Introduction

The provisions of sections 11 and 12 of the Income-tax Act, 1961 (“the Act”) provide for exemption to trusts/institutions in respect of income derived from the property held under trust and voluntary contributions received with a specific direction that the same shall form part of the corpus of the trust or institution. This exemption is subject to fulfilment of prescribed conditions.

One of the conditions is that the income derived from property held under trust should be applied for the charitable purposes, and where such income cannot be applied during the previous year, it may be accumulated and invested in the modes prescribed and applied for such purposes in subsequent years as prescribed. It also provides that, if the accumulated income is not applied in accordance with the conditions provided in the said section within the specified time, then such income is deemed to be taxable income of the trust or the institution. Section 12AA provides for registration of the trust or institution which entitles them to get the benefit of sections 11 and 12. It also provides the circumstances under which the registration can be cancelled. Section 13 of the Act provides the circumstances under which exemption under sections 11 or 12 in respect of whole or part of income can be denied to the trust or institution.

The Finance Bill, 2017 has proposed various amendments to the existing provisions of sections 11 and 12 of the Act which amendments are explained hereunder:

1. Restriction on exemption in case of corpus donation by exempt entities to other exempt entities

As per the existing provisions of the Act, donations made by a trust to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, except those made out of accumulated income, are considered as application of income for the purposes of its objects. Similarly, donations made by entities exempted under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 to any trust or institution registered under section 12AA, except those made out of accumulated income, are also considered as application of income for the purposes of its objects.

Donation given by these exempt entities to another exempt entity, with specific direction that it shall form part of corpus, though considered as application of income in the hands of donor trust but is not considered as income of the recipient trust.

Allowing the corpus donations as an application of income was leading to indefinite accumulation of funds through other trusts without there being actual applications.

To keep in check this practice which was being adopted by some charitable institutions, the Finance Bill, 2017 has proposed to insert a new Explanation to section 11 of the Act to provide that any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1) of section 11, being contributions with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income.

It is also proposed to insert a similar proviso in clause (23C) of section 10 so as to provide similar restriction in respect of any amount credited or paid out of their income.

2. Fresh application within 30 days of modification of objects

The provisions of section 12AA of the Act contain provisions relating to registration of a trust for availing benefit under sections 11 and 12 of the Act. It also provides that the Principal Commissioner of Income-tax or the Commissioner of Income-tax may cancel the registration on being satisfied that the activities are not genuine or are not being carried out in accordance with its objects subsequent to the grant of registration. Presently, there are no provisions which enable trusts/institutions to apply and obtain a fresh registration in cases where there are modification in the objects after grant of registration.

The Finance Bill, 2017 proposes to amend section 12A of the Act so as to provide that where a trust/institution which has been granted registration under section 12AA or under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996] and, subsequently the trust/institution adopts or undertakes modifications in its objects which do not conform to the conditions of registration, the trust/institution shall be required to obtain fresh registration. The application for fresh registration has to be made in the prescribed manner within 30 days of adoption or modification of its objects.

3. Filing of return of income for availing exemption

Presently, entities registered under section 12AA of the Act are required to file its return of income under section 139(4A) of the Act, if their income without giving effect to sections 11 and 12 of the Act exceeds the basic exemption limit. There was no clarity as to whether return of income is to be filed within the time limit of section 139 of the Act or otherwise.

The Finance Bill, 2017 proposes to amend the provisions of section 12A of the Act so as to provide an additional condition of filing the return of income within the prescribed time limit u/s. 139(1).

4. Extension of the power to survey

Existing provision pertaining to places where survey can be undertaken are proposed to be expanded. The Finance Bill, 2017 proposes to provide that the income-tax authorities can enter into place where charitable activities are carried on for the purpose of carrying out survey.

Strength does not come from physical capacity. It comes from an indomitable will.

— Mahatma Gandhi

Whatever you do will be insignificant, but it is very important that you do it.

— Mahatma Gandhi

1. The Finance Bill, 2017 seeks to amend 73 sections of the Income-tax Act, 1961 (the “Act”) and insert 12 new sections including substitution of one section. The thrust of the direct tax proposals in this Budget is on growth stimulation, relief to middle class, affordable housing, curbing black money, promoting digital economy, transparency of political funding and simplification of tax administration.

I. Profits from business

2. Clauses 13 to 19 of the Finance Bill, 2017 proposes amendments to the provisions pertaining to profits from business/ profession.

(a) Amendment to Section 35AD

3. Section 35AD of the Act provides for investment linked deduction on the amount of capital expenditure incurred wholly or exclusively for the purposes of business during the previous year for a specified business except capital expenditure incurred for acquisition of any land or goodwill or financial instrument. Section 35AD was introduced by Finance Act, 2009 with a view to creating rural infrastructure and environment friendly alternate means of transportation for bulk goods.

4. This Section 35AD is sought to be amended to provide that any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure. This amendment is sought to be made applicable with effect from 1st April, 2018 i.e. for financial year 2017-18 onwards and should be applicable in respect of payments made on or after 1st April, 2017.

5. Clause (f) of sub-section (8) of Section 35AD already prohibits deduction of capital expenditure incurred on the acquisition of any land or goodwill or financial instrument. Suitable amendment has been proposed therein to deny deduction in respect of payments otherwise than through the permissible medium i.e. account payee cheque/ draft or electronically if it exceeds ten thousand rupees. After the amendment, expenditure in respect of which payments to one person in one day is made in cash would not be eligible for deduction under this Section. This is a positive amendment in furtherance of Government’s efforts of making our economy less cash-reliant. However, no exception has been carved out from this proposed amendment and expediency or urgency are not provided as grounds for departure from it.

6. While the Act already contains provisions in the form of Section 40A(3) and Section 40A(3A) to disallow revenue expenditure above a certain threshold in respect of which cash payments are made, this is the first such attempt to penalise cash payments even in respect of capital expenditure by way of disallowance. It is important to note that Rule 6DD of the Income-tax Rules, 1962 (the “Rules”) provide for exceptions to Section 40A(3) and Section 40A(3A) and lists circumstances in which cash payments are allowed as deduction despite being beyond the threshold limit. Since now even capital expenditure is sought to be covered for prohibition of cash payments, the provisions of Rule 6DD should have been made applicable to capital expenditure as well. However, the same has not been done. This may result in hardship for assessees even in genuine cases. It is suggested that the exceptions provided under Rule 6DD should be applicable to all cash payments, whether towards revenue expenditure or capital expenditure.

7. While payments made through National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) can be regarded as payments through “use of electronic clearing system through a bank account”, a question arises whether expenditure in respect of which payment is made through credit card can be disallowed. Payments through credit cards are neither payments through account payee cheques/drafts nor can they be said to be through “use of electronic clearing system through a bank account”. Credit card bills are capable of settlement either by cash or through banking transactions. In my view, if an assessee incurs expenditure in respect of which he/she makes payment through credit card and subsequently settles the credit card bill through account payee cheque/draft or electronically, this should be sufficient for not attracting disallowance under Section 35AD. However, if the assessee settles the credit card bill in respect of payment for expenditure referred to in Section 35AD, in my view, deduction should not be allowed to such assessee in respect of such expenditure. The mischief sought to be remedied by the amendment is the use of cash for payments. If the assessee settles the credit card bill otherwise than through cash payment, it should be in line with the legislative intention, and hence, should not attract disallowance under the provisions of the amended provisions.

(b) Amendment to Section 36

8. As per the existing provisions of Section 36(1)(viia)(a) of the Act, a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, can claim deduction of 7.5% of total income (computed before making any deduction under that clause and Chapter VIA) in respect of provision for bad and doubtful debts.

9. In order to strengthen the financial position of these entities, Clause 14 proposes to amend the said sub-clause to enhance the present limit from 7.5% to 8.5% of the amount of the total income (computed before making any deduction under that clause and Chapter VIA).

10. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years and would enable these entities to reduce their tax liabilities and boost banking sector.

(c) Amendment to Section 40A

11. Clause 15 of the Finance Bill, 2017 seeks to make three amendments to Section 40A. While the first pertains to disallowance of excessive and unreasonable expenditure, the other two pertain to the Government’s efforts in moving towards less-cash economy.

12. In so far as the first amendment in Section 40A is concerned, the same is a consequential to the amendment in Section 92BA of the Act. As per the existing provisions, expenditure in respect of which payment is made to persons referred to in Section 40A(2)(b) are covered under the definition of specified domestic transactions. Furthermore, as per existing Section 40A(2)(b), in respect of such specified domestic transactions which are at arm’s length price as defined in clause (ii) of Section 92F, no disallowance is required to be made under Section 40A(2)(b). Now, in order to reduce the compliance burden of taxpayers, it is proposed to provide that expenditure in respect of which payment has been made by the assessee to a person referred to in under Section 40A(2)(b) are to be excluded from the scope of Section 92BA of the Act. Amendment has been proposed to Section 92BA to omit clause (i) as per which expenditure in respect of which payment has been made or is to be made to a person referred to in Section 40A(2)(b) of the Act was includible as specified domestic transactions. Therefore, as a consequential amendment, the benefit currently available under Section 40A(2)(b) i.e. no disallowance in respect of specified domestic transactions if they are at arm’s length is proposed to be withdrawn by limiting the same to assessment year commencing on or before the 1st day of April, 2016.

13. The existing sub-section (3) of Section 40A of the Act bar deduction of expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds twenty thousand rupees. Similarly, sub-section (3A) provides that where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure, and in a subsequent year, the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of that subsequent year if the payment or aggregate of payments made to a person in a day exceeds twenty thousand rupees. The proposed amendment reduces this limit to ten thousand rupees and permits deduction if payment is made through electronic clearing system through a bank account.

14. Of late, payments banks and mobile wallets have emerged as a modern and convenient tool for making payments especially utility bills. It is not uncommon for a utility bill to exceed ten thousand rupees. In such a case, a question can arise whether payment of utility bills (and other expenditure) through payments banks and mobile wallets can be regarded as payment through “use of electronic clearing system through a bank account”. In this regard, it is important to note that amounts can be transferred in payments banks accounts and mobile wallets only through bank accounts. In other words, cash cannot be deposited directly in payments banks accounts and mobile wallets. In fact, the Government itself is promoting payments through payments banks and mobile wallets in its efforts of moving towards less-cash economy. Therefore, payments through media such as these should not attract disallowance under Section 40A(3)/(3A) of the Act.

15. An exception already exists in Section 40A(3A) in respect of payments for plying, hiring or leasing carriages in respect of which the limit is thirty-five thousand rupees instead of twenty thousand rupees. This limit has not been changed and payments up to thirty-five thousand rupees for plying, hiring or leasing carriages continue to be allowable as deduction.

16. Rule 6DD of the Rules which provides for exceptions to Section 40A(3) and Section 40A(3A) and lists circumstances in which cash payments are allowed as deduction despite being beyond the threshold limit would continue to be applicable to the revised limits.

17. Furthermore, sub-section (4) of Section 40A provides that no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner where any payment in respect of any expenditure has been made by an account payee cheque drawn on a bank or account payee bank draft. This benefit to the payer has been extended even for payments through use of electronic clearing system through a bank account.

(d) Amendment to Section 43

18. Sub-section (1) of Section 43 of the Act defines “actual cost”. By the amendment of Finance Bill, 2017, second proviso has been proposed to be inserted in sub-section (1) to provide that expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost.

19. As stated earlier, the Finance Bill, 2017 is the first attempt to penalise cash payments even in respect of capital expenditure. In
Kanshi Ram Madan Lal v. ITO [1983] 3 ITD 290 (Delhi), the Delhi bench of the Income-tax Appellate Tribunal (the “Tribunal”) held that Section 40A(3) of the Act was not attracted to capital expenditure, and hence, depreciation on capital assets purchased in cash could not be disallowed. However, as a result of this proposed amendment, this position is set to change. The exclusion of cash payments in computing “actual cost” as per Section 43(1) pursuant to this amendment should nullify this Delhi Tribunal decision. This is because depreciation is available on “written down value” defined under Section 43(6) of the Act. “Written down value” being derivable from “actual cost” would also, as a corollary, exclude such cash payments. Therefore, this amendment would have the effect of disallowing depreciation in respect of assets for which payments have been made in cash..

20. A consequential amendment to definition of actual cost of asset in case of withdrawal of deduction in terms of sub-section (7B) of Section 35AD is provided by inserting a proviso in Explanation 13 to Section 43(1). The amendment provides that where any capital asset in respect of which deduction allowed under Section 35AD is deemed to be the income of the assessee in accordance with the provisions of sub-section (7B) of Section 35AD, the actual cost to the assessee shall be the actual cost to the assessee, as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been allowable had the asset been used for the purposes of business since the date of its acquisition.

21. The amendments to Section 43 of the Act will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

(e) Amendment to Section 43B

22. As per clause 17 of the Finance Bill, 2017, it is proposed to amend Section 43B of the Act to provide that any sum payable by the assessee as interest on any loan or advances from a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank shall be allowed as deduction if it is actually paid on or before the due date of furnishing the return of income of the relevant previous year. This is as per matching principle since the interest income on bad or doubtful debts is chargeable to tax on receipt basis, therefore, even the interest payable on such bad or doubtful debts need to be allowed on actual payment.

23. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

(f) Amendment to Section 43D

24. The existing provisions of section 43D of the Act provides that interest income in relation to certain categories of bad or doubtful debts received by certain institutions or banks or corporations or companies, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account for that year or actually received, whichever is earlier. This provision is an exception to the accrual system of accounting which is regularly followed by such assessees for computation of total income. The benefit of this provision is presently available to scheduled banks, public financial institutions, State financial corporations, State industrial investment corporations and certain public companies like housing finance companies. With a view to provide a level playing field to co-operative banks vis-à-vis scheduled banks and to rationalise the scope of the section 43D, by clause 18 of the Finance Bill, 2017, it is proposed to amend Section 43D of the Act so as to extend this benefit to co-operative banks other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank as well.

25. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

(g) Amendment to Section 44AA

26. Section 44AA of the Act deals with maintenance of books of account by assessees engaged in any business or profession. In order to reduce the compliance burden, it is proposed to amend the provisions of Section 44AA to increase monetary limits of income and total sales/turn over/gross receipts specified for maintenance of books of account from one lakh twenty thousand rupees to two lakh fifty thousand rupees and from ten lakh rupees to twenty-five lakh rupees, respectively in the case of individuals and Hindu undivided family carrying on business or profession. The same limits are also proposed for business or profession newly set up. It is important to note that the new limits are applicable only for individuals and Hindu undivided family and not to other classes of assessees to whom the old limits continue to apply.

27. These limits were last revised in the year 1998, and considering inflation, it was high time that these limits were revised. The limit of two lakh fifty thousand rupees below which books of account are not required to be maintained is now in line with the basic exemption limit.

28. This amendment is proposed in clause 19 of the Finance Bill, 2017 and will take effect from 1st April, 2018, and will accordingly apply in relation to the assessment year 2018-19 and subsequent years.

II. Presumptive Tax

29. The provisions pertaining to presumptive taxation of businesses are contained in Section 44AD of the Act while those pertaining to professionals are contained in Section 44ADA of the Act. No amendment is proposed to presumptive tax scheme for professionals in Finance Bill, 2017. However, in case of presumptive tax for businesses, by press release dated 19th December, 2016, it was declared that in respect of amount of total turnover or gross receipts received through banking channel/ digital means, a rate of 6% instead of 8% shall be deemed to be profit. This measure was taken in order to achieve the Government’s mission of moving towards a less cash economy and to incentivise small traders/ businesses to proactively accept payments by digital means.

30. Legislative changes have been proposed to Section 44AD of the Act by Clause 21 of the Finance Bill, 2017 wherein the amendment to the above effect has been introduced. This proposed amendment when enacted will have the effect of reducing the tax liability of small and medium businesses by 25% in respect of turnover which is received by non-cash means. This benefit will be applicable for transactions undertaken in the current financial year 2016-17 also and for subsequent years.

31. This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

III. Tax audits

32. The provisions regarding liability to get the books of account audited are contained in Section 44AB of the Act. Till the enactment of Finance Act, 2015, the limit on sales/ turnover/gross receipts below which assessees engaged in business or profession were not required to get their books of account audited was one crore rupees. This limit remained unchanged in Finance Act, 2016. However, by Finance Act, 2016, the limit for audit for assessees opting for presumptive taxation scheme under Section 44AD of the Act was raised to two crore rupees. However, this higher threshold for non-audit of accounts had been given only to assessees opting for presumptive taxation scheme under Section 44AD of the Act. This was clarified by press release dated 20th June, 2016 as well.

33. In view of the above, by clause 20 of the Finance Bill, 2017, it is proposed to amend Section 44AB to exclude the eligible person, who declares profits for the previous year in accordance with the provisions of sub-section (1) of Section 44AD and his total sales, total turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year, from requirement of audit of books of account under section 44AB. This is expected to reduce the compliance burden of the small tax payers and facilitate the ease of doing business. This amendment will apply in relation to the assessment year 2017-18 and subsequent years.

34. The Budget proposals in respect of profits from business or profession, presumptive tax, tax audits are largely towards curbing black money and promoting digital economy. The Government deserves congratulations for its sustained efforts in moving the economy towards a less-cash one through focused legislation in this regard.

Section	Amendment Proposed
194-IB	Under existing provisions of section 194-I of the Act tax is deductible at source from payment of rent. Individuals and HUFs other than those liable for tax audit are not required to deduct tax under this section. A New section 194-IB is being inserted to provide for deduction of tax at source @ 5%. Tax is required to be deducted in the last month of the year or last month of the tenancy period if the property is being vacated. In case payee is not having PAN and provisions of section 206AA of the Act are applicable, amount of tax deductible shall not exceed the amount of rent payable in the last month of the previous year or in the last month of the tenancy. The deductor will not be required to comply with the provisions of section 203A of the Act regarding obtaining of TAN. The amendment will take effect from 1-6-2017.
194-IC	In respect of joint venture agreements it is being provided by way of amendment in section 45(5A) of the Act that capital gain in case of individuals and HUFs will be chargeable in the year in which the project completion certificate is obtained in respect of the project. In the case of joint venture agreements, apart from sharing of constructed area in certain cases the payment is also made by the developer in cash or way of cheque. It is being provided by inserting a new section 194-IC that tax will be deductible @ 10% from the amount paid by the developer under the agreement.
194J	Tax is deductible under section 194J of the Act @ 10% in respect of payments made on account of professional and technical services. It is being provided that in case of a payee engaged only in the business of operation of call centre tax will be deductible @ 2%.
194LA	U/s. 194LA tax is deductible @ 10% from payment of compensation on acquisition of immovable property, other than agriculture land. In terms of provisions of “Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Re-settlement Act, 2013”, compensation payable on acquisition of land is not chargeable to tax. Pursuant to specific provision in this regard in above Act, a proviso is being inserted in section 194LA to provide that in case of compensation payable under the above Act tax will not be deductible at source.
194LC	U/s. 194LC of Income-tax Act, tax is deductible at the concessional rate of 5% from interest payable to Non-Resident on borrowings made by specified companies in foreign currency from sources outside India by way of loan and on long-term bonds, including long-term infrastructure bonds. The provision is applicable only if the borrowings have been made before 1-7-2017. The period is proposed to be extended to 1-7-2020. The concession, henceforth, will also be applicable on interest payable on Rupee denominated bonds.
194LD	Provisions similar to section 194LC are contained in provisions of section 194LD in relation to interest payable to Foreign Institutional Investors or Qualified Foreign Investors at concessional rate of 5%. In this section also, qualifying period for payment of interest at concessional rate is being extended from 1-7-2017 to 1-7-2020.
197A	Provisions of section 197A are being amended by inserting sections 194D in it so as to grant exemption from deduction of tax at source from payment of insurance commission by insurance companies exceeding ₹ 15,000/- per financial year on furnishing of self declaration by payee in form 15G and 15H to the effect that no tax is payable by him on the basis of his estimated income.
204	As per provisions of section 195(6) of the Income-tax Act a person making payment to Non-Resident is required to furnish details relating to payment irrespective of the fact whether payment is chargeable to tax or not. Particulars are to be furnished in Form Nos. 15CA, 15CB and 15CC. Section 204 of the Act is being amended to insert a clause that “the person responsible for paying to a Non-Resident” would mean the payer himself or if the payer is a company, the company itself including the principal officer thereof.
206C	Section 206C provides for collection of tax at source while receiving sale consideration in the cases specified therein. Following amendments are being made in provisions of section 206C of the Act. (i) Section provides for collection of tax at source @ 1% in a case where sale consideration in case of jewellery exceeds ₹ 5 lakhs. By way of insertion of a new section 269ST in the Act, it is being provided that no person shall receive sale consideration in excess of ₹ 3 lakh failing which penalty will be leviable equal to amount of sale consideration. In view of provisions of section 269ST, provision under section 206C regarding sale consideration exceeding ₹ 5 lakh in case of jewellery has become redundant and, therefore, amendments are being made to delete the reference to sale consideration received in cash in case of jewellery. (ii) Sub-section (IF) of section 206C provides for collection of tax at source @ 1% in case of sale of motor vehicle of the value exceeding ₹ 10 lakh. In order to provide exemption from above provision to Central Government, State Government, High Commissions, local authorities and public sector companies engaged in the business of carrying passengers, amendment is being made in provisions of sub-section (IF) of section 206C of the Act to provide that provisions of this section will not apply in above cases.
206CC	Section 206AA of the Income-tax Act provides for deduction of tax at source at a higher rate in case payee is not having PAN. Similar provision is being made in regard to collection of tax at source u/s. 206C of the Act by inserting a new section 206CC. The aforesaid section provides that :- (i) The person paying any sum on which tax is collectible u/s. 206C of the Act has to furnish PAN to the person selling the goods. In case PAN is not furnished, tax will be collected at the rate twice of the rate specified in above section or @ 5% whichever is higher. (ii) As per provisions of section 206C(IA), tax is not required to be collected in respect of sale of certain goods in case a declaration is furnished to the effect that these goods shall be used for the purpose of manufacturing and not for trading purpose. It is being provided that such declaration shall be invalid unless PAN is given in the declaration. In case of invalid declaration tax will be collectible at the rate as mentioned above, considering the case as if PAN has not been furnished. (iii) In terms of sub-section (9) of 206C a certificate can be obtained from the A.O. for collection of tax at source at the lower rate. It is being provided that such certificate shall not be issued unless PAN has been given in the application made for such certificate to the A.O. (iv) It is also being provided that in case PAN submitted is invalid or does not belong to the collectee, it shall be deemed that collectee has not furnished the PAN and tax will be collected accordingly. (v) It is also being clarified that provisions of this section shall not apply to a Non- Resident who is not having permanent establishment in India.
244A	In certain circumstances the tax deductor is also entitled to claim refund of tax deducted and deposited with the Government. Section 244A of the Act which provides for grant of interest on refund allowable to an assessee has no provision in regard to grant of interest in case refund has become allowable to the tax deductor. It is being provided that interest will also be allowed on grant of refund to tax deductor pursuant to his claim or as per the appellate order.

Arun Jaitley, the Finance Minister has proposed some changes which will help to boost ailing Housing Sector in our country due to lack of demand and also cash crunch after demonetisation. The proposals for promoting Real Estate Sector are analysed here.

1. Amendment of Section 80-IBA to promote Affordable Housing

The existing provisions of Section 80-IBA provides for 100% deduction in respect of the profits and gains derived from developing and building certain housing projects subject to specified conditions. The conditions specified, inter alia, include the limit of 30 square metres for the built-up area of residential unit in respect of project located in the Chennai, Delhi, Kolkata and Mumbai. However with the amendments made in this Budget the specified area to be considered will be carpet area and not the built up area. Further the restriction of area of 30 Sq. Metres also applied to places within 25 kms from the municipal limits of these four metropolitan cities. With the amendments, the flat to be constructed up to 60 Sq. Metres of carpet area in places outside a metropolitan city. Further, it is also provided that in order to be eligible to claim deductions, the project shall be allowed to be completed within a period of 5 years instead of existing 3 years. The amended provisions will take effect from FY 2017-18 (assessment year 2018-19). The amendment is welcome measure and will help in providing shelter at affordable price to needy people including those in rural areas and the business community in housing sector will be able to save on income tax due to benefit of tax free income of such projects.

2. Relaxed provisions for computation of capital gains in case of joint development agreement

Under the existing provisions of section 45, capital gain is chargeable to tax in the year in which transfer takes place except in certain cases. The definition of ‘transfer’,
inter alia, includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred. In such a scenario, execution of Joint Development Agreement (JDA) between the owner of immovable property and the developer triggers the capital gains tax liability in the hands of the owner in the year in which the possession of immovable property is handed over to the developer for development of a project. With a view to minimise the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, the FM has proposed to insert section 45(5A) to provide that in case of an assessee being individual or Hindu undivided family, who enters into a specified agreement for development of a project, the capital gains shall be chargeable to income tax as income of the year in which the certificate of completion for the whole or part of the project is issued by the Municipal Corporation or competent authority.

It has been further proposed to provide that the stamp duty value of his share, being land or building or both, in the project on the date of issuing of said certificate of completion as increased by any monetary consideration received by the Land owner in pursuance of signing of the JDA, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the land. However, the benefit of this proposed changes shall not apply to an assessee who transfers his share in the project to any other person on or before the date of issue of said certificate of completion. In such a situation, the capital gains as determined under general provisions of the Income-tax Act shall be deemed to be the income of the previous year in which such transfer took place and shall be computed as per provisions of the Act without taking into account the proposed amended provisions.

Section 49 is also proposed to be amended so as to provide that the cost of acquisition of the share in the project being land or building or both, in the hands of the land owner shall be the amount which is deemed as full value of consideration under the proposed provision. The amended provisions will take effect from FY 2017-18 (Assessment Year 2018-19). The FM has also proposed to insert a new section 194-IC in the Income-tax Act so as to provide that in case any monetary consideration is payable on or after 1st April, 2016 under the JDA, TDS at the rate of 10 per cent shall be deductible from such payment.

The taxation in case of JDA was an area of litigation and big dispute. The amendment will help in putting a curtain on such uncertainty and reduce the litigation.

3. Relaxation in deemed Notional Rent

Considering the business exigencies in case of real estate developers, the FM has also proposed to amend section 23 for the manner of determination of annual value of house property and to provide that where the house property consisting of any building and land appurtenant thereto and the flats are held as stock-in-trade and the property or any part of the property is not let during the year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil. This amendment is also practical and will eliminate the bona fide problem of promoters to some extent and will take effect from FY 2017-18 and will apply to assessment year 2018-19. It would have been better not to charge tax on deemed rent on flats held as stock-in-trade.

4. Base year for computation of capital gains

The FM has proposed to amend section 55 of the Act so as to provide that the cost of acquisition of an asset acquired before 1-4-2001 shall be allowed to be taken as fair market value as on 1st April, 2001 and the cost of improvement shall include only those capital expenses which are incurred after 1-4-2001. It will replace the existing date of 1st April, 1981. The amended base year will apply in respect of long term capital gains arising in FY 2017-18. It may be noted that for cost of acquisition of the asset the assessee has been allowed an option of either to take the fair market value of the asset as on 1-4-2001 or the actual cost of the asset as cost of acquisition. As the base year for computation of capital gains has become more than three decades old, assessees are facing genuine difficulties in computing the capital gains in respect of a capital asset, especially immovable property acquired before 1-4-1981 due to non-availability of relevant information for computation of fair market value of such asset as on 1-4-1981. Consequently the benefit of cost inflation index may be claimed at the discretion of the taxpayer on the basis of fair market value as on 1st April, 2001 (instead of actual cost in case property was acquired prior thereto). The measure is a step in right direction and will help in ease of doing business.

5. Promoting investment in immovable property

The existing provision of the Income-tax Act provide that to qualify for long-term asset, an assessee is required to hold the asset for more than 36 months subject to certain exceptions, for example, the holding period of 24 months has been specified for unlisted shares. With a view to promote the real-estate sector and to make it more attractive for investment, the FM has proposed to amend section 2(42A) of the Income tax Act so as to reduce the period of holding from the existing 36 months to 24 months in case of immovable property, to qualify as long-term capital asset.

This amendment is a welcome measure and will apply to transactions taking place during FY 2017-18.

6. Expanding the scope of long-term bonds under 54EC

The existing provision of section 54EC provides that capital gain to the extent of ₹ 50 lakhs arising from the transfer of a long-term capital asset shall be exempt if the assessee invests the whole or any part of capital gains in certain specified bonds, within the specified time. Currently, investment in bond issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited is eligible for exemption under section 54EC.

In order to widen the scope of the section for sectors which may raise fund by issue of bonds eligible for exemption, the FM has proposed to amend section 54EC so as to provide that investment in any bond redeemable after three years which has been notified by the Central Government in this behalf shall also be eligible for exemption with effect from 1st April, 2017.

INDIRECT TRANSFER PROVISIONS

Proposed Amendment

Vide clause 4 of The Finance Bill, 2017 (for short “Bill”) Explanation 5A has been proposed to be inserted after Explanation 5 in clause (i) of section 9(1) (for short ‘Explanation 5’) with retrospective effect from 1st day of April, 2012. Proposed Explanation 5A reads as under:

“Explanation 5A — For the removal of doubts, it is hereby clarified that nothing contained in Explanation 5 shall apply to an asset or capital asset mentioned therein, which is held by a non-resident by way of investment, directly or indirectly, in a foreign institutional investor as referred to in clause (a) of the Explanation to section 115AD and registered as Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992.”

Introduction

Section 115AD specifies different rates of tax in respect of income of Foreign Institutional Investors (FIIs) from securities or capital gains arising from their transfer. Clause (a) of Explanation to Section 115AD defines expression “Foreign Institutional Investor” being such investor as the Central Government may, by notification in the Official Gazette specify in this behalf.

Accordingly, with retrospective effect from 1st day of April, 2012 the Foreign Institutional Investor, as referred to in clause (a) of the Explanation to section 115AD and who is also registered as Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992, has been proposed to be exempted from the applicability of Explanation 5 in clause (i) of section 9(1).

This amendment has been made retrospectively w.e.f. 1-4-2012 and applicable to A.Y. 2012-13 and subsequent years.

Legislative History of the Provision

To understand the importance and impact of such proposed amendment, it would be necessary to refer to the legislative history of the Explanation 5. This Explanation was added to clause (i) of section 9(1) along with Explanation 4 by the Finance Act, 2012 w.r.e.f. 1st day of April, 1962. Section 9 in Chapter II of The Income Tax Act 1961 (Act) specifies the incidences of income deemed to accrue or arise in India. Explanation 4 was added to this section to clarify the expression ‘through’ which shall mean and include and shall be deemed to have always meant and included ‘by means of’, ‘in consequence of’ or by ‘reason of’. At the same time Explanation 5 clarifies that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

After insertion of Explanations 4 and 5 to section 9(1)(i) w.r.e.f 1-4-1962, number of representations were received by the CBDT expressing the apprehensions about the applicability of the Explanation to the transactions not resulting in any transfer, directly or indirectly of assets situated in India. It has been pointed out that such an extended application of the provisions of the Explanation may result in taxation of dividend income declared by a foreign company outside India. This may cause unintended double taxation and would be contrary to the generally accepted principles of source rule as well as the object and purpose of the amendment made by the Finance Act, 2012. To remove such doubts the CBDT has issued Circular No. 4/2015 dated 26-3-2015 and clarified that “Declaration of dividend by such a foreign company outside India does not have the effect of transfer of any underlying assets located in India. It is therefore, clarified that the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing or arising in India by virtue of the provisions of Explanation 5 to section 9(I)(i) of the Act.”

Thereafter, Explanations 6 and 7 are inserted in section 9(1)(i) by the Finance Act, 2015, w.e.f. 1-4-2016. The scope of these Explanations on ‘Notes on clauses’ in the Finance Bill, 2015 as under:

Clause 5 of the Bill seeks to amend section 9 of the Income-tax Act relating to income deemed to accrue or arise in India.

Clause (i) of sub-section (1) of the aforesaid section provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. Explanation 5 to the said clause provides that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India, shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

It is proposed to amend the said clause (i) by insertion of Explanation 6 to provide that the share or interest shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets is more than ten crore rupees and represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may be. The definition of value of assets and the specified date is also proposed to be provided in the said Explanation.

It is further proposed to insert Explanation 7 in the said clause (i) so as to provide that the income shall not accrue or arise to a non-resident in case of transfer of any share or interest referred to in Explanation 5, unless——

(a) He along with its associate enterprises,——

(i) Neither holds the right of management or control;

(ii) Nor holds voting power or share capital or interest exceeding five per cent of the total voting power or total share capital, in the foreign company or entity directly holding the Indian assets (direct holding company);

(b) He along with its associate enterprises, in case of the transfer of shares or interest in a foreign entity which does not hold the Indian assets directly ——

(i) Neither holds the right of management or control in relation to such company, as the case may be, or the entity.

Discussion

Section 9(1)(i) describes that any income accruing or arising whether directly or indirectly; a) through or from any business connection in India, or b) through or from any property in India, or c) through or from any asset or source of income in India, or d) through the transfer of a capital asset situated in India, is deemed to accrue or arise in India. Several Explanations are added to explain this clause of section 9. Explanations 4 and 5, as mentioned earlier, were added by the Finance Act, 2102.

Hon’ble Delhi High Court in the case of DIT v. Copal Research Ltd. 371 ITR 114 (Del.) has considered the scope of Explantion 4 and 5 to section 9(1)(i) of the Act. The reference can be made to the following observations:

“It is trite law that a legal fiction must be restricted to the purpose for which it was enacted. The object of Explanation 5 was not to extend the scope of section 9(1)(i) of the Act to income, which had no territorial nexus with India, but to tax income that had a nexus with India, irrespective of whether the same was reflected in a sale of an asset situated outside India. Viewed from this standpoint there would be no justification to read Explanation 5 to provide recourse to section 9(1)(i) for taxing income which arises from transfer of assets overseas and which do not derive bulk of their value from assets in India. In this view, the expression “substantially” occurring in Explanation 5 would necessarily have to be read as synonymous to “principally”, “mainly” or at least “majority”. Explanation 5 having been stated to be clarificatory must be read restrictively and at best to cover situations where in substance the assets in India are transacted by transacting in shares of overseas holding companies and not to transactions where assets situated overseas are transacted which also derive some value on account of assets situated in India. In our view, there can be no recourse to Explanation 5 to enlarge the scope of Section 9(1) of the Act so as to cast the net of tax on gains or income that may arise from transfer of an

asset situated outside India, which derives bulk of its value from assets outside India.”

Their lordships also observed that “by virtue of Section 9(1)(i) of the Act all income arising from transfer of a capital assets situated in India would be deemed to accrue or arise in India and would thus be exigible to tax under the Act. A share of a company incorporated outside India is not an asset which is situated in India and, but for Explanation 5 to Section 9(1)(i) of the Act, the gains arising out of any transaction of sale and purchase of a share of an overseas company between non-residents would not be taxable in India. This would be true even if the entire value of the shares of an overseas company was derived from the value of assets situated in India. This issue arose in the case of
Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1/204 Taxman 408/17 taxmann.com 202 (SC) and the Supreme Court held that the transaction of sale and purchase of a share of an overseas company between two non-residents would fall outside the ambit of Section 9(1)(i) of the Act.”

The above decision has been challenged by the Department in SLP filed before Apex Court which has been admitted. The legal battle on this issue will be going on until set at rest by the Apex Court.

Conclusion

Not going into much detail and restricting the discussion to the subject, it may be mentioned that by proposed insertion of Explanation 5A after Explanation 5 to Section 9(1)(i), an attempt has been made to bring certainty to some extent to the incidence of tax in the hands of Foreign Institutional Investors (of the categories specified in proposed Explanation 5A) with retrospective effect from A.Y. 2012-13 onwards which is a welcome move and augment foreign investment in India.

DOMESTIC TRANSACTIONS

Inroduction

Section 92BA was introduced by section 36 of the Finance Act, 2012, w.e.f. 1-4-2013 in order to give an exhaustive meaning of the expression “specified domestic transaction” as appearing in sections 92, 92C, 92D and 92E of the Act. It inter alia provides that any expenditure in respect of which payment has been made by the assessee to certain “Specified Persons” u/s. 42A(2)(b) is covered within the ambit of specified domestic transactions.

With the efflux of time it was noticed that the related parties to whom such payments are made by the entities, which were under obligation to comply with the transfer pricing provisions, were also bearing maximum marginal rate of tax. Section 92BA was brought to the statute with an objective to introduce anti-domestic tax avoidance regulations extending the scope of India transfer pricing regime and such step was in accordance with the decision of the Hon’ble Supreme Court in the case of
Glaxo Smithkline Asia (P.) Ltd. [2010] 236 CTR 113 (SC).

These provisions were introduced with a minimum compliance of threshold limit of ₹ 5 crore. It was noticed by the authorities that assessee’s have faced a lot of administrative and compliance burden and therefore, the said limit of ₹ 5 crore was enhanced to ₹ 20 crore by the Finance Act, 2016 w.e.f. 1-4-2016 and the proposed amendment by the Finance Bill, 2017 is in furtherance of reducing the over burdened compliance obligations of the entities falling under these provisions.

Thus, in order to relieve the entities falling within this category from over-burdened compliance, an amendment has been proposed by introduction clauses 15 and 41 in the Finance Bill, 2017 which provides that expenditure in respect of which payment has been made by the assessee to a person referred to in u/s. 40A(2)(b) are to be excluded from the scope of section 92BA of the Act. Accordingly, it is proposed in the Finance Bill, 2017 to omit clause (i) in section 92BA which reads as under:-

(i) Any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A;

Consequential amendment has also been proposed to be made in the proviso to clause (a) in sub-section (2) of section 40A of the Act. These amendments will take effect from 1-4-2017 and would be applicable in relation to Assessment Year 20017-18.

Conclusion

It is a welcome amendment as it has relieved the domestic assessees from the great burden of compliance and reporting of the transactions which, from the past experience, have largely been found to be tax neutral. However, the other clauses of section 92BA of the Act remain ineffective particularly in relation to the entities where any of them is claiming deductions/exemption. So, without losing any revenue, the amendment has been made to reduce the burden of compliance.

 

Faith is not something to grasp, it is a state to grow into.

— Mahatma Gandhi

There are two days in the year that we can not do anything, yesterday and tomorrow.

— Mahatma Gandhi

The Finance Bill, 2017 places some restrictions on cash transactions which have far reaching implications. They will come into force with effect from 1st April, 2017. Broadly speaking, restrictions proposed in the Finance Bill are of two types:-

(i) Restriction on the amount of payments u/s. 40A(3) and 40A(3A) of the Income-tax Act, 1961 (the Act) and its extension to capital expenditure

(ii) Prohibition on receipts in cash of ₹ 3 lakhs or more — Section 269ST

Restriction u/ss. 40A(3) and 40A(3A) of the Act — Clause 15 of Finance Bill, 2017

2. As per the existing provision of sub-section (3) of section 40A of the Act, any expenditure in respect of which a payment or aggregate of payments made to a person in a day; otherwise than by a crossed account payee cheque or an account payee bank draft exceeding ₹ 20,000/- is not allowed as deduction in computing his income from business or profession.

3. Sub-section (3A) of section 40A of the Act prohibits the deduction of expenditure incurred in a particular year in computing the income from business and profession but the payment of a sum exceeding ₹ 20,000/- is made in a single day in any subsequent year otherwise than by account payee cheque or bank draft, it will be chargeable to tax as the income of the subsequent year.

4. In both the situations at paragraphs 2 and 3 above, the existing threshold of cash payment to a person on any single day is proposed to be reduced from ₹ 20,000/- to ₹ 10,000/-.

5. In order to discourage cash transactions even for capital expenditure, it is proposed to amend section 43 of the Act to provide that where an assessee incurs any expenditure for acquiring an asset for which, a payment or aggregate of payments made to a person in a day in cash exceeds ₹ 10,000/-, such expenditure shall be ignored. Besides, no deduction will be allowed in respect of capital expenditure for specified businesses covered u/s. 35AD of the Act where the cash expenditure exceeds ₹ 10,000/- in respect of which payment or aggregate of payments is made to a person in a day.

6. The specified mode of payment, namely, crossed account payee cheque or draft is also proposed to be expanded to include any payment through the use of electronic clearing system through a bank account. Such a clearing system may include Real Time Gross Settlement (RTGS), credit card or debit card payments and even payments through the Aadhaar Card System.

Prohibition on cash transactions each of ₹ 3 lakhs or more

7. The newly inserted section 269ST provides that no person shall receive in cash ₹ 3 lakhs or more,

(a) In aggregate from a person in a day or

(b) In respect of a single transaction or

(c) In respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.

8. The restriction of ₹ 3 lakhs will not apply to Government, any banking company, post office saving bank or co-operative bank or any other person or class of persons or receipts that may be notified by the Central Government. In view of the insertion of section 269ST, the provision of section 206C relating to tax collection at source @1% of the cash sale consideration of jewellery exceeding ₹ 5 lakhs has become redundant and is to be omitted.

9. The restriction on cash transactions is the result of Supreme Court’s constituted Special Investigation Team which had made such a proposal in July, 2011. The objective of imposing restrictions on cash transactions is to curb the flow of domestic black money which is not only adversely affecting the revenues of the Government but is also affecting the investment for productive purposes because most of the black money is transacted in cash, it remains unaccounted and quite a sizable amount remains unproductive and is stored in the form of cash or remains invested in low priority investments in gold, jewellery etc. The restrictions are intended to move towards a less cash economy and to reduce generation and circulation of black money.

Implications of section 269ST of the Act

10. As stated above, three kinds of restrictions on receipt of cash of ₹ 3 lakhs or more have been prescribed. They relate to:

(i) Receipts from one person

(ii) Receipts in relation to a single transaction even though payments are made on different dates and

(iii) Transactions relating to one event or occasion from a person.

11. The cash restrictions are independent of the nature of transaction. It may represent the transaction of sale of goods on trading account or capital account or it may even be a loan transaction and is in addition to the provisions of section 269SS that deals with acceptance of loans, deposits or specified sum in cash exceeding ₹ 20,000/- which will be treated as the undisclosed income and subjected to tax.

12. In the first category, receipts from different persons in a day, of an amount which is less than ₹ 3 lakhs, will be permissible. However, if they relate to a single transaction, say, purchase of an expensive diamond or luxury durables, the total value of the transaction will be the determining factor and if it is of ₹ 3 lakhs or more, it will be hit by section 269ST even if the payments are made through more than one person or they are made on different dates of individual amounts of less than ₹ 3 lakhs.

13. Likewise, the transactions relating to one event, say marriage or birthday, the aggregate of all the transactions like say, rent of tents, decoration, cost of food and beverages will be aggregated to determine the threshold limit of ₹ 3 lakhs beyond which, the restriction of cash transaction will be applicable. This provision is likely to adversely affect the sale of luxury goods and consumer durables. It will also affect adversely the marriage market by restricting the sale of gems and jewellery, designer apparels etc. However, it will reduce the size of the grey market as well as the size of the unorganised sectors of the economy. The sellers of goods and services will look for buyers who can make the payments by modes other than cash.

14. Some important issues may also arise concerning the compliance with section 269ST vis-à-vis the Sale of Goods Act, 1930, under which, most of the business transactions are made. Section 4 of the Sale of Goods Act, 1930 defines the contract of sale as a contract whereby a seller transfers or agrees to transfer the property in goods to the buyer for a price. Where the transfer of the property in the goods has to take place at a future date or is subject to some conditions thereafter to be fulfilled, the contract will be an Agreement to Sell. The contract of sale or agreement to sell may provide for the immediate delivery of the goods or immediate payment of the price or both. It may also provide for the delivery or payment by installments, or that the delivery or payment or both shall be postponed. The goods which form the subject of a contract of sale or agreement to sell may be either existing goods, owned or possessed by the seller, or future goods. The payment may be made in advance even where the transaction is not final, in that the price is required to be settled in future when the goods would come into existence.

15. There may also be situations where the price is settled but quantity and time of the delivery is uncertain. For example, when a person agrees to buy the steel rods for the construction of his house, the price may be settled but the quantity depending upon the requirement of steel may be uncertain and the delivery may also depend upon the requirements of the buyer. The price may be payable when delivery of the required lot is taken.

16. In such situations, record would be to keep of the aggregate value of the transaction and if it exceeds ₹ 3 lakhs or more, each payment, even if it is less than ₹ 3 lakhs, would need to be made other than cash.

Penalty u/s. 271DA of the Act

17. Under the newly inserted section 271DA, contravention of section 269ST prohibiting cash receipt of ₹ 3 lakhs and above is punishable with penalty which is equal to the amount of such cash receipt. The penalty is required to be imposed by the Joint Commissioner of Income Tax. No penalty will, however, be levied if the person concerned proves that there were good and sufficient reasons for the contravention. By use of the words “good and sufficient reasons” in contra-distinction to a ‘reasonable cause’, a greater burden of proof has been cast on the assessee to show that the reasons for contravention would not only be good but also sufficient. The absence of the bank account of the payer, say an agriculturist, may not qualify to be a good and sufficient reason for accepting the payment in contravention of section 269ST particularly because the Government has been laying great emphasis on opening of Jan Dhan accounts in banks by every person even though there was to be a no deposit in that account. In pursuance of the policy of the Government, several crores of such Jan Dhan bank accounts have been opened by villagers including farmers and as such, the absence of a bank account may not provide good and sufficient reason for the payee to accept the cash of ₹ 3 lakhs or more.

18. To conclude, the restriction of cash transaction, though harsh and difficult to comply, will go, in the long run, bring about great benefits to country by curbing the use of black money and other attendant evils associated with it. It will not only improve tax compliances but in the long run, accelerate economic growth by larger utilisation of money through banking and other verifiable channels unlike at present where quite a large proposition of cash representing black money stays idle or is invested in unproductive assets like gold jewellery or other precious metals.

Live as if you were to die tomorrow. Learn as if you were to live forever.

— Mahatma Gandhi

1. Introduction

Union Finance Minister Shri Arun Jaitley, placed Union Budget for the year 2017-18 before Parliament on 1st February, 2017, instead of
28th February, 2017. No separate budget for Railways was placed by the Railway Minister and the Railway Budget stands merged with the General Budget, which have been claimed as an historic step. Classification of expenditure between plan and non-plan have been done away with. The Finance Bill, 2017 to give effect to the financial proposals of the Central Government for the Financial Year 2017-18 was introduced in Lok Sabha on 1st February, 2017. Though many amendments, insertions, and substitutions have been made in the existing Act, this article is restricted to the provisions relating to search, assessment and reassessment only.

2. Search Provisions

Existing section 132(1) of this Act requires the prescribed authority to record “reasons to believe” before issuing authorisation to the authorised officer to search and reasons in the situation detailed in clauses (a) or (b) or (c) of the said section. Recording of reasons is not an idle formality. There must be live link and rational and reasonable connection, between the information and the satisfaction. On challenge it is justiciable and in case there is no information on which a reasonable person well instructed in law could form the belef, action is liable to be quashed. Assessees used to apply for copy of authorisation, copy of reasons recorded with material and information in possession for recording such reasons. The Revenue used to deny the copy or the inspection on the plea it is an administrative act and informer/ information is in secrecy and cannot be disclosed.

2.1 In CIT v. Smt. Chitra Devi (2009) 313 I.T.R. 174 (Raj.), it was held that on challenge of invalidity of the search before the tax authorities or the Appellate Tribunal the Revenue is bound to produce the search authorisation and relevant record for perusal of the Income Tax Appellate Tribunal and on failure to do so, search could be held as bad and assessment proceedings quashed. SLP was dismissed by the Supreme Court. In CIT v. Smt. Umesh Goel (2016) 387 I.T.R. 575 (Raj.) it was found that on challenge to validity of the search and reasons recorded, the CIT(A) called for Form No. 45, warrant. It was perused and found that there is no specific warrant of authorisation against the assessee and hence search being invalid proceedings for assessment are bad.

2.2 In order to avoid such challenge, it is proposed to insert an Explanation after the fourth proviso to the said sub-section (1) so as to provide that the “reason to believe” recorded by the prescribed authority shall not be disclosed to any person or any authority or the Appellate Tribunal. This amendment will take effect retrospectively from the date of commencement of the Act i.e., 1st April, 1962. Now the assessee would not be able to call for copy of recorded reasons, nor to inspect or to require the assessing authority or appellate authority or the Income Tax Appellate Tribunal to call for the records, peruse the “reasons recorded”, to entertain objection as to invalidity of the search so conducted and seizure effected. Challenge to the validity of the search and its consequence would not be entertained by the tax authorities and Appellate Tribunal.

2.3 In my view the challenge to the validity of the search, non-existence of “reason to believe”, non-existence of material information to entertain, the belief, absence of conditions precedent which are sinequanon for issuance of authorisation for search and seizure can continue to be challenged under Articles 226 and 227 of our Constitution, by way of a suitable writ. On challenge and on
prima facie satisfaction, the writ court would be competent to direct the Revenue to produce the record and after production to peruse, to furnish copy, to provide copy to the petitioner and to consider issue of lack of jurisdiction and invalidity of the action. The forbidden authorities are appellate, the Income Tax Appellate Tribunal and the person searched or any other person, other than the High Court or the Supreme Court in challenge under Article 32 of the Constitution. Right to challenge as on an action u/s. 148 of the Act by way of a writ remains open. All judicial precedents for the expression “reason to believe” for section 147 would be to the aid of the petitioner.

2.3.1 In New Kashmir and Oriental Transport Co. (P.) Ltd. v. CIT (1973) 92 I.T.R. 334 (Allahabad), as early as on 7-9-1972, it was held that when a challenge is thrown to the validity of search in a writ petition, the petitioner is entitled to inspect the record of the proceedings and to obtain copies of the orders passed in those proceedings, as Rule 12 framed under section 132 (14) requires, the reasons shall be recorded. In
M. D. Overseas Ltd. v. DGIT (2011) 333 ITR 407 (Allahabad), it observed. “The Court, in an appropriate case, can order the Department to indicate the contents or nature of information/ material and reasons to believe authorising the search (without disclosing the source of information) to the aggrieved person. The question of relevancy of information/material and reasons to believe is to be judged after hearing the aggrieved person. The question of their relevancy is not to be decided without assistance of the aggrieved person. This is subject to any valid claim of privilege under sections 123 and 124 of the Evidence Act, 1872.” It directed for disclosure of the information.

2.3.2 In Visa Comtrade Ltd. v. VOI (2011) 338 ITR 343 (Orissa) it was held “Before taking action under section 132 the competent authority must assure and reassure about the truthfulness and correctness of the information. A search under section 132 is a serious invasion into the privacy of the citizen. Therefore, section 132(1) has to be strictly construed and the information of the person or reason to believe by the authorising officer must be apparent from the note recorded by him”. It also observed “Formation of opinion on the basis of reason to believe that a particular property/asset has not been disclosed or would not be disclosed so that the action under
section 132 would be taken, is not an empty formality.”

2.3.3 Recently on 13-5-2015 in DGIT v. Spacewood Furnishers Pvt. Ltd. and Others (2015) 374 I.T.R. 595 (S.C.)
observed “The necessity of recording of reasons for issue of a warrant of authorization for search under section 132 of the Income-tax Act, 1961, so as to ensure accountability and responsibility in the decision-making process acts as a cushion in the event of a legal challenge being made to the satisfaction reached. Reasons enable a proper judicial assessment of the decision taken by the Revenue. However, this, by itself, would not confer in the assessee a right of inspection of the documents or to communication of the reasons for the belief at the stage of issuing of the authorisation. Any such view would be counter-productive of the entire exercise contemplated by section 132 of the Act. It is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee. While reasons in support of the “reasonable belief” contemplated by section 132 must be recorded, there is no provision requiring the reasons recorded prior to authorising the search to be disclosed or communicated to the person against whom the warrant of authorisation is issued.”

2.4 The proposed Explanation is to do away with the claim of an assessee to challenge validity of the search on non-recording of valid reasons. However, as explained earlier the inherent right to challenge the validity and jurisdiction for issuance of the authorisation to search exists, could not be done away with and could not be closed. It would be open to an assessee to challenge the search and subsequent action by an appropriate writ, before the High Court. The Hon’ble Court would be entitled to call for the records, peruse and provide copy or permit inspection, as it may deem fit and proper.

2.5 Similar Explanation has been proposed to be inserted w.e.f. 1-10-1975, in the said sub-section (1A) of section 132 so as to declare that “reason to suspect” shall not be disclosed to any person or an authority or the Appellate Tribunal. However, as analysed herein before the right of the Courts and High Courts remain as hithertofore.

2.6 It has also been proposed to insert sections (9B), (9C), (9D) in existing section 132, to attach provisionally any property belonging to the assessee with the prior approval of Principal Director General or Director General or Principal Director or Director. This power is conferred for the purpose of protecting the interest of Revenue. Reasons shall have to be recorded and provisional attachment order shall have to be issued in writing with the prior approval of the specified authority. Such order would be operative for six months from the date of the order. Power has also been conferred on the authorised officer to refer valuation of a property to the valuation officer in the manner provided u/s. 142A of the Act. The valuation officer to provide the valuation report in six months. The proposed provisions are similar to existing section 281-B of the Act.

2.7 It has been further proposed to amend existing Explanation to section 132 so as to apply the provisions of existing section 153B, time limit for completion of assessment, with respect to “execution of an authorisation for search” for the purposes of the existing section (9A) and proposed new sections (9B — Provisional Attachment) and section (9D — Valuation). These amendments will take effect from 1-4-2017 i.e., are prospective.

2.8 On the same lines as under section 132 (1)and 132(1A) it has been proposed to insert an Explanation to the said sub-section, so as to declare that the reason to believe for making the requisition shall not be disclosed to any person or any authority or the Appellate Tribunal. But it can be called for by the Court or the High Court as discussed hereinabove. This amendment has been proposed to be operative from 1-10-1975.

3. Return, assessment and reassessment

Existing sub-section (4C) of section 139 mandates filing of returns by certain entities which are exempt u/s. 10. It is proposed to provide that — (1) Fund established for the welfare of employees u/s. 10 (23AAA), Investor Protection Fund u/s. 10(23 EC or Clause 23 (ED); Core Settlement Guarantee Fund u/s. 10(23 EE) and Board or Authority u/s, 10(29A) shall also be mandatorily required to furnish the return of income.

3.1 Section 139(5) regarding filing of revised return is proposed to be amended whereby time for furnishing revised return shall be up to the end of the relevant assessment year or before completion of assessment whichever is earlier. Existing period of one year from the end of the relevant assessment year is reduced. Both these amendments would be from 1-4-2018 and shall apply to the Assessment Year 2018-19 and subsequent years

3.2 Section 234F has been proposed to be inserted whereby late fee of ₹ 5,000/- or ₹ 10,000/- as the case may be shall be payable if return for the Assessment Year 2018-19 and onwards is filed not on the due date but before 31st December or after 31st December, as the case may be. However whose total income does not exceed ₹ 5 lakh quantum of fee would be ₹ 1,000/-. It shall be payable along with tax and interest on self-assessment u/s. 140A of the Act. Such fee payable shall also be considered while processing of return u/s. 143(1) of the Act.

3.3 Section 143(1D) (as substituted by section 68 of the Finance Act, 2016) has been proposed to be substituted whereby it shall not be necessary to do processing u/s. 143(1), where a notice for scrutiny has been issued u/s. 143(2). It shall be for the Assessment Year 2017-18 and onwards.

3.4 Existing section 153 of the Act provides for time limit for completion of assessment, reassessment and recomputation. Time limit proposed for regular assessment u/s. 143 or 144 is being reduced to 18 months from existing 21 months for the Assessment Year 2018-19 and 12 months for the Assessment Year 2019-20 and onwards.

3.5 Similarly for an assessment, reassessment or recomputation u/s. 147, if notice u/s. 148 is served on or after 1-4-2019, time limit for completion of assessment shall be 12 months from the end of the financial year in which notice was served.

3.6 Time limit for making fresh assessment pursuance to an order of the Tribunal u/s. 254 or revision u/s. 263 or 264 shall be 12 months from the end of the financial year in which order is received or passed.

3.7 From existing third proviso to Explanation 1 of section 153, the reference to section 153B has been proposed to be omitted. All these amendments will take effect from 1-4-2017.

3.8 It is proposed to amend existing sub-section (5) of section 153. Where an order u/s. 250 or 254 or 260 or 262 or 263 or 264 requires verification of any document or other person or granting on opportunity of being heard, the time limit relating to fresh assessment shall be as that in amended section 153(3).

3.9 Section 153(9) has been proposed to be amended to provide that where a notice under Section 142(1) or 143(2) or 148 has been issued prior to 1-6-2016 and assessment or reassessment has not been completed by the due date due to exclusion of time referred to in Explanation I, such act shall be completed in accordance with the provisions existing before the substitution of the said section by the Finance Act, 2016 meaning thereby under the old section. These amendments will take effect from 1-6-2016.

4. Special Agreement in search or requisition cases.

During the last five years there is thrust on searches and its expeditious assessments, to enable to collect additional revenue and to curb unaccounted for assets, transactions, black money and corruption, which is flagrantly prevalent in all the fields. Section 197(c) of the Finance Act, 2016, provided that where any income has accrued, arisen or received or any asset has been acquired out of such income prior to commencement of the Income Declaration Scheme, 2016, and no declaration in respect of such evaded income is made, then such income shall be deemed of the year in which a notice under section 142(1) or 143(2) or 148 or 153 A or 153C of the Act is issued by the Assessing Officer and it shall be taxed in such year. It was noticed that such section is unconstitutional and action would be void. However, the Central Board of Direct Taxes clarified that the Finance Act, 2016, being later on point of time would prevail over the provisions of the Income-tax Act. It is not correct interpretation of law. Good sense have prevailed and the said section 197(c) stand omitted. We are happy it is better to correct the mistake rather then to harass the taxpayers with long drawn litigation. We have been told that some enlightened super active assessing authorities issued notices under the said provision. Such notices shall have to be withdrawn as a face saving. This amendment is w.e.f. 1st June, 2016.

4.1 Section 153A provides in case of search under section 132 and requisition under section 132A for issuance of notice to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made. Now it is proposed to extend the said six years up to ten assessment years relevant to the previous year in which search is conducted or requisition is made in the following circumstances:

(i) If the Assessing Officer has in his possession books of account or other document or evidence which reveal, the escaped income is likely to be fifty lakhs or more in ten years;

(ii) Such escaped income is represented in the form of asset including immovable property being land or building or both, shares and securities, deposits in bank account loans and advances and it relates to the said ten years ;

(iii) Search is initiated or requisition is made on or after 1-4-2017. Consequent amendments have been proposed to the provisos of section 153A. It is also proposed to insert Explanation to define the expression “relevant assessment year”, to mean an assessment year preceding the previous year of search or requisition which falls beyond six assessment years, but not later than ten assessment years, from the end of the assessment year relevant to the previous year in which search is conducted or requisition is made. Explanation 2 explains the word “asset” as noted earlier. Applicability of this provision from 1-4-2017 shows the intention of the Government to give one more final chance to avail of “Pradhan Mantri Garib Kalyan Yojana, 2016”, which is open up to 31-3-2017.

4.2 Section 153B is proposed to amend time limit for completion of six assessments under section 153A within 21 months from the end of the financial year in which the last of the authorisation for search or requisition was executed. Hence time limit for searches conducted up to 31-2-2017 shall remain as it exists earlier. However for the search and seizure cases conducted on or after 1-4-2017 the time limit for making an assessment shall be reduced from 21 months to 18 months. It is also proposed to reduce the time limit for completion of assessment in case of such searches from
1-4-2019 and onwards to 12 months

4.3 In case of third party assessment under section 153C the time limit for completion of assessment shall be same as that of the person searched or 12 months from the end of the financial year in which books of account or documents or assets seized or requisition are handed over to the said Assessing Officer, whichever is later.

4.4 It is also proposed to insert a proviso to the Explanation to the said section, that where a proceeding before the Settlement Commission abates under section 245HA, the period of limitation shall not be less than one year after exclusion of the period taken in the settlement proceedings under section 245HA(4) of the Act.

4.5 As a saving measure, in respect of a notice under section 153A or 153C, issued prior to 1-6-2016, and assessment is pending, such assessment shall be completed in accordance with the provision of this section as it stood before its substitution from 1-6-2016. Second proviso to section 153C has been proposed to be amended, so as to provide a reference to the relevant assessment year as referred in the Explanation to section 153 A (1) i.e., instead of six years — not to exceed ten years. All these amendments shall be operative from 1-6-2017.

5. Conclusion

The extension of period to 10 years in search cases as against six years in other cases cannot be said to be discriminatory or unconstitutional. Separate classification of person searched and found possessed with specified assets and without the specified assets, can be claimed to be reasonable classification and two identifiable categories. Reduction in period for completion of assessments and reassessments is welcome. If would expedite revenue collection and also expeditious end of lis with the Revenue. However, it is desirable to change mindset of assessing and appellate authorities so as to make assessment in accordance with law and not hanky-panky or on surmises or suspicions or conjectures. Let the taxpayers and the tax collectors have introspection and both to do their duty as a civilized citizen of this Great country of India.

Respected Professional Colleagues,

Wish you a Very Happy Basant Panchami and Mahashivratri.

Basant Panchami is a festival of flowers, brings new hopes, new aspirations, new zeal and new fervour. Basant Panchami has also brought with it the Budget 2017-18.

In the words of our Prime Minister Mr. Narendra Modi, “it is an Uttam Budget, devoted to strengthening the hands of the poor. The commitment to eliminate corruption and black money is reflected in the budget. It is yet again devoted to the well-being of the villages, farmers and the poor. In many ways, this budget will facilitate the changes that our country is going through. This budget will help small business to become competitive in the global market.”

In any case, Budget 2017-18 has brought the inflation under control. CPI-based inflation declined from 6% in July, 2016 to 3.4% in December, 2016. Economy has moved on a high growth path. India’s Current Account Deficit declined from above 1% of GDP last year to 0.3% of GDP in the first half of 2016-17. FDI grew 36% in first half of fiscal year 2016-17 over first half of 2015-16, despite 5% reduction in global FDI inflows. Foreign exchange reserves have reached
361 billion USD as on 20th January, 2017.

Budget agenda for 2017-18 is “transform, energise and clean India”— TEC India which seeks to transform the quality of governance and quality of life of people, to energise various sections of society, especially the youth and the vulnerable, and to enable them to unleash their true potential and clean the country from the evils of corruption, black money and non-transparent political funding. We the members of AIFTP are committed to stand by the Government for a welfare State where each and every countryman has fresh air to breathe in. The
budgetary amendments are being discussed in the separate article by our AIFTP stalwarts.

It gives me an immense pleasure to inform that many of our suggestions included in the representation sent by AIFTP to the Finance Ministry have been accepted and included in the Budget 2017-18. Our special thanks to Mr. Narayan Jain (Kolkata) who has helped in preparing the representation.

Friends as you are aware, we have started a task of preparing the papers to be sent to Charity Commissioner on war-footing. Shri Vipul Joshi, our worthy Treasurer, has done a great job and prepared the consent letters / representation to be made by each and every NEC Member starting from 1997 till date. Mr. Ravi is sending the letters through e-mail to all the members. It is requested to kindly send the scanned copy of these consent letters duly signed immediately on receipt of the same and also to send through courier so that report may be prepared accordingly, for filing to the Charity Commissioner. I hope that the said task can be completed within a month through your whole hearted support. As Martin Luther King J. R. said “the time is always right to do the right thing”. Therefore, treat this as a right time to send your letters to do the right thing.

Friends, we have also made representation to the Hon’ble Finance Minister for including the names of Advocates and Tax Practitioners in section 53(4) of the Amended Model GST Law. Shri Axat P. Vyas (Jamnagar) and Shri Bhaskar Bhai Patel (Vadodara) have not left any stone unturned for this noble cause.

Friends, North Zone of AIFTP is organising a National Tax Conference at Chandigarh on 25th and 26th February, 2017. This 1st NEC meeting will also be held on 25th February, 2017 at Chandigarh. All the NEC members are invited to this first meeting to have a face-to-face discussion and decide a road map for the year 2017.

Our West Zone members have also organised a workshop at Mumbai on various dates for imparting knowledge on GST, MVAT and Service Tax. Similarly, East Zone and Central Zone are also organising similar workshops in Kolkata and Ratlam respectively. Special thanks to all our members for organising the conferences/seminars to enrich the legal knowledge.

I once again wish all of you A VERY HAPPY BASANT PANCHMI followed by MAHASHIVRATRI and HOLI.

Best Wishes,

Prem Lata Bansal
National President

Union Budget 2017-18

India’s Union Budget 2017-18 is historic in many ways. Departing from the colonial-era tradition of presenting the Union Budget on the last working day of February, the Honourable Finance Minister (FM) Mr. Arun Jaitley presented it on a much earlier date of February 1, 2017.

This was also the first time the Railway Budget was not separately presented but merged into the Union Budget and the distinction between Plan and Non Plan expenditure was done away with, shifting instead to a more meaningful distinction between capital versus revenue methodology.

The Budget 2017 is also unique in view of the few unprecedented events. The decision of the Government to implement demonetisation and embark on digitalisation at rapid pace coupled with implementation of Goods and Services Tax (GST) during the ensuing fiscal year would be close on the heels of the shake-up because of uncertain and politically changed environment.

With the imminent arrival of GST, the Finance Minister preferred not to make many changes in current regime of Excise & Service Tax as the same would be replaced by GST soon.

Prime Minister Mr. Narendra Modi stated that the pro-poor Budget presented by Honourable Finance Minister, is an ‘Uttam’ Budget, devoted to strengthening the hands of the poor and has focused on all sectors and classes.

For sure, this Government was voted in on an expectation of good governance. That it has ushered in a transformation in the way India is run, cannot be denied. The strong leadership has brought back India to the discussion tables, if not centre-stage, be it on the Comity of Nations or the niche World Economic Forum. Right from the tough posture displayed in handling national security affairs or charting a new course in diplomatic relations, this Government has certainly shown resolve.

Admittedly, the crackdown on black money or the ‘Shuddhi Yatra’, as our PM terms it, has been a key hallmark of this regime. The relentless focus on measures to target income from illicit activities, be it counterfeiting or terror financing or corruption, has indeed been pervasive.

Great art is always a balancing act. But all art has both — an emotional content and an intellectual content. The Hon’ble Finance Minister pulled off a good balancing act in the Union Budget 2017-18 and the first impression of it seems to have let people euphoric. The Budget attempts to pave a path for the transformative shift towards growth following the overarching agenda of Transform, Energise and Clean India.

However, the Finance Bill 2017, has made many provisions of Direct Taxes applicable retrospectively, though the Hon’ble Finance Minister had promised that he will not resort to retrospective amendment. Further, a couple of judgements of the Supreme Court have been reversed by the Finance Bill, 2017. So, how and when the stabilisation and simplification would be achieved in tax laws?

Furthermore, the Finance Bill, 2017 proposes to introduce a section 271J to the Income-tax Act, 1961 by providing that an accountant or a merchant banker or a registered valuer furnishes incorrect information in a report or certificate, the Assessing Officer or CIT(As) may direct him to pay by way of penalty a sum of ₹ 10,000/- for each such report or certificate, but it is to be noted that no appeal has been provided against the proposed section.

In this issue, various eminent authors have analysed the important provisions of the Union Budget 2017-18, which would help the readers to understand the implications of the Budget. We are thankful to all the authors for their valuable contribution to this issue.

H. N. Motiwalla

Joint Editor