Income Tax changes in Budget 2010: A bird's eye view!

By TIOL News Service

NEW DELHI, FEB 27, 2010: SEC 2(15) amended by Finance Act, 2008 w.e.f. 1-4-2009 to take away from the ambit of ‘charitable purpose” if the activity of advancement of any other object of general public utility” involves carrying on of 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.

On the basis of public request, now FM has waived this disability condition if receipts by way of such activities do not exceed sum of Rs. 10 lakhs. This amendment is w.e.f. 1-4-2009 wherein this stipulation was brought on statute. Now atleast marginal cases where consideration received by way of such activities can relax and continue to enjoy the benefit applicable to charitable institutions ( without any litigation !!! ).

Income of non-resident – Source rule again modified

By Finance Act 2007 an Explanation was added below sub-section (2) of sec. 9 with retrospective effect from 01-06-1976 to re-iterate the “source” rule. In respect of income by way of interest, royalty and fee for technical services it was clarified that irrespective of whether the non-resident has residence or place of business or business connection in India, such income shall be included in his total income. In the Explanatory memorandum to the Finance Bill, 2007 it was explained that while introducing these provisions in 1976 the intention of parliament was to include income by way of interest, royalty and fee for technical services in the total income of the non-resident if such payment was made by a resident and the subject matter for which payment was made ie. Money or services were utilized in India irrespective of the fact as to whether the non-resident has permanent Establishment in India or the services were rendered from abroad.

This explanation brought to the statute with retrospective effect has again become toothless because of wrong drafting. Hence the explanation is now replaced again with effect from 01-06-1976. Now a deeming provision has been made to hold that  income by way of interest, royalty and fee for technical services will accrue or arise in India irrespective of the fact that a non-resident has residence or place of business or business connection in India or he has rendered services in India and such income will be included in his total income. Now the provisions have become stringer and any payment received by non-resident in India on account of interest, royalty and fee for technical services will be chargeable to tax in India. Where the services were rendered, has become irrelevant. Presence or absence of P.E. or business connection, is also irrelevant. Even isolated transaction of a non-resident can now attract tax in India if it is in the nature of interest, royalty or fee for technical services.

Incentive on research and development

Sec. 35D amended to enhance the weighted deduction granted on in-house research and development from 150% to 200%. Also contribution made to national laboratories, research associations, colleges, universities and other institutions doing scientific research is increased from 125% to 175%.  Similarly payments made to approved associations doing research in social science or statistical research also made eligible for weighted deduction of 125%. 

Sec. 80GGA also amended to include associations doing research in social science or statistical research as eligible institutions.

Sec. 10(21) exempts income of scientific research associations approved under sec. 35. This exemption is now extended to associations doing research in social science or doing statistical research.  This is with effect from 01-04-2011.

Such research association is also made liable to file Income tax return under sec. 139(4A). The proviso to sec. 143(3) dealing provisions for scrutiny assessment also modified. 

Cancellation of registration granted to Trusts

Sec. 12AA(3) provides for cancellation of registration granted to trusts under sec. 12AA(1). The section is amended w.e.f. 01-06-2010 to provide for cancellation of registration granted under the old provisions of sec. 12A also.

 Conversion of small companies to Limited Liability Partnership firms (LLP)

To promote such conversion, transfer of assets will not be treated as transfer for the purpose of computing capital gains. Sec. 47 amended to this effect. Conditions stipulated are that
all the assets and liabilities are to be transferred

1. all the erstwhile directors should be partners of the LLP in the  same capital contribution and profit sharing ratio
2. shareholders should not receive any other consideration directly or indirectly through such conversion
3. aggregate profit sharing ratio of the shareholders should not be less than 50% during the period of five years from the date of conversion
4. total sales, turnover or gross receipts of such company in any of the three previous years prior to the previous year in which such conversion took place, should not exceed Rs. 60 lakhs, and
5. no amount is paid either directly or indirectly to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion

 
If any of the conditions stipulated above are not complied with, provision has been made by amending sec. 47A to charge capital gains on the LLP in the year in which such non-compliance took place.  

Fifth proviso to Sec. 32(1) also amended to take care of depreciation claims in such cases of conversion so that the aggregate depreciation claimed by both the concerns should not exceed as if the conversion had not taken place ie. If it was treated as a single entity during the year and also the depreciation has to be apportioned among both the entities on the basis of number of days the asset was used by each entity. 

Sec. 35DDA dealing with amortization of expenditure incurred under voluntary retirement scheme also amended to take care of such conversion so that the LLP will be eligible for such deduction for the un-expired period and the company will not be eligible after such conversion.

Sec. 72A also amended to take care of unabsorbed depreciation and accumulated loss of the company in the hands of the LLP. However, if any of the conditions stipulated in sec. 47 are not complied with subsequently, provision has been made to tax the set off allowed in the hands of the LLP as income of the LLP in the year in which such non-compliance took place. 

Consequently Sec. 43 dealing with definition of cost of asset and written down value, also amended.
 
Sec. 49 amended to treat the cost of asset received by LLP as the cost for which the company acquired such asset, while computing capital gains on subsequent transfer of such assets by the LLP.

But LLP will not have the benefit of tax credit on MAT paid by the company. Sec. 115JAA has been modified.

Amendment w.e.f. 01-04-2011

Investment linked incentives.

A new section 35AD was introduced in last Finance Bill to allow capital expenditure incurred on specified business. Scope of this section is expended during the year to include building and operating new hotel of two-star or above category anywhere in India. This is intended to promote tourism industry which is catering employment to a large number of people nowadays.

This deduction is made optional for the assessee and in case any assessee claims deduction under this section., they will not be eligible to claim deduction under Chapter VI-C in respect of income earned from such business. Sec. 80A also amended so that if any deduction is claimed and allowed under Chapter VI-C in respect of profits of any specified business, no deduction is eligible for such business under sec. 35AD for that assessment year or any other assessment year. 

Amendment w.e.f. 01-04-2011

There was a stipulation that assesses engaged in laying and operating cross-country gas or oil pipeline has to make minimum one-third of its pipeline capacity available for use on common carrier basis by others. This was technically creating problems to people in the industry as such restrictions are regulated by petroleum and Natural gas Regulatory board. Hence the restriction of one-third is now modified to be in tune with the restrictions placed by the Board from time to time.

Disallowance for not deducting or paying the tax deducted at source made more liberal

As per the existing provisions of sec. 40(a)(ia), on payments made to residents on account of interest, commission, brokerage, rent, royalty, fee for professional services, fee for technical services, contract or sub-contract on which tax is deductible at source but was not deducted or after deduction has not paid till the end of the previous year, such sum was not allowed as deduction while computing the business income of the assessee. The only exception given was with respect to deductions made during the last month of the previous year for which time was allowed for payment till the due date specified in sec. 139(1). It was also provided that if such tax was deducted in any subsequent year or paid after the end of the previous year [ in respect of deductions made in last month of the previous year, paid after the due date specified under sec. 139(1) ], such expenditure will be allowed as deduction in the subsequent year in which it was deducted or paid.

This provision now stands relaxed so that any deduction of tax at source made during the entire previous year can be paid on or before the due date specified under sec. 139(1) so as to be eligible for deduction of such expenditure. If the tax is deducted in any subsequent year or after deduction during the year has paid after the due date specified in under sec. 139(1), then the expenditure will be deductible in such subsequent year in which it is paid.      

It may be noted that these amendments are in respect of payments made to residents only whereas for similar payments to non-residents, sec. 40(a)(i) stipulates the payment of tax deducted before the time prescribed under sec. 200(1) and not 139(1). There is no modification to this provision. Why such discrimination is shown to payments made to non-residents, is not known. It is high time both these provisions be made uniformly stringent / relaxed.

Sec. 201(1A) modified to provide for levying interest at the rate of one and a half percent per month for the period during which assessee deducted the tax but not paid. However the interest rate for the period during which default for deducting tax at source continues to be one percent per month.
 
Mitigating hardship to small entrepreneurs

Limit for Compulsory audit of accounts raised

The same FM in his 1984 Budget fixed the limits for compulsory audit of accounts u/s 44AB as Rs. 40 lakhs turnover in respect of business and Rs. 10 lakhs receipts for those carrying on profession. Considering the increase in volume of trade nowadays and to mitigate hardship caused to small entrepreneurs, this limit is now raised to Rs. 60 lakhs and Rs. 15 lakhs respectively.

However sec. 271B w is proposed to be amended to enhance the penalty for failure to get the accounts audited from Rs. 1 lakh to Rs. 1.5 lakhs.

Limits provided in sec. 44AD dealing with Special provision for computing profits and gains of business of civil construction etc. also stands raised to Rs. 60 lakhs.

Amendment w.e.f. 01-04-2011

Special provision for computing income by way of royalties etc. in case of non-residents
 
Sec. 44DA deals with such income earned by non-residents. It is now specifically provided that sec. 44BB dealing with presumptive taxation of non-residents engaged in business of providing services or facilities in connection with prospecting or extraction or production of mineral oils, will not be applicable to such income. Corresponding amendments also made in sec. 44BB.

Rigour of deemed income reduced

Finance Act, 2009  made immovable properties received without consideration or for under-consideration as income of the recipient w.e.f. 01-04-2009. This created a lot of litigation as under-consideration, is always subjective and non malafide intention can be attributed on most occasions. Hence the present Finance bill omitted the provision relating to under-consideration with retrospective effect from 01-04-2009. Now only if an immovable property whose stamp duty value exceeds Rs. 50,000 is received without consideration, it is exigible to tax [ if it is received from persons / situations not specifically exempt as per the second proviso to sec. 56 (2)(vii) ].    

Also the explanation to this sub-section modified with retrospective effect from 01-04-2009 to include only capital asset under this deeming provision of other income. Bullion is also included in the definition of property w.e.f. 01-04-2010.

The scope of this section is further expended w.e.f 01-06-2010. Now if a firm or private limited company receives from any person any property being shares of a private limited company without consideration, the aggregate fair market value of such shares ( if it is more than Rs. 50,000 ) will be treated as income of the recipient. If such shares are received for a consideration less than the aggregate fair market value of such shares by an amount exceeding Rs. 50,000, the difference between the fair market value and consideration will be treated as income of the recipient. However, amalgamation, demerger and business reorganization are exempted from this deeming provision.

Sec. 142A amended w.e.f 01-06-2010 so that reference can be made to Valuation Officer to determine fair market value of property referred to in this section. 

New / liberalization of the provisions relating to deductions under Chapter VI-B

New section 80CCF introduced with effect from 01-04-2011 for granting deduction to individuals and HUF towards payment to subscribe long term infrastructure bonds notified by Central govt. the upper limit is fixed at Rs. 20,000.

Contributions made to Central government Health scheme also made eligible for deduction u/s 80D w.e.f 01-04-2011.

 Sec. 80IB(10) – deduction for undertaking developing and building housing projects.
As per the existing provisions, if the housing project is approved by the local authority after 01-04-2004, construction has to be completed within four years from the end of the financial year in which approval is made. Now as per the proposed amendment in the Finance Bill, such restriction is applicable only for the approvals made during F.Y. 2004-05 and for the approvals made after 01-04-2005, period of construction can be upto a five years.

Specification for commercial area also stands modified. At present the stipulation is 5% of the aggregate built-up area or 2000 sq. ft. whichever is less. This stands modified as 3% of the aggregate built-up area or 5000 sq. ft. whichever is more. This will certainly give more leverage to the real estate sector to accommodate more commercial area which is essential to cater to the basic needs of the residential community in such project.

Sec. 80ID introduced to cater the special needs of hotels and convention centres in connection with the Commonwealth Games now proposes modification to make eligible hotels and convention centres which will start functioning by 31-07-2011. Earlier the deadline was 31-03-2010. Now that the Government has realized or acknowledges the fact that these infrastructure facilities will not be ready by 31st March, 2010 it is extending the deadline to a more realistic date of 31st July, 2010.

Modification of sec. 115JB

From A.Y. 2011-12 onwards if the tax on income computed under the normal provisions of the I.T. Act is less than 18% of the book profit, the book profit will be treated as income and tax payable will be at the rate of 18% of such income. Earlier this was only 15%. 

Issue of TDS certificate to deductee

Finance Act 2004 brought in subsection (3) to sec. 203 to dispense with the practice of issuing TDS certificates by the deductors. This was under the impression that the process of TDS can be fully computerized and once the deductor files TDS return, there is no need to issue TDS certificates separately to the deductees as such data can be automatically uploaded in the ledger account of deductees maintained in IRLA and thus credit can eb given in the individual assessment of deductees.  The deadline intitially fixed was 2005. This was modified to 2006 by Finance Act 2005. Again it was modified to 2008 by Finance Act, 2006. Subsequently by Finance Act, 2008 it was modified to 2010. Finally CBDT realized that this task cannot be achieved and hence FM dropped the provision itself in the present Finance Bill. Similar amendment made in sec. 206C dealing with issue of Tax Collection Certificate.

Settlement Commission regains its power

Finance Act, 2007 drastically reduced the powers and work of Settlement Commission by taking away from its ambit cases covered by search / requisition action under sec. 132 and 132A. The definition of case as appearing in sec. 245A was amended to exclude all cases where search has been initiated. Finance Bill, 2010 proposes to omit such provisions so as to include the search cases also subject for settlement before the Settlement Commission.      

Sec. 245C modified to provide the eligibility for making application before Settlement Commission at Rs. 50 lakhs additional income tax payable in respect of search / requisition cases and Rs. 10 lakhs in other cases.  

As per sec. 245D(4A), Settlement Commission has to pass order under sec. 245D(4) within 12 months from the end of the month in which application was made. This provision was made applicable only to applications made during 01-06-2007 to 01-06-2010. For applications made thereafter, period prescribed is 18 months, so that Settlement Commission will have now more time to pass order under sec. 245D(4).

Similar amendments also made in Wealth tax Act.

Condonation of delay in filing appeal or reference before High Court

Subsequent to the decision of apex Court and Bombay high Court in a series of cases wherein it was held that no provision is available in Income Tax Act for the high Court to condone the delay in filing  to file appeal or reference before High Court, now Finance Bill 2010 proposes to amend sec. 256 and 260A so that High Court can condone delay infilling appeal if there exists sufficient cause for the delay. In fact, noticing these decisions, amendment was brought in last Finance Bill in Central Excise Act. However it took CBDT one more year to suggest similar amendment.

Similar amendments also made in Wealth tax Act.

Allotment of Document Identification Number

This was a new procedure introduced w.e.f. 01-10-2010. This stands postponed to 01-07-2011.  Whether the field formations of CBDT will be geared up by this date is still a question mark.

Computation of profits and gains of insurance business

The First schedule dealing with computation of profits and gains of insurance business is proposed to be amended by including

1. Gain or loss in realization of investments if they are not credited / debited to profit and loss account, and
2. Provision for diminution in value of investments debited to profit & loss account.

Reforms in Tax Administration

FM has realized that tax reforms is a process and not an event. He is firm on implementing Direct taxes code from 01-04-2011. How far it will materialize is a big question mark.

Centralized processing Centre at Bangalore is now processing 20,000 returns per day. Govt. proposes to open 2 more centres during the year. Similarly Sevottakm project is now functioning at Pune, Kochi and Chandigarh. This is proposed to be extended to 4 more cities.

New return for for Individual salaries class Saral-II will be applicable from coming Assessment year.

Reduction in tax rates

Last year exemption limit for individuals was raised to Rs. 1,60,000 and surcharge was withdrawn for individual tax payers. Now the tax slabs are raised ie. 10% slab raised from 3 lakhs to Rs. 5 lakhs and 20% slab raised from Rs. 5 lakhs to Rs. 8 lakhs. Only income above Rs. 8 lakhs will be taxed at 30%. Surcharge for companies also reduced from 10% to 7.5 %.

Considering that these limits were fixed years back, the present move to marginally enhance the limit is a welcome move by FM and it will mitigate the unnecessary hardship caused to small taxpayers to approach the I.T. department to get refund of such taxes deducted.