Section (S.) 145 of the Income-tax Act, 1961 (ITA) provides that taxable income of an assessee falling under the heads “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting which is regularly employed by the assessee. It further provides that the Central Government (CG) may notify, from time-to-time, Income Computation & Disclosure Standards (ICDS) to be followed by any class of taxpayers or in respect of any class of income.

Based on the recommendations of the ICDS Committee and public representations on the draft ICDS, the CG had notified 10 ICDS (‘ICDS, 2015’) vide notification dated 31st March, 2015 for compliance by all assessees following mercantile system of accounting for computing ‘business’ and ‘other sources’ income w.e.f. 1st April, 2015.

However, several issues were raised by stakeholders on ‘ICDS, 2015’ and thereafter CG referred the issues to the ICDS Committee for issuing proper clarifications/ guidance. In the interim, CG also deferred the effective date of ICDS applicability by one year (i.e. to FY 2016-17) pending issue of appropriate clarifications/ guidance by ICDS Committee as well as revision of the Tax Audit Report to capture disclosures required in terms of ICDS.

The ICDS Committee after considering the issues raised by stakeholders, suggested a two-step approach for smooth implementation of ICDS i.e.

• Changes in the ICDS, 2015; and

• Issue of FAQs for clarifying on rest of the pending issues.

Considering the ICDS, Committee recommendations, CG rescinded1 the ICDS 2015 and notified revised2 ICDS (‘revised ICDS’) to be applicable from FY 2016-17 and thereafter. Further, CG amended3 Form 3CD (tax audit report) for ICDS related disclosure requirements and for quantifying adjustment to profits or loss for complying with ICDS.

The following table provides a glimpse of changes brought in through revised ICDS as well provides details (in brief) of clarifications provided by CBDT through FAQs:

Caption Particulars
1. General
Revised ICDS • ICDS does not apply to individuals/ HUF not required to get their accounts audited under Section 44AB of ITA

• Under transitional provision of each ICDS, consequential changes are made to give effect to the change in effective date of ICDS applicability i.e. FY 2016-17

FAQs • ICDS are not meant for maintenance of books of account/ preparing financial statements however, accounting policies mentioned in ICDS-I (Accounting Policies) being fundamental in nature shall apply while computing ‘business’ and ‘other sources’ income (Q. 1)

• Provisions of ICDS are notified, after due deliberations and examination of judicial precedents, to bring certainty and therefore shall be applicable to such transactional issues, even if inconsistent with judicial precedents (Q. 2)

• In case of conflict between ICDS and Income Tax Rules, 1962 (‘Rules’), Rules shall prevail over ICDS (Q. 4)

• ICDS apply for computation of ‘business’ and ‘other sources’ income, irrespective of the accounting standards adopted by the companies i.e. either accounting standards or Ind-AS (Q. 5)

• ICDS provisions are applicable to the assessee’s computing income under the presumptive tax scheme [e.g. ICDS-III (Construction Contracts) or ICDS IV (Revenue recognition) shall apply for determining receipts/ turnover presumptive income of a firm under Section 44AD of ITA] (Q 3)

• Provisions of ICDS shall apply for computation of income liable to tax on gross basis like interest, royalty and fee for technical services for non-residents under S.115A of the ITA (Q.14)

• General provisions of ICDS not applicable to the assessee’s governed by sector specific provisions contained in ITA or ICDS (Q .7)

• ICDS not applicable for computing Minimum Alternative Tax (MAT) under
S. 115JB of the ITA since MAT is computed on ‘book profit’ i.e. Net profit as per P&L a/c prepared under Companies Act, 2013 subject to specified adjustments in ITA (Q. 6)

• ICDS applicable for computing Alternative Minimum Tax (AMT), applicable to non-corporate assessee, since AMT is computed on adjusted total income based on the normal provisions of the ITA, subject to specified adjustments (Q. 6)

• Net effect on the income due to application of ICDS to be disclosed in tax return. Further, the disclosures required as per ICDS shall be made in the tax audit report however there shall not be any separate disclosure requirements for assessees who are not liable tax audit (Q. 25)

2. ICDP-II (Accounting Policies)
Revised ICDS No Change
FAQs • Market to Market (MTM) loss or expected loss shall not be recognised unless permitted by any other ICDS however is silent on MTM gains or expected profits. FAQs provides that the same principle, on a mutatis mutandis basis, shall apply to MTM gains or expected profits (Q. 8)

• An accounting policy shall not be changed without ‘reasonable cause’. However the term ‘reasonable cause’ is undefined. FAQs state that ‘reasonable cause’ is an existing concept and has evolved well over a period of time, conferring desired flexibility to the taxpayer in deserving cases (Q. 9)

• ICDS-I shall govern those derivatives which are not covered within the scope of ICDS-VI/VIII. Therefore, MTM loss on such derivatives may not be tax deductible (Q. 10)

3. ICDS-II (Inventory valuation)
Revised ICDS • ICDS 2015 provided items which will form part of ‘cost of services’ in case of a ‘service provider’. The reference to ‘service provider’ is omitted from the cost of services however the ambiguity continues with regards to applicability of inventory valuation to service provider as the same is not included in scope exclusion of ICDS-II as provided in the scope exclusion of accounting standard dealing with Valuation of Inventories

• Standard costing method of inventory valuation permitted if standard cost approximates actual cost

• In respect of retail method of measuring inventory, cost is determined by reducing appropriate percentage of gross margin from the sales value. ICDS now requires that an average percentage for each retail department under retail method is to be mandatorily used

FAQs No FAQs related to ICDS-II
4. ICDS III – Construction Contract
Revised ICDS Transitional provisions now provide for complete grandfathering in respect of construction contracts which commenced on or before 31st March, 2016 but not completed by the said date and therefore contract revenue and contract costs from such construction contracts shall be recognised based on the method regularly followed by the assessees prior to 31st March, 2016
FAQs • Retention money needs to be recognised as revenue on billing if there is reasonable certainty of its ultimate collection, even if such receipt is contingent on satisfaction of certain performance criteria (Q. 11)

• As presently there are no ICDS notified for real estate developers, built operate transfer projects and leases and therefore these transactions shall be governed by the existing provisions of ITL and ICDS, as may be applicable (Q. 12)

5. ICDS IV – Revenue Recognition
Revised ICDS Revenue recognition criteria for service contracts (in addition to percentage completion method (POCM) as provided by ‘ICDS 2015’)

• Option provided to recognise service revenue on straight line basis, over the specific period, in a case where the services are provided by an indeterminate number of acts over a specific period of time

• Option provided to recognise service revenue on completion or when
substantially completed, in a case where duration of the service contract is not
more than 90 days

• Transitional provisions of ICDS-IV is linked to
transitional provisions of ICDS III and therefore service contract which
commenced on or before 31st March, 2016 but not completed by the said date shall
be recognised based on the method regularly followed by the assessee prior to
31st March, 2016

• Revenue recognition criteria for interest income (in addition to
recognition on time basis as provided by ‘ICDS 2015’)

• Interest on refund of any tax, duty or cess shall deemed to be the income
of the year in which such interest is received by the assessee


FAQs Interest accrues on time basis and royalty accrues on the contractual term and therefore needs to be recognised even when the criteria of reasonable certainty of ultimate collection is not met. Any subsequent non-recovery in either cases can be claimed as bad debts under S. 36(1)(vii) of the ITA. Further, specific provisions of ITA (e.g. S. 43D) shall prevail over the provisions of ICDS (Q. 13)
6. ICDS V – Tangible assets
Revised ICDS No significant change
FAQs Expenses incurred after trial run and experimental production but before commencing commercial production, shall need to be capitalised (Q. 15)
7. ICDS VI – Effects of changes in foreign exchange rates
Revised ICDS • Distinction between integral and non-integral foreign operation removed. Accordingly, it now requires that financial statements of a foreign operation should be translated as if the transactions of the foreign operation are that of the taxpayer himself, irrespective of whether foreign operations are integral or non-integral.

• Non-monetary item, being inventory, which is carried at net realisable value shall be converted by using the exchange rate that existed when such value was determined

FAQs Foreign currency translation reserve balance as on 1st April, 2016 (opening balance) pertaining to exchange differences on monetary items for non-integral operations shall be recognised in financial year 2016-17 to the extent not recognised as income in the past (Q.16)
8. ICDS VII – Government Grants
Revised ICDS No significant change
FAQs Transitional provisions require recognition of Government grant as per ICDS which meet the recognition criteria on or after 1sy April, 2016. Further, ICDS provides that recognition shall not be postponed beyond actual receipt and therefore Government grants actually received prior to 1st April, 2016 shall deemed to be recognised on its receipt and accordingly shall not be governed by ICDS but shall be governed by the existing provisions of the ITA.4 (Q. 17)
9. ICDS VIII – Securities
Revised ICDS • Definition of securities amended to include share of a company in which public are not substantially interested

• In addition to FIFO method, revised ICDS now also permits weighted average method for ascertainment of cost of securities

• Revised ICDS introduces new ‘Part B’ to deal with securities (which includes derivatives within its ambit) held by scheduled bank or public financial institutions and provides that the classification, recognition and measurement of securities shall be in accordance with the extant guidelines issued by Reserve Bank of India and any claim for deduction in excess of the said guidelines shall not be permissible. To this extent, provisions of ICDS-VI relating to forward exchange contract shall not apply

FAQs • Interest income on securities which was taxed on accrual basis however not actually received till the date of sale of such security (broken period interest), shall be allowable as deduction while computing income arising from sale of such security (Q.18)

• Illustration provided in the FAQ on valuation of securities based on the accounting standards (i.e. individual scrip wise) as well as based on the bucket approach as suggested in ICDS (i.e. category-wise valuation). The illustration highlights that valuation as per ICDS may be higher than valuation as per books on individual scrip-wise basis (Q.19)

10. ICDS IX – Borrowing cost
Revised ICDS • ICDS 2015 did not provide the criterion of substantial period of time5 for classifying any tangible or intangible asset (except for inventory) as qualifying asset requiring capitalisation for specific as well as general purpose borrowing

Amended ICDS provides that qualifying asset shall be such assets, for the general purpose borrowing, that necessarily require a period > 12 months for the acquisition, construction or production. However, no threshold is provided for borrowing for specific purpose

• Amendments made in normative formulae for computing general purpose borrowing cost

• Period clarified when the capitalisation will cease; and

• Certain amendments in the formulae to exclude specific borrowing cost as well as the assets related to specific purpose borrowing.

FAQs • Borrowing cost considered for capitalisation shall exclude borrowing cost which are specifically disallowed under the specific provisions of the ITA (Q. 20)

• Bill discounting charges and other similar charges are covered under the definition of borrowing cost (Q. 21)

• Allocation of general borrowing cost amongst different qualifying assets shall be done on asset-by-asset basis (Q. 22)

11. ICDS X – Provisions, Contingent Liabilities and Contingent Assets
Revised ICDS No significant change
FAQs • Illustration provided to explain the impact of transitional provision which were introduced with the intent that there should neither be double taxation nor should there be escape of any income due to application of ICDS from a particular date (refer note for the illustration) (Q. 23)

• Provisioning for employee benefits which are otherwise covered by accounting standard shall continue to be governed by specific provisions of ITA and are not dealt with by ICDS (Q.24)

Reader are also requested to note that while ICDS has been postponed to FY 2016-17 onwards however certain amendments (refer Section 2(24)(xviii) relating to taxability of Government grant and proviso to Section 36(1)(iiii) which deals with disallowance of interest cost for assets not put to use) as carried out by Finance Act, 2015 in the ITA are also in the statute book and are already in force from 1st April, 2015.
Note: Impact of transitional provisions of ICDS-X as explained by way of illustration in the FAQ (Q. 23)

No. Particulars Amounts in million
A Provision required as per ICDS as on 31st March, 2017 for items brought forward from 31st March, 2016 30
B Provisions as per ICDS for FY 2016-17 50
C Total gross provision (A+B) 80
D Less: Provision already recognised in computation of taxable income in FY 2015-16 or earlier years 20
E Net provision as per ICDS in FY 2016-17 to be recognised as per transition provision 60

We are responsible for what we are, and whatever we wish ourselves to be, we have the power to make ourselves.

– Swami Vivekananda

1 Notification No. 86 of 2016 dated 29th September, 2016

2 Notification No. 87 of 2016 dated 29th September, 2016

3 Notification No. 88 of 2016 dated 29tj September, 2016

4 This is irrespective of the fact that the conditions attached to such grant are satisfied on or after 1st April, 2016

5 Generally, a period of 12 months is considered as a substantial period of time

6 Accounting Standard 15 on Employee Benefits


1. A taxing statute is an ongoing Act. Its construction requires continuous updation to accommodate changes in business dynamics emerging from the borderless world. The statute should be forward looking. In this closely networked world, tax laws should keep pace with business mechanics; capital movement and digital economy. Technological advancement has resulted in the steep rise of seamless international transactions. Taxation of these transactions has emerged as a global concern. Indian law has thus geared up to prescribe new tax mechanism by adopting some of the international tax practices. This write-up deals with two such proposed insertions by Finance Bill, 2017 [discussed in Parts A and B respectively].

Part A – Interest Deduction

2. Concept of Thin Capitalisation

Thin Capitalisation connotes a capital structure consisting of a larger proportion of debt as compared to equity. A debt would entail a finance cost or interest. Such interest payouts when claimed as a deduction, results in shrinking of taxable profits. Excessive debt funding entailing corresponding interest costs could strip off the earning which leads to loss of revenue for the exchequer. Such high leveraged capital structures which were sometimes a commercial need, became a modus operandi for tax avoidance for many. At a group level, the level of debt was multiplied through intra-group financing. International survey of the affiliates with high interest-to-income ratios in higher tax rate countries, the interest-to-income ratio was 29% in 2011 which exceeded the average interest-to-income ratio of 10% [Source: Measuring and Monitoring BEPS – Action Plan 11].

3. Prevalent approach of Indian Legislature

In India, the Government adopted a ‘pro-investment’ policy. There was no legislation in the income-tax statute to counter Thin Capitalisation. On the contrary interest payments made by Indian companies to a non-resident was subject to a discounted tax withholding of 5% [under section 194LC] as compared to higher rates prescribed under section 195 and a corresponding tax rate of 20% under section 115A. The dividend payouts were subject to 15% (exclusive of surcharge and cess) tax on distribution with such dividends being wholly exempt in the hands of the shareholders. Further, a non-resident could claim credit on the DDT paid in India by resorting to underlying tax credit method [although litigative]. Judicially, the Indian Courts and Tribunals did not have the teeth to deter Thin Capitalisation practice. The Bombay High Court’s verdict in DIT v. Besix Kier Dabhol SA (2012) 26 169 (Bom.)
was an evidence of judiciary’s inability to stop Thin Capitalisation practice. In this case, the assessee argued that in the absence of any specific Thin Capitalisation rules in India, the Revenue cannot disallow the interest payment on debt capital after having observed the abnormal Thin Capitalisation ratio of 248:1. The Bombay High Court adjudged that no disallowance could be made in the absence of Thin Capitalisation rules.

4. International Developments

Internationally, many countries sought to discourage a skewed capital resulting in excessive interest outflow and consequent profit erosion. The Organisation for Economic Co-operation and Development (OECD) released final reports on the Base Erosion and Profit Shifting (BEPS) Action Plan. This OECD initiative is endorsed by the G20 countries to usher in standardisation in global tax rules. As a member of the G20 and an active participant of the BEPS project, Indian legislature has been keen on effective implementation of BEPS Action Plan. It is likely that various recommendations the BEPS Action Plans may be implemented through amendments to the Indian domestic tax law or India tax treaties. A start was already made by introduction of equalisation levy and Country-by-Country Reporting (CbCR) in the transfer pricing spectrum in the last budget. Walking in the same direction, the Indian legislature now seeks to introduce provisions to counter Thin capitalisation.

5. Budget 2017

Finance Bill, 2017 proposes to introduce section 94B into the statute dealing with limitation on interest deduction in certain cases. The proposed section 94B reads as under:

“94B. (1) Notwithstanding anything contained in this Act, where an Indian company, or a permanent establishment of a foreign company in India, being the borrower, pays interest or similar consideration exceeding one crore rupees which is deductible in computing income chargeable under the head “Profits and gains of business or profession” in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, the interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest, as specified in sub-section (2):

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

(2) For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less.

(3) Nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance.

(4) Where for any assessment year, the interest expenditure is not wholly deducted against income under the head “Profits and gains of business or profession”, so much of the interest expenditure as has not been so deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for that assessment year to the extent of maximum allowable
interest expenditure in accordance with sub-section (2):

Provided that no interest expenditure shall be carried forward under this sub-section for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed.

(5) For the purposes of this section, the expressions––

(i) “Associated enterprise” shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;

(ii) “Debt” means any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head “Profits and gains of business or profession”;

(iii) “Permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.”

6. One can discern the objective of this provision from the memorandum to Finance Bill, 2017 which explains the legislative intent in the following manner:

Limitation of interest deduction in certain cases

A company is typically financed or capitalised through a mixture of debt and equity. The way a company is capitalised often has a significant impact on the amount of profit it reports for tax purposes as the tax legislations of countries typically allow a deduction for interest paid or payable in arriving at the profit for tax purposes while the dividend paid on equity contribution is not deductible. Therefore, the higher the level of debt in a company, and thus the amount of interest it pays, the lower will be its taxable profit. For this reason, debt is often a more tax efficient method of finance than equity. Multinational groups are often able to structure their financing arrangements to maximise these benefits. For this reason, country’s tax administrations often introduce rules that place a limit on the amount of interest that can be deducted in computing a company’s profit for tax purposes. Such rules are designed to counter cross-border shifting of profit through excessive interest payments, and thus aim to protect a country’s tax base.

Under the initiative of the G-20 countries, the Organization for Economic Co-operation and Development (OECD) in its Base Erosion and Profit Shifting (BEPS) project had taken up the issue of base erosion and profit shifting by way of excess interest deductions by the MNEs in Action Plan 4. The OECD has recommended several measures in its final report to address this issue.

In view of the above, it is proposed to insert a new section 94B, in line with the recommendations of OECD BEPS Action Plan 4, to provide that interest expenses claimed by an entity to its associated enterprises shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise, whichever is less.


In order to target only large interest payments, it is proposed to provide for a threshold of interest expenditure of one crore rupees exceeding which the provision would be applicable.

It is further proposed to exclude Banks and Insurance business from the ambit of the said provisions keeping in view of special nature of these businesses.”

7. The introduction of section 94B finds its roots in BEPS Action Plan 4

The objective of Action Plan 4 is to capture large interest payments to associated enterprises. It seeks to counter cross-border shifting of profit through excessive interest payments and to protect a country’s tax base. It is thus an anti-abuse provision. This is possibly the reason why the section is proposed to be placed in Chapter X of the Act which deals with Special Provisions Relating to Avoidance of Tax.

Meaning & scope of interest and similar consideration

8. Sub-section (1) of section 94B deals with payment of interest or similar consideration which is ‘deductible’ in computing income chargeable under the head ‘Profits and gains from business or profession’. The section does not define ‘interest’. In the absence of section specific definition one could rely on the definition of the term ‘interest’ in section 2(28A) which reads as under:

“(28A) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised”.

9. The definition can be bisected as under –

a. Interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation); or

b. Any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.

10. Thus, the payment could be interest, service fees or any other charges. The payment variants do not matter. The emphasis is on the purpose of payment. It must be a liability arising ‘in respect of’ any debt/ borrowing to qualify as interest. The ambit of section 2(28A) is thus wide. The legislature now proposes to envelope interest and ‘similar consideration’ within its ambit. One may have to thus await the interpretation of this loosely worded phrase. One wonders whether any payment could be visualised which is outside the ambit of interest but is in relation to borrowings?

11. There is one more attribute attached to such interest payment. They should be deductible against income under the head ‘Profits and gains from business or profession’. This would mean that any interest payment which is otherwise not deductible under Chapter IV-D of the Act would not be covered herein. For instance, section 36(1)(iii) stipulates that interest payment pertaining to debt incurred for purchase of assets ought to be capitalised till the date the asset is put to use. A disallowance under section 36(1)(iii) [through the mandate of capitalsation] would automatically exclude such interest from section 94B.

Scope of ‘debt’

12. Sub-section (1) deals with issue of debt by the associated enterprise and corresponding borrowal by the Indian company or permanent establishment of foreign company in India. The two complementary and corresponding actions must co-exist to trigger section 94B. The term ‘debt’ has been defined by sub-section (5) to mean any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head “Profits and gains of business or profession”. The opening portion of the definition appears to focus on various forms of availing debt – i.e., loan, financial instrument (like debentures), finance lease or derivative. However, the latter portion makes the ambit of ‘debt’ extremely wide to cover any arrangement giving rise to interest or discount or finance charges which are deductible against business income. Would this mean that transaction such as lease rentals are also covered within the section? It seeks to cover every arrangement that ‘gives rise’ to finance charges. One may have to read ‘gives rise to’ as ‘proximate nexus’ to respect the spirit of the section.

Quantification of disallowance

13. The closing portion of sub-section (1) deals with computation of interest disallowance. It states that interest shall not qualify as a deduction in computation of business income to the extent it arises from excess interest as specified in sub-section (2). The section requires identification of interest which arises from excess interest. The language is inelegant. It is difficult to comprehend how an interest can arise from interest? The possible intent was to carve out interest to the extent of being excessive as explained by sub-section (2). However, a literal reading of the section appears to have some fallacies.

14. Sub-section (2) defines excess interest in an exhaustive manner to mean an amount of total interest paid or payable in excess of 30% of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less. In other words one has to compare 30% of EBIDTA with interest paid or payable for the previous year. The lower of the two has to be derived. Any interest paid or payable in excess of such derived number is excess interest. The section uses the term ‘earnings’ which is more a financial terminology. An appropriate definition of this term would negate any ambiguities or multiplicity in interpretations. For instance, should extraordinary items in the financial statement be considered? What about income from discontinuing operations or exceptional items? Clarity in this regard would be a welcome clarification.

15. Sub-section (2) interestingly only captures ‘interest’. Payment which may fall within the realm of ‘similar consideration’ [as provided in sub-section (1)] appears to be missing. This appears to be an omission which could possibly be corrected in the Finance Act. It is important to note that 30% threshold is applied only to the profits of the relevant year. Accumulated profits of the earlier years are not to be factored for such computation. However, the section
remains silent on the computation in the event of loss.

Expensive proviso to sub-section (1)

16. Proviso to sub-section (1) creates a deeming fiction. It deals with guarantee arrangements by associated enterprises. It visualises a situation where debt is issued by a third party or independent lender and the associated enterprise provides guarantee to such debt. In such a situation the law deems that the said loan (although issued by lender in reality) is deemed to have been issued by the associated enterprise. The first question is whether sub-section (1) covers deemed issue of loans by associated enterprises. Should the use of ‘issued’ in sub-section (1) be interpreted to include ‘deemed to be issued’? It is also interesting to ponder as to why has a substantive deeming provision of this nature couched in a proviso? However, having regard to the scheme of the section, it appears that deemed issue of debt is also covered within sub-section (1).

17. The proviso requires certain specific action to be undertaken by the associated enterprise. It states that an associated enterprise should provide guarantee to such lender or deposits a corresponding and matching amount of funds with the lender. The tenor of proviso appears to suggest that the guarantee provided to or deposit kept with the lender should be an amount equal to the debt availed. Can this mean that a debt borrowed from a lender which is partially (or substantially) guaranteed by associated enterprise is outside the ambit of section 94B? Although this does not seem to be the legislative intent, the language appears to fall short of the objective sought to be acheived.

18. The deeming fiction only appears to have focused only on the debt aspect and not on interest. To elucidate, the proviso states that a debt guaranteed is deemed to be debt issued. Whereas a corresponding deeming provision to state that interest corresponding to such deemed debt is also an interest deemed to be paid or payable to associated enterprise is missing. It is a trite to state that the deeming provision should be given its full effect. In the absence of a deeming provision in the context of interest, this canon of taxation fails. One may recollect the verdict of Bombay High Court in
CIT v. ACE Builders (P) Ltd (2006) 281 ITR 210 (Bombay) wherein it was held that the legal fiction created in section 50 is to deem capital gains as short-term capital gains and not to deem an asset as short-term capital asset. It cannot therefore be said that section 50 converts long-term capital asset into short-term capital asset. The same sentiments are applicable in the present case as well.

Carry forward of excess interest

19. Sub-section (4) deals with the carry forward of interest which is not wholly deductible (against business income) in a particular year. The sub-section provides an opportunity to carry forward such non-deductible interest against business income of subsequent years. Proviso to sub-section (4) ushers in 8 year cap for which such carry forward is permitted. On a year-on-year basis, one has to adhere to the restriction that the total interest in one particular year cannot be claimed beyond the extent outlined in sub-section (2). In other words, interest brought forward from earlier years cannot exceed the limits stipulated in sub-section (2) [i.e., computation of excess interest]. Sub-section (4) facilitates seamless movement of excess interest to subsequent years to facilitate a claim in those years subject to the ‘extent’ or ‘limits’ prescribed in sub-section (2). Similar to the flaw in sub-section (2), it appears that there is omission of carry forward of excess ‘similar consideration’ [as referred to in sub-section (1)].

20. A collective reading of sub-sections (1), (2) and (4) indicates that section 94B deals with restriction on payment of interest to associated enterprise. Such interest paid or payable can be claimed to a maximum extent of 30% of EBIDTA or actual payment whichever is less [sub-section (2)]. In a year, there could be two portions of interest that are examined for claim of deduction. The first one being the interest paid or payable for the previous year and the latter is the carried forward excess interest [in accordance with sub-section (4)]. The claim of current year interest and carried forward interest should independently pass the test of sub-section (2). The limits outlined in sub-section (2) should therefore be separately applied to both the current year interest and carried forward interest. It is important to note that there is no explicit mention in the section that current year interest along with carried forward interest together should not exceed the limits of sub-section (2). However, this could be a matter of litigation unless a clarification is provided in the section or by appropriate notification by the Central Board of Direct Taxes.

Relaxation for a few

21. Sub-section (1) absolves payments of interest or similar consideration not exceeding one crore rupees from the spectrum of section 94B. However, the relaxation lies in limbo since it is not clarified as to when should this threshold be examined? To elucidate, should one crore be reckoned per borrowing or per year or per lender? This assumes utmost importance because payments made to a particular associated enterprise (lender) may be below one crore in one year but may exceed in the subsequent years or when viewed cumulatively, the threshold may be breached. In such a circumstance, would the Revenue adopt a ‘look back’ approach to disallow on retrospective basis? These questions are currently glaring to the taxpayer.

22. Apart from the above mentioned threshold, there is relaxation given to companies engaged in business of banking and insurance. The reason for such relaxation has been special nature of business. It remains to be seen whether only banks and insurance companies per se are excluded or the other players operating in these segments can also be absolved [for instance, leasing companies, NBFC(s)]?


23. Transfer pricing adjustments have echoed in every boardroom of a company whose transactions cross the borders of this country. The focus has always been on the taxpayer in India who has transacted with its associated enterprise. The target is to achieve an arm’s length price. What is the corresponding effect in the associated enterprise’s books; what is the treatment therein of the impugned transaction – these questions were not questionable (albeit, the tax assessments are seldom settled without these details).

24. The Organisation for Economic Co-operation and Development (“OECD”) has observed in its commentary on Article 9 of the model treaty convention that sovereign countries can opt for secondary adjustments, if permissible under their domestic tax laws. Internationally, the practice of secondary adjustment has been accepted by various nations. Whilst the approaches to secondary adjustments by individual countries vary, they have now emerged as an internationally recognised method in transfer pricing regime. In order to align the transfer pricing provisions in line with OECD transfer pricing guidelines and international best practices, new section 92CE is proposed.

25. Finance Bill, 2017 proposes a new section 92CE into the statute. The law proposes to mandate a ‘secondary adjustment’ in addition to the primary adjustment (which was hitherto understood as the transfer pricing adjustment). The analysis would now go one step deeper. The provision is more invasive and would require an ongoing strategic approach at the group-level.

26. Section 92CE reads as under:

’92CE. (1) Where a primary adjustment to transfer price –

(i) Has been made suo motu by the assessee in his return of income;

(ii) Made by the Assessing Officer has been accepted by the assessee;

(iii) Is determined by an advance pricing agreement entered into by the assessee under section 92CC;

(iv) Is made as per the safe harbour rules framed under section 92CB; or

(v) Is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or section 90A for avoidance of double taxation, the assessee shall make a secondary adjustment:

Provided that nothing contained in this section shall apply, if,–

(i) The amount of primary adjustment made in any previous year does not exceed one crore rupees; and

(ii) The primary adjustment is made in respect of an assessment year commencing on or before the 1st day of April, 2016.

(2) Where, as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed in such manner as may be prescribed.

(3) For the purposes of this section,–

(i) “Associated enterprise” shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;

(ii) “Arm’s length price” shall have the meaning assigned to it in clause (ii) of section 92F;

(iii) “Excess money” means the difference between the arm’s length price determined in primary adjustment and the price at which the international transaction has actually been undertaken;

(iv) “Primary adjustment” to a transfer price means the determination of transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee;

(v) “Secondary adjustment” means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.

27.Precursor to secondary adjustment: Sub-section (1) outlines that a transfer pricing adjustment or primary adjustment is a precursor for a secondary adjustment. The term ‘primary adjustment’ has been defined in sub-section (3) to mean determination of transfer price resulting in an increase in the total income or reduction in the loss of the assessee. The section thus remains silent on a situation wherein there is no ‘increase’ in total income despite certain transfer pricing adjustment.

28. Sub-section (1) deals with five situations where the primary adjustments could happen – namely, suo motu adjustment by assessee in return of income; adjustment by assessing officer (AO) which is accepted by assessee; pricing under advance pricing arrangement; pricing under safe harbour rules; and resolution under Mutual Agreement Procedure.

29. If there is a primary adjustment on account of any of the aforementioned events, a secondary adjustment has to be made by the assessee. However, such secondary adjustment is not required if the quantum of primary adjustment [not the quantum of international transaction(s)] is less than rupees one crore in the previous year or where the primary adjustment is made before Assessment Year 2016-17. The two conditions are independent and have to be read disjunctively although the Finance Bill has used ‘and’ in between the two conditions. The use of the word ‘and’ appears to be an error and which one should expect the same to be corrected in the Finance Act.

30. Out of the five forms of primary adjustments referred to above, the second variant of primary adjustment deals with an adjustment done by the AO and which is accepted by the assessee. There could be multiple inferences from this portion of the provision. Some of the possible inferences are:

(a) It refers to only an adjustment made by AO and accepted by assessee without dispute. In other words, the said variant would fail immediately after the assessee makes an appeal before the Commissioner of Income-tax or prefers an objection before the Dispute Resolution Panel.

(b) It refers to adjustment made by AO and this fact remains unchanged even if the adjustment is disputed before the higher forum. The appellate authorities or tribunals or courts can only adjudge whether the adjustment made by AO is appropriate or otherwise. Therefore, the adjustment always remains to be the one made by AO.

(c) It refers to the adjustment made by AO which is affirmed or rejected by the higher appellate forum. However, an adjustment made over and above the AO’s adjustment [in terms of quantum or adjustment] would not be covered within the primary adjustment.

(d) It refers to adjustment made by AO which may be affirmed, rejected or enhanced. However, the order giving effect to the verdict is made by the AO. Therefore, an adjustment always continues to be one made by AO. If this proposition were to be accepted, the assessee should contest every adjustment till Supreme Court level; for acceptance at any level would trigger the secondary adjustment.

31. It may be premature to state with conviction as to which of the above would be correct. However, this appears to be a breeding ground for litigation.

32. The term ‘secondary adjustment’ is defined in clause (v) of sub-section (3) to mean an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee. On paraphrasing, the following facets of secondary adjustment emerge:

(a) It is an adjustment in the books of account;

(b) It should be adjusted in the books of the assessee as also its associated enterprise;

(c) The objective of the adjustment is to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment;

(d) It should result in removing the imbalance between cash account and actual profit of the assessee.

Condition (a) & (b)

33. The secondary adjustment is required to be made in the books of account. It is a one-off instance wherein the legislature is mandating an adjustment to be reflected in the books of account. Income-tax is a charge on total income. The gamut of taxation cannot travel beyond total income computation. Income-tax laws cannot trespass into accounting domain. Books of account can only form a base to commence the tax computation. However, it is interesting to ponder whether an income-tax adjustment should inevitably find a place in books of account? While it has always been contended that accounting cannot dictate the taxing statute, can there be a role reversal? A fair conclusion would be to say that the two complement each other.

34. Even assuming for a moment that Income-tax laws would also govern the books of account, it is unimaginable to perceive that Indian income-tax laws would be able to direct a non-resident to make an adjustment in its books of account. This would go way beyond the concept of extra-territoriality. Further, a secondary adjustment pre-supposes an existence of associated enterprise at the time of international transaction (stage I); on primary adjustment (stage II); and on secondary adjustment (stage III). However, in this dynamic business world wherein mergers, hive-offs and group restructuring are the buzz words, the associated enterprise may not exist in all the three points in time. In such a situation, the secondary adjustment cannot be carried out.

Condition (c) & (d)

35. The secondary adjustment should reflect the actual allocation of profits between assessee and associated enterprises which is consistent with the transfer price determined as primary adjustment. It is certain that the assessee and Revenue would be at loggerhead on what constitutes actual allocation of profits. There would certainly be certain incomes and outflows which are non-allocable – can the Revenue force upon an allocation which it perceives to be actual? There could be various yardsticks for allocation – say, based on turnover, time, area, manpower. To insist on one would be re-writing the commercial arrangements between the parties. This would mean that the Revenue could now decide the content and quantum of the assessee’s books. It is believed that the secondary adjustment would negate the imbalance between cash account and actual profits of the assessee.

36. It is critical to understand that any adjustment to books of account which gets captured in financial statements would be subject to Minimum Alternate Tax (“MAT”).

Interest on deemed advance

37. Sub-section (2) deals with deemed advance. On primary adjustment, there may be an increase in the total income or reduction in the loss for the assessee. There would therefore be a difference between the actual pricing by the assessee and the pricing in primary adjustment. The differential is coined as ‘excess money’ by this section. Sub-section (2) requires repatriation of this excess money into India within prescribed timeline. In the event of failure to repatriate, such excess money is deemed to be an advance made by the assessee to such associated enterprise. Consequently, interest on such advance, shall be computed in such manner as may be prescribed.

38. The timelines for repatriation and interest computation are yet to be prescribed. It is interesting to observe as to how would the repatriation timelines be fixed for entities who do not have any compulsion to repatriate funds into India. To explain, a unit operating in a Special Economic Zone is not bound to repatriate funds into India within a fixed timeline [unlike section 10A(3) which prescribed a six month timeline]. Can section 92CE now compel such entities to repatriate excess money into India? One may also note that if the MAP proceedings prescribe a different time period, such time frame may prevail over section 92CE having regard to section 90(2). Further, the excess money is deemed to be an advance on breach of the prescribed repatriation timeline. This being the case, an interest on such advance would be computed from the date of it becoming an advance [i.e., the date of contravention when prescribed timeline is breached] or is it the date of actual international transaction? These are some of the questions to which answers are awaited in the prescribed rules/notifications.

39. Extending the interest computation aspect further, should a transfer pricing analysis be carried on such interest payments? While in terms of methods, one can fix into the sixth (or prescribed method), it remains to be seen whether interest computed in the manner prescribed would not be questioned by the Revenue authorities.

40. The deeming fiction of converting the excess money into advance could create ambiguity on whether such monies would be treated as loan for other provisions of the Act? For instance, section 2(22)(e) provides that if a closely held company makes advance to the shareholder beneficially holding more than 10% stake, such loan would be deemed as ‘dividend’ and accordingly taxable in the hands of the shareholder (and also withholding tax obligation instead of Dividend Distribution Tax). However, the appropriate view would be not to extend the deeming fiction of one provision into another.

41. As mentioned earlier, secondary adjustment can only be initiated when there is a primary adjustment. The two adjustments are inextricably linked. Secondary adjustment is actually an extension of primary adjustment. Thus, similar to primary adjustment, any variation under secondary adjustment can be made only to international transaction as defined in section 92B. The question is whether such deemed advances is a international transaction? Although one could argue that Explanation to section 92B houses ‘capital financing’, the question lingers whether a deemed advance of this nature is also covered therein? The secondary adjustment may not satisfy the pre-requisites of international transaction [viz., of income, profit, loss or assets]. Further, there is no amendment to section 2(24) [definition of income] to accommodate such adjustments as income chargeable to tax. However, this aspect has been debated for many years now in the context of primary adjustment as well. So the legacy issue of whether a transfer pricing adjustment constitutes income continues to remain.


42. It is imperative to gear up to the business changes across the globe. However, the philosophy of ‘ease of doing business’ cannot be given a go-by. Foreign investments are given primacy like never before. While investment should not be attracted by giving doles, they cannot be burdened by compliances and ambiguities in law. Introduction of Thin Capitalisation was only a question of time. However, ushering in of concepts should be supported by apt drafting of the section. One wonders whether an ideal debt-equity ratio should have been prescribed by section 94B? Secondary adjustment could be an international practice, but one wonders whether the proposed deeming in this section is taking us away from real income theory? Is it time for India to implement such measures when the transfer pricing litigation has substantially contributed to the heap of tax cases.


We are ever free if we would only believe it, only have faith enough.

– Swami Vivekananda

The terms ‘may be’ and ‘shall be’ have always been at loggerheads in tax litigation. These have also been favourite topics to fight for by the legal luminaries. One can find a number of judgments from the Apex Court, various High Courts and fallout of these judgments in the form of a number of decisions of various Benches of the Tribunal. What happens when the interpretations of these terms are sought in the context of interpreting the Double Taxation Avoidance Agreements entered into between India and other countries? Invariably in all the tax treaties entered into by India, one can see that there are a few articles which talk about an income which ‘shall be’ taxed in a particular contracting State. However there are a few Articles whereby certain incomes ‘may be’ taxed in a particular contracting State. Present write-up is an attempt to dig out the reasoning for use of such variance in terminology and the practical impact on the taxability of income of the same.

Under Article 245(1) of the Constitution, Parliament is empowered to make laws for the whole or any part of the territory of India and the Legislature of a State is empowered to make laws for the whole or any part of the State, subject to the provisions of the Constitution. These legislative powers are distributed between Parliament and the State Legislatures, in terms of Lists I, II and III of the 7th Schedule. Article 51(c), which is part of the Directive Principles of State Policy, obliges the State to endeavour to foster respect for International Law and Treaty obligations. Article 253 is an enabling provision that empowers Parliament to make any law for the whole or any part of the territory of the country for implementing any treaty, agreement or convention with any other country.

India has comprehensive Double Taxation Avoidance Agreements with various countries. The Double Taxation Avoidance Agreements that India has entered into with various countries stipulate agreed rate of tax and jurisdiction on specified types of income arising in a country to tax resident of another country. Section 90 of the Income-tax Act is specifically intended to enable and empower the Central Government to issue a Notification for the implementation of a Double Taxation Avoidance Agreement and hence, as a consequence, the provisions of such an agreement would operate even if inconsistent with the provisions of the Income-tax Act. Section 90 of the Act gives relief to the taxpayers who have paid the tax to a country with which India has signed the Double Taxation Avoidance Agreement. It also confers the power on the Central Government to enter into any agreement with the Government of another country for granting relief to an assessee who has paid income tax under the Act and also income tax in that other country and also in respect of income tax which is chargeable under the Act and under the corresponding law of that country. This has been done with a view to promote mutual economic relations, trade and investment and for avoidance of double taxation of income under the Income-tax Act as well as the Act of the other contracting State. Section 90(2) lays down that where the Central Government has entered into an agreement with the Government of any other country for granting relief of tax or for avoidance of double taxation, then the provisions of Income- tax Act shall apply to the assessee only to the extent they are more beneficial to it. In case the provisions of the Act are more onerous and burdensome, then the provisions of the same would not apply and the assessee would be governed squarely by the provisions of the double taxation avoidance agreement.

On this aspect, Chennai Bench of the ITAT in the case of Sivagami Holdings P. Ltd. v. ACIT – [2011] 10 ITR (Trib.) 48 (Chennai) has held that the DTAA is entered into between the countries only for the limited purpose of avoiding the hardship of double taxation and if the income is not taxed in the contracting State, the same should be taxed in India is an oversimplified statement on the whole regime of Double Taxation Avoidance Agreement. It is true that the prime motivating factor in developing the concept of Double Taxation Avoidance Agreement is the genuine hardship of the international assessee that the same amount of income became the subject of taxation both in the home State and in the contracting State. It is to alleviate this burden of double taxation that the instrument of Double Taxation Avoidance Agreement has evolved through the process of law.

It is to be understood that treaties entered into between two nations are just agreements entered into between two parties and they get the colour of legally bound nature from the relevant provisions in any nation’s local law. The rules of interpretation of statutes cannot be strictly applied while interpreting these treaties. The treaties are to be read in consonance with the intention of the parties, i.e., the contracting States, entering into the same.

As has already been stated hereinabove that there are instances under the DTAAs where the terminology used is ‘shall be taxed’. In such cases there cannot be any doubt as to the position that the income has to be taxed in that state only. But what happens in case the term used is ‘may be taxed’? The questions that arise are whether this does not give absolute power to that State to tax such incomes or whether it intends to give equal power to both the States to tax the same income or it snatches away the power to tax from one State to another?

This issue, for the first time, came up for consideration before the Karnataka High Court in
CIT v. R. M. Muthaiah (1993) 202 ITR 508 (Kar.), which was in relation to Indo-Malaysian DTAA. Here also, the High Court had an occasion to deal with the phrase “may be taxed” as given in Article-VI(1) which, at the relevant time, read as “income from immovable property may be taxed in the Contracting State in which such property is situated”. The High Court held that the result of this clause is that where the income from immovable property in Malaysia has been expressed as “may be taxed” by the Government of Malaysia, then it operates as a bar on the power of the Indian Government to tax such income. This bar would operate in sections 4 & 5 of the Income-tax Act, 1961 also. The High Court has also drawn its inference from the language of sub-sections (a) and (b) of section 90 wherein, the former reference is for granting of relief in respect of the income on which income tax has been paid both under the domestic law and under the laws of other countries and later clause refers to avoidance of double taxation which means once tax has been paid to the other contracting State then no tax is to be paid here in India. This distinction, it was held that, has to be taken into consideration while deciding this issue because once the assessee has paid tax in other Contracting State in terms of the agreement, then by necessary implications, Indian Government cannot levy tax on the same income.

Since the department did not go in appeal against this decision, before the Supreme Court, it has attained finality and this fact has also been noted down by the Apex Court in the landmark judgment in the case of
Azadi Bachao Andolan reported in 263 ITR 707 (SC).

The issue, later, arose in the year 1994 regarding taxation of capital gains and business incomes, arising from sources in Malaysia, to a Hindu Undivided Family from south of India, which was resident in India, before Madras High Court in the case of
CIT v. VR. S.R.M Firm 208 ITR 4 (Mad.). During the year certain business income as well as capital gains on sale of an immovable property situated in Malaysia arose to the assessee firm. The Assessing Officer proceeded only on the basis of the provisions of Indian domestic law that since assessee was resident of India and hence global income is to be taxed, taxed both these incomes in assessee’s hands. On assessee’s reliance on the DTAA between India and Malaysia whereby these incomes were provided to be ‘may be taxed’ in Malaysia, the A.O. was of the view that it is only ‘may be’ taxed, therefore the resident State has the absolute right to tax.

On appeal, the High Court pointed out that Article XXII(1) of the agreement with Malaysia declares that the laws in force in either of the contracting States will continue to govern the taxation of income in the respective States except where provisions to the contrary are made in the agreement. Therefore, where there exists a provision to the contrary in the agreement, there is no scope for applying the domestic law. The Court, further, observed that sections 22 to 27 of the Income-tax Act broadly deal with the income from house property. But in view of paragraph 1 of Article VI of the agreement between India and Malaysia, income from immovable property can be taxed only in and by the contracting State where the property is situated. There is no scope for the other contracting State to deal with such income. Further, on the interpretation of the term ‘may be’ on which heavy reliance was placed by the revenue, Hon’ble High Court observed as under:

“The contention on behalf of the Revenue that wherever the enabling words such as “may be taxed” are used there is no prohibition or embargo upon the authorities exercising powers under the Income-tax Act, 1961, from assessing the category or class of income concerned cannot be countenanced as of substance or merit. As rightly pointed out on behalf of the assessees, when referring to an obvious position such enabling form of language has been liberally used and the same cannot be taken advantage of by the Revenue to claim for it a right to bring to assessment the income covered by such clauses in the agreement, and that the mandatory form of language has been used only where there is room or scope for doubts or more than one view possible, by identifying and fixing the position and placing it beyond doubt.”

Revenue carried the matter in appeal before Apex Court in the case reported as CIT v. P.V.A.L. Kulandagan Chettier (2004) 267 ITR 654 (SC). The Apex Court observed that when it is intended under the DTAA that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5 of the Act, if he is deemed to be a resident of a contracting State where his personal and economic relations are closer, then his residence in India would become irrelevant. In terms of the DTAA, wherever any expression is not defined in the agreement, the expression defined in the Income-tax Act would be attracted. Since income includes capital gains under the domestic law, capital gains derived from immovable property situated in Malaysia would be income under the DTAA and, Article VI would be attracted. With regard to the argument as to the interpretation of phrase ‘may be’ raised by department, the Apex Court held as under:

“We need not enter into an exercise in semantics as to whether the expression “may be” will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the treaty in question as a whole, when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant, the treaty will have to be interpreted as such and prevails over sections 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.”

In this way, though, the Apex Court refrained itself from giving a precise meaning to the term ‘may be’, the order of the High Court was confirmed on a different line.

In this background, interpretation of the term ‘may be’ can be inferred on the following lines:


The bilateral double taxation agreements generally lay down two situations, in the first situation an assessee may be required to pay tax in the country of residence and is exempted in the country in which the income arises. In the other situation the country where the income arises deducts tax at source and the taxpayer receives compensation in the form of a foreign tax credit in the country of residence which would entitle the taxpayer to a credit in the country of residence to the extent the income that has been taxed in the country where the income has so arisen. To be able to avail the benefit of foreign tax credit the assessee has to declare himself (in the country where income has arisen) to be a non-resident.

It is to be kept in mind that the treaties are entered into between the two nations primarily to avoid double taxation of a single instance of income by both the states simultaneously. There are two methods of elimination of double taxation. Exemption or Avoidance Method provides to tax one income in only one of the States. Wherever the term used in the DTAA is ‘shall be taxed’ or ‘shall not be taxed’ or ‘shall be exempt ‘etc., the avoidance method for elimination of double taxation is being perceived. These Articles remain uncontroversial in view of such clear language. The other method of elimination of double taxation is the ‘Credit Method’. Whenever an income is taxed by both the contracting States, the credit of taxes paid by the assessee in the other contracting State will be given by the State in which the assessee is a resident. The term ‘may be taxed’ in fact contemplates this method of elimination of double taxation.

These two rules have been explained in para 19 of OECD commentary under the title taxation of income and capital read as under:

“19. For the purpose of eliminating double taxation, the Convention establishes two categories of rules. First, Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of source or situs and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the contracting States. The other contracting State is thereby prevented from taxing those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the State of residence. In the case of other items of income and capital, the right to tax is not an exclusive one. As regards two classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief – as to avoid double taxation; this is the purpose of Articles 23A and 23B. The Convention leaves it to the contracting States to choose between two methods of relief, i.e. the Exemption Method and the Credit Method.”

India follows Credit Method for relieving double taxation.


It can by no stretch of imagination be perceived that whenever it is said that a certain income ‘may be taxed’ in a particular State, it may mean that the said income is not to be taxed in that particular State or only the other contracting State has the power to tax the said income. The reason is simply the fact that the treaties are drafted by the people possessing high degree of legal prudence. If this is the case, who stopped them to provide in the relevant Article the taxability in the intending state by using the words like ‘shall be’ or ‘will be’. What was the need to use such gibberish language? Such an interpretation will be defeat of all common principles of interpretation of statute or of simple agreements.

Pune Bench of the Tribunal, in DCIT v. Patni Computer System Ltd., [2008] 114 ITD 159 (Pune), has categorically specified that the decision of R.M. Muthaiah (supra) and S.R.M. Firm & Ors. (supra) lays down the prevailing legal position in India which has been affirmed by the Hon’ble Supreme Court in Azadi Bachao Andolan (supra) and P.V.A.L. Kulandagan Chettiar (supra) that once the income is held to be taxable in a tax jurisdiction under the DTAA, unless there is a specific mention that it can also be taxed in the other tax jurisdiction, the other tax jurisdiction is denuded of its power to tax the same.

ITAT Mumbai Bench ‘L’ in the case of Ms Pooja Bhatt v. DCIT [2008] 26 SOT 574 (Mumbai)
held that when the film artist assessee is a resident of India who had participated in an entertainment show performed in Canada in the year under consideration i.e. 1994-95 and had received certain sum for the participation and tax was also deducted at source in Canada in respect of said receipt/income, then in this situation, in view of Article 18 of DTAA between India and Canada, amount so received by the assessee could not be taxed in India. ITAT, Mumbai Bench interpreting the expression “may be taxed” in para 1 in Article 18 held that this expression gives only an option to the other contracting state to tax the income but does not preclude the contracting state of residence to assess the said income. Accordingly, such expression authorizes only contracting state of source to tax such amount and by necessary implication the contracting state of residence is precluded from taxing such income.


For getting benefit of a tax treaty, one has to read the treaty with respect to the income, taxability of which has to be taxed. The relevance of the term ‘may be taxed’ lies on the fact that the subject income may be or may not be exigible to tax as per local laws of the state in which it is provided to be ‘may be’ taxed. Since the DTAAs are meant to provide and are applicable only to the extent more beneficial to a subject than the local laws. In such a scenario income which is not taxable under the local laws of a state is not desirable to be taxed as per the DTAA. In this context judicial interpretation given to such situations that one need not go to the DTAA if a certain income is not taxable as per the Income Tax Act, is useful. Therefore, the desired conclusion emerges that in a situation where an income ‘may be’ taxed in a particular state, it should be taxed in that state only if it is also taxable as per its local law.

It should be kept in mind that the term ‘may be’ has been placed mainly in those articles concerning taxability of those incomes, on which the source state has a limited right of taxation, i.e. to the extent the income is attributable to the activities carried out in that state only. This fact also leaves open the right of taxation to the resident state also to a certain extent.

In a way the term is permissive and it permits taxability rather giving an option.


This inference may simply be drawn from the fact that in a situation where an income is not taxed in the particular state in which it is provided to ‘may be’ taxed because of it not being taxed as per the local laws, the other contracting state also not taxing the same may provide for elimination even once the taxation of income. The logical conclusion is that in cases of income ‘may be’ taxed in a particular state, that state gets the first right to tax the same. However both the States are equally entitled to tax the same and in such a scenario the elimination of double taxation regime comes into picture.

Chennai Bench of the Tribunal in ITO v. M/s. Data Software Research Co. Pvt. Ltd., ITA No. 2072/Mum./2006, order dated 27th November 2007, wherein on interpretation of a similar phrase appearing in Indo-U.S. DTAA appeared, has held that if the P.E. of a resident Indian is assessed in U.S.A., it is entitled to tax credit for the tax paid in the contracting State but there is nothing in the DTAA which states that such profit has to be exempted in India. Thus, the Tribunal was of the opinion that both the countries have the jurisdiction to tax wherever there is an expression “may be taxed”.

A very apt interpretation of the phrase has been given by the Mumbai Bench of the Tribunal in the case of
Essar Oil Ltd. v. Addl. CIT(2013) 28 ITR (Trib.) 609 (Mum.), which reads as under:

“The phrase “may be taxed” gives the taxing right to the source country, however, this does not in any manner delimit the right of tax or extinguishes the right to tax of the country of residence which alone has a mandate to tax the global income of its resident under the domestic law. This is followed mostly all over the world. This fundamental aspect as discussed above has been time and again opined and laid emphasis by OECD commentaries, U.N. model commentaries various eminent jurists like Klaus Vogel, Philip Baker, which have been discussed in earlier part of our findings. The international view had been that the phrase “may be taxed” cannot be interpreted in the manner that the country of resident is left with no right to tax its resident. However, we reiterate here that these international conventions or views do not have a binding precedence but have a great persuasive value in understanding the various concepts which are based on understanding the international law and the negotiation of the treaty. When the model convention of the treaty or the OECD model has been made the basis of agreement, (which here in this case both the treaties, Oman and Qatar are based on OECD model), then the commentaries given under these conventions acts as an external aid and a guiding factor. It is assumed that negotiating parties have understood the various expressions used in the treaty in the manner provided by these commentaries and international conventions. In the present case, both the treaties, Oman DTAA and Qatar DTAA are based on model convention, hence the views expressed has a great persuasive value. That is why the Hon’ble Supreme Court in Azadi Bachao Andolan (supra) has referred to and placed reliance on various international commentaries and views expressed by OECD, Klaus Vogel, Philip Baker, Lord Mc’nair and other foreign Court decisions. The Hon’ble Supreme Court had no inhibition on relying on these views because they reflect the concept prevailing under the international law.”

Delhi Tribunal in the case of Telecommunications Consultants India Ltd. v. Additional Commissioner of Income-tax (2012) 18 ITR (Trib.) 368(Del.), held that if, in the DTAA, an item of income is “may be taxed” in State of source and nothing is mentioned about taxing right of State of residence in convention itself, then State of residence is not precluded from taxing such income and can tax such income using inherent right of State of residence to tax such global income of its resident. Only in the case where phrase “shall be taxed only” used, then only the State of residence is precluded from taxing it. In such cases, where the phrase “may be taxed” used, the State of residence has been given its inherent right to tax.


Though all the abovesaid is equally true for India as well, however, in this context a Notification No. 91 of 2008 dated 28-8-2008 issued by Central Government in respect of Double Taxation Relief is relevant which reads as under:

“In exercise of the powers conferred by sub-sections (3) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of the resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”

This notification was issued in the context of sub section (3) to section 90, which reads as under:

“Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.”

The effect of this notification is retrospective from the date on which the respective treaties are entered into. This proposition is fortified by the explanation 3 to section 90 of the Act inserted by Finance Act, 2012 w.e.f 1-10-2009 as under:

“Explanation 3. – For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.”

The objective behind introduction of this amendment is explained in the Memorandum explaining the provisions of the Finance Bill, 2012 as follows:


Section 90 of the Act, empowers the Central Government to enter into an agreement with foreign countries or specified territories for the purpose of granting reliefs particularly in respect of double taxation. Under this power, the Central Government has entered into various treaties commonly known as Double Taxation Avoidance Agreements (DTAA’s).

Section 90A of the Act similarly empowers the Central Government to adopt and implement an agreement between a specified association in India and any specified association in a specified territory outside India for granting relief from ‘double taxation’ etc., on the lines of section 90 of the Act.

Sub-section (3) of sections 90 and 90A of the Act empowered the Central Government to assign a meaning, through notification, to any term used in the Agreement, which was neither defined in the Act nor in the agreement.

Since this assignment of meaning is in respect of a term used in a treaty entered into by the Government with a particular intent and objective as understood during the course of negotiations leading to formalisation of treaty, the notification under section 90(3) gives a legal framework for clarifying the intent, and the clarification should normally apply from the date when the agreement which has used such a term came into force.

Therefore, the legislative intent of sub-section (3) to section 90 and section 90A that whenever any term is assigned a meaning through a notification issued under section 90(3) or section 90A(3), it shall have the effect of clarifying the term from the date of coming in force of the agreement in which such term is used, needs to be clarified.

It is proposed to amend section 90 of the Act to provide that any meaning assigned through notification to a term used in an agreement but not defined in the Act or agreement, shall be effective from the date of coming into force of the agreement. It is also proposed to make similar amendment in section 90A of the Act.

The amendment in section 90 will take effect retrospectively from 1st October, 2009 and the amendment in section 90A shall take effect retrospectively from 1st June, 2006″.

The Memorandum states that the notification under section 90(3) of the Act merely gives a legal framework for clarifying the intent and objective as understood during the course of negotiations of the treaty and thus the same shall be applicable to the DTAA from the date of entering of the DTAA even if the said DTAA is entered into prior to coming into force of section 90(3) of the Act on 1-4-2004. However even if the notification were said to be clarificatory it could be retrospectively applicable only from Assessment Year 2004-05 onwards when section 90(3) was introduced, this view was taken by the Mumbai Bench of the Tribunal in the case of
Essar Oil Ltd. v. ACIT (supra), wherein it was held that the Notification No. 91 of 2008 was clarificatory and applicable from Assessment Year 2004-05 onwards only.

The decision in the case of Essar Oil Ltd. (supra) was followed by the Hyderabad Bench of the Tribunal in the case of
N. S. Srinivas v. ITO, ITA No. 310/Hyd/10, dated 17-4-2014.

It is also clear that the said provision has been brought into the statute in order to remove any ambiguity arising in drafting of the treaty, out of the use of the term ‘may be’. With this for a resident of India, the situation is very clear, if an income which ‘may be’ taxed in other State, India has all the right to tax the same in the assessee’s hand, however credit of taxes paid in that other State has to be given in India in order to eliminate double taxation.


The issue of interpretation of phrase “may be taxed in other contracting States”, as used in different Articles including Article 7 in the DTAA has been discussed in detail by the Tribunal in Essar Oil Ltd. (supra) after taking into consideration various decisions of the High Court, Supreme Court, effect of amendment in section 90(3) and notification dated 28th August 2008, issued by the Central Government. The conclusion arrived by the Tribunal after discussing various aspects are as under:

Once the tax is payable or paid in the country of source, then country of residence is denied of the right to levy tax on such income or the said income cannot be included in return of income filed in India, would no longer apply after the insertion of provision of sub-section (3) of section 90 w.e.f. 1st April, 2004, i.e. Assessment Year 2004-05.

The notification dated 28th August 2008 is clarificatory in nature and hence interpretation given by Government of India through this notification will be effective from 1st April 2004, i.e., from the date when provision of section 90(3) was brought in the statute, giving a legal framework for clarifying the intent of one of the negotiating parties.

The phrase “may be taxed” is not appearing in the statute, but it is appearing in the agreement and therefore, the interpretation as understood and intended by the negotiating parties should be adopted. Here one of the parties i.e., Government of India has clearly specified the intent and the object of this phrase. If the phrase were used in a statute, then any interpretation given by the High Court or the Supreme Court is binding on all the subordinate Courts and has to be reckoned as law of the land.

The notification is not contrary to the provisions of the Act. Consequently, the judgments rendered prior to Assessment Year 2004-05, will not have binding precedence in the later years.

In this way the effect of the judgments of Supreme Court, High Courts and benches of the Tribunal, rendered in this context may not hold good with effect from the Assessment Year 2004-05 onwards, intention of the legislature has to be arrived at while judging the taxability of such incomes.

Respected Professional Colleagues

Wish you a very happy Ram Navami and Mahavir Jayanti. May Lord Rama fill up your life with joy, happiness and above all good heath.

Year 2017 is full of events. January 2017 witnessed the effect of demonetisation and February brought with itself the annual budget. Key changes are made in the Act, some of them which are of general importance are as under:

A. Section 139AA is inserted after section 139A whereby after 1st July 2017, to quote Aadhaar Number is made mandatory (i) while making application for PAN and (ii) in the return of income. In case a person does not have an Aadhaar, he will be required to quote his Aadhaar enrollment number indicating that an application to obtain Aadhaar has been filed. Further every person holding a PAN on July 1, 2017 and who is eligible to hold an Aadhaar, will be required to provide his Aadhaar Number to the authorities, by a date and in a manner notified by the Central Government. A failure to provide the same would result in PAN being invalidated and the person would be treated at par with anyone who has not applied for a PAN. The Government may exempt persons from this provision through a notification.

B. A far reaching administrative reform is made whereby certain Tribunals are proposed to be replaced and their functions are proposed to be taken over by existing Tribunals under other Acts. The Chairpersons, Vice Chairpersons, Chairmen or other members who are currently having post with the Tribunals to be merged, will be entitled to receive up to 3 months’ pay and allowances for premature termination of their office term. Further as per newly inserted provisions of section 252A, the Central Government may make rules to provide for the (i) qualifications, (ii) appointments, (iii) term of office, (iv) salaries and allowances, (v) resignation, (vi) removal and (vii) other conditions of service for these members. The age of retirement for these persons has been specified such as (i) 70 years for Chairpersons, Chairmen or Presidents and (ii) 67 years for Vice Chairpersons, Vice Chairmen, Vice Presidents and Presiding Officers. At this juncture, it is to be noted that in the case of
Madras Bar Association vs. Union of India (TC No.150 of 2006 (SC) decided on 25-9-2014), Hon’ble Supreme Court while examining a case relating to National Tax Tribunal had held that Appellate Tribunals have similar powers and functions as that of High Courts and therefore, matters relating to appointment, re-appointment and tenure must be free from executive involvement. This principle appears to be ignored while suggesting this amendment.

C. In the Finance Bill 2017, section 269ST was proposed to be inserted whereby it was proposed that cash transactions exceeding ₹ 3 lakh will not be permitted (i) from a single person in one day, (ii) in respect of a single transaction (irrespective of number of payments) and (iii) for any transactions relating to a single event. In the Act, the said limit is reduced to ₹ 2 lakh from

₹ 3 lakh. Failure to comply with the said provision will attract the penalty, being a sum equal to the amount of such receipt u/s. 271DA. However, it is open to such person to prove that there were good and sufficient reasons for the contravention. Moreover, this penalty shall be imposed only by the Joint Commissioner.

D. Donation to Political Parties by Companies : At present company may contribute up to 7.5% of the average of its net profit in the last 3 financial years, to political parties and to disclose the said amount of contribution in its Profit & Loss A/c along with name of the parties to which such contribution was made. This limit has been done away with in amended section 13A. It is stated that no donation exceeding ₹ 2,000/- is received by such political party otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bond. These provisions are made to bring out the transparency and also to curb the black money.

Friends, there are number of amendments but the same will be discussed at the appropriate conferences. However, one thing is clear that Department has become vigilant at this time, new ITR forms have been published in the month of March, 2017 itself and therefore, the general public will not have to rush to the Courts for extending the due date of filing of return as done in preceding years.

Government has notified simplified one page form “ITR-1 (Sahaj)” for individuals earning income from salary, pension, one house property and income from other sources. A new column has been introduced in all ITR forms to report in respect of cash deposited in their bank account during the Demonetisation period i.e., from Nov., 2009 to Dec., 30, 2016. A special column has been made for quoting Aadhaar Number. New columns (Schedule-SI) have been inserted in ITR forms to report unexplained income because as per the provisions of section 115BBE, any unexplained credit or investments attracts tax at 60% along with surcharge and cess as applicable, irrespective of the slab of income and tax. Similarly, new column (Schedule-OS) has been inserted in the ITR forms to declare dividend exceeding ₹ 10 lakh which may attract tax @ 10%. A new field has been provided under Schedule VI-A to claim deduction on account of home loan interest u/s. 80EE. For the returns filed u/s. 44AD, new column has been inserted to show turnover received through digital mode which may be taxed at 6% instead of 8%. Now taxpayers are required to mention registration number of the firm of Chartered Accountant which has done audit, in ITR forms.

In view of above, it appears that the Chartered Accountants, Advocates and Tax Practitioners have to be more careful while filing the returns.

Friends, there is a lot to be discussed. The platform has already been prepared to roll down the GST Act with effect from 1st July, 2017. Entire country including professionals, businessmen, industrialists and manufacturers all are preparing themselves to welcome GST which is the biggest tax reform since independence. Our Federation is also ready to hold and organise conferences and seminars at various places.

Friends, last but not the least, I once again request (as I am doing in every communiqué) our past and existing executive members to send the consent letters duly signed to Mr. Ravi so that the compliance may be made before the Charity Commissioner. It is not out of place to mention that you all are very much concerned for the Federation, you are the pillar of Federation and therefore, it is your pious duty to comply with the same. I hope that I will not have to request again in my next communiqué.

Friends, I remind you all of National Tax Conference and National Executive Committee Meeting organised by the West Zone at Vallabh Vidya Nagar, Anand, Gujarat on 22nd and 23rd April, 2017 and also of an International Study Tour to Sri Lanka from 3rd June to 9th June, 2017.

I once again express my deepest regards and wish you all A Very Happy New Year (Vikram Samvat)

With Best Wishes,

Prem Lata Bansal
National President

Political Funding


The political funding in India began in 1920s when Congress under leadership of Mahatma Gandhi began fund raising from business houses and individuals for freedom struggle. The companies and individuals donated generously for what they considered a “noble cause”. This practice continued even after freedom and became increasingly politicised. The fund raised by political parties now was mainly to run everyday affairs of the party and to fight and win elections. All political parties today rely on both legitimate and illegitimate sources for money. While the practice of financing by corporate and businessmen continued, it was supplemented by kickbacks and commissions received from the foreign deals.

Current Rules and Regulations about contributions

The political parties receive funds from three main sources viz., individual contribution, corporate contribution and foreign contributions. Currently, there are no limits on individual contributions. Corporate contribution are allowed from only non-Government companies, which is at least three year old, and does not make total contribution in a year more than 7.5% of its average net profit of last three years. Such contribution must be authorised by the board of directors resolution. Foreign contributions – till recently, there was a ban on foreign contribution to candidates and political parties. Foreign funding of political parties was banned under section 3 of the Foreign Contribution (Regulation) Act, 2010. In April 2016, Government amended the Foreign Contribution Regulation Act (FCRA), 2010 through the Finance Bill, 2016.

Implications of FCRA Amendments

The main objective of this amendment was to make way for the political parties to receive donations from foreign companies such as Vedanta as “Indian Sources” despite of their being “foreign”. All multinational corporations operating in India like IBM, Samsung, General Motors etc., can finance parties. This will be in addition to the donations by the Indian corporate legal. As per the current rules, the companies need to show the amount contributed to political parties in their profit and loss statements with names of the parties. On the other hand, each political party is required to report all contributions above

₹ 20,000 received from any company or person to Election Commission every financial year.

Disclosure of amount exceeding ₹ 20,000/-

Since rules ask the parties to show only those contribution which exceed ₹ 20,000/-, most of the funding sources are “unknown sources”. Similarly, around half of the total donations to major parties come from the donors whose details are not available in public domain. These details are only available when political parties file their returns. The biggest issue in transparency is that “most contributions” to political parties are below ₹ 20,000/- limit. Further, this funding by donations is only a fraction of their total income. Details of their income from remaining sources is still unavailable. Thus, there is a huge cover of secrecy and opaqueness in who gives them money.

The question of political funding in the country is inextricably linked to two major issues. First, it is corruption and black money generation. It is an open secret that corporates take heavy loans from the public sector banks and then give part of this loan towards political party funding. As a standard practice, the companies show inflated value of equipments aboard and use this mechanism to create corpus of cash in tax heavens abroad. Part of this fund comes back to India to fund political parties. So far, no substantial steps have been taken to bring overall transparency in political funding. Secondly, the amendment of FCRA via Finance Act was called subversion of democracy.

Time to institutionalise Funding of Political Parties

The question of how political parties in India should be funded is inextricably linked to corruption and black money generation. Therefore, funding to political parties be made totally transparent and above board. But how to do it? A modest beginning has been made in this direction in the Budget 2017/18.

Transparency in Electoral Funding

The existing provisions of Section 13A of the Act, inter alia provides that political parties that are registered with the Election Commission of India, are exempt from paying income tax. To avail the exemption, the political parties are required to submit a report to the Election Commission of India as mandated under sub-section (3) of section 29C of the Representation of the People Act, 1951 (43 of 1951) furnishing the details of contributions received by a political party in excess of ₹ 20,000/- from any person. However, under existing provisions of the Act, there is no restriction of receipt of any amount of donation in cash by a political party.

Secondly, a political party is also required to file its return of income under Section 139(4B) of the Act, if its income exceeds the maximum amount not chargeable to tax (without considering the exemption under Section 13A). However, filing of the return is not a condition precedent for availing exemption under the said section.

In order to discourage the cash transactions and to bring transparency in the source of funding to political parties. It is proposed to amend the provisions of Section 13A to provide for additional conditions for availing the benefit of the said section which are as under:-

(i) No donations of ₹ 2,000/- or more is received otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bonds.

(ii) Political party furnishes a return of income for the previous year in accordance with the provisions of sub-section (4B) of Section 139 on or before the due date under section 139.

Further, in order to address the concern of anonymity of donors, it is proposed to amend the said section to provide that the political parties shall not be required to furnish the name and address of the donors who contribute by way of electoral bond. Electoral bond means a bond referred to in the Explanation to sub-section (3) of Section 31 of Reserve Bank of India Act, 1934.

Electoral Bond is a financial instrument for making donations to political parties. These are issued by Scheduled Commercial banks upon authorisation from the Central Government to intending donors, but only against cheque and digital payments (it cannot be purchased by paying cash). These bonds shall be redeemable in the designated account of a registered political party within the prescribed time limit from issuance of bond.

Electoral Bond is an effort made to cleanse the system of political funding in India. The scheme of electoral bonds addresses the concerns of donors to remain anonymous to the general public or to rival political parties.

Further, in accordance with the suggestion made by the Election Commission, the maximum amount of cash donation that a political party can receive is stipulated at ₹ 2,000/- from one person, pursuant to the announcement in Union Budget 2017-18. However, political parties will be entitled to receive donations by cheque or digital mode from their donors, who in turn are entitled to deduction u/s. 80GGB and u/s. 80GGC of the Income-tax Act, 1961. Every political party would have to file its return within the time prescribed in accordance with the provision of the Income-tax Act. Existing exemption to the political parties from payment of income-tax would be available only subject to the fulfilment of these conditions.

However, there is apprehension that lowering the limit for anonymous cash donation from ₹ 20,000/- to ₹ 2,000/- will not help to bring about transparency in political funding, as earlier those who did not want to declare donations used to issue receipt for less than ₹ 20,000/-, now they will do the same for less than ₹ 2,000/-.

H. N. Motiwalla
Joint Editor