before 30th September, 2016. The tax

at the rate of 30% of the disclosed income will be payable with surcharge called

Krishi Kalyan Surcharge at 7.5% and penalty at 7.5%. Hence, total amount

payable will be 45% of the income declared by the assessee under the scheme.

This tax, surcharge and penalty will be payable within two months (i.e. on or

before 30th November, 2016)

23.2 DETAILS OF THIS SCHEME ARE GIVEN IN A SEPARATE ARTICLE ATTACHED:

24. TO SUM UP:

24.1 The Finance Minister has taken some steps towards his declared objective

of granting relief to small tax payers, granting incentives for promotion of

affordable housing, reducing tax litigation, affording one-time opportunity to

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declare undisclosed domestic income and assets etc. In some of the areas the

efforts are half hearted and the assesses may not get full advantage from the

provisions made in the Financial Act.

24.2 Justice Easwar Committee appointed to make recommendations for

simplification of Income tax provisions has submitted its report. Some of the

amendments made in the Income tax Act are based on these recommendations.

It is nether unfortunate that these recommendations are only partly

implemented in this Budget.

24.3 Last year the Government made an attempt to address the issue relating

to undisclosed income and assets in Foreign Countries. A “Black Money

(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015” was

passed. This year the Finance Act contains “The Income Declaration Scheme,

2016”. Under his Scheme one time opportunity is given to those persons who

have not declared their domestic income or assets in the past. 45% tax

(including surcharge and penalty) is payable on such undisclosed income. There

are some conditions in the scheme which may be difficult to comply with CBDT

has issued some clarifications on various issues. It is reported that the last

year’s scheme for declaration of undisclosed Foreign Income and Assets did not

get adequate response. Let us hope that the scheme announced this year for

declaration of undisclosed domestic income and assets gets adequate response.

24.4 Another step taken by the Finance Minister relates to reduction in tax

litigation. For this purpose “Dispute Resolution Scheme – 2016” has been

announced. This scheme is similar to “Kar Vivad Samadhen Scheme”, which was

introduced in 1998. This scheme is limited to settlement of tax disputes pending

on 29.2.2016 before CIT (A). It does not cover tax disputes before ITA Tribunal,

High Court or the Supreme Court. Here also the provision for payment of

notional penalty @ 25% where disputed tax exceeds `10 Lacs will be an

impediment in the success of the scheme. This Scheme Covers Settlement of tax

disputes due to retrospective amendments made in the Income tax Act. For

such cases tax disputes pending before any appellate authority can be settled on

payment of only disputed tax. Interest and penalty will be waived. It will

possible for assesses to settle tax disputes relating to retrospective amendments

made in section 9, 14A, 37, 40 etc.

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24.5 The introduction of a new chapter XII – EB (Section 115 TD to 115 TF)

effective from 1.6.2016 to levy ‘Exit Tax’ on Charitable Trusts is a big blow on

Charitable Trusts. In our country Charitable Trusts are working to supplement

the work of the Government in the field of education, medical relief, eradication

of poverty, relief during calamities such as draught, earthquake etc. For this

reason, exemption is given to such charitable trusts: In recent years it is noticed

that the provisions relating to the exemption to such trusts are being made more

complicated. The attempt of the tax administration is to see how best this

benefit to charitable trusts in denied. By levy of “Exit Tax” on cancellation of

registration u/s 12AA is one such step. It is the general experience of such trusts

that section 12AA Registration is being cancelled on some technical grounds and

the trusts have to litigate on this issue. If, ‘Exit Tax’ is levied on cancellation of

Registration u/s 12AA, the trustees of such trusts will be put to great hardship.

24.6 Another major amendment made this year is about change in the concept

for levy of penalty. The concept of concealment of Income or furnishing of

inaccurate particulars of income for levy of penalty is now given up. Now,

penalty will be leviable if there is a difference between the assessed income and

declared income. Such difference will be divided into two parts viz. “Under

Reporting” and “Misreporting” of income. There is a thin line of distinction

between the two. This new concept will invite litigation about interpretation

whether there is “Under Reporting” where penalty is 50% of tax or

“Misreporting” where penalty is 200% of tax. The old concept of concealment or

furnishing of inaccurate particulars of income for levy of penalty has been

interpreted in several judgments of the High Courts and the Supreme Court in

last more than 6 decades. The law on the subject was well settled. This new

concept of “Under Reporting” and “Misreporting” introduced this year will

unsettle the settled law and assesses will have to face fresh litigation.

24.7 Welcome provision introduced this year on the recommendation of Justice

Easwar Committee relates to extension of concept of presumptive taxation in

cases of small professionals earning gross receipts not exceeding ` 50 Lacs.

They will not be required to maintain accounts if they offer 50% of Gross

Receipts as their income. Justice Easwar Committee had suggested limit of gross

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receipts at `1 Crore and presumptive income at 33 1/3%. This suggestion is only

partly implemented. This provision will go a long way in resolving tax disputes in

cases of small professionals.

24.8 Taking an overall view of the amendments made this year in the Income

tax Act, one can compliment the Finance Minister for his sympathetic approach

to the tax payers. Some the amendments are really tax payer friendly as they

grant relief to small tax payers. He has taken measures to promote affordable

housing and to boost growth and employment generation.

24.9 While concluding his Budget Speech he has observed in Para 188 and 189

as under:

“188. This Budget is being presented amidst global and domestic

headwinds. There are several challenges. We see them as opportunities.

I have outlined the agenda of our Government to “Transform India” for the

benefit of the farmers, the poor and the vulnerable.

“189. It is said that “Champions are made from something they have deep

inside of them – a desire, a dream, a vision. We have a desire to provide

socio-economic security to every Indian, especially the farmers, the poor,

and the vulnerable; we have a dream to see a more prosperous India, and

vision to “Transform India”.

Let us hope he is able to achieve his goal with the co-operation of all

citizens of the country.