pre-budget memorandum on direct tax laws 2015-16 · nandita p. parekh naushad a. panjwani saurabh...

Pre-BudgetMemorandum

OnDirect tax laws

2015-16

Bombay CharteredAccountants' Society

7, Jolly Bhavan No. 2, New Marine Lines, Mumbai 400 020Tel.: 61377600 Fax: 61377666

E-mail: [email protected] | Website: www.bcasonline.org WebTV: www.bcasonline.tv | Web Journal: www.bcajonline.org

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Bombay Chartered Accountants’ Society

7, Jolly Bhavan No. 2, New Marine Lines, Mumbai 400 020Tel.: 61377600 Fax: 61377666

E-mail: [email protected] n Website: www.bcasonline.org WebTV: www.bcasonline.tv n Web Journal: www.bcajonline.org

Managing Committee

PresidentNitin P. Shingala

Vice PresidentRaman H. Jokhakar

Hon. Joint SecretariesNarayan R. Pasari

Sunil B. Gabhawalla

Hon. TreasurerMukesh G. Trivedi

MembersAbhay R. Mehta

Anil D. DoshiBharatkumar K. Oza

Chetan M. ShahJagdish T. PunjabiJayant M. ThakurJayesh M. Gandhi

Jayraj S. ShethKrishna Kumar S. Jhunjhunwala

Manish P. SampatNarayan K. VarmaNandita P. Parekh

Naushad A. PanjwaniSaurabh P. Shah

Sonalee A. GodboleSuhas S. Paranjpe

Taxation Committee

ChairmanKishor B. Karia

Co-ChairmanSanjeev R. Pandit

Ex-OfficioNitin P. Shingala

Raman H. Jokhakar

ConvenorsAnil D. Doshi

Ganesh RajgopalanJagdish T. Punjabi

MembersAmeet N. Patel

Anil J. SatheAnkit V. Shah

Arvind H. DalalAshok L. Sharma

Bhadresh K. DoshiBharat S. Raut

Gautam S. NayakHardik D. MehtaHitesh D. GajariaKirit R. Kamdar

Mukesh G. TrivediNarayan K. Varma

Nihar N. JambusariaNilesh M. Parekh

Nina P. KapasiPinakin D. DesaiPradip N. Kapasi

Pradyumna N. ShahRajan R. Vora

Rajeev N. ShahRajesh S. Kothari

Rajesh V. ShahRutvik R. SanghviSanjeev D. LalanSaroj V. Maniar

Sonalee A. GodboleTilokchand P. Ostwal

Yogesh A. Thar

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BCAS At Your Service

A voluntary organisation established on 6th July, 1949, BCAS has more than 9,000 members from all over the country at present and is a principle-centred and learning-oriented organisation promoting quality service and excellence in the profession of Chartered Accountancy and is a catalyst for bringing out better and more effective Government policies & laws and for clean & efficient administration and governance.

The diverse activities of BCAS include:

BCA Journal: The Bombay Chartered Accountant Journal (BCAJ) is a publication with a track record of over 40 years and is considered as an outstanding publication by tax and accounting professionals in practice or in industry. It includes analytical articles and updates on the subjects such as Direct Tax, Indirect Tax, International Tax, Accounting and Auditing and Information Technology.

BCAS Web TV (www.bcasonline.tv): BCAS Web TV is a new initiative of BCAS based on the Internet Video Streaming Service where you can see video or hear audio recordings of select events conducted by BCAS on your computer or on your internet enabled mobile device.

Publications: Every year BCAS publishes Referencer along with a CD which is an indispensable tool for professionals as well as those in the industry. We also publish books on varied topics of professional interest such as Audit Check-list, TDS, Fraud, Transfer Pricing, FEMA, Laws & Business and Charitable Trust.

Representations: BCAS makes representations to various authorities on different laws as well as on procedural issues, with a view to making them just and friendly to the general public. The representations include pre and post budget memoranda to the Ministry of Finance, Government of India, Ministry of Company Affairs, and Central Board of Direct Taxes among others.

Educational Activities: BCAS conducts various educational activities such as seminars, workshops, residential refresher courses, study circles, lecture meetings, distant learning programmes on Service tax and TDS.

Free Advisory Clinics: BCAS conducts following free clinics: Accounts & Audit Clinic, Charitable Trust Clinic and RTI Clinic to help the members & non-members in respective areas. Eminent experts provide free advice at these clinics on pre-fixed days.

BCAS Website: The website of BCAS viz. www.bcasonline.org, apart from giving the latest news, circulars and notifications relevant for professionals, also serves as a “Knowledge Portal”, and is an excellent source of information.

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TABLE OF CONTENTS

Part A - Reforms in Tax Policy and Tax Administration ................................................................... 5

Principles and Objectives ............................................................................................................ 5

Guiding principles for making/ amending tax laws & their administration .................................. 6

Compliance cost should be minimised ........................................................................................ 8

Administrative Reforms are Key ................................................................................................. 9

Direct Tax Code – Not worth considering ................................................................................... 11

Part B - Suggestions for Structural Changes ................................................................................... 12

1. Exemption in respect of Agricultural Income - Sec. 10(1) ..................................................... 12

2. Amortisation of Expenditure of Capital Nature .................................................................... 13

3. Deduction under Sec. 43B – Removal of unfair provisions ................................................... 14

4. Allowability of interest paid under the Act .......................................................................... 14

5. Deemed Speculation Loss in case of Companies – Explanation to Sec. 73 ............................. 15

6. Set-off of long-term and short-term capital losses against income under the same head ..... 16

7. Year of credit for Tax Deducted at Source (TDS) ................................................................... 17

8. Avoid unnecessary TDS – Restrict the scope of TDS ............................................................. 18

9. Not Ordinarily Resident (NOR) - Sec. 6(6) ............................................................................. 18

10. Effect of New Companies Act, 2013 – References under the Act .......................................... 19

11. Accountability on the part of the Income-tax Department ................................................... 20

12. Broadening of Taxpayer base .............................................................................................. 22

Part C - Specific Suggestions .......................................................................................................... 24

Chapter 1 - Rates of Tax ................................................................................................................ 24

1. Delete surcharge on Income-tax .......................................................................................... 24

2. Tax payable on Long Term Capital Gain not to exceed the tax payable at normal slab rate .. 24

3. Taxation of income by way of ‘Royalty’ or ‘Fees for Technical Services’ ............................... 24

Chapter 2 - Charitable Organisations ............................................................................................. 26

1. Loss of exemption if income applied for Specified Persons — Secs. 13(1)(c) & 13(3) ............ 26

2. Definition of “Charitable Purpose” - Sec. 2 (15) ................................................................... 26

3. Deduction of tax at source from the income of Charitable or Religious Trust ....................... 29

Chapter 3 - Salaries ....................................................................................................................... 31

1. Reinstate erstwhile Sec. 16 (i) - Standard Deduction ............................................................ 31

2. Effect of non-payment of salary to employees ..................................................................... 31

Chapter 4 - Income From House Property ...................................................................................... 32

1. Deduction in computing Income from House Property ........................................................ 32

Chapter 5 - Income from Business or Profession ............................................................................ 33

1. Disallowance under Sec. 40A(3) ........................................................................................... 33

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2. Disallowance of expenses relating to exempt income - Sec. 14A .......................................... 34

3. Definition of `Income’ and Employee's Contribution to P.F. etc. - put it on par with Sec. 43B, Sec. 2(24)(x) and Sec. 36(1)(va) ............................................................................................ 36

4. Depreciation Allowance – Sec. 32 ........................................................................................ 36

5. Allowability of depreciation on immovable property received without consideration or for inadequate consideration .................................................................................................... 37

6. Investment allowance – Sec. 32AC ...................................................................................... 38

7. Investment linked deductions – Sec. 35AD (7B) ................................................................... 39

8. Disallowance for non-deduction of TDS – Sec. 40(a)(ia) ....................................................... 39

9. Year of deductibility of Legitimate Business Expenditure - Reduce avoidable litigation ........ 40

Chapter 6 - Minimum Alternate Tax (MAT) – Sec. 115JB ................................................................ 42

1. Effect of brought-forward losses and unabsorbed depreciation ........................................... 42

2. Effect of provision for doubtful debts .................................................................................. 43

3. Rate of tax on MAT ............................................................................................................. 43

Chapter 7 - Dividend Distribution Tax [DDT] - Sec. 115-O .............................................................. 44

1. Effect of DDT in case of Non-Resident shareholders............................................................. 44

2. Dividend Distribution Tax – Secs. 115-O and 115R ............................................................... 45

Chapter 8 - Capital Gains ............................................................................................................... 46

1. Withdrawal of Exemption – Sec. 47A ................................................................................... 46

2. Secs. 47(x) & (xa) and 49(2A) - Capital Gain on Conversion of Foreign Currency Exchangeable Bonds (FCEB) and other Bonds & Debentures ...................................................................... 46

3. Assets acquired prior to 1st April, 1981 – Cost of acquisition – Sec. 55(2)(b) ......................... 47

4. Conversion of Private Limited Company into LLP or from Firm / Proprietary Concern into Company – Secs. 47(xiiib), 47(xiii) / 47(Xiv) ......................................................................... 47

5. Conversion of Partnership Firm to LLP ................................................................................. 48

6. Holding period (Short-term/ Long-term) of capital asset and rate of tax on capital gains – Secs. 2(42A) and 112 ........................................................................................................... 49

7. Capital gains exemption for investments in residential house – Secs. 54 and 54F ................ 50

8. Treatment of forfeited advance relating to capital asset – Secs. 51, 56(2)(ix) and 2(24)(xvii) 50

Chapter 9 - Losses ......................................................................................................................... 52

1. Return of Losses – Scaling down with respect to delay in months ........................................ 52

2. Set off of brought forward business loss - Secs. 72 & 50 ...................................................... 52

Chapter 10 - Deductions ................................................................................................................ 53

1. Failure to make claim for certain Deductions in the Return of Income - Sec. 80A (5) ............ 53

2. Deduction in respect of Health Insurance Premia (Mediclaim) – Sec. 80D ............................. 53

3. Deduction of Tuition Fees for children – Sec. 80C (1)(xvii) .................................................... 54

Chapter 11 - Method of Accounting .............................................................................................. 55

1. Inclusion of taxes etc. in value of inventory – Sec. 145A(a) .................................................. 55

2. Income Computation and Disclosure Standards (IT-AS) – Sec. 145 ....................................... 55

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Chapter 12 - Clubbing Of Minor’s Income ...................................................................................... 57

1. Case for enhancement of exemption limit for income clubbed in the hands of the Parent ... 57

Chapter 13 - Interest under Income-tax Act ................................................................................... 58

1. Rationalisation of interest payable on refund under Sec. 244(1A) ........................................ 58

2. Interest – Sec. 234C – no interest for small delays ............................................................... 58

3. The levy of interest under Sec. 234A should not continue after payment of tax ................... 58

4. Cap on interest under the Act .............................................................................................. 59

Chapter 14 - Deduction of Tax at Source ....................................................................................... 60

1. Tax deduction under Sec. 195 on payments to non-residents .............................................. 60

2. Higher TDS for non-quoting of Permanent Account Number (PAN) - Sec. 206AA .................. 60

3. The applicability of requirement of tax deduction by non-residents while making payment to residents ............................................................................................................................. 61

Chapter 15 - Provisions relating to amalgamation, demerger etc. ................................................. 62

1. Definition of Demerger – Sec. 2(19AA) ................................................................................ 62

2. The effect of amalgamation / demerger on deduction under Sec. 80-IA - Sec. 80-IA(12A) .... 63

Chapter 16 - Survey - Sec. 133A ..................................................................................................... 65

1. Survey - Sec. 133A ............................................................................................................... 65

Chapter 17 - Taxation of Firm and Partners ................................................................................... 66

1. Distribution of capital assets on dissolution of firm to partners - Sec. 45(4) ......................... 66

2. Distribution of Capital Assets to Partners - Removal of serious hardships - Sec. 45(4) .......... 66

Chapter 18 - Procedures ................................................................................................................ 67

1. Revision of Belated Return under Sec. 139(5) ...................................................................... 67

2. Limit of Rs. 1,00,000 mentioned in s. 149(1)(b) be increased suitably and a monetary limit be introduced in Sec. 149(1)(a) ................................................................................................. 67

Chapter 19 - Deemed Dividend ..................................................................................................... 68

1. Deemed Dividend – Sec. 2(22)(e) ......................................................................................... 68

Chapter 20 - Taxation of gifts etc. .................................................................................................. 69

1. Gifts etc. in kind to be treated as income - Sec. 56(2)(vii) ..................................................... 69

2. Taxation of certain transactions without consideration or for inadequate consideration - Sec. 56(2)(viia) ............................................................................................................................ 71

3. Taxation of Share Premium – Sec. 56(2)(viib) ....................................................................... 72

4. Taxation of Share Premium – Sec. 68 ................................................................................... 73

Chapter 21 - Recovery ................................................................................................................... 74

1. Stay of Demand ................................................................................................................... 74

Chapter 22 - Tax Audit - Sec. 44AB ................................................................................................ 75

1. Tax audit in case of partners of firm .................................................................................... 75

Chapter 23 - Taxation of Non-residents ......................................................................................... 76

1. Requirement to obtain Tax Residency Certificate – Introduction of threshold ..................... 76

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2. Exemption from filing Return of Income-tax where tax is deducted at source in case of Non-Residents – Sec. 115A .......................................................................................................... 76

3. Tax Deduction at Source in respect of Payment to Non-residents – Sec. 195(7) ................... 77

4. Transfer of Shares of Foreign Companies with underlying Indian Assets – Sec. 9(1)(i) ......... 78

5. Definition of “Transfer” – Sec. 2(47) .................................................................................... 80

Chapter 24 - General Anti-Avoidance Rule [GAAR] – Secs. 95 to 102.............................................. 81

Chapter 25 - Domestic Transfer Pricing [DTP] – Secs. 92, 92BA, 92C, 92CA, 92D & 92E ................. 84

1. Removal of Domestic Transfer Pricing Provisions................................................................. 84

2. Specific suggestions regarding Domestic Transfer Pricing Provisions .................................... 84

2.1 Applicability of DTP provisions to Sec. 40A(2)(a) .............................................................. 84

2.2 Other Points in respect of DTP provisions ........................................................................ 86

Chapter 26 - Definition of “Royalty” – Sec. 9(1)(vi) ..................................................................... 89

Chapter 27 - Increase in levy of Fees for non-filing / late filing of tds returns – Sec. 234E ............... 91

Chapter 28 - Wealth-tax ................................................................................................................ 92

Annexure 1 - Year of Credit for Tax Deducted at Source ................................................................ 93

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Bombay Chartered Accountants’ Society

Pre-Budget Memorandum on Direct Tax Laws 2015-16

PART A - REFORMS IN TAX POLICY AND TAX ADMINISTRATION

1. As the next Budget will be the first full-fledged budget of the new Government headed by the

Hon’ble Prime Minister Shri Narendra Modi, we understand that the rationalisation and

simplification of direct tax laws and its administration will be one of the major objectives of this

Budget. With a highly experienced and learned person, like the Hon’ble Finance Minister Shri

Arun Jaitley, in charge of achieving the objectives of the Budget, this should not be a difficult

task. To this end, we believe, the following suggestions for reforms to tax policy and tax

administration would be useful.

Principles and Objectives

1.1 Rationalising and simplifying the direct tax laws and bringing them in line with the current

needs of a liberalising and globally competitive economy is an urgent though uphill task

especially given the mindset of the people at various levels of the tax administration. Any

process of rationalization and simplification of the direct tax laws should be guided by the

following broad principles:

i. Any increase in tax revenue should not be by way of increases in tax rates, but rather by

increasing the tax base through fair, efficient, transparent and accountable tax

administration on the one hand and through the rationalisation and simplification of the

tax laws on the other;

ii. Tax reforms should be achieved through creation of an atmosphere in the tax

administration which encourages voluntary compliance with the tax laws;

iii. Tax reforms should be achieved through creation of a tax policy with rational and

globally competitive tax rates;

iv. Tax reforms should be aimed at providing a fair, speedy and efficient mechanism to

resolve genuine disputes regarding the interpretation and administration of tax laws;

v. Tax reforms should also be aimed at providing a speedy and efficient mechanism for

severely punishing habitual tax evaders and corrupt officials on the one hand, and

should give a fair deal to tax-payers who become victims of tax laws which are by their

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nature complex and cannot be simplified beyond a certain point. Likewise, this

mechanism should also provide an opportunity for forthright officials to get a fair deal in

the event of their becoming victims of the present system of tax administration;

vi. Tax policy should aim for a lighter burden on earned income as compared to unearned

income, by making appropriate adjustments in the tax structure and tax rates; and

vii. Tax reforms should strive for minimal compliance cost to the tax-payers.

Guiding principles for making/ amending tax laws & their administration

2. To achieve the objectives of tax reform, guiding principles for making/amending tax laws and

their administration should be fixed and should be adhered to strictly as has been the case with

the Directive Principles of the State Policy in the Constitution. A broad outline of these guiding

principles could be as follows:

i. It has been the experience in the past that often tax laws are amended with a view to

punishing a small number of tax avoiders/ evaders. Unfortunately, in this process, the tax

laws have become very harsh and complex for the wider tax paying community. Therefore,

the tax laws should be amended to provide convenience to the majority of tax-payers

(rather than with a view to punishing a few wrong doers/ defaulters). This will have the

added advantage of creating an atmosphere of trust on the one hand, and substantial

reduction in corrupt practices on the other.

ii. One of the basic tenets of a good tax policy is stability in tax rates for a period of at least five

years, and that frequent changes in tax rates should be avoided. Unfortunately, the recent

experience shows that while keeping the schedule of tax rates unchanged or while

marginally reducing them, various clever methods are adopted to indirectly increase the tax

rates. A classic example is the increase in surcharge for most assessees, the introduction of

Education Cess and the Secondary and Higher Education Cess. This has resulted in a

substantial increase in the effective rates of tax in most cases. The continuous increase in

the rate of Dividend Distribution Tax and Minimum Alternate Tax are also worth noting.

iii. Another basic tenet of a good tax policy is stability in tax laws and to this end, there is a need

to formulate a long term tax policy for a period of at least five years. Once such a policy has

been formulated after public debate, it should not be tampered with except under

extraordinary circumstances. This will avoid the need for frequent amendments to the tax

laws, which have made the present tax laws not only complex but also difficult to implement

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in a fair manner. To this end, the annual exercise of imposing amendments to the tax laws

through the Union Budget should be given up.

Amendments to the tax laws should be made only through a separate Taxation Laws

(Amendment) Act. This should be enacted only after a detailed public debate with an open

mind and after due consideration by a Standing Committee of the Parliament having

members who are conversant with the complexities of the tax laws and the ground realities

of their administration. In the same manner, even prescription of the tax rates should be de-

linked from the Union Budget and the tax rates should be incorporated into the tax laws. In

case of an emergency, of course, the law can always be amended by ordinance.

iv. For the purpose of achieving real growth in tax revenue, it is necessary to widen the tax base

rather than increase the tax burden of the existing tax-payers. The main hurdle to increasing

the tax base is the perception of the public about the tax administration, which is testified by

the recent rise of the term “Tax Terrorism”. Unless this adversarial mindset changes, it is

unlikely that the tax base will increase in real terms. The change in this perception can be

achieved only by building the confidence of the citizens in the tax administration. For this,

some permanent statutory provisions should be made whereby the small assessees can be

asked to pay a fixed amount of tax in absolute terms upto a certain level of income with the

assurance that their declaration of income will be accepted at face value without further

enquiries except in cases where the Revenue Department possesses concrete evidence that

the declaration made by an assessee is materially incorrect. For this, a simple scheme can be

worked out in the Act itself with proper safeguard against its abuse.

v. As stated earlier, it is the fear of harassment at the hands of the tax administration, which

has kept a number of small potential tax-payers outside the tax net. This large number of

potential tax-payers need to be persuaded that filing returns of income will confer some

kind of advantage. In this context, some convincing and workable system of monitoring and

protection against harassment at the field level is essential. A group of experts/ social

activists with impeccable integrity could be attached to each regional IT establishment to

provide some protection to the tax-payers.

vi. The present scheme of assessment of income by the Tax Department at various levels has

also raised a number of practical issues with regard to harassment of tax-payers and an

increase in unethical practices. One way to combat this, and also to create a proper

atmosphere, is to eliminate many of the discretionary powers vested in Assessing Officers

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while assessing income. This can be done by providing a scheme of presumptive income for

all mid-level assessees along the lines of the current provisions of Sec. 44AD.

vii. In the recent past, it has been the experience of the tax paying community that tax laws are

amended with retrospective effect, often in order to nullify the impact of judicial

pronouncements against the revenue. This has a dual effect - firstly, it creates an

atmosphere of disrespect for the judiciary, which is not a good sign in the long term in any

civilised democratic country, and secondly, it affects the financial projections of assessees,

and in many cases, has a severe impact on the business community. This, indirectly,

contributes to the creation of disrespect for the tax laws. In fact, this encourages rent

seeking behaviour and corrupt practices in the administration of the tax laws.

Therefore, bearing in mind the long-term interests of the country and the objective of

increasing tax revenue by encouraging voluntary compliance, policy should be against

retrospective amendment to the tax laws, which would have an adverse effect on the tax-

payers. All amendments to the tax laws should be made prospective.

We compliment the present Government in general, and Hon’ble Finance Minister in

particular, for declaring that these policies of the previous Government will not be

continued by the new Government.

Compliance cost should be minimised

3. The most important basic principle of good Tax Law and fair Tax Administration is to keep the

cost of compliance with the various requirements of the Tax Laws as low as possible. The aim

should be to reduce the costs of compliance year on year to a bare minimum. Unfortunately, in

this respect, the previous Government was working exactly in the opposite direction, especially

in the recent past. This is evident from the rapid and arbitrary expansion of the provision relating

to Tax Deducted at Source (TDS) in a routine manner without any accommodation for genuine

exceptions, the introduction of a separate return, assessment and other procedure to be

complied with in respect of the levy of Fringe Benefit Tax (since omitted), the introduction of the

requirement of furnishing quarterly returns for TDS, etc. in addition to many other requirements

of a procedural nature.

Unfortunately, in July 2014 budget of the current Government, some provisions of this nature

were also found. However, we believe that these do not in fact reflect the Tax Policy of this

Government.

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The time has come for some mechanism to be introduced to collect data regarding to the cost of

compliance incurred annually by the tax-payers. This has never been done under the previous

Governments. In fact, the cost of compliance incurred by the tax-payers is nothing but a cost of

Tax Administration borne by the tax-payers, and therefore, should be included in the cost of

running the Tax Administration.

Administrative Reforms are Key

4. Experience shows that if even a harsh tax law is administered in a fair manner, it will not have

any negative impact on the tax-paying community at large but the reverse is not true. This does

not mean that the tax laws should be made harsher, but is rather an acknowledgement of the

fact that the manner of administration of the tax laws is more important than the tax laws

themselves from the point of view of achieving the objectives of increasing tax revenue.

Accordingly, genuine reforms to the tax administration are essential in order to provide humane,

fair, efficient, transparent tax administration with accountability. There is an urgent need to

carry out major reforms in this area. For this, a number of genuine steps need to be taken such

as:

i. Introducing a statutory monitoring mechanism, with necessary powers, independent of the

tax administration in the tax laws. This mechanism should provide a forum to the tax paying

community to approach the body for redress against unfair and discriminatory treatment.

Such a forum should also have the power to take suo moto action against errant tax officials

at all levels of the tax administration. Such forum should ultimately provide for the speedy

disposal of cases against errant officials and justice to honest officials who have,

unfortunately, become victims of the present system. To begin with, such a forum can be

created in each State (to be headed by the Chief Justice of the High Court in the State) and

responsible to the Parliament through the Finance Ministry (and not the CBDT). This forum

should have representatives from the tax profession and respectable citizens as members in

addition to the retired judges of High Court and/or the Supreme Court. This forum should

not become a place for the extension of service, after the age of retirement, for tax officials

as is the case with the Settlement Commission. In this context, considering the present

atmosphere in the tax administration, the current system of OMBUDSMAN has not worked.

Only high powered forum of the type suggested herein may have a real impact.

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ii. All instructions issued by the CBDT that affect/ concerns the tax-payers should be made

public.

iii. Since the Right to Information Act is in force, appropriate steps should be taken to see that

the tax administration strictly complies with the provisions of this Act and appropriately

publicises the manner of its implementation.

iv. We understand that under the previous Government, the Prime Minister had taken the

initiative to adopt the policy of performance-based promotion, but nothing concrete

happened in that regard. Immediate steps should be taken to pursue this policy. The method

of evaluation of performance should be transparent and should be made known to citizens.

At the same time, while adopting such a policy, the higher collection of tax revenue alone

should not be regarded as good performance unless this collection is proved to have been

carried out in a fair and equitable manner and without being unduly harsh to the tax payer.

In this regard, an appropriate scheme should be worked out to check whether the tax

officials concerned have, through over-enthusiasm, indulged in unjustifiable and harsh

actions. This could involve assessing their performance with reference to the ultimate result

in terms of the approval of their actions at the first two Appellate levels. Apart from this, to

be fair to the tax officials, the targets fixed for collection should not be too high or unrealistic

and should also be flexible taking realities on the ground into consideration.

v. The appointment of members of the CBDT should be for a minimum period of two years.

Members of this body should be of high integrity with a proven track record with regard to

fair and efficient tax administration. There should be strict guidelines for such appointments.

This is of utmost importance because this body is ultimately responsible for tax

administration. The timely appointment of forthright, efficient and competent officials with

good administrative competence will go a long way towards improving tax administration

and inspiring the confidence of the tax-payers in the tax administration.

vi. One of the basic tenets of any tax administration is to provide sufficient time to the tax-

payers to adjust their affairs to comply with any new procedural requirements.

Unfortunately, in the recent past, the Tax Administration is functioning exactly in the

opposite direction in this regard.

A classic example of this can be found in the recent amendments made to the Tax Audit

Report in Form 3CA/3CB and to the Statement of Particulars in Form 3CD by the Notification

dated 25/07/2014, which have been made applicable for the AY 2014-15. The new forms

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require the assessee and the auditor to furnish substantially more information. It is not

possible to comply with these additional requirements in relation to the accounting year

which commenced on 01/04/2013 and has already ended on 31/03/2014. To rub the salt

into the wound, the due date for furnishing this report was extended by two months

without extending the due date for furnishing the Return of Income for the Asst. Year 2014-

15. Even on this issue, tax-payers had to approach the Courts, and only under the direction

from the Courts, was the date for furnishing the Return of Income extended. Unfortunately,

this happened under the regime of the new Government, perhaps because this was very

early in the tenure of this Government. Under the previous Government, there were many

such instances of unfair or unreasonable deadlines.

Such an approach of the Government reduces the confidence of the tax-payers in the tax

administration and makes it difficult for the tax-payers to remain compliant. In principle, new

requirements should always be made known to the tax-payers in advance, preferably before the

commencement of the relevant accounting year, to enable them to design their systems and

software, to comply with the same without any undue pressure.

Direct Tax Code – Not worth considering

5. It would not be out of place to mention that in the final draft of the Direct Tax Code [DTC] the

above approach does not seem to have been adopted. Therefore, this draft of DTC is not worth

considering for achieving the objective of genuine reforms in tax policy and administration. In

our representation in response to the DTC Bill, we had given our detailed objections to the

scheme of the DTC and the proposals contained therein.

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PART B - SUGGESTIONS FOR STRUCTURAL CHANGES

1. Exemption in respect of Agricultural Income - Sec. 10(1)

1.1 Restrict exemption of Agricultural Income – Set-up a Fund for poor farmers by taxing rich

farmers

The exemption of agricultural income is one of the major causes of low number of tax payers

in the Country. There is no justification for not taxing rich farmers. They should also

contribute their share for the development of the Country and also for the benefit of poor

farmers.

It is suggested that exemption for agricultural income should be restricted to fixed amount

(say, Rs. Three lakh) and income in excess thereof should be taxed as income-tax for the

States. A separate fund should be set-up out of such collection for allocation to the States

for utilizing the same to extend required help to poor farmers. This will achieve the dual

goal of raising revenue from those who can afford to pay tax and availability of funds for

helping poor farmers to stop them from committing suicides. Appropriate scheme for

distribution of such Fund in a transparent manner with accountability should be worked

out to avoid possibility of leakages in delivery system.

1.2 Taxation of Agricultural Income of Non-Agriculturist – Stop abuse of exemption

Till it becomes possible to implement the scheme of taxation of agricultural income on the

line suggested in Para 1.1 above, it is necessary to stop abuse of this exemption. This

exemption has left scope for tax evasion on a large scale, particularly for those who are de

facto non-agriculturist but who have managed to continue to maintain their status as an

agriculturist and continue to earn/ declare large amount of exempt agricultural income.

Therefore, there is nothing wrong in taxing agricultural income of those who also have large

non-agricultural taxable income. They are effectively not-agriculturist.

The Chelliah Committee had recommended taxation of agricultural income if an agriculturist

has income from non-agricultural sources above the exemption limit and at the same time

has income from agricultural sources above specified limit. Even Task Force (Direct Taxes)

headed by Dr. Vijay Kelkar has made recommendation on these lines in its Report.

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The time has come to implement recommendations of taxing such agricultural income

because this would amount to taxing agricultural income of non-agriculturist, as

exemption in respect of agricultural income was never meant for them.

Till appropriate legal frame work is created for this, tax payers having non-agricultural

income (say, exceeding Rs. 10 lakh) can be taxed at a higher rate [which can be based on

the amount of agricultural income earned by them] so that benefit of exemption of

agricultural income is lost/reduced in their cases. For example, if an assessee has non-

agricultural income of Rs. 50 lakh and agricultural income of Rs. 25 lakh (total Rs. 75 lakh),

the proportion of agricultural income is 1/3rd and the rate of tax on non-agricultural

income in excess of Rs. 10 lakh (i.e. on Rs. 40 lakh) can be increased by 1/3rd i.e. from 30%

to 40%. The excess amount so collected can be used for setting-up a fund for poor farmers

referred in para 1.1 above.

2. Amortisation of Expenditure of Capital Nature

In the fast changing economic scenario, business entities are required to incur various types of

expenses such as restructuring costs, etc. These expenses may not result in acquisition of any

depreciable fixed asset. Some of these could be considered as expenditure of capital nature

under the conventional tests although in the modern business environment, in fact, they are

incurred on account of business expediency. This fact has been recognised by introduction of

Secs. like 35D, 35DD, 35E. However, these sections do not exhaustively cover all expenses that

do not get deduction as revenue expenditure although incurred for business.

It is suggested that all expenses that are incurred for business purpose but are neither revenue

in nature nor result in acquisition of a depreciable fixed asset should be allowed as deduction

over a period of three to five years by way of amortisation.

Further, in response to Government’s effort to develop infrastructure through private sector,

companies undertake development of infrastructure facility and operate it. For example, a

company may construct a bridge or a road. Its revenues will be from the toll charges that it is

allowed to charge. The bridge or the road may never be its asset and it may not be granted any

depreciation on the same. In fact, this issue is under litigation and this is totally unjust. In such a

case, the cost of the infrastructure facility constructed should be allowed as a deduction over

the relevant period.

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Once these provisions are made, individual sections providing for amortisation of expenses can

be done away with. This would substantially reduce litigation on the nature of expenditure, i.e.

capital or revenue.

3. Deduction under Sec. 43B – Removal of unfair provisions

The Income-tax Act, 1961 [the Act] provides for computation of income according to the method

of accounting followed by the assessee. A large number of assessees follow mercantile (accrual)

system of accounting. Under the Companies Act, all companies are statutorily required to follow

mercantile system of accounting.

However, Sec. 43B makes a departure from the principle that income is to be computed

according to the method of accounting adopted by the assessee. It provides for deduction of

certain expenses only on the basis of actual payment. This has caused hardship. This provision

has been considered by the Chelliah Committee as complicating the law, and as unfair and

unjust, as it militates against the principles of taxation of real income.

The provisions of Sec. 43B were initially enacted in respect of statutory payments. It is noticed

that its scope has now been extended even to contractual payments, such as expenditure on

leave encashment by employees, interest payable to financial institutions etc.

This unnecessarily complicates computation of taxable income each year, and further increases

the areas of difference between book profit and taxable income. Instead of simplifying the law

reducing the gap between the book profit and the taxable income, the law is made complex by

making such provisions. With the Accounting Standard on Deferred Taxation becoming

mandatory to corporates, increased disparity between the book profit and the taxable income

makes accounting more complex. It is suggested that the scope of Sec. 43B should not cover

contractual payments, but should be restricted to statutory payments only and the section

should be amended accordingly.

4. Allowability of interest paid under the Act

Currently, interest paid by the Government to an assessee is chargeable to tax. However,

interest paid by the assessee to the Government under various sections is not allowed as

deduction while computing the total income. Interest paid by the assessee is for the use of

money by him and is compensatory in nature.

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Hence, interest paid by the assessees to the Government under various sections of the Act

should be allowed as deduction in computing the total income. If the assessee does not have

business income, deduction should be allowed under the head ‘Income from Other Sources’.

Alternately, the interest received by the assessee should be exempt from tax.

5. Deemed Speculation Loss in case of Companies – Explanation to Sec. 73

As per the provisions of Sec. 73 of the Act, any loss, computed in respect of a speculation

business carried on by the assessee, cannot be set off except against profits and gains, if any, of

another speculation business.

As per Explanation 2 to Sec. 28 of the Act, where speculative transactions carried on by an

assessee are of a nature so as to constitute a business, the business (referred to as “speculation

business”) shall be deemed to be distinct and separate from any other business.

As per Sec. 43(5) of the Act, “speculative transaction” means a transaction in which a contract

for the purchase or sale of any commodity, including stocks and shares, is periodically or

ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

Accordingly, speculative business is normally understood as business in respect of transactions

where settlement takes place without actual delivery.

However, as per Explanation to Sec. 73 of the Act, where any part of the business of a company

(other than a company whose gross total income consists mainly of income which is chargeable

under the heads, “Interest or securities”, “Income from house property”, “Capital gains” and

“Income from other sources” or the company the principal business of which is the business of

trading in shares or banking or the granting of loans and advances) consists in the purchase and

sale of shares of other companies, such company shall be deemed to be carrying on a

speculation business to the extent to which the business consists of the purchase and sale of

such shares.

Accordingly, as per the Explanation to Sec. 73, in case of many companies, even delivery based

share transactions are deemed to be speculative. The present provision deeming even delivery

based purchase and sale of shares as speculative business discriminates between corporate and

non-corporate assessees.

Automation of the trading mechanism, screen based trading, controls on reporting of capital

market transactions by share brokers, dematerialization and other measures initiated by SEBI

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over the last few years have brought total transparency in share trading, leaving little scope for

manipulation of share trades by transfer of profits/losses from one person to another. In any

case, corporates are more regulated compared to non-corporates and hence, disadvantage to

companies in terms of discriminatory tax provision as described above can hardly be justifiable.

The need of the hour is to encourage corporatisation which could bring about more

transparency and healthy business practices. However, the present provisions act as a

disincentive for corporatisation.

It is, therefore, suggested that the aforesaid Explanation to Sec. 73 of the Act be deleted.

6. Set-off of long-term and short-term capital losses against income under the same head

6.1 The present scheme of set off of brought forward losses allows set off of loss under a

particular head of income only against income under the same head in the subsequent year.

This causes great hardship, especially to an assessee, who with a view to recouping loss

made in business, sells a capital asset for revival of his business. In such a case, in spite of

substantial brought forward business loss, he is required to pay tax on capital gains, limiting

his capacity to re-establish himself in business. This problem has become more severe with

the introduction of amended Sec. 50 and deletion of Sec. 41(2). Under Sec. 41(2), ‘balancing

charge’ was included as income under the head ‘Profits and Gains from Business or

Profession’ and an assessee could set off brought forward business loss against the

‘balancing charge’. Further, loss under the head ‘Capital Gains’ is not allowed to be set off

against income under any other head of income even in the year in which loss is incurred.

This is against the concept of taxation of ‘real income’.

Further, loss under the head ‘Income from Other Sources’ is not allowed to be carried

forward at all. It is suggested that such loss should be allowed to be carried forward.

In view of the above, the following modifications should be made in the scheme of ‘set off’

of losses:

a) Inter head set-off of all losses in the year in which it is incurred should be permitted;

b) All losses should be allowed to be carried forward for set-off in subsequent years.

c) Losses carried forward for set off in the subsequent years under each head of income

like, ‘Income from house property’ or ‘Profits and gains from business or profession’

(other than losses from speculation business or losses from the activity of owning and

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maintaining race horses) and ‘Income from other sources’ should all be allowed to be

set off against income under any head.

d) Brought forward losses of the predecessor should be allowed to be set-off in the hands

of successor in the event of inheritance of business or dissolution of Firm/ AOP/ BOI

with suitable checks and balances.

6.2 If above cannot be implemented, the following may be considered:

The Finance Act, 2002 had substituted Sec. 70. Under the provisions of the substituted

section, losses arising from transfer of long-term capital assets cannot be set-off against

income arising on transfer of short-term capital asset although they are under the same

head. Such a provision is unreasonable and leads to injustice. For example, if a person

receives bonus shares on shares held for more than one year and he sells the original shares

as well in the bonus shares immediately, often due to indexation there is a loss on transfer

of original shares while there is a gain on transfer of bonus shares. Although, in real sense

bonus shares are merely an off shoot of the original shares, the short-term capital gain

arising on transfer of bonus shares is taxed without adjusting against long-term capital loss

arising on transfer of original shares. Considering the automation of the trading mechanism

in shares etc., now there is no possibility of any misuse of such provision.

The current Sec. 70 compartmentalises the losses artificially. It is suggested that Sec. 70 as

it existed before its substitution be reinstated.

7. Year of credit for Tax Deducted at Source (TDS)

Under the current system, credit for TDS is granted to the deductee in the year in which the

relevant income is assessable. This system has created a large number of issues and effectively it

has resulted into almost chaos in the recent past. Deductees are struggling for getting credit for

the TDS. We understand that large amount of TDS is lying in suspense account with the

Government for not being able to grant legitimate credit to deductees. This has also its side

effects such as creation of wrong demand, avoidable applications for rectifications, wastage of

time in follow-up actions by the deductees etc. The Department also has made various genuine

attempts to clear this mess but without any substantial result.

Prior to 1st June, 1987, the credit for TDS was allowed in the assessment year relevant to the

financial year in which the tax was deducted. That system was working very smoothly without

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any major issue. The reasons for bringing the change in system no longer exist in the current

scenario of computerisation and advanced technology.

A detailed note describing the issues under the current system and the reasons thereof is given

as Annexure 1.

In view of the above, it is suggested that the credit for TDS should be granted in the

assessment year relevant to the financial year in which the tax is deducted. As such, the

position prevalent prior to 1st June, 1987 should be restored. This will make life of the

assessees as well as the Department simpler.

8. Avoid unnecessary TDS – Restrict the scope of TDS

It may be noted that substantial taxes are deducted at source from large assessees, who are

regular in paying their advance tax as well as in filing their tax returns. Such assessees have to

employ additional staff merely to ensure that they obtain tax deduction certificates from all

deductors, and spend substantial time reconciling the tax deducted at source, as reflected in

form 26AS with the tax actually deducted by various deductors. Often, they have to file many

files containing such certificates for verification by assessing officers. This leads to substantial

wastage of time and energy, without any additional benefit accruing either to the Government

or to such assessees. What benefit does the Government get when tax is deducted from

payments made to say, State Bank of India or any other PSUs or for that matter any large

reputed corporate? To the extent of such TDS, they pay less advance tax. Ultimately, collection

of tax is the same, may be with marginal difference in timings.

It is therefore suggested that the Act should be amended to provide that tax will not be

required to be deducted from payments made to large corporate assessees, for example,

companies which form part of the Nifty 500 index, public sector undertakings, local

authorities, etc. Such exemption may be made conditional on their making payment of

advance tax in 6 instalments instead of 4 instalments. To determine the eligibility for such

exemption reasonable guidelines can be framed on objective basis after discussion with experts

in the field. The names of such companies could be notified on yearly basis in the month of

March every year effective from next 1st April. This will reduce substantial effort that goes into

unnecessary deduction, payment, accounting, furnishing of tax deduction certificates, claiming

tax credit and granting tax credit of various small amounts, which will be replaced by 6 payments

in a year to be made by such entities.

9. Not Ordinarily Resident (NOR) - Sec. 6(6)

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The Finance Act, 2003 had amended Sec. 6(6) pertaining to NOR status. As per the amendment,

if a person is a non-resident in India for 9 years out of last 10 years, or he is in India for less than

730 days in last 7 years, then he is regarded as a NOR. This discourages NRIs/ Persons of Indian

origin to visit India frequently. Apart from this, if stay of such person in India for any unavoidable

reasons (such as hospitalisation, social occasion etc.) exceeds 181 days in two financial years out

of 10 years, that causes tremendous tax compliance hardship to such persons.

The concept of ‘Not Ordinarily Resident’ is unique to India and is responsible for huge deposits

from NRIs. This also acts as an incentive for returning Indians and gives them breathing period to

settle down in India. Moreover, this status helps as an incentive to attract “expatriates” who can

work in India for longer duration without attracting tax on their foreign sourced passive income.

Even Foreign Exchange Management Act, 1999 (FEMA) recognises the concept of “not

permanently resident of India” to facilitate repatriation of funds, to hold properties abroad, and

earn income therefrom by expatriates working in India. Thus, the concept of NOR status is a part

of an overall strategy to encourage flow of investment and technology from NRIs as well as

Foreigners by offering them concessions under Income-tax and FEMA. It may be noted that in

terms of tax revenue, this amended provision should not make any material difference

because, in such cases, in respect of taxes paid outside India on the foreign income, generally,

the assessee will be entitled to credit. The amended provision only increases avoidable

procedural work for such persons with regard to filing return of Income, claiming foreign tax

credit etc. and creates extra work for the department without practically any major

corresponding increase in tax revenue.

The earlier concept had worked well over number of years, it was time tested and people tested

principle, which according to us need not have been touched at all. However, in order to

discourage any abuse of this NOR status, the definition may be modified in such a manner that

person who remains non-resident in India for three out of last eight years (as against the

earlier condition of two out of nine years) can qualify to become NOR. Thus, the effective

benefit of the NOR status would be available for five years instead of present period of two

years. The second limb of the condition to become NOR namely, physical presence in India for

less than 730 days in last seven previous years may be removed in order to simplify the law.

10. Effect of New Companies Act, 2013 – References under the Act

Under various provisions of the Act [such as Secs. 2(18), 2(19AA), 115JB etc.) there are

references to the provisions of the Companies Act, 1956. Since now the Companies Act, 2013

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has been made effective, appropriate changes for reference to the new Companies Act under

the relevant provisions of the Act are required.

It is suggested that appropriate changes should be made under the Act for the above

purposes.

11. Accountability on the part of the Income-tax Department

11.1 To bring in ‘voluntary compliance’ as an acceptable concept in tax-payers, what is required,

more than fair tax-laws, is fair, just, tax-payer friendly tax-administration, accountable to the

tax-payer and to the society in general.

The most essential pre-requisite to make tax administration accountable is to legislate some

provisions for accountability in tax laws.

We believe that the tax-administration is no doubt a tax-gathering body but in reality its

function is to serve tax-payers and for that purpose be accountable.

The preamble to the Right to Information Act states:

“AND WHEREAS, democracy requires an informed citizenry and transparency of

information which are vital to its functioning and also to contain corruption and to hold

Government and their instrumentalities accountable to the governed …”

Accountability of the Government and its instrumentalities is an important aspect of

democracy. But this has been severely lacking. What is needed is attitudinal change in the

mindset of the individuals’- right from the Chairman of the CBDT to the peons.

11.2 Government has certain expectations from taxpayers. The ‘CITIZEN’S CHARTER’ lists all of

them. However, no efforts are made to encourage, motivate and assist taxpayers to enable

them to meet these expectations. For example:

Expectations include ‘to verify credits in tax-credit statement’. When a tax-payer verifies

and finds errors in the same, the Department’s officials make no effort to assist the tax-

payer.

When a tax-payer has some difficulty in understanding the tax-provisions or when unjust

treatment is given to him or he is facing the ‘corrupt’ official, no higher authority is

available to approach in the matter.

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We believe that large number of tax-payers are honest and law abiding, more can be

brought in that category if the Department becomes more accountable.

11.3 In order to make the system and the Income-tax Department accountable, we make

following suggestions on macro level:

In the Act, provision needs to be made to create and establish an independent body having

wide authority to ensure accountability in the working of the Department. Such a body

needs to be headed by a person of eminence like a retired judge of a High Court or the

Supreme Court or senior respected professional. That body shall have as its members -

representatives of the profession;

representatives of tax-payers; and

retired CCIT or CIT

In brief, we suggest that - The Body so constituted shall have following functions and

powers:

a) It shall monitor the ‘Service Delivery Standards’ laid out in the citizen’s Charter and

ensure proper implementation of the ‘Service Quality Policy’ issued by the income-tax

Department.

b) All grievances of citizens not resolved by the tax authority would be handled by this

Body.

c) The grievances of the Department’s personnel and/or whistle-blowers in the

Department will also be handled by this Body.

In order that this body is independent of the tax-authority, it should report to the Parliament

through the finance ministry.

A more detailed note on the constitution and other aspects for its working, functions etc.

can be provided, if desired. We believe that this kind of body shall usher in accountability

into the Department. Citizens will believe and so also the Department’s individuals that

there is somebody to look up to if he/she has some problem with the tax department. In

short, we urge that formation of such independent well-powered body be provided in the

Act. It will make a huge difference in the governance of the tax Department as it shall bring

in accountability.

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11.4 The provisions of Sec. 244A of the Act should be changed to the following effect:

Presently, the section grants interest on refunds due to the tax-payers @ 6% p.a. (Against

12% p.a. charged under other Secs. such as Sec. 234A/ 234B etc.)

As per the “Service Delivery Standards” laid down in the ‘CITIZEN’S Charter’ standard is to

issue refunds within 6 months to 9 months. If it is not so issued, presently nobody is

accountable. Experience shows that in thousands of cases refunds are not issued for years

and the standards (present or earlier) are not observed.

Often unofficial instructions are given by higher authorities to assessing officers, not to issue

refunds in the last quarter of the financial year to show better picture of the net tax

collection.

If the tax-payer has to pay a price for any default, the Department must also pay a price for

default.

If the tax-payer has obligations and accountability in law and has enforceable obligations, we

opine that the department also should be accountable and have enforceable obligations.

We suggest that the following should be provided in Sec. 244A of the Act:

If the refunds due are not issued within 12 months from the end of the month in which

the return of income is furnished or appellate order is passed, the rate of interest shall

be enhanced to 12% p.a. for next 12 months and 18% p.a. for the period thereafter.

Such additional payment of interest should be treated as part of the cost of tax

administration.

12. Broadening of Taxpayer base

There has been a strong feeling amongst the citizenry that the honest and tax compliant

assessees are targeted or flogged more and more while those who are not in the tax net / tax

compliant go virtually scot-free and no visible strong action is taken against them. There is

urgent need to broaden the taxpayers’ base in the country and spare the honest taxpayers from

more and more compliance burden.

In this regard, it is suggested that:

a. in order to motivate desired behaviour among the public, the government should

introduce a system for rewarding the honest taxpayers in recognition of having met

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national responsibility;

b. strong and better use of data warehousing and analytics to identify new taxpayers;

c. introduction of Presumptive Taxation Scheme on the lines of earlier Presumptive Taxation

Scheme of Rs. 1,400/- with suitable modification of the amount, say Rs. 3,000/-.

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PART C - SPECIFIC SUGGESTIONS

Chapter 1 - RATES OF TAX

1. Delete surcharge on Income-tax

Surcharge on income-tax was levied as a temporary measure to meet the shortfall in revenue

collection. This was introduced only for one year but has continued. Surcharge unnecessarily

complicates tax computations, while misleading the taxpayers as to the correct effective rate of

tax. In principle, it is wrong to levy and continue surcharge for a long period. Hence, the

surcharge on income-tax should be deleted.

2. Tax payable on Long Term Capital Gain not to exceed the tax payable at normal slab rate

Presently, the rate at which individuals and HUFs pay income-tax depends on their total income.

If the total income of an individual or a HUF is less than the maximum amount not chargeable to

tax, which presently is Rs. 2,50,000, then such an individual or a HUF does not pay any income-

tax. If the total income of an individual or a HUF exceeds the maximum amount not chargeable

to income-tax but is upto Rs. 5,00,000 then such an individual or a HUF pays income-tax on the

total income in excess of Rs. 2,50,000 @ 10%. However, if the total income includes long term

capital gains then the amount of long term capital gain is chargeable to tax under Sec. 112 of the

Act @ 20%. If the entire income of such individual or HUF consists of only long term capital gains

then such individual loses the advantage of paying tax @ 10% which is the applicable slab rate.

It is suggested that a suitable amendment be made in Sec. 112 to provide that the tax on long

term capital gain shall not exceed the tax which would have been payable by the individual or

HUF at the normal slab rate.

3. Taxation of income by way of ‘Royalty’ or ‘Fees for Technical Services’

The Finance Act, 2013 had made an amendment in Sec. 115A of the Act, whereby tax rates in

respect of income by way of royalty or fees for technical services received by a non- resident

under an agreement entered after March 31, 1976, were increased from 10% to 25%.

This amendment really increases the cost of manufacture for Indian businesses, since most such

agreements provide for payment of royalty to the foreign companies on a net-of-tax basis,

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where taxes are borne by Indian parties. The rate of 25% effectively amounts to 33% of the

royalty amount, significantly increasing the burden on an Indian company.

It is suggested that the rate should be restored to 10%, which is also the rate provided in many

tax treaties.

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Chapter 2 - CHARITABLE ORGANISATIONS

1. Loss of exemption if income applied for Specified Persons — Secs. 13(1)(c) & 13(3)

1.1 A charitable religious trust/ institution (Trust) loses the benefit of exemption under Sec. 11 if

it uses/ applies, directly or indirectly, any part of its income for the benefit of specified

persons as provided in Sec. 13(1)(c). One of the categories of persons specified in Sec. 13(3)

is a manager. Generally a manager is a salaried employee. Loss of exemption in case of

provision of a facility to manager may create unintended hardship. For example, if a trust

runs and operates an ashram in a rural area, and during a visit to that area with his family,

the manager along with his family is permitted to reside in the ashram, such a facility should

not result in the trust forfeiting its exemption.

Therefore, it should be clarified that a manager (who is salaried employee) is not covered

within the scope of Sec. 13(3).

1.2 On account of materiality, in Sec. 13(3)(b) the monetary limit of Rs. 50,000/- specified in

respect of substantial contributions should be raised to Rs. 5,00,000/-.

2. Definition of “Charitable Purpose” - Sec. 2 (15)

2.1 One of the objects included in the definition of charitable purpose is "the advancement of

any other object of general public utility" [general public utility]. Prior to 1984, this part of

the definition was subjected to further condition with the words "not involving the carrying

on of any activity for profit. This condition had led to large scale litigation on account of

different interpretations made by the authorities while dealing with the said expression

under different situations. Having realized this, by the Finance Act, 1983, these words

restricting this part of the object of the said definition were omitted w.e.f 1st April, 1984.

Simultaneously, Sec. 11(4A) was introduced which recognized the fact of carrying on

business activity by a Trust and even permitted exemption in respect of profits and gains of

such business under specified circumstances. These provisions were further liberalized by

substituting Sec. 11(4A) with the new one by the Finance (No. 2) Act, 1991 w.e.f. 1st April,

1992. Under these provisions, profits and gain of business of a Trust was eligible for

exemption if, the business was incidental to the attainment of the objectives of the Trust

and separate books of account were maintained in respect of such business. These

provisions had continued up to Assessment Year 2008-09 on the statute and the law was

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almost settled on the issue relating to business and other income and its eligibility for

exemption in case of a Trust.

2.2 The Finance Act, 2008 (from Asst. Year 2009-10) amended the above part of definition of

charitable purpose to provide that the object of general public utility shall not be regarded

as charitable purpose, if it involves (i) the carrying on of any activity in the nature of trade,

commerce or business or (ii) any activity of rendering any service in relation to any trade etc.

for a consideration, irrespective of the nature of use/application or retention of the income

from such activity.

2.3 Considering the very wide language used in the above-referred amendment, number of

genuine organisations established for charitable purpose, which have been granted

exemption on that basis for decades apprehended that they may face litigation on

interpretation of the restrictions contained in the amended provisions for continuing to get

the exemptions hitherto available to them. Therefore, various representations were also

made to that effect.

2.4 Considering the apprehensions of such organisations, the Hon. Finance Minister, at the time

of passing the Finance Bill, 2008, clarified the object and the effect of the amendment as

follows:

“Clause 3 of the Finance Bill, 2008 seeks to amend the definition of ‘charitable purpose’

so as to exclude any activity in the nature of trade, commerce or business, or any activity

of rendering any service in relation to any trade, commerce or business, for a cess or fee

or any other consideration, irrespective of the nature or use of application, or retention,

of the income from such activity. The intention is to limit the benefit to entities which

are engaged in activities such as relief of the poor, education, medical relief and any

other genuine charitable purpose, and to deny it to purely commercial and business

entities which wear the mask of a charity…………”

“……… I once again assure the House that genuine charitable organisations will not in

any way be affected.......”

2.5 The above amendment to the definition of “charitable purpose” in Sec. 2(15) has made

unintended impact and has involved the institutions of charities into enormous litigation. As

mentioned in para 2.1, the historical evolution shows that the charitable institutions had

enormous litigation for almost three decades to understand the correct purport of the

definition of this term. This change to that definition has once again destabilized the law.

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The purported object behind the amendment is to deny exemption only to those institutions

who sub-serve the object of general public utility in a manner that the object of general

public utility is necessarily served by them only by operating a trade, commerce or business

along commercial lines with an eye on profit making design. The purported intention -

though, brought out in the Explanatory Memorandum and the Finance Minister’s speech,

the wording of the amendment does not bring out this intent clearly with the definition in

this form. As a result, most of the charities who sub-serve the object of general public utility

are put to substantial hardship on the field.

2.5.1 The difficulties faced are as under:

a) There are a number of charities which are primarily serving the object of medical

relief, relief of the poor and education. These institutions may nevertheless be also

sub-serving the object of general public utility in a small measure. All these

institutions are running the risk of losing total exemption even though the primary

and predominant object is not intended to be touched by the amendment.

b) Trust deeds of almost all charitable institutions are widely worded in terms of the

scope of their activities. Fulfilment of general public utility is normally one of the

stated objects in the trust deed. Many institutions may nevertheless not be pursuing

the general public utility object at all. Some may pursue some such object on an

assumption that it is incidental to the primary object of education, medical relief,

etc. Such institutions are facing questions as to why they should not be covered by

the sweep of this amendment.

c) There could be genuine difference of opinion on the question whether an activity of

the Trust is covered by one of the first three objects in the definition or whether the

activity is covered by last limb of object viz. general public utility.

d) The way amendment is worded, the Assessing Officers take the view that once there

is recovery of a membership fee or recovery of any form of consideration, the

charitable institution will lose exemption even if:

i. The recovery is not in lieu of any specific service.

ii. The recovery is merely cost recoupment exercise.

iii. The recovery is not suggestive of an activity undertaken along the

commercial lines with profit making as an objective.

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2.6 The contribution of charities to the country cannot be undermined and hence there is an

urgent need to ensure that the amendment does not overreach beyond the intended

effect. Therefore, the first proviso to Sec. 2(15) introduced with the amendment made by

the Finance Act, 2008 should be deleted and position prior to that amendment should be

restored.

2.7 Alternatively, if the said proviso has to continue for any reason, we have the following

suggestions:

(i) It should be made clear that the said proviso only covers an activity in the nature of

trade, commerce or business which is, “for profit”, such that the mere circumstance of

receipt of membership fee or cost recoupment without any profit making design is not

interpreted as an objectionable activity. The reflection of the words “for profit” as part

of the definition will not only bring out the legislative intent more clearly but will also

make the definition sound akin to the definition as we had till the year 1992, so that the

ratio of judgment of Supreme Court in the case of Surat Art Silk Cloth Manufacturers

Association is available to the tax paying community as guideline.

(ii) The second part of the first proviso beginning with “or any activity” till end should be

deleted as this has led to unintended effect.

(iii) It should be ensured that the loss of exemption is limited only to that business income

which is derived from the tainted activity. As per the present provision, an institution

which is considered as sub-serving even one object of general public utility which is not

regarded a charitable purpose, may not be able to enter Sec. 10(23)/ 11 itself.

(iv) Threshold limit of Rs. 25 lakh specified in the second proviso for non-applicability of the

first proviso, should be increased to Rs. One crore.

3. Deduction of tax at source from the income of Charitable or Religious Trust

Presently, tax is deducted at source from the income of a charitable or religious trust although

its income is exempt from tax under Sec. 11, unless it obtains certificate under Sec. 197 of the

Act. Obtaining such certificate is extremely tedious and in practice it becomes another

assessment. Further, investments are made from time to time and it is not practically possible to

obtain certificate under Sec. 197 for non-deduction of tax.

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It is therefore suggested that in case of a charitable or religious trust which has income only by

way of interest and / or rent (apart from donations) no tax should be deducted at source if

such Trust files with the payer of the income declaration (to be prescribed) to the effect that

the Trust is duly registered under Sec. 12AA, the registration has not been cancelled, that its

income is exempt under Sec. 11 and that in the last completed assessment, if any, exemption

under Sec. 11 has not been denied.

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Chapter 3 - SALARIES

1. Reinstate erstwhile Sec. 16 (i) - Standard Deduction

Sec. 16(i) which provided for standard deduction in case of salaried employees was removed by

the Finance Act 2005 w.e.f. April 1, 2006.

Consequently the salaried individuals pay tax on their gross salary. No deduction is allowed to

them in respect of expenses they may have genuinely incurred to earn the salary income. This is

in stark contradiction to an individual engaged in business / profession who can claim expenses

incurred in relation to his business or profession.

Thus as an outcome, there is a disparity between the salaried employees and those carrying on

business / profession, resulting in higher tax being paid by the salaried employees. One may

note that it is equally essential for the salaried individuals to keep abreast with the latest

developments in their area of work/specialization and hence they have to necessarily incur

expenses for the same.

To bring in the necessary parity amongst salaried and non-salaried tax payers, it is suggested

that standard deduction be reinstated in the statute book. Approximately 20% of the gross

salary, subject to a maximum limit of say Rs. 100,000, could be considered for the purpose of

standard deduction.

2. Effect of non-payment of salary to employees

Salaries get taxed on due basis, but a tax deduction arises only when it is paid. At times,

employees of sick / loss making companies do not receive their salary for a considerably long

time and they financially suffer during that period. In such a situation, an employee without

receiving the salary has to pay tax on the same from his own resources as tax deductions would

not take place until it is actually paid. On account of non-receipt of salary they would be

suffering and, the issue of tax liability makes their position worse.

This is very harsh on an employee whose resources are any way limited. In such situations,

taxation of salary should be deferred till such salary is actually received.

Alternatively, tax on the salary due but not yet received by the employee may be recovered

from the employer.

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Chapter 4 - INCOME FROM HOUSE PROPERTY

1. Deduction in computing Income from House Property

1.1 Sec. 24 provides for a ‘standard deduction’ of 30% of the annual value while computing

income under the head ‘Income from house property’. The section does not envisage any

other deduction of expenses except interest. It has been observed that in respect of certain

properties expenses on account of lease rent for land, insurance premium and taxes levied

by State Government are substantial.

It is, therefore, necessary that deduction for lease rent for land and taxes levied by a State

Government are separately allowed in addition to the standard deduction. Standard

deduction of 30% in such cases be permitted after deduction of the aforesaid expenses.

1.2 The deduction of interest is subject to a condition that the assessee furnishes a certificate

from the person to whom the interest is payable. This condition regarding furnishing of

certificate from the payee is impractical since the recipient of interest may not always be

aware of the purpose of the loan. Such certificate does not serve any useful purpose.

The certificate, if at all considered necessary, may be restricted to the amount of interest

payable.

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Chapter 5 - INCOME FROM BUSINESS OR PROFESSION

1. Disallowance under Sec. 40A(3)

1.1 Disallowance under Sec. 40A(3) – Discontinue flat disallowance in genuine cases

Where payment in respect of any business expenditure incurred is made in excess of Rs.

20,000 / Rs. 35,000 otherwise than by a crossed account payee cheque/ draft then, the same

becomes disallowable while computing the business income. To this provision, in the past,

there were various exceptions provided in Rule 6DD. Apart from the specific exceptions

clause (j) of that Rule 6DD (upto Assessment year 1995-96) contained a residuary clause

which had exceptions and which, in substance, provided that if such payments were made

due to exceptional or unavoidable circumstances or to avoid any genuine difficulty, then, no

disallowance was to be made under the section, provided the assessee furnished, to the

satisfaction of the Assessing Officer, the evidence of the genuineness of the payment and

the identity of the payee.

Therefore, in genuine cases, the assessee could get deduction of such payments. Many

instructions had also been issued in the past to cover certain specific situations under Rule

6DD(j) to avoid hardships in such situations.

However, even in genuine cases, the Assessing Officer is now under an obligation to make a

disallowance. This causes genuine hardships, and sometimes unbearable and unfair financial

burden to assessees. For example, if the assessee has gone, say from Bombay to Delhi, and

he has to pay his hotel bills, say to an ITDC Hotel, which are in excess of Rs. 20,000 and if he

has no option but to pay in cash (say, because at the time of leaving hotel, for any technical

reason, it is not possible for the hotel to swipe the credit card) , then this payment would

suffer disallowance, even where the genuineness of transaction is beyond doubt and the

identity of the payee can never by questioned. At times, in foreign travel, such bills are

required to be paid in cash at the hotel. If the assessee makes payment for purchase of air

tickets, say to Air India, in cash in excess of Rs. 20,000, the same would also suffer

disallowance.

1.2 Disallowance of aggregate payment in excess of Rs. 20,000/35,000 in a single day

otherwise than by account payee cheque/draft

Sec. 40A(3) stipulates that if the aggregate payment for expenditure in a day to a person,

otherwise than by an account payee cheque/draft, exceeds Rs. 20,000, then the same will be

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disallowed. This limit was subsequently increased to Rs. 35,000 in case of payments for

hiring, etc. of goods carriages.

As this section covers aggregate of payments made in a single day to the same person,

assessees are facing practical difficulties in complying with these conditions. For example, if

payment of freight is made by different branches of the assessee located at different places

(may be even in different cities) on the same day for freight to different truck drivers of the

same owner and the aggregate amount exceeds Rs. 35,000, then the assessee will have to

face disallowance and it would be impossible for the assessee to control such payments

made on the same day by the different branches. Another example could be if 200 branches

of State Bank of India make payments exceeding Rs. 100 each to the same courier company

for courier charges on the same day in cash, then, the aggregate will exceed Rs. 20,000 on a

single day to the same person. One can visualize a number of such absurd situations where

even compilation of the required data for this purpose may not be feasible.

Further, at times there are genuine reasons for not being able to effectuate payment

through account payee cheque or bank draft, the assessee however gets penalized by

disallowance of the entire expenditure.

1.3 In view of the above, it is suggested that Sec. 40A(3) should be amended on following

lines:

The above restriction of aggregating payments in a single day should be confined to

each transaction and should not be extended to payments made to the same person

for different transactions.

The limit of Rs. 20,000, which was revised from Rs. 10,000 long back in 1996, is

overdue for revision and therefore, the same may be increased to Rs. 1,00,000.

Specific provision should be made that if the assessee proves the identity of the payee

and genuineness of expenditure, no disallowance will be made.

In any case, the disallowance should be restricted to 30% of the payment [like Sec.

40(a)(ia)] and not the entire payment.

2. Disallowance of expenses relating to exempt income - Sec. 14A

2.1 Dividend Income/ Share in profit from a firm

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Sec. 14A was introduced by the Finance Act, 2001 with retrospective effect from 01.04.62 to

provide that expenditure incurred by the assessee in relation to exempt income shall not be

allowed as a deduction in computing the total income. The above provision was made to

stop the possible abuse of claiming deduction of such expenses against the other taxable

income. The purpose behind this provision is to disallow such expenses as the income itself

is not liable to tax. Therefore, the scope of this section should be limited to cases where

the income is really not taxable and should not be extended to cases where income is

technically treated as exempt.

The dividend income from shares/units is exempt in the hands of the share / unit holders

not because the same is not taxable at all but because of the fact that on distribution of such

dividend, the tax is now collected by the Government from the company / mutual fund.

Therefore, dividend, in real terms, is a tax-paid income though technically the same is

treated as exempt in the hands of the share / unit holder. Likewise, a partnership firm pays

tax on its total Income at the maximum marginal rate and therefore, to avoid possibility of

double taxation, a special provision in Sec. 10(2A) is made to provide exemption in the hands

of the partner in respect of his share in profit from the firm. Like dividend, in real terms, this

is also not exempt income in the hands of the partner and the same is tax-paid income

received by him from the firm. It is only technically exempt in the hands of the partner.

In view of the above, it is unfair to apply the provisions of Sec. 14A to dividend income or

share of profit from the firm which are technically treated as exempt in the hands of the

share/ unit holders / partners and which are really tax-paid income. Therefore, it is

suggested that specific provision should be made to exclude applicability of Sec. 14A to

dividend income of share/ unit holders as well as share of profit from the firm in the hands

of a partner.

Apart from the above, the implementation of the provisions of Sec. 14A has far exceeded

its intended scope and introduction of Rule 8D has created severe genuine hardship.

Therefore, it is absolutely necessary to make appropriate amendment in Sec. 14A, to

provide a reasonable cap on the amount of disallowance relating to indirect expenses.

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3. Definition of `Income’ and Employee's Contribution to P.F. etc. - put it on par with Sec. 43B,

Sec. 2(24)(x) and Sec. 36(1)(va)

Under Sec. 2(24)(x), monies received by an assessee from his employees as contributions to any

provident fund or superannuation fund or any fund set up under the provisions of ESI Act or any

other fund for the welfare of such employees are treated as income of the assessee.

Under Sec. 36(1)(va), such monies received from employees are allowed as a deduction only if

the same are credited by the assessee to the employee's account in the fund on or before the

due date under the relevant Act, etc. Similar condition was there in Sec. 43B(b) for allowance of

the employer's contribution upto the Asst. Year 2003-04. However, Sec. 43B has been amended

by the Finance Act, 2003 (w.e.f. Asst. Year 2004-05) to provide that such employer`s contribution

will be allowed as deduction if the amount is paid on or before the due date of furnishing return

of income under Sec. 139(1). However, similar amendment has not been made in Sec. 36(1)(va)

which deals with employee's contribution. Therefore, what is shocking is that even a delay of

one day in making payment of such employee’s contribution disentitles an assessee from

claiming the amount of deduction permanently whereas employer's contribution now gets

different treatment as aforesaid. This is grossly unjust and unfair, particularly when such small

delays are not even taken cognizance of under the relevant Acts.

It is, therefore, suggested that Sec. 36(1)(va) be amended to provide deduction for employee's

contribution on the lines of Sec. 43B.

4. Depreciation Allowance – Sec. 32

4.1 Restoration of Depreciation Allowance in respect of cost of small items of assets

In the past, with a view to avoid litigation on the point of nature of expenditure (i.e. capital

or revenue) in respect of purchase of small items of assets, provisions had been introduced

to treat cost of such assets as depreciation allowance. Earlier, the limit on cost of such assets

was Rs. 750/-. This was then increased by the Finance Act, 1983 to Rs. 5,000/-, again for the

same reasons. These provisions have been omitted w.e.f. Asst. Year 1996-97.

The omission of the above provisions has created unnecessary hardship of keeping

unwarranted records in respect of purchases of such small items. This was a useful provision

to maintain simplicity and to avoid possible litigation on such small items of assets, based on

principles of materiality.

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Therefore, it is suggested that the above provisions should be reintroduced, with a

condition that the same would not apply where the total value of such additions during

the year exceeds 10% of the written down value of the relevant block of depreciable

assets or Rs. 1,00,000/-, whichever is higher. Such a provision will act as a check on the

temptation to abuse but at the same time, will serve the purpose for which it was

originally introduced. A similar provision existed under the Companies Act, 1956.

4.2 Removal of restriction of depreciation allowance in respect of Books

The Income-tax (Twenty fourth) Amendment Rules, 2002 had amended Appendix I to the

Income-tax Rules, 1962 to amend the rates of depreciation in respect of various assets with

effect from 1st April, 2003. One of the amendments had been to restrict the rate of

depreciation on books (not being annual publications) to 60% instead of 100%.

This amendment has created hardship for professionals. In this era of far-reaching and quick

changes, these books do not have any resale value, these have to be scraped. Also, the cost

of these books is not high and it has become extremely cumbersome and time consuming to

keep track of the books.

It is therefore suggested that the specific provision should be made in Sec. 32 to allow

depreciation on the cost of books purchased.

5. Allowability of depreciation on immovable property received without consideration or for

inadequate consideration

When an individual or a HUF receives, in any previous year, immovable property without

consideration or for inadequate consideration, then by virtue of provisions of Sec. 56(2)(vii) the

difference between stamp duty value of the immovable property so received and the amount of

consideration is charged to tax. The immovable property so received could be an asset which is

used by the recipient for the purposes of his business or profession profits whereof are

chargeable to tax. Simultaneous with the introduction of the provisions of Sec. 56(2)(vii), Sec. 49

has been suitably amended to provide that the value which has been subjected to income-tax

under Sec. 56(2)(vii) shall be deemed to be the cost of acquisition of such property. However,

there is no corresponding amendment to enable allowance of depreciation on the value so

considered under Sec. 56(2)(vii).

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It is suggested that the definition of `actual cost’ in Sec. 43(1) be suitably amended to provide

that value which has been subjected to income-tax under Sec. 56(2)(vii) shall be deemed to be

its cost of acquisition.

6. Investment allowance – Sec. 32AC

Currently, a company engaged in the business of manufacture or production of any article or

thing (‘manufacturing company’) is entitled to deduction of 15% of the actual cost of the new

plant and machinery (New Asset) acquired and installed during the specified period if the

aggregate amount of the actual cost of such New Asset exceeds Rs. 25 crore, subject to the

specified conditions. This deduction is available only to ‘manufacturing company’ and not to the

other assessees.

Suggestions

(i) It should be appreciated that small manufacturing and processing entities (SMEs) generally

provide more employment than larger entities. Again, such small entities are spread over in

different states and geographically, benefit a larger area, being very large in number.

Therefore, there is no reason to limit the benefit of deduction only to entities which can

invest Rs. 25 crore during the specified period in such New Assets. As such, it is suggested

that the benefit of Sec. 32AC should be allowed to all manufacturing entities (corporate

as well as non-corporate) and there should not be any minimum limit of investment. This

will encourage the manufacturing activity in the country at all levels and the contribution of

the SMEs will also get recognised in this process. It is also advisable and necessary to

specifically provide that the benefit of Sec. 32AC is also available to processing industry.

(ii) Apart from the above, the benefit of deduction is restricted to only ‘manufacturing

company’. Thus, service sector and other non-manufacturing sectors [such as infrastructure

sector, power sector (where there could be litigation), real estate sector etc.] are excluded.

Therefore, in the context of the goal of overall growth in the economic activities, these

sectors also deserve consideration for deduction under this section.

(iii) The section requires that the New Asset should be acquired and installed during the

previous year with the cost exceeding Rs. 25 crore. In many cases, the acquisition and

installation may not take place in the same year and therefore, there is a possibility of loss of

benefit to the assessee who acquires the New Asset in one year and the installation thereof

takes place in the another year.

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The benefit of deduction should be allowed with reference to the acquisition and

installation of the New Asset during the period from 1st April, 2014 to 31st March, 2017 and

deduction should be allowed every year with reference to the actual cost of the New Asset

installed during the year up to financial year 2016-17.

7. Investment linked deductions – Sec. 35AD (7B)

Sec. 35AD provides for deduction in respect of any capital expenditure (with some exceptions)

incurred for the purposes of any specified business. Further, Sec. 28(vii) taxes any sum received

on account of demolition, destruction, discarding or transfer of such asset, the entire cost of

which was allowed as a deduction under Sec. 35AD. One of the changes made by the Finance

(No. 2) Act, 2014 in the provisions of Sec. 35AD is the insertion of sub-section (7B) which

effectively provides for taxing the benefit earlier granted under Sec. 35AD (to be determined in a

specified manner) if the relevant asset is used for a purpose other than for the specified business

during the specified period of eight years, otherwise than by way of a mode referred to in Sec.

28(vii).

Suggestions

(i) In the above provision, a reference of ‘otherwise than by way of mode referred to in Sec.

28(vii)’, may create some difficulty as Sec. 28(vii) refers to demolition, transfer etc. and

does not necessarily deal with the use of asset. This requires an appropriate change in the

language.

(ii) In cases where benefit of deduction granted under Sec. 35AD is taxed by invoking

provisions contained in Sec. 35AD (7B), appropriate consequential amendment should be

made to Sec. 43(1) to give consequential effect to allow depreciation on such asset in

subsequent years. For this, appropriate amendment should also be made in Sec. 43(6) to

treat such asset as part of relevant block of assets.

8. Disallowance for non-deduction of TDS – Sec. 40(a)(ia)

The provisions of Sec. 40(a)(ia), as amended by the Finance (No. 2) Act, 2014, provide for a

disallowance of 30% of the expenditure of specified expenses payable to residents in case of

default in TDS obligation in relation to such expenditure. The scope of the expenditure covered

in this section has also been substantially widened.

Suggestions

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(i) Large number of consequences for non-compliance of TDS provisions are provided under the

Act such as the recovery of the amount of tax, levy of mandatory interest, levy of penalty,

and launching of prosecution in certain cases. In addition to this, this provision was

introduced for disallowing the expenditure itself in the hands of the payer.

First of all, it should be recognised that the collection of tax is primarily the responsibility of

the Government and the tax deductors under the TDS provisions are acting as agents of the

Government without any consideration because of a mandate of the law. In this context, it is

totally unfair and unjust to punish them in this manner for the free-of-charge work done for

the Government.

The continuance of this provision itself is highly objectionable and therefore, provision for

such disallowance introduced by the earlier Government itself should be deleted. In any

case, the scope of the expenditure covered under this provision should not have been

changed and hence the original position should be restored.

(ii) If, Sec. 40(a)(ia) is to be continued in the original form or modified form, the amendment is

creating genuine hardship in the transition period. Since disallowance is now restricted to

only 30% of the expenditure, in the transition period, there could be difficulty in cases where

the disallowance of full expenditure is already made in an earlier year and in the subsequent

year (from AY 2015- 16), when the deduction of only 30% expenditure will be allowed on

account of deduction and payment of the amount of TDS. The manner in which the

amendment is made in this respect, in such cases, from AY 2015-16 the assessee may get

only 30% of the expenditure as deduction in respect of expenditure which was fully

disallowed under Sec. 40(a)(ia) in the prior assessment years.

In view of the above, the appropriate provision should be made for the transition period

to avoid the hardship which may be caused to the assessees.

9. Year of deductibility of Legitimate Business Expenditure - Reduce avoidable litigation

Under the Act, each assessment year is treated as an independent year. Therefore, in many

cases, dispute arises as to the year of deduction of genuine business expenditure incurred. The

assessees continue to contest and litigate such issues so that the claim of legitimate deduction

of business expenditure is not lost altogether as time for filing revised return or taking any other

remedial actions to get the deduction in the year to which such expenditure pertains as per the

department's view has expired. This happens in a case where, at a later stage, the appellate

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authority/courts take a view that the expenditure in question is deductible in any other year.

This is one of the main causes of litigation on such issues.

In view of the above, appropriate provision should be made in Sec. 155 of the Act to provide

that if the Assessing Officer takes a view that the claim of deductible expenditure made by the

assessee in one year relates to any other year, then, the Assessing Officer should recompute

the total income of that other year allowing deduction of such expenditure within one month

from the date of passing the order for the assessment year in which the deduction is claimed

by the assessee and which has been disallowed. In such cases, the AO should raise the

demand, if any, only for the differential amount. If such a provision is made, the litigation on

such issues can be avoided.

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Chapter 6 - MINIMUM ALTERNATE TAX (MAT) – SEC. 115JB

1. Effect of brought-forward losses and unabsorbed depreciation

The objective of Legislature of introducing MAT was to bring "Zero tax companies" in the tax net.

These companies were declaring dividends to shareholders, but were not paying any tax. The

provision was introduced to make such companies pay a minimum tax on their book profits.

However, clause (iii) of the Explanation 1 in sub-section (2) of Sec. 115JB of the Act provides that

"book profit" for the purposes of the said section should be reduced by the amount of loss

brought forward or unabsorbed depreciation, whichever is less as per books of account. For this

purpose, it is further provided that the loss shall not include depreciation and deduction of such

loss from "book profit" will not be allowed if the amount of brought forward loss or unabsorbed

depreciation is nil.

As a result of the above, companies which have higher unabsorbed book depreciation of past

years and lower past years` unabsorbed book losses can only set off the lower amount of book

losses against the net profit of the year for computing "book profit" for the purposes of the

aforesaid section. Similarly, certain companies may have higher unabsorbed book losses but

lower unabsorbed book depreciation for past years, in which event, they can only set off the

lower amount of unabsorbed depreciation for the purpose of the aforesaid section. The

situation will be worse if the Company does not have either amount of such business loss or

unabsorbed depreciation because in such a case, it will not get any deduction. Thus, the above

provision is highly unjustified and puts unnecessary tax burden on companies, since companies

which have actually incurred book losses (including book depreciation) are not in a position to

entirely set off their past book losses, but are subjected to MAT on "book profit" computed in an

artificial manner.

The objective of levying MAT was to tax the book profits of companies without giving them any

benefit in respect of various deductions and special allowances available to them under the

normal provisions of the Act. It was never the intention of the Legislature to tax companies

when they had unabsorbed book losses (including book depreciation).

Accordingly, the above mentioned clause (iii) to the Explanation 1 to Sec. 115JB(2) of the Act

should be amended so that companies are in a position to set off full amount of unabsorbed

book losses (including book depreciation) incurred by them and are subjected to MAT only on

"real" book profits.

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2. Effect of provision for doubtful debts

The MAT was introduced on the statute only with a view to require profitable companies to pay

MAT as they used to distribute dividend to the shareholders but were not paying any income-tax

on account of various incentives available under the Act. MAT is based on the book profit, which

generally should be in line with the commercial profits. While determining such book profit,

Provisions for Bad and Doubtful Debts (PBDD) is required to be deducted because the object is

to arrive at the commercial profits. In fact without such a provision, the profit can never be

regarded as true and fair, which is the requirement of the Companies Act. Such provisions are

essential in view of the mandatory Accounting Standards. In this background, the Supreme Court

has rightly held that such PBDD is a permissible deduction in determining the book profits

[though otherwise, the same is not deductible for computing to taxable income] on the ground

that the same is the provision for diminution in the value of any asset.

Instead of accepting the above commercially and statutorily justifiable position, The Finance (No.

2) Act, 2009 provided (with retrospective effect from 1st April, 1998) that any provision for

diminution in the value of any asset will not be a permissible deduction in computing the Book

Profit. This is unjustified as for the purpose of MAT, the base is not the total income, but the

book profit, which is essentially the commercial profit.

In view of the above, it is suggested that the above provision should be deleted as the same is

unjust. Merely because the apex court has justifiably confirmed the stand of the assessees, it

is not correct to amend the statute to reverse the situation.

3. Rate of tax on MAT

Apart from the above, 18.5% rate of MAT is too high. It started with the rate of 7.5%. Therefore,

this rate should be reduced to 10%.

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Chapter 7 - DIVIDEND DISTRIBUTION TAX [DDT] - SEC. 115-O

1. Effect of DDT in case of Non-Resident shareholders

A domestic company, at the time of declaration, distribution or payment of dividend is required

to pay tax on distributed profit which is popularly known as DDT irrespective of status of the

shareholder (i.e. whether resident or non-resident). Such dividend in the hands of the

shareholder is exempt under Sec. 10(34) as the tax thereon has already been paid by the

company by way of DDT. Therefore, effectively, the tax payable by the shareholder is directly

collected from the company on such dividend, but the tax is borne by the shareholder.

It is also provided that no deduction under any other provision of the Act shall be allowed to the

company or the shareholder in respect of the amount of dividend or DDT thereon.

In view of the above, in case of a non-resident shareholder, anomalous situation arises in most

cases. Because, generally such dividend received by the non-resident shareholder is taxable in

his country of residence where, in most cases, he is entitled to credit for the taxes paid in the

other country (in this case, India) on such dividend to avoid double taxation of the same income

into different countries in the hands of the same shareholder. This is on account of either the

Double Tax Avoidance Agreement (DTAA) entered into between the two countries or under the

domestic law of the country of residence.

However, in India, tax is not charged on the dividend income in the hands of the shareholder,

but the same is collected from the company by way of DDT. Therefore, the shareholder directly

does not pay any tax on such dividend income in India. In view of this, in most cases, non-

resident shareholder finds it difficult to get the credit of the income-tax paid by way of DDT

which is technically levied on the company. In view of this situation, benefit of the tax credit

which should generally go to the non-resident shareholder [who is investor in India] indirectly

goes to his country since he has to pay tax on such dividend income in his country without

getting any credit in respect of the DDT.

In view of the above, it is suggested that appropriate provision should be made in Sec. 115-O

to provide that DDT paid in respect of non-resident shareholder is deemed to be income-tax

paid by shareholder on relevant income and necessary mechanism should also be provided to

grant appropriate certificate to such shareholder in respect of DDT treated as income-tax paid

in India by him, on such dividend income.

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2. Dividend Distribution Tax – Secs. 115-O and 115R

Company distributing dividend to its shareholders has to pay DDT @ 15% plus applicable

surcharge and cess under Sec. 115-O. Similarly, mutual funds distributing income (unit’s income)

to unit holders of any scheme, other than an equity oriented scheme, have to pay DDT @ 25%

(for individuals and HUF) and 30% (for others) under Sec. 115R plus applicable surcharge and

cess. The Finance (No. 2) Act, 2014 has amended both these sections. As a result of the

amendment the amount on which DDT is to be paid has been modified. The amended provision

requires to gross-up the amount on which DDT is to be paid. In real terms, this increases the

base rate.

Suggestions

(i) With the above amendment, effectively the base rate of DDT provided in both the sections is

increased. Therefore, if at all it is necessary to increase the tax for higher revenue collection,

it is advisable to increase the base rate rather than complicating the method of

computation of the amount on which the DDT is to be paid.

(ii) In case of individual/ HUF unit holders the base rate is effectively getting increased from

25% to 33.33% plus applicable surcharge and cess. As against this, the normal maximum

marginal rate is 30% plus applicable surcharge & cess. As mentioned in para (Refer para 6

of the subsequent Chapter 8 – Capital Gains) dealing with the holding period and the rate

of tax on capital gains relating to units, the investments are made generally by the

individuals / HUFs in debt funds after retirement of the individual to avoid financial risk.

Such individuals / HUFs are generally taxable in the first slab (10%) or in the second slab

(20%) of the taxable income and many of them may not have even taxable income. Even

such unit holders will be indirectly paying tax at the effective rate of 33.33% plus

applicable surcharge and cess. This is unjust and very harsh to such middle class people.

It is therefore suggested that the section should exclude the cases of unit holders who are

individuals/ HUFs in such debt schemes. Alternatively, section should be confined only to

the units of money market mutual fund or a liquid fund and should not to be made

applicable to other debt funds.

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Chapter 8 - CAPITAL GAINS

1. Withdrawal of Exemption – Sec. 47A

Sec. 47(iv) and Sec. 47(v) provide for exemption of transfer of capital assets by a holding

company to its wholly owned subsidiary and by a wholly owned subsidiary to its holding

company. Sec. 47A(1) provides for withdrawal of such exemption with retrospective effect in the

year of transfer, if the subsidiary ceases to be a wholly owned subsidiary or if the transferred

capital asset is converted into stock-in-trade within a period of 8 years from the date of transfer.

Various other Secs. , such as Sec. 47A (2) & (3), Sec. 54(1)(ii), Sec. 54EC (2), Sec. 54F (2), etc., also

provide for withdrawal of exemption if certain conditions are not adhered to for a specified

period. However, these sections tax the capital gains, which was earlier exempted, only in the

previous year in which the condition is violated, and not in the year in which the exemption was

granted. Sec. 47A(1) is the only section under which such withdrawal of exemption is in the year

in which exemption was earlier granted.

This results in genuine difficulty, as in most such cases, the forfeiture of exemption is on account

of changed circumstances necessitating such an action. It is therefore suggested that even in

such cases, the capital gain exempted earlier should be taxed in the year of violation of the

condition, and not in the year in which the exemption was granted. This would also result in

uniform treatment of withdrawal of exemption under all sections dealing with exemption of

capital gains.

2. Secs. 47(x) & (xa) and 49(2A) - Capital Gain on Conversion of Foreign Currency Exchangeable

Bonds (FCEB) and other Bonds & Debentures

Sec. 47 (xa) read with Sec. 49(2A) effectively provide that on conversion of FCEB in to shares of

any company will not give rise to capital gain and for the purpose of computing capital gain

arising on sale of such shares at subsequent stage, cost of acquisition shall be taken as the

relevant part of cost of FCEB. Though the cost of the shares is required to be taken as cost of the

bonds, there is no provision for taking holding period of the shares from the day of acquisition of

the Bonds [FCEB]. Similar difficulty exists in case of conversion of debentures and other bonds in

to shares for which also similar provision exists in Sec. 47(x).

It is suggested that appropriate amendment should be made in Sec. 2(42A) to provide that

holding period of such shares should be taken from the date of acquisition of FCEB/debentures

/ other bonds and not from the date of allotment of shares.

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3. Assets acquired prior to 1st April, 1981 – Cost of acquisition – Sec. 55(2)(b)

For the purpose of computing capital gains in case of transfer of capital asset acquired prior to

1st April, 1981, the assessee has been given an option to substitute cost of acquisition by a fair

market value as on 1st April, 1981. This date of 1st April, 1981 was substituted in the place of 1st

January, 1964 by the Finance Act, 1986 w.e.f. 1st April, 1987.

It should be appreciated that the prices of capital assets, especially the immovable properties,

have increased manifold in last two decades on account of inflation and this date of 1st April,

1981 has remain unchanged since 1987. This is unfair and unjust. In the Direct Tax Code Bill,

2010, for this purpose, 1st January, 2000 was proposed.

It is suggested that the date for substitution of cost of acquisition by the fair market value

should be changed from 1st April, 1981 to 1st April, 2000.

4. Conversion of Private Limited Company into LLP or from Firm / Proprietary Concern into

Company – Secs. 47(xiiib), 47(xiii) / 47(Xiv)

4.1 Sec. 47 dealing with transactions not regarded as transfer, clause (xiiib) provides that

transfer of capital asset or intangible asset by a private or unlisted public company to an LLP

or any transfer of shares held in such company by a shareholder as a result of conversion of

such company into an LLP pursuant to Secs. 56 and 57 of the Limited Liability Partnership

Act, 2008, is not regarded as transfer, subject to fulfilment of the conditions mentioned

therein. Sub-clause (e) of the proviso to clause (xiiib) of Sec. 47 provides that the total sales,

turnover or gross receipts in the business of the company in any of the three previous years

preceding the previous year in which the conversion takes place do not exceed sixty lakh

rupees. Practically, the benefit of this clause [Sec. 47(xiiib)] is therefore not available since

there are hardly any companies with such low turnover. This clause was introduced to

ensure that it works as an incentive to convert the companies into LLPs. Further, the

Companies Act, 2013 has imposed various compliance requirements and restrictions on

private limited companies (which restrictions were not there under the erstwhile Companies

Act, 1956). Private limited companies and unlisted companies find it burdensome to comply

with them.

It is therefore suggested it would be in the fitness of things that the limit of sixty lakh

rupees mentioned in sub-clause (e) of the proviso to Sec. 47(xiiib) be deleted. This will

leave entrepreneurs with the choice of doing business in LLP form of entity which has

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become available only recently. It will ensure that the provisions are useful to assessees at

large and the intention viz. tax neutrality on conversion of companies into LLP will be

achieved.

4.2 Sec. 47 contains provisions in respect of transactions not regarded as ‘transfer’ for the

purposes of capital gains. Sec. 47(xiii) provides that any transfer of a capital asset or

intangible asset by a firm to a company as a result of succession of the firm by a company in

the business carried on by the firm, would be an exempt transfer subject to condition that

the aggregate of the shareholding in the company of the partners of the firm is not less than

fifty per cent of the total voting power in the company and their shareholding continues to

be as such for a period of five years from the date of the succession.

A similar condition regarding period of five years is provided in Sec. 47(xiiib) and Sec. 47(xiv).

It is submitted that in today’s fast changing business environment, no useful purpose is

being served by keeping a long period of five years for continuing shareholding.

It is, therefore, strongly suggested that the period for continuing profit sharing ratio /

shareholding should be reduced to 3 years from 5 years presently specified. This would

help the reorganisation / restructuring of small and medium enterprises without fear of

losing the exemption.

5. Conversion of Partnership Firm to LLP

In the Memorandum explaining the Finance (No. 2) Bill, 2009, it is stated that the conversion

from a general Partnership Firm to an LLP will have no tax implications if, rights and obligations

of the partners remain the same after conversion etc. However, there is no specific provision

made to that effect.

It is suggested that a specific clarificatory provision should be made for conversion of general

partnership firm to LLP to clarify that the same will have no tax implications. This should be on

the lines of the present provisions dealing with the conversion of partnership or proprietary

concern into limited company contained in Secs. 47 (xiii)/ (xiv) of the Act. This would avoid

possibility of any litigation on such conversion and its tax implications.

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6. Holding period (Short-term/ Long-term) of capital asset and rate of tax on capital gains – Secs.

2(42A) and 112

The Finance (No. 2) Act, 2014 has, for treating unlisted shares of companies and units as long-

term capital asset, increased the holding period from more than twelve months to more than

thirty-six months. This amendment applies to all transactions where the unlisted shares or units

of Mutual funds are transferred after 10.7.14.

Suggestions

(i) The above amendment will affect the current holdings of the taxpayers and as such, have a

retrospective effect which is contrary to the statement of the Finance Minister in his budget

speech of 2014, wherein (para 10) he has categorically stated that ‘this Government will not

ordinarily bring out any change retrospectively which creates a fresh liability’.

In view of the above, it is suggested that the amendment should be applied only to the

investments made in such assets on or after 10th July, 2014.

(ii) The above amendment covers every type of unit (other than units of equity oriented fund

and units of UTI). At the same time, with the amendment in Sec. 112, rate of tax on long-

term capital gain on transfer of all the units (without any exception) has also been effectively

increased from 10% to 20%, subject to applicable exemption under Sec. 10(38).

It should be appreciated that the investments in such units are generally made by the

retired senior citizens and they make such investments in the units of the debt fund only

with a view to avoid risk which is inherent in making investments in an equity oriented

scheme. The number of such retail investors is very high as compared to high net worth

investors. Therefore, it is inappropriate to give such treatment in terms of holding period as

well as higher rate of tax to investments in such units.

As such, it is suggested that in respect of such units, the earlier position should be

restored. In any case, the amended provisions should not be made applicable to

individuals and HUFs. Alternatively, if at all the change made has to continue, then the

same should be confined to investment in units of money market mutual fund or a liquid

fund referred to in Sec. 115R(2).

(iii) Apart from the above, the term ‘unit’ – now remains undefined in both the provisions. The

term ‘Unit’ should be defined.

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7. Capital gains exemption for investments in residential house – Secs. 54 and 54F

The Finance (No. 2) Act, 2014 has amended the provisions of Secs. 54 and 54F to provide that

the benefit of exemption under Secs. 54 / 54F is available in respect of purchase/ construction

of one residential house.

Suggestions

(i) Many a times, the joint family residing under one roof in one large residential house gets

divided. In such cases, it becomes necessary to sell such large residential house, which is

generally owned by one senior member of the family (such as father/ mother) and to

purchase more than one residential house for the benefit of the divided members (generally

children). This is the current social need. When properties go for redevelopment, the flats

that are constructed are smaller and the consideration is often in form of more than one flat

in the new building. In such cases, it will be difficult to satisfy such essential social need of

the family by purchasing more than one residential house (New Asset) and to claim the

exemption under Sec. 54. Smaller flats also makes more housing stock available.

Therefore, it is suggested that the benefit of exemption under Sec. 54 should not be

denied if the investment is in more than one house.

(ii) Similar provisions should be made in respect of amendment in Sec. 54F also.

8. Treatment of forfeited advance relating to capital asset – Secs. 51, 56(2)(ix) and 2(24)(xvii)

Sec. 51, prior to its amendment by the Finance (No. 2) Act, 2014, effectively provided that where

a capital asset was on previous occasion subject of negotiation for its transfer, any advance or

other money received or retained by the tax payer in respect of such negotiation (forfeited

amount) shall be deducted from the cost etc. of such asset. As a result of the amendment

carried out to Sec. 51 by the Finance (No. 2) Act, 2014, such forfeited amount is treated as other

income (instead of reducing from the cost under Sec. 51) of the assessee.

Suggestions

(i) As a result of the amendment carried out by the Finance (No. 2) Act, 2014, the receipt of

capital nature is now taxed as Revenue Income. In principle, this is incorrect. This should be

taxed as capital gains.

(ii) Apart from the above:

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a) In a given case, it is possible that there could be a litigation on the amount forfeited by

the assessee and if it is taxed under Sec. 56(2)(ix) in one year and subsequently, if the

assessee is required to refund the forfeited amount, there is no provision in the Act to

carry out appropriate rectification of the year in which the amount is taxed under Sec.

56(2).

b) Further, if as a result of the litigation or otherwise, the assessee is required to transfer

the asset to the same person whose advance etc. is forfeited, then, in such an event, it

would be necessary to make appropriate adjustment in determining the amount of

consideration for computing capital gain in respect of the amount already taxed under

Sec. 56(2)(ix). For this necessary provision needs to be made.

Therefore, it is suggested that the appropriate provision in this respect should be made in

Sec. 155.

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Chapter 9 - LOSSES

1. Return of Losses – Scaling down with respect to delay in months

1.1 According to Sec. 80 read with Sec. 139(3), if the return of income is not filed before the due

date, then the benefit of carry forward of losses is not allowed. This is a very harsh provision

as there could be various genuine circumstances like strike, lockout, death or reasons

beyond the control of the assessee due to which he may not be able to file the return of

income in time. At times, delay may be of few days. Therefore, it is suggested that though

there may be some provision of penal nature which will discourage the belated filing of

return of income, at the same time the same should not totally disentitle the deserving

assessees from carry forward of losses.

1.2 It is suggested that in case of such delay, 5% of loss for every month of delay in filing

return of income should be reduced from the loss assessed and remainder loss should be

allowed to be carried forward. This would be a sufficient penal charge for delay in filing

the loss returns.

2. Set off of brought forward business loss - Secs. 72 & 50

At present, under the provisions of Sec. 72 of the Act, brought forward business loss of earlier

years can be set off against profits and gains of business or profession carried on by an assessee

in subsequent assessment years upto 8 years. Where the capital asset forming part of a block of

assets in respect of which depreciation has been allowed is sold and there is any surplus (either

because the block of assets ceases to exist or because the consideration received exceeds the

value of block), such surplus is at present regarded as "short-term capital gain". Such a gain is

effectively a business profit but the same fictionally gets taxed under the head `Capital Gains’. It

is suggested that the brought forward business loss should be allowed to be set off against

such short-term capital gain chargeable to tax under Sec. 50 in subsequent assessment years.

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Chapter 10 - DEDUCTIONS

1. Failure to make claim for certain Deductions in the Return of Income - Sec. 80A (5)

Certain deductions in respect of income are provided from time to time under the Act to achieve

various economic and social objectives. Considering the level of awareness and literacy in the

country, many taxpayers, who are otherwise eligible for such deductions, may not be aware of

the same. With a view to grant justice to such assessees, a Circular was issued by the CBDT way

back in 1955 (Circular No. 14 dated 11th April, 1955), which clearly brought out that the officers

of the department must not take advantage of ignorance of the assessees as to their rights. It is

the duty of the officers to assist the taxpayers in every reasonable way, particularly in the matter

of claiming and securing relief and in this regard the officers should take initiative in guiding the

taxpayers where proceedings or other particulars before them indicate that some refund or

relief is due to the assessees. This attitude would, in the long run, benefit the Department, for it

would inspire confidence in him that he may be sure of getting square deal from the department

and therefore, the officer should draw attention of the assessee to any refund or relief to which

the assessee is clearly entitled, but he may have omitted to claim the same for some reason or

the other.

In spite of the above settled position, in many cases, some of the officers have not yet allowed

such deductions to the assessees which have resulted into litigation.

Unfortunately, instead of reiterating the dictate of the circular and to provide fair deal to the

taxpayers, for the first time, the Finance (No. 2) Act, 2009 introduced Sec. 80A(5) to provide that

the deductions under Secs. 10A / 10AA / 10B / 10BA or under provisions of Chapter VIA relating

to certain income shall not be allowed if, the assessee fails to make the claim in that respect in

his return of income. This is the unfortunate and unjustified provision. Again, most shockingly,

the same was introduced with retrospective effect from 1.4.2003.

In view of the above, it is suggested that under no circumstances, the above provision should

continue and the same should be omitted.

2. Deduction in respect of Health Insurance Premia (Mediclaim) – Sec. 80D

Currently, the limit for deduction of health insurance premium is Rs. 15,000 and in case of senior

citizen the same is Rs. 20,000. It should be appreciated that the cost of medical treatment in

India has substantially gone up in the recent past. Therefore, need for health insurance cover for

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higher amount has also become necessity for a common man. Even the Hon. Prime Minister has

recognised this ground reality in his various public discourses.

It is suggested that the limit for the amount of such deduction should be substantially

increased to say, Rs. 75,000 in all cases and Rs. 1 lakh in case of senior citizen.

3. Deduction of Tuition Fees for children – Sec. 80C (1)(xvii)

For the purpose of achieving the object of nation development, the current Government has

justifiably laid substantial emphasis on education with skill development. Therefore, there is an

urgent need to encourage and facilitate people to educate their children and create the required

workforce for the development of the nation. At the same time, the cost of education in India

has also gone up substantially.

Currently, a deduction of tuition fees for full time education of two children is eligible for

deduction under Sec. 80C. This is covered within the overall limit of deduction under Sec. 80C of

Rs. 1,50,000.

It is suggested that the deduction in respect of payment of such tuition fees for the education

of two children should be separately provided with a limit of reasonable amount say, Rs. 1

lakh. It is also suggested that the tuition fees paid need not necessarily be for the full time

education of the children and the amount paid for part-time education for the children should

also qualify for deduction.

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Chapter 11 - METHOD OF ACCOUNTING

1. Inclusion of taxes etc. in value of inventory – Sec. 145A(a)

This section effectively provides that while valuing inventory, the amount of any tax, duty, cess

or fees paid or liability incurred for the same shall be included therein. This provision has

resulted into substantial litigation without serving any useful purpose.

This provision actually affects only the income of the initial year, since thereafter value of the

closing stock of each year should become the opening stock of the subsequent year.

The Supreme Court has, in the case of Dai Ichi Karkaria Ltd. approved the Guidance Note on

Accounting for MODVAT issued by The Institute of Chartered Accountants of India.

There is no justification for continuing this provision and it is therefore suggested that Sec.

145A(a) should be deleted.

2. Income Computation and Disclosure Standards (IT-AS) – Sec. 145

Currently, the Central Government has notified two Accounting Standards which effectively deal

with certain disclosures to be made and principles to be followed. These standards effectively do

not have any bearing on the computation of total income. Even Sec. 145 deals with the method

of accounting. The amendment made by the Finance (No. 2) Act, 2014 to the provisions of Sec.

145 authorise the Central Government to notify Income Computation and Disclosure Standards

(IT-AS) effectively for computing the income under the heads ‘Profits and gains of business or

profession’ and ‘Income from other sources’. The Explanatory Memorandum to the Finance (No.

2) Bill, 2014 also clarifies that such IT-AS are not meant for maintenance of books of account but

are to be followed for computation of total income.

The basic principle of income-tax is to tax the real income and commercial profit of the

assessee subject to certain specific allowances / disallowances. The accounts of the assessee

are maintained on the basis of the Accounting Standards prescribed under the Companies Act

and / or issued by The Institute of Chartered Accountants of India (ICAI), a statutory body

established under the Act of the Parliament to regulate the accounting profession. Therefore,

the profit disclosed in the books of account maintained by the assessee adopting such

Accounting Standards reflects the true commercial profit earned by the assessee. Generally,

that should be accepted as income for the purpose of the Act, subject to certain necessary

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allowances and disallowances. It would be totally unjust, unfair and very onerous to impose

another set of standards (i.e. IT-AS) on the assessees for the purpose of computation of total

income. These draft IT-AS in fact change the above basic principles and affect the

computation of total income of assessees. Although it is stated that such IT-AS are not

meant for maintenance of books of account, if one peruses the draft IT-AS released by the

Revenue Department, it becomes clear that effectively such IT-AS will have a direct bearing

on the maintenance of books of account. As such, with these IT-AS, effectively the assessee

would be required to keep and maintain another set of books of account to comply with the

requirement of IT-AS.

Suggestion

In view of the above, the amendment made by the Finance (No. 2) Act, 2014 to Sec. 145 is

highly objectionable and should be reversed. In the event that the amendment made is not

reversed, the implementation thereof will create onerous burden on the assessees for

compliance and will increase the paper work manifold without any substantial advantage to the

Revenue in the long term. We already have the classic example of bad and highly litigative

experience of introduction of Sec. 145A by the Finance (No. 2) Act, 1998 and we have still not

been able to come out of the difficult situations it has unnecessarily created for a large number

of assessees in terms of avoidable litigation without any corresponding benefit to the Revenue in

the longer term. This factual position also, by now, is informally recognised by many officials at

higher level in the Revenue Department.

The above provision is clearly against the declared policy of the new Government of minimum

government and maximum governance.

Therefore, it is suggested that the above amendment should be reversed and the pre-

amendment position with regard to Sec. 145 should continue. In fact, the pre-amendment Sec.

145(2), introduced by the Finance Act, 1995, should also be deleted to put an end to such an

unrealistic approach.

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Chapter 12 - CLUBBING OF MINOR’S INCOME

1. Case for enhancement of exemption limit for income clubbed in the hands of the Parent

Sec. 10(32) grants, from 1st April, 1993, an exemption of clubbed income to the extent of Rs.

1,500 per child. This is too meagre and an upward revision upto Rs. 25,000 per child is overdue.

This exemption could be limited to two children.

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Chapter 13 - INTEREST UNDER INCOME-TAX ACT

1. Rationalisation of interest payable on refund under Sec. 244(1A)

1.1 The interest payable by the assessee under Secs. 234A, 234B or 234C for delay in filing the

return of income or for shortfall in payment of advance tax or for deferment of advance tax

is 12% p.a. (i.e. 1% per month or part thereof) and it is also not considered as deductible

expenditure while computing total income. However, where a refund of any amount

becomes due to the assessee under the Act, then interest thereon is paid only @ 6% p.a. (i.e.

0.5% per month). In cases where refunds are granted with interest under Sec. 244A, such

interest is taxable. Further, such interest is not paid if refund is less than 10% of tax

determined under Sec. 143(1) as also on regular assessment.

1.2 It is suggested that interest payable to assessee on refund should at least be on par with

interest payable by the assessee i.e. it should be increased to 12% p.a.

1.3 Alternatively, such interest should not be subject to tax as interest paid by the assessee is

also not deductible. This will boost payment of advance tax to the Govt. Treasury.

2. Interest – Sec. 234C – no interest for small delays

Presently, if there is any delay or deferment in payment of advance tax, interest is charged at the

rate of one percent for three months in respect of advance tax instalments paid up to 15th of

March. Thus, in case of delay of even one day interest is charged for three months. This is harsh

on assesses on one hand and on the other, it discourages an assessee to pay the advance tax

immediately if for any reason he misses the due date for the payment of advance tax. Similarly,

interest is charged at the rate of one percent for one month in respect shortfall for the period

beyond 15th March although maximum period of delay or deferment in this case is 15 days.

It suggested that for any delay or deferment in the payment of advance tax, interest be

charged at the rate of one percent on monthly basis (as against for three months) respect of

advance tax instalments up to 15th of March and for the period beyond 15th March interest be

charged only for half a month at rate of one percent.

3. The levy of interest under Sec. 234A should not continue after payment of tax

Under Sec. 234A, assessee is liable to pay interest for delay in furnishing Return of Income. Many

a times, for various genuine reasons, the assessee finds it difficult to compile necessary

particulars for preparing and furnishing Return of Income. This results into delay in furnishing

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Return of Income. Such delay also takes place on account of other situations such as strike, lock

out, death in the family etc. In such cases, many a times, the assessee prefers to pay self-

assessment tax on estimated basis which can be adjusted against the tax liability worked out at

the time of furnishing belated Return of Income.

Under Sec. 234A, the interest is technically computed upto the date of furnishing Return of

Income without granting any credit for the self-assessment tax paid by the assessee before

furnishing the Return of Income. Based on judgment of the Supreme Court in the case of Pranoy

Roy [2009] 179 Taxman 53 (SC), in such cases, the interest for the delay in furnishing Return of

Income should be computed after granting credit for self-assessment tax already paid by the

assessee. However, the provisions of Sec. 234A have still not been amended on this line.

It should be appreciated that the interest is compensatory in nature and therefore, once the

assessee has paid the amount of tax, no interest should be charged to the extent the amount is

paid by the assessee. This will also encourage assessees to pay self-assessment tax on an

estimated basis in cases where it is not feasible to furnish Return of Income in time.

It is suggested that appropriate amendment should be made in Sec. 234A to provide for the

above situation.

4. Cap on interest under the Act

Under the Act, an assessee is liable to pay interest for shortfall in payment of advance tax. The

interest liability is computed based on assessed tax. At the time of assessment, the Assessing

Officer may make an addition to the returned income resulting in difference between the

returned income and the assessed income. Such additions to the total income are disputed

additions and agitated by the assessee. There are instances of assessees succeeding in the first/

second appeal and losing before the Courts. Finally, if the assessee does not succeed before the

Courts, the interest burden becomes heavy. At times, it is more than the amount of addition or

income earned by the assessee. Therefore, in such cases, it is suggested that the law should

provide for a cap on the amount of interest payable by the assessee which should not exceed

the amount of 50% of the tax demand raised on assessment on the relevant issues.

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Chapter 14 - DEDUCTION OF TAX AT SOURCE

1. Tax deduction under Sec. 195 on payments to non-residents

Sec. 195 provides for deduction of tax at the time of credit to the account of the non-resident

payee or at the time of actual payment, whichever is earlier. This provision causes great

hardship as due to exchange rate differences, the amount credited and the amount actually paid

in most cases differ in rupee terms, though they are identical in terms of the foreign exchange

amount. This results in a shortfall of tax deducted, which is beyond a payer’s control.

We suggest that Sec. 195 be amended and tax should be required to be deducted only at the

time of making actual payment to a non-resident.

2. Higher TDS for non-quoting of Permanent Account Number (PAN) - Sec. 206AA

The Finance (No. 2) Act 2009 inserted Sec. 206AA w.e.f. from 1.4.2010. This section provides that

in the event of non-submission of PAN by the payee, tax shall be deducted at the higher of the

following rates, namely;

Rate specified in the relevant provisions of the Act;

Rate or rates in force;

@ 20%.

This provision does not recognise the practical difficulties of the deductor especially for

payments relating to non-residents. In many cases, one-time payments to non-residents are

negotiated on a net of tax basis. In other words, a non-resident in such cases receives the

payment net of withholding tax. The tax in this case is borne by the Indian deductors and the

same is grossed up. The payees are not keen to obtain PAN in such cases since these are one-

time transactions as also the fact that the tax is borne by the Indian payer.

It is worth noting that this provision adversely hits the Indian payer who is required to bear an

additional tax burden merely because of the fact that the non-resident payee has not furnished

PAN.

This requirement and the consequential higher rate would add to the cost of services and

procurement for Indian Industry.

It is suggested that:

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Sec. 206AA be withdrawn, for the non-resident payees.

Further, the rate be reduced to 10%, as 20% rate assumes a profit greater than 60%, which is

unreasonable assumption.

3. The applicability of requirement of tax deduction by non-residents while making payment to

residents

Under various provisions of Chapter XVII-B of the Act (such as Secs. 194A, 194C, 194H, 194J etc.)

tax is required to be deducted while making payment to residents. Therefore, if a non-resident

makes a payment to a resident outside India in respect of items covered under such provisions,

the issue arises as to whether such a non-resident is required to deduct tax while making such

payment to the resident if, such payment is otherwise covered by the provisions of such

sections. The issue becomes more critical in cases where the non-resident payer does not have

any tax presence in India. If he is required to deduct tax while making payment outside India to

residents, he will also be under an obligation to comply with the procedural requirement of

obtaining PAN, TAN, deposit of TDS with the Government of India, issue TDS certificate,

furnishing TDS returns etc. in India.

It seems that the Income-tax Department holds the view that in such cases, a non-resident payer

is required to comply with the requirement of TDS under the Act. The understanding of the

Revenue Department is reflected in the Circular No. 726 dt. 18.10.1995 under which an

exemption from deducting tax under Sec. 194J by a non-resident while making payment to

certain residents (lawyers, chartered accountants etc.) is granted as provided therein.

We understand that India is one of the very few countries where the Income-tax Department

expects non-residents to comply with Indian TDS provisions while making payment outside India

to Indian residents and also comply with the procedural requirement referred to hereinbefore.

When these provisions are brought to the notice of such non-residents, they are shocked and

are not prepared to meet with the requirement of Indian Revenue Departments. At times they

prefer not to avail any services from Indian residents when such expectations of Indian Income-

tax Department are brought to their notice. Such provisions have also created anxiety amongst

the overseas non-resident community. This appears to be an absurd expectation of the Income-

tax Department in India and therefore, a clarificatory amendment should be made in Chapter

XVII-B to specifically provide that non-residents while making payment outside India to Indian

residents are not expected to deduct tax under Chapter XVII-B of the Act.

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Chapter 15 - PROVISIONS RELATING TO AMALGAMATION, DEMERGER ETC.

1. Definition of Demerger – Sec. 2(19AA)

1.1 The definition of “demerger” is unduly restrictive, and subject to various conditions. In

practice, many of the demergers fall outside the purview of the definition, and therefore, do

not get the intended benefit of tax neutralisation. To illustrate:

(i) The first condition is that all the property of the undertaking should become the

property of the Resulting Company. In practice, in many cases, certain assets are not

capable of being transferred, either statutorily (e.g. tenancy under the Maharashtra

Rent Control Act) or contractually (there may be contractual prohibition on transfer of

certain assets such as patents, technical knowhow, etc.), and hence, such assets cannot

be transferred to the Resulting Company by the Demerged Company.

(ii) Similarly, a condition is laid down that all the liabilities relatable to the undertaking

immediately before the demerger should become the liabilities of the Resulting

Company. At times, it may not be possible to transfer certain liabilities. For example, a

creditor may not give his consent to transfer of liability due to him to the Resulting

Company.

(iii) Explanation 2 provides that not only identified liabilities should be transferred to the

Resulting Company, but also general borrowings in the ratio of assets transferred to the

total assets of the demerged company before demerger. In practice, this may lead to an

absurd situation, particularly in cases where the borrowings are not represented by

assets (e.g. borrowings to offset losses incurred).

(iv) Assets and liabilities have to be transferred at book values. In practice, in most cases, a

demerger does not take place at book value. Since, the assets in most cases have been

acquired many years before by the Demerged Company, such assets generally appear in

the accounts of the Demerged Company at a fraction of the real market value of such

assets. If the objective of demerger is to enter into joint venture or to offer shares to

other persons in a specified business, obviously, the shareholders of the Demerged

Company would not like to share the benefit of the capital appreciation of such assets

with the new shareholders of the Resulting Company, and hence, the demerger

generally takes place at the market value of the assets.

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Moreover, the borrowing against such assets may be much more than the book value of

such assets, because of the inherent market value of such assets. Therefore, if the

transfer is to take place at the book value of all the assets and liabilities of that

undertaking, it may result in the absurd situation where the Demerged Company may

have to pay the Resulting Company for takeover of the undertaking. This may not qualify

as a demerger, because obviously the Resulting Company cannot issue shares to the

shareholders of the Demerged Company in such a situation.

Generally, intangible assets would be reflected at nil value in the books of the Demerged

Company. It would be totally unjustified for such assets to be transferred at their book

value (nil), even though such assets, such as brand names, patents etc., may possess a

high commercial value.

Besides, where the transfer of assets is made at book value, there would be no question

of capital gains, except to the extent arising on account of difference between book

value of depreciable assets and their written down value as per tax records. Therefore,

exemption is really not required for demergers made at book value, but is required

mainly for demergers made at market value.

(v) The transfer of the undertaking is required to be on a going concern basis. Often a

demerger may be carried out of a closed unit, with the intention of reviving such a unit.

Such a demerger may not qualify as a demerger under the above provisions.

1.2 It would therefore be almost impossible for any demerger to serve any commercial purpose,

when it is required to fulfil all these conditions. It is therefore suggested that no conditions

should be laid down in order to qualify as a demerger, other than the conditions that it

should be a transfer of an undertaking or a major part of an undertaking for allotment of

shares of the Resulting Company to the shareholders of the Demerged company and that

the demerger should be treated as for genuine purposes once it is approved under the

relevant provisions of the Companies Act.

2. The effect of amalgamation / demerger on deduction under Sec. 80-IA - Sec. 80-IA(12A)

As per the provisions of Sec. 80-IA, 100% deduction for 10 years [Tax Holiday Period] in respect

of profits of certain undertakings or enterprises engaged in the business of infrastructure facility,

industrial park, power generation etc. is available as provided in the said provisions. In Sec. 80-

IA(12), it is further provided that when an undertaking or enterprise of an Indian company

entitled to deduction under this section is transferred during the Tax Holiday Period to another

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Indian company in a scheme of amalgamation or demerger, the provisions of Sec. 80-IA will

continue to apply to the amalgamated or the resulting company in respect of the profit of such

undertaking or enterprise for the residuary part of the Tax Holiday Period.

The Finance Act, 2007 introduced Sec. 80IA (12A) which provides that the provisions of above

referred Sec. 80-IA(12) shall not apply to any enterprise or undertaking which is transferred in a

scheme of amalgamation or demerger on or after 1/4/2007. This provision is a retrograde step

and is very unfortunate as instead of encouraging the merger and amalgamation or demerger by

making them tax neutral, the provision seeks to take away the available benefit which

discourages the genuine cases of required amalgamation and demerger.

It is suggested that Sec. 80IA (12A) should be omitted.

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Chapter 16 - SURVEY - SEC. 133A

1. Survey - Sec. 133A

1.1 Prior approval of Joint Commissioner or Joint Director etc. for conducting survey

The Finance Act, 2003 had amended Sec. 133A to provide some safeguard or control over

the indiscriminate power of an Assessing Officer. Accordingly, it has been provided that prior

approval the Joint Commissioner/Director will be required before taking any action under

Sec. 133A. There are no other checks and balances on exercise of this drastic power. The

requirement of the approval at this level has not achieved the desired objective.

Considering the nature of power and its serious effect on the assessee and the manner in

which the surveys are being conducted, it is strongly suggested that the power of granting

approval should be vested either with the Principal Chief Commissioner or the Chief

Commissioner particularly bearing in mind the fact that in many such cases even the Joint

Commissioner acts as an Assessing Officer.

1.2 Power of survey to Tax Recovery Officer [TRO]

The objective behind the provision of Sec. 133A is to make a surprise visit to the business

premises of the assessee and to find out the factual position with regard to cash on hand,

stock-in-trade and to inspect books of account and other documents. Accordingly, the action

of survey is nothing but the fact finding operation with regard to the business of the

assessee. This is only meant for making a correct assessment of total income of the assessee.

It has nothing to do with the recovery of tax. For recovery of tax, other sufficient powers are

available in the Act. In spite of this, power has been granted to the Tax Recovery Officer to

conduct survey under Sec. 133A which in our view, is not necessary and it only results into

further harassment to assessees. If for any reason this power is to be retained then, it is

necessary to provide for prior approval of the Chief Commissioner before exercising such

power.

1.3 It should also be appreciated that the perception of the community about the conduct of

the survey party during such action is not very encouraging. Therefore, such an approval

from the Chief Commissioner level is a necessity to check the abuse of these powers.

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Chapter 17 - TAXATION OF FIRM AND PARTNERS

1. Distribution of capital assets on dissolution of firm to partners - Sec. 45(4)

In the event of distribution of capital assets to partners on dissolution of a partnership firm, tax

on notional capital gain is levied on the firm by taking fair market value of such capital assets as

the consideration irrespective of causes or motives of dissolution. This, at times, result into

serious hardships e.g. if a firm is dissolved due to demise or insolvency of one of the partners of

the Firm, on a literal construction of Sec. 45(4), such Firm exposes itself to a very heavy tax

liability on a notional capital gain to be computed on the basis of fair market value of capital

assets which gets distributed amongst its partners and/or the heirs of the deceased Partners.

The firm with two partners exposes itself more to this risk.

In view of the above, it is suggested that the provisions of Sec. 45(4) should not be made

applicable in the event where a firm gets dissolved on account of the circumstances beyond

the control of the partners such as demise or insolvency of a partner or on account of

operation of statutory provisions of any other Law etc.

2. Distribution of Capital Assets to Partners - Removal of serious hardships - Sec. 45(4)

Neither Sec. 49 nor Sec. 55 of the Act provide that if the firm has paid Capital Gains tax on

distribution of capital assets on dissolution or otherwise, the cost in the hands of the concerned

partner will be the value at which the firm is deemed to have transferred the asset to the

partner. Therefore Secs. 49/55 should clarify that in such cases, cost to the partner will be the

value on the basis of which the firm has been assessed to capital gains.

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Chapter 18 - PROCEDURES

1. Revision of Belated Return under Sec. 139(5)

The Supreme Court in the case of Kumar Jagdish Chandra Sinha vs. CIT (1996) 220 ITR 67 has

held that a revised return cannot be filed under sub-section (5) of Sec. 139 in a case where

return is filed under Sec. 139(4). It may be noted that delay in filing original return could be for

genuine reasons or delay may be of few days. Therefore, even in cases of delay in furnishing

original return, assessee should be given an opportunity to rectify any error or omission in the

return of income. This only encourages voluntary compliance.

It is suggested that in Sec. 139(5), a reference to return filed under Sec. 139(4) should also be

made to enable revision of a belated return.

2. Limit of Rs. 1,00,000 mentioned in s. 149(1)(b) be increased suitably and a monetary limit be

introduced in Sec. 149(1)(a)

Sec. 149(1)(b) provides that no notice under Sec. 148 of the Act shall be issued for the relevant

assessment year if four years but not more than six years have elapsed from the end of the

relevant assessment year unless the income chargeable to tax escaping assessment amounts to

or is likely to amount to Rs One lakh or more for that year. This limit of Rs. One lakh was

substituted for Rs. 50,000 by the Finance Act, 2001. Considering the inflation and a long period

of fifteen years when the limit was last revised, it is suggested that the limit of Rs. One lakh be

increased to Rs. Five lakh.

Further Sec. 149(1)(a) does not provide for any monetary limit in respect of cases not covered by

clauses (b) and (c) of sub-section (1) of Sec. 149 of the Act. This causes undue hardship where

the income which is alleged to have escaped assessment, is a small amount. It also results in loss

of valuable time of the Assessing Officer without any corresponding tax revenue flowing to the

exchequer. It is suggested that a monetary limit of Rs. One lakh be prescribed in Sec. 149(1)(a).

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Chapter 19 - DEEMED DIVIDEND

1. Deemed Dividend – Sec. 2(22)(e)

1.1 Clause (22), of Sec. 2 defines the term “dividend”, and sub-clause (e) thereof includes, within

the meaning of this term, even an advance or loan, to a shareholder having at least a 10%

voting-power in a company in which the public are not substantially interested, to the extent

that the company possesses accumulated profits. Thus, a payment, which is clearly not a

dividend as commercially understood, is, by a fiction of law, deemed to be one.

1.2 Apart from payment to the shareholder himself, a loan or advance to a firm in which he is a

partner with a 20% share, or to an association or body of which he is a member and entitled

to 20% of its income, is also considered, to be deemed dividend, and is taxed accordingly.

1.3 The object clearly is to prevent tax-avoidance by making an advance or loan (which would

not be taxable), instead of distributing the amount as a dividend, which is subject to Income-

tax.

1.4 The provision suffers from many inequities:

a) It taxes a loan, though it may be quite a genuine one, which is duly repaid within its

scheduled short time. Moreover, there is no corresponding tax-relieving provision at

the time of recovery of the loan.

b) The tax is attracted, notwithstanding that the loan may be advanced at a fair

commercial rate of interest and notwithstanding that preponderant majority of

persons owning the concern which received the loan are not even shareholders of

the lending company.

At present, no tax is payable by the shareholder on dividend received from companies and

only the company pays Dividend Distribution Tax @ 15%. Therefore, levy of tax on deemed

dividend in the hands of shareholder at the normal rate is unjustifiable especially when all

other deemed dividends are also subjected to Dividend Distribution Tax.

In any case, if the loan is given at specified interest rate to be prescribed or when the

advance is given for genuine business purpose, the provision should not apply. Apart from

this, when actual dividend is distributed, appropriate adjustment should be permitted in

determining the liability to pay Dividend Distribution Tax under Sec. 115-O.

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Chapter 20 - TAXATION OF GIFTS ETC.

1. Gifts etc. in kind to be treated as income - Sec. 56(2)(vii)

1.1 Finance (No. 2) Bill, 2004 has sought to introduce such provision with regard to gift of any

sum received by the individual / HUF (HUF). It was sought to be introduced with a view to

prevent money laundering and thereby prevent receipt of money in the form of bogus gifts.

While passing the Bill, considering the purpose of the new provision being introduced, it was

clarified that government had no intention of bringing back Gift Tax in the form of Income-

tax. The proposal made in the Bill, at that time, was modified while passing the Bill and

clearly bringing out the object by providing that the same will apply only to the receipt ‘sum

of money’ without consideration [earlier provision].

1.2 The provisions were subsequently amended to extend the scope of the same to gift received

in kind in the form of immovable property as well as specific movable property. This

unfortunate and unjust, considering the above object. The amendment also extends further

to cover within its scope not only gifts, but also cases of sale/purchase of such properties,

where the sale price / purchase price is less than the stamp duty valuation in case of

immovable property, or where the same is less than the fair market value in case of specified

movable properties [such as shares/securities/ jewellery/drawings/paintings/any work of art

etc.].

1.3 It may be noted that the Supreme Court in the case of Navinchandra Mafatlal vs CIT 26 ITR

758, while upholding tax on capital gains, had clearly made a distinction between tax on

income arising on transfer of capital asset and tax on capital value of an asset by treating it

as income.

1.4 The above amendments are totally unjustified and unfair and is nothing but an attempt to

bring back gift tax in an indirect way. In the case of immovable properties, flats / units in two

different adjacent buildings may have different prices with a substantial difference on

account of various factual reasons and this fact has been recognised by the Courts from time

to time. Unfortunately, the stamp duty laws of the States do not provide for such

differences. At the same time, various States for the purpose of increasing their revenue,

without increasing the rates of stamp duty keeps on adopting higher values of immovable

properties for the purpose of levy of stamp duty, which is, in most cases, much higher than

the actual prevailing prices. It is only in case of certain prime/ prestigious properties, that

the actual price is more than the stamp duty value. Most tax-payers, who acquire such

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properties once in life time, mainly to fulfil their housing needs, will be more affected by this

proposal as they cannot afford to litigate either with Income-tax Authority or with the stamp

duty authority of the State. It is unfair to punish such taxpayers.

1.5 Likewise, in the case of specified movable properties, considering their nature, it would be

impossible to determine the fair market value [for example in the case of paintings,

drawings, is it ever feasible to determine fair market value?]. In view of this, the amended

provisions have created hardships and will result into substantial litigation.

In view of the above, it is suggested that the amendment made extending the scope of

provisions to gifts in kind should be omitted and earlier provision should be restored.

Alternatively, if the extended scope is to be retained, amendment should be made to

confine the same to gift in the form of immovable property and in that case also, smaller

taxpayers should be excluded. In case of purchase/sale of immovable property, the

provision should only apply to the immovable property having apparent consideration in

excess of specified limit for which the provisions contained in the earlier Chapter XXC

should be taken as a base with necessary increase in limits specified therein, considering

the inflation since then. For other immovable properties, a provision should be made that

the provisions would be applied only in cases where the difference between the apparent

consideration and the stamp duty value is more than specified percentage, say 20%. Such

a provision should also be made in Sec. 50C.

In any case, the provisions should not be applied to any movable property.

1.6 Measures of Rationalisation

Apart from above, the provision needs to be rationalised.

Further, there is an anomaly in the existing provisions in as much as a gift received by a

person from his father’s brother is exempted from tax but if the same person (i.e. the

nephew) makes a gift to his father’s brother, then the latter would have to pay tax on the

gifted amount if the aggregate gifts received by him exceed Rs. 50,000 in a year. Similarly,

receipt by a HUF from its member is not covered by the charge created under Sec. 56(2)(vii)

but the receipt by a member of HUF from the HUF is covered. These anomalies need to be

removed immediately.

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2. Taxation of certain transactions without consideration or for inadequate consideration - Sec.

56(2)(viia)

Sec. 56 was amended by Finance Act, 2010 w.e.f. June 1, 2010 to include within its ambit

transactions undertaken in shares of a company (not being a company in which public are

substantially interested) either for inadequate consideration or without consideration where the

recipient is a firm or a company (not being a company in which public are substantially

interested). The Memorandum explaining the provisions of the Finance Act 2010 cites these

provisions to be anti-abuse provisions.

The transactions undertaken for business reorganisation, amalgamation and demerger which are

not regarded as transfer under clauses (via), (vic), (vicb), (vid) and (vii) of Sec. 47 of the Act have

been specifically excluded.

The provision thus seeks to tax the transactions of transfer of shares without or for inadequate

consideration in the hands of the recipient of shares, as income from other sources. However,

the following issues emerge:

a) Transactions exempt from capital gains tax, not fully excluded – Transfer of capital assets in

case of amalgamation or demerger (Secs. 47(vi) and 47(vib)), where capital assets are

transferred to an Indian company have not been specifically excluded. Further, transfer of

capital assets between holding company and its wholly owned subsidiary company are also

not excluded. While such transfers are not subject to capital gains tax under Secs. 47(iv) and

47(v) of the Act, receipt of such capital assets by the transferee company, at less than fair

market value may be taxable as income from other sources. The provision will dilute the

impact of capital gains exemption provided under Sec. 47 of the Act.

b) Similarly, slump sale transactions (covered by Sec. 50B) may also trigger taxability in the

hands of recipient as well, irrespective of the fact that capital gains tax has been paid by the

seller in respect of the same transaction.

It is suggested that:

Safe harbour of say 15% may be built in the provisions.

The transactions which are excluded from the applicability of Sec. 45 by virtue of specific

exclusions provided in Sec. 47, should be kept outside the purview of this section.

Specific exclusion should be provided for shares received in the course of business re-

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organisations or by way of bonus/ rights/ buyback.

Specific exemption for genuine cases of distress sale should be carved out.

It may be advisable to amend Sec. 2(18) to provide that where a company is listed on any

exchange in any other foreign country, it would be deemed to be a company in which the

public are substantially interested. Alternatively, any reference to a company should be

with regard to an Indian company only.

3. Taxation of Share Premium – Sec. 56(2)(viib)

3.1 The Finance Act, 2012 has added clause (viib) to sub-section (2) of Sec. 56 of the Act, under

which the share premium received by a closely held company from a resident in excess of

the fair market value of the shares is deemed to be the income of the company. The fair

market value has to be substantiated based on the value of the assets of the company or as

per the prescribed method. Exemption has been provided to amounts received by a venture

capital undertaking from a venture capital fund or a venture capital company.

3.2 It appears that this provision is intended to target the practice of obtaining investment in

capital of a company at a high premium in cases where the valuations / future projections do

not justify such a premium. It is submitted that such misuse has been by only a few

companies, but the remedy provided would adversely affect a significantly large number of

promising companies all over the country.

3.3 This provision will seriously impact genuine small start-ups and other small and medium-size

companies looking to grow rapidly, particularly in the services sector, which depend upon

angel investors or private equity funds for their funding. Such funding normally depends

upon future prospects of the company, rather than the current value of the assets of the

company. This provision would completely destroy the developing culture of angel investors

and private equity funds funding promising entrepreneurs, who have the skills, but not the

requisite capital.

3.4 Sufficient safeguards exist under Sec. 68 to tax undisclosed income received by companies in

the form of share capital. It is therefore suggested that such a harsh provision should be

deleted.

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3.5 Alternatively, an exemption should be provided for such shares allotted at a premium,

where the shares are held by the allottee for not less than 3 years from the date of

allotment.

4. Taxation of Share Premium – Sec. 68

4.1 A proviso has been inserted in Sec. 68 by the Finance Act, 2012, w.e.f. 1-4-2013, which

provides that the nature and source of any sum credited as share capital, share premium,

etc. in the books of a closely held company shall be treated as explained only if the source of

funds is also explained by the assessee company in the hands of the resident shareholder.

An exemption has been provided to amounts received from a VCC / VCF.

4.2 The manner in which the proviso is worded seems to indicate that the Explanation offered in

respect of any such sums received from a non-resident shall always be deemed to be not

satisfactory. This clearly is not the intention, and therefore the term “being a resident in

whose name such credit is recorded in the books of such company” in clause (a) of the

proviso, should form part of the main proviso itself.

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Chapter 21 - RECOVERY

1. Stay of Demand

Subsequent to the completion of assessment the department officials start insisting for payment

of the demand determined in the assessment order. It is matter of common knowledge that

assessments are completed by considering all the disallowances in the earlier years. The

Assessing Officer (AO) disregards the favourable decision of the Appellate authorities on the

ground that the Income-tax department has preferred an appeal before the higher authority.

However, as regards the payment of tax demand, the Department officials expect the assessee

to make payment of the entire demand irrespective of the outcome of such issues in earlier

years.

Many a times, the recovery is enforced in total disregard of the facts of the case/ principles of

natural justice/ judicial precedents and at time, directions of the Courts. In this process, the

Officers are guided by the sole object of meeting unrealistic targets of revenue collection. Such

an approach of the Tax Administration is now popularly known as “Tax Terrorism”.

It is suggested that there should be a provision for automatic stay of demand till the disposal

of the first appeal (baring exceptional circumstances which may be pre-defined).

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Chapter 22 - TAX AUDIT - SEC. 44AB

1. Tax audit in case of partners of firm

The persons carrying on profession/business are required to comply with the requirements of

Tax Audit under Sec. 44AB once their Gross Turnover/Receipts etc. exceed the threshold.

In case of a partner of a partnership firm, his share of profit is exempt under Sec. 10(2A) as the

firm pays the tax at the maximum marginal rate. The remuneration and interest received by the

partners from the firm is taxable as Business Income. In such cases, the issue has been raised in

some cases that even partners are required to get their accounts audited if their share in profit

and/or remuneration / interest from the firm exceeds the threshold provided in Sec. 44AB

notwithstanding the fact that the accounts of the partnership firm have already been audited

under Sec. 44AB.

In view of the above, it is suggested that clarificatory amendment should be made in Sec. 44AB

to provide that for the purpose of applying Sec. 44AB in the hands of the partners in such

cases, the share of profit and/or remuneration/interest received from the firm shall not be

taken into account while determining the amount of threshold provided in Sec. 44AB.

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Chapter 23 - TAXATION OF NON-RESIDENTS

1. Requirement to obtain Tax Residency Certificate – Introduction of threshold

Sec. 90(2) provides that in respect of countries with which Central Government has entered into

an agreement for avoidance of double taxation then an assessee to whom such agreement

applies, the provisions of the Act shall apply to the extent they are more beneficial to the

assessee. However, sub-section (4) of Sec. 90 provides that an assessee who is a non-resident is

not entitled to claim any relief under such agreement unless he produces a certificate of his

being a resident in any country outside India (Tax Residency Certificate) from the Government of

that country. Sub-section (4) applies to all non-residents irrespective of the level of income and

the nature thereof. This creates unintended hardship in large number of cases where amounts

involved are not very large and also creates a negative image of the country as it involves time

and cost to obtain such Tax Residency Certificate. This also substantially affects business

environment and may create litigation for SMEs, especially for export markets.

It is therefore strongly suggested that the threshold, say Rs One crore, be specified for

applicability of this provision relating to obtaining a Tax Residency Certificate.

2. Exemption from filing Return of Income-tax where tax is deducted at source in case of Non-

Residents – Sec. 115A

Sec. 115A (5) of the Act provides that it shall not be necessary for a non-resident assessee to file

a return of income if his or its total income comprises only of dividend or interest income and if

the tax deductible at source under the Act is duly deducted.

Sec. 115A deals also with tax rates for royalty and fees for technical services. Tax is required to

be deducted at source also in respect of such income. However, there is no exemption for a non-

resident recipient of royalty and fees for technical services from filing of return of income if tax is

duly deducted at source from such income.

There are sufficient provisions in the Act to ensure that tax is deducted at source before

remittance and to recover the tax from the payer of income in case of failure to deduct tax at

source. Besides, there are also provisions to penalize the payer in case of such failure. Apart

from penal action, there are provisions for disallowing deduction in respect of expenditure

where payments are made without appropriate deduction of tax at source.

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There is therefore no reason why a non-resident whose only income is by way of royalty or fees

for technical services and who does not have a permanent establishment in India should be

forced to file a return of income when proper taxes are deducted at source. Information as

regards such payees is, any way available in the TDS returns that would be filed by the payer.

It is therefore suggested that the scope of Sec. 115A(5) be expanded so as to exempt all such

non-residents whose income consists of only royalty or fees of technical services and proper

taxes are deducted at source.

3. Tax Deduction at Source in respect of Payment to Non-residents – Sec. 195(7)

3.1 The Finance Act, 2012 has inserted sub-section (7) to Sec. 195 which provides as under:

“(7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board

may, by notification in the Official Gazette, specify a class of persons or cases, where the

person responsible for paying to a non-resident, not being a company, or to a foreign

company, any sum, whether or not chargeable under the provisions of this Act, shall make

an application to the Assessing Officer to determine, by general or special order, the

appropriate proportion of sum chargeable, and upon such determination, tax shall be

deducted under sub-section (1) on that proportion of the sum which is so

chargeable.”[emphasis supplied]

3.2 From the language of the aforesaid sub-section, it is evident that it would lead to increase in

work load of the assessee and the Assessing Officer, cause delay in the process of remittance

by the assessee to the non-resident which in turn will, apart from impacting the business

environment, increase litigation. The Supreme Court has categorically held that where the

sum payable to a non-resident is not chargeable to income-tax in India, there is no question

of deduction of tax source from the same, at the time of making payment to the non-

resident.

3.3 It is strongly suggested that the provisions of sub-section (7) of Sec. 195 be suitably

amended to empower the Board to notify only certain class of cases where sum payable to

a non-resident is chargeable to tax. Empowering the Board to notify even those cases

where the sum payable is not chargeable to tax will lead to harassment, hardships and

would also lead to delay in payments and litigation.

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4. Transfer of Shares of Foreign Companies with underlying Indian Assets – Sec. 9(1)(i)

4.1 The Finance Act, 2012 has made various amendments retrospectively from 1st April, 1962 to

overcome the decision of the Supreme Court in the case of Vodafone International

Holdings B.V. vs Union of India wherein the Supreme Court held that capital gains on

transfer of shares of foreign companies between two non-residents, in a complex corporate

structure, indirectly transferring shares and control of Indian operating companies, is not

taxable in India. It also held that in such a case the payer is not liable to deduct tax at source.

4.2 This issue was subject to substantial litigation since the Income-tax Department tried to tax

the gains arising to a foreign company from transfer of shares of a foreign holding company,

which indirectly held underlying Indian assets (indirect transfer). The SC in the above

decision held that the source rule provisions under the Act need to be strictly construed and,

accordingly, in the absence of a 'look through' provision, an indirect transfer is not be

taxable in India.

4.3 The clarificatory Explanations to Secs. 2(14), 2(47), 9(1) and 195 of the Act have been

inserted by the Finance Act, 2012, with retrospective effect from 1 April, 1962, with the

objective to tax indirect transfer of capital assets in India. Explanations inserted, ‘clarify’ with

retrospective effect from 1 April, 1962, the meaning of the terms "transfer' and "capital

asset', and further expand the scope of Sec. 9(1)(i) of the Act, and have thereby brought

within the ambit of the Act, capital gains arising from the off-shore transfer of interest /

shares, outside India.

4.4 Explanation 4 to Sec. 9(1)(i) has been inserted by Finance Act, 2012 to clarify that the term

"through' means and includes "by means of', "in consequence of', or "by reason of'. This

Explanation is intended to tax indirect transfers, to overcome the ratio of Vodafone‘s case.

However, this Explanation applies to all the four limbs of Sec. 9(1)(i), i.e. business connection

in India, property in India, any asset or source of income in India and transfer of a capital

asset in India. This has far reaching effect, taxing any sort of income which has any relation

to India. It is therefore suggested that this meaning of the term “through” should apply

only to the fourth limb, i.e. transfer of a capital asset situated in India.

4.5 Explanation 5 to Sec. 9(1)(i) of the Act clarifies that an asset or a capital asset being any

share or interest in an entity incorporated / located outside India, shall be deemed to have

always been situated in India, if the share or interest derives, directly or indirectly, its value

substantially from the assets located in India.

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5.5.1 Explanation 5 to Sec. 9(1)(i) does not define the term ‘substantial value’. Further, it

also does not specify any threshold. This has led to uncertainty and litigation. It may

be noted that the Direct Taxes Code Bill, 2010 had expressly provided for subjecting

to tax, transfer of shares of a foreign company by a non-resident, which represents

at least 50% of the fair market value ('FMV') of assets in India. It is suggested that a

specific limit should be provided, preferably 76% of the FMV to bring about clarity

and certainty.

5.5.2 Apart from the above, it is absolutely necessary to provide that only value of

Indian assets is liable to tax, on proportionate basis and tax cannot be charged on

the value of assets located outside India. Similar provision was made in Direct

Taxes Code Bill, 2010.

4.6 Further, Explanation 2 to Sec. 195(1) of the Act clarifies that the obligation under Sec.

195(1) to make deduction shall be deemed to have always extended to all persons,

resident or non-resident, irrespective of the presence of the non-resident, in India.

4.6.1 Reading the provisions of Sec. 195 of the Act with the aforesaid Explanation, it is

clear that the tax withholding provisions also apply to non-residents, regardless of

their presence in India, once the chargeability under the Act has been established.

However, what is important is to see how the collection / recovery of tax will be

effectuated from such non-residents, who have effectuated an indirect transfer of

shares outside India and have already paid the consideration.

4.6.2 The retrospective amendment made is harsh, unreasonable and arbitrary if the party

who has not deducted tax at source and who, according to the then existing

provisions of the Act, was right in doing so, is now called upon to pay the tax of third

party. Also, there could be practical difficulty in recovering the tax and depositing

the same since the transactions have already been completed. It is suggested that

these provisions be made prospective from the date they were enacted.

4.7 Apart from the above, these retrospective amendments would treat taxpayers unequally. An

assessee whose case is not before any authority or court is not affected but an assessee

whose case is before any authority is affected. A case which has attained finality and all

limitations for taxation have lapsed is not affected but an assessee in whose case limitation

period has not expired, may be affected. Therefore, it is suggested that the aforesaid

amendments be made prospective from the date they were enacted.

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5. Definition of “Transfer” – Sec. 2(47)

5.1 The Finance Act, 2012 has amended the definition of `transfer’ with retrospective effect

from 1 April 1962, by inserting Explanation 2 to Sec. 2(47). The Explanation so inserted

clarifies that transfer includes and shall be deemed to have always included disposing of,

parting with an asset or any interest therein, creating any interest in any asset in any manner

whatsoever, directly or indirectly, absolutely, conditionally, voluntarily or involuntarily, by

way of an agreement (whether entered into in India or outside India) or otherwise,

notwithstanding that such transfer of rights has been characterised as being effected or

dependent upon or flowing from the transfer of share or shares of a company registered or

incorporated outside India.

5.2 Such a broad definition of the term has serious implications for even domestic transactions,

which are otherwise not regarded as transfers. Transactions such as creation of a mortgage,

grant of short-term leasehold rights, etc. may also fall within the definition of transfer, and

could have serious implications for genuine transactions carried out in the past by residents,

which were otherwise not regarded as transfers.

5.3 It is therefore suggested that the extended definition of “transfer” should apply only to

transfer of shares of a foreign company having the effect of transferring an asset in India

or creating an interest in any asset in India and it should apply prospectively.

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Chapter 24 - GENERAL ANTI-AVOIDANCE RULE [GAAR] – SECS. 95 TO 102

1. The Finance Act, 2012 has introduced General Anti-Avoidance Rule (GAAR) in Chapter X-A to

provide for a deterrent against tax avoidance and tax evasion practices. By the Finance Act,

2013, certain amendments have been made in these provisions. GAAR can be invoked by the

Income-tax Department in respect of any arrangement whose main purpose is to obtain a tax

benefit. GAAR empowers the Income-tax Department to declare an arrangement as an

“Impermissible Avoidance Arrangement". An arrangement is treated as an “Impermissible

Avoidance Arrangement” (IAA) if its main purpose is to obtain a tax benefit. Besides the main

purpose of tax benefit, for a transaction to be declared as an IAA, at least one of the following

conditions is required to be satisfied:

(i) It has created rights and obligations which would normally not be created between

persons dealing at arm’s length; or

(ii) It results, directly or indirectly, in the misuse or abuse of the provisions of the Act; or

(iii) It lacks commercial substance in whole or in part; or

(iv) It has been entered into, or carried out, in a manner not normally employed for bona

fide purposes.

2. The word `arrangement’ has been defined to mean any step in, or part of, or the whole of any

transaction, operation, scheme, agreement or understanding whether enforceable or not and it

also includes alienation of any property in such transaction, operation, scheme, agreement or

understanding. Not only an arrangement, but also any step in or part of any arrangement may

also be declared as an IAA.

3. GAAR, in its current form, is extremely wide in its scope and virtually covers anything and

everything giving a tax benefit which would cause uncertainty as even legitimate arrangement

could also be covered by GAAR. It grants wide powers with discretion to the Income-tax

Department which could be prone to misuse by the Tax Department. In the absence of a

mechanism for ensuring accountability of Tax Officers, the position becomes worse. It is

suggested that the provisions of GAAR be significantly amended on the lines herein suggested.

4. The definition of IAA covers a part or whole of an arrangement whose main purpose is to obtain

a tax benefit. Further, `tax benefit’ has been very widely defined to mean a reduction, avoidance

or deferral of tax or increase in refund of tax under the Act or due to a tax treaty or reduction in

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total income including increase in loss. Apart from this, Sec. 97 which effectively provides for

deemed lack of commercial substance is also very widely worded. A combined reading of these

definitions of IAA and Tax Benefit and the provisions relating to deemed lack of commercial

substance seems to suggest that it could lead to absurd results as any legitimate arrangement by

a taxpayer could potentially attract GAAR. These definitions are unworkable in practice and not

warranted. Further, the terms such as “bona fide business purpose", “misuse, or abuse of the

provision of the Act” etc. lead to give wide discretion with the Assessing Officers.

5. Sec. 96(2) of the Act provides that an arrangement shall be presumed to have been entered into

for the main purpose of obtaining a tax benefit, if the main purpose of a step or a part of the

arrangement is to obtain a tax benefit. This would be regardless of the fact that the main

purpose of the arrangement as a whole, may not be to obtain a tax benefit. This provision gives

undue flexibility to the Income-tax Department to ignore non-avoidable steps in a composite

transaction, and to isolate steps which they may consider to be undertaken for the purposes of

obtaining a tax benefit.

5.1 It would not be appropriate to treat steps in a composite transaction in isolation or ignore

them if such steps have a commercial purpose. In such a scenario, whenever legitimate tax

benefit is considered as a part of a commercial transaction, it could be alleged that the main

purpose for this step is to obtain a tax benefit. Such an allegation could be made even in

cases where the assessee has two different choices for any step in the arrangement and the

assessee prefers the one which leaves him with lighter burden of tax. Apart from this, the

presumption of adverse main purpose contained in Sec. 96(2) is also unjust. As such, the

provisions of sec. 96(2) are unwarranted. Therefore, the said provision needs to be suitably

modified so as not to treat a step or a part of the arrangement in isolation or ignored if it is

not a major part of the commercial transaction. Even Standing Committee on Finance has

made suggestions on this line.

6. Sec. 144BA(17) provides that the term of the Approving Panel shall ordinarily be for one year

and may be extended from time to time upto a period of three years. This is totally unjustified

as one cannot expect an Approving Panel to change every year and to do justice in one year. In

fact, considering the complexities involved in the provisions relating GAAR, the minimum term

for such Approving Panel should be three years. Otherwise, the current provision also has the

effect of indirect control of the Government over the panel members and thereby, panel’s

independence will be substantially affected and the provisions of Approved Panel will not

serve the intended purpose.

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7. It is suggested that:

(i) In the initial few years a reasonable threshold of about Rs. 25 crores Tax Benefit should be

provided for invoking the provisions of GAAR in the Act itself (as against the current

threshold of Rs. 3 crores Tax Benefit provided in the Rules) to avoid frivolous cases and

reduce the administrative burden on taxpayers and the Income-tax Department and to

avoid large scale litigation. This threshold can be reconsidered after considering the

experience of implementation of the GAAR provisions at field level in initial years.

(ii) While the need for GAAR in the Act is beyond question, the current GAAR provisions, on

an overall basis, are very risky and, in practice, ultimately are likely to create substantially

difficult situations for the business community as they provide general and blanket

discretion to the Revenue Department. The provisions relating to Approving Panel also

may not serve as sufficient safeguard without appropriate modification of the GAAR

provisions. Therefore, there is a definite need to revisit the whole set of provisions and

remove artificial deeming fictions provided in the Chapter. It is necessary to reconsider the

definition of IAA. For this, it is suggested that only the primary condition of the main

purpose being obtaining a tax benefit and the additional requirement of lack of

commercial substance (and not the deemed lack of commercial substance provided in Sec.

97) should be retained as a necessary condition for determination of an arrangement as an

IAA and thereby, for invoking the provisions of GAAR. All other deeming fictions [including

provisions of Secs. 97 and 96(2)] should be removed.

(iii) Further, the applicability of GAAR provisions should be deferred for 3 years and in the

meanwhile, the provisions should be revisited on the lines suggested above and final

provisions should be enacted after genuine public debate with an open mind in one year’s

time which should be then applied after 2 years from their final enactment.

(iv) It may be noted that mere deferment of the current GAAR provisions in the existing form

will not serve any purpose whatsoever.

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Chapter 25 - DOMESTIC TRANSFER PRICING [DTP] – SECS. 92, 92BA, 92C, 92CA, 92D & 92E

1. Removal of Domestic Transfer Pricing Provisions

Domestic Transfer Pricing provisions are more relevant and prevalent in countries like USA and

Canada, where both federal and state income-taxes separately exist. In India since income-tax is

a central tax, DTP provisions have no relevance as any adjustment due to domestic transfer

pricing provisions should, logically have offsetting effect and should have no material revenue

impact as both the assessees would be resident in India. Further, the documentation

requirements in case of transfer pricing are quite onerous, and have resulted in substantial

increase in compliance costs for domestic taxpayers. Therefore, domestic transfer pricing

provisions should be removed from the Act.

2. Specific suggestions regarding Domestic Transfer Pricing Provisions

2.1 Applicability of DTP provisions to Sec. 40A(2)(a)

a) The Finance Act, 1968 had introduced a new Sec. 40A in the Act with effect from 1 April

1968. Sec. 40A(2) provides that an expenditure incurred in business or profession for

which payment has been or is to be made to the tax-payer’s relatives or associate

concerns is liable to be disallowed in computing the profits of the business or profession

to the extent the expenditure is considered to be excessive or unreasonable. The

reasonableness of any expenditure is to be judged having regard to the fair market value

of the goods, services or facilities for which the payment is made for the legitimate

needs of the business or profession or the benefit delivered by, or accruing to, the tax-

payer from the expenditure. Such portion of the expenditure which, in the opinion of

the Income-tax Officer, is excessive or unreasonable is to be disallowed in computing the

profits of the business or profession.

b) The Sec. 68 was inserted with the object to check evasion of tax through excessive or

unreasonable payments to relative or any other specified person. The relevant extracts

of the Departmental Circular - Circular No. 6-P, Dated 6-7-1968, whereby this section

was introduced, are as under:

“Where payment for any expenditure is found to have been made to a relative or

associate concern falling within the specified categories, it will be necessary for the

Income-tax Officer to scrutinise the reasonableness of the expenditure with reference

to the criteria mentioned in the section.

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The Income-tax Officer is expected to exercise his judgment in a reasonable and fair

manner. It should be borne in mind that the provision is meant to check evasion of

tax through excessive or unreasonable payments to relatives and associate concerns

and should not be applied in a manner which will cause hardship in bona fide cases.”

c) With the recent insertion of proviso to sub-section (2)(a) of Sec. 40A by the Finance Act,

2012, w.e.f. 1-4-2013, no disallowance under this clause on account of expenditure

being excessive or unreasonable having regard to the fair market value of goods,

services or facilities shall be made in respect of Specified Domestic Transaction [SDT]

referred to in Sec. 92BA, if such transaction is at arm’s length price (‘ALP’) as defined in

clause (ii) of Sec. 92F. Hence, with the insertion of this proviso, the section has extended

the applicability of the specific concept of arm’s length price instead of a fair market

value to determine the value of domestic related party transactions. Under the pre-

amended provisions of Sec. 40A(2)(b) the Assessing Officer [AO] had all discretion to

ensure that payment made or expenditure incurred was based on fair market rates and

hence there was no reason to amend the stated position and introduce Domestic

Transfer Pricing provisions.

d) The limit of payment in excess of Rs. 5 crores is unrealistic and burdensome as such

payment would include even purchase of goods.

e) The administration in India is not geared up to handle such matters as the law requires

reference to Transfer Pricing Officer which is a specialized wing, which does not exist all

over India.

f) The benchmarking of many transactions may be impossible using arm’s length

principle, such as (a) Managerial Remuneration and remuneration to partners; (b)

Applicability of SDT to entities falling under presumptive taxation provisions; (c)

Allocation of expenses between the group entities, following consistent principles and

allocation keys; (d) Joint Development Agreement; (e) ESOPs etc.

g) If at all DTP provisions are required, it is suggested that:

(i) The principle to be followed should be to ensure that payment made by one tax payer,

to another should be subject to full taxation at maximum marginal rate and there

should not be any arbitrary apportionment to save taxes. If that is achieved, then the

tax officer and tax payer should not be overburdened with compliance of

documentation requirement.

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(ii) In any case, such provisions could be restricted to tax payers availing Chapter VIA

deductions or exemptions under Sec. 10AA but should not be extended to payments

covered by Sec. 40A(2) of the ITA. However, the extension of these provisions to all

expenditure incurred by tax-payer on payments to its relatives or associate concerns

leads to absurdity. One cannot determine the arm’s length price that should have

been paid on various transactions, since the payment may be based on various

factors and considerations, like the business market scenario, competition, each

individual’s experiences, intellect, etc.

h) Alternatively, it is also suggested:

(i) The second proviso to Sec. 92C(4) permits single track adjustment and prohibits

consequential adjustment in the hands of the other party. This provision is made

applicable to SDT as well. As a result, disallowance of expenditure in the hands of

one related party does not mean that there would be corresponding reduction in

the hands of recipient. Recipient will be assessed with reference to actual income as

earned, even assuming entire expenditure is disallowed in hands of related party.

This approach of revenue will lead to unjust enrichment of the State at the cost of

the taxpayer.

(ii) It is further suggested that even if the above provisions continue and deduction on

account of payment to a related party is reduced by application of SDT provisions,

the related party’s income should also automatically stand reduced to that extent.

2.2 Other Points in respect of DTP provisions

Apart from the above, in respect of DTP provisions, the following points require

consideration:

(a) Harmonisation of the ‘related party’ definitions

Presently, two different sections referred to in Sec. 92BA and Sec. 92A of the Act have

different thresholds for determination of the ‘related party’ definitions which are as

under:

(i) Substantial Interest – Not less than 20% of voting power – Explanation (b) to Sec.

40A(2).

(ii) Associated Enterprises - Not less than 26% of voting power – Sec. 92A(2)(a) & (b).

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There is clearly a need for harmonisation of the different thresholds for the related

party definitions in the aforesaid sections and necessary amendments in this regard

should be carried out.

(b) Guidance in respect of benchmarking of Directors’ remuneration

Presently, there is no guidance in respect of benchmarking of the Directors’

remuneration. Since payment of directors’ remuneration is subject to DTP provisions,

necessary guidance for benchmarking in respect of the same should be provided.

(c) Arm’s Length Price vs Ordinary Profits

Sec. 80IA(8) deals with ‘ordinary profits’ whereas transfer pricing compliance refers to

the ‘Arm’s Length Price’ of the transactions. Conceptually, ‘price principles’ cannot apply

for benchmarking of ‘profits’.

(d) Corresponding Adjustments

Presently, in the DTP provisions there is no provision relating to corresponding

adjustment. It is very important that in case of any assessee covered under the DTP

provisions, if any upward adjustment is made, then corresponding adjustment in the

hands of the other party should be invariably be made. Necessary amendment should be

made in the DTP provisions to provide for the corresponding adjustments.

(e) Increase in the threshold limit of Rs. 5 crore

The threshold of 5 crore is too low for applicability of the Domestic Transfer Pricing

Provisions. In order to ensure that only substantial transactions are covered under the

DTP provisions, the threshold should be raised to Rs. 25 crore.

(f) Provisions of Advance Pricing Agreement [APA] should be made applicable to DTP

The APA provisions are being made applicable to only international transactions. The

same should also be made applicable to domestic transactions covered by DTP

provisions.

(g) Exclusion of Expenditure of a Capital Nature

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The term “specified domestic transaction” has been defined to mean any expenditure in

respect of which payment has been made or is to be made to a person referred to in

clause (b) of sub-section (2) of Sec. 40A. Such expenditure may possibly include capital

expenditure made to such a related person, even though Sec. 40A(2)(b) does not apply

to capital expenditure. It is therefore suggested that it should apply to expenditure

referred to in Sec. 40A(2)(a), and not to payments made to persons specified in Sec.

40A(2)(b).

(h) Documentation Requirements

A separate threshold of Rs. 10 crore should be provided for requirement of maintenance

of documentation.

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Chapter 26 - DEFINITION OF “ROYALTY” – Sec. 9(1)(vi)

1. Clause (iii) of Explanation 2 to Sec. 9(1)(vi) provides that royalty means, inter alia, consideration

for use of any patent, invention, model, design, secret formula, process or trade mark or similar

property.

2. Explanations 4, 5 and 6 inserted in clause (vi) of Sec. 9(1) with retrospective effect from 1st June,

1976, read as under:

Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any

rights in respect of any right, property or information includes and has always included

transfer of all or any right for use or right to use a computer software (including granting of a

licence) irrespective of the medium through which such right is transferred.

Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and

has always included consideration in respect of any right, property or information, whether

or not—

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

Explanation 6.—For the removal of doubts, it is hereby clarified that the expression

“process” includes and shall be deemed to have always included transmission by satellite

(including up-linking, amplification, conversion for down-linking of any signal), cable, optic

fibre or by any other similar technology, whether or not such process is secret;‘

3. On account of these Explanations, purchase of computer software, subscriptions to databases,

data processing charges and satellite processing charges, inter alia, could be regarded as royalty

with retrospective effect. Almost all taxpayers would have made payments in the past for such

services to non-residents (or in some cases to residents) without deduction of tax at source in

respect of such payments, which were hitherto regarded as not taxable. The obligation of

deduction of tax at source cannot be retrospectively provided for, since it is practically

impossible to comply with a future unknown law. Therefore, such amendment should be made

applicable only prospectively. Alternatively, such payers should not be regarded as assessees

in default for periods up to Assessment Year 2012-13.

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4. Many individuals today purchase software on the internet from foreign software vendors for

small amounts. It would be practically impossible for such individuals to comply with the

cumbersome requirements of deducting and paying TDS, obtaining a TAN, filing TDS statements

and issuing TDS certificates. An exemption therefore needs to be provided in Sec. 195 for

individuals, who are not subject to tax audit, from the requirement of deduction of TDS.

5. Purchase of shrink wrapped software is also regarded as a royalty payment, which is not in

accordance with the international practice. Besides, since international software vendors insist

on a fixed net of tax price, the effective cost of over 33% is borne by Indian industry, significantly

reducing their competitive ability. Payment for purchase of software packages should be

excluded from the definition of ‘royalty’ under Sec. 9(1)(vi).

6. Further, on a reading of the above Explanations, it is apprehended that attempt may be made to

question even use of a telephone / mobile phone / internet connection as royalty on the ground

that it tantamount to use of a ‘process’ [which now includes transmission by cable, optic fibre or

other similar technology], and could constitute ‘royalty’. Consequently, all the users of

telephones / mobile phones / internet covered by Sec. 194J making payment in excess of Rs.

30,000 per year, may be questioned for alleged default for non-deduction of tax and face

litigation. This is obviously not the intention of the legislature.

7. This may be the fall-out of the language used in the Explanation 6 in clause (vi) of Sec. 9(1),

which appears to be wholly unintended and unwarranted. It is, therefore, strongly suggested

that Explanation 6 should be deleted. Alternatively, appropriate clarificatory amendment

should be made.

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Chapter 27 - INCREASE IN LEVY OF FEES FOR NON-FILING / LATE FILING OF TDS RETURNS – SEC. 234E

1. Sec. 234E of the Act provides for penalty in case of non-filing / late filing of TDS statements

to Rs. 200 per day of default which is stated to be in the nature of a fee.

2. In this regard, it may be noted that the tax deductor is required to furnish the TDS returns

for each quarter within 15 days from the end of the quarter except for the last quarter,

where the TDS statement can be furnished within 1 month from the end of the quarter. It

needs to be appreciated that filing of e-TDS statements is an onerous task and it is very

difficult for assessees to collate and compile all the voluminous data / information for filing

of TDS returns within 15 days from the end of the relevant quarter.

In principle, it is unjust and incorrect and therefore Sec. 234E should be deleted.

Alternatively, it is suggested that if increased fee is to be levied, the due date for

furnishing of the TDS returns for the first three quarters be extended to 1 month from the

end of the quarter instead of 15 days.

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Chapter 28 - WEALTH-TAX

Under the Wealth-tax Act, the maximum amount not chargeable to wealth-tax is Rs. 30 lakh

[threshold]. This threshold was increased from Rs. 15 lakh by the Finance (No. 2) Act, 2009.

The wealth-tax is charged on specified assets which, inter alia, include urban land (with some

exceptions), motor-cars, jewellery etc. Considering inflation in the recent past and current prices of

such assets, the threshold of Rs. 30 lakh seems meaningless. It should be appreciated that the scope

of the levy of the wealth-tax was restricted on the ground that the wealth-tax never contributed any

substantial revenue to the exchequer.

It is suggested that the threshold should be substantially increased to say, Rs. 2 crore.

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ANNEXURE 1 - YEAR OF CREDIT FOR TAX DEDUCTED AT SOURCE

Currently, while processing tax returns, tax credit is given on the basis of tax deducted at source

reflected in Form 26 AS, whereas the assessee claims tax credit on the basis of the income offered to

tax by him, in accordance with Sec. 199. This results in substantial difference, requiring rectification

and submission of various details by the assessees. Unfortunately, the assessees had to approach

Courts in many cases to get the credit for taxes deducted from their income (TDS) and Courts have

passed strictures against the approach of the tax administration in this respect. India, perhaps is the

only country where the assessee has to go to Court for getting credit of taxes paid to the

Government by way of TDS.

Denial of tax credit to an assessee where tax has been deducted at source from his income cannot

be justified under any circumstances. Tax deduction is being carried out on account of the

requirements of law, and therefore the law should ensure that a person from whose income, tax

has been deducted at source, gets credit for the entire amount of tax deducted without any

difficulty whatsoever.

The reasons for such differences are many. The deductor may be following the mercantile method of

accounting, and may therefore deduct tax at source at the time of credit, while the deductee may be

following the cash method of accounting and claiming tax credit in the year in which the income is

actually received by him. Alternatively, the deductor may be following the cash system of accounting

and may deduct tax at source at the time of payment, while the deductee may be following the

mercantile system of accounting and may therefore claim tax credit in the year in which the income

is offered on accrual basis e.g. Government payments etc. There could also be instances where the

deductor pays an advance to the deductee, and deducts tax at source at that point of time, while the

deductee who is following the mercantile method of accounting would account for the income and

claim TDS in the year in which the invoice is raised by him. There could be many such instances,

resulting in mismatch of the year in which tax is deducted at source by the deductor and the year in

which tax credit is claimed by the deductee. These are business realities which cannot be ignored by

the tax administration under the guise of their own administrative difficulties and some exceptional

cases of fraud which would not have taken place without the help of some employees of the tax

administration.

The difficulty primarily arises on account of the requirement of Sec. 199 read with Rule 37BA (3),

that credit for tax deducted at source and paid to the Central Government shall be given for the

assessment year for which such income is assessable.

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The requirement for giving credit for tax deducted at source in the assessment year in which the

income is assessable was first introduced by the Finance Act, 1987 with effect from 1 June 1987, and

has continued since then. At that point of time, there was no concept of Annual Information Return,

nor was the process of capturing details of payment and tax deduction computerised, and it was

therefore essential to prevent misuse by claiming credit for tax deducted without offering the

relevant income to tax.

As compared to 1987 position, now the scenario has undergone total change. With the increased

computerisation of the tax records, it is possible to locate cases where tax has been deducted at

source, but income is not offered to tax. There is therefore no justification for continuing the

requirement of giving tax credit only in the assessment year in which the relevant income is offered

to tax.

It is therefore suggested that Sec. 199 should be amended to restore the position as was prevalent

till 1987, so as to grant tax credit in the assessment year immediately following the financial year

in which tax has been deducted at source. This will ensure that the tax credit claimed by the

taxpayer and tax deducted at source reflected in Form 26AS will match, reducing substantial

amount of time wasted in unnecessary rectifications and follow-up of incorrect demands.

The requirement of Rule 37BA(3) that tax credit would be given only if it is paid to the Central

Government, by the deductor is also unfair, as the deductee has no control over whether the

deductor has paid tax to the Central Government or not. The deductee cannot also insist in law on

the deductor handing over the relevant tax to him to pay it to the Government. Since the tax has

been deducted at source by the deductor on account of the requirement laid down by the

Government, it is the obligation of the Government to ensure that the law is enforced and only the

wrongdoers are punished, and not a person who has committed no fault. It is only the income-tax

Department which has the power to ensure recovery of the relevant tax from the deductor who has

deducted the tax but not paid it. Under such circumstances, to deny credit to the deductee for no

fault of his is absolutely unjustified. It should be appreciated that the deductor acts as an agent of

the Government.

The existing provisions of Sec. 205 merely bar recovery of tax from the deductee, but do not ensure

grant of refund to the deductee. Very often, the demands remain outstanding in the department’s

records, and are incorrectly adjusted against subsequent refunds due to the assessee, resulting in

unnecessary hardship to the assessee from whom the tax is wrongly recovered notwithstanding the

provisions of Sec. 205. Therefore, Sec. 205, needs to be further amended to provide that no such

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unauthorised adjustments should be made and the deductee must be granted refund legitimately

due to him.

In cases where a deductee claims credit for tax deducted at source and is able to demonstrate that

the relevant tax has been deducted though not paid by the deductor, credit has to be given to the

deductee and action taken against the deductor for recovery of the tax. Therefore, there should be

no requirement in Rule 37BA(3) that tax should have been paid by the deductor in order to grant

credit for the tax deducted at source. Sec. 205 should also be amended to provide that if any

refund is due to the assessee in respect of such tax deducted at source, but not paid, such refund

shall be granted to the assessee.

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pre-budget memorandum on direct tax laws 2015-16 · nandita p. parekh naushad a. panjwani saurabh...

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