1. I am following cash system of accounting. I collect GST amount in bill and keep separate account of GST collection as and when I receive, but pay as per bill after deducting ITC as and when paid by me. The issue is whether section 43B applies to tax collection and kept separately? If yes, then is it to apply as per bill or receipt? The claim of ITC in return but not paid during the year – should it be offered as income?

Ans. Section 43B would apply to GST payments. As per section 145A(ii), for determining income chargeable under the head “Profits and gains of Business or Profession”, the valuation of sale of goods or services shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation. The sales would therefore have to be grossed up to include GST collected on the sales. GST would be allowable as an expense as and when paid. GST payable would be net of ITC, and hence such net amount of GST would be deductible, effectively making the ITC actually claimed in the GST return taxable.

2. I have a long term capital loss of  2.25 lakh (computed without indexation or substitution of FMV as of 1-2-2018) on sale of listed equity shares on the stock exchange, and also have a long term capital gain of  18 lakh (computed with indexation of cost). Can I set off the loss on sale of shares against the gain on sale of property?

Ans. Any long term capital loss computed under sections 48 to 55 can be set off against any other long term capital gain arrived at under a similar computation under the provisions of section 70(3). However, the question that arises is whether the computation of long term capital loss, being without indexation, is a similar computation as the long term capital gain on sale of property, which is with indexation of cost.

The CBDT has clarified, vide its answer to Q No 24 of the FAQs issued by it under F. No. 370149/20/2018-TPL dated 4th February 2018, that long-term capital loss arising from transfer of shares, on which STT has been paid, made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act, and therefore, can be set-off against any other long-term capital gains. Therefore, the long term loss on sale of shares can be set off against long term capital gains on sale of property.

3. I have paid a construction contractor  45 lakh towards contract for construction of my house during the period from 1st April 2019 to 31st August 2019. I am paying further amounts of  30 lakh from September 2019 to March 2020. Am I required to deduct TDS under section 194M, and on what amount?

Ans. The provisions of section 194M came into effect from 1st September 2019, and therefore tax is required to be deducted at source from payments made after that date. The proviso to section 194M states that no deduction is required to be made under this section if the aggregate of such sums credited or paid during a financial year does not exceed ₹ 50 lakh. Therefore, the total of all payments/credits during a year is required to be seen to understand whether deduction is required.

In the facts as given, tax will be required to be deducted on ₹ 30 lakh, being the payments made after the section came into force, since the payments for the year exceed ₹ 50 lakh. No tax is required to be deducted on ₹ 45 lakh, since those payments were made prior to the section coming into force.

4. Some companies provide incentives to their dealers in the form of

a. gift of vehicle/tv etc.

b. gift cheque

c. foreign travel vouchers.

What will be the position of taxability of such incentives in the hands of recipient as well as allowability to the company? Will it make any difference if it is given in the form of a prize?

Some companies arrange business meetings/conference of dealers in foreign countries, where the dealers are given travel coupons of various travel companies for family. What are the implications?

Ans. The above gifts of vehicle, TV, foreign travel voucher or travel coupons for family members of the dealer would be regarded as benefits or perquisites arising from business carried on by the dealers, and would be taxable under section 28(iv). Section 28(iv) however only applies to benefits or perquisites received in kind, and does not apply to receipts of money, as held by the Supreme Court in the case of CIT vs. Mahindra & Mahindra Ltd 404 ITR 1. The gift cheque, being a receipt of money, would not be taxable under section 28(iv), but would nevertheless be a taxable business receipt. It would not make any difference if the above items are given as prizes.

1. CGST Act Amendments

a. The definition of “Union territory” has been amended to update the definition of “Union territory” to include U.T. of Ladakh and newly merged U.T. of Dadra and Nagar Haveli and Daman and Diu.

b. Section 10 has been amended, to exclude certain categories of taxable persons from the ambit of the Composition Scheme, who are engaged in exempted or inter- state supply of services or supply of services through an E-Commerce Operator.

c. Due date for claiming ITC on Debit Note as per Section 16(4) is no more linked to date of its original invoice, and now date of debit note is to be seen for claiming ITC.

d. Section 29(1)(c) has been amended to provide for cancellation of registration which has been obtained voluntarily under section 25(3)

e. Section 30(1) Proviso is being substituted to provide for additional 30 days for filing application for revocation of Cancellation of Registration, in deserving cases by Additional Commissioner or Joint Commissioner and another 30 days by Commissioner.

f. Section 31 is has been to provide enabling provision to prescribe the manner of issuance of Tax invoices in case of services or supplies.

g. Section 51 has been amended to provide for issuance of TDS Certificate in a prescribed form and in a prescribed manner. The Provision for late fees has been deleted.

h. Section 109 has been amended to bring the provision for Appellate Tribunal under the CGST Act in the Union Territory of Jammu and Kashmir and Ladakh.

i. Section 122 has been amended by inserting a new sub-section to make the beneficiary of the transactions of passing on or availing fraudulent Input Tax Credit liable for penalty similar to the penalty leviable on the person who commits such specified offences.

j. Section 132 has been amended to make the offence of fraudulent availment of input tax credit without an invoice or bill a cognizable and non-bailable offence; and to make any person who commits, or causes the commission, or retains the benefit of transactions arising out of specified offences liable for punishment.

k. Section 140 has been amended w.r.e.f. 1.July 2017, to prescribe the manner and time limit for taking transitional credit.

l. Section 168 has been amended to remove power of Commissioner to give instructions and directions as per Section 66(5) and second proviso to Section 143(1).

m. Section 172 has been amended to make provision for enabling issuance of removal of difficulties order for another 2 years, i.e. till 5 years from the date of commencement of the said Act.

n. Entries at 4(a) & 4(b) in Schedule II is being amended w.r.e.f. 1st July 2017 to make provision for omission of supplies relating to transfer of business assets made without any consideration from Schedule II of the said Act..

2. IGST Act Amendments

a. Section 25 has been amended to make provision for enabling the issuance of removal of difficulties orders for another 2 years, i.e. till 5 years from the date of commencement of the said Act.

3. Changes in Tax Rate

a. Exemption from GST for fishmeal [HS 2301], for the period 1st July 2017 to 30th September 2019, and Levy of 12% rate of Tax during the period 1st July 2017 to 31st December 2018, on pulley, wheels and other parts (falling under heading 8483) and used as parts of agricultural machinery of headings 8432, 8433, and 8436, subject to the condition that if GST has been paid, the same would not be eligible for refund.

b. Notification No. 3/2019-Compensation Cess (Rate) dated 30 September 2019 amended with retrospective effect from 01.07.2017 resulting in no refund on account of inverted duty structure would be admissible on any tobacco products.

4. Changes in Customs Duty Rate

a. Increase in BCD of import of footwear, Kitchen-ware, Glass-ware and household appliances, furniture goods and compressor of refrigerator and A/C, water cooler, catalytic convertor, Chargers and power adaptors, SKD form electrical vehicles and import of rough semi precious stones, Rubies, Emeralds and Tuna bait (fish), whey, butter, ghee, butter oil, walnuts, shelled, meslin, molasses, preparation for infant use, preserved potatoes, peanut butter, sacramental wine, fin fish feed

b. Exemption from BCD to Milk and cream (in powder or granules or any sold forms) up to 10,000 metrics tons of such imports in financial year

c. Changes in rate of BCD for raw sugar, Naphtha for generation of electrical energy, Japanese Encephalitis vaccine, Parts of Cellular Mobile phones

d. Reduction in BCD for import of newsprint, uncoated paper, platinum or palladium

5. Central Excise – Amendments

a. Increase in Excise duty on Cigarettes and tobacco products, by way of increase in National Calamity Contingent Duty (NCCD)

b. No change in rate of duty for Bidis

c. Increase in Excise duty on Petroleum crudes

This is a Small Compilation giving the amendments in brief. It is for reference purpose only.

 

Budget 2020: Exemption Under Section 11 and Section 10(23C) and Approval Under Section 80G for Charitable / Religious Etc. Trusts, Institutions Etc. – An Analysis of Proposed Amendments

Introduction: The Finance Bill, 2020 has proposed to make substantial changes regarding provisions for granting exemptions to the charitable / religious trusts, institutions etc. U/s. 11 of the Income Tax Act, 1961 (“Act”). The substantial amendments are also proposed in respect of exemption U/s. 10(23C) which are granted to the trusts, institutions, universities, educational institutions, hospitals, other medical institutions etc. The amendments are also proposed in respect of approval of funds, institutions etc. (donations to which are eligible for deduction to the donor) under section 80G.

Under the new regime, the amendments are proposed in section 10(23C), section 11, section 12A, section 12AA and section 80G. A new section 12AB is also proposed to be introduced. All these amendments are proposed to be made w.e.f. 01st June, 2020.

In this article an attempt has been made to have an overview of the proposed changes.

1. New Provisions / Procedure For Registration / Approval

The registration to the charitable / religious trust, institutions etc. is presently given u/s. 12AA of the Income Tax Act (“Act”). Now, w.e.f. 01st June, 2020 it is proposed to make this section ineffective and to give registration under new section 12AB.

For institutions etc. approved under clauses (iv), (v), (vi) and (via) of section 10(23C) and section 80G, new provisions / procedure for approval has been proposed, but the same is by way of proposed amendments respectively in the section 10(23C) and section 80G themselves.

2. New Registration / Approval for Limited Period of 5 Years only

Presently, the registration U/s. 12AA and approval U/s. 10(23C), 80G are given without any expiry period (though may be cancelled in specific circumstances). Now, under new provisions these are proposed to be given only for the limited period of 5 years (without any discretion in the hands of the authorities for any period less than 5 years etc.). On expiry of the aforesaid period the registration / approval may be re obtained.

3. Classification of Applicants for Registration / Approval in Four Categories

The proposed amendments classifies the cases of applicants for approval / registration in to four category i.e.,

(i) Already registered / approved under the existing law

(ii) Those whose registration / approval under new law is expired in 5 years

(iii) Those who have been given provisional registration under new law (for 3 years) and

(iv) Any other cases i.e., obviously fresh registration / approval applicants under new law. All applications under old law which will be pending as on the date of coming in to force of the amendment will be treated as fresh applications filed under the new law.

The relevant extract from Memorandum Explaining Clauses are as under:-

(vii) the application pending for approval, registration, as the case may be, shall be treated as application in accordance with the new provisions, wherever they are being provided for.”

4. Existing Registered / Approved Entities also Required to Re Obtain Registration / Approval

These cases are dealt with in clause 7(1)(A)(a) & clause 10(1)(A) & clause 33(i)(b) and other related clauses of Finance Bill. The sub clause (i) of clause (ac) of sub section (1) of amended section 12A and clause (i) of first proviso to amended section 10(23C) & clause (i) of proviso to sub section (5) of section 80G are relevant. The institutions etc. which are already registered under existing section 12AA or earlier section 12A / approved under existing provisions of section 10(23C) or section 80G will also be required to obtain fresh registration / approval under new section 12AB / amended section 10(23C) / amended section 80G.

The application for re obtaining the approval / registration will have to be given within the period of three months from the date of coming in to force of the amendment. On receipt of the application, the PCIT / CIT will pass an order for registration / approval for the period of 5 years. The new approval / registration will be applicable from the assessment year from which the approval / registration was originally granted under the existing provisions. The order for registration / approval in such cases will be required to be passed within 3 months from the end of the month in which the application will be filed.

5. Relevant extract from Memorandum Explaining Clauses

The relevant extract explaining the intention behind the amendment and scope of amendment is as under :

It is also felt that the approval or registration or notification for exemption should also be for a limited period, say for a period not exceeding five years at one time, which would act as check to ensure that the conditions of approval or registration or notification are adhered to for want of continuance of exemption. This would in fact also be a reason for having a non-adversarial regime and not conducting roving inquiry in the affairs of the exempt entities on day to day basis, in general, as in any case they would be revisiting the concerned authorities for new registration before expiry of the period of exemption. This new process needs to be provided for both existing and new exempt entities. (Emphasis supplied by us)”

(iii) an entity approved, registered or notified under clause (23C) of section 10, section 12AA or section 35 of the Act, as the case may be, shall be required to apply for approval or registration or intimate regarding it being approved, as the case may be, and on doing so, the approval, registration or notification in respect of the entity shall be valid for a period not exceeding five previous years at one time calculated from 1st April, 2020.”

(iv) an entity already approved under section 80G shall also be required to apply for approval and on doing so, the approval, registration or notification in respect of the entity shall be valid for a period not exceeding five years at one time.”

6. Renewal of Registration /Approval After Expiry of 5 Years

The application for re obtaining the registration / approval will have to be given at least 6 months prior to the expiry of the registration / approval. The PCIT / CIT will have to make the necessary enquiries and to pass order for granting or rejecting the registration / approval. The order for registration / approval is required to be passed within 6 months from the end of the month in which the application is filed. The renewed registration / approval will be applicable from assessment year immediately following the financial year in which such application is made.

The author personally feels that the applicability of renewed approval / registration has been associated with the financial year in which the application has been made. This may create some practical problems. For example, if registration is given from assessment year 2021-22 to 2025-26 (i.e., financial year 2024-25), the registration will expire on 31st March, 2025. Now, the application for renewal will have to be made in financial year 2024-25 itself. The fresh registration will have to be granted from the assessment year 2025-26 for which the institution will be already registered / approved.

7. New Provisions for Provisional Registration / Approval

Under the existing provisions, there were no provisions relating to the provisional registration / approval. Either the application is rejected or accepted and full / final registration is granted. Now the amendments proposes to give the approval U/s. 10(23C), 80G / registration U/s. 12AB on provisional basis. The provisional approval may be granted for the period of 3 years (without any discretion in the hands of the authorities for any period less than 3 years etc.). The first time fresh applicants will not be directly given full / final registration but will be granted only provisional approval / registration. Later on, full / final registration / approval may be granted following the prescribed procedure.

8. Procedure for Fresh First Time Applicants

The proposed provisions regarding first time applicants are contained in clause 7(1)(A)(a) and clause 10(1)(A) & clause 33(i)(b) and other related clauses of Finance Bill. These are covered in “any other cases” mentioned in the amended provisions. The sub clause (vi) of clause (ac) of sub section (1) of amended section 12A and clause (iv) of first proviso to amended section 10(23C) and clause (iv) of proviso to sub section 5 of section 80G are relevant.

The application for fresh registration / approval is to be made at least one month prior to the commencement of the previous year relevant to the assessment year from which said approval / registration is sought. For example, if the exemption is sought for the income from financial year 2021-22 the application will have to be made at least one month before 1st April, 2021 i.e., in March 2021 or prior.

In case of fresh first time applicants, the PCIT / CIT is required to give provisional approval / registration for three years and to send the copy of order to the applicant. No requirement for any detailed enquiry etc. is mentioned like in other cases of approval / registration. The requirement for detailed enquiry has been mentioned only regarding application for full / final registration / approval to provisionally registered / approved entity. The provisional registration is to be given from the assessment year from which the registration was sought. The order for registration / approval in such cases will be required to be passed within a months from the end of the month in which the application will be filed.

9. Procedure for Conversion of Provisional Registration To Full / Final Registration

These cases are dealt with in clause 7(1)(A)(a) and clause 10(1)(A) & clause 33(i)(b) and other related clauses of the Finance Bill. The provisionally registered institutions etc. will have to apply for full / final approval at least 6 months prior to the expiry of the provisional registration or within 6 months of commencement of activities which is earlier. In case the final approval / registration is granted the same will be from the assessment year from which the provisional approval / registration was granted. The order for registration / approval in such cases will be required to be passed within 6 months from the end of the month in which the application will be filed.

The “commencement / non commencement of activities” has remained a disputed basis for rejection of application for registration / approval under the existing law. Therefore, it appears that under the new law, the genuine institution may not be rejected approval / registration (though provisional) for want of commencement of activities.

The relevant extract from the Memorandum Explaining Clauses are as under :

(vi) an entity making fresh application for approval under clause (23C) of section 10, for registration under section 12AA, for approval under section 80G shall be provisionally approved or registered for three years on the basis of application without detailed enquiry even in the cases where activities of the entity are yet to begin and then it has to apply again for approval or registration which, if granted, shall be valid from the date of such provisional registration. The application of registration subsequent to provisional registration should be at least six months prior to expiry of provisional registration or within six months of start of activities, whichever is earlier.”

10. Fresh Registration / Approval to be Applied Much Earlier

Under the existing provisions, the application for registration U/s. 12AA can be made at any time during the financial year from which the exemption is required. For example, if the exemption is required from the income of financial year 2018-19, the application could have been made at any time between 01st April, 2018 to 31st March, 2019, even on the last day of the financial year i.e., on 31st March, 2019. In case the registration is granted the same will be applicable to the income of the whole financial year 2018-19.

Similarly, for getting approval for exemption U/s. 10(23C) in respect of income from any financial year, the application is to be made at any time before the 30th September next from the end of the financial year i.e., for exemption of income from the financial year 2018-19, the application had to be made at any time up to 30th September, 2019.

Now, under the proposed provisions, the fresh applicants (first time applicants) will have to make application for registration / approval much earlier i.e., at least one month prior to the commencement of the financial year from which exemption is required. The approval / registration will be granted from such financial year.

(Note : it appears that there is some drafting error in the proposed amendment. The language used for prescribing time limit for making application is “(iv) in any other case, at least one month prior to the commencement of the previous year relevant to the assessment year from which the said approval is sought, “. The language used for grant of registration is “(iii) in any other case, from the assessment year immediately following the financial year in which such application is made:” (emphasis supplied by us) For example it the registration / approval is sought for the financial year 2021-22 (assessment year 2022-23) then application will have to be made in the financial year 2020-21. Now, registration will be granted from the assessment year following the financial year in which the application is made i.e., in this case from the assessment year 2021-22 or financial year 2020-21 whereas the application has been made from the financial year 2021-22 (assessment year 2022-23).

11. Simultaneous Registration for Exemption under Section 11 etc and Approval For Section 10(23C) Exemption Now Not Permissible

The proposed amendment to section 11 provides that if the institution is registered for exemption U/s. 11 etc. as well as approved U/s. 10(23C) / notified U/s. 10(46) then the above registration shall became inoperative from the date of coming in to force of the amendment. If in future, an institution which is registered U/s. 12AA / 12AB also gets approval U/s. 10(23C) or become notified U/s. 10(46) after amendment, then also in such case the registration U/s. 12AA / 12AB shall became inoperative from the date of such approval / notification.

The proposed amendments gives an option to the institution to get its registration u/s. 12AA / 12AB operative by making application for that. However, in such circumstances he will not be entitled to get benefit of section 10(23C) approval / 10(46) notification. The procedure for making registration operative again is given in the amended provisions.

The crux of the above amendment is that at a time an institution can take benefit of either section 12AA / 12AB or of section 10(23C) and 10(46).

12. Due Date of Filing of Income Tax Return Extended To 31st October

The due date for filing of the Income Tax Return for such institutions have also been extended to 31st October from 30th September.

13. Other Relevant Amendments

(1) Similar amendments are proposed in respect of institutions approved U/s. 35.

(2) Deduction under section 80G/ 80GGA to a donor shall be allowed only if a statement is furnished by the donee who shall be required to furnish a statement in respect of donations received and in the event of failure to do so, fee and penalty shall be levied.

(3) Similar to section 80G of the Act, deduction of cash donation under section 80GGA shall be restricted to Rs 2,000/- only.

14. Relevant Clauses of Finance Bill

These are mentioned hereunder for ready reference :

i. Amendment of section 10

7. In section 10 of the Income-tax Act,–

(I) in clause (23C),–

(A) with effect from the 1st day of June, 2020,–

(a) for the first and second provisos, the following provisos shall be substituted, namely:–

Provided that the exemption to the fund or trust or institution or university or other educational institution or hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via)under the respective sub-clauses shall not be available to it unless such fund or trust or institution or university or other educational institution or hospital or other medical institution makes an application in the prescribed form and manner to the Principal Commissioner or Commissioner, for grant of approval,–

(i) where such fund or trust or institution or university or other educational institution or hospital or other medical institution is approved under the second proviso [as it stood immediately before its amendment by the Finance Act, 2020], within three months from the date on which this clause has come into force;

(ii) where such fund or trust or institution or university or other educational institution or hospital or other medical institution is approved and the period of such approval is due to expire, at least six months prior to expiry of the said period;

(iii) where such fund or trust or institution or university or other educational institution or hospital or other medical institution has been provisionally approved, at least six months prior to expiry of the period of the provisional approval or within six months of commencement of its activities, whichever is earlier;

(iv) in any other case, at least one month prior to the commencement of the previous year relevant to the assessment year from which the said approval is sought, and the said fund or trust or institution or university or other educational institution or hospital or other medical institution is approved under the second proviso:

Provided further that the Principal Commissioner or Commissioner, on receipt of an application made under the first proviso, shall,—

(i) where the application is made under clause (i) of the said proviso, pass an order in writing granting approval to it for a period of five years;

(ii) where the application is made under clause (ii) or clause (iii) of the said proviso,–

(a) call for such documents or information from it or make such inquiries as he thinks necessary in order to satisfy himself about—

(A) the genuineness of activities of such fund or trust or institution or university or other educational institution or hospital or other medical institution; and

(B) the compliance of such requirements of any other law for the time being in force by it as are material for the purpose of achieving its objects; and

(b) after satisfying himself about the objects and the genuineness of its activities under item (A), and compliance of the requirements under item (B), of sub-clause (a),–

(A) pass an order in writing granting approval to it for a period of five years;

(B) if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its approval after affording it a reasonable opportunity of being heard;

(iii) where the application is made under clause (iv) of the said proviso, pass an order in writing granting approval to it provisionally for a period of three years from the assessment year from which the registration is sought, and send a copy of such order to the fund or trust or institution or university or other educational institution or hospital or other medical institution:”;

(b) for the eighth and ninth provisos, the following provisos shall be substituted, namely:–

Provided also that any approval granted under the second proviso shall apply in relation to the income of the fund or trust or institution or university or other educational institution or hospital or other medical institution,–

(i) where the application is made under clause (i) of the first proviso, from the assessment year from which approval was earlier granted to it;

(ii) where the application is made under clause (iii) of the first proviso, from the first of the assessment years for which it was provisionally approved;

(iii) in any other case, from the assessment year immediately following the financial year in which such application is made:

Provided also that the order under clause (i), sub-clause (b) of clause (ii)and clause (iii) of the second proviso shall be passed, in such form and manner as may be prescribed, before expiry of the period of three months, six months and one month, respectively, calculated from the end of the month in which the application was received:”;

(B) in the tenth proviso, for the words and figures “section 288 and furnish along with the return of income for the relevant assessment year”, the words, figures and letters “section 288 before the specified date referred to in section 44AB and furnish by that date” shall be substituted;

(C) with effect from the 1st day of June, 2020,–

(a) the sixteenth proviso shall be omitted;

(b) for the eighteenth proviso, the following proviso shall be substituted, namely:–

Provided also that all applications made under the first proviso [as it stood before its amendment by the Finance Act, 2020] pending before the Principal Commissioner or Commissioner, on which no order has been passed before the date on which the first proviso has come into force, shall be deemed to be an application made under clause (iv) of the first proviso on that date:”;

ii. Amendment of section 11

9. In section 11 of the Income-tax Act, in sub-section (7), with effect from the 1st day of June, 2020,–

(a) for the words, brackets, letters and figures “under clause (b) of sub-section (1) of section 12AA”, the words, figures and letters “under section 12AA or section 12AB” shall be substituted;

(b) for the words, brackets, figures and letter “clause (1) and clause (23C)”, the words, brackets, figures and letter “clause (1), clause (23C) and clause (46)” shall be substituted;

(c) the following provisos shall be inserted, namely:–

“Provided that such registration shall become inoperative from the date on which the trust or institution is approved under clause (23C) of section 10 or is notified under clause (46) of the said section, as the case may be, or the date on which this proviso has come into force, whichever is later:

Provided further that the trust or institution, whose registration has become inoperative under the first proviso, may apply to get its registration operative under section 12AB subject to the condition that on doing so, the approval under clause (23C) of section 10 or notification under clause (46) of the said section, as the case may be, to such trust or institution shall cease to have any effect from the date on which the said registration becomes operative and thereafter, it shall not be entitled to exemption under the respective clauses.”.

iii. Amendment of section 12A

10. In section 12A of the Income-tax Act,–

(I) in sub-section (1),–

(A) after clause (ab), the following clause shall be inserted with effect from the 1st day of June, 2020, namely:–

“(ac) notwithstanding anything contained in clauses (a) to (ab), the person in receipt of the income has made an application in the prescribed form and manner to the Principal Commissioner or Commissioner, for registration of the trust or institution,–

(i) where the trust or institution is registered under section 12A [as it stood immediately before its amendment by the Finance (No. 2) Act, 1996] or under section 12AA, [as it stood immediately before its amendment by the Finance Act, 2020] within three months from the date on which this clause has come into force;

(ii) where the trust or institution is registered under section 12AB and the period of the said registration is due to expire, at least six months prior to expiry of the said period;

(iii) where the trust or institution has been provisionally registered under section 12AB, at least six months prior to expiry of period of the provisional registration or within six months of commencement of its activities, whichever is earlier;

(iv) where registration of the trust or institution has become inoperative due to the first proviso to sub-section (7) of section 11, at least six months prior to the commencement of the assessment year from which the said registration is sought to be made operative;

(v) where the trust or institution has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, within a period of thirty days from the date of the said adoption or modification;

(vi) in any other case, at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought, and such trust or institution is registered under section 12AB;”;

(B) in clause (b), for the words “and the person in receipt of the income furnishes along with the return of income for the relevant assessment year”, the words, figures and letters “before the specified date referred to in section 44AB and the person in receipt of the income furnishes by that date” shall be substituted;

(II) in sub-section (2), with effect from the 1st day of June, 2020,–

(A) in the first proviso, for the words “Provided that”, the following shall be substituted, namely:–

“Provided that the provisions of sections 11 and 12 shall apply to a trust or institution, where the application is made under–

(a) sub-clause (i) of clause (ac) of sub-section (1), from the assessment year from which such trust or institution was earlier granted registration;

(b) sub-clause (iii) of clause (ac) of sub-section (1), from the first of the assessment years for which it was provisionally registered:

Provided further that”;

(B) in the second proviso, for the words “Provided further”, the words “Provided also” shall be substituted;

(C) in the first and third provisos, after the word, figures and letters “section 12AA”, the words, figures and letters “or section 12AB” shall be inserted.

iv. Amendment of section 12AA

11. In section 12AA of the Income-tax Act, after sub-section (4), the following sub-section shall be inserted with effect from the 1st day of June, 2020, namely:–

“(5) Nothing contained in this section shall apply on or after the 1st day of June, 2020.”.

v. Insertion of new section 12AB

12. After section 12AA of the Income-tax Act, the following section shall be inserted with effect from the 1st day of June, 2020, namely:–

“12AB. (1) The Principal Commissioner or Commissioner, on receipt of an application made under clause (ac) of sub-section (1) of section 12A, shall,—

(a) where the application is made under sub-clause (i) of the said clause, pass an order in writing registering the trust or institution for a period of five years;

(b) where the application is made under sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) of the said clause,–

(i) call for such documents or information from the trust or institution or make such inquiries as he thinks necessary in order to satisfy himself about—

(A) the genuineness of activities of the trust or institution; and

(B) the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects; and

(ii) after satisfying himself about the objects of the trust or institution and the genuineness of its activities under item (A), and compliance of the requirements under item (B), of sub-clause (i),–

(A) pass an order in writing registering the trust or institution for a period of five years;

(B) if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its registration after affording a reasonable opportunity of being heard;

(c) where the application is made under sub-clause (vi) of the said clause, pass an order in writing provisionally registering the trust or institution for a period of three years from the assessment year from which the registration is sought, and send a copy of such order to the trust or institution.

(2) All applications, pending before the Principal Commissioner or Commissioner on which no order has been passed under clause (b) of sub-section (1) of section 12AA before the date on which this section has come into force, shall be deemed to be an application made under sub-clause (vi) of clause (ac) of sub-section (1) of section 12A on that date.

(3) The order under clause (a), sub-clause (ii) of clause (b) and clause (c), of sub-section (1) shall be passed, in such form and manner as may be prescribed, before expiry of the period of three months, six months and one month, respectively, calculated from the end of the month in which the application was received.

(4) Where registration of a trust or an institution has been granted under clause (a) or clause (b) of sub-section (1) and subsequently, the Principal Commissioner or Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution after affording a reasonable opportunity of being heard.

(5) Without prejudice to the provisions of sub-section (4), where registration of a trust or an institution has been granted under clause (a) or clause (b) of sub-section (1) and subsequently, it is noticed that–

(a) the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub-section (1) of section 13; or

(b) the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality, then, the Principal Commissioner or the Commissioner may, by an order in writing, after affording a reasonable opportunity of being heard, cancel the registration of such trust or institution.”

vi. Amendment of Section 80G

“(viii) the institution or fund prepares such statement for such period as may be prescribed and deliver or cause to be delivered to the prescribed income-tax authority or the person authorized by such authority such statement in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed:

Provided that the institution or fund may also deliver to the said prescribed authority a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under this sub-section in such form and verified in such manner as may be prescribed; and

(ix) the institution or fund furnishes to the donor, a certificate specifying the amount of donation in such manner, containing such particulars and within such time from the date of receipt of donation, as may be prescribed:

Provided that the institution or fund referred to in clause (vi) shall make an application in the prescribed form and manner to the Principal Commissioner or Commissioner, for grant of approval,–

(i) where the institution or fund is approved under clause (vi) [as it stood immediately before its amendment by the Finance Act, 2020], within three months from the date on which this proviso has come into force;

(ii) where the institution or fund is approved and the period of such approval is due to expire, at least six months prior to expiry of the said period;

(iii) where the institution or fund has been provisionally approved, at least six months prior to expiry of the period of the provisional approval or within six months of commencement of its activities, whichever is earlier;

(iv) in any other case, at least one month prior to commencement of the previous year relevant to the assessment year from which the said approval is sought:

Provided further that the Principal Commissioner or Commissioner, on receipt of an application made under the first proviso, shall,—

(i) where the application is made under clause (i) of the said proviso, pass an order in writing granting it approval for a period of five years;

(ii) where the application is made under clause (ii) or clause (iii) of the said proviso,–

(a) call for such documents or information from it or make such inquiries as he thinks necessary in order to satisfy himself about—

(A) the genuineness of activities of such institution or fund; and

(B) the fulfilment of all the conditions laid down in clauses (i) to (v); and

(b) after satisfying himself about the genuineness of activities under item (A), and the fulfilment of all the conditions under item (B), of sub-clause (a),–

(A) pass an order in writing granting it approval for a period of five years;

(B) if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its approval after affording it a reasonable opportunity of being heard;

(iii) where the application is made under clause (iv) of the said proviso, pass an order in writing granting it approval provisionally for a period of three years from the assessment year from which the registration is sought, and send a copy of such order to the institution or fund:

Provided also that the order under clause (i), sub-clause (b) of clause (ii) and clause (iii) of the first proviso shall be passed in such form and manner as may be prescribed, before expiry of the period of three months, six months and one month, respectively, calculated from the end of the month in which the application was received:

Provided also that the approval granted under the second proviso shall apply to an institution or fund, where the application is made under–

(a) clause (i) of the first proviso, from the assessment year from which approval was earlier granted to such institution or fund;

(b) clause (iii) of the first proviso, from the first of the assessment years for which such institution or fund was provisionally approved;

(c) in any other case, from the assessment year immediately following the financial year in which such application is made.”;

(ii) in sub-section (5D), after Explanation 2, the following Explanation shall be inserted, namely:–

“Explanation 2A.— For the removal of doubts, it is hereby declared that claim of the assessee for a deduction in respect of any donation made to an institution or fund to which the provisions of sub-section (5) applies, in the return of income for any assessment year filed by him, shall be allowed on the basis of information relating to said donation furnished by the institution or fund to the prescribed income-tax authority or the person authorised by such authority, subject to verification in accordance with the risk management strategy formulated by the Board from time to time.”;

(iii) after sub-section (5D), the following sub-section shall be inserted, namely:–

“(5E) All applications, pending before the Commissioner on which no order has been passed under clause (vi) of sub-section (5) before the date on which this sub-section has come into force, shall be deemed to be applications made under clause (iv) of the first proviso to sub-section (5) on that date.”.

PROPOSED CHANGE BY THE FINANCE BILL UNDER THE FOLLOWING SECTION :-

1. Section 43B:- Allowing deduction for amount disallowed under section 43B, to insurance companies on payment basis.

Section 43B of the Act provides for allowance of certain deductions, irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by the assessee, only in the previous year in which such sum is actually paid.

Section 44 of the Act provides that computation of profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or a co-operative society shall be computed in accordance with the rules contained in the First Schedule to the Act.

As per Rule 5 of the First Schedule, the deduction of expenditure was subject to the provisions of Sec 43B but there is no provision of allowance of the expenses in subsequent year on actual payment.

In the finance bill 2020 has proposed to insert a proviso after clause (c) of the said rule 5 to provide that any sum payable by the assessee which is added back under section 43B in accordance with clause (a) of the said rule shall be allowed as deduction in computing the income under the rule in the previous year in which such sum is actually paid.

2. U/s 143 Tax Administration and Compliance:-

i. Modification of e-assessment scheme sub section (3A)

Section 143 of the Act provides the manner for processing and assessment of return of income (ITR) where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142 of the Act. Section 143(3A) provides that the Central Government may make a scheme, by notification in the Official Gazette, for the purposes of making assessment of total income or loss of the assessee under section 143(3) so as to impart greater efficiency, transparency and accountability by certain means specified therein. Accordingly, E-assessment Scheme, 2019 was notified under section 143(3A) of the Act.

Now, the scope of section 143(3A) has been expanded to include the reference of section 144 of the Act relating to best judgment assessment in the said sub-section.

ii. Modification of e-assessment scheme sub section (3B) of section 143

The central government for purpose of giving effect to the scheme made under sub section (3A) by a notification in the official gazette, direct that any of the provision of this act relating to assessment of total income or loss shall not apply or shall apply with such exception modification and adaptations as may be specified in this notification provided that no direction shall be issue after the 31st day of march 2020.

In the Finance Bill 2020 has proposed and extended the period from 31st March 2020 to 31st March 2022.

iii. New System of e-appeal

It is proposed to insert new sub-section (6A) in section 250 of the Act to provide for the following: —

Empowering Central Government to notify new an e-appeal scheme for disposal of appeal by CIT(A) so as to impart greater efficiency, transparency and accountability.

Eliminating the interface between the CIT (A) and the appellant in the course of appellate proceedings to the extent technologically feasible.

Optimizing utilization of the resources through economies of scale and functional specialization.

Introducing an appellate system with dynamic jurisdiction in which appeal shall be disposed of by one or more CIT(A).

proposed to empower the Central Government, for the purpose of giving effect to the scheme made under the proposed sub- section, by notification in the Official Gazette, to direct that any of the provisions of this Act relating to jurisdiction and procedure of disposal of appeal shall not apply or shall apply with such exceptions, modifications and adaptations as maybe specified in the notification. Such directions are to be issued on or before 31st March 2022.

3. Amendment in section 139 of the Income tax Act, in sub clause (1) in explanation 2 in clause (a)

The due date for filling return other than the assessee who is required to furnish a report referred to in section 92E, company and other than company whose account are to be required to be audited under this act, or any other laws for the time being enforce, working partner of the firm whose accounts are required to be audited under this act or under any other law for the time being enforce has been substituted from 30th day to September to 31st day of October. The return of the company, other than company audited u/s 44AB of the Income tax Act, the due date for file to return from 30th day of September has been substituted to 31st day of October.

4. Amendment in section 140 of the Income tax Act

The provision of section 140 return u/s 139 or section 115WD shall be verified by :—

a) IN case of an individual

i) By the individual himself

ii) Where he is absent from India, by the individual himself or by sum person duly authorized by him in this behalf

iii) Where is mentally in capacitated from attending to his affairs by his guardian or any other person competent to act on a behalf and

iv) Where for the any other person it is not possible for the individual to verify the return by any person duly authorized by him in this behalf

In the finance bill following amendment has been proposed:-

i) In case of a company by the managing director is not able to verify the return, the any other person as may be prescribed for this purpose shall be inserted and

ii) In case of clause (cd) in case of limited liability partnership the word by any partner thereof had been inserted from any other person as may be prescribed for this purpose, if the dignities partner are not able to verify the return the any other person as authorized by the partner shall verified the return.

5. New section 285BB has been Inserted in the Finance Bill 2020

In the finance bill 2019 the section 285BA was inserted obligation to furnish statement of financial transaction or reportable accounts and in the finance bill new section 285BA has been inserted with effect from 1st June 2020 namely

The prescribe income tax authority or the person authorized by the such authority shall uploaded in the registered account of the assessee an annual information statement in such form and manner with such time and alongwith such information which is in the possession of an income tax authority, as may be prescribed”

As per provision of section 285BA the financial transaction has been uploaded on income tax site but the new section 285BB has been inserted and the Income tax Authority shall be uploaded the information again the information of the assessee on the registered ID of the assessee which is in the possession of income tax authority.

6. Amendment in section 288 in The Finance Bill 2020

The section 288(2) authorized the representative who is entitled to attend the case before the authority. IN this section after clause (vii) a new clause (viii) has been inserted namely “any other person as may be prescribe”

1. Withdrawal of perquisites/allowances to Union Public Services Commission (UPSC), and members of Chief Election Commissioners and Election Commissioners

Under the existing provisions of section 10(45), the any allowance or perquisite as notified by the Central Government paid to the Chairman or Retired Chairman or any other member or retired members of Union Public Services Commission was to be considered as an exempt income and was accordingly no tax was to be paid on this income received. These provisions were introduced by Finance Act, 2011 with retrospective effect from
1-4-2008. Also, currently specified perquisites of Chief Election Commissioner or Election Commissioner are exempt from taxation under the enabling provisions in the respective acts governing their service conditions i.e. under section 8 of Election Commission (Conditions of Service of Election Commissioners and Transaction of Business) Act, 1991.

The following perquisites/allowances were notified by Central Government under the said section vide Notification No. 49 of 2011,

Allowances exempt in case of serving chairman and members of UPSC:

(i) the value of rent-free official residence;

(ii) the value of conveyance facilities including transport allowance;

(iii) the sumptuary allowance;

(iv) the value of leave travel concession provided to a serving Chairman or member of the UPSC and members of his family.

Allowances exempt in case of retired chairman and retired members of UPSC:

(i) a sum of maximum of ₹ 14,000 per month for defraying the service of an orderly and for meeting expenses incurred towards secretarial assistance on contract basis;

(ii) the value of a residential telephone free of cost and the number of free calls to the extent of 1500 per month (overall and above the number of free calls per month allowed by telephone authorities).

It is now proposed to delete the section 10(45) of the Income Tax Act, 1961. As of consequence, these allowances and perquisites will no more be exempt. Further, even section 8 of Election Commission Act, 1991 is amended to delete the exemption of income tax on value of of rent-free residence, conveyance facilities, sumptuary allowance, medical facilities and other such conditions of service as are applicable to a Judge of the Supreme Court, paid to Chief Election Commissioner and other Election Commissioners.

It is to be noted that similar tax exemptions provided to the Judges of Supreme Court under the Supreme Court Judges (Condition and services) Act, 1958 are still intact and are not proposed to be deleted.

This amendment is effective from AY 2021-22 and subsequent years.

2. Threshold limit set for employer’s contribution to recognized provident funds, superannuation funds and national pension scheme (NPS)

The existing provisions of section 17(2)(vii), provides that any contribution made by employer to the approved superannuation fund for the assessee in excess of ₹ 1,50,000/- shall be chargeable to tax in hands of employee as perquisites.

Also, the contribution made by employer for the employee on account of recognized provident fund exceeding 12% of salary is taxable. The assessee is also allowed deduction under NPS u/s. 80 CCD (1) of the Act for amount contributed up to 14% of salary by Central Government and amount up to 10% contributed by any other employer. Currently, there is no upper limit to the cumulative allowability of these deductions.

Now, the said sub section 17(2) (vii) is substituted by new subsections (vii) and (viia) which provides that a combined upper limit of seven lakh and fifty thousand rupee in respect of employer’s contribution in a year to NPS, superannuation fund and recognised provident fund and any excess contribution. Consequently, it is also provided that any annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme may be treated as perquisite to the extent it relates to the employer’s contribution which is included in total income.

The rationale behind bringing an upper limit threshold for contributions made by employer was mentioned by the Finance Minister in his speech and memorandum to Finance Bill, is no combine upper limit for the purpose of deduction of contribution made by employer has given undue advantage to employees earning high salary income. While an employee with low salary income is not able to let employer contribute a large part of his salary to all these three funds, employees with high salary income are able to design their salary package in a manner where a large part of their salary is paid by the employer in these three funds. Thus, this portion of salary does not suffer taxation at any point of time, since Exempt-Exempt-Exempt (EEE) regime is followed for these three funds. Thus, not having a combined upper cap is iniquitous and hence, not desirable.

As an effect to this amendment, the employers have to be very careful in structuring the salary of their employees and shall also have to take care in calculation of TDS so as to include contributions and interest accrued on those as perquisite income in hands of employees.

This amendment is effective from AY: 2021-22 and subsequent assessment years.

3. Additional Compliance Provisions for scientific research organisations

Section 35 allows the expenditure incurred by an assessee for scientific research for its own business or for contribution towards certain approved scientific research associations, universities, colleges etc. or to any other company which uses it for scientific research. In order to be eligible to claim the expenditure, the expense should be made to the aforesaid associations to make application for grant of approval from the Central Government.

In order to keep a check on such scientific research associations, universities, colleges and companies etc., and to rationalise the provisions afresh, the section has been amended to include a proviso to provide that every notification in respect of such research association, university, college or other institution under clause (ii) and clause (iii) or under clause (iia) in respect of the company issued by Central Government shall stand withdrawn unless such research associations etc. makes an intimation to income tax authority in such form and manner within three months from 1st June, 2020 (the effective date of this amendment). Once such intimation is received, the notification shall be valid for another 5 assessment years beginning from AY: 2021-22. It is also provided that if the Central Government notifies any such institutions to avail deduction after the Finance Bill, 2020 is enacted into Act, such notification shall be effective for another 5 consequent assessment years.

Moreover, a new sub section (1A) has been introduced to provide that such deductions to contributions as referred in sub section (1) shall be allowed only if such research associations etc., prepares and submits such statement to income tax authority as to be prescribed. Also, provisions have been given for filing a correction statement for rectification of any mistakes in the statements furnished at earlier occasion and to furnish the donor a certificate specifying the amount of donation within such time and manner from receipt of donation as may be prescribed.

The rationale behind introducing these provisions could be to streamline the deductions made to scientific research associations etc. and have the data about such organisations updated. Further, there have been cases traced in past to misuse these provisions to avail extra deduction and these steps may be taken to provide for an extra check measure to such misuse. However, these provisions shall definitely be an extra burden on such institutions and they have to act immediately by furnishing such intimation to avoid the withdrawal of such notification received by it.

4. Providing an option to assessee not avail deduction of section 35AD

Under the present provisions of section 35AD (1), 100% deduction is allowed on capital expenditure (other than expenditure on land, goodwill and financial assets) incurred on any specified businesses during the previous year in which such expenditure is incurred. However as per the current provisions, the assessee does not have an option to not avail the incentive under this section. It seems from the language of the present statute that it is mandatory to claim this deduction of the conditions of the section are met with.

Moreover, sub section (4) of section 35AD, provides that no deduction shall be allowed under any other section in respect of expenditure referred to in sub section (1) in any previous year or under this section in any other previous year.

However, because of the wording of these sections, there was a legal anomaly that those domestic companies who opt for concessional tax rates u/s. 115BAA and 115BAB of the Act and therefore does not claim deduction u/s. 35AD, would also be denied normal depreciation u/s. 32 by virtue of operation of sub section (4) of section 35AD of the Act. However, this would tantamount to misinterpretation and was not the intention of law and to correct this position, amendments have been made in section 35AD (1) to make the operation of section optional for assessee. Also, sub section (4) has been suitably amended to specifically provide that no deduction in respect of this section shall be allowed if the deduction has been claimed by assessee and allowed to him under this section.

This amendment is effective from AY: 2020-21 and subsequent assessment years.

5. Recognized association to be replaced by recognized stock exchange for commodity derivative transactions

Proviso to section 43(5) exempted an eligible transaction in respect of trading in commodity derivatives from being treated as speculative transaction provided it is conducted through a recognized association (commodity exchange). Since now all commodity derivative transactions are now carried out only on recognized stock exchanges, section 43(5) has been amended to replace the words recognized association with recognized stock exchange at all places it appears in the section.

Also, definition of recognized stock exchange in sub clause (iii) of Explanation 2 to section 43(5) has been amended to mean it as recognized stock exchange as referred in section 2 (f) of the Security Contracts (Regulation) Act, 1956 and the one which fulfils such conditions as may be prescribed and notified by the Central Government for that purpose.

6. Cost of acquisition of the land or building as on 1-4-2001

Section 55 provides that for calculation of capital gains, an assessee shall be allowed deduction for cost of acquisition and cost if improvement. However in cases when the asset is acquired before 1-4-2001, the assessee is allowed to either consider fair market value of the asset as on 1-4-2001 or the actual cost as the cost of acquisition for the purposes of computation of capital gains. Also, in cases where the asset has been received by any modes mentioned in section 49(1) like inheritance, will, gift etc. and it became property of the previous owner before 1-4-2001 than the assessee has an option to consider the fair market value as on 1-4-2001 as the cost of acquisition.

With a view to rationalise this provision, a proviso is inserted to section 55(2)(ac) to provide that in case the asset is land and building or both, the fair market value of such an asset cannot be more than the stamp duty value of the asset as on that date in cases where it is available. Further, stamp duty value for purpose of this proviso shall mean the value adopted or assessed or assessable by any authority of the Central Government or a State government for the purposes of payment of stamp duty of immovable property.

This amendment shall be effective from AY: 2021-22 and subsequent assessment years.

7. Introduction of Tax Payers Charter in the Act

A new section 119A has been introduced in the Act to empower the CBDT to adopt and declare a tax payer’s charter and issue such orders, instructions, directions or guidelines to other income tax authorities as it may deem fit for the administration of charter. At present there is a Citizen’s Charter in place however it is not forming part of the Act and therefore is quite informal and rarely followed. This is a welcome move as administration between the Board and income tax authorities have also been privy to their internal circulars, instructions etc. and with introduction of such charter in the Act itself, it shall be binding on all income tax authorities and assesses throughout. This may bring better administration, transparency and speedy disposal.

This amendment shall take effect from 1-4-2020

8. Restriction on the power of survey by Income Tax Authorities

Section 133A empowers the Income tax authority as defined therein to conduct survey proceedings at the business premises of the assessee under his jurisdiction. To avoid the abuse of these survey provisions by the Income Tax Authority and to protect interest of assessee, in Finance Act 2003, sub section 6 to section 133 was introduced to provide that any officer below the rank of Joint Commissioner or Joint Director i.e. like Assessing Officer, Assistant Commissioner of Income Tax, Tax recovery officer etc., cannot undertake survey proceedings without prior approval from Joint Director or Joint Commissioner. Now these provisions are widened further to provide substitute sub section (6) as under:

– In case when information has been received from the prescribed authority, no income tax authority below the rank of Joint Director or Joint Commissioner shall conduct any survey under this section without prior approval of Joint Director or Joint Commissioner; and

– In any other cases, no income tax authority below the rank of Commissioner or Director, shall conduct any survey proceedings without prior approval from Commissioner or Director.

Introduction of this provision shall provide a check on the growing survey proceedings and avoid unnecessary harassment to tax payers as promised by the Honourable Finance Minister.

This amendment shall take effect from 1-4-2020

Clause 98 of the Finance Bill, 2020 proposes to introduce section 271AAD in the Income-tax Act, 1961 (“the Act”). The Explanatory Memorandum explains the rationale of introducing the provision as under –

Penalty for fake invoice.

In the recent past after the launch of Goods & Services Tax (GST), several cases of fraudulent input tax credit (ITC) claim have been caught by the GST authorities. In these cases, fake invoices are obtained by suppliers registered under GST to fraudulently claim ITC and reduce their GST liability. These invoices are found to be issued by racketeers who do not actually carry on any business or profession. They only issue invoices without actually supplying any goods or services. The GST shown to have been charged on such invoices is neither paid nor is intended to be paid. Such fraudulent arrangements deserve to be dealt with harsher provisions under the Act.

Therefore, it is proposed to introduce a new provision in the Act to provide for a levy of penalty on a person, if it is found during any proceeding under the Act that in the books of accounts maintained by him there is a (i) false entry or (ii) any entry relevant for computation of total income of such person has been omitted to evade tax liability. The penalty payable by such person shall be equal to the aggregate amount of false entries or omitted entry. It is also proposed to provide that any other person, who causes in any manner a person to make or cause to make a false entry or omits or causes to omit any entry, shall also pay by way of penalty a sum which is equal to the aggregate amounts of such false entries or omitted entry. The false entries is proposed to include use or intention to use –

(a) forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or

(b) invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both; or

(c) invoice in respect of supply or receipt of goods or services or both to or from a person who do not exist.

This amendment will take effect from 1st April, 2020.”

The explanation for proposed insertion of this section is given in the Explanatory Memorandum under the caption “Penalty for fake invoice”. The marginal note to the section is captioned “Penalty for false entry, etc. in books of account”. Therefore, a cursory look at the caption in the memorandum and the title as stated in the marginal note suggests that the scope of the provision is much wider than what has been stated in the Explanatory Memorandum.

Section 271AAD is a proposed to be inserted in Chapter XXI of the Act which is captioned “Penalties Imposable”. Salient features of the provision, as is proposed to be inserted, are as under –

i) the provisions of this section are without prejudice to any other provisions of the Act;

ii) the penalty under this section can be imposed by the Assessing Officer;

iii) there has to be a finding during any proceeding under the Act;

iv) the finding has to be to the effect that in the books of account maintained by any person there is –

a. a false entry; or

b. an omission of any entry which is relevant for computation of total income of such person, to evade tax liability;

v) the term “false entry” is defined in an Explanation to this section;

vi) the levy of penalty appears to be discretionary;

vii) the quantum of penalty is a sum equal to the aggregate amount of such false or omitted entry;

viii) any other person who causes the person to make a false entry or omits or causes to omit any entry can also be directed to pay a penalty of a sum equal to the aggregate amount of such false or omitted entry;

ix) since this is a provision in Chapter XXI, provisions of sections 274 and 275 are applicable to penalty under this section.

Each of the above are explained in the subsequent paragraphs.

Who can impose the penalty: The Assessing Officer may direct that a person shall pay a penalty under this section. Unlike section 270A, the Commissioner (Appeals), Principal Commissioner or Commissioner does not have a power to direct payment of penalty under this section.

In a case where jurisdiction has been conferred on a Joint Commissioner or an Additional Commissioner to do an assessment then in such a case, such a Joint Commissioner or Additional Commissioner will be an ₹Assessing Officer’ and consequently will be empowered to levy penalty under section 271AAD.

Since the penalty under this section is based on a finding during ₹any proceeding under this Act’, a question arises as to how can an Assessing Officer direct penalty in the course of appellate proceedings or revision proceedings. Does one conclude that it can be based on a finding in the proceedings before the Assessing Officer? In order to avoid litigation on this, it is advisable that a suitable amendment be made to the language of the provision before its enactment or in the alternative, CBDT may clarify that the provisions of this section will apply only in the course of proceedings before the Assessing Officer and not any other tax authority.

What is the penalty for? The penalty under this section is for—

(i) a false entry; or

(ii) an omission of any entry which is relevant for computation of total income of such person, to evade tax liability.

in the books of account maintained by a person.

For the purpose of this section, the term “false entry” is defined in an Explanation to section 271AAD. The Explanation defines the term “false entry” inclusively as follows –

“false entry” includes use or intention to use –

(a) forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or

(b) invoice in respect of supply of receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both; or

(c) invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.

Quantum of penalty — A sum equal to the aggregate amount of such false or omitted entry.

Since when is the provision effective — Section 1(2) of the Finance Bill, 2020 provides that save as otherwise provided in this Act sections 2 to 104 shall come into force on 1st April, 2020. Section 98 of the Finance Act, 2020 inserts section 271AAD. There is nothing contrary stated in section 98 of the Finance Act, 2020. Therefore, the provisions of section 271AAD are inserted with effect from 1.4.2020. The Explanatory Memorandum to the Finance Bill, 2020 states that this provision will take effect from 1st April, 2020. A question arises as to whether the provision is effective from Assessment Year 2020-21 and therefore it will also apply to even acts done before the enactment of the provision. Since this is a penal provision which has not been expressly made retrospective a better view appears to be that this section will apply to entries made or omission of an entry after the date of enactment of the provision. It is a principle of interpretation of a penal provision that the penalty on the date of committing the offence will apply. In the cases covered by section 271AAD the offence is recording of a false entry or omitting an entry which is relevant for computation of total income with a view to evade tax liability. In the event the act or omission is before 1.4.2020, it is possible to argue that the provisions of section 271AAD should not be made applicable to such acts / omission.

Without prejudice to any other provisions of this Act — The provisions of this section are without prejudice to any other provisions of the Act meaning thereby that the penalty under this section can be in addition to any other penalty, if any, to be levied under any other provision of the Act. In other words, penalty under this section cannot be avoided on the ground that a penalty under some other provision of the Act has already been levied on the person.

Delhi High Court in Apogee International Ltd. vs. UOI [(1996) 220 ITR 248 (Delhi)] has, for the purpose of section 143(2) of the Act, explained the meaning of “without prejudice to” as follows –

From a bare reading of clause (i) to sub-section (1)(a) of section 143, it is evident that giving of intimation in terms of provisions is ₹without prejudice’ to the provisions of sub-section (2), which means that an intimation sent to the assessee specifying the sum payable by him in terms of that sub-section does not preclude the operation of the provisions of sub-section (2). By force of the expression ‘without prejudice’, the jurisdiction of the assessing authority to proceed under sub-section (2) of section 143 is preserved despite intimation under sub-section (1).”

Madhya Pradesh High Court, in CIT vs. Regional Soyabean Products Co-op. Union Ltd., [(1999) 239 ITR 217 (MP), cited in CIT vs. H.E.G. Ltd. [(2002) 255 ITR 251 (MP)] has, for the purpose of section 143(1) of the Act, held as under –

But, the expression ₹without prejudice to the provisions of sub-section (2)’ appearing in the section would mean that once a notice has been issued under sub-section (2), then in that case the Assessing Officer shall not resort to section 143(1)(a)(i). The expression ₹without prejudice to the provisions of sub-section (2)’ means that it saves the action already initiated under section 143(2) of the Act. If the Legislature really intended to give full power to the Assessing Officer under section 143(1)(a)(i), then they would not have saved the action under section 143(2). In fact, this expression has carved out an exception that the Assessing Officer can send intimation to the assessee if the Assessing Officer has not exercised the power under section 143(2) of the Act.”

In the circumstances, it appears that the penalty under this section will be irrespective of the fact that a penalty under any other provision of the Act has been initiated or levied. Action taken under this section shall not be adversely affected by the action taken under any other provision of the Act.

during any proceeding under this Act’ – The phrase ₹during any proceeding under this Act’ is very wide and can mean proceedings for assessment, survey, search, appeal, revision, rectification, passing an order to give effect to an appellate order, etc. They would even cover proceedings under section 133(6). However, since the power to direct payment of penalty is only with the Assessing Officer and not the other authorities like Commissioner (Appeals) or the Principal Commissioner or Commissioner it could be debated as to whether this phrase should be read to mean only those proceedings which are before the Assessing Officer. Taking a different view would mean that the Assessing Officer can direct payment of penalty on the basis of finding of a different authority.

books of account maintained by any person’ – The penalty is not on an assessee but on a person. While every assessee is a person, every person may not necessarily be an assessee. The person should be maintaining books of account. The term ₹books or books of account’ is defined in section 2(12A) of the Act.

A question arises as to whether penalty can be levied for a false entry or for omission of an entry from the books of accounts in a case where a person is not mandatorily required to maintain books of accounts say e.g. a case where a person chooses to be governed by the provisions of presumptive taxation or where the requirement of maintaining books of account is not applicable to the person. Such a person may choose to maintain books of account to comply with the requirements of some other law. In such a case, will such a person be liable for penalty under this section, in case there is a false entry in such books of account or an omission of an entry which is relevant for computation of total income of such person to evade tax liability.

₹may direct’ – The language of the section is the Assessing Officer ‘may direct’. This is similar to the language of section 271 and several other penalty provisions. In the context of provisions of levy of penalty under section 271(1)(c) of the Act, the phrase ₹may direct’ has been explained to confer a discretion on the Assessing Officer. It appears that here also the phrase ₹may direct’ will mean that a discretion has been conferred on the Assessing Officer. Therefore, in a case where an Assessing Officer has, exercising the discretion, not levied penalty no fault may be found with such an action of the Assessing Officer.

Is scope of the section confined to only cases of ‘fake invoice’ – The Explanatory Memorandum has the rationale for introduction of this section under the caption ₹Fake Invoice’. The rationale, as given, is that certain racketeers are issuing invoices without supplying goods or services so as to enable a person who receives such an invoice to claim Input Tax Credit on the basis of the invoice so issued. The GST on the supply mentioned in such invoice is not paid to the government. However, the person in whose books purchase entry is recorded on the basis of such an invoice fraudulently claims ITC. It is with a view to punish such persons harshly that the provision has been introduced.

However, sub-section (1) provides that the penalty under this section may be levied in one of the two situations mentioned in sub-section viz. (i) there is a false entry in the books of account maintained by any person; or (ii) in the books of account maintained by a person there is an omission of any entry which is relevant for computation of total income of such person, to evade tax liability. Entries other than those of recording fake invoice could also qualify as ₹false entry’. Moreover, the term ₹false entry’ has been inclusively defined. Therefore, the scope of the provision is much wider than what has been explained in the Explanatory Memorandum.

A question arises as to whether the courts will hold that the scope of the provision be restricted to the intention mentioned in the Explanatory Memorandum. In view of the clear language of the provision it appears that it may be difficult to hold that the scope of the provision be restricted only to those cases which are covered by the Explanatory Memorandum.

Meaning of ‘false entry’ – Having a false entry in the books of accounts maintained by a person and such a false entry being found in the course of any proceeding under the Act empowers the Assessing Officer to direct levy of penalty under section 271AAD.

As has been stated, the term ₹false entry’ has been inclusively defined in the Explanation to the section. The three cases mentioned in clauses (a) to (c) of the Explanation are undoubtedly cases of ‘false entry’ but it may be argued, on behalf of the revenue, that even a case other than the one covered by the three clauses of the Explanation is also covered by the term ‘false entry’ since the definition is inclusive and not exhaustive. It appears that though the term ₹includes’ has been used, the definition has to be taken as an exhaustive definition and not an inclusive definition. A definition which uses the word ‘includes’ can also be regarded as an exhaustive definition if the words which follow the word ‘includes’ are those which would be covered by the natural meaning of the term sought to be defined. As has been stated above, the three circumstances mentioned in Explanation are undoubtedly cases of ₹false entry’. Since what has been stated in the inclusive part is what even otherwise would have been covered by the natural meaning of the term ₹false entry’, relying on the ratio of the following decisions it is possible to argue that the definition is an exhaustive definition.

i) Commissioner of Customs vs. Caryaire Equipment India Private Limited (2012) 4 SCC 645

ii) Urmila Devi vs. U P Power Corporation and Ors. 2003 (53) ALR 643

iii) Jeramdas Vishendas vs. Emperor, AIR 1934 Sindh 96

In other words it appears to be possible to contend that only in the three cases mentioned in the Explanation be regarded as cases of ‘false entry’ and not any other case.

While clause (ii) of sub-section (1) dealing with omission to make an entry, makes a reference to an entry which is relevant for computation of total income and also that the omission is to evade tax liability, these two pre-requisites are missing in clause (i). Therefore, even if a false entry is not relevant for computation of total income and/or it is inadvertently recorded in the books of account, still the requirement of clause (i) of sub-section (1) will be regarded has having been satisfied and the person will be covered by the provisions of this section.

Meaning of ‘omission’ – While the term ₹false entry’ is defined, ₹omission’ is not defined. Webster’s Dictionary explains the meaning of ₹omission’ as “1. The act of omitting; 2. The state of being omitted. 3. Something left out, not done, or neglected; an important omission in a report.”

The Advanced Law Lexicon, 3rd Edition, 2005, explains the meaning of ‘Omission’ inter alia as –

Omission” with reference to the performance of a duty involves the idea of conscious or wilful omission. Lond & S. W. Ry. vs. Flower. 45 LJCP 54. See also 11CPLR (Cr.) 16.

For the purposes of s. 153(1) of the Employment Protection (Consolidation) Act 1978 (c. 44) “omission” has to be given its ordinary and natural meaning, so that the non-payment of money or the denial of a benefit can be an “omission”, notwithstanding that there was no obligation on the part of the employer to make
the payment or grant the benefit 
[National Coal Board vs. Ridgway [(1987) 3 All E.R. 582]

The expression ‘omission’ does not connote any obligation. ‘Omission’ is a colourless word which merely refers to the not doing of something and if the assessee in fact does not make a return, it is an omission on his part, whether the law casts any obligation upon him to make a return or not. [Pannalal nandlal Bhandari vs. CIT, AIR 1956 Bom 557, 558. [Income-tax Act (11 of 1922), S. 34(1)].

A person cannot be said to have omitted or failed to disclose something when, of such thing, he had no knowledge. P. R. Mukherjee v. CIT, AIR 1956 Cal. 197, 200.

An “omission” to perform a duty involves the idea that the person to act is aware that performance is required or needful (London & South Wester Railway Flower, 1 CPD 77). See DONE. Cp. Somerset v. Wade, (1894) 1 QB 574, cited SUFFER. See also per KENNEDY J., Nathan v. Rous, (1905) 1 KB 527, cited BY WHOSE.”

In the circumstances, it appears that the “omission” referred to in clause (ii) of sub-section (1) is not recording an entry which a person was obliged to record and therefore it there is no duty on a person to record a particular entry, omission thereof may not qualify for levy of penalty. Therefore, in a case where an assessee is not required to maintain books of accounts a person cannot be said to have omitted all the entries.

Clause (ii) of sub-section (1) refers to omission of an entry which is relevant for computation of total income of such person and is to evade tax liability. Therefore, omission of an entry which is not to evade tax liability will not attract the rigors of section 271AAD.

Penalty under other provisions – An entry / omission which qualifies for levy of penalty under section 271AAD may also attract penalty under other provisions of the Act. Therefore, a question arises as to whether a person can be penalised twice for the same offence. Relying on Article 20 of the Constitution an argument of ₹double jeopardy’ may be sought to be taken up. While double jeopardy is an argument which will work in criminal proceedings / criminal offences, it has been stated in H. M N. Seervai : Constitutional Law of India (3rd Edition), Vol. 1, p. 759, quoted in Shiv Dutt Rai Fateh Chand and Others vs. Union of India (1983) 3 SCC 529 that “… Article 20 relates to the constitutional protection given to persons who are charged with a crime before a criminal court. In the following cases, it has been held that ₹double jeopardy’ does not apply to tax cases –

i) ITO vs. Sultan Enterprises [(2002) 256 ITR 185 (Bombay)];

ii) CIT vs. Ram Chandra Singh [(1976) 104 ITR 77 (Patna)].

Amount of penalty – The amount of penalty is aggregate amount of false entry or omitted entry. Since the penalty under this section is in addition to penalty under other provisions of the Act, the penalty is draconian and in several cases may even lead to a financial disaster as the amount of penalty is not linked to the profit which one has made but to the amount of the entry / omission.

Penalty on other person as well – Sub-section (2) of the Act is without prejudice to the provisions of sub-section (1). Under sub-section (2) any person who causes the person referred to in sub-section (1) [hereafter referred to as “other person”] to make a false entry or omits or causes to omit any entry then such other person shall also be liable to pay penalty equal to aggregate amount of such false or omitted entry.

While implementing the provisions of sub-section (2) an issue may arise as to whether the Assessing Officer of a person in whose books a false entry is recorded or an omission of an entry is found comes to a conclusion that ₹other person’ has caused the person to make a false entry and such other person also needs to be penalised under sub-section (2), then how will such an Assessing Officer levy penalty on the other person because the Assessing Officer may not have jurisdiction over the other person and/or there may be no proceedings which may be going on in the case of the other person unless of course the conclusion is arrived at in the course of a survey on the other person or in proceedings under section 133(6), etc. However, even in such cases the issue of jurisdiction could still be there.

Appeal against order levying penalty: An appeal against the order imposing penalty under section 271AAD shall lie to CIT(A) by virtue of the provisions of Section 246A(1)(q) of the Act.

No amendment to section 273B: A penalty which is leviable under the sections mentioned in section 273B of the Act shall not be levied if a person has reasonable cause. Consequent to insertion of section 271AAD no amendment is proposed to section 273B. Therefore, it appears that ₹reasonable cause’ as a plea cannot be taken as a statutory right.

Opportunity of being heard: Section 274 and 275 shall apply to a penalty to be levied under section 271AAD and therefore, before penalty is levied an opportunity of being heard shall be provided to the person.

Conclusion: The provision as is proposed is draconian to say the least. The provision needs to be amended drastically to provide clarity in implementation of the provision. Also, it needs to be stated that the same transaction will not attract provision under more than one provisions of the Act. Therefore, if there is undisclosed income as a result of false entry then penalty may be levied only under section 271AAB and not under this section. One can only hope that if the suitable amendments are not made, CBDT issues a Circular diluting the rigors of the provision.

Hon’ble Finance Minister has presented her second Union Budget 2020-21. The Union Budget centers around three ideas — Aspirational India, Economic development and a Caring Society. Expectations from the Budget for 2020-21 were running high amidst economic slowdown, slowdown in growth, a steep fall in investment rate and a stressed financial system has consequential effect on the economy. Hence lot of expectations. The budget is well intentioned but, appears to be overambitious in achieving budgetary collection and growth targets.

As usual, several changes have been proposed for Direct Tax such as new income-tax slabs proposing lower rates, removal of dividend distribution tax in the hands of companies and taxing the same in hands of recipients, expanding scope of TCS on liberalised remittance etc. Some of the changes proposed are procedural while some are trivial in nature. Making frequent changes in the direct tax every year including procedural changes makes income-tax more compliance based and complex rather than simplifying it. The changes suggested should be more broad based and principle oriented rather than procedure oriented.

Some of the changes proposed in the Income Tax Act 1961, (“the Act”) relating to incentives are given below. Some of the clauses or sections proposed in Finance Bill pertaining to some of the incentives are clubbed together to have a better understanding of the subject or amendments proposed.

1. Amendments related to business trusts [2(13A), 10(23FC), 10(23FD) 115UA, 194LBA]

(i) Amendment to definition of the term “business trust” – Clause 3(i) corresponding to section 2(13A):

• Definition of the term “business trust” is provided in section 2(13A) of the Act which covers trust registered as Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) under the Securities and Exchange Board of India Regulations, 2014 and units of such trusts are required to be listed on a recognized stock exchange in India. Presently, business trust covers only InvITs or REITs whose units are listed on a recognised stock exchange and does not cover the private unlisted InvITs and REITs.

• India’s capital market regulator, the Securities and Exchange Board of India (SEBI) notified the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations) and the SEBI (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) in September 2014 with a view to increase investor participation in the infrastructure and real estate sector. The Government of India also introduced a tax regime applicable to InvITs and REITs in the Finance Act, 2014 defining them together as ‘Business Trusts’ under the Act.

• The Finance Bill 2020 now proposes to do away with mandatory listing requirements of InvITs and REITs. As a result, now all the private unlisted InvITs and REITs will also fall within the definition of Business Trust.

• Securities and Exchange Board of India (Infrastructure Investment Trusts) (Amendment) (Regulations), 2019 vide notification No.SEBI/LAD-NRO/GN/2019/10 has, inter alia done away with the mandatory listing requirement for InvITs. In Budget 2020, an amendment has been proposed to align with the SEBI notification thereby giving the benefit to unlisted InvITs. This move will benefit private unlisted InvITs and REITs to increase the investor access.

• Due to proposed amendment in the definition of business trust covering within its ambit the private unlisted InvITs and REITs will put them at par with listed InvITs and REITs. As a result such unlisted InvITs and REITs of a business trust will be able to get the benefit of exemption from income by way of dividend, rent and interest and the distribution of such income will be taxed only in the hands of the unit holders on distribution subject to the TDS provisions.

• Such amendment shall come in force from 01.04.2021.

(ii) Taxation of dividend income in the hands of business trust – Clause 7(II)(b) Section 10(23FC):

• The provision of section 10(23FC) of the Act states that any income of a business trust by way of:

(a) interest received or receivable from a special vehicle or

(b) dividend referred to in section 115-O(7) of the Act shall not be included in its total income.

• Finance Bill 2020 proposes to replace existing clause (b) in view of proposal to remove dividend distribution tax as provided in section 115-O of the Act, by clause “dividend received or receivable from the special purpose vehicle” and such dividend income shall now be considered as an exempt income.

• Such amendment shall come in force from 01.04.2021.

(iii) Taxation of dividend in the hands of the unit holders – Clause 62 corresponding to section 115UA:

• Section 115UA of the Act provides for a taxation regime applicable to business trusts. Under the said regime, the total income of the trust, excluding capital gains income is charged at the maximum marginal rate. Further, the income by way of interest and rent, received by the business trust from a Special Purpose Vehicle (SPV) is accorded a pass through treatment i.e. there is no taxation of such interest or rental income in the hands of the trust and no withholding tax at the level of SPV.

• Presently, as per section 115UA r.w.s. 10(23FC)(a) of the Act, only interest income is taxable in the hands of the unit holders whereas the dividend income is exempt.

• The dividend distribution by the business trust will now be taxable in the hands of the unit holders .

• In view of the abolition of dividend distribution tax proposed in the Finance Bill 2020, reference to clause (a) of section 10(23FC) of the Act made in section 115UA of the Act has now been proposed to be deleted and as a result dividends received by a business trust from a SPV is proposed to be taxed in the hands of unit holder.

• Such amendment shall come in force from 01.04.2021.

(iv) Exemption of distributed income received by unit holder – Clause 7(II)(c) Section 10(23FD)

• Presently, any distributed income being dividend received by a unit holder from business trust is exempt as per section 10(23FD) of the Act.

• The Finance Bill 2020 proposes to remove such dividend income from being exempt under section 10(23FD) of the Act thereby making it taxable in the hands of the unit holders as stated above.

• Such amendment shall come in force from 01.04.2021.

(v) Withholding tax on the distribution of dividend by business trust – Clause 81 corresponding to section 194LBA:

• Presently, business trusts are required to deduct tax at source only in respect of interest and rental income distributed to unit holders as per section 194LBA of the Act. Dividend income distributed to unit holders was not subject to TDS provisions.

• Now as per the proposed amendment in Finance Bill 2020, tax is required to be deducted at source at 10% on distribution of dividend income to the resident and non resident unit holders by such business trust.

• Such amendment shall come in force from 01.04.2020.

• Presently listed InvITs and REITs of Business trusts in India has a single level of tax i.e. the corporate tax paid by the SPVs owning the assets and the rest of the chain being tax exempt. These provisions are similar to the global standards. The SPVs paid tax only on their annuity income — rents, tolls, etc. and hence there is only a single point of taxation.

• The plan to amend the tax treatment of dividend income received by unit holders of these instruments is likely to create two levels of taxation. This may jeopardise new fundraising plans of domestic infrastructure and real estate companies. Further, the unit holders receiving the dividend will now end up paying income tax and to that extent it neutralizes the effect of the benefit of reduced income tax rates proposed for individuals in the Finance Bill 2020.

2. Income of Mutual funds – Section 10(23D), Clause 7(II)(a) of Finance Bill 2020

• Section 10(23D) of the Act currently provides an exemption to income of mutual fund companies subject to payment of additional tax on any income distributed by it to the unit holders in accordance with section 115R of the Act. Hence, income of a mutual fund was subject to additional tax on distribution of income to unit holders as given in Chapter XII-E i.e. section 115R.

• The Finance Bill 2020 proposes to delete the reference to additional tax on distribution of income to unit holders as given in Chapter XII-E in view of the proposed amendment for levy of income-tax on distribution of income by the mutual fund in the hands of unit holders.

• The provision of section 115R of the Act, which provides for additional tax payable by a mutual fund company on distribution of income to its unit holders and also section 10(35) of the Act which provides for exemption of income in the hands of unit holder distributed by mutual fund, are now proposed to be deleted. As a result the income will be taxed in the hands of unit holders and to that extent it neutralizes the effect of the benefit of reduced income tax rates proposed for individuals in the Finance Bill 2020. Hence in section 10(23D), the reference to chapter XII-E is proposed to be removed.

• Such amendment is consequential in nature and shall come in force from 01.04.2021.

3. Exemption in respect of certain income of wholly owned subsidiary of Abu Dhabi Investment Authority and Sovereign Wealth Fund – Insertion of new clause (23FE) in section 10 of the Act.(Clause 7(II)(d)):

• New clause is proposed to be inserted after clause (23FD) in section 10 of the Act which is reproduced herein below:

(23FE) any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or equity, if the investment–

(i) is made on or before the 31st day of March, 2024;

(ii) is held for at least three years; and

(iii) is in a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA or such other business as the Central Government may, by notification in the Official Gazette, specify in this behalf.

Explanation.—For the purposes of this clause, “specified person” means––

(a) a wholly owned subsidiary of the Abu Dhabi Investment Authority which––

(i) is a resident of the United Arab Emirates; and

(ii) makes investment, directly or indirectly, out of the fund owned by the Government of the United Arab Emirates;

(b) a sovereign wealth fund which satisfies the following conditions, namely:––

(i) it is wholly owned and controlled, directly or indirectly, by the Government of a foreign country;

(ii) it is set up and regulated under the law of such foreign country;

(iii) the earnings of the said fund are credited either to the account of the Government of that foreign country or to any other account designated by that Government so that no portion of the earnings inures any benefit to any private person;

(iv) the asset of the said fund vests in the Government of such foreign country upon dissolution;

(v) it does not undertake any commercial activity whether within or outside India; and

(vi) it is specified by the Central Government, by notification in the Official Gazette, for this purpose;

• As per the proposed clause if any investment is made by specified persons in a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating or maintaining any infrastructure facility as defined in Explanation to section 80-IA(4)(i) of the Act or such other business as may be notified by the Central Government in this behalf, then income of such persons in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India in the form of debt or equity subject to fulfillment of conditions will be exempt from income tax.

• The meaning of ‘specified person’ has been provided in the said clause as:

• A wholly owned subsidiary of Abu Dhabi Investment Authority which –

a. is a resident of the United Arab Emirates (UAE) and

b. makes investment directly or indirectly out of the fund owned by the Government of the UAE;

• A sovereign wealth fund which satisfies the following conditions, namely:

a. it is wholly owned and controlled, directly or indirectly, by the Government of a foreign country;

b. it is set up and regulated under the law of such foreign country;

c. the earnings of the said fund are credited either to the account of the Government of that foreign country or to any other account designated by that Government so that no portion of the earnings inures any benefit to any private person;

d. the asset of the said fund vests in the Government of such foreign country upon dissolution;

e. it does not undertake any commercial activity whether within or outside India; and

f. it is specified by the Central Government, by notification in the Official Gazette, for this purpose;’;

• In order to be eligible for exemption, the investment is required to be made on or before 31st March, 2024 and is required to be held for at least three years.

• Rationale for introduction of the above clause is to promote investment of sovereign wealth fund/ Foreign Investments in infrastructure facilities. Sovereign wealth funds (SWFs) already have a presence in India’s renewables, hydro, transmission and distribution sectors and the 100% tax exemption on interest, dividend and capital gains will be a huge positive for them. This proposed amendment will help in tapping the sovereign funds and boost the investment in infrastructure.

• Such amendment shall come in force from 01.04.2021.

4. Exemption for crude oil company – Clause 7(III) corresponding to section 10(48C)

• Clause (48A) of section 10 of the Act provides for an exemption to income accruing or arising to a foreign company on account of storage of crude oil facility in India and sale of crude oil there from to any person resident in India and (48B) of section 10 of the Act provides for exemption in respect of any income accruing or arising to a foreign company on account of sale of leftover stock of crude oil after the expiry of agreement.

• Finance Bill 2020 proposes to insert new clause after clause (48B) in section 10 of the Act.

• It is proposed to provide exemption, to any income accruing or arising to Indian Strategic Petroleum Reserves Limited (ISPRL), being a wholly owned subsidiary of Oil Industry Development Board under the Ministry of Petroleum and Natural Gas, as a result of an arrangement for replenishment of crude oil stored in its storage facility in pursuance to directions of the Central Government in this behalf.

• This exemption shall be subject to the condition that the crude oil is replenished in the storage facility within three years from the end of the financial year in which the crude oil was removed from the storage facility for the first time.

• Such amendment will take effect from the 1st day of April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

5. Report by an accountant for claiming exemption – Clause 8 corresponding to section 10A

• Section 10A of the Act provides for deduction of profits and gains derived by an undertaking from the export of articles or things or computer software subject to the conditions prescribed therewith.

• One of the conditions for claiming such deduction provided in section 10A(5) of the Act is that assessee should furnish the prescribed form 56F i.e. a report of the Chartered Accountant along with the return of income .

• Under section 44AB of the Act, every person carrying on business is required to get his accounts audited, if his total sales, turnover or gross receipts, in business exceed or exceeds one crore rupees in any previous year. In case of a person carrying on profession he is required to get his accounts audited, if his gross receipts in profession exceeds fifty lakh rupees in any previous year. The Finance Bill 2020 has proposed an amendment to section 44AB of the Act whereby the tax audit report will now be required to be furnished by the said assessee at least one month prior to the due date of filing of return of income and not along with furnishing return of income. The amendment has been proposed so as to enable pre-filling of returns in case of persons having income from business or profession.

• Hence, consequential amendment has been proposed in section 10A(5) of the Act whereby, the Chartered Accountant is required to submit his report in specified form one month before filing of return of income i.e on or before 30th September and not along with the furnishing return of Income before its due date which is now proposed to be 31st October in such cases..

• Such amendment will take effect from the 1st day of April, 2020 and will, accordingly, apply in relation to the Assessment Year 2020-2021 and subsequent assessment years.

6. Carry forward and set off of losses in certain cases – Clause 31 corresponding to section72AA:

• Section 72AA of the Act provides for carry forward of accumulated losses and unabsorbed depreciation allowance in the case of amalgamation of banking company with any other banking institution under a scheme sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of the Banking Regulation Act, 1949. This section operates notwithstanding anything contained in sub-clause (i) to (iii) of clause (1B) of section 2 or section 72A of the Act.

• In order to address the issue faced by the amalgamated public sector banks and public sector General Insurance Companies, it is now proposed to extend the benefit of this section to amalgamation of,-

(i) one or more corresponding new bank or banks with any other corresponding new bank under a scheme brought into force by the Central Government under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or both, as the case may be, or

(ii) one or more Government company or companies with any other Government company under a scheme sanctioned and brought into force by the Central Government under section 16 of the General Insurance Business (Nationalisation) Act, 1972.

• “Corresponding new bank” is proposed to be given the meaning as assigned to it in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or clause (b) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

• “Government company” is proposed to be given the meaning assigned to it in section 2(45) of the Companies Act, 2013. In addition, it is to be engaged in the general insurance business and has come into existence by operation of section 4 or section 5 or section 16 of the General Insurance Business (Nationalisation) Act, 1972.

• “General insurance business” is proposed to be given the meaning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972.

• This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

7. Deduction for interest on loan taken for certain house property – section 80EEA -Clause 32:

• Section 80EEA of the Act was inserted by Finance Act 2019 allowing deduction of interest up to Rs. 1,50,000/- on loan taken from financial institution for acquisition of affordable residential house property.

• One of the conditions for claiming such deduction is that, such loan has been sanctioned by the financial institution during the period from 01.04.2019 to 31.03.2020. The Finance Bill 2020 proposes extension of period for sanctioning of loan by financial institution to 31.03.2021 for acquisition of affordable residential house property

• Such a proposal is aimed to incentivise first time buyers to invest in residential house property whose stamp duty does not exceed forty-five lakh rupees.

• Such deduction is applicable only if an asseessee opts for taxation as per old regime and assessee is not entitled to such deduction if he opts for reduced tax rates without claiming any deduction as proposed in Finance Bill 2020.

• Considering the proposed reduced rate of Income Tax in Finance Bill 2020 for individuals, such amendment may not offer any benefit or incentive to those who want to acquire affordable residential house property and buying of affordable house will have to be considered independently without any tax benefits.

• Such amendment will take effect from the 1st day of April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

8. Lower tax rate for certain companies – Clause 52 corresponding to section 115BAB:

• Taxation Law Amendment Act, 2019 introduced a new section 115BAB to promote manufacturing activity where a concessional tax rate of 15% has been allowed to companies set-up and registered on or after 01.10.2019 which commence manufacturing or production of an article or thing latest by 31.03.2023.

• Finance Bill 2020 proposes to extend such beneficial tax rate to companies engaged in business of generation of electricity.

• Such amendment proposed will put electricity generating company at par with companies manufacturing or producing an article or a thing.

9. TDS on professional fees – Clause 79 corresponding to section 194J

• Section 194J of the Act states that any person not being an individual or HUF who is responsible for paying to a resident any sum of the following nature exceeding ₹ 30,000/- has to deduct tax at source at the rate of 10% of such sum:

a. fees for professional services or

b. fees for technical services or

c. any remuneration or fees or commission payable to a director of a company or

d. royalty or

e. any sum referred to in section 28(va) of the Act

• Section 194C of the Act provides that any person responsible for paying any sum to a resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract shall at the time of payment or credit of such sum deduct an amount equal to one per cent in case payment is made to an individual or a HUF and two per cent in other cases.

• The Finance Bill 2020 proposes a reduced rate of 2% for fees for technical services (other than professional services) from existing 10%.

• There were large number of litigations treating assessee in default for short deduction of tax where assessee had considered payment to a person for technical services as payment in pursuance of a contract and thereby deducted tax at the rate of 2%. On the other hand the Income Tax Department was of the view that tax was required to be deducted for such payments at the rate of 10% under 194J instead of 2% under 194C. In order to put such litigations to rest, an amendment is proposed in the current finance bill where the rate for payments in the nature of fees for technical services has been revised at 2% instead of higher rate of 10%.

• It is to be noted that many litigations are on account of short deduction of TDS and hence it is suggested that one uniform rate should be considered for TDS purpose which will further reduce litigation and will also result in simplification of TDS provisions.

• Such amendment shall come in force from 01.04.2020.

10. Expenditure on scientific research -Section 35 Clause 17:

• Section 35 of the Act provides for deduction of expenditures on scientific research, including any sums paid to an approved research association, university, college, another institution, or a company.

• Under the current provisions, even if the approval granted to any of the entities (mentioned above, excluding a company) is withdrawn, the taxpayer is still allowed a deduction under section 35 of the Act, if payment to such entity has been made before the withdrawal of such approval.

• A similar provision is now being proposed for granting deduction to taxpayers if the payment to company has been made before of withdrawal of approval granted to a company.

• It is proposed to insert a fifth proviso to said section 35(1) of the Act requiring above-mentioned entities to submit an intimation within the three months from the date of said proviso coming into effect. Subject to such compliances, its approval shall be deemed to be valid for another five years.

• It is also proposed that approvals granted in future shall, at any one time, have effect for such years, not exceeding five assessment years as may be specified in the notification.

• It is also proposed that the entities mentioned above shall − prepare and deliver statements to the income tax authority; and furnish to the donor, a certificate specifying the amount of donation in such manner, containing such particulars and within such time from the date of receipt of sum, as may be prescribed.

• The rationale as mentioned in memorandum explaining proposed amendments is that the approval or registration or notification for exemption should also be for a limited period, say for a period not exceeding five years at one time, which would act as check to ensure that the conditions of approval or registration or notification are adhered to for want of continuance of exemption. This would in fact also be a reason for having a non-adversarial regime and not conducting roving inquiry in the affairs of the exempt entities on day to day basis, in general, as in any case they would be revisiting the concerned authorities for new registration before expiry of the period of exemption. This new process needs to be provided for both existing and new exempt entities.

• However, such amendments lead to frequent compliances by such entities. In many cases such entities are non-profit making organization and do not have wherewithal to do such compliances. It is to be noted that during the assessment proceedings, assessing officer has power to recommend for withdrawal of notification or exemptions where he notices misuse of such notification or exemptions. Now such entities are subjected to multilayer scrutiny. Such provisions will only lead to red tapism.

• These amendments are proposed to be applicable from 1st June 2020.

Backdrop to the Start-ups in India

In January 2016, the Modi Government launched its flagship initiative “Startup India” with a vision to build a strong ecosystem for encouraging entrepreneurship in India and nurturing innovation. It was a step to facilitate sustainable economic growth, generate larger employment opportunities, promote foreign investment and enable ease of doing business for the start-ups in India.

The government thereby also launched Startup India Action Plan, focusing on the three pillars- (i) Simplification and Handholding, (ii) Funding Support and incentives, and (iii) Industry-Academia Partnership and Incubation.

By virtue of the above Startup India Action Plan, eligible start-ups in India can avail various regulatory and tax benefits / incentives and can also have access to funding options, subject to fulfilment of certain conditions / criteria.

Listed below are few tax benefits available even prior to the introduction of Budget 2020-

(i) Eligible start-ups formed on or after 1 April 2016 (but before 1 April 2021) and with a turnover not exceeding INR 25 crores can claim 100 percent of deduction of the profits earned for any 3 consecutive years out of first 7 years from the date of incorporation;

(ii) Capital Gain exemption has been provided in respect of long-term capital gains upto INR 50 lakhs, if the capital gains is reinvested in the units of a notified fund set up for start-ups for a period of atleast 3 years;

(iii) Eligible start-ups have been exempted from angel tax [premium taxable under section 56(2)(viib) of the Income-tax Act, 1961 (‘the Act’)];

(iv) Carry forward of loss to be allowed even if there is a change in shareholding beyond 49 percent threshold as prescribed under section 79 of the Act.

Amendments in relation to the Start-ups as proposed by the Finance Bill, 2020

The Finance Minister in her speech mentioned that the start-ups have emerged as engines of growth for our economy.

However, as a reality check, while the above tax benefits were available, they were subject to satisfaction of various conditions which made it impracticable for the start-ups to claim the tax benefits. Therefore, rightfully the government has sought to relax the conditions so as to encourage more start-ups in India and also to pass on the realistic tax benefits to the eligible start-ups. The proposed amendments are discussed below-

Relaxation of conditions for claiming tax holiday under section 80-IAC

While tax holiday is available to the start-ups for 3 consecutive years out of first 7 years, considering the fact that in many cases, the gestation period for a startup to break-even may be longer, it was practically not possible for them to claim the benefit of the tax holiday. With this hurdle in mind, it has now been proposed to extend this period of 7 years to 10 years.

Therefore, now an eligible startup can claim the tax holiday of 3 consecutive years out of the 10 years from the year of incorporation.

Further, the turnover limit for eligible start up has also been increased from the existing INR 25 crores to INR 100 crores.

Taxability of Employee Stock Option Plan (‘ESOP’)

It is a general practice in the start-ups that during the formative years, they use ESOPs to attract and retain highly talented employees at a relatively low salary amount with the balance being made up by ESOPs.

Currently, the ESOPs are taxed as perquisites at the time of exercise of option. The tax on such perquisite is required to be paid at the time of exercising of option which lead to cash flow problem since there is no cash inflow in the hands of the employee at the time of exercise of option.

In order to ease the above burden of payment of tax by the employees of start-ups or TDS by the startup employer, it is now proposed to insert subsection (1C) in section 192 which defers the tax liability on on ESOPs and sweat equity shares.

As per the proposed amendment, the tax deduction or payment as the case may be on such ESOPs shall be within fourteen days from the earliest of following on the basis of the rates in force of the financial year in which the specified security or sweat equity share is allotted or transferred:

• after the expiry of forty-eight months from the end of the relevant assessment year (i.e. 5 years from the financial in which the specified security or sweat equity share is allotted or transferred to the employee); or

• from the date of the sale of such specified security or sweat equity share by the assessee; or

• from the date of the assessee ceasing to be employee of the eligible startup.

The above amendments are a welcome move in order to give much desired boost to the eligible start-ups. While the amendment to section 80-IAC will widen the number of eligible start-ups for claiming the deduction / tax holiday under the said section, deferment of ESOP taxability will also provide liquidity for the start-ups and its employees.

Having said the above, while deferment of ESOP taxability is a welcome step, restricting it to the employees of startup will not be appropriate as the employees of companies (other than start-ups) also are on the same footing as they also do not receive any cash flow at the time of exercise of option. Therefore, the above proposed ESOP taxability should be the same for all the employees irrespective of whether they are employees of start-ups or otherwise.

Some other benefits / announcements for start-ups:

Some of the other steps by the government to boost the economy and to provide the much-needed push to the start-ups.

• The government has proposed to set up seed fund which will provide early life funding, support ideation and development of early stage start-ups.

• In order to expand the base for knowledge-driven enterprises, intellectual property creation and protection will play an important role, several measures are proposed in this regard, which will benefit the Start-ups.

• Investment clearance cell will be set up for providing “end-to-end” facilitation and support, including pre-investment advisory, information advisory, information relating to land banks; and facilitate clearance at centre and state level.

Conclusion

While the above steps and announcements are welcome in order to provide a much needed impetus to the start-ups, only time will tell whether the desired objective is achieved in the sought direction.

Further, introduction of TDS provisions (at the rate of 1 percent) on e-commerce transactions will not only impact the cash flow of the start-ups but also increase the compliance burden on the start-ups in the e-commerce industry, considering the fact that there are many start-ups in the e-commerce space and also with a very thin margin at times.

Also, introduction of TCS provisions on overseas tour packages [at the rate of 5 percent (10 percent in absence of PAN or Aadhaar) and on purchase of goods in excess of INR 50 lakhs (at the rate of 0.1 percent) will increase the compliance burden for start-ups.

The above amendments in the TDS and TCS provisions are no way in the direction of ease of doing business and will result into lot of practical difficulties and challenges for the start-ups to comply with the same. Lets hope the government acts as a stimuli and not a roadblock of compliances for the growth of the start-ups.

 

1. The author acknowledges the support provided by CA Rishabh Parekh for this article

Back ground : Budget has been presented with underlined amending text in the finance Bill 2020 without reproducing the original text of the relevant provision of the law. In order to provide the background with the amendment column 4 has been drafted with deletion shown in the existing law and the new text has been reproduced fully in as per the Finance Bill.

Sr. No

Clauses of Finance Bill

Heading

Section No.

Original Provision

Amended Provision

Highlights / Implication

1

Clause 4

Definition of Residence

Section 6

Residence in India.

6. For the purposes of this Act,—

(1) An individual is said to be resident in India in any previous year, if he –

(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or

(b) [***]

(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

Explanation. 1— In the case of an individual,—

(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted.

There is no amendment to Sec 6(1) however amendment is carried out in clause b of the explanation as under

Explanation. 1—In the case of an individual,—

(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words had been substituted.

A new subsection 1A has been introduced as under

(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

• Citizen of India or POI can visit India for 119 days or lower, else they will be qualify as resident of India, subject to their tax treaty with India.

• If a citizen of India is not a tax resident in any country outside India, then such citizen will be deemed to be a resident in India and their global income will be taxed.

• Even if Citizen of India have not stayed for a single day in India this particular provision ie section 6(1A) will make such a Citizen a Deem Resident if he is not a Tax Resident outside India in any other territory by virtue of his domicile or similar criteria.

• One more view could be whether due to non obstante clause Sub clause 1A could infer that nothing will apply as stated in Sec 6(1) if one is regarded as not a deem resident and hence he /she is Non Resident even if he/ she is visiting India for more than 119 days or irrespective of his/her stay or visit in India.

• To counter above, it can also be argued that once you are not a deem resident does not mean you are regarded as Non Resident, due to the language of section 2(30) which defines Non Resident as person who is not a ‘Resident’.

2

Clause 5

Definition of business connection expanded

Section 9 (1)(i)

Explanation 2A to Section 9(1)(i)

Significant Economic Presence (SEP)

SEP of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means

Author’s Comments:

It may be noted that so far amount under sub clause (a) or number of users in sub clause (b) above have not been notified by CBDT.

Explanation 2A to Section 9(1)(i)

Significant Economic Presence (SEP) – w.e.f 1st

April, 2022 & Explanation 3A w.e.f 1st day of April, 2021

SEP of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed,

New Insertion Explanation 3A.–– For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1 to Sec 9(1)(i)shall include income from––

(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;

(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India;

(iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.

• The scope is broadened by deleting the words through digital means which implies that interaction with users in India through any means will constitute SEP .

• Certain operations like purchase of goods for export is excluded from the purview of operations carried out in India. However under Explanation 2A, interactions with prescribed number of users will amount to business connection.

Sec 9(1)(i) – Explanation 3A

• Includes income from sale of data collection by residents and also sale of goods or services to the same customers who are part of the contents of the data collection

• There could be an element of duplication because data is collected for the purpose of sale of goods or services, as income from sale of goods or services is assumed to cover even income from sale of data by use of which goods or services are sold.

 

3

Clause 5

Income Deemed to Accrue of Arise in India

Section 9(1)(i)

Explanation 1 to Section 9(1)(i)

(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India

Explanation 1 to Section 9(1)(i) – w.e.f 1st April, 2022

(a) in the case of a business other than the business having business connection in India on account of significant economic presence of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India

 

4

Clause 5

Income Deemed to Accrue of Arise in India

Section 9(1)(i)

Explanation 5 to Section 9(1)(i)

For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India:

Provided that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of  the Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015:

Provided further that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).

Explanation 5 to Section 9(1)(i)- Second proviso is amended and third proviso has been inserted as under:

Provided further that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 prior to their repeal, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).

Provided also that nothing contained in this Explanation shall apply to an asset or a capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, made under the Securities and Exchange Board of India Act, 1992

• In view of the new FPI regulations announced in 2019 in supersession of the erstwhile FPI regulations of 2014, it is now proposed to amend the provisions of explanation 5 of section 9(1)(i) to even include the exemption to investments in category-I FPI under the 2019 SEBI FPI Regulations.

• Investment by NRs in category-I and category-II FPIs registered under the 2014 SEBI FPI Regulations are proposed to be grandfathered, provided such investment were made before 23 September 2019.

5

Clause 5

Definition of Royalty expanded

Section 9 (1)(vi)

Explanation 2 to Sec 9(1)(vi)

“Royalty” as defined in Explanation 2(v) of section 9(1)(vi), inter alia, mean the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films.

Explanation 2 to Sec 9(1)(vi)

It is proposed to amend the definition of “Royalty” to even include consideration received from the sale, distribution or exhibition of cinematographic films under its scope.

• The amendment will impact tax required to be deducted under section 194J in addition to existing set of items under the definition of Royalty.

6

Clause 6

Exclusion from Business Connection

Section 9A

Section 9A – Certain activities not to constitute business connection in India

(3) The eligible investment fund referred to in sub-section (1), means a fund established or incorporated or registered outside India, which collects funds from its members for investing it

for their benefit and fulfils the following conditions, namely……

(c) the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed five per cent of the corpus of the fund

..

..

..

..

..

(j) the monthly average of the corpus of the fund shall not be less than one hundred crore rupees

Provided that if the fund has been established or incorporated in the previous year, the corpus of fund shall not be less than one hundred crore rupees at the end of a period of six months from the last day of the month of its establishment or incorporation, or at the end of such previous year, whichever is later…..

Proviso to clause inserted after (c) of subsection (3)

For the purposes of calculation of the said aggregate participation or investment in the fund, any contribution made by the eligible fund manager during the first three years of operation of the fund, not exceeding twenty-five crore rupees, shall not be taken into account

First Proviso to clause (j) of subsection (3)

if the fund has been established or incorporated in the previous year, the corpus of fund shall not be less than one hundred crore rupees at the end of a period of twelve months from the last day of the month of its establishment or incorporation or at the end of such previous year, whichever is later…

• Conditions for exemption to offshore funds from ‘business connection’ is relaxed.

• Threshold is provided to the sponsor due to the fact that sponsor contribution received in advance may automatically be found in breach until contributors are still to make their payment towards their commitments.

• This flexibility is provided due to the fact that if there is delay in receipt of the contribution then conditions of average corpus of 100 Crore may not be breached.

7

Clause 41

DTAA & MLI

Section 90

Section 90 – Agreement with foreign countries or specified territories

(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India……..

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be

Section 90 (1)(b) is amended as under

For the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory)

• Section 90 empowers the Government to enter into DTAA’s for avoidance of double taxation of income under the laws of India and the foreign country / territory.

India has signed and ratified the MLI with many countries as part of measures to prevent base erosion and profit shifting practices.

This amendment has been brought to prevent the granting of DTAA benefits in inappropriate circumstances and to align it with MLI, to tackle situations wherein opportunities arise for non-taxation or reduced taxation through tax evasion or avoidance (including treaty shopping arrangements).

8

Clause 42

DTAA & MLI

Section 90A

Section 90A – Adoption by Central Government of agreement between specified associations for double taxation relief.

(1) Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such agreement—

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that specified territory outside India, or

Section 90A (1)(b) is amended as under

For the avoidance of double taxation of income under this Act and under the corresponding law in force in that specified territory outside India, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory)

• Such Amendment is in line with the amendment to Section 90.

9

Clause 43

Safe harbour rules & Permanent Establishment or Business Connection

Section 92CB

Section 92CB – Power of Board to make safe harbour rules

(1) The determination of arm’s length price under section 92C or section 92CA shall be subject to safe harbour rules

Section 92CB (1) is amended as under

The determination of–

(a) income referred to in clause (i) of sub-section (1) of section 9; or

(b) arm’s length price under section 92C or section 92CA, shall be subject to safe harbour rules

• A non resident would now be able to take shelter under the safe harbour rules (to be prescribed) for determining profit attributable to its PE in India.

10

Clause 44

APA & Attribution to PE

Section 92CC

Section 92CC – Advance pricing agreement

(1) The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

(2) The manner of determination of arm’s length price referred to in sub-section (1), may include the methods referred to in sub-section (1) of section 92C or any other method, with such adjustments or variations, as may be necessary or expedient so to do.

(3) Notwithstanding anything contained in section 92C or section 92CA, the arm’s length price of any international transaction, in respect of which the advance pricing agreement has been entered into, shall be determined in accordance with the advance pricing agreement so entered.

………

(9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the arm’s length price or specify the manner in which arm’s length price shall be determined in relation to the international transaction entered into by the person during any period not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the arm’s length price of such international transaction shall be determined in accordance with the said agreement.

Section 92CC is amended as under

(1) The Board, with the approval of the Central Government, may enter into an advance pricing agreement

with any person, determining the –

(a) arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to an international transaction to be entered into by that person;

(b) income referred to in clause (i) of sub-section (1) of section 9, or specifying the manner in which said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident.

(2) The manner of determination of the arm’s length price referred to in clause (a) or the income referred to in clause (b) of sub-section (1), may include the methods referred to in sub-section (1) of section 92C or the methods provided by rules made under this Act, respectively, with such adjustments or variations, as may be necessary or expedient so to do.

(3) Notwithstanding anything contained in section 92C or section 92CA or the methods provided by rules made under this Act, the arm’s length price of any international transaction or the income referred to in clause (b) of sub-section (1), in respect of which the advance pricing agreement has been entered into, shall be determined in accordance with the advance pricing agreement so entered.

(9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the –

(a) arm’s length price or specify the manner in which the arm’s length price shall be determined in relation to the international transaction entered into by the person;

(b) income referred to in clause (i) of sub-section (1) of section 9, or specifying the manner in which the said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident, during any period not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the arm’s length price of such international transaction or the income of such person shall be determined in accordance with the said agreement

• A non-resident taxpayer could also approach APA authorities to seek certainty around profit attribution in accordance with Sec 9(1)(i).

11

Clause 45

Date of furnishing TP Report

Section 92F

Section 92F – Definitions of certain terms relevant to computation of arm’s length price, etc.

“specified date” shall have the same meaning as assigned to “due date” in Explanation 2 below sub-section (1) of section 139;

Section 92F

“specified date” means the date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139 for the relevant assessment year

• Presently, due date for furnishing Accountants Report in Form 3CEB is 30th November following the end of relevant fiscal year.

• Now, the Due date for furnishing Accountants Report in Form 3CEB would be 31st October following the end of relevant fiscal year.

• This amendment shall be made effective from 1 April 2020

In view of the change

a. There will be lower time available with the Assessee to prepare the transfer pricing study report

b. Most of the data of the comparable companies may not be found in the public data base used as data available up to 31st

October can only be used as time available to file such data with MCA is 30th November after the financial year is over, consequently this may pose a serious challenge of availability of the contemporaneous and as well as revision in the study during the Revenue Audit/scrutiny of the data.

12

Clause 46

Interest deduction to PE/ AE

Section 94B

Section 94B – Limitation on interest deduction in certain cases

(1) Notwithstanding anything contained in this Act, where an Indian company, or a permanent establishment of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head “Profits and gains of business or profession” in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, the interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest, as specified in sub-section (2) :

Provided that where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise.

Insertion of subsection (1A)

Nothing contained in sub-section (1) shall apply to interest paid in respect of a debt issued by a lender which is a permanent establishment in India of a non-resident, being a person engaged in the business of banking

• Provisions of section 94B are liberalised to exclude Indian Branches of Foreign Banks from the purview of the rigorous section 94B.

13

Clause 47

Tax on Dividends, Royalty and Technical Service Fees in case of Foreign Companies

Section 115A

Section 115A

Sub Section (5) states that a non-resident is not required to furnish its return of income under sub-section (1) of section 139 of the Act, if its total income, consists only of certain dividend or interest income and the TDS on such income has been deducted according to the provisions of Chapter XVII-B of the Act.

Section 115A

Subsection (5) is amended as under:

A non-resident, shall not be required to file return of income under sub-section (1) of section 139 of the Act if,

(i) his or its total income consists of only dividend or interest income as referred to in clause (a) of sub-section (1) of said section, or royalty or FTS income of the nature specified in clause (b) of sub-section (1) of section 115A; and

(ii) the TDS on such income has been deducted under the provisions of Chapter XVII-B of the Act at the rates which are not lower than the prescribed rates under sub-section (1) of section 115A.

• Relief from filing Income Tax Returns is extended to the NR taxpayers/ foreign companies whose total income consists of royalty or FTS and on which TDS have been deducted u/s 115A(1).

14

Clause 70

Reference to Dispute Resolution Panel

Section 144C

Section 144C- Reference to dispute resolution panel

(1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee

if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee

……

(15)…..

(b) “eligible assessee” means, –

(i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA;

and

(ii) any foreign company

Subsection (1) is amended as under:

(1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee

if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee

(15)…..

(b) “eligible assessee” means, –

(i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA;

and

(ii) any non-resident not being a company, or any foreign company

• A taxpayer can approach a DRP against all variations even if they do not impact the returned income or loss. For example, recharacterization of transaction.

• Definition of eligible assessee is widened to include all non resident taxpayer as against only foreign companies at present

15

Clause 82

Income by way of Interest from Indian Company

Section 194LC

Section 194 LC

(1) Where any income by way of interest referred to in sub-section (2) is payable to a non-resident, not being a company or to a foreign company by a specified company or a business trust, the person responsible for making the payment, shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct the income-tax thereon at the rate of five per cent.

(2) The interest referred to in sub-section (1) shall be the income by way of interest payable by the specified company or the business trust,—

(i) in respect of monies borrowed by it in foreign currency from a source outside India,—

(a) under a loan agreement at any time on or after the 1st day of July, 2012 but before the 1st day of July, 2020; or

(b) by way of issue of long-term infrastructure bonds at any time on or after the 1st day of July, 2012 but before the 1st day of October, 2014; or

(c) by way of issue of any long-term bond including long-term infrastructure bond at any time on or after the 1st day of October, 2014 but before the 1st day of July, 2020,

as approved by the Central Government in this behalf; or

(ia)in respect of monies borrowed by it from a source outside India by way of issue of rupee denominated bond before the 1st day of July, 2020, and

(ii) to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or the bond and its repayment.

 

Section 194 LC – Proviso to subsection (1) is inserted

(1) Where any income by way of interest referred to in sub-section (2) is payable to a non-resident, not being a company or to a foreign company by a specified company or a business trust, the person responsible for making the payment, shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct the income-tax thereon at the rate of five per cent.

Provided that in case of income by way of interest referred to clause (ib) of sub-section (2), the income-tax shall be deducted at the rate of four per cent.

Subsection (2) is amended as under

(2) The interest referred to in sub-section (1) shall be the income by way of interest payable by the specified company or the business trust,—

(i)in respect of monies borrowed by it in foreign currency from a source outside India,—

(a) under a loan agreement at any time on or after the 1st day of July, 2012 but before the 1st day of July, 2020 2023; or

(b)by way of issue of long-term infrastructure bonds at any time on or after the 1st day of July, 2012 but before the 1st day of October, 2014; or

(c) by way of issue of any long-term bond including long-term infrastructure bond at any time on or after the 1st day of October, 2014 but before the 1st day of July, 2020 2023,

as approved by the Central Government in this behalf; or

(ia)in respect of monies borrowed by it from a source outside India by way of issue of rupee denominated bond before the 1st day of July, 2020 2023, and

(ib) in respect of monies borrowed by it from a source outside India by way of issue of any long-term bond or rupee denominated bond on or after the 1st day of April, 2020 but before the 1st day of July, 2023, which is listed only on a recognised stock exchange located in any International Financial Services Centre, and

(ii) to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or the bond and its repayment.

Following Explanation is inserted after clause (b)

(c) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005;

(d) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43.

In order to attract fresh investment, create jobs and stimulate the economy the concessional rate of TDS of five percent has been extended for the period upto 1st July 2023.

16

Clause 83

Income by way of Interest on Certain Bonds and Government Securities

Section 194LD

Section 194 LD

(2) The income by way of interest referred to in sub-section (1) shall be the interest payable on or after the 1st day of June, 2013 but before the 1st day of July, 2020 in respect of investment made by the payee in –

(i) a rupee denominated bond of an Indian company ; or

(ii) a Government security:

Provided that the rate of interest in respect of bond referred to in clause (i) shall not exceed the rate as may be notified by the Central Government in this behalf.

Section 194 LD – Subsection (2) is substituted as under

(2) The income by way of interest referred to in sub-section (1) shall be the
interest payable, –

(a) on or after the 1st day of June, 2013 but before the 1st day of July,
2020 2023 in respect of the investment made by the payee in –

(i) a rupee denominated bond of an Indian company; or

(ii) a Government security;

(b) on or after the 1st day of April, 2020 but before the 1st day of July,
2023 in respect of the investment made by the payee in municipal debt
securities:

Provided that the rate of interest in respect of bond referred to in
sub-clause (i) of clause (a) shall not exceed the rate as the Central Government
may, by notification in the Official Gazette, specify.

Following Explanation is inserted after clause (b)

(ba) “municipal debt securities” shall have the meaning assigned to it in
clause (m) of sub-regulation (1) of regulation 2 of the Securities and Exchange
Board of India (Issue and Listing of Municipal Debt Securities) Regulations,
2015 made under the Securities and Exchange Board of India Act, 1992

In order to attract fresh investment, create jobs and stimulate the economy the concessional rate of TDS of five percent has been extended for the period upto 1st July 2023.

17

Clause 103

Power to Make Rules

Section 295

Section 295

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters;

(b)The manner in which and the procedure by which the income shall be arrived at in the case of—

(i) income derived in part from agriculture and in part from business;

(ii) persons residing outside India;

(iii) an individual who is liable to be assessed under the provisions of sub-section (2) of section 64

Clause (b) to subsection 2 of section 295 is amended as under

The manner in which and the procedure by which the income shall be arrived at in the case of—

(i) income derived in part from agriculture and in part from business;

(ii) persons residing outside India;

(iia) operations carried out in India by a non-resident;

(iib) transactions or activities of a non-resident

(iii) an individual who is liable to be assessed under the provisions of sub-section (2) of section 64

CBDT has been empowered to make the necessary rules to determine the income arising out of operations carried out in India and transactions or activities of a non-resident.

Other Provisions affecting Non Residents

Sr. No

Clauses of Finance Bill

Heading

Section No.

Original Provision

Amended Provision

Highlights / Implication

1

Clause 59

§

Dividend Distribution Tax levied on companies

Section 115O

Section 115 O – Dividend Distribution Tax levied on companies

Section 115-O provides for levy of additional income tax at the rate of 15% plus surcharge and

cess on any amount declared, distributed or paid by a domestic company by way of dividend, whether out of current or accumulated profits.

Section 115 O – Dividend Distribution Tax levied on companies – 1st April, 2020

It is proposed that no dividend distribution tax shall be paid on the dividend declared,

distributed or paid after 31st March 2020.

Dividend paid by domestic companies will now be taxed in the hands of the recipient

As a consequence of abolishing section 115-O the following sections have been amended accordingly so as to charge the recipient of dividend as per the rates mentioned in the Finance Act:

Sec 115A, 115AC, 115ACA, 115AD, 115C, 195,197

Insertion of new section 80M which permits deduction of inter corporate dividend in the hands of the company receiving the dividend i.e. To the extent dividend is received by the Indian Company, there will be deduction u/s 80M for the payment of dividend out of such dividend received but same will form part of the book profits

Classical system of dividend as introduced may reduce the overall tax liability (corporate + shareholder) in few cases where rate at which dividend is taxed is lower than tax u/s 115-O as hitherto levied e.g. Lower slab income and few multinationals where dividend tax rate under DTAA is lower

2

Clause 60

Tax on Distributed Income to Unit Holders

Section 115R

Consequences of Change in Method of Dividend Taxation

Section 115R – Tax on Distributed Income to Unit Holders

Notwithstanding anything contained in any other provision of this Act, any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income at the rate of…..

Subject to above provision Income of the Mutual Fund was exempt from Tax under Section 10(23D) as under.

(23D) subject to the provisions of Chapter XII-E, any income of—

(i) a Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder;

(ii) such other Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India and subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in this behalf.

Explanation.—For the purposes of this clause,—

(a) the expression “public sector bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corres-ponding new Bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Under-takings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Under-takings) Act, 1980 (40 of 1980) and a bank included in the category “other public sector banks” by the Reserve Bank of India;

(b) the expression “public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);

(c) the expression “Securities and Exchange Board of India” shall have the meaning assigned to it in clause (a) of sub-section (1) of section 2 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

Since Tax was paid by the Mutual Fund on the distributed amount to unit holders such income was then exempt in the hands of the unit holders u/s 10(35)

Section 115 R – Tax on Distributed Income levied on Mutual Funds – discontinued from 1st April, 2020

It is proposed that no tax shall be paid on income distributed by Mutual Funds after 31st March 2020 however Tax will be deducted from the distribution to the unit holders..

Also exemption available to Unit holders u/s 10 (35 ) is also removed as a consequences to change in method of taxing.

(23D) subject to the provisions of Chapter XII-E, any income of—

 

Mutual fund will not be required to pay any tax on distribution u/s 115R made to the unit holders, such distribution will now be taxable in the hands of the Unit Holders (Resident & Non Resident)

TDS shall be deducted by the Mutual Fund only on the dividend distributed (not the capital gain as clarified by CBDT)

A small change which has a reference to distribution tax on unit holders is now removed from the language of the Section 10 (23D)

3

Clause 62

Tax on income of unit holder and business trust.

Section 115UA

Section 115UA – Tax on income of unit holder and business trust

(1) Notwithstanding anything contained in any other provisions of this Act, any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.

(2) Subject to the provisions of section 111A and section 112, the total income of a business trust shall be charged to tax at the maximum marginal rate.

(3) If in any previous year, the distributed income or any part thereof, received by a unit holder from the business trust is of the nature as referred to in sub clause (a) of clause (23FC) [or clause (23FCA)] of section 10, then, such distributed income or part thereof shall be deemed to be income of such unit holder and shall be charged to tax as income of the previous year.

(23FC) any income of a business trust by way of—

(a) interest received or receivable from a special purpose vehicle; or

(b) dividend referred to in sub-section (7) of section 115-O.]

Explanation.—For the purposes of this clause, the expression “special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration;

((23FCA) any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust.

Explanation.—For the purposes of this clause, the expression “real estate asset” shall have the same meaning as assigned to it in clause (zj)of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(23FD) any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being that proportion of the income which is of the same nature as the income referred to in sub-clause (a) of clause (23FC) or clause (23FCA);

Section 115UA – Tax on income of unit holder and business trust

(1) Notwithstanding anything contained in any other provisions of this Act, any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.

(2) Subject to the provisions of section 111A and section 112, the total income of a business trust shall be charged to tax at the maximum marginal rate.

(3) If in any previous year, the distributed income or any part thereof, received by a unit holder from the business trust is of the nature as referred to in sub clause (a) of clause (23FC) [or clause (23FCA)] of section 10, then, such distributed income or part thereof shall be deemed to be income of such unit holder and shall be charged to tax as income of the previous year.

(23FC) any income of a business trust by way of—

(a) interest received or receivable from a special purpose vehicle; or

(b) dividend referred to in sub-section (7) of section 115-O.] received or receivable from a special purpose vehicle

Explanation.—For the purposes of this clause, the expression “special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration;

(23FD) any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being that proportion of the income which is of the same nature as the income referred to in sub-clause (a) of clause (23FC) or clause (23FCA);

 

Income in nature of Dividend was exempt if it was declared, distributed and paid to a business trust due to specific exemption u/s 115-O(7) and will be still exempt after the amendment in hands of Business Trust due to change in the language of the Sec 10(23FC) and has remained taxable in the hands of Unit Holders.

Income other than the one specified under Section 10(23FC) and 10 (23FCA) is taxable to the Business Trust at the MMR and hence same is exempt from tax to the unit holders under section 10(23FD)

 

Whether Budget 2020 will give the required push to the Start-ups

Backdrop to the Start-ups in India

In January 2016, the Modi Government launched its flagship initiative “Startup India” with a vision to build a strong ecosystem for encouraging entrepreneurship in India and nurturing innovation. It was a step to facilitate sustainable economic growth, generate larger employment opportunities, promote foreign investment and enable ease of doing business for the start-ups in India.

The government thereby also launched Startup India Action Plan, focusing on the three pillars- (i) Simplification and Handholding, (ii) Funding Support and incentives, and (iii) Industry-Academia Partnership and Incubation.

By virtue of the above Startup India Action Plan, eligible start-ups in India can avail various regulatory and tax benefits / incentives and can also have access to funding options, subject to fulfilment of certain conditions / criteria.

Listed below are few tax benefits available even prior to the introduction of Budget 2020-

(i) Eligible start-ups formed on or after 1 April 2016 (but before 1 April 2021) and with a turnover not exceeding INR 25 crores can claim 100 percent of deduction of the profits earned for any 3 consecutive years out of first 7 years from the date of incorporation;

(ii) Capital Gain exemption has been provided in respect of long-term capital gains upto INR 50 lakhs, if the capital gains is reinvested in the units of a notified fund set up for start-ups for a period of atleast 3 years;

(iii) Eligible start-ups have been exempted from angel tax [premium taxable under section 56(2)(viib) of the Income-tax Act, 1961 (‘the Act’)];

(iv) Carry forward of loss to be allowed even if there is a change in shareholding beyond 49 percent threshold as prescribed under section 79 of the Act.

Amendments in relation to the Start-ups as proposed by the Finance Bill, 2020

The Finance Minister in her speech mentioned that the start-ups have emerged as engines of growth for our economy.

However, as a reality check, while the above tax benefits were available, they were subject to satisfaction of various conditions which made it impracticable for the start-ups to claim the tax benefits. Therefore, rightfully the government has sought to relax the conditions so as to encourage more start-ups in India and also to pass on the realistic tax benefits to the eligible start-ups. The proposed amendments are discussed below-

Relaxation of conditions for claiming tax holiday under section 80-IAC

While tax holiday is available to the start-ups for 3 consecutive years out of first 7 years, considering the fact that in many cases, the gestation period for a startup to break-even may be longer, it was practically not possible for them to claim the benefit of the tax holiday. With this hurdle in mind, it has now been proposed to extend this period of 7 years to 10 years.

Therefore, now an eligible startup can claim the tax holiday of 3 consecutive years out of the 10 years from the year of incorporation.

Further, the turnover limit for eligible start up has also been increased from the existing INR 25 crores to INR 100 crores.

Taxability of Employee Stock Option Plan (‘ESOP’)

It is a general practice in the start-ups that during the formative years, they use ESOPs to attract and retain highly talented employees at a relatively low salary amount with the balance being made up by ESOPs.

Currently, the ESOPs are taxed as perquisites at the time of exercise of option. The tax on such perquisite is required to be paid at the time of exercising of option which lead to cash flow problem since there is no cash inflow in the hands of the employee at the time of exercise of option.

In order to ease the above burden of payment of tax by the employees of start-ups or TDS by the startup employer, it is now proposed to insert subsection (1C) in section 192 which defers the tax liability on on ESOPs and sweat equity shares.

As per the proposed amendment, the tax deduction or payment as the case may be on such ESOPs shall be within fourteen days from the earliest of following on the basis of the rates in force of the financial year in which the specified security or sweat equity share is allotted or transferred:

• after the expiry of forty-eight months from the end of the relevant assessment year (i.e. 5 years from the financial in which the specified security or sweat equity share is allotted or transferred to the employee); or

• from the date of the sale of such specified security or sweat equity share by the assessee; or

• from the date of the assessee ceasing to be employee of the eligible startup.

The above amendments are a welcome move in order to give much desired boost to the eligible start-ups. While the amendment to section 80-IAC will widen the number of eligible start-ups for claiming the deduction / tax holiday under the said section, deferment of ESOP taxability will also provide liquidity for the start-ups and its employees.

Having said the above, while deferment of ESOP taxability is a welcome step, restricting it to the employees of startup will not be appropriate as the employees of companies (other than start-ups) also are on the same footing as they also do not receive any cash flow at the time of exercise of option. Therefore, the above proposed ESOP taxability should be the same for all the employees irrespective of whether they are employees of start-ups or otherwise.

Some other benefits / announcements for start-ups:

Some of the other steps by the government to boost the economy and to provide the much-needed push to the start-ups.

• The government has proposed to set up seed fund which will provide early life funding, support ideation and development of early stage start-ups.

• In order to expand the base for knowledge-driven enterprises, intellectual property creation and protection will play an important role, several measures are proposed in this regard, which will benefit the Start-ups.

• Investment clearance cell will be set up for providing “end-to-end” facilitation and support, including pre-investment advisory, information advisory, information relating to land banks; and facilitate clearance at centre and state level.

Conclusion

While the above steps and announcements are welcome in order to provide a much needed impetus to the start-ups, only time will tell whether the desired objective is achieved in the sought direction.

Further, introduction of TDS provisions (at the rate of 1 percent) on e-commerce transactions will not only impact the cash flow of the start-ups but also increase the compliance burden on the start-ups in the e-commerce industry, considering the fact that there are many start-ups in the e-commerce space and also with a very thin margin at times.

Also, introduction of TCS provisions on overseas tour packages [at the rate of 5 percent (10 percent in absence of PAN or Aadhaar) and on purchase of goods in excess of INR 50 lakhs (at the rate of 0.1 percent) will increase the compliance burden for start-ups.

The above amendments in the TDS and TCS provisions are no way in the direction of ease of doing business and will result into lot of practical difficulties and challenges for the start-ups to comply with the same. Lets hope the government acts as a stimuli and not a roadblock of compliances for the growth of the start-ups.

 

1. The author acknowledges the support provided by CA Rishabh Parekh for this article

Introduction

In the budget speech, Finance Minister while mentioning about the Direct Tax proposals, at para 6.15, stated as under: –

6.15. It is proposed to rationalise the process of registration in the case of Trusts, Institutions, Funds, University, Hospital etc, and approval in the case of Association, University, Collage Institution or Company. It is also proposed to provide filing of statements of donation by donor so that the deduction claimed by the donor in its tax return can be pre-filed”.

1.1. In pursuit of such objectives, Finance Bill 2020, introduced in the Parliament by the Finance Minister, proposed rationalisation of provisions that related to trusts and institutions. Section 11 of the Act, is the section that enables the grant of exemption, in respect of income derived from property held under trust for charitable or religious purpose. The exemption shall be to the extent to which such income is applied or accumulated during the previous year for such purposes, as per the provisions obtaining in sections 11, 12, 12A, 12AA and 13 of the Income Tax Act 1961. Further section 10, in terms of sub clauses (iv), (v), (vi) and (via), of clause (23C) provides for registration of other trusts, funds, institutions, university or other educational institutions.

1.2. Keeping in view the technology development, and the practical difficulty in obtaining registration, approval / notification before actually starting the activities, and with the view that the present process needs improvement, a new process has been provided for both existing and new trusts. As per the new process, the approval or registration or the notification for exemption should be for a limited period not exceeding five years at one time. This is with a view to ensure that the conditions for approval or registration or notification are adhered to for want of continuance of exemption. The new process is for both existing and new trusts. The amendments that have been sought to be made to the present governing provisions are as under:—

Proposed amendments — New provisions

I. Presently section 12AA of the Income Tax Act 1961, provides for the “Procedure for Registration”. It is proposed to amend this section. Accordingly Nothing contained in this provision shall apply on or after 1-6-2020, as per sub-section (5) inserted. There is an amendment to clause (7) of section 11. The amendments in nut shell, is as under:-

a) Similar to exemptions under clause (1) and (23C) of section 10, exemption under clause (46) of section 10 shall be allowed to an entity even if it is registered u/s12AA subject to the condition that the registration u/s. 12AA shall become inoperative from the date on which the entity approved under section 10(23C) / (46) or 1st June 20, whichever is later. As per the amended provision, if the entity wishes to make it operative in the future, it will have to file an application as per new section 12AB inserted, and then its approval under clause (23C) or (46) of the section 10, it had earlier, shall cease to have any effect from the date on which registration u/s. 12AB becomes operative.

b) As per sub clause (iiiab) or (iiiad) of section 10(23C), the exemption is direct without any necessity of formal approval.

c) The issue that may arise for consideration, is that whether the restriction as per the amended clause on switching before the exemption regime will also apply in case of entities registered u/s. 12AA and claiming exemption under various sub clauses of section 10 (23C) of the Income Tax Act 1961.

II. Section 12A provides for the “Conditions for applicability of section 11& 12” of Income Tax Act 1961. New clause (ac), to sub clause (1) of Section 12A is proposed to be added with sub clauses (i) to (vi). The effect of the added sub clauses is as under:—

a) All the trusts registered under erstwhile 12A/12AA shall have to reapply for registration / approval as the case may be on or before 30.09.2020.

b) The trust or institution registered under new section 12AB and the period of the said registration is due to expire, reapply at least six months prior to expiry of the said period;

c) The trust or institution, has been once provisionally registered under section 12AB, reapply at least six months prior to expiry of period of the provisional registration or within six months of commencement of its activities, whichever is earlier;

d) The registration of the trust or institution becomes inoperative due to the first proviso to sub-section (7) of section 11, reapply at least six months prior to the commencement of the assessment year from which the said registration is sought to be made operative;

e) The trust or institution, if adopted or undertaken modifications of the objects which do not conform to the conditions of registration, reapply within a period of thirty days from the date of the said adoption or modification;

f) In any other case, apply at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought,

Such Trust or Institution will be treated as registered, in accordance with the new provision proposed u/s. 12AB.

III. Addition of matter to Clause (b), of sub clause (1) to section 12A

Where the total income of the trust or institutions as computed under this Act, without giving effect to the provisions of section 11 and section 12, exceeds the maximum amount which is not chargeable to income tax in any previous year, the accounts of the trust or institution for that year have to be audited and the audit report should be furnished “before the specified date referred to section 44AB i.e, on or before the date, one month prior to due date specified u/s 139(1)” (Added).

IV. A new section 12AB has been introduced. As per this provision:—

a) In case of an application for registration under section 12(A)(1)(ac)(i), CIT shall directly pass the order of registration for 5 years, with effect from 1-4-2020 within 3 months from end of month in which application was received.

b) In case of an application for registration u/s. 12A(1)(ac), clauses (ii), (iii), (iv), (v), Principal CIT shall pass an order granting registration of 5 years or order rejecting the application as the case may be after calling for necessary documents and information to verify the genuineness of activities of trust and compliance of any other Law by the trust as applicable within 6 months from the end of the month in which application was received.

c) An entity making fresh application for approval under clause (vi) of section 12A(1)(ac), shall be provisionally approved or registered for three years on the basis of application without detailed enquiry even in the cases where the activities of the entity are yet to begin and then it has to apply again for approval or registration which, if granted, shall be valid from the date of such provisional registration, within 1 month from end of month in which application was received.

d) The application for registration, subsequent to provisional registration should be at least six months prior to the expiry of provisional registration or within six months of start of activities whichever is earlier.

e) The application pending for approval, registration, as the case may be shall be treated as application in accordance with the new provisions wherever they are being provided for.

V. Sub section (4) and (5) to section 12AB, specify the provisions related to cancellation of registration by CIT, where the activities of trust were found to be non genuine / against the approved object, in violation of the provisions of Income Tax Act 1961 or any other law. In respect of trust or institution or university, or other Educational Institution or Hospital or other medical institution referred to in sub clauses (iv) or sub clause (v) or sub clause (vi) or sub clause (via) of section 10(23C) and claiming exemptions, and registered / seeking registration under the respective sub clauses, provisions exactly similar to section (4) & (5) of section 12AB have been inserted in 1st, 2nd, 8th, 9th, 10th and 16th proviso to section 10(23C).

VI. Sub clauses (viii) and (ix) are added to sub section (5) of section 80(G) of Income Tax Act. According to the said clauses added:—

(i) The exempt entity receiving Donation / any Sum hitherto has no reporting obligation.

(ii) The entities receiving Donation / any Sum, are made to furnish a statement in respect thereof.

(iii) The entity should issue a certificate to Donor / Payer, and the claim for deduction to the Donor / Payer, may be allowed on that basis only.

(iv) If there is a failure to furnish the statement, levy of penalty is also provided, may be to ensure proper filing of the statement.

Such a situation for addition of clauses (viii) & (ix) to sub section (5) to 80(G) may be to standardise the process through one to one matching between the amount received by the exempt entity and the amount claimed as deduction by the Donor / Payer. Perhaps as similar to TDS matching.

VII. Explanation 2A has been proposed to be inserted below sub section (5D) of section 80(G). This was to enable the claim of an assessee for the deduction in respect of any donation made to an institution or fund to which the provisions of sub section (5) shall apply, in the return of income for any assessment year filed by him shall be allowed on the basis of information relating to said donation furnished by the institution or fund to the prescribed income tax authority.

VIII. Consequential Amendments.

a) There is an amendment to sub section (2) of section 56. It has been proposed to make reference of section 12AB, in the clauses (v), (vi), (vii) and clause (x) of sub section 2 of section 56. Such reference was to the effect, that the said clauses shall not apply to any sum of money received from any Trust, or Institution registered u/s. 12 AB of the Income Tax Ac. This amendment will take effect from 1st June 2020.

b) Section 80GGA deals with “Deduction in respect of certain donations for scientific research or rural development”. It has been proposed to add, explanation to sub section (2A) of section 80GGA. This is to the effect that the assesse’s claim, for deduction in respect of any sum referred to in sub section (2) in the return of income for any assessment year filed by him, shall be allowed on the basis of information relating to such sum furnished by the payee to the prescribed income tax authority or the person authorised by such authority, subject to verification in accordance with the risk management strategy formulated by the board from time to time. This amendment will take effect from 1st June 2020.

c) Section 115BBDA, deals with “Tax on certain dividends received from domestic companies”. There is an explanation to the said section in clause (b) of the explanation, in the sub clause (iii), it has been proposed, for the words, figures and letters “under section 12A or section 12AA”, the words, figures and letters” “under section 12A or section 12AA or section 12AB” shall be substituted with effect from 1st day of June 2020.

d) Section 115TD, deals with tax on “Accredited income”. It has been proposed to make reference to section 12AB, in the said section, wherever the reference to section 12AA has been made. This was to the effect, that the provisions of the section shall Mutatis Mutandis apply to the Trust or Institution registered under section 12AB. This amendment shall take effect from 1st June 2020.

e) In section 253, of the Income Tax Act, which provides for preferring an appeal by an assessee to the Appellate Tribunal against certain orders by which he is aggrieved, in sub sec (i) which provides for one such order u/s. 12AA of Income Tax Act 1961, in clause (c) for the words, figures and letters “u/s. 12AA”, the words, figures and letters “under section 12AA or section 12AB” shall be substituted with effect from 1st Day of June 2020.

f) A new section 271K has been inserted. Clause (ii) of section 271K provides for enabling the officer to levy a penalty in a sum not less than ₹ 10,000/- but which may extend to ₹ 1 lakh if the institution or fund, fails to deliver or cause to be delivered a statement within time prescribed under clause (viii) of sub-section (5) of section 80(G) or furnish a certificate prescribed under clause (ix) of the said sub section.

IX. Implications of the amendments to section 12A, 12AA 10(23C), and section 80G are:—

(i) The Government intends to create a national register of all the charitable and religious institutions. Currently the registration is granted and recorded locally.

(ii) The Income Tax Department shall issue an Unique Identification Number to all the charitable and religious institutions.

(iii) The exercise of revalidation of all the charitable institutions will enable the Government to weed out all the inactive and defunct charitable institutions.

(iv) The renewal of both 12A and 12AA, every five years, will provide an opportunity to withdraw the exemptions without going through the complicated cancellation provisions.

(v) An organisation can be denied renewal even for violations under other laws as may be deemed material for the purpose of achieving its objectives. For instance, if the renewal is denied under FCRA then one can expect that the renewal of registration under Income Tax laws may also be denied.

(vi) In this context it is of relevance to note that the phrase used is “The law which are material for the purpose of achieving its objective”

(vii) The amended law should primarily apply to the violation of activity based or fiscal law which has a direct effect on the activities, however, there is a need for clarity in this regard otherwise this provision could be misused and result in hardship to the NGOs.

(viii) The Finance Bill 2020 provides a provisional registration for 3 years for all new organisations applying for exemption under the respective provisions

(ix) The Finance Bill 2020 proposes that an organisation cannot simultaneously enjoy exemptions under two provisions i.e under section 12AA and 10(23C)

(x) The Income Tax department intends to maintain record and track of Sec 80G related transactions at the national level.

(xi) The thoughts or institutions are required to apply for revalidation within 3 months from 1st June 2020.

(xii) The registration so validated shall be valid only for 5 years.

(xiii) The application for the renewal of registration, after 5 years needs to be submitted at least six months prior to the expiry of the validity period.

Conclusion

Amendments, proposed, and stated to be towards rationalisation of the process of registration, with the consequential changes wherever necessary, whether result in fulfilment of the objectives sought to be a achieved or whether they are prone to breed further litigation has to be left to the time, when the interpretation starts taking place, depending upon the facts and circumstances of each situation and how the revenue reacts to such situations. This is because the imperfections pervading in the context of series of amendments to the Income Tax act 1961, over the years never stood certified to the justness as evidenced in terms of the judicial propositions, and thus known for their non-utility.

Introduction

1. The Finance Bill, 2020 has made several important changes in the taxation system of charitable trusts availing of the benefit of exempting their incomes from the charge of income tax. The objective of the changes is to curb the malpractices that have been noticed in the functioning of some of such trusts.

2. Ten clauses in the Bill, namely, Clauses 7(1), 9 to 12, 29(A) and 29(B)(ii), 33, 34, 54(b) and 61 have made changes in sections 10(23C), 11, 12A, 12AA, 12AB, 56, 80G, 80GGA, 115BBDA and 115TD of Income-tax Act, 1961 (the Act) respectively. These changes mainly relate to the grant of registration requiring every approved registered charitable trust to apply for re-registration and subsequently after every five years. New charitable trusts will be granted provisional registration for a period of three years and full/final registration later by adopting the prescribed procedure.

3. Simultaneous registration for tax exemption to charitable institutions in accordance with the procedure prescribed in section 12AA or approved u/s 10(23C) or exemption through notification u/s 10(46) of the Act will not be permissible. Section 12AA dealing with the procedure for registration of a charitable trust will cease to be applicable from 01.06.2020; instead a new section 12AB has been inserted prescribing the procedure for fresh registration. Instead of the CIT(Exemption), application would need to be made to the Principal Commissioner of Income-tax or Commissioner of Income-tax (CIT).

4. Conditions for the applicability of sections 11 and 12 to the income from property held for charitable or religious purposes or income from contributions have also been changed by amendments in section 12A of the Act. The important amendments are explained below:—

(i) Provisions of section 12A prescribing the conditions for the applicability of sections 11 and 12 have been amended to provide that all the trusts which have already been registered have to file application for registration again in the prescribed form with the Principal Commissioner or Commissioner within a period of 3 months from the date when the amended provisions will come into force, which would mean by 01.09.2020. Even a charitable trust, educational or medical institution already granted exemption, will also have to submit such an application.

(ii) With the substitution of the newly inserted section 12AB, w.e.f. 01.06.2020 prescribing the procedure for grant of registration, the earlier section 12A will become inoperative from that date.

(iii) Subsequent application for renewal of registration will need to be made at least six months prior to the expiry of the period of the earlier registration.

(iv) Where the earlier registration has become in-operative in terms of section 11(7) of the Act by virtue of claiming deduction by the trust u/s 10(23C) or 10(46) of the Act and the trust again opts to get the registration operative, application will need to be made at least 6 months prior to the commencement of the assessment year for which, the said registration is sought to be made operative.

(v) Like-wise, where a provisional registration was granted earlier being a new trust, the application is to be made at least 6 months prior to the expiry of the period of provisional registration or within 6 months from commencement of the activities of the trust.

(vi) Where any modification is made to the objects of the trust which do not conform to the conditions for registration, an application is to be made within a period of 30 days from the date of the modification.

(vii) In any other case, application is to be filed at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration is sought.

5. Section 12AB of the Act provides for the procedure for grant of the registration on receipt of the application by the Principal Commissioner or the Commissioner of Income-tax. The main requirements are as follows:-

(i) In the case of an existing registered trust, which has to file application on coming into force the new procedure, the order for registration shall be passed within a period of 3 months from the end of the month in which the application is received and the registration shall remain valid for a period of 5 years.

(ii) For subsequent registration, the Principal Commissioner or Commissioner, after being satisfied on the genuineness of the activities of the trust, shall pass the order within a period of 6 months from the end of the month in which application is received and registration shall be operative for a period of 5 years.

(iii) In the case of new trusts, provisional registration shall be granted within one month and same will continue for a period of 3 years.

6. Provisions of section 11(7) of the Act provide that if a charitable trust was granted registration u/s 12AA of the Act, it has to claim exemption only in terms of sections 11 & 12 of the Act and not under various clauses of section 10 except under clauses (1) & (23C) of section 10 of the Act.

7. On the lines of the exemption available to a charitable trust u/s 10(23C), option is also being provided to claim exemption u/s 10(46) of the Act in case of trusts established by a Central or State Act or by the Central or State Government as are notified for the purpose of this section.

8. It is also being provided that in case the trust obtained approval u/s 10(23C) or is notified u/s 10(46) of the Act, registration u/s 12A of the Act will become in-operative with the option that subsequently such a trust can get its registration u/s 12A operative by making an application and thereafter, its approval or notification under section 10(23C) or 10(46) will cease to be effective.

9. The amendments u/s 56 of the Act, which deal with the taxation of income from other sources, are consequential in order to give effect to the changes made in the procedure for grant of exemption to charitable trusts.

10. Section 80G permits deduction from the income of the donor in respect of donation to the prescribed fund or approved charitable institution. This section is being amended to include a few more conditions for the deduction of donations to an institution or fund to which this section applies. They are as follows:-

(i) An institution or fund already approved u/s 80G of the Act shall also apply for approval and on doing so, the approval/registration/notification in respect of the entity shall be valid for a period of upto 5 years at any one time.

(ii) Any application pending for approval of registration shall be treated as an application in accordance with the new provisions wherever they are being provided

(iii) The institution or fund will prepare a statement of donations for the period as may be prescribed and deliver or cause it to be delivered to the prescribed Income-tax Authority.

(iv) The institution or fund has to furnish to the donor a certificate certifying the amount of donation and also furnish to him such other information as may be prescribed.

11. Section 80GGA of the Act prescribes for deduction of donations for scientific research or rural development. Deduction to the donor from his income u/s 80G or 80GGA of the Act will be allowed only if a statement is furnished by the donee recipient who will be required to furnish a statement in respect of the donations received. In case of failure to do so, a fee and penalty will be levied. Where the name of the donor does not appear in the report furnished by the donee or where no report is furnished by him, the deduction u/s 80G will not be allowed to the donor. A heavy burden has, therefore, been placed on the donor to ensure that the donees furnish the prescribed statements to the tax authorities.

12. Section 115BBDA deals with the taxation of dividend received by an assessee from a domestic company exceeding Rs. 10 lakhs while section 115TD levies tax on the income of a trust or an institution which has ceased to be eligible for exemption as a registered charitable institution. Consequential changes have been made in these two sections to make reference to the new provisions included in the Bill for the registration of a charitable trust and the grant of exemption of its income from income tax.

13. To sum-up, a major overhaul has been attempted not only in the procedure for the grant of registration to the charitable trusts but the prescription of a periodical review of their functioning as bonafide charitable institutions has been prescribed by the Finance Bill, 2020 to ensure that they function only to promote the cause of charity and not for private profit.

14. Hopefully, this strengthening of the law relating to charitable trusts and charitable institutions will go a long way in removing the malpractices that have been on the increase in recent years by which institutions, running for private profits, have been escaping income tax on their incomes under the garb of approved charitable institutions.