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.

 

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

“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