1. The Finance Bill, 2017 seeks to amend 73 sections of the Income-tax Act, 1961 (the “Act”) and insert 12 new sections including substitution of one section. The thrust of the direct tax proposals in this Budget is on growth stimulation, relief to middle class, affordable housing, curbing black money, promoting digital economy, transparency of political funding and simplification of tax administration.
I. Profits from business
2. Clauses 13 to 19 of the Finance Bill, 2017 proposes amendments to the provisions pertaining to profits from business/ profession.
(a) Amendment to Section 35AD
3. Section 35AD of the Act provides for investment linked deduction on the amount of capital expenditure incurred wholly or exclusively for the purposes of business during the previous year for a specified business except capital expenditure incurred for acquisition of any land or goodwill or financial instrument. Section 35AD was introduced by Finance Act, 2009 with a view to creating rural infrastructure and environment friendly alternate means of transportation for bulk goods.
4. This Section 35AD is sought to be amended to provide that any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure. This amendment is sought to be made applicable with effect from 1st April, 2018 i.e. for financial year 2017-18 onwards and should be applicable in respect of payments made on or after 1st April, 2017.
5. Clause (f) of sub-section (8) of Section 35AD already prohibits deduction of capital expenditure incurred on the acquisition of any land or goodwill or financial instrument. Suitable amendment has been proposed therein to deny deduction in respect of payments otherwise than through the permissible medium i.e. account payee cheque/ draft or electronically if it exceeds ten thousand rupees. After the amendment, expenditure in respect of which payments to one person in one day is made in cash would not be eligible for deduction under this Section. This is a positive amendment in furtherance of Government’s efforts of making our economy less cash-reliant. However, no exception has been carved out from this proposed amendment and expediency or urgency are not provided as grounds for departure from it.
6. While the Act already contains provisions in the form of Section 40A(3) and Section 40A(3A) to disallow revenue expenditure above a certain threshold in respect of which cash payments are made, this is the first such attempt to penalise cash payments even in respect of capital expenditure by way of disallowance. It is important to note that Rule 6DD of the Income-tax Rules, 1962 (the “Rules”) provide for exceptions to Section 40A(3) and Section 40A(3A) and lists circumstances in which cash payments are allowed as deduction despite being beyond the threshold limit. Since now even capital expenditure is sought to be covered for prohibition of cash payments, the provisions of Rule 6DD should have been made applicable to capital expenditure as well. However, the same has not been done. This may result in hardship for assessees even in genuine cases. It is suggested that the exceptions provided under Rule 6DD should be applicable to all cash payments, whether towards revenue expenditure or capital expenditure.
7. While payments made through National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) can be regarded as payments through “use of electronic clearing system through a bank account”, a question arises whether expenditure in respect of which payment is made through credit card can be disallowed. Payments through credit cards are neither payments through account payee cheques/drafts nor can they be said to be through “use of electronic clearing system through a bank account”. Credit card bills are capable of settlement either by cash or through banking transactions. In my view, if an assessee incurs expenditure in respect of which he/she makes payment through credit card and subsequently settles the credit card bill through account payee cheque/draft or electronically, this should be sufficient for not attracting disallowance under Section 35AD. However, if the assessee settles the credit card bill in respect of payment for expenditure referred to in Section 35AD, in my view, deduction should not be allowed to such assessee in respect of such expenditure. The mischief sought to be remedied by the amendment is the use of cash for payments. If the assessee settles the credit card bill otherwise than through cash payment, it should be in line with the legislative intention, and hence, should not attract disallowance under the provisions of the amended provisions.
(b) Amendment to Section 36
8. As per the existing provisions of Section 36(1)(viia)(a) of the Act, a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, can claim deduction of 7.5% of total income (computed before making any deduction under that clause and Chapter VIA) in respect of provision for bad and doubtful debts.
9. In order to strengthen the financial position of these entities, Clause 14 proposes to amend the said sub-clause to enhance the present limit from 7.5% to 8.5% of the amount of the total income (computed before making any deduction under that clause and Chapter VIA).
10. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years and would enable these entities to reduce their tax liabilities and boost banking sector.
(c) Amendment to Section 40A
11. Clause 15 of the Finance Bill, 2017 seeks to make three amendments to Section 40A. While the first pertains to disallowance of excessive and unreasonable expenditure, the other two pertain to the Government’s efforts in moving towards less-cash economy.
12. In so far as the first amendment in Section 40A is concerned, the same is a consequential to the amendment in Section 92BA of the Act. As per the existing provisions, expenditure in respect of which payment is made to persons referred to in Section 40A(2)(b) are covered under the definition of specified domestic transactions. Furthermore, as per existing Section 40A(2)(b), in respect of such specified domestic transactions which are at arm’s length price as defined in clause (ii) of Section 92F, no disallowance is required to be made under Section 40A(2)(b). Now, in order to reduce the compliance burden of taxpayers, it is proposed to provide that expenditure in respect of which payment has been made by the assessee to a person referred to in under Section 40A(2)(b) are to be excluded from the scope of Section 92BA of the Act. Amendment has been proposed to Section 92BA to omit clause (i) as per which expenditure in respect of which payment has been made or is to be made to a person referred to in Section 40A(2)(b) of the Act was includible as specified domestic transactions. Therefore, as a consequential amendment, the benefit currently available under Section 40A(2)(b) i.e. no disallowance in respect of specified domestic transactions if they are at arm’s length is proposed to be withdrawn by limiting the same to assessment year commencing on or before the 1st day of April, 2016.
13. The existing sub-section (3) of Section 40A of the Act bar deduction of expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds twenty thousand rupees. Similarly, sub-section (3A) provides that where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure, and in a subsequent year, the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of that subsequent year if the payment or aggregate of payments made to a person in a day exceeds twenty thousand rupees. The proposed amendment reduces this limit to ten thousand rupees and permits deduction if payment is made through electronic clearing system through a bank account.
14. Of late, payments banks and mobile wallets have emerged as a modern and convenient tool for making payments especially utility bills. It is not uncommon for a utility bill to exceed ten thousand rupees. In such a case, a question can arise whether payment of utility bills (and other expenditure) through payments banks and mobile wallets can be regarded as payment through “use of electronic clearing system through a bank account”. In this regard, it is important to note that amounts can be transferred in payments banks accounts and mobile wallets only through bank accounts. In other words, cash cannot be deposited directly in payments banks accounts and mobile wallets. In fact, the Government itself is promoting payments through payments banks and mobile wallets in its efforts of moving towards less-cash economy. Therefore, payments through media such as these should not attract disallowance under Section 40A(3)/(3A) of the Act.
15. An exception already exists in Section 40A(3A) in respect of payments for plying, hiring or leasing carriages in respect of which the limit is thirty-five thousand rupees instead of twenty thousand rupees. This limit has not been changed and payments up to thirty-five thousand rupees for plying, hiring or leasing carriages continue to be allowable as deduction.
16. Rule 6DD of the Rules which provides for exceptions to Section 40A(3) and Section 40A(3A) and lists circumstances in which cash payments are allowed as deduction despite being beyond the threshold limit would continue to be applicable to the revised limits.
17. Furthermore, sub-section (4) of Section 40A provides that no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner where any payment in respect of any expenditure has been made by an account payee cheque drawn on a bank or account payee bank draft. This benefit to the payer has been extended even for payments through use of electronic clearing system through a bank account.
(d) Amendment to Section 43
18. Sub-section (1) of Section 43 of the Act defines “actual cost”. By the amendment of Finance Bill, 2017, second proviso has been proposed to be inserted in sub-section (1) to provide that expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost.
19. As stated earlier, the Finance Bill, 2017 is the first attempt to penalise cash payments even in respect of capital expenditure. In
Kanshi Ram Madan Lal v. ITO  3 ITD 290 (Delhi), the Delhi bench of the Income-tax Appellate Tribunal (the “Tribunal”) held that Section 40A(3) of the Act was not attracted to capital expenditure, and hence, depreciation on capital assets purchased in cash could not be disallowed. However, as a result of this proposed amendment, this position is set to change. The exclusion of cash payments in computing “actual cost” as per Section 43(1) pursuant to this amendment should nullify this Delhi Tribunal decision. This is because depreciation is available on “written down value” defined under Section 43(6) of the Act. “Written down value” being derivable from “actual cost” would also, as a corollary, exclude such cash payments. Therefore, this amendment would have the effect of disallowing depreciation in respect of assets for which payments have been made in cash..
20. A consequential amendment to definition of actual cost of asset in case of withdrawal of deduction in terms of sub-section (7B) of Section 35AD is provided by inserting a proviso in Explanation 13 to Section 43(1). The amendment provides that where any capital asset in respect of which deduction allowed under Section 35AD is deemed to be the income of the assessee in accordance with the provisions of sub-section (7B) of Section 35AD, the actual cost to the assessee shall be the actual cost to the assessee, as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been allowable had the asset been used for the purposes of business since the date of its acquisition.
21. The amendments to Section 43 of the Act will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.
(e) Amendment to Section 43B
22. As per clause 17 of the Finance Bill, 2017, it is proposed to amend Section 43B of the Act to provide that any sum payable by the assessee as interest on any loan or advances from a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank shall be allowed as deduction if it is actually paid on or before the due date of furnishing the return of income of the relevant previous year. This is as per matching principle since the interest income on bad or doubtful debts is chargeable to tax on receipt basis, therefore, even the interest payable on such bad or doubtful debts need to be allowed on actual payment.
23. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.
(f) Amendment to Section 43D
24. The existing provisions of section 43D of the Act provides that interest income in relation to certain categories of bad or doubtful debts received by certain institutions or banks or corporations or companies, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account for that year or actually received, whichever is earlier. This provision is an exception to the accrual system of accounting which is regularly followed by such assessees for computation of total income. The benefit of this provision is presently available to scheduled banks, public financial institutions, State financial corporations, State industrial investment corporations and certain public companies like housing finance companies. With a view to provide a level playing field to co-operative banks vis-à-vis scheduled banks and to rationalise the scope of the section 43D, by clause 18 of the Finance Bill, 2017, it is proposed to amend Section 43D of the Act so as to extend this benefit to co-operative banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank as well.
25. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.
(g) Amendment to Section 44AA
26. Section 44AA of the Act deals with maintenance of books of account by assessees engaged in any business or profession. In order to reduce the compliance burden, it is proposed to amend the provisions of Section 44AA to increase monetary limits of income and total sales/turn over/gross receipts specified for maintenance of books of account from one lakh twenty thousand rupees to two lakh fifty thousand rupees and from ten lakh rupees to twenty-five lakh rupees, respectively in the case of individuals and Hindu undivided family carrying on business or profession. The same limits are also proposed for business or profession newly set up. It is important to note that the new limits are applicable only for individuals and Hindu undivided family and not to other classes of assessees to whom the old limits continue to apply.
27. These limits were last revised in the year 1998, and considering inflation, it was high time that these limits were revised. The limit of two lakh fifty thousand rupees below which books of account are not required to be maintained is now in line with the basic exemption limit.
28. This amendment is proposed in clause 19 of the Finance Bill, 2017 and will take effect from 1st April, 2018, and will accordingly apply in relation to the assessment year 2018-19 and subsequent years.
II. Presumptive Tax
29. The provisions pertaining to presumptive taxation of businesses are contained in Section 44AD of the Act while those pertaining to professionals are contained in Section 44ADA of the Act. No amendment is proposed to presumptive tax scheme for professionals in Finance Bill, 2017. However, in case of presumptive tax for businesses, by press release dated 19th December, 2016, it was declared that in respect of amount of total turnover or gross receipts received through banking channel/ digital means, a rate of 6% instead of 8% shall be deemed to be profit. This measure was taken in order to achieve the Government’s mission of moving towards a less cash economy and to incentivise small traders/ businesses to proactively accept payments by digital means.
30. Legislative changes have been proposed to Section 44AD of the Act by Clause 21 of the Finance Bill, 2017 wherein the amendment to the above effect has been introduced. This proposed amendment when enacted will have the effect of reducing the tax liability of small and medium businesses by 25% in respect of turnover which is received by non-cash means. This benefit will be applicable for transactions undertaken in the current financial year 2016-17 also and for subsequent years.
31. This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.
III. Tax audits
32. The provisions regarding liability to get the books of account audited are contained in Section 44AB of the Act. Till the enactment of Finance Act, 2015, the limit on sales/ turnover/gross receipts below which assessees engaged in business or profession were not required to get their books of account audited was one crore rupees. This limit remained unchanged in Finance Act, 2016. However, by Finance Act, 2016, the limit for audit for assessees opting for presumptive taxation scheme under Section 44AD of the Act was raised to two crore rupees. However, this higher threshold for non-audit of accounts had been given only to assessees opting for presumptive taxation scheme under Section 44AD of the Act. This was clarified by press release dated 20th June, 2016 as well.
33. In view of the above, by clause 20 of the Finance Bill, 2017, it is proposed to amend Section 44AB to exclude the eligible person, who declares profits for the previous year in accordance with the provisions of sub-section (1) of Section 44AD and his total sales, total turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year, from requirement of audit of books of account under section 44AB. This is expected to reduce the compliance burden of the small tax payers and facilitate the ease of doing business. This amendment will apply in relation to the assessment year 2017-18 and subsequent years.
34. The Budget proposals in respect of profits from business or profession, presumptive tax, tax audits are largely towards curbing black money and promoting digital economy. The Government deserves congratulations for its sustained efforts in moving the economy towards a less-cash one through focused legislation in this regard.