JULY 17, 2009

Alternate Dispute Resolution Mechanism: Panel direction to be binding on AO

By K Vaitheeswaran, Advocate

THE more one reads the Budget documents the more interesting insights come out of it. Apart from many significant changes which have been reported by TIOL, there are still many more to look into.

Salaries

Section 10(10C) provides for exemption of amount received on voluntary retirement subject to certain conditions. A proviso has been added to Section 10(10C) which negates the exemption allowed under this clause in cases where relief has been allowed to an assessee under Section 89.

The Madras High Court in the case of CIT Vs S.Sundar & Others held that the assessee was eligible to claim simultaneous benefit under Section 10(10C) as well as Section 89(1) of the Income Tax Act, 1961 in respect of the compensation received under the voluntary retirement scheme. This amendment negates the above Madras High Court judgement.

Deduction under Section 35

Section 35 which provides for deduction in respect of expenditure on scientific research related to business is amended to extend the deduction in respect of any business of manufacture or production of any article or thing not being an article or thing specified in the list of the 11^th Schedule.

This is a significant amendment since the benefit of weighted deduction is now being extended to research pertaining to the business of manufacture or production of any article or thing excluding the item listed in the 11^th Schedule.

For the first time, a definition of ‘manufacture’ has been inserted in the Income Tax Act in the form of clause (29BA) in Section 2 which logically would be applicable even to this provision.

++ A new Section 35AD is proposed to be introduced w.e.f. 1^st April 2010 which provides for deduction in respect of capital expenditure incurred wholly and exclusively for the purposes of any specified business.  Such deduction is available subject to certain conditions.

++ A corresponding amendment has been made to Section 28 (effective from 01.04.2010) to include any sum whether received or receivable either in cash or kind on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred under the ambit of business income, provided the whole of expenditure on such capital asset has been allowed as a deduction under Section 35AD.

++ A new Section 73A has been inserted providing for the set-off and carry forward of any losses derived from such specified business under Section 35AD.

++ Explanation 13 has been added to clause (1) of Section 43(a) providing that the actual cost of acquisition of any capital asset will be considered as “NIL” if deduction has been claimed under Section 35AD.

++ The erstwhile provisions of Section 44AD relating to profits and gains of business of civil construction has now been substituted with new provisions whereby the provisions of presumptive taxation will be applicable to “eligible assesses” engaged in “eligible business”.

++ The Section defines “eligible assessee” and “eligible businesses”.

++ A sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession".

++ Any deduction allowable under the provisions of sections 30 to 38 shall be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

++ An assessee covered by this scheme will not be eligible to claim a deduction under sections 10A, 10AA, 10BA or under any provision of Chapter VIA.

++ The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

++ The provisions relating to payment of advance tax shall not apply to the assessee opting for this scheme.

Eligible assessee means an individual , HUF or a partnership firm who is a resident but not a limited liability partnership as defined in Section 2(1)(n) of Limited Liability Partnership Act, 2008 and who has not claimed deduction under any of the Sections 10A, 10AA, 10B, 10BA or under Chapter VIA in the relevant assessment year.

Eligible business is defined to mean any business except the business of plying, hiring or leasing goods carriages (covered in 44AE) where the total turnover or gross receipts in the previous year does not exceed Rs 40 lakhs.

This is a far reaching amendment and a number of small businesses would get benefited.

Amendment of Section 44AF

Section 44AF relating to presumptive tax on retail trade has been amended and shall not apply to any assessment year beginning on or after the 1st day of April, 2011.

Amendment to Section 80A

Section 80A provides for deductions in computing the total income of an assessee. Sub-section (4) has been inserted to this Section providing that no deduction under Chapter VI-A will be allowed if deduction has already been allowed under Section 10A or 10AA or 10B or under any provisions of Chapter VI-A under the heading “C-Deductions in respect of certain incomes’.  The amount of deduction shall not exceed the profits and gains of the undertaking or unit or enterprise or eligible business. This amendment has a retrospective effect and is effective from 01.04.2003.

The amendment has apparently taken into account the decision of the Five Member Special Bench of the ITAT in the case of ACIT Vs. Hindustan Mint & Agro Products Pvt. Ltd. (2009-TIOL-405-ITAT-DEL-SB) where the Special Bench observed that the Special Bench in the case of Rogini Garments (2007-TIOL-150-ITAT-Mad-SB) rightly held that repeated deductions of same profit and gains of undertaking were not intended to be disallowed.

This amendment endorses the view expressed by the Supreme Court in the case of Goetze (India) Ltd. Vs. CIT = (2006-TIOL-198-SC-IT).

Amendment to Section 80-IA

Section 80-IA which provides for deduction in respect of profits and gains for undertakings engaged in industrial development has been amended, to extend the benefit to an undertaking which commences the activity on or before 31^st March 2011.

A retrospective amendment effective from 01-04-2000 has been made in the Explanation after sub-section 13 which states that this section shall not apply in relation to a business referred to in sub-section (4) which is in the nature of a works contract awarded by any person and executed by the undertaking.

This is not a welcome change and is likely to affect the entire infrastructure segment. Section 80IA(4) defines infrastructure facility to mean a road including toll road, bridge, rail system, highway project, water supply project, water treatment system, irrigation project, sanitation and sewerage system, solid waste management system, port , airport, inland waterway, inland port or navigational channel in the sea. Most of these are works contracts and the amendment is likely far reaching negative consequences.

Amendment to Section 80-IB

++ Amendments have been introduced to 80-IB sub-section 9 to facilitate mineral oil refining projects and allow a further period of three years that is upto 31.03.2012 to begin the refining of mineral oil and avail the tax benefit.

++ The tax holiday benefit is also extended to natural gas from blocks licensed under VIII round up bidding for award of exploration contracts (NELP-VIII) under the New Exploration Licensing Policy.

++ The Explanation to this Sub-section states that all blocks licensed under a single contract which has been awarded under the New Exploration Licensing Policy announced by the Government of India or has been awarded in pursuance of any law or has been awarded by Central or State Government in any other manner shall be treated as a single undertaking with retrospective effect from 01.04.2000.

++ The amendment seeks to nullify the interpretation put forth based on various judicial precedents to the effect that every well should be treated as ‘an undertaking’.

++ A new Section 144-C is proposed to be introduced with effect from 01.10.2009 in order to facilitate a reference to an alternate Dispute Resolution Panel in respect of certain eligible assessees namely a person in whose case a variation in income or loss arises on account of an order passed by a transfer pricing officer under Section 92CA(3) or any foreign company.

++ Under the Schedule a draft or the proposed order would be sent to the assessee if there is a variation in income or loss which is prejudicial to the interest of the assessee. Within 30 days the assessee shall file his acceptance of the variations or objections with the Dispute Resolution Panel and the Assessing Officer. The Dispute Resolution Panel shall issue directions as it thinks fit for the guidance of the assessing officer to enable him to complete the assessment. The direction shall be given considering the draft order, objection, evidence, report from assessing officer, records, enquiry, etc. The Panel has the power to confirm or reduce or enhance the variations.  However, it cannot set aside any proposed variation or issue a direction for further enquiry.

++ The Dispute Resolution Panel would be a collegium comprising of three Income Tax Commissioners constituted by the Board.  If there is any difference of opinion amongst the Members, the majority view would prevail.

++ Every direction of the Panel shall be binding on the Assessing Officer and no direction can be given after 9 months from the end of the month in which the draft order is forwarded to the eligible assessee.