V. P. Gupta, Advocate 

Finance Bill, 2023 has proposed certain amendments in provisions of TDS and TCS contained in Income Tax Act. The Amendments proposed are being discussed herein.

  1. Increase in rate of TCS on certain remittances

    Section 206C provides for collection of tax at source from certain receipts / remittances. Sub-section (1G) was inserted in the Income Tax Act vide Finance Act, 2020 to provide for TCS on remittances made out of India under Liberalised Remittance Scheme of RBI and for the purpose of purchase of overseas tour program package. In case of remittance under LRS Authorised Dealer and in case of overseas tour package the seller, the relevant travel agent has to collect TCS from the person making remittance or purchasing tour package. Presently, rate of TCS is 5% and that is also applicable on remittance in excess of Rs.7 lacs, except in case of overseas tour package in which case TCS @ 5% is to be collected without any threshold exemption. Provisions are proposed to be amended to increase the rate of TCS and also withdraw the threshold limit of Rs.7 lacs in certain cases. The current and proposed position is as under: – 

    Sl.

    No.

    Type of remittance Present rate Proposed Rate
    1. For the purpose of any education, if the amount being remitted out is a loan obtained from any financial institution as defined in section 80E. 0.5% of the amount or the aggregate of the amounts in excess of Rs.7 lacs. No change.
    2. For the purpose of education, other than the case referred in point no.1 above or for the purpose of medical treatment. 5% of the amount or the aggregate of the amounts in excess of Rs. 7 lacs. No change.
    3. Overseas tour package 5% without any threshold limit. 20% without any threshold limit.
    4. Any other case 5% of the amount or the aggregate of the amounts in excess of Rs. 7 lacs. 20% without any threshold limit.

    In view of the proposed amendment rate of TCS on purchase of overseas tour package would be 20% as against 5% at present. Further in case of remittances under LRS other than for the purposes of education and medical treatment also rate applicable will be 20% without any threshold limit. 

    It may be stated in this regard that rate of 20% is very high and unreasonable. The intention of the government to introduce TCS on these remittances was to bring the same on record and ensure that remittances have been made out of taxable income. The purpose was being fulfilled by the rate of 5% itself. Accordingly, the government should reconsider and rate should continue to be 5% as at present.

    This amendment will take effect from 01.07.2023, meaning thereby remittances made on or after the above date will be subject to the new provisions. 

  2. Provision for carry back TDS to relevant earlier year

    Section 199 of the Act read with Rule 37BA provides for grant of credit for TDS in the year in which relevant income has been offered for tax by the assessee. In many cases income is accounted for by an assessee on accrual basis and same is also included in taxable income whereas tax is deducted at source by the payer in a later year. There is no provision in the Income Tax Act to carry back such amount of TDS and allow benefit of the same in earlier year in which income has been offered for tax. It is creating difficulty to the assesses in getting credit for TDS deducted by the payer in later year whereas income has already been offered for tax in an earlier year. Sub-section(20) is being inserted in section 155 of the Act to provide that where an income has already been included in the return furnished by an assessee u/s 139 for an earlier assessment year and tax on such income has been deducted at source and paid to the credit of Central Government in a later year, the Assessing Officer shall on an application made by the assessee in the prescribed form, shall amend the assessment order or the intimation allowing credit for such TDS in the relevant earlier assessment year. Such application, however, is to be made within a period of two years from end of the financial year in which such tax has been deducted at source. It has also been provided that time limit of 4 years provided in section 154 for rectification of the relevant order shall be reckoned not from the date of order but from end of the financial year in which such tax has been deducted.

    Provisions of section 244A are also being amended in this regard. As per above section interest is allowable on any refund on account of TDS from 1st April of the relevant year to the date of grant of refund. In the case of grant of refund as a result of carry back of TDS interest will be allowable not from the 1st April of the relevant year but from the date of making such application till the date of granting the refund.

    The aforesaid amendment will still not resolve difficulty in case of assesses in whose cases deductor has after deducting tax has either not deposited the same or has deposited late. An assessee can claim credit for TDS only for the amounts reflected in 26AS while filing the return of income. Return is also processed and credit is also allowed only for that amount vide intimation or assessment order. In case deductor has either defaulted in depositing TDS or has not deposited till the date return is filed by the assessee he cannot claim credit for TDS. Even if TDS has been deposited subsequently by the deductor he will revise his TDS statement of the relevant year. Accordingly, claim can be made by the assessee only in that relevant year for which the assessment has already been completed or intimation has been issued. The aforesaid case is still not covered by the amended provision. Therefore, further amendment is required also to cover cases for grant of credit of TDS where deductor has deposited the tax belatedly. Credit to assesses should also be granted in all cases where deductor has deducted even if he has defaulted in depositing the tax. It is the responsibility of government to take necessary action against the deductor to ensure that tax deducted by him is deposited with the government. 

  3. TDS on online games

    A new section 194BA is proposed to be inserted in the Act to provide for deduction of tax at source on any income by way of winning from online games. Tax is to be deducted on any withdrawal made during the year and also on the balance of net winnings remaining at the end of the financial year. Rate of tax for deduction would be 30% which rate has also been provided for taxability of winnings from online game in section 115BBJ , which section is also proposed to be inserted. New provisions will come into force with effect from 01.07.2023. 

  4. Amendments in section 194B and 194BB

    Section 194B provides for deduction of tax at

    source from winnings from lottery, crossword puzzles or card game or other game. Similarly, section 194BB provides for deduction of tax at source from winning from horse race. Tax is required to be deducted @ 30% in case an amount of winning exceeds Rs.10,000/-. Following amendments are proposed to be made in these sections: –

    1. A proviso is proposed to be inserted in section 194B so as to exclude from the scope of this section winning from online game on or after 01.07.2023. This amendment is proposed since a new section 194BA is being inserted to provide for deduction of tax at source on winning from online games.
    2. It is proposed to provide that deduction under both the sections will be made in case aggregate amount from winnings during the year exceeds Rs.10,000/- instead of deducting tax from each winning. 
  5. Extending the scope of certificate for low or nil rate of TDS

    Section 197 empowers the Assessing Officer to issue certificate of TDS at the lower or nil

    rate in respect of payments specified in the sections mentioned in above section. Scope of section 197 is being extended to provide that Assessing Officer will also be empowered to issue certificate for TDS at lower or nil rate in the case of interest income payable to non- resident unitholders in case of business trust as per section 194LBA. The above section provides for deduction of tax at source @ 10% in case of certain income and @ 5% in respect of interest income. 

  6. Amendment in section 193 to remove exemption for TDS on interest on listed debentures

    Section 193 of the Act provides for deduction of tax at source from interest on securities. Proviso to above section list out certain securities in which cases TDS is not required to be deducted. Clause (ix) of the Proviso to section 193 provides for exemption from TDS payment of interest on any security issued by a company, where such security is in a dematerialised form and is listed on a recognised stock exchange. The government is of the view that provision is being misused and there is under reporting of interest income by the recipients due to TDS exemption. Therefore, clause (ix) is proposed to be deleted with effect from 01.04.2023. As a result, tax will also be required to be deducted u/s 193 of the Act on interest payable on such securities, including listed debentures. 

  7. Amendment in section 196A to provide tax treaty benefit

    Section 196A provides for TDS on payment of certain income @ 20%. In view of specific rate provided in section benefit of lower rate of tax provided in tax treaty cannot be allowed by the deductor. With a view to provide relief to non- resident recipients of income section is being amended to provide that tax will be deducted @ 20% or at the rate provided in tax treaty, whichever is lower.  

  8. Amendment in Section 192A of the Act providing for TDS on accumulated balance due to an employee

    Section 192A provides for TDS on payment

    of accumulated balance due to an employee under the employees’ provident fund scheme @ 10 % of taxable component of the payment due to the employee. Tax, however, is not required to be deducted in case amount of such payment is less then Rs.50,000/-. It has further been provided in the section that in case employee does not furnish his PAN tax is to be deducted at maximum marginal rate. The aforesaid provision providing for TDS at maximum marginal rate is being deleted. As a result, now general provisions of section 206AA will be applicable in case employee, who does not furnish PAN and accordingly, tax will be deductible @ 20% instead of maximum marginal rate.

  9. Amendments in sections 206AB and 206CCA to exclude persons not required to file return from the category of non-filers.

Provisions of sections 206AB and 206CCA provides that tax should be deducted / collected at twice the rate specified in relevant provisions of the Act or rates in force or @ 5%, whichever is higher in the case of the assesses, who have not filed their return of income for immediately preceding financial year in which tax is required to be deducted and time for furnishing the return of income under section 139(1) has already expired. Provisions of sections 206AB and 206CCA are proposed to be amended to exclude the assesses from such category who are not required to file their return of income. In other words, above provisions providing for higher rate of TDS will not be applicable in the case of assessee who have been exempted from filing their return of income.

CA H. N. Motiwalla

  1. Valuation of Inventory

    The Finance Bill, 2023

    The Assessees are required to maintain books of account for the purposes of the Income tax Act, 1961. The Central Government has notified the Income Computation and Disclosure Standards (ICDS) for the computation of income. ICDS-II relates to valuation of inventory. Section 148 of the Companies Act 2013 also mandates maintenance of cost records and its audit by cost accountant in some cases.

    In order to ensure that the inventory is valued in accordance with various provisions of law, it is proposed to amend section 142 of the Act relating to Inquiry before assessment to ensure the following:-

    1. To enable the Assessing Officer to direct the assessee to get the inventory valued by a cost accountant, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf. Assessee is then required to furnish the report of inventory valuation in the prescribed form duly signed and verified by such cost accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require.

    2. To provide that the expenses of, and incidental to, such inventory valuation (including remuneration of the cost accountant) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the prescribed guidelines and that the expenses so determined shall be paid by the Central Government.

    3. To provide that except where the assessment is made under section 144 of the Act, the assessee will be given an opportunity of being heard in respect of any material gathered on the basis of such inventory valuation which is proposed to be utilized for assessment.

    4. The “cost accountant” means a cost accountant as defined in clause (b) of sub- section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act.

    1. Further, the following consequential amendments are proposed:-

      1. To amend section 153 of the Act, so as to exclude the period for inventory valuation through the cost accountant for the purposes of computation of time limitation.

      2. To amend section 295 of the Act, so as to include in the aforesaid section, the power to make rules for the form of prescription of report of inventory valuation and the particulars which such report shall contain.

The amendments in section 142 and 153 of the Act will take effect from 1st April, 2023 and will accordingly apply to the assessment year 2023-2024 and subsequent assessment years. The amendment in section 295 of the Act will take effect from 1st April, 2023. 

Inventory

There is no proposal to define “inventory”. For this purpose ICDS II defines inventory excluding certain inventories viz 

  1. Work-in-progress arising under ‘construction contract’ including directly related service contract which is dealt with by the Income Computation and Disclosure Standard on construction contracts;

  2. Work-in-progress which is dealt with by other Income Computation and Disclosure Standard;

  3. Shares, debentures and other financial instruments held as stock-in-trade which are dealt with by the Income Computation and Disclosure Standard on securities;

  4. Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realisable value;

  5. Machinery spares, which can be used only in connection with a tangible fixed asset and their use is expected to be irregular, shall be dealt with in accordance with the Income Computation and Disclosure Standard on tangible fixed assets.

     

As per ICDS II “Inventories” are assets:

  1. held for sale in the ordinary course of business;

  2. in the process of production for such sale;

  3. n the form of materials or supplies to be consumed in the production process or in the rendering of services.

 Two Kinds of assessee:

As mentioned above section 148 of the Companies Act, 2013 mandates maintenance of cost records. Thus the companies which are required to maintain cost records under section 148 of the Companies Act, 2013 should try to take the inventory valuation from the cost records maintained, if any, so that in case of any type of enquiry/audit under section 142(2A) of Income Tax Act, the chances of variations in the inventory valuations are minimized. The Finance Bill 2023 seeks to amend section 142 of the Income-tax Act relating to inquiry before assessment. Sub-section (2A) of the said section

provides that if, at any stage of the proceedings before him the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and in the interests of revenue, is of the opinion that it is necessary, he may with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get his accounts audited by an accountant, and to furnish report as per rules.

So, there would be two kinds of assessee”

(a) Companies where section 148 of the Companies Act 2013 is applicable and maintenance of cost records as required

b) Persons other than mentioned in (a) above

The companies which fall in (a) category above must prepare the cost records first, value the inventory as per cost records and consider the same in the financials being finalized for the year. This amendment is applicable for the assessment year 2023-24 therefore companies which are covered under section 148 of the Companies Act should get the costing prepared first before finalization of the financials for the year 2023 so as to identify the value. The persons mentioned in (b) above may start the process of having an exhaustive costing system so that at the end of any year the cost data is available to be used for inventory valuation. Once the specific process of inventory valuation through costing/cost records is adopted, the chances of variances in inventory valuation in case of any special assignment undertaken under section 142(2A) of Income Tax Act will be minimized.

Sum-up

While audit of accounts during an ongoing assessment may not pose much practical difficulties, but valuation of inventory, which is generally an ever-changing item of asset, may pose a lot of practical difficulties especially if the said inventory does not, wholly or partially, exist on the date such an exercise is undertaken or has undergone a change in form, etc. Valuation of inventory of unique items or items involving secret formula, etc. may pose issues of breach of secrecy or IPR, etc.

If inventories of tangible and intangible are valued as per proposed section 142(2A) of the Act,

then there would be very little scope to the Assessing Officer to refer the matter to value the assets by Valuation Officer under section 142A of the Act. 

B. Promoting Timely Payments to MSMEs

Preamble

The objective of promoting timely payments to Micro and Small Enterprises, Finance Minister

Nirmala Sitharaman in her Budget speech has proposed to insert a new clause (h) in section 43B to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of Micro, Small and Medium Enterprises Development Act, 2006, be allowed as deduction under section 43B on payment basis.

As you are aware that MSMEs are the backbones of industrial development in any country. These MSMEs are the main source of generation of employment and act as key supporter to various types of big industrial houses and entities. MSMEs play a key role in economic development. 

Definition of Micro, Small and Medium Enterprises

As per MSMEs Act, the classification of enterprises and limit of investments are as under 

In the case of enterprises engaged in Manufacture or production of goods pertaining to any industry specified in the first schedule to IDRA 1951

In case of enterprise engaged in pertaining or rendering services

 

Investment in Plant & Machinery (INR)

Investment in Plant & Machinery (INR)

Micro Enterprises

Not exceeding twenty five lakh

Not exceeding ten lakh

Small Enterprises

More than twenty five lakh but not exceeding five crore

More than ten lakh but not exceeding two crore

Medium Enterprise

More than five crore but does not exceed ten crore

More than two crore but not exceeding five crore

Further it is clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded. 

Section 15 of MSMEs

Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED) provide for liability of the buyer to make payment of MSME supplier, as is agreed in writing, before the appointed day. The credit period shall in no event (irrespective of the written agreement or otherwise) exceed 45 days from the day of acceptance or the day of deemed acceptance. 

Amendment to section 43B of the Act

In order to enforce timely payment to MSME supplier, it is proposed to amend section 43B of the At and insert clause (h) to provide for deduction of payment to MSME beyond the time specified under section 15 of MSMED Act in the year of actual payment.

CA Sanjeev Lalan

  1. Section 241A deals with withholding of refund in certain cases, where a refund becomes due to an assessee under section 143(1) and notice for assessment is issued to him under section 143(2), the Assessing Officer may withhold such refund till the date such assessment is made, if he is of the opinion that the grant of refund is likely to adversely affect the interest of the revenue. Where an assessee had declared huge loss in a given year, refund could not be withheld merely on the ground that in the immediately preceding year huge income was declared and therefor thorough investigation was necessary [(2021) 131 taxmann.com 128 (SC)]. In the instant case department’s SLP was dismissed. In Mcnally Bharat Engineering Company Ltd. vs. ACIT 1(1) Kolkata, it was held that where notice for refund was issued after scrutiny assessment but refund was withheld without assigning any reasons, action on part of department in withholding refund was not sustainable in law and was to be set aside.
  2. Such withholding can be done after recording the reasons for doing so and with prior approval of the PCIT / CIT and the said provision is applicable to assessment years on or after 2017-18.
  3. Most of the litigation in cases where refund has been withheld, under section 241A, have revolved around the reasons recorded or approval granted. In Trueblue India LLP vs. D/ACIT [(2022) 142 taxmann.com 506 (Del)] it was held that merely because a notice u/s.143(2) was issued to verify the

    claim of deduction, refund payable could not be withheld u/s.241A. In Ericsson India

    (P) Ltd. vs. ACIT [(2022) 136 taxmann.com 228 (Del)] it was held that when assessee was following consistent practice to account for unearned revenue, refund cannot be withheld without taking into account wherewithal of the assessee and such withholding was not founded on cogent ground. Withholding of reund u/s. 241A pursuant to notice u/s. 143(2), without justifiable reasons has been held to be untenable [Cooner Institute of Health Care & Research Centre (P) Ltd. (2020) 118 taxmann. com 69 (Del); Huawei Telecommunications (India) Company (P) Ltd. (2020) 122 taxmann. com 4 (P&H); Corrtech International (P) Ltd. (2017) 86 taxmann.com 156 (Guj)]

  4. In Tata Communications Ltd. (2019) 111 taxmann.com 63 (Bom) the assessee had filed ITR as well as a revised ITR. Refund was sought to be withheld without processing the original or revised ITR u/s.143(1). It was held that where refund was sought to be withheld u/s.241A without processing the ITR as well as revised ITR u/s.143(1), said action of Assessing Officer being without authority of law, deserved to be set aside.
  5. Section 245 deals with set off of refunds against tax demand remaining payable. It provides that where refund is found to be due to any person under any provisions, the Assessing Officer or other income-tax authorities mentioned in the section, may, in lieu of payment, set-off part or whole of such refund against any sum remaining payable by such person, after giving him an intimation in writing regarding the proposed action.
  6. It is now realized that, there is an overlap between the two provisions. Therefore, it is proposed to integrate the two sections by substituting section 245 and omitting section 241A. The proposed amendment is that, where under any of the provisions of the Act, a refund is due to any person, the Assessing Officer or CIT or PCIT or CCIT or PCCIT, may, in lieu of payment of the refund, set-off the amount to be refunded or any part of that amount, against any sum remaining payable under the Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section.
  7. It is also proposed to provide that where a part of the refund has been set-off under sub-section (1) or where no amount is set- off, and refund becomes due to a person, then, the Assessing Officer, having regard to the fact that proceedings of assessment or reassessment are pending in such case and grant of refund is likely to adversely affect the revenue, and for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, may withhold the refund till the date on which such assessment or reassessment is made.
  8. The proposed amendment under section 245 would have an impact on cases referred to in sub-section (1A) of section 244A, i.e., where refund due to the assessee is withheld by the Assessing Officer under section 245(2) till the date of the making assessment or reassessment. It is proposed to amend section 244A(1A), by inserting a proviso, that in case of an assessee where proceedings for assessment or reassessment are pending, the additional interest shall not be payable to the assessee under this sub- section, for the period beginning from the date on which such refund is withheld by the Assessing Officer, till the date on which the assessment or reassessment pending in such case, is made.
  9. However, the proposed amendment shall not impact the existing position with regard to all other types of interest which can be paid to an assessee. However, additional interest under sub-section (1A) of section 244A, payable to the assessee as required under the Act shall not be granted, in view of the proposed amendment, for the refund so held back.
  10. The Income-tax Simplification Committee, constituted under the Chairmanship of Justice R.V. Easwar had submitted some Recommendations to promote ease of doing business and simplify procedures. One of it’s suggestion was on grant of timely refund with interest and also providing for payment of higher interest in case of delayed refund. Another suggestion was on rationalization of the provisions relating to set off of refunds due to an assessee. While on one hand the scope of TDS provisions is being continuously widened but on the other hand such measures are brought in to withhold refund and also not paying adequate interest on the same. In case of Non-residents this problems gets compounded further.
  11. While there may have been gap in the existing provisions, it is necessary to strengthen the faith of public and foreign business community by introducing necessary provisions to give wings to the concept of “Ease of Doing Business in India” by ensuring that-
    1. Refunds are duly processed and paid in time;
    2. Where refunds are withheld on genuine reasons, assessments u/s.143(2) are completed by reducing the existing time barring dates for such cases and
    3. Introducing accountability in all cases where refunds are withheld and at the same time ensuring that there are no high-pitched assessments in such cases.
  12. These amendments will take effect from the 1st day of April, 2023.

Aasawari Kadam, Advocate

It is that time of the year, the budget has been announced by the Hon’ble Finance Minister and the income-tax fraternity is dissecting the possible implications of proposed amendments in the Finance Bill, 2023 (“the Bill”). Similarly, this article is an attempt towards studying the possible implications of two penal provisions

i.e. (I) 271C and 276BA of the Income-tax Act, 1961 (“the Act”) which provides for penal and prosecutorial consequences respectively of non- deduction or non-payment of TDS as per the provisions of chapter XVII-B and (II) section 271FAA which provides for penal consequences of furnishing inaccurate information in the statement of financial transactions or reportable accounts as required under section 285BA.

I] Proposed amendments to Section 271C of the Act

  • Section 271C & 276B at present

It is known that a person responsible for paying any sum to another person has to withhold or deduct tax, which is called ‘Tax Deducted at Source’ or TDS, before actually making payment to the other person. The tax so deducted has to be remitted to the account of the government by such payer/ deductor before the prescribed due dates and also follow the prescribed compliance requirements. Deduction of tax at source is one of the methods of tax-recovery provided by the Act. So it naturally follows that a person failing to deduct TDS or remitting the TDS so deducted to the account of the Government shall incur a penalty for such failure.

It prescribes for levy of a sum equal to the amount of TDS which such deductor failed to deduct as per provisions of chapter XVII-B or pay the tax deducted on the dividend distributed as per section 115-O, pay the tax deducted as per section 194B i.e. winnings from lottery or crossword puzzle of the Act.

Further section 276B of the Act provides for prosecution proceedings in case of failure to pay the amount of TDS to the account of the government. Section 276B provides for a minimum imprisonment of 3 months up to a maximum of 7 years with a fine. Prosecution proceedings can be initiated in all the above situations specified in section 271C except for failure to deduct TDS in as much as Section 276B provides for prosecution only in case of failure to remit the TDS to the account of the government.

  • Proposed amendments to section 271C & 276B
  1. The Bill vide clauses 113 and 119, proposes to widen the scope of section 271C and 276B to include non-payment of TDS deducted as per sections 194R and 194S with effect from 1st April, 2023. It further provides that in case section 194BA, as proposed in the Finance Bill 2023, is inserted in the Act, then section 194BA shall also be included within the scope of section 271C and 276B of the Act with effect from 1st July, 2023.

     

  2. To begin with, section 194R was introduced with an objective to plug leakages of tax revenues as the revenue department observed that the person receiving such benefits do not often report such transactions in their books. It became effective only from 1st July, 2022 and it provides for deduction of tax at source at 10% by any person who is responsible for providing any benefit or perquisite, which can be wholly or partly in kind, to a resident, arising from such business or profession carried out by the resident. Thus, section 194R requires the existence of a business relationship between the parties and does not concern retail customers or salaried persons, who are covered under section 192. The section is clear that the tax is to be deducted before passing on such a benefit or perquisite. One simple example of a transaction covered under section 194R can be where a company engaged in the manufacture of televisions and other electronic appliances, provides such free electronic appliances to their sellers/ distributors/ retailers for meeting a sales target or simply for promoting their sales.

    No TDS shall be deducted if the aggregate value of transactions does not exceed Rs. 20,000 in a year or if the payer is an individual whose turnover does not exceed Rs. 1 Crore in case of a business or Rs. 50 Lakhs in case of a profession.

    Section 194R being newly introduced does not provide for penalty in case of failure to pay the tax deducted under the section which is proposed to be done through the Bill according to the Memorandum. The Bill proposes to add sub-clause (iii) to clause (b) of section 271C to levy 100% penalty on failure to pay TDS deducted under section 194R on on before the prescribed due date as per Act and it also provides for prosecution by way of amendment to section 276B by inserting sub-clause (iii) to clause (b) thereto in case of the above failure.

    Even though the intent of the legislation is to plug leakages of tax revenue, the legislators cannot go about and impose tax arbitrarily. At the first glance, the section 194R is not clear as to what amounts to perquisites or benefits. The language and intent of section 194R needs reconsideration since it is subjective, vague and open to wide interpretation. CBDT vide circular no. 12/2022 dated 16th June, 2022 has actually created more anomalies than to provide more clarity on the subject. To give a couple of examples, the deduction of tax under section 194R is irrespective of whether it is taxable in hands of the recipient under section 28(iv) or not and also in case a benefit or perquisite is received by an employee of the company then such employee shall be liable to tax under sections 194R as well as 192 at the hands of its employer, which results in double taxation. The section does not cover/ conceal all the four corners which will give wider power to the Assessing Officer to use their discretion for imposing a penalty under section 271C arbitrarily and increase income- tax litigation.

  3. Section 194S deals with deduction of tax at source on payment of consideration for transfer of a ‘virtual digital asset’ (“VDA”). The section came into force on 1st July, 2022. A VDA is defined under section 2(47A) of the Act which includes cryptocurrency/ virtual digital currency, Non-Fungible Tokens (“NFT”) and any other digital asset as the Central Government may notify. It is recognised as a movable property under section 56(2)(x). Indians were already dealing in cryptocurrency before 2013 when it was formally acknowledged by RBI for the first time by issuing circular1 prohibiting dealing in cryptocurrencies or other VDAs which was later set aside by the Supreme Court2. Hence after almost 10 years, the legislation to tax income on such transactions is long overdue.

    Section 194S provides for deduction of tax at source at 1% of the income generated on transfer of ‘Virtual Digital Asset’ (“VDA”) which may be in cash or in kind, wholly or partly. There may be a situation where the consideration is wholly in kind

    i.e. exchange of one VDA for another VDA. The CBDT has clarified3, that in such a case both the parties will be buyers as well as sellers and therefore, TDS shall be paid by both the parties before such VDAs can be exchanged.

    Further, the CBDT clarifies4 that if section 194S becomes applicable to a transaction, such income shall not be subjected to any other section of the Act, say 194Q which is applicable on purchase of goods. Speaking of goods, tax shall be deducted under section 194S from the consideration after netting of tax paid as per the Goods and Service Tax Act (“GST Act”) from the same.

    Section 194S also provides that no tax shall be deducted in case the aggregate value of consideration paid does not exceed Rs. 50,000 during a financial year in case of a specified person or Rs. 10,000 otherwise. Specified person is an individual or HUF not carrying any business or profession and in case they are, their total sales, gross receipts or turnover does not exceed Rs. 1 crore in case of business and Rs. 50 Lakhs in case of a profession. Thus threshold for non- specified persons i.e. firms, companies, etc. is quite low at Rs. 10,000 only, thereby increasing their compliance burden to that extent.

    By way of sub-clause (iv) to sub-section (1) of section 271C, it is proposed to bring non-payment of TDS deducted as per 194S within the scope of both the sections 271C and 276B of the Act. Similar to section 194R, section 194S came into effect only on 1st July, 2022 therefore, there were no penal provisions in case of failure to pay TDS on the aforementioned transactions, hence the amendment. The due date of deposit of taxes and filing returns thereof is the same as that applicable to the other sections concerning deduction of TDS

  4. The aforementioned amendments to section 271C with respect to inclusion of sections 194R and 194S shall take effect from 1st of April, 2023.
  5. The Bill has finally proposed to carve out online gaming from the provisions of section 194B concerning winnings from lotteries, crossword puzzles, races including horse races, card games and other games, etc. and insert section 194BA in the Act. While the move is welcome and there is not much hue and cry about it from the gaming community, it also raises a few questions which require clarifications, like “winnings” in context of online gaming is not defined, therefore, clarity is needed as to whether things like referral bonus points, money on signing up with a platform, etc will also be included within the meaning of winnings. The section does not provide for a minimum threshold of Rs. 10,000 which was there under section 194B which can  act as a deterrent to small players making a negligible winnings from such games who will be, irrespective of the amount of winnings, subjected to TDS at 30%. On the other hand a simultaneous amendment to section 115BBJ is proposed, wherein income tax of 30% should be calculated on a user’s net winnings i.e. after deducting the entry fee, for instance, which a gamer must have paid to enter a contest or tournament. It is proposed that TDS shall be deducted at the end of a Financial Year or if there is withdrawal from an online user account during the year, TDS shall be deducted at the time of such withdrawal in the manner prescribed. The deductor has to ensure payment of tax, before releasing net winnings, in a case where the net winnings are wholly in kind or partly in cash and partly in kind. Once again, with the introduction of this new section the due diligence and compliance burden of the online gaming platforms will increase.

If section 194BA is inserted in the Finance Act, 2023, as a consequent effect thereof sub-clause (v) to clause (b) shall be inserted in section 271C for failure to pay TDS which is deducted under section 194BA and by extension the default shall also be subject to prosecution proceedings under section 276B of the Act. The proposed insertion of this section, the online gaming sector is clearly under the radar of the department. This amendment shall take effect from 1st July, 2023.

6. In order to cover up any possible escapement of tax revenue, amendments are proposed by adoption of a stronger language in case of sections 271C and 276B to curb tax inasmuch as it provides that the payer/deductor shall ensure the payment of tax as per the relevant sections mentioned therein. The amendments propose that the person responsible to deduct tax shall “ensure the payment of ” which means that the deductor should either himself pay the tax or ensure that the payee has paid the relevant amount of tax.

II. Proposed amendments to section 271FAA dealing with penalty in case of violation of section 285BA

  • Section 271FAA at present

    Section 271FAA of the Act came into effect from 1st April 2015 and it provides for levy of Penalty in a case where a specified person furnishes inaccurate statement of specified financial transactions or reportable account as required under section 285BA of the Act. Section 285BA of the Act was introduced to keep a track of high-value transactions undertaken by a person during a year. This statement is to be furnished to the Director or Joint Director of Income-tax (Intelligence and Criminal Investigation). Whereas sub- section (1) specifies persons, responsible for registering or maintaining books of account or other documents, who are required to file the statement. The nature/ type of transactions as well as the minimum threshold value on or above which information has to be submitted in the statement is provided in Rules 114E of the Rules. Rules 114E to 114H provide further clarifications, computation of value of transactions, manner of reporting, etc.

    Self-certifications by reportable persons and the account holders is one of the requirements under the Rule 114H of the Rules for different purposes. There must have been incidences of submission of false self-certifications which is held to be amounting to furnishing inaccurate information and hence the amendment to penalise the same.

    Section 271FA provides for penalty on failure to furnish such statement financial transaction or reportable account whereas section 271FAA provides for penalty in case of furnishing inaccurate particulars in the statement of specified financial transaction or reportable account. Section 271FAA provides for a penalty of flat Rs. 50,000 on account of failure to carry out the due diligence requirements prescribed under sub-section (7) or deliberate furnishing of inaccurate particulars, it also covers situations where it is only at the time of filing the statement or even post filing that a person becomes aware of such inaccuracy but hides it from the income-tax authorities.

  • Proposed Amendment
  1. The Bill proposes to amend the section to provide that the prescribed authority for levying of penalty under section 271FAA shall be the authority prescribed under section 285BA of the Act.
  2. The Bill proposes to introduce sub- section (2) to the present section 271FAA wherein, in case there is a default on the part of prescribed Financial Institutions falling under clause (k) to sub-section

    (1) to provide accurate information on account of furnishing of false or incorrect information by the respective account holder in such financial institution, then the financial institution shall be levied an additional penalty of Rs. 5,000 for every inaccurate specified financial transaction or reportable account over and above the penalty of Rs. 50,000. However, the prescribed financial institution will be entitled to recover the additional penalty of Rs. 5,000 paid by it from the account of such account-holder in the manner prescribed. This amendment shall come into effect on 1st April, 2023.

For what amounts to “inaccurate information” under this section, explanations/ interpretation laid down by the Ld. Courts under section 271(1)(c) have to be borrowed. In PriceWaterhouseCoopers (P.) Ltd. v. CIT [2012] 25 taxmann.com 400 (SC), the Hon’ble Apex Court set aside the penalty levied under section 271(1)(c) on account of a bonafide mistake on the part of assessee by holding that “Notwithstanding the fact that the assessee is undoubtedly a reputed firm and has great expertise available with it, it is possible that even the assessee could make a “silly” mistake”. However, section 271FAA has made it clear that the furnishing of inaccurate information should be deliberate on the part of the person responsible or if he becomes aware of the correct information subsequently, he fails to inform the income-tax authorities about the same, this gives some elbow room for pleading bonafide mistake or an inadvertent error on the part of such person. Therefore, the actual account holder, being the person responsible for furnishing any alleged inaccurate information, should also be given an opportunity to explain his case.

Conclusion

Therefore, the Bill is progressive piece of legislation where the Legislature has brought the present provisions up to date with the latest developments and technologies in the world, while imposing stricter norms on non- compliance thereof. It will therefore also increase the due-diligence and compliance requirement of an assessee. While avoidance of tax cannot be permissible but there is a need to strike a balance with arbitrary levy of penalty and initiation of prosecution proceedings under the guise of non-compliance.


  1. “Statement on Developmental and Regulatory Policies” on April 5, 2018
  2. Internet and mobile association of India v. RBI (2020) 10 SCC 274,
  3. Circular no. 13 of 2022 dated 22nd June, 2022
  4. Ibid footnote 3

Rahul Hakani, Advocate

  1. Introduction of the authority of Joint Commissioner (Appeals) – A much needed move.

    CURRENT PROVISIONS.(LEGISLATIVE HISTORY)

    Chapter XX-A of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) deals with “Appeals to the Deputy Commissioner (Appeals) and Commissioner (Appeals) “. Section 246 deals with Appealable orders before Deputy Commissioner (Appeals) and Commissioner (Appeals) and Section 246A deals with Appealable orders before Commissioner appeals.

    Prior to 1978, Appellate Assistant Commissioner was the first Appellate Authority under the Act and Section 246 provided for Appealable orders before him. Thereafter, Finance (No 2) Act, 1977 created another first Appellate Authority called the “ Commissioner of Income Tax (Appeals)”. Accordingly Section 2(16A) was inserted w.e.f 10-7-1978 defining Commissioner (Appeals). Thus, first Appeals came to be filed either before the Appellate Assistant Commissioner or the Commissioner (Appeals) based on the nature of Assessee, quantum involved and other factors. Section 246 also made provision for transfer of pending appeals from the Appellate Assistant Commissioner to Commissioner (Appeals). Appeal before both the authorities was governed by only Section 246. Chapter XX-A read as “Appeals to the Appellate assistant commissioner and Commissioner (Appeals).“

    Thereafter the Direct Tax Amendment Act, 1987 redesignated Appellate Assistant commissioner as Deputy Commissioner (Appeals). Section 246 was also amended in it’s scope of Appealable orders before Deputy Commissioner (Appeals) and Commissioner Appeals by Direct tax Amendment Act, 1987 and Direct tax Amendment Act, 1989. Chapter XX-A w.e.f 1/4/1999 read as “Appeals to the Deputy Commissioner (Appeals) and Commissioner (Appeals)”. The changes were explained in Circular No 545 dated 21/9/1989 [181 ITR (st) 198], Circular No 549 dated 31/10/1989 [192 ITR (st) 1] and Circular No 551 dated 23/1/1990 [183 ITR (St) 7]. The relevant portion is as under :

    “Substitution of a new section 246 by the Amending Act, 1987 and further amendments therein by the Amending Act, 1989 14.1 Under the old provisions of section 246, various orders passed under the Income- tax Act were enumerated against which assessees could file appeal before the Appellate Assistant Commissioner or the Commissioner (Appeals). Since the Amending Act, 1987 inserted several new provisions under the Income-tax Act, including the new scheme of assessment of firm and partners, omitted certain old provisions and also changed the designations of various income-tax authorities, the said section 246 was required to be overhauled. The Amending Act, 1987 has, therefore, substituted a new section 246 in the Income-tax Act. The Amending Act, 1989 has further made amendments in the said new section 246 to set right certain anomalies and remove omissions and also to reverse the changes incorporated therein pursuant to the new scheme of assessment of firm and partners, as the said new scheme itself was withdrawn by the Amending Act, 1989. The provisions of the old section 246 and the new section 246, as it has emerged after amendments by the Amending Act, 1987 and the Amending Act, 1989, are discussed in the following paras :……………”

    Thereafter, by virtue of Finance (No. 2) Act, 1998, Section 246A was inserted w.e.f 1/10/1998 which provided for appealable orders before Commissioner (Appeals) only. The institution of Deputy Commissioner (Appeals) was closed. Said provision was explained in Circular No 772 dated 23/12/1998 [ 235 ITR (St) 35] as under :

    “Abolition of the appellate level at Deputy Commissioner (Appeals)

      1. Under the existing provisions of Income- tax Act, Deputy Commissioner (Appeals) are hearing appeals in very small cases. The Commissioner (Appeals) are also doing the identical functions. In the same case, appeal in one year may be pending before Deputy Commissioner (Appeals) and in the other year before the Commissioner (Appeals) depending upon the quantum of addi- tion. Presently, only a few posts of Deputy Commissioner (Appeals) are functioning in the country.
      2. A new section i.e., section 246A has been inserted to provide for filing of appeals before the Commissioner (Appeals) against all order where appeals earlier lay either with Deputy Commissioner (Appeals) or

        Commissioner (Appeals). It also provides that every appeal which is pending before the Deputy Commissioner (Appeals) would stand transferred to the Commissioner (Appeals) on the appointed date. Vide Notification SO 811(E) dated 14-9-1998, 1st day of October, 1998 has been notified as the appointed date for the purpose of the above section.

      3. Similar amendments have also been made in the Wealth-tax Act and Gift-tax Act.
      4. This amendment takes effect from the 1st day of October, 1998.”

    The Finance Act, 2000 made Section 246 non- functional after 1/6/2000 and thus appeals could not be decided by Deputy Commissioner (Appeals). Circular No 794 dtd 9/8/2000 [245 ITR (St) 21] explained the provisions as under :

    “Sunset clauses to sub-sections (1) and (2) of section 246 of the Income-tax Act

      1. Section 246 of the Income-tax Act in sub-sections (1) and (2) lists out the orders passed by the Assessing Officer against which appeal may be filed before the Deputy Commissioner (Appeals) and the Commissioner (Appeals), respectively. Section 246A providing appeals before the Commissioner (Appeals) was introduced by the Finance (No. 2) Act, 1998 with effect from 1st October, 1998 in respect of the appeals against orders made before or after the appointed day. The appointed day was notified as 1-10-1998. The introduction of a new section was necessitated by the decision to do away with one appellate level at the level of Deputy Commissioner (Appeals).
      2. When section 246A, came into effect from 1-10-1998, no terminal clauses were provided to sub-section (1) and sub-section (2) of section 246 to take care of the pending matters, if any. The Act amends these sub- sections now by making them inapplicable to appeals filed on or after 1-6-2000. It is also clarified that any appeal made under section 246 of the Income-tax Act on or after 1-10- 1998 and before 1-6-2000 shall be deemed to be the appeal filed under section 246A. Similar amendments are made in section 23 of the Wealth-tax Act, 1957.
      3. These amendments take effect from the 1st day of June, 2000.”

    Thus, presently the Commissioner of Income Tax (Appeals) act as the only first appellate authority against majority of the orders passed by the assessing Officer as provided u/s 246A of the Act. Commissioner (Appeals) was consciously made the only first appellate authority for the reasons stated in Circular No 772 dated 23/12/1998 (supra).

    PROPOSED AMENDMENT

    The Finance Bill, 2023 proposes to substitute section 246 of the Act to provide for appeals to be filed before Joint Commissioner (Appeals).

    Sub-section (1) of the proposed section seeks to provide that any assessee aggrieved by any of the following orders of an Assessing Officer (below the rank of Joint Commissioner) may appeal to the Joint Commissioner (Appeals) :

    1. an order being an intimation under sub-section (1) of section 143, where the assessee objects to the making of adjustments, or any order of assessment under sub-section (3) of section 143 or section 144, where the assessee objects to the amount of income assessed, or to the amount of tax determined, or to the amount of loss computed, or to the status under which he is assessed;
    2. an order of assessment, reassessment or recomputation under section 147;
    3. an order being an intimation under sub- section (1) of section 200A;
    4. an order under section 201;
    5. an order being an intimation under sub- section (6A) of section 206C;
    6. an order under sub-section (1) of section of section 206CB;
    7. an order imposing a penalty under Chapter XXI; and
    8. an order under section 154 or section 155 amending any of the orders mentioned in (i) to (vii) above:

      It is proposed to insert a proviso under sub- section (1) that an appeal cannot be filed before the Joint Commissioner (Appeals) where an order referred to under this sub-section is passed by or with the approval of an income- tax authority above the rank of Deputy Commissioner.

      Sub-section (2) of the proposed section seeks to provide that where any appeal filed against an order referred to in sub-section (1) is pending before the Commissioner (Appeals), the Board or an income-tax authority so authorised by the Board in this regard, may transfer such appeal and any matter arising out of or connected with such appeal and which is so pending, to the Joint Commissioner (Appeals) who may proceed with such appeal or matter, from the stage at which it was before it was so transferred. This will enable transfer of certain existing appeals filed before the Commissioner (Appeals) to the Joint Commissioner (Appeals).

      Sub-section (3) of the proposed section seeks to provide that notwithstanding anything contained in sub-section (1) or sub-section (2), the Board or an income-tax authority so authorised by the Board in this regard, may transfer any appeal which is pending before a Joint Commissioner (Appeals) and any matter arising out of or connected with such appeal and which is so pending, to the Commissioner (Appeals) who may proceed with such appeal or matter, from the stage at which it was before it was so transferred.

      Sub-section (4) of the proposed section seeks to provide that where an appeal is transferred under the provisions of sub-section (2) or sub- section (3), the appellant shall be provided an opportunity of being reheard.

      Sub-section (5) of the proposed section seeks to provide that for the purposes of disposal of appeal by the Joint Commissioner (Appeals), the Central Government may make a Scheme, by notification in the Official Gazette, so as to dispose appeals in an expedient manner with transparency and accountability by eliminating the interface between the Joint Commissioner (Appeals) and the appellant in the course of appellate proceedings to the extent technologically feasible and direct that any of the provisions of this Act relating to the jurisdiction and procedure for disposal of appeals by Joint Commissioner (Appeals) shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification.

      Sub-section (6) of the proposed section seeks to provide that for the purposes of subsection (1), the Board may specify that the provisions of that sub-section shall not apply to any case or any class of cases.

      It is also proposed to insert an Explanation in this section to define “status” to mean the category under which the assessee is assessed as “individual”, “Hindu undivided family” and so on.

      CONSEQUENTIAL AMENDMENTS

      It is also proposed to amend section 2 of the Act by inserting a definition for Joint Commissioner (Appeals) and to amend section 116 of the Act to make Joint Commissioner (Appeals) an income- tax authority under the Act.

      Further, consequential amendments are proposed in relevant provisions of the Act in order to ensure that functioning of the Joint Commissioner (Appeals) is aligned with that of the Commissioner (Appeals). Thus provisions

      relating to filing of appeals as well as provisions dealing with powers of Commissioner (Appeals) are amended to include Joint Commissioner (Appeals). Further, penalty provisions and other provisions where the Commissioner (Appeals) could exercise powers are now amended to include Joint Commissioner (Appeals).

      LEGISLATIVE INTENT

      It has been noted that as the first authority for appeal, Commissioner (Appeals) are currently overburdened due to the huge number of appeals and the pendency being carried forward every year. In order to clear this bottleneck, a new authority for appeals is being proposed to be created at Joint Commissioner/ Additional Commissioner level to handle certain class of cases involving small amount of disputed demand. Such authority has all powers, responsibilities and accountability similar to that of Commissioner (Appeals) with respect to the procedure for disposal of appeals.

      IMPLICATIONS

      Joint Commissioner (Appeals) would include Additional Commissioner (Appeals) also. This change will increase the quantum of Officers who can decide Appeals.

      The Joint Commissioner (Appeals) will not be able to decide appeals where Assessment Order is passed pursuant to his directions under Section 144A. Further in search assessment where approval of Joint commissioner is taken u/s 153D or an order is passed by him, he will not be able to decide appeals arising therefrom. Also, where reopening is done pursuant to sanction by Additional Commissioner or Joint Commissioner it appears that validity of consequent reassessment orders could not be decided in appeal by Joint/Additional Commissioner (Appeals).

      The memorandum explaining the provisions do not give details of the no of Appeals pending and how many of such appeals would be transferred. Hence, one is not certain whether

       

      the desired objective would be achieved or not by the proposed amendment.

      The amendment does not provide for any opportunity of hearing to the assessee whose case is transferred from Joint Commissioner (Appeals) to Commissioner (Appeals) and vice versa. Opportunity of hearing should be provided.

      One of the reason for abolition of Deputy Commissioner (Appeals) was that in the same case, appeal in one year was pending before Deputy Commissioner (Appeals) and in the other year before the Commissioner (Appeals) depending upon the quantum of addition. Care should be taken that same scenario is not repeated.

      The Joint/Additional Commissioner (Appeals) have over the years acted as an Assessing Officer. It is important for the success of the institution of appeals that an Appellate authority has a different way of looking at an Income tax issue compared to an Assessing Officer. It is well known that our mind makes us hesitant towards change — modifying prior beliefs or behaviours. As humans we often hold on to stubborn ideas, biases and prejudices. It must be ensured that the Assessee before the Joint/ Additional Commissioner (Appeals) should not get the impression that he is subjected to an extended assessment proceedings. Appeal should not become an empty formality. Hence, before Joint Commissioners accept the role of Appellate authority proper training must be given to the officers.

  2. Rationalisation of Appeals to the Appellate Tribunal – Appeal By AO against Order of DRP?

    CURRENT PROVISIONS

    Section 253 of the Act contains provisions relating to filing of appeals to the Appellate Tribunal (ITAT). Sub-section (1) of the said section details the types of orders passed under various sections of the Act, against which an aggrieved assessee may appeal to the Appellate Tribunal. The said sub-section provides that any assessee aggrieved by any order passed by a Commissioner (Appeals) under section 154, section 250, section 270A, section 271, section 271A, section 271J or section 272A may appeal to the Appellate Tribunal. Therefore, the Appellate Tribunal is the first level of appeal for such orders of the Commissioner (Appeals).

    PROPOSED AMENDMENT

    1. It has been proposed to amend the provisions of section 253 of the Act to provide that appeal against penalty orders passed by Commissioner (Appeals) under the sections 271AAB, 271AAC and 271AAD shall be made to the Appellate Tribunal.
    2. It has been proposed that section 253 of the Act may be amended so that appeal against an order passed under section 263 of the Act by Principal Chief Commissioner or Chief Commissioner or an order passed under section 154 of the Act in respect of any such order shall be made to the Appellate Tribunal.
    3. It is proposed that an amendment may be made in sub-section (4) of section 253 by substituting the words “against the order of Commissioner (Appeals)” with “against an order”.

      LEGISLATIVE INTENT

      Sections 271AAB, 271AAC and 271AAD are penalty provisions under Chapter XXI of the Act for imposition of penalty. Section 271AAB of the Act provides for imposition of penalty by the Assessing Officer in a case where search has been initiated under section 132 of the Act. Section 271AAC of the Act provides for imposition of penalty by the Assessing Officer in a case where income determined includes any income referred to in section 68, 69, 69A, 69B, 69C or 69D of the Act for any previous year. Section 271AAD of the Act contains provisions for imposition of penalty by the

      Assessing Officer if during any proceedings under the Act it is found that in the books of account maintained by any person there is a false entry or an omission of any entry which is relevant for computation of total income of such person to evade tax liability. Vide Finance Act, 2022, sections 271AAB, 271AAC and 271AAD were amended to enable Commissioner (Appeals) also to pass an order imposing penalty under the said sections. However, as the reference to the same has not been inserted in sub-section (1) of section 253 of the Act, an aggrieved assessee cannot appeal against such penalty orders passed by Commissioner (Appeals) which may lead to taxpayer grievance. Therefore the proposed amendment.

      Further, vide Finance Act, 2021, section 263 of the Act was amended to enable Principal Chief Commissioner and Chief Commissioner to also pass an order of revision under the said section. However, in the absence of any reference to such orders passed under section 263 of the Act in sub-section (1) of the section 253 of the Act, an assessee aggrieved by any order under section 263 of the Act by a Principal Chief Commissioner and Chief Commissioner or an order under section 154 of the Act rectifying such order under section 263 of the Act cannot appeal against such orders to the Appellate Tribunal. Therefore, the proposed amendment.

      Sub-section (4) of the section 253 of the Act allows the respondent in an appeal, against an order of Commissioner (Appeals), to file a memorandum of cross-objections before the Appellate Tribunal. However, it is pertinent to note here that appeal can be made to the Appellate Tribunal against orders of authorities other than Commissioner (Appeals) also, like Principal Commissioner or Commissioner or Principal Director or Director etc. As a result, the respondent, whether it is Revenue or the assessee, cannot file memorandum of cross-objections against an appeal before the

      Appellate Tribunal by virtue of the provisions of sub-section (4) of section 253 of the Act. This creates grievances as well as reduces the fair and equitable dispensation of judgement in such cases. Therefore, it is proposed that an amendment may be made in sub-section (4) of section 253 to enable filing of memorandum of cross-objections in all classes of cases against which appeal can be made to the Appellate Tribunal. For example, where the assessee files an appeal to the appellate tribunal against an order passed by the Assessing Officer in consequence of an order of the Dispute Resolution Panel the Assessing Officer would be able to file a cross objection to such appeal which cannot be filed presently.

      IMPLICATIONS.

      Section 253(4) reads as under :

      “(4) The Assessing Officer or the assessee, as the case may be, on receipt of notice that an appeal against the order of the Commissioner (Appeals), has been preferred under sub- section (1) or sub-section (2) by the other party, may, notwithstanding that he may not have appealed against such order or any part thereof, within thirty days of the receipt of the notice, file a memorandum of cross-objections, verified in the prescribed manner, against any part of the order of the Commissioner (Appeals), and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in sub- section (3).”

      The example given in the memorandum explaining the provisions whereby on account of proposed amendment in Section 253(4) an Assessing Officer can file cross-objection where an order of DRP is under challenge before the ITAT by the Assessee has created lot of controversy. This is because it is well settled that Cross objection is nothing but an Appeal. As per Section 144C(10), every direction issued by the DRP is binding on the Assessing Officer. Hence, the question of Assessing Officer manifesting his grievance against the order of DRP by filing a cross objection i.e. an appeal is impermissible and also in the teeth of provisions of Section 144C and the scheme of Section 253.

      Section 253 (1) provides various orders against which Assessee can file an Appeal to ITAT. Section 253(2) provides for appeal to be filed by the Income tax department against the order passed only by Commissioner (Appeals). Sub-Section (4) of Section 253 provides that cross-objection can be filed only if a party has failed to file appeal as per Section 253(1) or

      253(2). Thus, income tax department can only file cross-objection where an Assessee has filed Appeal against the order of commissioner (Appeals) u/s 154 or 250. Hence, amendment of Section 253(4) without amending Section 253(2) providing various orders against which income tax department can file appeal, it will not be possible for income tax department to file cross-objections against those orders. Thus, even orders passed by Commissioners, principal commissioners etc which are intended to be covered by Section 253(4) should also be incorporated in Section 253(2).

      In-fact, Sub-Section (2A) was specifically introduced by Finance Act, 2012 which permitted the income tax department to file appeal against the directions of DRP. This amendment was omitted by Finance Act, 2016.

      Thus, merely by substituting “against the order of Commissioner (appeals)” with “against the orders” will not expand the coverage of orders beyond those passed by Commissioner (Appeals) for filing cross-objection by the Assessing officer.

  3. RATIONALIZATION OF PROVISIONS OF PROHIBITION OF BENAMI PROPERTY TRANSACTIONS ACT, 1988
    1. Amendment to Section 46 CURRENT PROVISIONS

      Under the existing provisions of section 46 of the Prohibition of Benami Property Transactions Act, 1988 (PBPT Act), any person, including the Initiating Officer (IO), aggrieved by the order of the Adjudicating Authority, may prefer an appeal to the Appellate Tribunal within a period of 45 days from the date of the order.

      PROPOSED AMENDMENT

      The provisions of section 46 of the PBPT Act may be amended to allow the filing of appeal against the order of the Adjudicating authority within a period of 45 days from the date when such order is received in the office of the Initiating Officer or the aggrieved person as the case may be.

      LEGISLATIVE INTENT

      The order often takes time to reach the office of the Initiating Officer or the approving authority and, it is difficult to file an appeal within the prescribed time limit and leads to delay in such filing.

      IMPLICATIONS

      Even under the Income Tax Act, 1961, as per Section 254(2) a Miscellaneous Application to rectify mistakes apparent in the order passed u/s 254(1) has to be filed within six months from the end of the month in which the order is passed. However in following decisions it is held that date of passing of order means the date on which the order is received:

      Techknoweledgy Interactive Partners P. Ltd. v. ITO [2021] 190 ITD 643 (Mum)(Trib)

      For workability of scheme of section 254(2), limitation period is to be counted from date of service of order and not from date of order

      Golden Times Services (P.) Ltd. v. Dy. CIT (2020) 422 ITR 102 (Delhi)

      Starting point of limitation provided under section 254(2) has to commence from date of actual receipt of judgment and order passed by Tribunal which is sought to be reviewed.

      Daryapur Shetkari Sahakari Ginning and Pressing Factory v. ACIT (2021) 277 Taxman 155 (Bom) (HC)

      Period of limitation prescribed in section 254(2) would commence from date when affected party got knowledge of decision in question and it would not commence from date when order was passed.

      The proposed amendment to Section 46 is a welcome decision as it has brought certainty and will avoid legal disputes on the issue of limitation.

    2. Amendment to Section 2(18).

CURRENT PROVISION

Under the existing provisions of section 2(18) of the PBPT Act, the ‘High Court’, for the purpose of filing appeal against the order of the Appellate Tribunal, have been defined as Jurisdiction of such High Court within which either the aggrieved party ordinarily resides or carries on business or personally works for gain, or if the aggrieved party is Government then, jurisdiction of the High Court within which the respondent, or any respondent in case of multiple respondents resides, or carries on business or works for gain.

PROPOSED AMENDMENT

To modify the definition of ‘High Court’ by inserting a proviso so as to provide that where the aggrieved party does not ordinarily reside or carry on business or personally work for gain in the jurisdiction of any High Court or where the Government is the aggrieved party and any of the respondents do not ordinarily reside or carry on business or personally work for gain in the jurisdiction of any High Court, then the High Court shall be such within whose jurisdiction the office of the Initiating Officer is located.

LEGISLATIVE INTENT

It had been observed that the non-residents against whom proceedings under PBPT Act have been initiated and who does not fall in the category of appellant or respondent mentioned in the definition, do not fall under the jurisdiction of any High Court. Hence, to enable the determination of High Court jurisdiction for the non-resident appellants or respondents, it is proposed to amend section 2(18) of the PBPT Act.

The amendment will provide certainty to the non-residents who are aggrieved by the order of the Appellate Tribunal regarding the appropriate High Court wherein they will have to file appeal.

CA Kinjal Bhuta

  1. Alignment of time line provisions u/s. 153:
    1. Extension of time period to complete assessments from 9 months to 12 months.

      Section 153 specifies various time limits for completion of assessment and re-assessment and re- computation proceedings under the Income Tax Act, 1961. This section is amended quite often in last few years from Finance Act, 2016 to bring down the time limit to complete assessments and thereby being more. The sub- section ( 1 ) of this section provides the time limit for order of assessment under section 143 or section 144 of the Act. Prior to Finance Act, 2016 the time limit was 21 months from the end of the assessment year in which the income was first assessable. This time period of 21 months was gradually reduced to 18, 12 and 9 months. Currently, the time period for all assessments of AY: 2021-22 and thereafter is 9 months from the end of the assessment year in which the return is first assessable.

      Finance Act, 2022 introduced a new sub- section ( 1 A) in section 153 of the Act to provide that in case of updated returns which are filed u/s. 139 (8A), an order of assessment or reassessment under section 143 or section 144 of the Act to be passed before the expiry of 9 months from the end of the financial year in which such return was furnished. Whereas for the normal assessments u/ s. 143 ( 3 ) and 144

      the time period is counted from the end of the assessment year in which return is first assessable, for updated returns, the assessments needs to be completed within 9 months from the end of financial year in which return is filed.

      However, one thing is common in both of the above mentioned assessment completion limits, which is the period is computed as 9 months from the end of relevant assessment or financial year as the case may be. The first step-stone for commencing the assessment proceedings is issuance of notice u/s. 143(2) which can be served to the assessee upto 3 months from the end of the relevant assessment year. With the overall reduced time limits, effectively in many situations the actual period to conduct and complete assessment proceedings was reduced to 6 months after excluding 3 months available to issue notice u/s. 143(2). To complete the entire proceedings within 6 months was a challenge especially under the faceless regime where there are layers of authorities are prescribed. In the recent past, it has been observed that there are several cases where the assessment orders passed are not well reasoned or the assessee is not given sufficient opportunity to make replies to notices due to paucity of time and rush to complete assessments before the stipulated due dates. A lot of grievances and appeals were filed in the past regarding this issue of providing sufficient opportunity to response.

      Therefore, the time available for completion of assessment relating to the assessment year commencing on or after the 1st day of April, 2022 shall be twelve months from the end of the assessment year in which the income was first assessable. Consistent with the above, the time available for completion of assessment proceedings in the case of an updated return is also proposed to be increased to 12 months from the end of the financial year in which such return is furnished.

    2. Amendment to provide timeline for orders passed by PCCIT and CCIT u/s. 263.

      Section 263 of the Act was amended to enable Principal Chief Commissioner (PCCIT) and Chief Commissioner (CCIT) to also pass an order of revision under the said section like CIT. However, the current section which provides time line in section 153 to pass an order of assessment or reassessment or order under section 92CA by the Transfer Pricing Officer does not refer to the orders so passed by PCCIT or CCIT u/s. 263 or 264. Therefore, Section 153 is amended to provide that the provision of sub-sections (3), (5) and (6) shall also be applicable to such revision orders passed by PCCIT or CCIT also.

    3. Extension of time period by 12 months for assessments in case of search and seizures.

      The Finance Act, 2021 brought a paradigm shift in re- assessment proceedings by providing a complete new set of provisions for such assessments. One significant change made is that even the assessments pursuant to search and seizure operations is now also covered under the ambit of Section 147 i.e. reassessments. Earlier, these assessments post search and seizure were covered by a complete code from sections 153A to 153C. As per section 153A and 153C, if there was

      any assessment which was pending on the date of initiation of search, the same was abated. Abated assessments are carried on as a regular assessment taking into account the information available as a result of search operations. However, these sections 153A and 153C cease to operate now as the same are covered u/s. 147.

      The current provisions of the Act relating to reassessment do not provide for abatement or revival of any assessment or reassessment proceedings pending on the date of search under section 132 of the Act or requisition under section 132A of the Act. As a result, the information available in a search, which has a bearing on the pending scrutiny proceedings may not be effectively used due to the limitation of such proceedings. It takes some time to transfer the relevant files of search operations and seized material to the Assessing officer who shall be authorized to conduct the assessment proceedings. Further, the Assessing Officer also needs to carry out investigation and gather evidence to compute the income of the assessee as a result of the search or requisition proceedings. Therefore, so as to give enough time to the Assessing Officer to conduct such scrutiny assessments, a new sub- section 3( A) is introduced to section 153, which provides that the period available for completion of assessment or reassessment, under the said sub-sections (1), (1A), (2) and (3) of the said section shall be extended by twelve months in a case of an assessee where such search is initiated under section 132 or such requisition is made under section 132A or in the case of an assessee to whom any money, bullion, jewellery or other valuable article or thing seized or requisitioned belongs to or in the case of an assessee to whom any books of account or documents seized or requisitioned pertains or pertain to, or any information contained therein, relates to.

    4. Reference of assessments in case of updated returns:

      The updated returns were introduced in the last Finance Act. A parallel amendment was also brought to ascertain time limits for completions of assessments of such updated returns. However, reference of the said assessments was not evenly given in the entire section 153. To align this anomaly, reference to sub-section (1A) is now provided in sub-sections (3), (4), (6) as well as in the first proviso to Explanation 1 of section 153.

      These amendments will take effect from the 1st day of April, 2023.

  2. Rationalisation of reassessment proceedings:

    The Finance Act, 2021 amended the procedure for assessment or reassessment of income in the Act with effect from the 1st April, 2021. The said amendment modified, inter alia, sections 147, section 148, section 149 and also introduced a new section 148A in the Act.

    1. Extension in filing return of income in pursuance to notice u/s. 148:

      Under the existing provisions, the period to file return of income in pursuance to notice under section 148 is subjective as ‘specified in the notice’ issued for re-opening, which is generally one month from the date of the receipt of the notice as per current practice. This period to file return of income is increased to three months from the end of the month in which the notice is issued or such period as may be allowed by Assessing Officer on basis of application made by the assessee. It is also provided that if the return of income is filed under this section beyond the time period allowed, then it shall not be deemed to be return under section 139.

      In the current scenario, many a times the re- assessment procedures were delayed

      because the assessee would not have filed a return of income. Unless the return of income was not filed, the notice u/s. 143(2) which is mandatory to begin re-assessment provisions could not be issued. This would delay the entire process and drag the matter towards the due date. As a consequence of this amendment, it would mean that no notice under section 143(2) shall be required to be issued for such returns filed beyond the time limit. However, there may be also be perceived that, section 234A regarding interest for default in furnishing of return of income, would also not apply in such cases.

    2. Extending time limit by 15 days in case of search and survey related assessments:

      In cases where search is initiated under section 132 of the Act or books of account, other documents or any assets are requisitioned under section 132A of the Act, assessment or reassessment is now made under section 147 of the Act. Under the existing provisions, the Assessing Officer is required to conduct a procedure of enquiry as prescribed in section 148A prior to issuance of notice under section 148. The provisions of section 148A is not applicable in case of search initiated under section 132 or where assets, documents or books are requisitioned under section 132A. However, for survey under section 133A, the proceedings under section 148A are required to be conducted prior to issuance of notice.

      When such search, requisition or survey proceedings are conducted after 15th March of a financial year, there is very little time to collate the information and issue a notice under section 148 or show cause notice under section 148A(b) of the Act. Moreover, the search is conducted by the Investigation Wing and the notice is required to be issued by the Assessing Officers. However, evidence of tax evasion may be reflected

      in the statements recorded or documents seized or impounded etc. during such action before 31st March, but issuance of notice related to such information or search may go beyond the time limitation provided due to the procedure involved. As mentioned in the explanatory memorandum to the Finance Bill, that due to these practical time crunch, important information related to revenue leakage cannot be proceeded on for searched conducted and information obtained as a consequence of these searches in the last few days of any financial year.

      Therefore, Section 149 (1) is amended to add a proviso to extend time limits by 15 days in the following two scenarios:

      1. In case where the search, requisition or survey proceedings are conducted after 15th March of a financial year expiring as on 31st March of the said financial year, a period of fifteen days shall be excluded for the purpose of computing the period of limitation for issuance of notice under section 148 of the Act and it will be deemed that the notice is issued on 31st March of such financial year.
      2. In cases where the information emanates from statement recorded or documents impounded under section

        131 or section 133 A on or before 31st March of the financial year, in consequence of search or search for which last authorisations is executed or under search requisition which is done so after 15th March of such year, a period of fifteen days shall be excluded from computing the time l imit for issuance of notice under section 148 and also for show cause notice under section 148A(b) shall be deemed to be issued as on 31st March of the financial year.

    3. Increasing the authorities for sanction u/s. 151:

      Section 151 provides the sanctioning authority for the issue of notice under section

      148. Under the existing provisions, sanction is required from PCCIT or PDGIT in case re-opening is beyond three years from the end of the relevant assessment year. Only in a case where PCCIT or PGDIT is not available, sanction from CCIT or DGIT could be obtained. Now it is provided that, re- opening can be done by CCIT or DGIT also when re-opening is beyond period of three years along with PCCIT and PGDIT.

      In arriving at the time limits of period of three years for sanction under section 151(i), the provisions to section 149(1) regarding extended period of 15 days or extensions owing to stay or injunction of any court shall be excluded.

      These amendments will be effective from 1st April, 2023.

  3. Assistance to authorized officer during Search & Seizure.
    1. Section 132 of the Act makes provisions

      related to search and seizure. The section makes detailed provisions for powers of income-tax authority during the search and seizure proceedings, procedure to be followed, requisition of services of other officers for assistance, examination of books of account or other documents, procedure for custody of evidence, provisional attachment etc. The section also provides the timelines to be followed by the income- tax authority during and post search proceedings.

      Under the existing provisions of section 132 , it is provided that authorised search officers may requisition services of police officer or any officer of

      Central Government to assist him during the search. Due to digitisation of transactions with advent of technology in the current times, the search process has become complex and requires specific domain experts. Therefore, the amendment substitutes sub-section

      (2) of section 132 to provide that the authorised officers can also requisition services of any other such person as may be approved by PCCIT or CCIT or PDGIT or DGIT in accordance with procedures to be prescribed.

    2. Under the existing provisions of sub- section (9D), the authorised officer can make a reference to valuation officer under section 142A. The sub-section is substituted to provide that reference can be also made to any other person or entity or valuer registered under any law in force as may be approved by PCCIT, CCIT, PDGIT or DGIT for

      estimating the fair market value of the property in the prescribed manner and to submit a report of such reference within 60 days.

      Due to the limitation of using same administrative officers, there was limitation in case of investigations and related requirements during search and seizure. The need of these amendments was felt perhaps with the innovative ways in which the details, documents and other evidences are stored by organisations. These provisions are definitely in l ine with the modern economy and the newer structures in which businesses operate these days. In the coming time, one can predict better outcomes of search operations with these operational liberties offered under

      the Act. These above two amendments will be effective from 1st April 2023.

    3. With the amendment made in Finance Act, 2021, the assessment for the search cases are now covered under the new section 147 and section 153A and 153B are no more applicable. Section 153B provides for execution of the ‘last of authorisation for search’ based on which the time l imit of conclusion of re- assessments are determined. An explanation has been added to section 132 to bring the provisions of last authorisation in its ambit as it was provided in section 153B. This is the same explanation which was earlier in section 153B which states that last authorisation in case of search would be the last panchnama drawn in relation to any person in whose case the warrant of authorisation of search has been issued. Further, in a case where requisition is made u/s.132A, the last authorisation would be the accrual receipt of the books of account or other documents or assets by the authorisation officer.

      This amendment is effective retrospective from 1st April, 2022.

  4. Modification of direction related to faceless Schemes and e-proceedings.

    Various e-proceedings and faceless schemes

    were introduced in the last few years under the powers given by the provisions introducing such schemes. These sections had incorporated time l imits to issue directions under such schemes for timely implementation.

    Section Schemes introduced Limitation period

    to bring directions under

    existing law

    135A-

    Faceless collection of

    information

    E-Verification Scheme, 2021 31.03.2022
    245MA-

    Dispute Resolution

    Committee

    E-Dispute Resolution Scheme, 2022 31.03.2023
    245R-

    E-advance

    rulings

    E-advance rulings Scheme, 2022 31.03.2023
    250- Faceless Appeals Faceless Appeal Scheme, 2021 31.03.2022
    275-Faceless Penalty Faceless Penalty Scheme, 2022 31.03.2022

    Any amendment or adjustments which may be required in the schemes announced could not be made due to the limitation period specified in the section. To overcome any such implementation issue, a proviso is added in all the above sections enabling Central Government to amend any directions issued under these sections if it was issued before the limitation period.

    These amendments are retrospectively effective from 1st April, 2022 for sections 135A, 250 and 274 and from 1st April, 2023 for sections 245MA and 245R.

  5. Clarification regarding advance tax for filing updated returns.

    The Finance Act, 2022 inserted sub-section (8A) in section 139 of the Act enabling the furnishing of an updated return by taxpayers

    up to two years from the end of the relevant assessment year subject to fulfilment of certain conditions as well as payment of additional tax. For the determination of the amount of additional tax on such updated return section 140 B was inserted in the Act. The sub-section (4) of the section 140B provides for the computation of interest under section 234B of the Act on the tax on updated return. The said sub-section

    (4) provides that interest payable under section 234B of the Act shall be computed on an amount equal to the assessed tax or the amount by which the advance tax paid falls short of the assessed tax. This had an implication, that interest was payable only on the difference of the assessed tax and advance tax.

    Further, the sub-clause (i) of the clause (a) of the sub-section (4) provides that advance tax which has been claimed in earlier return of income shall be taken into account for computing the amount on which the interest was to be paid. Therefore, in order to clarify the provisions of the sub-section (4) of section 140B of the Act, amendment has been made that interest payable under section 234B shall be computed on an amount equal to the assessed tax as reduced by the amount of advance tax, the credit for which has been claimed in the earlier return, if any. This amendment will take effect retrospectively from the 1st day of April, 2022.

    Overall most of the above amendments made in the Finance Bill, 2023 are to provide clarifications or to rationalize the existing provisions so as to enable better administrative functions. However, one thing which can be ascertained from these amendments, is that the authorities are aware of various intricate issues pertaining to ground realities and practical difficulties. An attempt to clarify and simply the law, is an effort in right direction.

CA Ketan Vajani

While presenting the budget for the year 2023- 24, the Hon’ble Finance Minister has made a genuine attempt to keep a large segment of the citizens happy with some concessions, albeit somewhat deceptive, in so far as tax rates and surcharge are concerned under the new regime. The things, however, are not that simple as they appear and one will have to evaluate the options under different regimes to decide the better course of action. While rate of tax and surcharge etc. is more relevant for common man, it is primarily a question of arithmetic. We as students of tax laws need to focus more on various other amendments which has effect of changing certain known principles and will make it necessary for us to understand thoroughly so that we can in turn guide our clients in the correct manner.

In this article, we will deal with some of such amendments proposed in the area of capital gains and also capital receipts. The amendments made in this area are though appearing to be small, there are few significant issues that are going to emerge in the years to come and therefore it will be worth for us to study these amendments with greater care. With that idea at mind, let’s start looking at few of such amendments in this very important area of tax laws :

Capital Gains on Market Linked Debentures

Existing provisions

In present securities market, various hybrid products of investments are available. Market

linked debentures are one of such hybrid products. Market Linked Debenture (MLD) are listed on stock exchanges. These securities are though issued as a debt security, they differ with plain vanilla debt securities in as much as their performance is linked to the equity markets and therefore the rate of return is also variable, as compared to fixed rate of return for a debt security.

Under the existing provisions of section 112 of the Act, the long term capital gains on transfer of a listed security suffers tax @ 10% without indexation. Further, the period of holding prescribed for such a security to be classified as long term capital asset is 12 months.

Proposed amendment

Clause 24 of the Finance Bill seeks to insert a new section 50AA in the Act. The newly proposed section proposes to lay down special provision for computation of capital gains in case of Market Linked Debentures. The section seeks to provide that the full value of consideration received or accruing as a result of transfer or redemption or maturity of MLD as reduced by the cost of acquisition thereof and the expenditure incurred wholly or exclusively in connection with transfer or redemption of such MLD shall be treated as capital gains arising from transfer of a short term capital asset notwithstanding the provisions of section 2(42A) and section 48 of the Act. The proviso to the section provides that no deduction shall be allowed in respect of STT paid for such Market Linked Debentures.

The Explanation to the section defines the term “Market Linked Debenture” to mean a security by whatever name called, which has an underlying principal component in the form of a debt security and where the returns are linked to the market returns on other underlying securities or indices and includes any security classified or regulated as a market linked debenture by the Security and Exchange Board of India.

Effective Date

The proposed section 50AA will be inserted with effect from 1-4-2024 i.e. assessment year 2024-25 and onwards.

Comment

The provisions of section 50AA will become operative with effect from assessment year 2024-25 de-hors the date of the assessee acquiring such MLDs. Unfortunately there is no provision for grandfathering of the debentures acquired prior to the insertion of the proposed section 50AA. Accordingly, even the MLDs already acquired by the assessee will also be governed by the newly proposed section 50AA if the transfer takes place on or after 1st April, 2023. As such, though the amendment is not retrospective, the same is certainly retro-active in operation.

Conversion of Gold to Electronic Gold Receipt and vice versa

In our country we have a fascination towards

gold for centuries. Almost all families, however small their financial standing might be, will possess some amount of gold in the house for sure. The government had accordingly thought it fit to have a regulated Gold Exchange and the SEBI has been made the regulator for the same. SEBI has come out with a detailed regulatory framework for spot trading in gold on existing stock exchanges and has devised Electronic Gold Receipts (EGR) as an instrument for this.

The objective of the government is to promote the concept of Electronic Gold as against

physical gold to be held as a form of investment. The scheme permits conversion of physical gold to electronic gold and also shifting back to the physical gold whenever thought fit. However, there is no clarity as regards the tax effect on conversion of physical gold to electronic gold and vice versa. The Finance Bill seeks to make amendments to section 47, section 49 and section 2(42A) for the above purpose.

Existing provisions

Section 47 of the Income-tax Act lists down the transactions which will not be regarded as transfer and therefore will be out of purview of capital gains tax. Section 49 of the Act provides for cost of acquisition with reference to the modes of acquisitions dealt in the section. Clause (42A) of section define the term : “short term capital asset”. Explanation to the said clause lists down for inclusion and exclusion of periods specified therein under various different situations for determining the period for which a capital asset is held by an assessee.

Proposed amendments

Clause 21 of the Finance Bill 2023 seeks to insert an additional clause in section 47 of the Act so as to provide that any transfer of a capital asset, being conversion of gold into Electronic Gold Receipt (EGR) issued by a Vault Manager or conversion of such EGR into gold will not be regarded as a transfer. For the purpose of this clause, the terms Electronic Gold Receipt and Vault Manager shall have the meaning as given to the respective term in SEBI regulations. This amendment will in effect make the conversion of gold into EGR and also conversion of EGR into physical gold as tax neutral.

Clause 23 of the Finance Bill 2023 seeks to insert sub-section (10) in section 49 of the Act. The proposed sub-section 10 seeks to provide that where an Electronic Gold Receipt issued by a Vault Manager became the property of the person as consideration for transfer of the gold, the cost of acquisition of the gold in the hands of the person in whose name EGR is issued shall

be deemed to be the cost of acquisition of the EGR. Similarly, where gold is released against an EGR, the cost of acquisition of the EGR shall be deemed to be cost of acquisition of such gold.

Clause – 3 (d) of the Finance Bill 2023 seeks to insert an additional clause, namely clause (hi) in the Explanation to clause 42A of section 2 of the Act. As per the proposed amendment, the period for which gold was held by the assessee prior to conversion into EGR will be included in determining the period of holding of the EGR. Similarly where gold is released in respect of an EGR, the period for which such EGR was held by the assessee prior to its conversion into gold shall be included for determining the period of holding.

Effective Date

All these amendments are proposed to be made with effect from 1-4-2024 and shall therefore apply for assessment year 2024-25 and subsequent years.

Comment

The amendment to section 2(42A) permits to include the period of holding of the original asset in case of gold while computing the period of EGR and also the period of holding of EGR for computing the period of holding for gold released in respect of EGR. However, there can be a case where the assessee was owning gold originally say for example since 2015. This was converted into EGR in April 2022 and was again converted back to physical gold in April 2024. The assessee sells physical gold in May 2024. On this facts, the period of holding of gold will include period of holding of EGR

i.e. period from April 2022 to April 2024. But the section does not permit to include the period between the years 2015 to 2022, while computing the period of holding. Accordingly, though technically the assessee is transferring gold in May 2024, which was originally acquired in 2015 and therefore the same is a long term capital gain, the language of section will make it difficult and will result in the same being

termed as short term capital gains. It seems that this is perhaps an unintended hardship hopefully the same shall be remedied while the Finance Bill is finally enacted.

Limiting the roll over benefit for exemptions under section 54 and section 54F of the Act

Existing provisions

Section 54 of the Act provides for deduction of long term capital gains on transfer of a residential house where the assessee invests the capital gains on such transfer for purchase or construction of another residential house subject to certain conditions and timelines as prescribed in the section. Similarly section 54F provides for deduction from long term capital gains arising on transfer of any capital asset, other than a residential house, where the assessee invests the amount of net consideration for purchase or construction of a residential house, again subject to various conditions and timelines as prescribed in the section. At present there is no upper limit prescribed and the assessee can avail the benefit of exemptions for any amount of investment made under both the sections without any monetary restrictions.

Sub-section (2) of section 54 provides for investment of the capital gains that remain unappropriated till the due date of Return of Income u/s. 139(1) in the capital gain account scheme with notified banks or institutions. Similarly sub-section (4) of section 54F provide for the investment of the net consideration that remain unappropriated till the due date of Return of Income u/s. 139(1) of the Act in such account.

Proposed amendments

Clause 25 of the Finance Bill seeks to amend section 54 of the Income-tax Act by inserting third proviso to sub-section (1) of section 54. The proposed third proviso seeks to provide that where the cost of new asset exceeds Rs. 10 Crores, the amount exceeding Rs. 10 Crores

shall not be taken into account for the purpose of the section. Clause 30 of the Finance Bill seeks to amend section 54F by inserting the second proviso to sub-section (1) of section 54F on similar lines.

Both the above clauses also seek to amend sub- section (2) to section 54 and sub-section (4) to section 54F so as to provide that the provisions of these sub-sections for the deposit in the Capital Gain Account Scheme shall apply only to capital gains or net consideration as the case may be upto Rs. 10 Crores.

Effective date

Both the above sections are proposed to be amended with effect from 1-4-2024 i.e. assessment year 2024-25.

Purpose of Amendments

As per the Memorandum explaining the provisions, the primary objective of both these sections was to mitigate the acute shortage of housing and to give impetus to house building activity. However, it has been observed that claims of huge deductions are made by high net-worth assessees under these provisions by purchasing very expensive residential houses which defeats the very purpose of these sections. The amendments are proposed in order to prevent this.

Effect of the amendments

On account of the above amendments, if an assessee invests more than Rs. 10 Crores in a residential house, the amount in excess of Rs. 10 Crores will not be considered as the cost of new asset. As such, say if an assessee purchases a residential house for Rs. 12 Crores, the amendments provide that the additional amount of Rs. 2 Crore will be ignored while computing the deductions under both the sections.

In so far as section 54 is concerned, there arises an unintended hardship in a case where the assessee transfer the new asset within the

period of 3 years from the date of its acquisition. The provisions of section 54(1) provide that while computing the capital gains in respect of the new asset arising from its transfer within a period of three years, the cost shall be considered as Nil in a case where some portion of capital gains was charged on transfer of the original asset. Further, in a case where the entire amount of capital asset for the original asset was available as deduction, the section provides that if in such case the new asset is transferred within a period of three years, the cost of acquisition shall be reduced by the amount of capital gains, which is not charged on account of deduction at the time of transfer of the original asset.

This mechanism provided in section 54 has not been amended and therefore it creates a situation where the assessee will suffer double disallowance. This can be better explained with the help of an example.

Let us assume a situation where the assessee has earned long term capital gains of Rs. 15 Crores on transfer of old asset. The assessee invests an amount of Rs. 12 Crores in the new residential house and is therefore eligible for deduction of Rs. 12 Crores under the present provisions. Accordingly the difference of Rs. 3 Crores is subjected to tax in the year of transfer of the original asset. Now assuming further that the new asset is transferred within a period of three years from its acquisition say for same amount Rs. 12 Crores. The section provides that for the purpose of computing capital gains on transfer of the new asset, the cost will be assumed to be Nil and therefore the entire amount of Rs. 12 crores will be treated as capital gains. This amount of Rs. 12 Crores is nothing but the withdrawal of deduction allowed earlier at the time of transfer of original asset.

As against this, under the proposed amended provisions, the assessee will be eligible to exemption of only Rs. 10 Crores as the cost of the new asset is capped at Rs. 10 Crores.

Therefore, in the year of transfer of original asset, the assessee will be subjected to long term capital gains of Rs. 5 Crores. Now in the subsequent year, when the new asset is transferred for Rs.12 Crores, the section provides that the cost shall be taken at Nil. Accordingly the entire 12 crore will be subjected to tax. Here it can be seen that though the assessee had got the deduction of only Rs. 10 Crores in the year of transfer of original asset, the amount brought to tax in the year of transfer of the new asset is Rs. 12 Crores and therefore the assessee suffers double disallowance to the extent of Rs. 2 Crores.

It appears that the above implication is again an unintended implication and is arising on account of the mechanism provided for the transfer of the new asset within a period of three years. With the deduction being capped at Rs. 10 Crore, a back-up amendment is also required to provide that where the deduction is restricted to Rs. 10 Crores in accordance with the proposed third proviso, the cost of acquisition at the time of the transfer of the new provision will be the actual cost of acquisition as reduced by Rs. 10 Crores. If such an amendment is also brought in the same will meet the ends of justice and the assessee would not suffer double disallowance as brought out hereinabove. Hopefully, this will be considered and suitable back-up amendments will be made at the stage of enactment of the Bill.

Rationalisation of exempt receipts under Life Insurance Policies

Existing provisions

Clause 10D of section 10 provides that in computing the total income of any person, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy subject to certain exceptions as listed in the clause. The fourth proviso to the clause provide that the exemption will not be available in relation to any unit linked insurance policies issued on or after 1-2-2021 if the amount

of premium payable for any of the previous year during the term of such policy exceeds Rs. 2,50,000/-. The fifth proviso provides that in case of multiple unit linked policies issued on or after 1-2-2021, the exemption will be available only in relation to those policies where the aggregate amount of premium on such policies do not exceed Rs. 2,50,000/-.

Proposed Amendments

Clause – 5(c) of the Finance Bill seeks to insert two additional provisos to clause 10D of section 10 of the Act. The sixth proviso proposes to provide that nothing contained in the clause shall apply with respect to any life insurance policy, other than a unit linked insurance policy (which is already carved out by virtue of the fourth proviso), issued on or after 1-4-2023 if the amount of premium payable for any of the previous year during the term of such policy exceeds Rs. 5 Lakhs.

While the sixth proviso deals with individual policies, the seventh proviso proposed to be inserted is in respect of multiple policies with high premiums. The seventh proviso accordingly seeks to provide that if the premium is payable by a person for more than one life insurance policy, other than a unit linked insurance policy (already carved out by the fifth proviso) issued on or after 1-4-23, the provisions of this clause shall apply only in relation to such policies where the aggregate amount of premium in any of the financial year does not exceed Rs. 5 Lakhs.

Let’s take an example to understand this better. Say if an individual subscribes to three different policies issued after 1-4-2023 and the annual premium for policy 1 is Rs. 3,00,000/- and for policies 2 and 3 are Rs. 2,00,000/- each. In such a case, the total premium will be Rs. 7,00,000/- and therefore by applying the seventh proviso the individual will be eligible to claim exemption in relation to policy – 1 and either policy 2 or policy 3. Accordingly one of the policies will result in a non-exempt receipt in

the case of the individual. In absence of any provision to the contrary, the individual should be able to select as to whether he wishes to claim exemption for policy 2 or policy 3.

The present sixth proviso to the clause will be eighth proviso to the clause and the same seeks to provide that the provisions of fourth, fifth, sixth and seventh proviso shall not apply to any sum received on the death of a person. Accordingly, the insurance claim received by a legal heir / nominee of a deceased insured, the exemption will continue to be available without any limit on the amount of premium on the policy.

Taxable under Income from other Sources

Clause – 32 of the Finance Bill seeks to insert clause (xiii) in section 56(2) so as to provide that any sum received, including the amount allocated by way of bonus in relation to such policies issued on or after 1-4-2023, in excess of the aggregate of premium paid during the term of such policy, and not claimed as deduction under any other provisions of the Act, will be taxed under section 56(2) i.e. as Income from other sources. The manner of computation for the same will be prescribed.

Similarly Clause – 3 (b) of the Finance Bill seeks to insert an additional clause in the definition of Income u/s. 2(24) to include amount received u/s. 56(2)(xiii) as income.

Effective Date

All the above amendments are proposed to be effective from assessment year 2024-25 onwards.

Reason for amendment

The objective of providing for exemption u/s. 10(10D) has been to further the welfare objective by subsidizing the risk premium for an individual’s life and providing benefit to small and genuine cases of life insurance coverage. Over the period of years, several different insurance policies have been designed by insurance companies which has the element of both risk coverage and investment embedded into it. Several high net worth individuals are subscribing to such policies and availing the exemption in respect of the sum received under such insurance policies. The amendments are proposed in order to prevent deny the exemption in such cases where the primary purpose is that of investment and risk coverage is incidental.

Comment

Considering the fact that the high premium policies have been considered as a mode of investment by the government, it would have been more appropriate to tax the same under the head of capital gains rather than as income from other sources. This would have been in accordance with the principle that property of any kind is a capital asset and alienation of such property would result in capital gains. This would have permitted the assessee to take the advantage of indexation for long term investment and also exemptions like section 54F.

Cost of Acquisition in case of certain assets

Existing provisions

Section 55 of the Act inter-alia provide that in relation to a capital asset being a goodwill of a business or profession or a trade mark or brand name associated with a business or profession or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession etc. the cost of acquisition or cost of improvement shall be considered in the manner specified in the said section. This also includes cases where the cost of acquisition and cost of improvement of various assets are to be treated as Nil.

Proposed amendment

Clause 31 of the Finance Bill seeks to amend section 55 of the Act so as to provide that the cost of acquisition and cost of improvement of a capital asset being any intangible asset or any

other right, other than those mentioned in the said sub-clause or clause, as the case may be, shall be Nil.

Effective Date

The above amendment is proposed to be made with effect from 1-4-2024 and accordingly it will apply from assessment year 2024-25 and onwards.

Reason for amendment

As per the Memorandum explaining the provisions, there are certain assets like intangible assets or any sort of right for which no consideration has been paid for acquisition. The cost of acquisition of such assets is not clearly defined as ‘Nil” in the existing provision. This has led to many legal disputes and the courts have held that for taxability under capital gains there has to be a definite cost of acquisition or it should be deemed to be Nil under the Act. Since presently there is no specific provision which states that the cost of such assets is nil, the chargeability of capital gains from transfer of such assets has not found favour with the Courts. The amendments are therefore proposed to define the term cost of acquisition and cost of improvement of such assets as Nil.

Comments

Section 48 of the Income-tax Act provide that the income chargeable under the head “Capital Gains” shall be computed by deducting from the full value of the consideration received or accruing as a result of transfer of the capital asset (a) expenditure in connection with the transfer and (b) the cost of acquisition of the asset and the cost of any improvement thereto. As such, the two important limbs for computation of income under the head of capital gains are (i) full value of consideration on account of transfer of the capital asset and

(ii) cost of acquisition and cost of improvement of the capital asset.

Courts have held that in a situation where either of the two limbs are missing, the computation

mechanism as provided in section 48 of the Act will fail and in such case the charging section

i.e. section 45 cannot be given effect to. This will result in the capital receipt going down without any levy of tax. The Hon’ble Supreme Court in the case of CIT v. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC) has observed as under :

“None of the provisions pertaining to the head “Capital gains” suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. It is apparent that the goodwill generated in a new business has been so regarded. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain.

If the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in section 49(1), it will become necessary to determine the cost of acquisition to the previous owner. Moreover, in a new business it is not possible to determine the date on which the goodwill comes into existence. The date of acquisition of asset is a material factor in applying the computation provision pertaining to capital gains. Having regard to the nature of goodwill, it will be impossible to determine its cost of acquisition. Nor can sub-section (3) of section 55 be invoked because the date of acquisition by the previous owner will remain unknown.

Therefore, the goodwill generated in a newly commenced business cannot be described as an “asset” within the term of section 45, and, therefore, its transfer is not subject to income-tax under the head “Capital gains”.

On account of this judgment, the amendments were made in the Act from time to time so as to provide that the cost of acquisition in relation to certain assets will be deemed to be Nil. Despite of various items being added in the list of such Nil cost assets, many items had still been left out of the purview of section 55 and the Courts

have continue to hold that no capital gain arises in the cases of transfer of such assets.

In the case of PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC), it has been held that the cost of acquisition in relation to the compensation for nationalization of bank is not possible to be determined and therefore no capital gain arise. Similarly the Bombay High Court in the case of CIT v. Sambhaji Nagar Co. Op. Hsg. Soc. Ltd. (2015) 370 ITR 325 (Bom) has held that TDR attached to land owned by co-op. housing society does not have any cost of acquisition and therefore there is no capital gains arising on transfer of such TDR.

There are many such other judgments and decisions of the Tribunal where the assessee has been able to successfully argue that no capital gains arise on account of there being no cost of acquisition in relation to different capital assets. With this amendment, this argument of the assessee will no more be relevant and in the cases of transfer of intangible asset of any type or any other similar rights, the cost of acquisition will be treated as Nil and capital gains will accordingly be computed.

Amendment in section 45(5A) in line with section 194-IC

Existing provisions

Under the existing provisions of section 45(5A) of the Act, capital gain arising to an individual or HUF from transfer of a land or building or both under a Joint Development Agreement is chargeable to income tax as income of the previous year in which the Certificate of Completion for the whole or part of the project is issued by the competent authority. The sub- section (5A) also provides that the full value of consideration for the purpose of section 48 shall mean the stamp duty value of his share in the constructed area as increased by consideration received in cash, if any, in respect of the specified agreement.

Proposed amendment

Clause – 20 of the Finance Bill seeks to amend the sub-section (5A) of section 45 so as to provide that the full value of consideration for the purpose of section 48 shall mean the stamp duty value of his share in the constructed area as increased by consideration received in cash or by a cheque or draft or by any other mode, in respect of the specified agreement.

Effective Date

The amendment is sought to be made with effect from assessment year 2024-25

Purpose

According to the Memorandum explaining the provisions, the taxpayers are inferring the provisions to mean that any amount of consideration received in a mode other than cash i.e. cheque or electronic payment modes would not be included in the consideration for the purpose of computing capital gains. This interpretation is not in accordance with the intention of law and the same is evident from the provisions of section 194-IC of the Act which provide for deduction of TDS in respect of the specified agreements. The amendment is proposed to align the provisions of section 194-IC with section 45(5A) of the Act.

Conclusion

I express my heartfelt gratitude to the All India Federation of Tax Practitioners to provide me this excellent opportunity to share some of my thoughts in this very important part of the amendments proposed by the Finance Bill 2023. This opportunity has made me go through the proposed amendments in greater detail and accordingly quenched my thirst for education in the best possible manner.

CA Paresh P. Shah

  1. Introduction

    In this article, we will cover the amendments proposed by Finance Bill 2023 to the Income Tax Act, 1961 (the ‘Act’ or ‘ITA’) which affect taxation of non-residents pertaining to the following:

    1. Section 9(1) – Extending deeming provisions under section 9 to certain persons being not ordinarily residents (Clause 4 of the Finance Bill 2023)
    2. Section 56(2)(viib) – Bringing the non- resident investors within the ambit of the section (Clause 32 of the Finance Bill 2023)
    3. Section 92(D) – Reducing time provided for furnishing TP report (Clause 46 of the Finance Bill 2023)
    4. Section 44BB and 44BBB – Prevention the misuse of section 44BB and 44BBB (Clauses 18 & 19 of the Finance Bill 2023)
    5. Tax Incentives to International Financial Services Centre (Clauses 5, 21 & 59 of the

    Finance Bill 2023)

  2. Extending deeming provision under section 9 to gift to ‘Not-ordinarily resident’ (‘NOR’)

    Under the Income Tax Act, any income that is deemed to accrue or arise in India is taxable in India. Sub-section (1) of section 9 of the Act is a deeming provision providing the types of income deemed to accrue or arise in India.

    Finance (No. 2) Act, 2019 inserted clause (viii) to sub-section (1) of section 9 of the Act to provide

    that the any sum of money exceeding fifty thousand rupees, received by a non-resident without consideration from a person resident in India, on or after the 5th day of July, 2019, shall be income deemed to accrue or arise in India. Sum of money is referred to in section 2(24)(xviia) of the Act

    1. Extract of the relevant portion of the existing provisions:
      1. Section 9(1) provides, inter alia, that the following type of income shall be deemed to accrue or arise in India:- Section 9(1)

        (viii) – income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid on or after the 5th day of July, 2019 by a person resident in India to a non-resident, not being a company, or to a foreign company.

      2. Section 2(24) (xviia) – any sum of money or value of property referred to in clause (x) of sub- section (2) of section 56
      3. Section 56(2)(x) – where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—
        1. any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;
        2. any immovable property,—
          1. without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
          2. for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—
            1. the amount of fifty thousand rupees; and
            2. the amount equal to 70[ten] per cent of the consideration:

              Provided that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub-clause

        3. any property, other than immovable property,—
          1. without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
          2. for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration.
      4. Non-residents are taxable in India in respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or is deemed to be received in India. Gift received by non-residents from residents was falling outside the purview of income accruing and arising in India and was therefore not taxed in India. However, with the insertion of subsection (viii) to Section 9(1) by the Finance Act, 2019, all the gift of money or property (as explained above) is taxed in the hands of non-resident donee, except for certain exemptions provided in clause (x) of sub-section (2) of section 56.
    2. Proposed Amendment under Finance Bill 2023
      1. The existing provision was only applicable to non-residents for gifts received from residents. However, Not Ordinarily Residents (‘NORs’) were still outside the ambit of the above amendment and were receiving gifts from residents but not paying tax on it. Moreover, the definition of NOR has been widened by Finance Act 2020. Therefore, to widen the scope, this amendment is proposed in order to widen and deepen the tax base and as an anti- abuse provision.
      2. Accordingly, it is proposed that Section 9(1)

        (viii) shall be substituted as follows:

        “(viii) income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid by a person resident in India ––

        1. on or after the 5th day of July, 2019 to a nonresident, not being a company, or to a foreign company;

          or

        2. on or after the 1st day of April, 2023 to a person not ordinarily resident in India within the meaning of clause

        (6) of section 6.” (Applicable from 01-04-2023)

    3. Comments and Implications

      The number of people falling under the NOR category have significantly increased after the amendment to the definition of residence in India brought in by FA 2020. An NOR is also not required to pay taxes on their foreign income except for income which accrues or arises outside

      India from a business controlled in or a profession set up in India.

      Thus, an NOR had the best of both worlds,

      i.e. no taxation of foreign income and also no requirement to stay outside India for more than 245 days or reduce the income in India to less than INR 15 lakhs.

      With the increase in the number of people falling under the NOR category, it was considered necessary to put the NOR category under the provisions of Section 56(2)(X) as well to plug the leakage of tax revenue and bring NORs on par with non-residents so far as taxation of gifts from residents is concerned.

  3. Section 56(2)(viiib) – Inclusion of non-residents within its ambit
    1. Extract of current Provisions and Analysis:
      1. Section 56(2) provides, inter alia, that the following type of income shall be chargeable to income-tax under the head “Income from other sources”- Section 56(2)(viib): where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares
      2. Rule 11UA of the Income-tax Rules provides the formula for computation of the fair market value of unquoted equity shares for the purposes of the Section 56(2)(viib) of the Act where by either the Net Asset Value method (i.e. Book value method) or the Discounted Cash Flow method (based on future cash flows) may be adopted.
      3. This Section is applicable to Companies, other than those where the public are substantially interested. The term “company in which public are substantially interested” has been defined in section 2(18) of the Income Tax Act. This broadly includes

        public companies which are listed on stock exchanges, or subsidiaries of listed public companies.

      4. Equity and Preference shares both are covered under this section.
      5. The tax is payable on the amount received against issue of shares by such a Company from residents, to the extent it exceeds the fair value of the shares.
      6. Clause (viib) of sub section (2) of section 56 of the Act was inserted vide Finance Act, 2012 to prevent generation and circulation of unaccounted money through share premium received from resident investors in a closely held company in excess of its fair market value
    2. Proposed Amendment and intent reflected in Memorandum
      1. In order to bring the non-resident investors within the ambit of section 56(2)(viib) and to prevent generation and circulation of unaccounted money through share premium, it is proposed to include the consideration received from a non- resident for issue of shares in excess of Fair Market Value as income under the head ‘Income from other sources’ in case of company receiving such Premium
      2. Accordingly, it is proposed by Finance Bill 2023 that Section 56(2)(viib) will read as under:

        “where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares” (Applicable from 01-04-2024)

      3. The amendment will apply to money received by a Company for issue of shares at a premium from anybody, regardless of their residential status.
    3. Comments and Implications

      The proposed amendment will impact start-ups and other Small and Medium Enterprises (SMEs) looking for rapid growth as they are thinly capitalized and depend upon foreign investors for their funding. Such funding is normally at a substantial premium as the underlying assets of the startup do not support a higher fair market value. As a result, such funding normally depends on future prospects of the company rather than the current value of the assets of the company. Currently, such funding by non-residents did not involve valuation under Section 56(2)(viib) as it was not applicable to non-residents, though it could be argued that such cases were otherwise covered under Section 56(2)(x) which required fair valuation to be considered in all cases where a person receives money or property from any other person, except exempt cases as provided therein. It appears that with this proposed amendment, the regulatory loophole is being inadvertently plugged.

      Notwithstanding the above proposed amendment, investment by non-residents in shares of Indian companies was subject to pricing guidelines under FEMA, unless such investment was on non-repatriation basis. So, in most cases, valuation as per internationally accepted methods was required and the shares were issued at or above such computed fair value as required under FEMA. With this proposed amendment, in cases where shares are issued above the fair value to non-residents, such a difference will now be taxed whereas earlier it was not being taxed as the section applied only to subscription by residents.

      Further, It may be noted that Startups can take resort to the CBDT notification

      13/2019 dated 5th March, 2019, which exempts Startups from the applicability of the provisions of Section 56(2)(viib), provided the conditions mentioned therein are fulfilled by the Startups.

  4. Reducing time provided for furnishing TP report – Section 92D(3)
    1. Current Provisions and Analysis
      1. Section 92D(1) provides that: Every person,—
        1. who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof as may be prescribed;
        2. being a constituent entity of an international group, shall keep and maintain such information and document in respect of an international group as may be prescribed.
      2. Section 92D(3) provides that – The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person referred to in clause (i) of sub-section (1) to furnish any information or document referred therein, within a period of thirty days from the date of receipt of a notice issued in this regard:

        Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.

      3. Section 92D of the Act, provides that every person who has entered into an international transaction or a specified domestic transaction shall keep and maintain the information and documents as provided under rule 10D of the Income- tax Rules, 1962
    2. Proposed Amendment by Finance Bill 2023
      1. It has been represented that in several instances due to limited time available for Transfer Pricing proceedings, it may not be practically possible to provide minimum 30 days for producing these information or documents which in any case is already in possession of the assessee. Accordingly, the time period allowed for submission of information or documents in respect of international transactions or a specified domestic transaction is required to be rationalised so as to provide the Assessing Officers a reasonable amount of time to examine the information / documents submitted and complete the pending proceedings.
      2. In view of the above, it is proposed to amend sub-section (3) of section 92D of the Act to provide that,-

        (i) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person referred to in clause (i) of sub-section (1) to furnish any information or document referred therein, within a period of ten days from the date of receipt of a notice issued in this regard:

        Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of ten days by a further period not exceeding thirty days. (Applicable from 01-04-2023)

    3. Comments and Implications

      The amendment is aimed at making more time available with the Assessing Officer (‘AO’) to complete the assessment within the time limits specified in Section 153 of the Act. The information that may be sought from the assessee is already likely to be available with the assessee given the fact that he is obligated to maintain the information and documents as specified in Rule 10D of the Income Tax Rules, hence

      reduction of period for submission may not make material difference to the assessee.

      As required under Section 92CA(3A), in cases where reference has been made by the AO to the Transfer Pricing Officer (‘TPO’) under Section 92CA(1) for computation of arms- length price, the TP order should be issued at least 60 days prior to the due date for completion of assessment as provided in Section 153 of the Act.

      Relevant extract of Section 92CA(3A) of the ITA is as follows: ……an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires.

      Accordingly, the AO has a limited time period of 60 days to conclude and issue the draft Assessment Order. In case he requires any further additional information, then under the existing provision a period of 30 days is available for the assessee to submit the same which may be extended by further 30 days thereby leaving no time for the AO to conclude the assessment. In view of same, the amendment is proposed whereby the time available to the assessee for submission of the required information is reduced to 10 days with further extension of 30 days thereby enabling the AO with sufficient days to complete the assessment within the overall period specified in Section 153 of the Act.

  5. Prevention of misuse of section 44 BB and 44 BBB- presumptive Scheme
    1. Current Provisions and Analysis
      1. Section 44BB of the Act provides for presumptive scheme in the case of a non-

        resident assessee who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. Under the scheme, a sum equal to 10% of the aggregate of the amounts specified in sub- section (2) of the said section is deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

      2. Section 44BBB of the Act provides for presumptive scheme in the case of a non- resident foreign company who is engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government. Under this scheme, a sum equal to 10% of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning is deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.
      3. Both sections provide that an assessee may claim lower profits and gains than the profits and gains specified if he keeps and maintains such books of account and other documents as required under sub-section

        (2) of section 44AA of the Act and gets his accounts audited and furnishes a report of such audit as required under section 44AB of the Act.

    2. Proposed Amendment by Finance Bill 2023
      1. It is seen that taxpayers opt in and opt out of presumptive scheme in order to avail benefit of both presumptive scheme income and non-presumptive income. In a year when they have loss, they claim actual loss as per the books of account

        and carry it forward. In a year when they have higher profits, they use presumptive scheme to restrict the profit to 10% and set off the brought forward losses from earlier years. Conceptually, if assessee is maintaining books of account and claiming losses as per such accounts, he should also disclose profits as per accounts. There is no justification for setting off of losses computed as per books of account with income computed on presumptive basis.

      2. To avoid such misuse, it is proposed to insert a new sub-section to section 44BB and to section 44BBB of the Act to provide that:

        Notwithstanding anything contained in subsection (2) of section 32 and sub- section (1) of section 72, where an assessee declares profits and gains of business for any previous year in accordance with the provisions of presumptive taxation, no set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year (Applicable from 01-04-2024)

    3. Comments and Implications

      The intention of law when introducing the presumption schemes of taxation under Section 44BB and Section 44BBB (which provided for lower taxation) was to pay minimum taxes after considering all the expenses on deemed basis and hence not to provide for the benefit of carry-forward and set-off of losses. However, due to the manner in which the said Sections were framed, such a loophole came into being which was exploited by the tax payers. The proposed amendment is therefore aimed at discouraging such an abuse of law.

  6. Tax incentive to the International Financial Services Centre (IFSC)

    In order to further incentivize operations from IFSCs, the following changes are proposed by the Finance Bill 2023

    1. Proposed Amendments by Finance Bill 2023
      1. Section 47 (viiad) – Finance Act 2021 provided incentives in case of relocation of funds to IFSC if the relocation had taken place on or before 31 March 2023. It is proposed to extend the sunset clause in case of relocation from 31st March 2023 to 31st March 2025.
      2. Accordingly, It is proposed to amend clause

        (b) of the Explanation to clause (viiad) of section 47 of the Act to extend the date for transfer of assets of the original fund, or of its wholly owned special purpose vehicle, to a resultant fund in case of relocation to 31st March, 2025 from current limitation of 31st March, 2023.

      3. Section 10(4)(E) – Income of non-residents on transfer of Offshore Derivative Instruments (ODI) entered into with IFSC Banking unit is exempt under section 10 (4E) of the Act. Under the ODI contract, the IFSC Banking Unit (IBU) makes the investments in permissible Indian Securities. Income earned by the IBU on such investments is taxed as capital gains, interest, dividend under section 115AD of the Act. After the payment of tax, the IBU passes such income to the ODI holders. Presently, the exemption is provided only on the transfer of ODIs and not on the distribution of income to the non- resident ODI holders, hence this distributed income is taxed twice in India i.e. first when received by the IBU and second, when the same income is distributed to non-resident ODI holders.
      4. Therefore, in order to remove the double taxation, it is proposed to amend clause (4E) of section 10 of the Act, to also provide exemption to any income distributed on the offshore derivative instruments, entered into with an offshore banking unit of an International Financial Services Centre as referred to in sub-section (1A) of section 80LA, which fulfils such conditions as may be prescribed. It has also been provided that such exempted income shall include only

        that amount which has been charged to tax in the hands of the IFSC Banking Unit under section 115AD.

      5. The IFSCA (Fund Management) Regulations, 2022, went into effect on May 19, 2022. To include the reference to the said regulation in the Income Tax Act’s provisions, it is proposed to amend the definition of “Investment Fund” (as provided in Explanation 1, in clause (a) to Section 115UB) to include the reference to the IFSCA (Fund Management) Regulations, 2022
      6. The amendments referred to in paragraphs
          1. and 6.3. will take effect on April 1, 2023, and will apply to assessment years 2023-24 and onwards. The amendment in paragraph
          2. will take effect on April 1, 2024, and will apply to assessment years 2024-25 and onwards.
    2. Comments and Implications

Several tax breaks have been granted to units located in the International Financial Services Centre (IFSC) under the Income Tax Act in recent years in order to make it a global financial services hub. Over the years, the Government has made tremendous effort in making policies, regulatory changes and providing tax incentives that are conducive for setting up presence in IFSC. The Economic Survey 2022-2023 mentioned that GIFT IFSC is now emerging as a preferred jurisdiction for international financial services. Recognising the growing significance of IFSC, the Global Financial Centres Index, London Report (March 2022) put IFSC in GIFT City at the top, among 15 centres globally.

The amendments proposed in the Finance Bill 2023 are in continuation of the pursuit of the Government to make IFSC an attractive destination for setting up operations and attracting investments.

CA (LLB) Abhitan Mehta

India Inc. always has a long wish list bet always it ends up being _ a bucket list which rarely gets ticked. The sigh of relief since the last few budgets has not been any big positive announcement (on the income tax front) but, no negative announcements or retrospective levies for India Inc. Even in this Finance Bill the beneficial provisions for corporates are far and few and if one excludes the benefit linked to start-ups and public sector divestment there is hardly a benefit for India Inc. which is even worth mentioning.

The good thing is that we are moving towards a stable tax regime and not significantly tinkering tax laws in every budget, the number of amendments even this year are no less (more than 100 amendments), but the majority of amendments are in the procedural sections and do not impact the general computation of income (other than amendments in relation to taxation Charities). One key thing to be noted by the corporates is that, the time period to commence manufacturing to avail the concessional tax regime of 15% (new manufacturing company) has not been extended and therefore the manufacturing should commence on or before 31.3.2024 (Section 115BAB). Therefore, the corporates planning for expansion through a new company should adhere to the timeline – even the commencement of manufacturing for one of the units prior to 31.3.2024 should suffice.

-There is no restriction on subsequent capacity expansion.

Extension of date of incorporation for eligible start-up

Currently, Section 80-IAC provides for a profit-

linked deduction to -an eligible start-up for a period of 3 years out of 10 years. The condition inter alia require that the Company/LLP is – incorporated after 1 April 2016 but before 1 April 2023. In order to further promote the development of start-ups in India the Finance Bill proposes to extend the period of incorporation of eligible start-ups to 1st day of April 2024.

This is consecutively the third budget wherein the period has been extended by one year. However, for incorporation of start-up there is no relief vis-à-vis the other conditions for the claim of deduction like the cap on the turnover, strict deployment of funds (e.g. the start-up cannot buy a car), etc.

The key difference in Section 80-IAC and Section 115BAB is that Section 80-IAC only requires the start-up should be incorporated prior to 1.4.2024, whereas in section 115BAB requires the company to commencemece the manufacturing prior to 31.3.2024. Therefore, for a start-up even if operations are commenced after 31.3.2024, the start-up should be eligible to claim deduction u/s 80-IAC.

Startups – Carry Forward and Set Off of Losses

Section 79 of the Income Tax Act restricts the carry forward of losses of a company in which public are not substantially interested (primarily unlisted companies which are not subsidiaries of a listed company) in case of change of more than 49% of the shareholding. The comparison of the shareholding is of the shareholding on the last day of the previous year in which the loss is incurred and the shareholding on the last day of the previous year in which the loss is intended to be set off. The objective of the section is to discourage the transfer of companies with the objective of taking the benefit of carried forward losses.

In case of start-ups the growth is primarily funded through the issue of fresh equity shares to investors, which may result in change of more than 49% of the shareholding and consequently would trigger the lapse of carry forward loss. Considering the hardships faced by the start-up a concession was granted to the eligible start- ups subject to the following conditions :

  1. All the shareholders of the company on the last day of the year of loss, continue to hold those shares on the last day of the previous year in the year of set off.
  2. The loss should have been incurred during the period of seven years beginning from the year of incorporation.

The Finance Bill proposes to increase the time period for loss of eligible start-ups to be considered for relaxation, from seven years to ten years from the date of incorporation. The reasons specified in the explanatory memorandum is to align the period in Section 79 with the period of benfit in Section 80-IAC

Practically, it is very difficult almost impossible to expect that all the shareholders of the start- up to continue without even taking a partial exit at the time of subsequent rounds of fund raising. Also, start-ups have a practice of giving significant employee remuneration through ESOPs; to expect all the employees to whom shares have been allotted, not to liquidate at the time of subsequent funding rounds or at the time of their exit from the company is an unreal expectation. Sometimes even the investors in the subsequent funding round, would prefer cleaning up of the cap table and would like to give exit to the present minority investors.

There may be ways and means to achieve technical compliance of the section and still achieve the commercial objective of dilution for example, if the shares of the start-up company are owned through an AIF, the unit holders can change by purchasing and selling units of the AIF but the AIF (trustees of the AIF) would continue to be the shareholders of the start-up. Similarly, start-up may issue bonus shares which are then sold by the founders and investors, so that the original shares continue to be with the founders and investors as required by the section. However, in the GAAR era, a challenge from the tax authorities on any structure entailing tax benefit cannot be ruled out.

To summarise, there is no downside of the proposed amendment but one seriously doubts if there is any real upside of the so called relaxation granted to the start up. It would have been more appropriate if the condition of continuation of shareholding is applied only to the shareholding of the to the founders of the start-up instead of applying it to all the shareholders.

Amortization of preliminary expenses

Section 35D of the Income Tax Act provides for amortization of certain preliminary expenses which are incurred in connection with extension of undertaking or setting up of a new unit. This includes expenditure in connection with preparation of feasibility report, project report, market survey etc.

The section inter alia provides that the work in connection with the preparation of feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services need to be carried out

Benefits to corporate taxpayers by Finance Bill, 2023 either by the assessee himself or by a concern which is approved by CBDT.

The Finance Bill proposes to remove the requirement of the said activities being done by assessee or approved concern. Instead, it is now proposed that the assessee shall furnish a statement containing the particulars of such expenditure within the prescribed period to the prescribed Income Tax Authority in the prescribed form and manner i.e. now it would be more of a reporting requirement to the tax officer for the claim of expense and the assessee would no longer be required to incur the expense through an approved concern.

It is certainly a welcome change, however, one fails to understand the need of filing a separate form, it would have been better if the requisite details are captured in the ITR and/or the tax audit report, instead of a separate reporting requirement.

Provisions related to business reorganisation

Where business reorganizations (merger or demerger) are approved with the appointed date covering the period for which income tax return is already filed and the timeline for filing revised return is elapsed, there were no enabling provisions in the Act to furnish a return of income duly giving effect to the business reorganizations.

Finance Act 2022 introduced Section 170A to provide that in case of business reorganisation, the successor shall file a modified return of income within a period of 6 months from the end of the month in which order approving the business reorganisation is issued, in respect of the period starting from the appointed date till the effective date of the order.

Finance Act 2022 did not provide for modification of return filed by the predecessor entity. Finance Bill proposes to amend the provisions of Section 170A to substitute the word “successor” with “entity” in order to enable modification of return filed by the predecessor entity.

Even now, the power to file the modified return is only with the successor and not with the predecessor. The only amendment is the successor now has the power to file a modified return for both the entities (successor and predecessor). This would work well in case of a merger as the amalgamating company would cease to exist and the successor has to file modified return for both entities.

However, in the case of a demerger, the problem would persist, as the demerged company does not have the power to file the modified return, only the resulting company (successor) has the power to file the modified return. Though the power of the successor is wide enough to file a revised return for both entities, a successor may not be comfortable in filing a revised return for the demerged company, for a host of reasons including that the successor is not aware of other operations of the demerged company and why should he take the responsibility for filing a tax return for the demerged company. Hopefully, this is a drafting issue and would be clarified.

Further, Finance Act 2022 did not provide for any procedure/ mechanism to be adopted by the Assessing for assessment/ reassessment once the modified return is submitted. Finance Bill proposes to amend of Section 170A to provide that where the assessment or reassessment proceedings for an Assessment Year relevant to a previous year to which the order in respect of the business reorganization applies:

  1. Have been completed on date of modified return – The Assessing officer shall pass order modifying the total income basis the modified return.
  2. Are pending as on the date of the modified return – The Assessing officer shall pass order considering the modified return.

Though the amendments help in providing further clarity on the implementation of business restructuring, couple of points which continue to remain vague are: (i) what if there is no pending proceeding (and no proceedings are completed), whether new assessment proceedings can be initiated based on return on the modified return

? (ii) What would be the power of the AO when he has to take into account the modified return, can he propose new additions/disallowances or he has to accept the modified return as is

? – this does not seem to be the intention, but

appropriate amendments would be required in the language of the proposed amendment to clarify the issues.

Facilitating strategic disinvestment

Section 72A allows carry forward and set off accumulated loss and unabsorbed depreciation allowance arising from the amalgamation or demerger. Carry forward of loss in the case of de-merger does not have any major conditions. However, carry forward of loss in case of merger has a host of conditions and is also primarily available in case of merger of industrial undertaking. To facilitate strategic divestment and without the lapse of carry forward loss, Finance Act, 2021 extended the benefit of carry forward of loss u/s 72A to the cases of strategic divestment.

The strategic divestment was defined as reduction in shareholding of Central Government and State Government below 51% with transfer of control to the buyer. The Finance Bill proposes to expand the definition of strategic divestment to cover divestment of shareholding even by public sector company.

Section 72AA deals with carry forward of loss in case of merger of banks. The scope

of the Section has been expanded to include the amalgamation of one or more banking company with any banking institution or company subsequent to strategic disinvestment provided the amalgamation is carried out within five years from the year of strategic disinvestment.

The Sections have a very niche applicability – divestments by the Government. However, one can only wonder about the disparity in taxation – we have Section 79 which restricts carry forward of loss in case of change in majority shareholding and we have provisions for strategic divestment wherein the carry forward of loss is explicitly allowed.

Closing remarks

The budget is consistent with the Governments policy to move towards away investment-linked deductions, discontinue profit linked deduction to corporates and to try and plug any tax benefit or relief granted by the courts to the taxpayers which according to them is not justified. The draconian amendment of the budget according to the author is the amendment to Section 28(iv) wherein the Supreme Court ruling in the case of Commissioner v. Mahindra And Mahindra Ltd.1 has been overruled to expand the scope of Section 28(iv) to even include a benefit or perquisite in cash which coupled with the requirement of TDS u/s 194R is a nightmare. The amendment would give rise to a host of issues – including implications on waiver of loans, write-off of bad debt, discounts (not covered by the circular) etc. One often wonders whether the zeal to tax the last dime is worth the hardship caused to genuine taxpayers in carrying out their routine business transactions.

 

1. [2018] 404 ITR 1 (SC)

CA Prasanna L. Joshi

On implementation of land ceiling laws in 1960s, with division of land holdings over last 3 generations, farmers are now left with smaller land holdings. Small farmers join co- operatives to get timely capital for their farming requirements, seeds for plantation of crops and fertilisers, pesticides, weedicides, to sustain them. These co-operatives are the backbone of rural economies. Then there are co-operatives operating businesses whose raw materials are agriculture based. The milk producers’ dairy co-operatives, sugarcane producers’ sugar co-operatives and cotton producers’ spinning mills, to name a few. These are essentially promoted by farmers with the active support of State Governments. The object of all such co- operatives is to add value to farmers’ produce, to make it marketable and to sell the same with the object of giving higher returns for the farmers’ produce. This noble object of putting more money in the pockets of lakhs of small and marginal farmers was a boon to rural consumption and creation of massive rural demand. Its effect can very well be seen in the rural economies where these co-operatives operate. A fall out was, power progressively got vested in managements of these co-operatives creating leaders with political aspirations. The heady mix of political power and hold over these co-operatives led to instances of mis- management and media attention. A few PILs were filed in courts, wherein some strictures were passed on the managements. In the last few decades the holier than cow perception regarding co-operatives took a severe beating.

Taxmen and courts were not immune to these vibes which inherently played a part in the tax litigation. The noble object of co-operatives to put more money in the pockets of lakhs of small farmers was forgotten and vibes from media played a role on sugar and dairy co-operatives facing the wrath of Taxmen.

Sugar Co-operatives

Sugar and Sugarcane are governed by Essential Commodities Act. Till 2014, sugar mills were required to sell a percentage of sugar produced at a price fixed by Govt. for sale in ration shops and FCI, called “Levy” sugar. The balance “Free” sugar could be sold in the market but its quantity was limited to the monthly quota released by Govt. for each sugar mill. Restrictions on sugar imports, exports and storage were in place to curb profiteering. Through these controls, Govt. ensured that there was no runaway increase in domestic sugar prices. Sugar mills are required to pay farmers for their cane, at least a minimum support price which is annually notified by the Govt. (SMP). In this era sugar mills made healthy profits at the cost of farmers by paying SMP for their cane. From decade of 1950-60, sugar co-ops entered the scene.

When a farmer becomes a member of a sugar co-op, he commits to cultivate cane on his farms, binds himself to supply the cane grown to the sugar co-op. and agrees to a host of directions issued by the co-op on cultivation of cane. Cane, after it is cut, becomes perishable and needs to

be crushed within 24 hours. Cane cutting and transport is organized by sugar mills so that fresh cane is crushed by them. Many farmers chose not to become members of a sugar co- op and retain their choice to supply cane to any other sugar mill in the hope that they can get better returns. The farmers are required to register the cane cultivated by them with a sugar mill. With these registrations in place, the sugar mill annually applies for a license from the State Govt. to commence cane crush. The registration form of sugar co-ops inter alia provides that the farmer shall accept the price of cane as is fixed by the State Govt.

When cane is procured by sugar co-ops from farmers, its price is not fixed, barring the support price (SMP) notified by Govt. World over the price of cane paid to farmers is derived from the price realised for sugar and its by- products. In India, sugar is produced from cane crushed during November to April. Farmers have to be paid for cane supplied within a fortnight. But sugar is sold over next 16 months. To pay first advance to farmers, sugar co-ops avail bank loans upto 85% of the value of sugar stocks pledged. When sugar is sold over the months, margin locked up gets released and funds are available to pay further advances. On sale over the months, the price of sugar produced also gets progressively discovered. Closing sugar stocks are valued at rate State Govt. directs. Based on value of production and costs incurred for conversion of cane to sugar, final cane price is proposed by sugar co-ops to the State Govt. Final cane price as approved by State Govt., is accounted for and claimed by sugar co-ops as their purchase price of cane.

For many years State Govt. levied an ad-valorem Purchase Tax on final price of cane purchased by sugar mills. Income Tax authorities concurrently sought to levy income tax on part of the price of cane purchased by sugar co-ops which has already suffered State’s purchase tax. Till 1989, State of Maharashtra levied a tax on agricultural income earned in excess of Rs 36,000. Further the agricultural income earned by a farmer who pays income tax on his non-agricultural income, is clubbed for rate purposes and suffers an indirect income tax in his hands.

Taxmen held that sugar co-ops were distributing part of their profits to farmers in the guise of cane payments. Taxmen allowed SMP as the price for purchase of cane and payments in excess thereof were disallowed. In May 1968, late Shri Nani Palkhiwala convinced the Income Tax Appellate Tribunal that businesses run by co-operatives need to be assessed differently. He argued that an ordinary businessman could exploit farmers by driving them to accept to minimum support cane prices (SMP). Sugar co- ops were formed to stop exploitation of farmers. Sugar is produced and sold by sugar co-ops so as to give best possible cane price to farmers. He said Revenue did not produce any evidence as to which farmers were ready to supply their cane at SMP. He argued that Revenue has no authority to tax agricultural income of farmers in the hands sugar co-ops as their alleged non- agricultural income. Tribunal agreed that if a sugar co-op were to retain more profit by paying SMP, it would have defeated the very object for which it was established. The cane price of sugar co-ops fixed by State Govt. was allowed as a deduction. In 1973, Hon’ble Supreme Court rejected CIT’s appeals in Pravara SSK, 94 ITR 321.

In 1974, Govt. of India realised that despite growth in cane area, sugar production did not commensurately grow. On recommendation it introduced payment of “additional price” (AP) in addition to minimum support price (SMP). The AO was to be determined after end of a sugar season (October to September). AP was calculated at 50% of the difference between value of sugar produced minus cost of its production as notified by Govt.

In 1995 Taxmen re-ignited the dispute concluded in 1973. They disallowed part of cane purchases

in excess of SMP only from members of sugar co-ops u/s 40A(2) on the ground that co-op sugar mill is an AOP. First appellate authorities deleted disallowance u/s 40A(2) but held payment was not wholly exclusively for business. They held that the manner in which final price was determined by State Govt., despite of judgement in Pravara, led to distribution of profits to all farmers, including to non-members. Special Bench of the Tribunal deleted the entire addition, 91 ITD 361. Hon’ble Bombay High Court rejected CIT’s appeals, 301 ITR 191. However, in January 2010, Hon’ble Supreme Court set aside the issue back to CIT(A) with certain directions, 326 ITR 42. The CIT(A) took a representative case and held that SMP was the purchase price of cane. He also held that going by real income theory, the AP was also to be allowed as deduction. He ignored that larger bench of the Hon’ble Supreme Court in a Civil Appeal had held that though SMP was Rs 360/Mt to Rs 400/Mt the price to be paid by sugar mills to non-members for their cane was Rs 740/Mt, 1995 SCC, Supl. (3) 475. In a subsequent SLP of CIT, another bench of the Hon’ble Supreme Court referred the issue to a larger bench.

Meanwhile, in late 2009 SMP and AP were substituted by Fair and Remunerative Price (FRP) with preamble to the Bill amending Essential Commodities Act clearly stating that FRP was to be taken as cost of cane for computing “levy” sugar price. In those days levy price was Rs 18/Kg (for 20% production) whereas market price of sugar was Rs 33/Kg (for 80% production). Obviously the average sugar realization of sugar mills being much higher than levy price, corresponding derived cane price was much higher than FRP. But in assessment of sugar co-ops, Revenue authorities allowed only FRP as a deduction ignoring farmers’ agitations demanding higher cane prices. Submissions against Revenue’s point of view were not even brought on record in assessment orders. Same Revenue authorities

allowed as deduction market prices much higher than FRP paid for cane purchases by competing private sector sugar mills. Sugar co-ops got no relief before First Appellate authorities as they did not consider prevailing facts requiring sugar co-ops to pay higher cane prices but extensively quoted the order of the CIT(A) in the representative case.

This tax dispute was flagged in 2015 before the then Finance Minister. He desired to end the tax litigation and by Finance Act 2015 inserted sub- section (xvii) in section 36(1) but w.e.f. AY 2016-

17. This stipulated that cane payments less than or equal to the cane price fixed or approved by Govt. be allowed as a deduction in assessment of sugar co-ops. However, many Revenue authorities did not abide by the amendment. CBDT was forced to issue a Circular No. 18 dated 25-10-2021 clarifying that “price fixed or approved by Govt.” would include price fixation by State Govts. through any state level mechanism. This applied to AY 2016-17 and onwards, but it was the past that was haunting the sugar co-ops.

In Mar, 2019 the larger bench of Hon’ble Supreme Court, 412 ITR 420, while considering the SMP and AP regime, held that for cane supplied by members to sugar co-ops, their cane purchases were to be allowed at SMP plus expenditure to be determined by the Assessing Officer out of difference between AP and SMP. For cane purchases from non-members, AO was to make a disallowance based on 40A(2). Nothing was said about cane price paid which was more than SMP plus AP. The larger bench judgement did not consider its court’s repeated views (preamble to EC Amendment Bill 2009) that AP was a liability of sugar mills and had to be included by Govt. in the cost of cane taken for computing levy price. This view of the Hon’ble Supreme Court was the reason for substitution of SMP plus AP by FRP. That the larger bench judgement was wrongly decided is mentioned in 11th Ed. of Kanga & Palkhiwala.

On directions of the Hon’ble Supreme Court given in 2010, first the CIT(A)s and next the Tribunal without evaluation of prevailing facts applied its larger bench judgement of 2019 and set aside the disallowance out of cane purchases for all years prior to AY 2016- 17, including FRP, to the AO. There were no findings on facts of the respective years which could have a bearing on deciding whether the cane price paid was an expenditure of the sugar co-ops. Linkage between realization of sugar and its by-products with the cane prices were ignored. Report of a committee constituted by the Hon’ble Prime Minister under Dr. C. Rangarajan recommending 75% of sugar realization or 70% of sugar plus by- products realization be shared as cane price with farmers was not even considered.

In set aside assessments till AY 2015-16, original disallowances out of cane purchases were reconfirmed by AOs and huge tax demands were re-created from AY 1990-91 onwards. As sugar co-ops over last 3 decades had already paid farmers final cane prices which were much higher than SMP and AP, they had no funds to pay 20% of the tax demands, even for seeking stays. Faced with this reality that tax was levied on money already paid long back to farmers, relief from past tax arrears on account of huge disallowances from cane purchases made over last 3 decades has been proposed by the Finance Minister. Finance 2023 Bill proposes to introduce sub-section (19) in section 155 which provides for AOs to allow as deduction cane prices fixed by Govt. by amending their existing assessments. Circular No. 18 dated 25-10-2021 clarifying “price fixed or approved by Govt.” would include price fixed by State Govt. under their state level mechanisms will come in handy. This brings down curtain on a tax litigation where assessments were made on a fundamentally wrong presumption that sugar mills could purchase cane at its minimum price even when sugar prices ruled high.

Cash Withdrawals from Co-op Banks

If a person annually withdraws cash from a bank, including a co-op society engaged in the business of banking or a post office, an aggregate of more than Rs 1 crore, then cash disburser is required to deduct tax @ 2% of such cash withdrawal. This limit for co-ops is proposed to be increased to Rs 3 crores. So also if the cash recipient has not filed his income-tax returns for last 3 years within his due dates, then, the annual aggregate limit stands reduced to Rs 20 lakhs. In cases of non-filers, TDS is 2% upto Rs 1 crores and 5% in excess thereof. With substitution of Rs 3 crores for co-ops in place of Rs 1 crores, this rigour of 5% TDS for non-filer customers of co-ops would become applicable after reaching annual cash withdrawal of Rs 3 crores. This decrease in outgo of TDS will benefit agrarian folks requiring cash for their businesses like farmers, petty contractors, small vendors and self-employed artisans who rarely file income tax returns due to low non- agricultural incomes.

Primary Co-op Societies

These are co-op societies which provide credit to their members for their agricultural and incidental activities. These societies usually operate at a grass root, say at taluka level. Their dealings, which include accepting deposits and giving loans, are mainly with rural and agrarian folks who generally have low incomes. For ease of business operations by folks of low income groups, the limits of Rs 20,000 in cash for accepting deposits, giving loans and accepting repayments from members of primary agricultural credit societies and primary co-op agricultural and rural development banks are being proposed to be relaxed to Rs 2 lakhs. The rigours of sections 269SS and 269T are also felt by small vendors and self-employed persons who are not aware of these provisions and are unfortunately caught in their mischief when the entities like banks and NBFCs file their reports. The appellate mechanism to grant them relief does not take into account the situation in which these folks function and relief on a wider scale is certainly desirable to exclude small persons.

New Manufacturing Co-ops

In line with tax rate applicable to new manufacturing companies, new co-operatives setting up manufacturing activities are entitled to a lower tax rate of 15%. They have to be registered on or after 1-4-2023 and manufacture or production should commence before 31-3- 2024. Usual conditions apply, i.e. should not be formed by splitting up of business already in existence; previously used machinery should not exceed 20% of the total value of machinery or plant used. Also it should not be engaged in any business other than manufacture or production, including electricity generation. Manufacture would not include software development, mining, converting marbles to slabs, bottling gas into cylinder, printing books or producing cinema films and other notified business. In computing eligible profits, special deductions are not be considered, like those for additional depreciation in first year, or exclusion of income of new units in SEZs, or special deductions for tea, coffee or rubber development or for site restoration in oil prospecting or extraction, or payments for approved programme of scientific research, or certain pre-operative expenses or expenditure on notified agricultural extension project and chapter VI-A deductions (other than on hiring new employees). In the subsequent years, brought forward losses or unabsorbed depreciation of this business will not be set off nor carried forward. If more than ordinary profits are attributed to arise to the newly started manufacturing co-op due to arrangement of transactions with connected persons, AO can re-compute reasonable profits of new co-op’s eligible activity by also applying ALP mechanism. Profits arising in excess of reasonable amount as determine by AO are to be taxed at 30% rate. As also income which is unrelated to manufacturing business is taxed at 22%. Option to select lower tax regime of 15% is to the exercised before due date of filing first year’s regular return of income and such option exercised will continue for subsequent years without alteration. The time limit of one year to commence manufacture may have to be revisited.

Development Authorities

Difficulty arose in assessments of notified bodies, authorities, boards, trusts or commissions whose income was excluded u/s 10(46) which provides they should not be engaged in any commercial activity. Said section does not specify as to what is a commercial activity. Hon’ble Supreme Court, 449 ITR 389, held that commercial activity mentioned in section 10(46) has the same meaning as “trade, commerce, business” in section 2(15). While considering as to what would be a commercial activity, the Hon’ble court considered firstly the quantum of mark up in their revenues in relation to their cost incurred and secondly section 10(46) did not have any limit like 20% of revenues from allied activities provided in section 2(15). On the other hand Hon’ble Court felt that boards created under statutes would be exempt from tax. To get over the issue of “not engaged in any commercial activity” a new provision by way of (46A) is proposed to be inserted in section 10 to provide exclusion from income for notified bodies, authorities, boards, trusts or commissions (not being a company) established by Central or State Act for the purposes of (i) dealing with and satisfying housing accommodation; (ii) planning, development or improvement of cities, towns and villages; (iii) regulating or developing any activity for benefit of general public or for regulating any matter arising therefrom. This should put an end to tax litigation against such statutory bodies, irrespective of the charges levied by them for their services.

For sugar co-operatives this budget has ended a nightmare for last 3 decades.

 

Benefits to corporate taxpayers by Finance Bill, 2023

CA (LLB) Abhitan Mehta

India Inc. always has a long wish list bet always it ends up being _ a bucket list which rarely gets ticked. The sigh of relief since the last few budgets has not been any big positive announcement (on the income tax front) but, no negative announcements or retrospective levies for India Inc. Even in this Finance Bill the beneficial provisions for corporates are far and few and if one excludes the benefit linked to start-ups and public sector divestment there is hardly a benefit for India Inc. which is even worth mentioning.

The good thing is that we are moving towards a stable tax regime and not significantly tinkering tax laws in every budget, the number of amendments even this year are no less (more than 100 amendments), but the majority of amendments are in the procedural sections and do not impact the general computation of income (other than amendments in relation to taxation Charities). One key thing to be noted by the corporates is that, the time period to commence manufacturing to avail the concessional tax regime of 15% (new manufacturing company) has not been extended and therefore the manufacturing should commence on or before 31.3.2024 (Section 115BAB). Therefore, the corporates planning for expansion through a new company should adhere to the timeline – even the commencement of manufacturing for one of the units prior to 31.3.2024 should suffice.

-There is no restriction on subsequent capacity expansion.

Extension of date of incorporation for eligible start-up

Currently, Section 80-IAC provides for a profit-

linked deduction to -an eligible start-up for a period of 3 years out of 10 years. The condition inter alia require that the Company/LLP is – incorporated after 1 April 2016 but before 1 April 2023. In order to further promote the development of start-ups in India the Finance Bill proposes to extend the period of incorporation of eligible start-ups to 1st day of April 2024.

This is consecutively the third budget wherein the period has been extended by one year. However, for incorporation of start-up there is no relief vis-à-vis the other conditions for the claim of deduction like the cap on the turnover, strict deployment of funds (e.g. the start-up cannot buy a car), etc.

The key difference in Section 80-IAC and Section 115BAB is that Section 80-IAC only requires the start-up should be incorporated prior to 1.4.2024, whereas in section 115BAB requires the company to commencemece the manufacturing prior to 31.3.2024. Therefore, for a start-up even if operations are commenced after 31.3.2024, the start-up should be eligible to claim deduction u/s 80-IAC.

Startups – Carry Forward and Set Off of Losses

Section 79 of the Income Tax Act restricts the carry forward of losses of a company in which public are not substantially interested (primarily unlisted companies which are not subsidiaries of a listed company) in case of change of more than 49% of the shareholding. The comparison of the shareholding is of the shareholding on the last day of the previous year in which the loss is incurred and the shareholding on the last day of the previous year in which the loss is intended to be set off. The objective of the section is to discourage the transfer of companies with the objective of taking the benefit of carried forward losses.

In case of start-ups the growth is primarily funded through the issue of fresh equity shares to investors, which may result in change of more than 49% of the shareholding and consequently would trigger the lapse of carry forward loss. Considering the hardships faced by the start-up a concession was granted to the eligible start- ups subject to the following conditions :

  1. All the shareholders of the company on the last day of the year of loss, continue to hold those shares on the last day of the previous year in the year of set off.
  2. The loss should have been incurred during the period of seven years beginning from the year of incorporation.

The Finance Bill proposes to increase the time period for loss of eligible start-ups to be considered for relaxation, from seven years to ten years from the date of incorporation. The reasons specified in the explanatory memorandum is to align the period in Section 79 with the period of benfit in Section 80-IAC

Practically, it is very difficult almost impossible to expect that all the shareholders of the start- up to continue without even taking a partial exit at the time of subsequent rounds of fund raising. Also, start-ups have a practice of giving significant employee remuneration through ESOPs; to expect all the employees to whom shares have been allotted, not to liquidate at the time of subsequent funding rounds or at the time of their exit from the company is an unreal expectation. Sometimes even the investors in the subsequent funding round, would prefer cleaning up of the cap table and would like to give exit to the present minority investors.

There may be ways and means to achieve technical compliance of the section and still achieve the commercial objective of dilution for example, if the shares of the start-up company are owned through an AIF, the unit holders can change by purchasing and selling units of the AIF but the AIF (trustees of the AIF) would continue to be the shareholders of the start-up. Similarly, start-up may issue bonus shares which are then sold by the founders and investors, so that the original shares continue to be with the founders and investors as required by the section. However, in the GAAR era, a challenge from the tax authorities on any structure entailing tax benefit cannot be ruled out.

To summarise, there is no downside of the proposed amendment but one seriously doubts if there is any real upside of the so called relaxation granted to the start up. It would have been more appropriate if the condition of continuation of shareholding is applied only to the shareholding of the to the founders of the start-up instead of applying it to all the shareholders.

Amortization of preliminary expenses

Section 35D of the Income Tax Act provides for amortization of certain preliminary expenses which are incurred in connection with extension of undertaking or setting up of a new unit. This includes expenditure in connection with preparation of feasibility report, project report, market survey etc.

The section inter alia provides that the work in connection with the preparation of feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services need to be carried out

Benefits to corporate taxpayers by Finance Bill, 2023 either by the assessee himself or by a concern which is approved by CBDT.

The Finance Bill proposes to remove the requirement of the said activities being done by assessee or approved concern. Instead, it is now proposed that the assessee shall furnish a statement containing the particulars of such expenditure within the prescribed period to the prescribed Income Tax Authority in the prescribed form and manner i.e. now it would be more of a reporting requirement to the tax officer for the claim of expense and the assessee would no longer be required to incur the expense through an approved concern.

It is certainly a welcome change, however, one fails to understand the need of filing a separate form, it would have been better if the requisite details are captured in the ITR and/or the tax audit report, instead of a separate reporting requirement.

Provisions related to business reorganisation

Where business reorganizations (merger or demerger) are approved with the appointed date covering the period for which income tax return is already filed and the timeline for filing revised return is elapsed, there were no enabling provisions in the Act to furnish a return of income duly giving effect to the business reorganizations.

Finance Act 2022 introduced Section 170A to provide that in case of business reorganisation, the successor shall file a modified return of income within a period of 6 months from the end of the month in which order approving the business reorganisation is issued, in respect of the period starting from the appointed date till the effective date of the order.

Finance Act 2022 did not provide for modification of return filed by the predecessor entity. Finance Bill proposes to amend the provisions of Section 170A to substitute the word “successor” with “entity” in order to enable modification of return filed by the predecessor entity.

Even now, the power to file the modified return is only with the successor and not with the predecessor. The only amendment is the successor now has the power to file a modified return for both the entities (successor and predecessor). This would work well in case of a merger as the amalgamating company would cease to exist and the successor has to file modified return for both entities.

However, in the case of a demerger, the problem would persist, as the demerged company does not have the power to file the modified return, only the resulting company (successor) has the power to file the modified return. Though the power of the successor is wide enough to file a revised return for both entities, a successor may not be comfortable in filing a revised return for the demerged company, for a host of reasons including that the successor is not aware of other operations of the demerged company and why should he take the responsibility for filing a tax return for the demerged company. Hopefully, this is a drafting issue and would be clarified.

Further, Finance Act 2022 did not provide for any procedure/ mechanism to be adopted by the Assessing for assessment/ reassessment once the modified return is submitted. Finance Bill proposes to amend of Section 170A to provide that where the assessment or reassessment proceedings for an Assessment Year relevant to a previous year to which the order in respect of the business reorganization applies:

  1. Have been completed on date of modified return – The Assessing officer shall pass order modifying the total income basis the modified return.
  2. Are pending as on the date of the modified return – The Assessing officer shall pass order considering the modified return.

Though the amendments help in providing further clarity on the implementation of business restructuring, couple of points which continue to remain vague are: (i) what if there is no pending proceeding (and no proceedings are completed), whether new assessment proceedings can be initiated based on return on the modified return

? (ii) What would be the power of the AO when he has to take into account the modified return, can he propose new additions/disallowances or he has to accept the modified return as is

? – this does not seem to be the intention, but

appropriate amendments would be required in the language of the proposed amendment to clarify the issues.

Facilitating strategic disinvestment

Section 72A allows carry forward and set off accumulated loss and unabsorbed depreciation allowance arising from the amalgamation or demerger. Carry forward of loss in the case of de-merger does not have any major conditions. However, carry forward of loss in case of merger has a host of conditions and is also primarily available in case of merger of industrial undertaking. To facilitate strategic divestment and without the lapse of carry forward loss, Finance Act, 2021 extended the benefit of carry forward of loss u/s 72A to the cases of strategic divestment.

The strategic divestment was defined as reduction in shareholding of Central Government and State Government below 51% with transfer of control to the buyer. The Finance Bill proposes to expand the definition of strategic divestment to cover divestment of shareholding even by public sector company.

Section 72AA deals with carry forward of loss in case of merger of banks. The scope

of the Section has been expanded to include the amalgamation of one or more banking company with any banking institution or company subsequent to strategic disinvestment provided the amalgamation is carried out within five years from the year of strategic disinvestment.

The Sections have a very niche applicability – divestments by the Government. However, one can only wonder about the disparity in taxation – we have Section 79 which restricts carry forward of loss in case of change in majority shareholding and we have provisions for strategic divestment wherein the carry forward of loss is explicitly allowed.

Closing remarks

The budget is consistent with the Governments policy to move towards away investment-linked deductions, discontinue profit linked deduction to corporates and to try and plug any tax benefit or relief granted by the courts to the taxpayers which according to them is not justified. The draconian amendment of the budget according to the author is the amendment to Section 28(iv) wherein the Supreme Court ruling in the case of Commissioner v. Mahindra And Mahindra Ltd.1 has been overruled to expand the scope of Section 28(iv) to even include a benefit or perquisite in cash which coupled with the requirement of TDS u/s 194R is a nightmare. The amendment would give rise to a host of issues – including implications on waiver of loans, write-off of bad debt, discounts (not covered by the circular) etc. One often wonders whether the zeal to tax the last dime is worth the hardship caused to genuine taxpayers in carrying out their routine business transactions.

 

1. [2018] 404 ITR 1 (SC)

 

 

Implications for Non-Residents under Finance Bill 2023

CA Paresh P. Shah

  1. Introduction

    In this article, we will cover the amendments proposed by Finance Bill 2023 to the Income Tax Act, 1961 (the ‘Act’ or ‘ITA’) which affect taxation of non-residents pertaining to the following:

    1. Section 9(1) – Extending deeming provisions under section 9 to certain persons being not ordinarily residents (Clause 4 of the Finance Bill 2023)
    2. Section 56(2)(viib) – Bringing the non- resident investors within the ambit of the section (Clause 32 of the Finance Bill 2023)
    3. Section 92(D) – Reducing time provided for furnishing TP report (Clause 46 of the Finance Bill 2023)
    4. Section 44BB and 44BBB – Prevention the misuse of section 44BB and 44BBB (Clauses 18 & 19 of the Finance Bill 2023)
    5. Tax Incentives to International Financial Services Centre (Clauses 5, 21 & 59 of the

    Finance Bill 2023)

  2. Extending deeming provision under section 9 to gift to ‘Not-ordinarily resident’ (‘NOR’)

    Under the Income Tax Act, any income that is deemed to accrue or arise in India is taxable in India. Sub-section (1) of section 9 of the Act is a deeming provision providing the types of income deemed to accrue or arise in India.

    Finance (No. 2) Act, 2019 inserted clause (viii) to sub-section (1) of section 9 of the Act to provide

    that the any sum of money exceeding fifty thousand rupees, received by a non-resident without consideration from a person resident in India, on or after the 5th day of July, 2019, shall be income deemed to accrue or arise in India. Sum of money is referred to in section 2(24)(xviia) of the Act

    1. Extract of the relevant portion of the existing provisions:
      1. Section 9(1) provides, inter alia, that the following type of income shall be deemed to accrue or arise in India:- Section 9(1)

        (viii) – income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid on or after the 5th day of July, 2019 by a person resident in India to a non-resident, not being a company, or to a foreign company.

      2. Section 2(24) (xviia) – any sum of money or value of property referred to in clause (x) of sub- section (2) of section 56
      3. Section 56(2)(x) – where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—
        1. any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;
        2. any immovable property,—
          1. without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
          2. for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—
            1. the amount of fifty thousand rupees; and
            2. the amount equal to 70[ten] per cent of the consideration:

              Provided that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub-clause

        3. any property, other than immovable property,—
          1. without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
          2. for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration.
      4. Non-residents are taxable in India in respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or is deemed to be received in India. Gift received by non-residents from residents was falling outside the purview of income accruing and arising in India and was therefore not taxed in India. However, with the insertion of subsection (viii) to Section 9(1) by the Finance Act, 2019, all the gift of money or property (as explained above) is taxed in the hands of non-resident donee, except for certain exemptions provided in clause (x) of sub-section (2) of section 56.
    2. Proposed Amendment under Finance Bill 2023
      1. The existing provision was only applicable to non-residents for gifts received from residents. However, Not Ordinarily Residents (‘NORs’) were still outside the ambit of the above amendment and were receiving gifts from residents but not paying tax on it. Moreover, the definition of NOR has been widened by Finance Act 2020. Therefore, to widen the scope, this amendment is proposed in order to widen and deepen the tax base and as an anti- abuse provision.
      2. Accordingly, it is proposed that Section 9(1)

        (viii) shall be substituted as follows:

        “(viii) income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid by a person resident in India ––

        1. on or after the 5th day of July, 2019 to a nonresident, not being a company, or to a foreign company;

          or

        2. on or after the 1st day of April, 2023 to a person not ordinarily resident in India within the meaning of clause

        (6) of section 6.” (Applicable from 01-04-2023)

    3. Comments and Implications

      The number of people falling under the NOR category have significantly increased after the amendment to the definition of residence in India brought in by FA 2020. An NOR is also not required to pay taxes on their foreign income except for income which accrues or arises outside

      India from a business controlled in or a profession set up in India.

      Thus, an NOR had the best of both worlds,

      i.e. no taxation of foreign income and also no requirement to stay outside India for more than 245 days or reduce the income in India to less than INR 15 lakhs.

      With the increase in the number of people falling under the NOR category, it was considered necessary to put the NOR category under the provisions of Section 56(2)(X) as well to plug the leakage of tax revenue and bring NORs on par with non-residents so far as taxation of gifts from residents is concerned.

  3. Section 56(2)(viiib) – Inclusion of non-residents within its ambit
    1. Extract of current Provisions and Analysis:
      1. Section 56(2) provides, inter alia, that the following type of income shall be chargeable to income-tax under the head “Income from other sources”- Section 56(2)(viib): where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares
      2. Rule 11UA of the Income-tax Rules provides the formula for computation of the fair market value of unquoted equity shares for the purposes of the Section 56(2)(viib) of the Act where by either the Net Asset Value method (i.e. Book value method) or the Discounted Cash Flow method (based on future cash flows) may be adopted.
      3. This Section is applicable to Companies, other than those where the public are substantially interested. The term “company in which public are substantially interested” has been defined in section 2(18) of the Income Tax Act. This broadly includes

        public companies which are listed on stock exchanges, or subsidiaries of listed public companies.

      4. Equity and Preference shares both are covered under this section.
      5. The tax is payable on the amount received against issue of shares by such a Company from residents, to the extent it exceeds the fair value of the shares.
      6. Clause (viib) of sub section (2) of section 56 of the Act was inserted vide Finance Act, 2012 to prevent generation and circulation of unaccounted money through share premium received from resident investors in a closely held company in excess of its fair market value
    2. Proposed Amendment and intent reflected in Memorandum
      1. In order to bring the non-resident investors within the ambit of section 56(2)(viib) and to prevent generation and circulation of unaccounted money through share premium, it is proposed to include the consideration received from a non- resident for issue of shares in excess of Fair Market Value as income under the head ‘Income from other sources’ in case of company receiving such Premium
      2. Accordingly, it is proposed by Finance Bill 2023 that Section 56(2)(viib) will read as under:

        “where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares” (Applicable from 01-04-2024)

      3. The amendment will apply to money received by a Company for issue of shares at a premium from anybody, regardless of their residential status.
    3. Comments and Implications

      The proposed amendment will impact start-ups and other Small and Medium Enterprises (SMEs) looking for rapid growth as they are thinly capitalized and depend upon foreign investors for their funding. Such funding is normally at a substantial premium as the underlying assets of the startup do not support a higher fair market value. As a result, such funding normally depends on future prospects of the company rather than the current value of the assets of the company. Currently, such funding by non-residents did not involve valuation under Section 56(2)(viib) as it was not applicable to non-residents, though it could be argued that such cases were otherwise covered under Section 56(2)(x) which required fair valuation to be considered in all cases where a person receives money or property from any other person, except exempt cases as provided therein. It appears that with this proposed amendment, the regulatory loophole is being inadvertently plugged.

      Notwithstanding the above proposed amendment, investment by non-residents in shares of Indian companies was subject to pricing guidelines under FEMA, unless such investment was on non-repatriation basis. So, in most cases, valuation as per internationally accepted methods was required and the shares were issued at or above such computed fair value as required under FEMA. With this proposed amendment, in cases where shares are issued above the fair value to non-residents, such a difference will now be taxed whereas earlier it was not being taxed as the section applied only to subscription by residents.

      Further, It may be noted that Startups can take resort to the CBDT notification

      13/2019 dated 5th March, 2019, which exempts Startups from the applicability of the provisions of Section 56(2)(viib), provided the conditions mentioned therein are fulfilled by the Startups.

  4. Reducing time provided for furnishing TP report – Section 92D(3)
    1. Current Provisions and Analysis
      1. Section 92D(1) provides that: Every person,—
        1. who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof as may be prescribed;
        2. being a constituent entity of an international group, shall keep and maintain such information and document in respect of an international group as may be prescribed.
      2. Section 92D(3) provides that – The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person referred to in clause (i) of sub-section (1) to furnish any information or document referred therein, within a period of thirty days from the date of receipt of a notice issued in this regard:

        Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.

      3. Section 92D of the Act, provides that every person who has entered into an international transaction or a specified domestic transaction shall keep and maintain the information and documents as provided under rule 10D of the Income- tax Rules, 1962
    2. Proposed Amendment by Finance Bill 2023
      1. It has been represented that in several instances due to limited time available for Transfer Pricing proceedings, it may not be practically possible to provide minimum 30 days for producing these information or documents which in any case is already in possession of the assessee. Accordingly, the time period allowed for submission of information or documents in respect of international transactions or a specified domestic transaction is required to be rationalised so as to provide the Assessing Officers a reasonable amount of time to examine the information / documents submitted and complete the pending proceedings.
      2. In view of the above, it is proposed to amend sub-section (3) of section 92D of the Act to provide that,-

        (i) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person referred to in clause (i) of sub-section (1) to furnish any information or document referred therein, within a period of ten days from the date of receipt of a notice issued in this regard:

        Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of ten days by a further period not exceeding thirty days. (Applicable from 01-04-2023)

    3. Comments and Implications

      The amendment is aimed at making more time available with the Assessing Officer (‘AO’) to complete the assessment within the time limits specified in Section 153 of the Act. The information that may be sought from the assessee is already likely to be available with the assessee given the fact that he is obligated to maintain the information and documents as specified in Rule 10D of the Income Tax Rules, hence

      reduction of period for submission may not make material difference to the assessee.

      As required under Section 92CA(3A), in cases where reference has been made by the AO to the Transfer Pricing Officer (‘TPO’) under Section 92CA(1) for computation of arms- length price, the TP order should be issued at least 60 days prior to the due date for completion of assessment as provided in Section 153 of the Act.

      Relevant extract of Section 92CA(3A) of the ITA is as follows: ……an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires.

      Accordingly, the AO has a limited time period of 60 days to conclude and issue the draft Assessment Order. In case he requires any further additional information, then under the existing provision a period of 30 days is available for the assessee to submit the same which may be extended by further 30 days thereby leaving no time for the AO to conclude the assessment. In view of same, the amendment is proposed whereby the time available to the assessee for submission of the required information is reduced to 10 days with further extension of 30 days thereby enabling the AO with sufficient days to complete the assessment within the overall period specified in Section 153 of the Act.

  5. Prevention of misuse of section 44 BB and 44 BBB- presumptive Scheme
    1. Current Provisions and Analysis
      1. Section 44BB of the Act provides for presumptive scheme in the case of a non-

        resident assessee who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. Under the scheme, a sum equal to 10% of the aggregate of the amounts specified in sub- section (2) of the said section is deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

      2. Section 44BBB of the Act provides for presumptive scheme in the case of a non- resident foreign company who is engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government. Under this scheme, a sum equal to 10% of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning is deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.
      3. Both sections provide that an assessee may claim lower profits and gains than the profits and gains specified if he keeps and maintains such books of account and other documents as required under sub-section

        (2) of section 44AA of the Act and gets his accounts audited and furnishes a report of such audit as required under section 44AB of the Act.

    2. Proposed Amendment by Finance Bill 2023
      1. It is seen that taxpayers opt in and opt out of presumptive scheme in order to avail benefit of both presumptive scheme income and non-presumptive income. In a year when they have loss, they claim actual loss as per the books of account

        and carry it forward. In a year when they have higher profits, they use presumptive scheme to restrict the profit to 10% and set off the brought forward losses from earlier years. Conceptually, if assessee is maintaining books of account and claiming losses as per such accounts, he should also disclose profits as per accounts. There is no justification for setting off of losses computed as per books of account with income computed on presumptive basis.

      2. To avoid such misuse, it is proposed to insert a new sub-section to section 44BB and to section 44BBB of the Act to provide that:

        Notwithstanding anything contained in subsection (2) of section 32 and sub- section (1) of section 72, where an assessee declares profits and gains of business for any previous year in accordance with the provisions of presumptive taxation, no set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year (Applicable from 01-04-2024)

    3. Comments and Implications

      The intention of law when introducing the presumption schemes of taxation under Section 44BB and Section 44BBB (which provided for lower taxation) was to pay minimum taxes after considering all the expenses on deemed basis and hence not to provide for the benefit of carry-forward and set-off of losses. However, due to the manner in which the said Sections were framed, such a loophole came into being which was exploited by the tax payers. The proposed amendment is therefore aimed at discouraging such an abuse of law.

  6. Tax incentive to the International Financial Services Centre (IFSC)

    In order to further incentivize operations from IFSCs, the following changes are proposed by the Finance Bill 2023

    1. Proposed Amendments by Finance Bill 2023
      1. Section 47 (viiad) – Finance Act 2021 provided incentives in case of relocation of funds to IFSC if the relocation had taken place on or before 31 March 2023. It is proposed to extend the sunset clause in case of relocation from 31st March 2023 to 31st March 2025.
      2. Accordingly, It is proposed to amend clause

        (b) of the Explanation to clause (viiad) of section 47 of the Act to extend the date for transfer of assets of the original fund, or of its wholly owned special purpose vehicle, to a resultant fund in case of relocation to 31st March, 2025 from current limitation of 31st March, 2023.

      3. Section 10(4)(E) – Income of non-residents on transfer of Offshore Derivative Instruments (ODI) entered into with IFSC Banking unit is exempt under section 10 (4E) of the Act. Under the ODI contract, the IFSC Banking Unit (IBU) makes the investments in permissible Indian Securities. Income earned by the IBU on such investments is taxed as capital gains, interest, dividend under section 115AD of the Act. After the payment of tax, the IBU passes such income to the ODI holders. Presently, the exemption is provided only on the transfer of ODIs and not on the distribution of income to the non- resident ODI holders, hence this distributed income is taxed twice in India i.e. first when received by the IBU and second, when the same income is distributed to non-resident ODI holders.
      4. Therefore, in order to remove the double taxation, it is proposed to amend clause (4E) of section 10 of the Act, to also provide exemption to any income distributed on the offshore derivative instruments, entered into with an offshore banking unit of an International Financial Services Centre as referred to in sub-section (1A) of section 80LA, which fulfils such conditions as may be prescribed. It has also been provided that such exempted income shall include only

        that amount which has been charged to tax in the hands of the IFSC Banking Unit under section 115AD.

      5. The IFSCA (Fund Management) Regulations, 2022, went into effect on May 19, 2022. To include the reference to the said regulation in the Income Tax Act’s provisions, it is proposed to amend the definition of “Investment Fund” (as provided in Explanation 1, in clause (a) to Section 115UB) to include the reference to the IFSCA (Fund Management) Regulations, 2022
      6. The amendments referred to in paragraphs
          1. and 6.3. will take effect on April 1, 2023, and will apply to assessment years 2023-24 and onwards. The amendment in paragraph
          2. will take effect on April 1, 2024, and will apply to assessment years 2024-25 and onwards.
    2. Comments and Implications

Several tax breaks have been granted to units located in the International Financial Services Centre (IFSC) under the Income Tax Act in recent years in order to make it a global financial services hub. Over the years, the Government has made tremendous effort in making policies, regulatory changes and providing tax incentives that are conducive for setting up presence in IFSC. The Economic Survey 2022-2023 mentioned that GIFT IFSC is now emerging as a preferred jurisdiction for international financial services. Recognising the growing significance of IFSC, the Global Financial Centres Index, London Report (March 2022) put IFSC in GIFT City at the top, among 15 centres globally.

The amendments proposed in the Finance Bill 2023 are in continuation of the pursuit of the Government to make IFSC an attractive destination for setting up operations and attracting investments.