The Finance Bill, 2021 (2021) 430 ITR 74 (St) has proposed several technical amendments, for the benefit of the readers the views of the experts are summarized on the basis of lectures delivered by the learned speakers at various forums, they as under:

Dr. Girish Ahuja: Dr. Ahuja while delivering a lecture at the Tax Law Educare Society, on February 03, 20211 has dealt with some of the amendments is great detail and provided a much-required clarity on the same, they are as under:

  1. Depreciation of Goodwill [Clauses 7, 18 and 20] [Retrospective]: Goodwill of a business or profession has been proposed to be removed from the definition of block of assets as defined under section 2(11) of the Income-tax Act, 1961(Act). The decision of the Hon’ble Supreme Court in the case of Smiff Securities Limited (2012) 348 ITR 302 (SC) is no longer good law. Consequential amendment has been brought under section 32, section 50 of the Act, inter alia.

  2. Unit Linked Insurance Policy (ULIP) [Clauses 3, 5, 14, 29, and Clauses 154 to 158] [Retrospective]: A ULIP has two components, viz. insurance and investment. Clause (10D) of section 10 of the Act provides for the exemption for the sum received under a life insurance policy in respect of which the premium payable for any of the years during the terms of the policy does not exceed ten percent of the actual capital sum assured. Exemption is not provided with respect to any ULIP (one or more) issued on or after the 1st February, 2021, if the amount of premium payable for any of the previous year during the term of the policy exceeds two lakh and fifty thousand rupees.

    Consequentially, a ULIP is now considered as a capital in such cases. Capital gain will be computed in the year of receipt of monies and will be taxable under section 112A of the Act at a concessional rate of 10 per cent without indexation.

  3. Public Sector disinvestment [Clauses 3 and 22] [Retrospective]: Section 2(19AA) of the Act has been suitably amended to facilitate disinvestment of public sector companies. Further, section 72A of the Act has been amended to provide for the carry forward and set off of such accumulated loss and unabsorbed depreciation.

  4. Definition of the term – “Liable to tax” [Clause 3] [Retrospective]: The term – liable to tax in relation to a person means that there is a liability of tax on that person under the law of any country and will include a case where subsequent to imposition of such tax liability, an exemption has been provided.

  5. Slump Sale [Clause 3] [Retrospective]: The definition of the term – slump sale by amending the provision of clause (42C) of section 2 of the Act so that all types of transfer as defined in clause (47) of section 2 of the Act are included within its scope. Decisions of the Hon’ble Supreme Court in the case of CIT v. R.R. Ramakrishna Pillai [(1967) 66 ITR 725 SC], Artex Manufacturing Company [(1997), 227 ITR 260], and Dhampur Sugar Mills [(2006) 147 STC 57]upheld.

  6. Taxability of Interest on various funds where income is exempt [Clause 5] [Prospective]: Exemption under section 10 shall not be applicable to the interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of contribution made by the person exceeding two lakh and fifty thousand rupees in a previous year in that fund

  7. Raising of prescribed limit for exemption [Clause 5] [Prospective]:
    it has been proposed that the exemption criterion for audit shall be increased to ₹5 crore and such limit shall be applicable for an assessee with respect to the aggregate receipts from university or universities or educational institution.

  8. Corpus Donation [Clauses 5 and 6] [Prospective]: Application out of corpus shall not be considered as application for charitable or religious purposes. Further, Application from loans and borrowings shall not be considered as application for charitable or religious purposes. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as application in the previous year in which it is repaid to the extent of such repayment. Further, no set off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed. The decision of the Hon’ble Supreme Court in the case of CIT(E) v. Subros Educational Society [2018] 96 taxmann.com 652 303 CTR 1 (SC)is no longer good law.

  9. Payment by employer of employee contribution to a fund on or before due date [Clauses 8 and 9] [Retrospective]: This issue has faced contradictory decisions from various Hon’ble High Courts and a hurdle for the CPC while processing returns. It has been expressly clarified that the payment will have to be made in accordance with section 36 (1)(va) of the Act and not section 43B of the Act. However, no old cases will be reopened, and for pending cases the High Courts will take its independent view.

  10. Increase in safe harbour limit [Clauses 10 and 21]:Where the transfer of residential unit takes place during the period from 12th November, 2020 to 30th June, 2021 and the transfer is by way of first-time allotment of the residential unit to any person, and the consideration received or accruing as a result of such transfer does not exceed two crore rupees. For these transactions, circle rate shall be deemed as sale/purchase consideration only if the variation between the agreement value and the circle rate is more than 20 per cent.

  11. Tax audit in certain cases [Clause 11] [Retrospective]: It is proposed to increase the threshold from five crore rupees to ten crore rupees in cases where-

    1. aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipt; and

    2. aggregate of all payments in cash during the previous year does not exceed five per cent of such payment.

  12. Tax neutral conversion of Urban Cooperative Bank into Banking Company [Clauses 13 and 15] [Retrospective]:
    It is proposed to expand the scope of business reorganization to include conversion of a primary co-operative bank to a banking company and the deductions available under section 44DB of the Act shall also be made applicable in relation to such conversion of primary co-operative bank to the banking company.

  13. Transfer of capital asset to partner on dissolution or reconstitution [Clauses 14 and 16] [Retrospective]:
    New proposed section 45 (4) of the Act applies in a case where a specified person who receives during the previous year any capital asset at the time of dissolution or reconstitution of the specified entity. The capital asset represents the balance in the capital account of such specified person in the books of the specified entity at the time of its dissolution or reconstitution. In this situation, the profit and gains arising from the receipt of such capital asset by the specified person shall be chargeable to income-tax as income of the specified entity under the head “capital gains” and shall be deemed to be the income of such specified entity of the previous year in which the capital asset was received by the specified person.

    Further, section 45(4A) of the Act applies in a case where a specified person receives during the previous year any money or other asset at the time of dissolution or reconstitution of the specified entity. The money or other asset is required to be in excess of the balance in the capital account of such specified person in the books of accounts of the specified entity at the time of its dissolution or reconstitution. In this situation, the profits or gains arising from the receipt of such money or other asset by the specified person shall be chargeable to income-tax as income of the specified entity under the head “Capital gains” and shall be deemed to be the income of such specified entity of the previous year in which the money or other asset was received by the specified person.

  14. Extension of date of sanction of loan for affordable residential house property [Clause 24] [Prospective]: In order to help such first-time home buyers further, it is proposed to amend the provision of section 80EEA of the Act to extend the outer date for sanction of loan from 31st March 2021 to 31st March 2022.

    On the other hand, the Government is trying to simplify the tax slab regime by ending deductions under chapter VIA. Therefore, this provision appears to contradict the government policy.

  15. Incentives for affordable rental housing [Clause 26] [Prospective]: In light of the pandemic and halt in construction and sales, the Government proposed that the outer time limit for 31st March 2021 in this section for getting the affordable housing project approved be extended to 31st March 2022.

  16. Filing of return [Clause 32] [Retrospective]: It is proposed that the last date for filing of belated or revised returns of income, as the case may be, be reduced by three months. Further, the Board has been given powers to resolve the grievances of the tax payers on account of a defective return.

  17. Assessment: Provisions of section 143 to reduce the time limit for sending intimation under section 143(1) of the Act from one year to nine months from the end of the financial year in which the return was furnished.

    It is also proposed to reduce the time limit for issue of notice under section 143(2) of the Act from six months to three months from the end of the financial year in which the return is furnished.

  18. Income escapement assessment & Abolishing section 153 A/153B/153C of the Act [Clauses 35 to 40 and 42 to 43]:For regular cases it is proposed, that the AO will flag information pursuant to a risk management strategy suggesting that income has escaped assessment, or on objections raised by the C&AG that assessment is not in accordance with the Act. Basis the said information/objection the AO will conduct an enquiry, if required, with the prior approval of the PCIT/PCCIT. Subsequently, the AO will provide opportunity of hearing (SCN) to the assessee with prior approval and along with the information. After the receipt of information. The AO to pass an order deciding whether or not the case is fit for section 148, with appropriate approval.

    Further, the time limit for issuance of Notice is made 3 years and 10 years if the income chargeable to tax represented in the form of an asset is more than ₹ 50 lakhs.

    For search cases, the AO shall be deemed to have information for 3 years immediately preceding the year of search. Inquiry and issuance of SCN and passing of order under section 148 is not required. The concept of “reasons to believe” appears to be absent.

  19. Relaxation for certain category of senior citizen from filing return of income-tax [Clause 47]:It is proposed to insert a new section to provide a relaxation from filing the return of income, if the senior citizen is resident in India and of the age of 75 or more, He has pension income and no other income (interest income from same bank is allowed). He shall be required to furnish a declaration to the specified bank. Once the declaration is furnished, the specified bank would be required to compute the income of such senior citizen after giving effect to the deduction allowable under Chapter VI-A and rebate allowable under section 87A of the Act.

  20. Section 194Q of the Act [Clauses 48 and 50]:It is proposed to provide for TDS by person responsible for paying any sum to any resident for purchase of goods. The rate of TDS is kept very low at 0.1%. To ensure that compliance burden is only on those who can comply with it, it is proposed that the tax is only required to be deducted by those persons whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year.

    Further clarified that, if on a transaction TCS is required section 206C (1H) as well as TDS under this section, then on that transaction only TDS under this section shall be carried out.

  21. Rationalisation of the provision concerning withholding on payment made to Foreign Institutional Investors (FIIs) [Clause 49]:It is proposed to provide that in case of a payee to whom an agreement applies and such payee has furnished the tax residency certificate, then the tax shall be deducted at the rate of twenty per cent. or rate or rates of income-tax provided in such agreement for such income, whichever is lower. This principle of tax deduction has also been upheld by Hon’ble Supreme Court in the case of PILCOM v. CIT West Bengal (2020) 425 ITR 312 (SC)

CA P. D. Desai: Mr. Desai delivered a lecture for the prestigious Bombay Chartered Accountant Society, on February 06, 20212 and has deep dived into to some of the important amendments in the Finance Bill, 2021. He believes the purpose of a Finance Bill is to improve simplicity with reasonableness. At the outset, the amendments pertaining to Faceless Tribunal seem to be in violation of principles of Natural Justice. The said amendment seems challengeable; it is advisable to approach the Hon’ble Court as it was done in the Aadhaar case.

His views on the amendments are as under:

  1. Goodwill [Retrospective amendment]: As per popular international literature, if a transaction is not taxable at the time of making the transaction and subsequently made taxable via an amendment, the same can be construed to be a retrospective amendment. There will be issues arising on account of bifurcation of goodwill in a block of assets and allowance of unabsorbed goodwill of prior years, among others.

  2. Slump Sale [Retrospective amendment]: The scope of slump sale has been widened to include slump exchange, as the same is a controversial issue and pending before the Hon’ble Supreme Court. Further, the retrospective amendments will have an impact on the computation of advance tax and in case of any shortfall, the department should ideally not raise an issue. The Hon’ble High Court of Gujrat in the case of CIT v. National Dairy Development Board [2017] 83 taxmann.com 109 (Gujarat)held that where there was no shortfall in advance tax payment when such liability arose, and advance tax liability arose later on only due to retrospective amendment in statute, no interest could be charged on advance tax.

  3. Equalisation Levy: The scope of Equalisation levy has been widened to include selling of goods of third parties. The amendment is in the nature of widening of the tax net for the said levy.

  4. “Liable to pay tax”: This has come subsequently to the amendments brought in the Finance Bill, 2020. It has now been clarified that, the meaning of the said phrase would include an event where there is a tax incidence in the other state and the same is exempted from tax. Exemptions and benefits under the DTAA would still be available to the taxpayers.

  5. Reassessment Law: The reassessment law is a settled law which has been in existence for around a hundred years. It would be safe to assume some principles will still apply moving forward. Although new precedents will be created in due course. Further, as per the amendments, the department is required to take approval of their senior at various stages; this would be the future of litigation in reassessment proceedings. The increase in the limit up to 10 years will call for higher indemnity in agreements.

  6. Partnership Firm: The amendments to section 45(4) and section 45(4A) of the Act are controversial and clarity is required for the same. Allotment of Stock in trade would possibly attract section 45(4A) of the Act. Further queries such as computation of capital account, as to whether the same includes loans, current accounts etc is still not known. Would it be possible to attract both section 45(4) and 45(4A) of the Act? Will mere change in profit sharing ratio amount to reconstitution of the Firm? Are some of the questions that require clarifications and are litigative in nature.

CA Gautam Doshi: Mr. Doshi delivered his lecture at WIRC of ICAI on February 06, 20213. He believes that the Government should consider having amendments every year; the amendments should come via an amendment Act rather than the Finance Bill as the same would be subjected to further discussion and debate.

Further, he has pointed out the retrospective amendments in laws pertaining to viz. Goodwill, Slump exchange and Partnership firm inter alia, which may have the right intention but being implemented in a hurried manner. He has requested a reconsideration on these provisions. Further the interest on advance tax will raise litigations as the CPC will not consider the fact that the law is retrospective. His discussion on specific amendments are as under:

  1. Depreciation on goodwill: The same has come as a legislative amendment negative the decision of the Hon’ble Supreme Court. The same is a policy decision and cannot be challenged. The goodwill now being considered as a long-term capital asset will raise another round of litigation.

  2. Slump Sale: The definition of slump sale has been widened to include slump exchange. A slump exchange is a camouflaged slump sale. Principles laid down by the Hon’ble Supreme Court in the case of CIT v. R.R. Ramakrishna Pillai [(1967) 66 ITR 725 SC] and Artex Manufacturing Company [(1997), 227 ITR 260] have been upheld.

  3. Partnership Firm: The amendments to section 45(4) and section 45(4A) of the Act will unsettle all the workings of the Firm. The word “reconstitution” has not been defined under the Act. Further, the manner of apportionment is yet to be prescribed. The new law doesn’t envisage several possibilities, where a partner retires and his capital contribution is over time and implication of GAAR inter alia. It appears that these provisions have been introduced for early collection. It would be appropriate to re-write these provisions.

  4. Provident Fund Contributions: The issue of “due date” for the purpose of deduction of employee’s contribution to a PF Fund has been an issue of litigation. The High Courts are in the ration 9:2:2, 9 High Courts in favour of the tax payer, 2 against and 2 High Courts have taken contradictory views.

  5. Presumptive taxation for LLPs: LLPs have been excluded from presumptive based taxation under section 44ADA of the Act, because they cannot be exempted from preparing books of accounts and availing this section.

  6. Liable to pay tax: This is an amendment specially for individuals, the same is clarificatory in nature. Treaty benefits would continue to apply.

  7. Interest earned from Provident Fund: The Provident Fund used to be an E-E-E scheme i.e., exempt during deposit, exempt while earning interest and exempt when the fund matures. Now, this will no longer be the norm. Interest will now be taxable if it attracts the newly introduced provisos to section 10(11) and 10(12) of the Act. Further, this amendment has to be moved from section 10 to the charging section so as to facilitate a year-on-year taxation.

  8. Reassessment: The law pertaining to reassessment has undergone a major change. The triggers and time lines have changed.

  9. DRC:There is a new committee formed for small tax payers where they can avail immunity from penalty and prosecution. Small tax payers were never under the lens for penalty or prosecution.

  10. Faceless ITAT: Whether this amendment will survive or not, will be decided by the Courts. There will definitely be challenges made by the tax practitioners once the scheme is made.

  11. Charitable Trusts: Several judgements are undone with this amendment. Charitable trusts will face difficulty in computing their return of income. Several changes in application of loan, corpus fund and carry forward of excess expenditure will now have to be relooked.

  12. Assessments: The timelines for assessments have considerably reduced. The same is a welcoming change.

Mr. Saurabh Soparkar, Senior Advocate: Mr. Soparkar delivered a speech at the Ahmedabad Branch of the WIRC on the Union Budget 20214. According to him the Financial year ended March 31, 2021 has been the worst economic year since independence. Growth and credibility were expected from the Budget 2021. 79 amendments were proposed in the Finance Bill, 2021. There has been no change in the rate of tax; a levy of COVID-cess or estate duty or wealth tax was anticipated by the tax practitioners. Some of the amendments discussed are as under:

  1. Goodwill: The Hon’ble Supreme Court had allowed depreciation on goodwill as a result of amalgamation. However, the amendment has gone in excess, to the extent, it is proposed to disallow all forms of goodwill from depreciation. Classification of what constitutes as goodwill and what remains as an intangible will be a matter of litigation. Where a goodwill is a part of a block of asset and loses its individual character, the assessee could take shelter of 43(6) of the Act and continue to claim depreciation.

  2. Charitable Trust: Corpus donation will now have to be necessarily invested. Application out of corpus is not “application” as per section 11 of the Act. Loan will not be considered as application of funds. Further, excess application will not be allowed to be carried forward. The decision of the Hon’ble Supreme Court in CIT(E) v. Subros Educational Society [2018] 96 taxmann.com 652 (SC) and Hon’ble Gujrat High Court in the case CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Gujarat)is no longer good law.

  3. Provident Fund: The Hon’ble Gujrat High Court in the case of CIT v. Gujarat State Road Transport Corporation 366 ITR 170 (Guj) (HC) held that where assessee did not deposit employees’ contribution to employees’ account in relevant fund before due date prescribed in Explanation to section 36(1)(va), no deduction would be admissible even though he deposits same before due date under section 43B of the Act. However, other High Courts have held the issue in favour of the assessee. The issue is subjudice before the Hon’ble Supreme Court. Further, the amendment has come in the nature of a clarification, therefore, it would be deemed to be construed as it has always existed as per the clarification now rendered.

  4. Relief for new home buyers: The amendments seem arbitrary; the policy is aimed to help real estate developers. Several queries such as why only residential property and why up to ₹2 crores only are not addressed.

  5. Partnership Firm: Certain tax planning strategies like converting a company to an LLP and subsequently retiring a partner, the same so as to avoid DDT, will no longer have any benefits.

  6. Slump Sale: There has been a misuse of the previous provision. This has been plugged. Decision in the case of CIT v. Bharat Bijlee Ltd. [2014] 365 ITR 258 (Bom.) (HC), and Areva T & D India Ltd. v. CIT [2020] 428 ITR 1 (Mad)(HC) where it was held that Transfer of assessee’s non-transmission and distribution business in exchange of issuance and allotment of equity shares under a scheme of arrangement approved by High Court is not a slump sale exigible to capital gains tax under section 50 of the Act. Is no longer good law.

  7. Extension of sunset clause: Section 54GB, section 80EEA, section 80 IAC, section 80IBA have all been extended up to March 31, 2021.

  8. Filing of Return: The last date for filing of revised return or belated return has been reduced by 3 months.

  9. Reassessment: Well-settled supreme court cases viz. Asst. CIT v. Rajesh Zaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500 (SC), CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC), and CIT v. Calcutta Discount Co. Ltd [1973] 91 ITR 8 (SC)are no longer good law. New law is in place with respect to information, although more clarity is required in understanding the risk management strategy of CBDT. Further section 153 A and 153C of the Act will no longer exist. Whether pending proceedings will abate or not is an issue.

  10. Faceless ITAT: It has been proposed to implement a faceless ITAT so as to ensure efficiency, transparency and accountability. Firstly, the Tribunals are not within the purview of the Finance Ministry rather the Ministry of Law & Justice. Secondly, with the first personal hearing being only at the High Court, that too only where a substantial question of law arises, would be an expensive affair for any tax payer.

Dénouement

A lot was expected from the 2021 Budget and a lot of amendments have also been provided. Several amendments are retrospective and others are awaiting schemes or further guidelines. A lot of the amendments are challengeable on various grounds. Some of the amendments, improving timelines for assessment inter alia are welcoming.

The Finance Bill, 2021 reminds every tax professional of the famous article authored by Dr. Nani Palkhivala, Senior Advocate, titled “The Maddening Instability of Income-tax Law”, where he expressed his distaste to the mindless & numerous amendments being made by the Hon’ble Finance Minister. We hope some clarity is provided before the proposals are accepted.

Disclaimer

The contents of this article are solely for educational and informal purposes. Due care has been taken preparing the gist of the speeches of learned speakers if there are any mistakes, errors or discrepancy the same may be brought to the notice of the editorial board of the AIFTP.
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  1. Source: https://www.youtube.com/watch?v=9ZSJrDl_7-w&t=4528s
  2. Source: https://www.youtube.com/watch?v=iJT9GurvkQ8
  3. Source: https://www.youtube.com/watch?v=QcggzOWaJpI
  4. Source: https://www.youtube.com/watch?v=n1TZ3COLGts

The concept of TDS was introduced with an aim to collect tax from the very source of income. It is based on the principle “Pay as you Earn”. As per this concept, when you receive payment, the tax element is deducted and directly routed to the government and what you receive is the net amount. Person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted. This is one way of collecting income tax. Benefit of TDS is that:

  1. Assessee makes payment at the initial stage and in instalments and also before the money comes in his hand. It makes payment of tax easier and avoid payment of substantial amount in one go at the end of the year.

  2. It helps government to collect the tax through out the year and also before end of the year and therefore, finances are available with the government at an early stage.

  3. It checks evasion of tax. Since tax is deducted at source from the income, the assessee has to declare income in his return and pay proper tax.

As per Scheme of Income Tax Act liability to pay tax is on the assessee himself. As stated in Section 190 of Income Tax Act. TDS is only one mode of payment of tax. Section 190(2) and also Section 191 further makes it clear the liability to pay tax will be on the assessee notwithstanding provisions of TDS.

Provisions of Sections 192 to 196D provides for deduction of tax at source from various payments. Tax deductor is required to comply with relevant provisions strictly for deducting tax at source and tax so deducted is to be deposited in time. He has also to file required statements and issue TDS certificates to deductee. Any failure or delay attract penal consequences, which includes payment of interest, penalty and also disallowance of expenses and above all prosecution proceedings.

It is important to note that deductors are not getting any reward or benefit to provide this service to the government whereas they are incurring substantial cost in providing this thankless service.

In above background one needs to understand the justification of amendments, which are proposed to be made in Income Tax Act vide Finance Bill, 2021.

TDS on purchase of goods

Vide Finance Act 2020, sub-section (1H) was inserted in Section 206C of the Act to provide for collection of TCS by the seller. This section reads as under:

(1H) Every person, being a seller, who receives any amount as consideration for sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub-section (1F) or sub-section (1G) shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 0.1 per cent of the sale consideration exceeding fifty lakh rupees as income tax:

Provided that if the buyer has not provided the Permanent Account Number or the Aadhaar number to the seller, then the provisions of clause (ii) of sub-section (1) of section 206CC shall be read as if for the words “five per cent.”, the words “one per cent.” had been substituted:

Provided further that the provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount.

“Seller” for this purpose has been defined to mean a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out.

Above provisions had placed enormous burden on big assessee of collecting tax at source without any justification. Apartment from the fact that provisions were inserted on the basis of wrong presumption that an assessee who is buying goods of above ₹ 50 lacs from a seller having total turnover of ₹10 Crores or more will not be in tax net, provisions were introduced without taking into consideration practical aspect of the matter. Section provided for collection of tax at the time of receipt of sale consideration. It was not appreciated if amount is not charged in the bill raised, how it is possible for an assessee to collect the tax at the time of receipt of sale consideration. Many big companies had amended their accounting softwares to include tax in the invoice to be raised. It was also considered appropriate to determine limit of ₹ 50 lacs on the basis of sales made during the year. CBDT, however, without taking into consideration practical difficulties vide circular issued on 29th September, 2020, when provisions were to be implemented with effect from 1st October, 2020 clarified that TCS will be on collection and limit of ₹ 50 lacs was also to be determined with reference to payments received, including advance payments for purchase of goods made by the buyer. Implementing the provisions on the basis of receipt of sale consideration and particularly, collecting the tax at that stage is almost impossible. It is quite uncertain and unclear even now, how the companies have to comply with these provisions.

Now, the provisions on same lines are being inserted vide Section 194Q for TDS by the buyer. Section 194Q proposed to be inserted in the Act reads as under:

“194Q. (1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 per cent. of such sum exceeding fifty lakh rupees as income-tax. Explanation – For the purposes of this sub-section, “buyer” means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.

  1. Where any sum referred to in sub-section (1) is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

  2. If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

  3. Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and the person liable to deduct tax.

  4. The provisions of this section shall not apply to a transaction on which-

    1. tax is deductible under any of the provisions of this Act; and

    2. tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.

Provisions of above section are on the same lines as were inserted last year for collection of tax at source. As per the section a buyer, purchasing goods for an aggregate amount exceeding ₹50 lakhs during the year shall be liable to deduct tax at the time of making payment there of or crediting the amount to the account of seller, at the rate of 0.1% of the sum exceeding ₹50 lakhs. The buyer has been defined to mean a person whose total sales, gross receipts or turnover during the year immediately preceding the financial year has been more than ₹10 crores. Section further provides that in case tax is deductible under any provisions of the Act, or tax is to be collected under provisions of section 206C of Income Tax Act, other than under sub-section (1H) of Section 206C of the Act, provisions of this section shall not be applicable. It means that every buyer whose turnover is more than ₹10 Crores purchasing goods from a person for an aggregate amount exceeding ₹50 lakhs is liable to deduct tax under this Section. Provisions of this section will supersede the provisions of section 206C(1H) of the Act. Meaning thereby, in a case where both the sections are applicable tax will be deductible under section 194Q of the Act.

Provisions of Section 206C(1H) were inserted and Section 194Q is proposed to be inserted in the Act with a view to widen the tax net. It is not understandable how these provisions will help in widening the tax net. Presumption that assesses, who have turnover of more than ₹10 crores, whether as buyer or seller and are buying or selling goods to an assessee of ₹50 lakhs or more would not be in tax net appears to be unreasonable, illogical, and unjustified. Such assesses would also be registered under GST. Further, assesses are also required to get their KYC updated with banks and number of other agencies from time to time and have to submit their PAN. Department has access to all the data submitted to GST Department and available with banks and other agencies. Assesses are also required to submit PAN even for small deduction of tax at source. They would also be liable to deduct tax under other provisions of Act and therefore, would be definitely having PAN as well as TAN. They would be filing return of income also. In case, such assesses are companies, there are compulsorily required to file return. Hence, these provisions appear to be not well thought of and are without considering proper position of such assesses. Same will not serve any purpose. Amount of tax to be collected or deducted is also very small.

These provisions will also substantially increase number of transactions of TDS or TCS. Details of all transactions are required to be given in statements of TDS or TCS to be filed and same have also to be listed in Returns of income. Department is also expecting assesses to claim credit of TDS or TCS in the year in which relevant transaction has been accounted for. Giving of such details and reconciling the same will be very difficult and will unduly increase the work substantially.

Implementation of provisions of section 206C(1H) of the Act were themselves creating lot of practical problems for the assesses. Provisions of Section 194Q will further add the difficulty. It will be very difficult to determine in each case whether the buyer is liable to deduct tax under section 194Q or not before invoking provisions of section 206C(1H) of the Act by the seller.

Provisions of section 194Q are applicable in case a person who is liable to make payment for purchase of goods exceeding ₹50 lakhs. Tax is required to be deducted at the time of payment or credit of the amount to the account of the seller. Section 206C(1H) of the Act provides for collection of tax with reference to receipt of sale consideration. Hence, there is a distinction between the basis on which tax is required to be deducted under section 194Q and tax is required to be collected under section 206C(1H) of the Act. It is quite possible that purchases of buyer may exceed Rs 50 lacs in one year whereas receipt of sale consideration may exceed ₹50 lac in following year. It would mean deduction of tax on same transaction in one year whereas collection of tax on that transaction in following year.

Modifying accounting software programs on the lines of provisions appears to be challenging job. So far practical problems in keeping record and complying provisions of Section 206C(1H) have not been fully sorted out in big companies and they are trying to adopt an approach which may be favorable to department so as to avoid any penal consequences. Implementation of provisions of Section 194Q appears to be really a difficult task.

This is not a step toward ease of doing business. In fact, these provisions not only should be withdrawn, but in case of big assesses, who are regularly filing their Returns of income and complying with tax payment obligation should be exempted from TDS / TCS and any person making payment to such assesses should not be liable to deduct or collect tax at source. In order to make up collection of tax by the government such assesses may be required to make payment of advance tax on monthly basis. Amount of TDS or TCS collected by the Government in respect of such transactions will be directly paid by such assesses. This will reduce lot of work involved in TDS and TCS compliances without loss to government.

Consequences of not furnishing PAN

In relation to provisions of section 206(1H) it was provided that in case person buying the goods does not furnish PAN to seller, who is liable to collect tax, tax will be collectible at the rate of 1% instead of 0.1% in terms of section 206CC of the Act. Pursuant to proposed provisions of section 194Q of the Act it is proposed to amend provisions of Section 206AA of the Act to provide that in case seller does not provide PAN tax will be deductible at the rate of 5% instead of 0.1%. Hence, there is difference in percentage of tax required to be collected and deducted in case PAN or Aadhar Number is not submitted.

TDS/TCS at higher rate in case of non-filers of returns

By insertion of Section 206AB and 206CCA it is proposed to provide that TDS/TCS will be deducted/collected at double the rates in case the assesses, who have not filed their return for last two years and amount of TDS or TCS has been more than ₹50,000/-. It will further increase difficulty of tax deductors and before making every payment even to small assesses it would be necessary to find out whether he is covered under the provisions of above sections and tax is required to be deducted or collected at higher rate. In case TDS or TCS is being deducted or collected in the case of the assessee and amount of TDS/TCS has been ₹50,000/- or more, definitely he has been having PAN and 26AS is also available in his case at the website of the Department. Since Department has full information regarding such assesses, necessary action should be taken by the department in case they are not filing their returns rather than imposing undue burden on assesses for TDS/TCS. Hence provisions deserve to be dropped.

Further, “specified person” in whose case provisions of above section will be applicable has been defined to mean an assessee who has not filed return in respect of two assessment years relevant to two previous years immediately prior to the previous year in which tax is required to be deducted, for which time limit for filing return of income has expired. Now, say deductor has to deduct tax while making payments during the period April, 2022 to July, 2022 two previous years prior to the year are year ended 31st March, 2021 and 31st March, 2022. Return of income for year ended 31st March, 2022 is to be filed by 31st July, 2022. Then, how one can decide, whether to deduct tax at higher rate or not? Hence, definition of ‘Specified person’ needs to be corrected.

In the interest of simplification, the provision can be that every person in whose case tax deductible is beyond a limit, say ₹ 5000/- in specified sections, he has to submit to the deductor copy of acknowledgement for filing return for the latest assessment year for which time limit for filing return of income has expired, one month prior to the date of raising invoice for services rendered. This will ensure filing of returns in time and will simplify the procedure.

In conclusion, it is submitted that government needs to consider practical difficulties being faced by deductors and also by deductees and be reasonable while imposing tax deduction and collection obligations. Since, now all the payments and transactions are digitalized, it is necessary to look into the provisions of TDS and TCS afresh and simply the provisions and reduce the burden on assesses.

The year 2020 was marred and disfigured by the widespread effect of COVID19 pandemic world over which literally strangulated the growth of majority of the promising economies including India. The government virtually followed the holistic and pragmatic approach and accordingly infused economic stimulus by introducing one of the largest economic packages popularly called the ‘Atamnirbhar Bharat’ with the intent to raise the criterion from being a sluggish economy to a vibrant one. The Budget (for short “Bill”) was so expected to introduce a line of incentives to boost the myriad sectors of the economy as a whole and to achieve the so called projected growth rate for the year 2021. It is being termed as a ”Budget of Hope” and indeed the Government left no stone unturned to provide the desired push to the ailing economy. The focus was to boost the ‘Make in India’ initiative, infrastructure sector and make India a financial services hub to attract foreign investments.

  1. Taxation of charitable trusts & institutions (hereinafter referred to as “Trust” for short) has been under scanner in recent times and Government in last few years have brought in various amendments in the relevant provisions governing the taxation of charitable This article proposes to deal with the proposals relating to taxation of public charitable trusts contained in Finance Bill, 2021. The proposals are aimed at resolving few anomalies, plug loopholes and eliminate possibilities of double taxation while calculating accumulation of income. The Clause –(5) and (6) of the Bill relates to the proposals concerning public charitable trust.

3.0 Proposals relating to Voluntary Contributions

3.1 Till the assessment year 1972-73, there was no provision deeming voluntary contributions to be income of a Trust, generally except for section 12(2) which deemed donations received from other trusts to be income derived from trust property for the purposes of section 11. Sec 2(24)(iia) provides that the term “income” includes voluntary contributions received by the entities like wholly or partly religious or charitable trusts, university, hospitals, schools etc. exempt u/s 10(23C)(iiid)/(vi)/via). The scheme of taxation of public charitable or religious trust or institution is that section 11, subject to other provisions, grants exemption from the levy of income-tax with respect to the income from property held for charitable or religious purposes. The section contemplates the computation of the income in a commercial manner and provides for accumulation or set apart for application. It is, therefore, necessary for AO to identify the property held in trust. Then, he will have to ascertain the income derived from the said properties of the trust and after ascertaining the income, he will have to examine whether any part of the said income has been accumulated for application. Such accumulation could be only up to a maximum, of 15 % of the income from the property. This provision itself shows that to the extent of 85 % of the income, there has to be an application of the income for charitable purposes. The trust may derive income from the trust property in the form of corpus donation.

3.2 In case of Trust the voluntary contributions can be divided into corpus donations, anonymous donations and other donations. The corpus donations are donations which are received with specific direction from the donor that the donation shall form part of corpus of the Trust. Refer to CIT v. Sthanakvasi Vardhaman Vanik Jain Sangh (260 ITR 366) (Guj). Later on Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1-4-1989 inserted clause-(d) to sec. 11(1) of the Act whereby any income in the form of voluntary contributions made with specific directions that they shall form part of corpus of the trust or institution shall not be included in the total income of the previous year of the person in receipt of such income. Thus sec 11(1) (d) grants an unqualified exemption for donations to corpus irrespective of the provision in the trust deed authorizing to apply whole or part of it. At the same time as held by Delhi bench of Tribunal in case of ITO v. Abhilash Kumari Charitable Trust (1987)(28 TTJ 523) the corpus donation can be applied towards the objects of the Trust and that such application would qualify for exemption u/s 11. Recently, in case of DCIT v. Shree Surat Jilla Leuva Patidar Samaj Trust (176 ITD 69)(SRT), it is held that if a donor while making the donations make it clear that the donation so made shall form part of the corpus of the Trust, it would be capital receipts and shall not be chargeable to tax. Consequently, the provisions related to accumulation of income and setting apart of that would not apply in such cases. This resulted into double benefit to the trust in the sense that the corpus donation were claimed exempt u/s.11(1)(d) whereas the amount spent/applied from the corpus donation was being claimed as application against the mandatory 85% application of non-corpus income to be made.

3.3 Therefore, the Bill has proposed the amendment to section 11(1)(d) w.e.f. 01.04.2022. It has proposed to substitute the present exemption by inserting the condition that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sec. 11(5) maintained specifically for such corpus. Thus, in order to claim exemption, in respect of income in the form of voluntary contribution, the trust will have to invest or deposit the same in the forms or modes specified in section 11(5) of the Act. This proposal will also result into locking of funds received in the form of corpus donation as specified investment or deposits. Moreover, the crucial words of this proposal are “maintained specifically for such corpus” which may be interpreted to the effect that the trust has to maintain the corpus donation in a separate account with bank. It will also be required to be clarified whether the trust should maintain separate deposit or investment qua each such corpus donation or maintaining a specific ledger account will suffice the purpose. The intension of the legislature seems that the amount of corpus donation is not utilized but its income is applied for the objects of the trust.

4.0 Proposed clause-(i) of Explanation -4 relating to application from corpus donation.

4.1 The bill also proposes to insert Explanation-4 in order to plug the loop hole of claiming the application out of corpus treated as application against mandatory 85% of non-corpus income. The proposed Explanation-4 provides that the application for charitable or religious purposes from the corpus referred to in section 11(1)(d) shall not be treated as application of income for charitable or religious purposes. However, the proposed proviso to this clause-(i) of Explantion-4, carves out an exception. The proviso provides that in case the amount or part thereof not so treated as application shall be treated as application for charitable or religious purposes in the previous year in which the amount or part thereof is invested or deposited back into the modes specified in section 11(5) maintained specifically for such corpus.

4.2 The effect of this proviso is that the trust has to make a fresh investment or deposit back of the amount equal to the amount not treated as application. Say for example if the trust has received corpus donation of ₹50 lakhs during F.Y.2021-22, in order to claim it exempt u/s.11(1)(d), the investment or deposit as specified in 11(5) should be made. Now, in case, the amount so received is spent in that year, it cannot be claimed as application against the mandatory 85% application of non-corpus income. However, if the trust invest or deposit back in specified modes, either whole or part of the amount so spent, the amount so invested would be treated as application in the year in which investment or deposit is made. Now, in our example, in case the trust makes investment or deposit either of ₹50 lakhs or part thereof, such amount of investment or deposit shall be treated as application and it can be claimed in the mandatory 85% application. This proposal may create difficulty in a situation where the application out of corpus donation is in one year whereas the reinvestment is in another year. Say for example, the trust has utilized ₹ 10 lakhs out of the corpus donation of ₹50 lakhs so received in F.Y.2021-22 whereas the reinvestment is made in F.Y.2022-23, the trust can claim mandatory application only in A.Y.2023-24 whereas it will not be able to claim it in A.Y.2022-23 which will disturb the financial position. This situation may also result into payment of tax in A.Y.2022-23 whereas, a deficit in A.Y.2023-24 which it will not be able to carry forward and claimed in the subsequent year in view of proposed Explanation-5 of this Bill.

5.0 Proposed clause-(ii) of Explanation -4 relating to application from loan or borrowings.

5.1 The Bill also seeks to remove the anomaly in respect of application out of loans & borrowings and such loan or borrowings when repaid are again claimed as application. This, results in unintended double deduction as stated in the memorandum explaining the Bill. The clause-(ii) of Explanation-4 proposes to disentitle the application out of loan or borrowings but to allow the repayment of loan or borrowing in the year of repayment to the extent of such repayment as application for public trust.

5.2 It is proposed in sub-clause (ii) of proposed Explanation-4 of this Bill that the application for charitable or religious purposes from any loan or borrowing shall not be treated as application of income for charitable or religious purposes. However, the proviso to this sub-clause provides that when the amount, either whole or part is not treated as application, the repayment of such loan or borrowing or part thereof shall be treated as application of income for charitable or religious purposes in the year of repayment and to the extent of repayment. Thus, the proposed Explanation will result into allowance of repayment of loan or borrowing as application of income in the year repayment to the extent so repaid. This proposal is in line with the decision in case of CIT v. Janmabhumi Press Trust (242 ITR 457)(Mad) wherein it was held that the repayment of the debt incurred by the trust for construction of the building should be treated as application of the income of the trust for charitable purposes. Similarly, in case of DIT (Exem.) v. Govindu Naicker Estate (315 ITR 217)(Mad) wherein it was held that repayment of bank loan taken for construction of commercial complex for augmenting the income of the trust, is an application of income for charitable purpose. Even CBDT Circular No. 100 dt. 24-01-1973 (88 ITR St.66) also clarified its stand that the repayment of the loan originally taken to fulfill one of the objects of the trust will amount to an application of the income for charitable and religious purposes.

5.3 The issue that may arise on account of this proposal is whether the application for charitable or religious purposes from fresh loan or borrowings taken during the FY 2021-22 and subsequent years would be hit or even application out of old c/f loan or borrowing will be covered? It appears that since the law in force at the time of claim of application of income would be applicable, even the application out of old borrowings will be covered. Say for example, the loan or borrowings is taken during FY 2020-21 and it is used for the purposes of charitable or religious purposes during FY 2021-22 as a capital expenditure or on revenue account, the said application will not be allowed in the A.Y. 2022-23 subject to the provision of sec 11(6) in respect of capital expenditure.

5.4 It further appears that in view of this proposed amendment, in case where loan or borrowings are applied for acquisition of any depreciable asset, the cost of such asset will not be admissible as application of income to that extent of loan or borrowing so utilized and at the same time, the claim of depreciation may be admissible because sec. 11(6) disentitles depreciation or other deduction or allowance in respect of any asset, acquisition of which has been claimed as an application of income in the same year or any other previous year. In such situation, it appears the depreciation allowance may be admissible and the proviso to this proposed clause-(ii) of allowing repayment of loan or borrowings in the year of repayment will not be applicable because it comes into play only when the amount is not treated as application of income. Say for example, the trust has borrowed ₹ 50 lakhs during FY 2021-22 and utilized it towards acquiring a depreciable asset, the amount so spent will not be admissible as application of income under the clause-(ii) of Expl-4 of the Bill. Now sec 11(6) disentitles the claim of depreciation on any asset only if acquisition of which is claimed as application of income in any year. In other words, the trust cannot claim double deduction one, by way of application of asset to the extent income used for acquisition of asset and again the depreciation on its cost. Therefore, a combined reading of the clause-(ii) of Expl-4 and sec. 11(6) enables to take a view that (i) the utilization of loan towards acquisition of any asset will not be treated as application of income and as a result, it will render such utilization entitled to depreciation and (ii) repayment of loan or borrowing will be treated as application of income in the year of repayment because the amount applied towards acquisition of asset has not been allowed as application of income by the clause. Now in our example, the borrowed amount of ₹ 50 lacs spent for acquiring the capital asset will not be treated as application under clause-(ii) as a result, claim of depreciation on said ₹ 50 lacs could be made u/s 11(6). Now when repayment of loan starts from next year, it shall be treated as application of income under this proviso and in that case, it is possible to argue that claim of depreciation may not be allowed u/s 11(6). The suitable clarification on this issue is desired.

6.0 Proposal relating to set off of deficit of preceding year/s:

6.1 The next proposal in the Bill relating to taxation of trusts & institution is the insertion of Explanation-5 to disregard deficit of current year for adjustment against the income of subsequent
year/s. Hitherto there is no provision in the Act for the trust that it can carry forward the excess application of the income to be set off against the future income. However the majority of judicial opinion was that deficit arising out of expenditure over income for the previous year should, therefore, be set off against surplus of income over expenditure relating to subsequent year. Refer to CIT v. Shri Plot Swrtaber Murti Pujak Jain Mandal (211 ITR 293)(Guj); CIT v. Maharana of Mewar Charitable Foundation (1987) (164 ITR 439 (Raj), CIT v. Institute of Banking Personnel Selection (2003)(264 ITR 110 (Bom), CIT v. Siddaramanna Charities Trust (1974) (96 ITR 275 (Mys) and CIT v. Matriseva Trust (2000) (242 ITR 20 (Mad) DIT v. Raghuvanshi Charitable Trust (44 DTR 223)(Del). The Department did not accept this proposition and had filed SLI in Supreme Court in the case of DCIT (Exem.) v. Subros Eduction Society which was dismissed by order dt. 9-11-2017. It was held in these decisions that where expenses for charitable and religious purposes have been incurred in earlier year and said expenses are adjusted against income of a subsequent year, income of that year can be said to have been applied for charitable and religious purposes in year in which expenses has been adjusted. It was further held that income derived from the trust property has to be determined on commercial principles and if commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in section 11 and will have to be excluded from the income of the trust under section 11(1)(a).

Now the proposal in this Bill by way of Explanation-5 puts at rest this controversy in favour of Department.

6.2 Now the proposed Explanation provide that while computing the income to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the preceding previous year. The result would be that such deficit will become a dead loss to the Trust.

6.3 Now the issue may arise in relation to deficit arising on account of excess application out of corpus donation or non-corpus donation/future income. Where the Trust or institution expends or applies more than its income in any year, it can mean that such excess amount is from corpus donation or future income. The intention should be manifest from the accounts. Now, in view of the Explanation-4 to sec 11(1) proposed by the Bill, the application for charitable or religious purposes from corpus donation is not to be treated as an application so that such amount spent or applied will not be eligible for c/f and set off against income of succeeding year/s. Hence is it possible to contend that excess application on revenue account by way of outstanding creditors for expenses can be set of in succeeding year when they are actually paid off?

6.4 Moreover, when there is reinvestment or deposit of amount applied from corpus donation which is to be treated as application in the year of investment or deposit as per proviso to clause-(i) of Expl-4, can deficit arising on account of such application be set of in next year/s ?

6.5 It is submitted that proposed Expl-5 provides for blanket rejection of such deficit of any preceding year/s against the current year because the words used in this Explanation are “any set off or deduction or allowance”. Therefore once any amount has gone into the composition of application in any of the preceding year, the same shall not be included in the calculation of application for the current year. It is desired that suitable relief should be allowed in cases where there is actual payment/application which has generated deficit.

7.0 Proposals relating to funds or trust or institution u/s 10(23C)

7.1 Section-10(23C) provides for exemption of income received by any person on behalf of different funds or institutions etc. specified in different sub-clauses. The sub-clauses (iiiad) of clause (23C) of section 10 provides for the exemption for the income received by any person on behalf of university or educational institution existing solely for educational purposes and not for the purposes of profit if the aggregate annual receipts of such educational institution do not exceed the amount of annual receipt, presently, of ₹ 1 cr. as per Rule-2BC of the IT Rules. Similarly, the sub-clauses (iiiae) of clause-(23C) of the said section provides for exemption in respect of income received by any person on behalf of hospital or institution as referred to therein provided the annual receipts of such hospital or institution does not exceed ₹ 1 cr. as per said Rule.

7.2 Now, the Bill proposes a welcome amendment by way of increasing the limit to ₹5 cr. and such limit shall be applicable to an assessee with respect to the aggregate receipts from university or educational institution etc. as referred to in said sub-clauses. This amendment will take effect from 01.04.2022 and accordingly apply to A.Y.2022-23 and subsequent assessment years. The close reading of the proposed amendment indicate that the upper ceiling of ₹5 cr. is the aggregate annual receipts of such university or educational institution etc. instead of the limit applicable to each university or other educational institution of the assessee and this may result into the benefit becoming illusory. It may be stated that the assessee may be having number of educational institutions running different educational courses say engineering or commerce or arts faculty. It is suggested that when a beneficial amendment is going to be made by way of increasing the upper limit of receipts, it should have been made applicable from A.Y.2021-22 just as many of the proposals of the Bill has been made applicable from A.Y.2021-22.

7.3 Under the existing provisions of the Act, the third proviso to section 10(23C) provides that the income in the form of voluntary contribution made with a specific direction that they shall not form part of the corpus of such fund or university or other educational institution etc. This Explanation was inserted by the Finance Act, 2020 w.e.f. 01.04.2020 but in view of the amendments proposed in this Bill in respect of voluntary contributions and application or accumulation of income for specified purposes u/s. 11(1) of the Act, the consequential amendment has been proposed in respect of the funds or trust or institution covered under section 10(23C)(iiiad) and (iiiae) w.e.f. 01.04.2022.

8.0 To conclude, the tax provisions applicable to charitable or religious trust have become increasingly complex and it has become difficult for the small trust, more particularly religious trust to comply with various procedural formalities and it may have to pay a high price. While one certainly appreciates that an exemption from payment of taxes does not come without duties that one has to discharge, the law in this regard must be administered with a human touch. The provisions relating to charitable or religious trusts or institutions should be interpreted in a manner that it advances the objects and encourage philanthropic activities which are badly needed in this country. Hon. Finance Minister in her budget speech, at para-170 has stated that “we hope to reduce compliance burden on small charitable trust running educational institution and hospitals”.

Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

1. Proposed Rationalization of provisions of Equalization Levy

1.1 Background:

1.1.1 Equalisation Levy (“EL”) was introduced in India in 2016, with the intention of taxing the digital transactions i.e., the income accruing to foreign e-commerce companies from India. It was aimed at taxing business to business transactions and was applicable to consideration received or receivable for specified services provided.

1.1.2 The provisions of EL are contained in Chapter VIII (containing Section 163 to Section 180) of the Finance Act, 2016 (“FA 2016”), as a separate, self-contained code, not forming part of the Income-tax Act, 1961 (“ITA”). It is therefore not covered by double taxation avoidance agreements (DTAAs). Consequently, non-residents subjected to EL cannot claim relief under DTAAs and will not be entitled to credit for EL paid in India in their country of residence.

1.1.3 Under Section 165 of FA 2016, the charge of equalisation levy shall be at the rate of 6% of the amount of consideration for any specified service received or receivable by a person, being a non-resident from:

  1. a person resident in India and carrying on business or profession; or

  2. a non-resident having a permanent establishment in India

The following conditions are to be met to be liable to equalisation levy under Section 165:

  1. The payment should be made to a non-resident service provider

  2. The annual payment made to one service provider exceeds ₹1,00,000 in a financial year.

1.1.4 Under Section 165A of FA 2016, from the 1st of April, 2020, equalisation levy shall be charged at 2% of the amount of consideration received/receivable by a non-resident e-commerce operator from e-commerce supply or services made, provided or facilitated by it:

  1. to a person resident in India

  2. to a non-resident in the ‘specified circumstances’

  3. to a person who buys such goods, services or both using internet protocol address located in India

Specified circumstances as mentioned in the 2nd point means:

  1. sale of advertisement, which targets a customer, who is a resident in India or a customer who accesses the advertisement though internet protocol address located in India; and

  2. sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India

An E-Commerce Operator is a non-resident who owes, operates or manages a digital or electronic facility or platform for online sale of goods or online provision of services or both.

E-Commerce Supply or Services means (i) online sale of goods owned by the e-commerce operator, or (ii) online provision of services provided by the e-commerce operator, or (iii) online sale of goods or provision of services or both facilitated by the e-commerce operator or (iv) any combination of the above.

The equalisation levy under Section 165A shall not be charged—

  1. where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment;

  2. where the equalisation levy is leviable under section 165; or

  3. sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated as referred to in sub-section (1) is less than two crore rupees during the previous year.

Similar transactions are sought to be taxed under ITA when Non-Resident has a business connection or Permanent Establishment in India.

It may be noted that as the EL leads to obligation on US companies to pay additional taxes, undertake costly compliances and subjects them to double taxation without regard to international tax principles, the Office of the United States Trade Representative (“USTR”) has found the EL to be actionable under the Trade Act of 1974. An India-USA trade deal which is stuck in the pipeline may also be impacted. The amendments proposed by the Finance Bill do little to help India’s case before the USTR as they create more uncertainty and potentially increase the tax impact on non-resident e-commerce operators.

1.2 Budget 2021 changes:

In last year’s Finance Act, 2020, the Government had expanded the scope of the EL to cover non-resident e-commerce operators making supplies in India. The provisions as they were introduced were ambiguous and created a lot of confusion among stakeholders. Recognising this, Budget 2021 has sought to provide some clarifications such as defining ‘online sale of goods’ and ‘online provision of services’, and removing from its scope the income that is already taxed as royalty or fees from technical services. The Memorandum to the Finance Bill, 2021 (“Finance Bill”) notes that the Government felt the need to provide certain clarifications to correctly reflect the intention of certain provisions of the Expanded EL. However, the changes have brought with them further questions and potentially unintended consequences as discussed here under:

1.2.1 Proviso is proposed to be inserted in Section 163 (Extent, commencement and application) to clarify that consideration received or receivable for specified services and for e-commerce supply or services shall not include consideration taxable as royalty or fees for technical services in India under the Income-tax Act read with the agreement notified by the Central Government under section 90 or section 90A of the Income-tax Act. Accordingly, royalty & fees for technical services would still be taxed at a higher rate of 10%.

1.2.2 Explanation to Section 164(cb) (Definitions) (Certain Activities to constitute e-commerce supply or service) is proposed to be inserted to define activities taking place online to be considered as “online sale of goods” and “online provision of services, such as

  1. acceptance of offer for sale, or

  2. placing of the purchase order, or

  3. acceptance of the purchase order, or

  4. payment of consideration, or

  5. supply of goods or provision of services, partly or wholly,

The clarification seems to suggest that EL would even cover any businesses that have an e-commerce model, pure e-commerce model, marketplace model and an intermediary as well. Offline transactions that may have even a minor digital element, could be potentially covered. There are doubts regarding whether the scope of the EL now covers situations where even a communications platform or a payment aggregator could be covered within its scope, even though no commission is earned by it. For example, if a non-resident platform enables users to message each other and two parties agree to sell a tangible good, it is not clear whether such platform would be required to deduct EL at 2% even though it provides free services to the users and it may not even be aware of the transaction and in any way the platform is not responsible for collecting or settling payments between the users.

1.2.3 Section 165A (Charge of Equalization Levy) (Meaning of Consideration received or receivable inserted) is proposed to be amended by inserting sub-section (3) to provide that consideration received or receivable from ecommerce supply or services shall include:

  1. consideration for sale of goods irrespective of whether the e-commerce operator owns the goods;

  2. consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator

In case of marketplace e-commerce operators, whereby the e-commerce operator is merely facilitating the sale of goods or provision of service between the seller and buyer on its platform in lieu of commission from the registered seller or buyer or both, it was unclear whether the EL would apply on the entire consideration of the transaction or only on the commission earned by the e-commerce operator. This can have a significant impact on marketplaces as it is likely to create cash flow issues for the e-commerce operators. Further, it is unclear whether EL will be applicable in situations wherein marketplaces facilitate sale of goods or provision of service without charging any commission from either the buyer or seller.

These amendments to EL are proposed to take effect retrospectively from 1 April, 2020.

2. Amendment to Section 10(50) of ITA to give effect to EL amendments

Last year’s Finance Act, 2020 had expanded the scope of EL provision under Section 165A of FA 2016 effective AY 2020-21. However, Section 10(50) exempted such income from AY 2021-22. This raised apprehension of double levy i.e. under the Act as well as under EL.

Finance Bill 2021 seeks to remove this anomaly by providing exemption from AY 2020-21.

It is also proposed to clarify that the income referred to in this clause shall not include and shall never be deemed to have included any income which is chargeable to tax as royalty or fees for technical services in India under the said Act read with the agreement notified by the Central

Government under Section 90 or Section 90A.

These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

3. Proposed insertion of definition of “Liable to tax” (Section 10(29A) of ITA)

The term ‘liable to tax’ is used in Section 6, Section 10(23FE) and in various tax treaties entered by India.

Therefore, Section 2(29A) is proposed to be inserted to define liable to tax as: The term ‘liable to tax’ in relation to a person means that there is a liability of tax on such person under any law for the time being in force in any country, and shall include a case where subsequent to imposition of tax liability, an exemption has been provided.

The new provision requires analysis of domestic tax law of country of residence to reach conclusion whether non-resident meets requirement of liable to tax. This is so because liability to taxation is not the same as payment of tax. Liability to taxation is a legal situation whereas payment of tax is a fiscal fact.

It may be noted that Explanation 4 to Section 90 provides that where any term is not defined in DTAA but is defined in the Act, it shall have same meaning as defined in the Act. However, Article 3(2) of DTAA permits reference to domestic law for undefined terms in DTAA only when context otherwise requires.

This amendment is proposed to take effect from Assessment year 2021-22 and subsequent assessment years.

4. Addressing mismatch in taxation of income from notified overseas retirement fund [Section 89A]

Proposed section 89A seeks to provide relief from double taxation due to mismatch of taxation on income from withdrawal of retirement benefit account maintained by a specified person in a notified country on account of the amount being taxable in the notified State on receipt basis while being taxable in India on accrual basis (“Specified Account”). The details of the application of the provision are to be prescribed by the Central Government.

This may relieve the problem of paying tax in India on an accrual basis, whereas taxes paid in foreign country on cash basis in future by a person will result in payment of the taxes again. Tax paid in India on current/accrual basis will not be given as credit due to year of tax in India vis-à-vis year of taxation in foreign country being different.

This amendment is proposed to take effect from 1st April, 2022 and will accordingly apply to assessment year 2022-23 and subsequent assessment years.

5. Rationalisation of the provision concerning withholding on payment made to Foreign Institutional Investors (FIIs) [Section 196D]

Section 196D prescribed flat withholding rate of 20% (plus surcharge and cess). Unlike Section 195, reference to ‘rates in force’ was missing resulting in TDS rate from 20.8% to 23.92% depending upon dividend income and categorization of FII.

Therefore, a proviso is being inserted to Section 196D providing for possibility of considering treaty rate for withholding purposes. Accordingly, it is proposed to provide that in case of a payee to whom an agreement referred to in 90(1) or 90A(1) applies and such payee has furnished the tax residency certificate referred to in section 90(4) or section 90A(4) of the Act, then the tax shall be deducted at the rate of 20% or rate or rates of income-tax provided in such agreement for such income, whichever is lower. Both the conditions need to be satisfied, mere tax residency certificate will not suffice.

This amendment is proposed to take effect from 1st April, 2021

6. Constitution of the Board for Advance Ruling

The Authority for Advance Rulings (AAR) is proposed to be substituted by the Board for Advance Ruling. The Board to consist of two members, each being officer not below the rank of Chief Commissioner of Income Tax, which will ensure continued functioning. This and other proposed changes are stated to impart greater efficiency, transparency and accountability.

This proposed change is anticipated to create a concern that executives will henceforth decide the matter instead of the judiciary.

These amendments are proposed to take effect from 1st April, 2021.

7. Proposed insertion of new section 206AB

Budget 2021 proposes to insert new Sections 206AB and 206CCA to motivate tax payers to file income tax returns. Accordingly, these new provisions provide higher rates of withholding tax (in the form of TDS or TCS, respectively) in instances where the person entitled to receive the sum of money:

  1. has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted,

  2. has an aggregate of tax deducted at source and tax collected at source of INR 50,000 or more in each of these two previous years; and

  3. for whom the time limit of filing return of income under Section 139(1) has expired.

It is further clarified that these provisions shall not apply, inter-alia, to non-residents who do not have a permanent establishment in India (i.e. a fixed place of business in India through which the business of the enterprise is wholly or partly carried on).

In view of the above proposal, a non-resident would be required to take extra precaution while determining whether it has a permanent establishment in India or not as an adverse determination by the tax authority could lead to default due to non-compliance with the aforesaid withholding tax provisions.

8. Relief to Start-ups

The existing provisions of Section 80-IAC of Income-Tax Act, 1961 provide for a deduction of an amount equal to 100% of the profits and gains derived from an eligible business by an eligible startup for three consecutive assessment years out of 10 years at the option of the assessee subject to the condition that the total turnover of its business does not exceed ₹ 100 crore for an eligible startup incorporated on or after the 1 April 2016 but before 1 April 2021.

The Budget now proposes to extend the period of incorporation of such eligible start-ups till 1 April 2022. This amendment will take effect from the 1st April, 2021.

Further, in order to incentivize funding for the startups, the Budget proposes to extend the capital gains exemption for investment in startups that is available under Section 54GB by one more year to March 31, 2022.

The government has also proposed to incentivize incorporation of one-person companies, a move which will benefit startups and innovators. This move will allow such firms “to grow without restriction on paid-up capital and turnover, allowing conversion into any other type of company at any time, reducing residency limit for an Indian citizen to set up an OPC from 182 days to 120 days, and allow also non-resident Indians to incorporate OPCs in India,” as per the budget speech.

The paid-up capital of small firms has also been increased to ₹ 2.50 crore from ₹ 50 lakh.

According to the Economic Survey 2020-21, as of the last week of December, there were 41,061 govt-recognised startups in India. Of this, over 39,000 startups accounted for 4,70,000 jobs. With as many as 38 unicorns, with 12 of them coming up last year, India’s startup ecosystem is currently the world’s third-largest.

9. Measures for Affordable Rental Housing

Budget 2021 has proposed Tax Incentives for Affordable Housing and Affordable Rental Housing Project. In order to incentivize purchase of affordable houses, it is proposed to extend the eligibility period for claim of additional deduction under Section 80-EEA for interest of ₹ 1.5 lakh paid for loan taken for purchase of an affordable house to 31st March 2022.

Further, in order to increase the supply of affordable houses, it is proposed to extend eligibility period by one more year for claiming tax holiday under Section 80-IBA for affordable housing project approved by the competent authority after 1st day of June, 2016 but on or before 31st March, 2022 by amending clause (a) of sub-section (2). It may be noted that the provisions of sub-section (1) of the said section provides for 100% deduction of the profits and gains derived from the business of developing and building affordable housing projects subject to certain conditions.

To promote supply of Affordable Rental Housing for the migrant workers, it is also proposed to allow a new tax exemption for the notified Affordable Rental Housing Projects. Accordingly, it is proposed to insert sub-section (1A) in the said section so as to provide for 100% deduction of the profits and gains derived from the business of developing and building affordable rental housing projects. It is also proposed to insert a new clause (da) in sub-clause (6) to define the expression “rental housing project” which means a project which is notified by the Central Government in the Official Gazette under this clause on or before the 31st day of March, 2022 and fulfills such conditions as may be specified in the said notification

These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

One of the four objects of the of the Finance Bill, 2021 was stated to be ‘removing of difficulties faced by the taxpayers’. Clauses 142-147 of the Finance Bill, proposing amendments to the Prohibition of Benami Property Transactions Act, 1988 (PBPTA), can be categorized as a step taken in that direction. Proposed amendments deals with the working of Adjudicating Authority (AA)under the PBPTA i.e. section 71 of the Act. Before deliberating upon the amendment, it will be useful to know the history of AA under the Act. Section 7 of the original Act i.e. PBPTA provided for an AA in the following manner:

Adjudicating Authority.–The Central Government shall, by notification, appoint one or more Adjudicating Authorities to exercise jurisdiction, powers and authority conferred by or under this Act.

For the unknown reasons the PBPTA remained practically unimplemented for a very long time. As the Rules and procedures to implement the Act were not framed, so it became a paper tiger. In 2016,certain amendments were made to the and section 71 was introduced. Section of the 71 of the Act reads as under:

  1. Transitional provision.—The Central Government may, by notification, provide that until the Adjudicating Authorities are appointed and the Appellate Tribunal is established under this Act,the Adjudicating Authority appointed under sub-section (1) of section 6 of the Money-Laundering Act, 2002 (15 of 2003) and the Appellate Tribunal established under section 25 of that Act may discharge the functions of the Adjudicating Authority and Appellate Tribunal, respectively, under this Act.]

Clearly, the provisions of the section were in the nature of stop gap arrangement, but as least these provisions tried to fill the vacuum created by the original Act. It appears that at the time of introducing the amendment to the PBPTA, the Ministry of Finance could not select and appoint the members of AA who could adjudicate the matters. So, as an emergency measure the AA.s of Prevention of Money Laundering Act (PMLA)were designated as AA.s of PBPTA also. Besides, the Appellate Tribunal of PMLA was assigned to function as the Appellate Tribunal for the PBPTA also.

While appointing the AA.s of the PMLA as the AA.s of PBPTA, the Ministry of Finance did not take in to cognizance the pendency of the cases and facilities of the AA.s of PMLA. In the infancy days of PMLA,there were only a few cases with the AA.s of that Act. But,by the year 2016,when the amendments were introduced to PBPTA, hands of AA.s, PMLA were full-rather the AA.s were overburdened with the workload. Cases coming from all over India were distributed among the three members of the AA. Sometimes there were only two members in the AA, PMLA. The volume of adjudication work was so heavy that members of the AA,PMLA could hardly handle it. As in the most of the cases the AA.s would confirm the provisional attachment orders passed by the officers of the Enforcement Directorate,so it was easier for them to anyhow stick to the timeline of passing adjudicating orders under the PMLA.

It is said that famine never comes alone,it is generally accompanied by a ‘Purshottam Maas’. Almost the same thing happened with the AA.s, PMLA. After 2016 amendment to the PBPTA, cases of that Act also started landing on the tables of members of the AA. It virtually became the proverbial overloaded camel that was being loaded with extra luggage. With its meager resources (manpower and office space) AA.s. PMLA were managing anyhow. But, the outbreak of fire in the office premises of AA, PMLA and shortage of staff made it difficult for them to handle the cases of both the Acts. I am witness to the huge piles of files surrounding the members of AA as well as their plight and stress. Due credit should be given to the members of AA, PMLA who were handling the cases of both the Acts till date..The proposed amendment will provide the most needed relief for the members of the AA, PMLA.

It is surprising that till date Government of India has not been able to appoint regular adjudicating authority to decide PBPTA cases. Four years was sufficient time to frame the terms and conditions for appointment of AA.s and select them. But, why it has not taken place, no one knows. There is no shortage of competent officers of Government of India/members of the Bar who can take over as members of AA, PBPTA. Proper recruitment rules and appointment of the members would have solved the problem for ever and would have given impetus to effective implementation of the PBPTA. An important legislation, to tackle the vices of Benami Property, deserves its own AA.s rather than depending on borrowed hands.

The Finance Bill proposes that now the Competent Authority constituted under the Smugglers and Foreign Exchange Manipulators(Forfeiture of Property) Act,1976 (SAFEMA) shall be the Adjudicating Authority under the PBPTA. SAFEMA, containing only 27 Sections, is one of the very small Acts. Section 3 (b)defines Competent Authority as under:

(b) “competent authority” means an officer of the Central Government authorised by it under sub- section (1) of section 5 to perform the functions of a competent authority under this Act;

Section 5 of SAFEMA reads as under:

Competent authority. (1) The Central Government may, by order published in the Official Gazette, authorise as many officers of the Central Government (not below the rank of a Joint Secretary to the Government), as it thinks fit, to Perform the functions of the competent authority under this Act.

(2) The competent authorities shall perform their functions in respect of such persons or classes of persons as the Central Government may, by order, direct.

Sections 7 and 16-19 deal with functions and powers of the Competent Authority. In short,an officer of the Central Government, not below the rank of a Joint Secretary to the Government, will now function as AA for the PBPTA matters. The members of BAR are not eligible to be appointed as Competent Authority under the SAFEMA.

One of the reasons for transferring the matters to the CA.s, SAFEMA, can be that only a few SAFEMA cases are pending for disposal with them. But, if their hands are full like that of AA of PMLA, then the proposed change will not be able bring any qualitative change.

As the offices of CA.s, SAFEMA are located in Chennai, Delhi, Kolkata and Mumbai, it is possible that matters pending with AA, PMLA would be sent to all the four places. If it happens, noticees of PBPTA would not be required to travel to Delhi to appear before the AA, PMLA. But, we have to wait to find out the nitty gritty of the proposed scheme of transfer of cases from AA, PMLA to CA, SAFEMA.

As per the Finance Bill, CA.s, SAFEMA will commence discharging their functions as AA PBPTA, from 01.07.2021. The Bill has proposed to extend the period of limitation under sub-section (7) of section 26 of the PBPTA. It provides that where the time limit for passing order under sub section (7) of section 26 of the PBPTA expires during the period beginning from 1.07.2021 and ending on 29.09.2021, the time limit for passing such order shall stand extended to 30.09.2021.

Let us hope that the proposed arrangement will remove the difficulties faced by the tax payers,as promised in the Bill.

Constitution of the Board for Advance Ruling and the need to pronounce rulings in advance?

Union Budget 2021 inter-alia proposes to take the agenda of the Government of making the tax payer and the tax department interactions faceless and also the time and again emphasized objective of minimizing tax litigation. Various steps are proposed to be taken towards these twin objectives viz.:

  • Constitution of a Dispute Resolution Committee for small and medium taxpayers;

  • Reduction in time limit for reopening of assessments;

  • Replacing the Authority for Advance Rulings [‘AAR’] with the Board for Advance Rulings [‘BFAR’];

  • Scrapping of the Income Tax Settlement Commission;

  • Provision for faceless proceedings before the Income Tax Appellate Tribunal in a jurisdiction less manner.

In this Article we have made an attempt analyse the implications of scrapping the AAR and replacing/substituting it with the BFAR.

Background:

In his Budget Speech for 1992-93, the then Finance Minister had assured that, in the interest of avoiding needless litigation and promoting better taxpayer relations, a scheme for giving advance rulings in respect of transactions involving non-residents was being worked out and would be put into operation. In pursuance thereof, a new Chapter XIX-B was introduced in the Income-tax Act, 1961 (“the Act”) on Advance Rulings in respect of transactions involving non-residents. “Advance Ruling” was defined to mean the determination, by an authority constituted by the Central Government and known as the AAR, of a question of law or fact in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident.

The AAR consists of a Chairman and various Vice-Chairman, revenue members and law members. In times to come, the law also expanded the scope of the AAR to enable it to decide an issue in the case of residents subject to the threshold prescribed.

Substantive provisions of law relating to the AAR are contained in section 245N to 245V of the Act and the procedure is spelt out in Rules 44E and 44F of the Income-tax Rules, 1962 as also the “Authority for Advance Rulings (Procedure) Rules, 1996” notified.

The AAR is prohibited from allowing the application where the question raised is pending before any income-tax authority or an Appellate Tribunal or where the question relates to determination of fair market value of any property or in cases where the transaction or issues designed prima facie for avoidance of income-tax.

The advantages with which the AAR was envisaged were:

  • Surety for the tax payer about its income-tax liability;

  • Ability to avoid long-drawn litigation;

  • Ability to sort out complex issues of income-tax including those concerning Double Tax Avoidance Agreements;

  • Binding nature of the rulings on the Applicant Tax payer as also the Commissioner of Income-tax and authorities below him, not only for one year but for all the years unless there was a change in facts and law;

  • Time limit of six months provided for the AAR for pronouncing its Rulings.

In it is initial days, the AAR saw a lot of tax payers approaching it. The AAR also pronounced many major rulings on the complex issue of taxation in the international tax domain in its hey days. These rulings are still used as a reference material by the tax payers and / or the appellate authorities to decide particular aspects.

Need for change – legislative intent of the proposal:

Over a period of years, for various reasons there has always been a substantial amount of pendency before the AAR. This was due to the number of cases / applications filed as also due to the inherent composition of the AAR.

Recently, even the Supreme Court in the case of National Co-operative Development Corporation v. CIT (2020) 427 ITR 288 had an occasion to commented as under:

The ground level situation is that this methodology has proved to be illusionary because there is an increasing number of applications pending before the AAR due to its low disposal rate and contrary to the expectation that a ruling would be given in six (6) months (as per section 245R(6) of the IT Act), the average time taken is stated to be reaching around four (4) years! (See Deloitte Report on Advance Rulings in India: Delivering Greater Tax Certainty (Deloitte Tax Policy Paper 5, 2019)). There is obviously lack of adequate numbers of presiding officers to deal with the volume of cases. Interestingly, the primary reason for this is the large number of vacancies and delayed appointments of Members to the AAR (ibid.,). In view of the time taken, the very purpose of AAR is defeated, resulting in the mechanism being used infrequently as is evident from the ever-increasing tax related litigation.

Actual reason given in the Memorandum Explaining the provisions of the Finance Bill, 2021, which has necessitated the need to look at an alternative method of providing Advance Rulings, is reproduced hereunder:

“A bench cannot function if the post of Chairman or Vice-Chairman is vacant. As per section 245-O of the Act, persons eligible for appointment as Chairman of AAR are retired judges of the Supreme Court, retired Chief Justice of a High Court or retired Judge of a High Court who has served in that capacity for at least seven years. Similarly, the persons eligible for appointment as Vice-Chairman are retired judges of a High Court. As per past experience, the posts of Chairman and Vice-Chairman have remained vacant for a long time due to non-availability of eligible persons.

This has seriously hampered the working of AAR and a large number of applications are pending since last many years. There is, therefore, a need to look for an alternative method of providing advance ruling which can give rulings to taxpayers in timely manner.”

It with this background that the Budget, 2021 has proposed to constitute a new authority viz., the Board for Advance Ruling and to amend the existing provisions of the AAR.

The Budget proposals:

It has been proposed that the AAR will cease to operate with effect from a date to be notified by the Central Government, which will constitute one or more BFAR for giving advance rulings on or after the notified date. Each such BFAR will consist of 2 Members each being an officer not below the rank of Chief Commissioner.

It is also proposed that the Ruling given by the BFAR shall not be binding on either parties i.e. the Applicant or the tax department and if aggrieved, either of the parties can file appeals before the High Court(s). This appeal can be filed within a period of 60 days from the date of communication of the Order or Ruling or which period can be extended by the High Court by a further period of 30 days at its discretion.

Enabling amendments are also proposed to transfer the applications pending with the AAR to the BFAR alongwith all the records, documents, etc.

Other existing provisions in section 245R of the Act, which deal with the procedure on receipt of application, powers of the Authority, obtaining a Ruling by misrepresentation / fraud, etc. are proposed to be made applicable mutatis mutandis to the BFAR.

The Budget also proposes to empower the Central Government to make a scheme by notification in the Official Gazette for the purpose of giving advance ruling by the BFOR. The scheme will impart greater efficiency, transparency and accountability by eliminating interface to the extent technologically feasible, by optimizing utilization of resources and introducing dynamic jurisdiction. The Central Government may, for the purposes of giving effect to this scheme, by notification in the Official Gazette, direct that any of the provisions of this Act shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification. However, no such direction shall be issued after the 31 March 2023.

Implications and comments:

While the intent of the Government of giving speedy advance rulings to the tax payers/ applicants in laudable, the effectiveness of BFAR would be tested in times to come.

In our view, for the BFAR to be a success as desired, the following factors amongst others would be necessary:

  • Approach and attitude of the Members on the Board;

  • Time taken for disposal of applications;

  • Consistency in the Approach of pronouncing Rulings on identical issues across the Country;

  • Success of the faceless mechanism in the process which may involve understanding of complex factual pattern and innovative legal arguments;

While the road ahead seems to be bumpy and tough for the BFAR in the ever-evolving world of technology and fast changing dynamics of tax jurisprudence, India continues to be a fascinating investment destination. Having an effective mechanism of an Advance Ruling is the need of the hour and it is with this that one can only wish that the BFAR does not go on the path of its predecessor AAR but works out as effective and efficiently as it is envisaged by all.

INTRODUCTION

1 The Supreme Court in CIT v. Dewas Cine Corporation (1968) 68 ITR 240 (SC) and CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 (SC) held that the distribution, division or allotment of assets between partners of a firm consequent on its dissolution amounts to a mutual adjustment of rights of the partners and such transaction was neither a sale nor exchange nor transfer of assets of the firm. Further in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC) it was held that there was no transfer in terms of extinguishment of rights of the Firm in the Capital asset when the capital asset is distributed to the partner on dissolution. The relevant portion of said decision which explains the reason for said legal position is as under :

“18. Having regard to the above discussion, it seems to us clear that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally, in law, the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm’s property or firm’s assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution the firm’s rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partnership which follows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm’s rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm’s rights in the partnership assets when distribution takes place upon dissolution.”

1.1 Thereafter, in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC) it was held that partner’s bringing in his capital asset into partnership as capital contribution was not chargeable to capital gains tax u/s 45 as no consideration is received by partner within the meaning of section 48 and no profit or gain accrues to him in commercial sense.

1.2 The above legal position i.e. (i) no liability to tax in the hands of the partner at the time of contributing capital asset as well as distribution of same on dissolution and (ii) no liability under stamp Act (as there is no transfer) led to tax evasion by some assessee who abused the legal position by making sale of asset through the medium of Partnership firms i.e. by conversion of personal asset into partnership asset and then again converting said partnership asset into personal asset of other partner. As per CBDT Circular No 495 dtd 22nd September,1987 reported (1987) 168 ITR ST 100-101, to plug this escape route of avoiding capital gains tax, Section 45(3) and Section 45(4) were introduced w.e.f 1/4/1988.

1.3 Though Section 45(4) was introduced to deal with evasion of tax, the Income Tax Department unsuccessfully tried to apply said provisions to genuine transactions of Reconstitution of firms even when there was no distribution of capital asset. This was generally done when the firm underwent reconstitution and before such reconstitution the assets of the firm were revalued and the Retiring partners received enhanced value of the property upon retirement. In catena of decisions, it was held that that after retirement of partners, the partnership continued and the business was also carried on by the remaining partners. Further, there was thus no dissolution of the firm and there was no distribution of capital asset so as to fall within the ambit of Section 45(4). In Addl. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) Supreme Court had approved the decision of Gujarat HC in CIT v. Mohanbhai Pamabhai, [1973] 91 ITR 393 (Guj) wherein it was held that when a partner retires from partnership firm and receives consideration in terms of money which includes proportionate share of goodwill therein, the same is not taxable as there is no ‘transfer’. Relying on Mohanbhai Pamabhai, the Apex Court had in the case of CIT v. R.Lingamallu Raghukumar (2001) 247 ITR 801 (SC) held that even if consideration paid to retiring partner, exceeds the balance in its capital account, the same shall not be chargeable to tax. The present amendment to Section 45(4) is to enlarge the Scope of Section 45(4) by going beyond the original object for which same was enacted and in doing so reversing the legal position settled by various judicial precedents

EXISTING SECTION 45(4)

2 The existing provisions of section 45(4) provides that the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of such firm or other association of persons or body of individuals of the previous year in which the said transfer takes place. Further, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration for the purposes of section 48.

2.1 The existing Section 45(4) is substituted by Section 45(4) and insertion of new Section 45(4A).

PROPOSED SECTION 45(4) & 45(4A)

3 New proposed sub-section (4) of section 45 of the Act applies in a case where a specified person who receives during the previous year any capital asset at the time of dissolution or reconstitution of the specified entity.

3.1 The capital asset represents the balance in the capital account of such specified person in the books of the specified entity at the time of its dissolution or reconstitution. In this situation, the profit and gains arising from the receipt of such capital asset by the specified person shall be chargeable to income-tax as income of the specified entity under the head ―capital gains and shall be deemed to be the income of such specified entity of the previous year in which the capital asset was received by the specified person.

3.2 For the purposes of section 48 of the Act, the fair market value of the capital asset on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

3.3 The balance in the capital account of the specified person in the books of account of the specified entity is to be calculated without taking into account increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset.

4 New proposed section sub-section (4A) of section 45 of the Act applies in a case where a specified person receives during the previous year any money or other asset at the time of dissolution or reconstitution of the specified entity.

4.1 The money or other asset is required to be in excess of the balance in the capital account of such specified person in the books of accounts of the specified entity at the time of its dissolution or reconstitution. In this situation, the profits or gains arising from the receipt of such money or other asset by the specified person shall be chargeable to income-tax as income of the specified entity under the head “Capital gains” and shall be deemed to be the income of such specified entity of the previous year in which the money or other asset was received by the specified person.

For the purposes of section 48 of the Act,

  • value of the money or the fair market value of other asset on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset; and

  • the balance in the capital account of the specified person in the books of accounts of the specified entity at the time of its dissolution or reconstitution shall be deemed to be the cost of acquisition. The balance in the capital account of the specified person in the books of account of the specified entity is to be calculated without taking into account increase in the capital account of the specified person due to revaluation of any asset or due to selfgenerated goodwill or any other self-generated asset.

5 For the purposes of above two sub-sections,-

  • specified person is proposed to be defined as a person who is partner of a firm or member of other association of persons or body of individuals (not being a company or a cooperative society), in any previous year;

  • specified entity is proposed to be defined as a firm or other association of persons or body of individuals (not being a company or a cooperative society);and

  • self-generated goodwill and self –generated assets are proposed to be defined as goodwill or asset, as the case may be, which has been acquired without incurring any cost for purchase or which has been generated during the course of the business or profession.

6 Consequential amendment is also proposed in section 48 of the Act to provide that in case of specified entity, the amount included in the total income of such specified entity under sub-section (4A) of section 45 which is attributable to the capital asset being transferred, shall be reduced from the full value of the consideration to compute income charged under the head capital gains. This is to be calculated in the manner to be prescribed later. This is to mitigate the double taxation which may have happened but for this provision in a situation where an asset which was revalued and for which income under the proposed sub-section (4A) of section 45 of the Act was brought to tax is transferred subsequently by the specified entity.

REASON FOR AMENDMENT.

7 As per the Memorandum explaining the provisions, reason for the amendment is stated as under:

“………it has been noticed that there is uncertainty regarding applicability of provisions of aforesaid sub-section to a situation where assets are revalued or self-generated assets are recorded in the books of accounts and payment is made to partner or member which is in excess of his capital contribution.”

7.1 The above reason for amendment clearly show that the object to re-introduce Section 45(4) in new avatar and insertion of new Section 45(4A) is different than the object of introducing it originally. It now proposes to tax transactions which otherwise could not have been taxed as per the scheme and object of the Indian Partnership Act, 1932 read with the Income tax Act, 1961.

7.2 The triggers for the amendment seems to be the two recent decisions of (i) Madras High Court in National Company v. Asstt. CIT, [2019] 415 ITR 5 (Mad), wherein it was held that capital asset received by the partner at the time of reconstitution of partnership firm by way of retirement is not covered by the provisions of Section 45(4) and consequently not liable to capital gains, [the court distinguished the decision of the Bombay High court in CIT v. A.N. Naik Associates, [2004] 265 ITR 346 (Bom) wherein it was held that transfer of capital asset to partner on retirement was covered u/s 4(4)] and (ii) Bombay High Court in PCIT v. Electroplast Engineers [2019] 263 Taxman 120 (Bom)(HC) wherein under a Deed of Retirement cum Reconstitution of the Partnership, the original two partners retired from the firm and three new partners continued the business of the firm. Goodwill was evaluated and the retiring partners were paid certain sum for their share of goodwill in proportion of their share in partnership. It was held that in the instant case all that happened was the firm’s assets were evaluated and the retiring partners were paid their share of the partnership asset. There was clearly no transfer of capital asset taxable u/s 45(4).

ANALYSIS OF PROPOSED AMENDMENT

A separate Code

  1. Section 45(4)/(4A) are applicable notwithstanding provisions of Section 45(1). It is now a charging provision. The requirement of “transfer” u/s 2(47) is no longer there. There is no requirement of distribution of Capital Asset i.e. no requirement of physical division, allocation etc of capital asset. Receipt of capital asset is sufficient. Further receipt of money in settlement on retirement is also covered though same does not constitute transfer. Reconstitution of firm is now specifically covered. The provision also provides for what would be the sale consideration and what would be the cost of acquisition. Hence, Section 45(4)/(4A) will have to be treated as a separate code for computation of capital gains.

Reconstitution.

10 In CIT v. Omprakash Premchand & Co (1997) 227 ITR 590 (MP) it is held that reconstitution and dissolution of firms are two distinct legal concepts. Dissolution brings the partnership to an end, while reconstitution means continuation of the partnership under altered circumstances.

10.1 Section 31 & 32 of the Partnership Act deals with re-constitution of Partnership firms. It covers the situation of admission, retirement, death and insolvency of partner. Section 187 of the Income Tax Act, deals with Assessment of Partnership firms where there is change in constitution of Partnership firms. Said Section not only covers admission and retirement but also covers change in profit sharing ratios made during the subsistence of the firm.

Retirement.

11 In National Company v. Asstt. CIT (Supra) it was held that distribution of Capital asset on retirement was not covered within the ambit of Section 45(4). In CIT v. R Lingmallu Rajkumar (Supra) it was held that the excess amount received by the assessee on retirement from the two partnership firms is not assessable to capital gains u/s 45(4) in the hands of the partner. Similarly in PCIT v. Electroplast Engineers (Supra) it was held that share in goodwill paid to partner in excess of his balance on retirement is not exigible to tax in the hands of the firm u/s 45(4). In CIT v. Dynamic Enterprises [2013] 359 ITR 83 (Kar)(HC) (FB) there was revaluation of asset pursuant to admission of new partners and retirement of few old partners and after such revaluation the retiring partners were paid cash. It was held that where retiring partner took cash towards value of his share in partnership firm and there was no distribution of capital assets among partners, there was no transfer of capital asset and, therefore, no profits or gains chargeable to tax under section 45(4) arose in hands of assessee-firm.

11.1 Thus, under existing provisions of Section 45(4), upon reconstitution of the firm, i.e upon retirement of partner, or admission cum retirement then such reconstitution did not give rise to a taxable event. Further, settling the account of a partner in cash on retirement did not result in distribution of capital asset and was thus excluded from the applicability of Section 45(4).

11.2 As per the amended Section 45(4) and Section 45(4), such reconstitution would fall within the ambit of Section 45(4) and Section 45(4A). Further, where the partner receives only money on reconstitution of the firm, even then there will be a taxable event u/s 45(4A). Thus, the ratio of above decisions rendered in the context of original Section 45(4) will no longer be a good law.

Admission & Change in profit sharing Ratio.

12 In ITO v. Smt Paru D Dave [2008] 110 ITD 410 (Mum)(Trib) asset was revalued and the revalued amount was credited to two partners who were the only partners of the firm. After few days, new partners were admitted who brought capital and gave loans to the firm and the profit sharing ratio of the assessee was reduced. Both the partners had subsequently withdrawn the revalued amounts credited to their accounts. The income tax department sought to tax such withdrawal by applying Section 45(4). It was held that Section 45(4) is not applicable. The relevant portion is as under :

“16. In the facts before us the partnership asset was revalued by the partners at the start of the year and the difference on account of revaluation of asset was credited to the partners account. The revaluation of partnership assets was anterior to the introduction of new partners. Revaluation of assets by partnership firm does not attract capital gains. The revaluation of assets of partnership and the credit of revalued amount to the capital account of partners in their respective share ratio does not entail any transfer as defined under section 2(47) of the Income-tax Act. The introduction of new partners to a partnership firm owning immovable assets and consequent reduction in the share ratio of present partners does not entail any relinquishment of their rights in the partnership property. On introduction of new partners, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses, if any of the partnership business. When any new partner is introduced into an existing partnership firm, the profit sharing ratios undergo a change, which does not amount to transfer as defined under section 2(47) of the Act, as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership and thus on realignment of profit sharing ratio, on introduction of new partners, there is no relinquishment of any non-existent share in the partnership assets as the asset remained with the firm. Such an arrangement is not covered by the provisions of section 45(4) of the Act, which covers the case of dissolution of partnership firm. Accordingly, no capital gains arises on such relinquishment of share ratio in the partnership firm. We confirm the order of CIT(A) and dismiss the grounds of appeal raised by the revenue.”

It appears that ratio of above decision will no longer hold good as reconstitution i.e admission of a partner is now covered by Section 45(4) & (4A) and thus where there is change in profit sharing ratio pursuant to such reconstitution whereby the partners receive the money over and above the amounts in their capital account on the date of such reconstitution then such change in profit sharing ratio will be cover by Section 45(4)/4(4A). It will not matter that revaluation was anterior in time to reconstitution since while calculating the balance in the capital account, increase on account of revaluation is to be ignored.

Change in profit sharing ratio by inter-se transfer between partners.

13 In Anik Industries Ltd v. DCIT [2020] 116 taxmann.com 385 (Mum)(Trib) assessee was contesting the chargeability of Capital Gains of Rs.400 Lakh received by it on account of reduction in share in a partnership firm namely M/s. Mahakosh Property Developers from 30% to 25%. The reduction in share in partnership was transferred to existing partners and the compensation was settled by credit to the current account of Assesse and debit to the current accounts of other partners. Both the Assessee as well Department did not dispute that there was Reconstitution on account of change in profit sharing Ratio. According to AO, said payment was nothing but consideration for intangible asset i.e. the loss of share of partner in the goodwill of the firm. As per ITAT the provisions of s.45(4) shall have no application since it was not a case of distribution of capital assets on the dissolution of firm rather it was a case of reduction in share of one partner which was taken over by existing partners. The firm has continued its business with existing partners including the assessee.

13.1 In the above case, as per proposed Section 45(4A) the partnership firm M/s Mahakosh Property Developers would be taxed as the partner had received money provided of-course such money received by the partner exceeds the balance in his capital A/c with the firm. However, the issue whether Reconstitution would cover change in profit sharing ratio [as provided u/s 187] without there being any admission or retirement of partner will be subject matter of litigation. According to me, both Section 45(4A) and Section 187 will have to be read harmoniously and change in profit sharing ration may fall within the ambit of Section 45(4A).

Death

14 In CIT v. Moped & Machines [2006] 281 ITR 52 (MP)(HC) there were two partners. The firm stood dissolved by operation of law as one partner died. It was held that there was no transfer u/s 2(47) on dissolution and further there was no distribution of assets as only one partner remained after the death of other partner. Thus, Section 45(4) had no application.

However, under the proposed Section 45(4)/45(4A), the requirement of distribution of capital asset and transfer of capital asset is no longer there. The only requirement is the event of dissolution of the firm and receipt of capital asset by the partner. Thus, in the above case, there is dissolution of the firm as well as receipt of the assets of the firm by the surviving partner. Consequently, firm will be liable to tax u/s 45(4)/45(4A).

Minor

15 In CIT v. Hari Nath Ram Nath [1997] 224 ITR 713 (All)(HC) in the context of Section 187, it was held that where on attainment of majority of two minors admitted to benefit of partnership one opted to become a partner while other opted out of partnership which necessitated execution of fresh partnership deed, it was a case of reconstitution of firm.

15.1 In CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 (SC) a case pertaining to Gift Tax, it was held that reduction in share of father upon admission of minor sons is gift of goodwill, liable for gift tax. Thus, where minor sons are admitted it will amount to Reconstitution of partnership Firm. Upon such Re-constitution, if any partner (including the new minor partners) receives money or other asset (i.e. including receipt of right to share in the profits from other partner), then provisions of Section 45(4)/45(4A) may be attracted even though the firm continues and there is no distribution of any Capital Asset.

Conversion

16 In CIT v. Texspin Engg. & Mfg. Works [2003] 263 ITR 345 (Bom)(HC) Assessee-firm which claimed that it had been converted into limited company under Part IX of Companies Act, was subjected to capital gains tax under section 45(4) on ground that there was transfer of assets by way of distribution and such transfer was on dissolution of firm. It was held by the High court that in instant case properties of erstwhile firm vested in limited company which was different from distribution on dissolution and, hence, very first condition for application of section 45(4), that is, transfer by way of distribution of capital asset was not satisfied.

16.1 It appears that above legal position with respect to Section 45(4) in case of conversion will no longer hold good as requirement of transfer and distribution is dispensed with for charging capital gains.

Capital A/c v Current A/c

17 The decision in Anik Industries Ltd v. DCIT (supra) also raises another issue. Whether settlement of accounts through current account or say loan account would be covered by Section 45(4)/(4A). The twin requirement is of receipt of Capital asset/money or other asset and such receipt is in excess of balance in capital account. Thus, if the twin requirements are satisfied then even if settlement on re-constitution is through the current account same would fall within the ambit of Section 45(4)/(4A).

Income taxable in the hands of the Specified Entity.

17.1 In Sudhakar Shetty (2011) 130 ITD 197(Mum), ITO v. Fine Developers [2013] 55 SOT 122 (Mum) & Mahul Construction Corporation v. ITO [2018] 168 ITD 120 (Mum) it was held that Capital gains u/s 45(4) will be taxable in the hands of the Partner and not the firm. The ratio of these decisions to this extent will no longer be valid.

“or other assets” – Scope.

18 One of the areas of litigation would be the determination of the scope of the term “or other assets” used in Section 45(4A). An important issue would be whether other assets would include stock-in trade of the firm. In ITO v. Fine Developers [2013] 55 SOT 122 (Mum) it was held that Section 45(4) would not have application to Section 45(4). However it could now be contended that earlier Section 45(4) used the word Capital Assets only and not “other assets”. But the applicability of Section 48 for computing Capital gains and amendment to Section 48 with respect to capital gains computed u/s 45(4A) would indicate that stock in trade may not be covered within the ambit of Section 45(4A). It appears that Section 45(4A) is inserted to cover cases where money is received by the partner or money and other assets including capital assets are received by the partner on dissolution/reconstitution and it is in that context that the words “money or other assets” are used.

Cost of Acquisition & Indexation.

19 In Section 45(4) cost of acquisition is given as

“(b) the cost of acquisition of the capital asset shall be determined in accordance with the provisions of this chapter.”

In Section 45(4A) cost of acquisition is given as

“(b) the balance in the capital account of the specified person in the books of accounts of the specified entity at the time of its dissolution or reconstitution shall be deemed to be the cost of acquisition.”

19.1 The above different version of cost of acquisition in Section 45(4) & 45(4A) raise following ambiguities :

  1. If cost of acquisition of the capital asset is to be taken u/s 45(4) then why Section 45(4) states “which represents balance in his capital account”.

  2. If cost of acquisition of the capital asset is to be taken u/s 45(4) then whether upto the extent of capital balance it is taxable u/s 45(4) and thereafter it is to be taxed u/s 45(4A) and whether practically both the Sections could operate simultaneously.

  3. If cost of acquisition u/s 45(4) is the balance in capital account then why different cost of acquisitions are prescribed for 45(4) & 45(4A).

  4. Why memorandum explaining the provisions only provide for one method of cost of acquisition i.e. the one prescribed u/s 45(4A).

19.2 As regards indexation, no specific mention is made about the same in Section 45(4)/(4A) is made about the same though what would be cost of acquisition for the purposes of Section 48 is prescribed. However, as Section 48 is made applicable it appears that cost of acquisition will be indexed cost of acquisition in case of Long term capital gains. It will be welcoming if this issue is clarified in the Act.

CONCLUSION

20 The present amendment will be effective from the 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years. Thus transactions of dissolution/reconstitution which have taken place after 1/4/2000 and before this Bill will also be covered by bthe amended provisions. Judicially it is well settled under the Income Tax Act, 1961 that amended provisions which modify accrued rights or which impose obligations or create new liabilities or attach new disability have to be treated as prospective unless the language of the statute is clear that it has retrospective operation. In CIT v. Walfort Shares & Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC) it is stated that “Retrospective operation of law should not be given so as to effect, alter or destroy an existing right and to create new liability or obligation. New liability cannot be created by a subsequent amendment in respect of a transaction when such law was not in the Statute book.” Also, the retrospective application of laws goes against the assurance given by the present government that taxation laws will be applicable prospectively.

20.1 The present amendments as pointed out above has overturned catena of judicial precedents. The scheme and theme of Indian partnership Act, 1932 is completely divorced from the applicability of the Income Tax Act, 1961. Partnerships as structure for carrying on business are easily created, terminated and involve least compliance. They are most convenient structure for businessman who are not highly educated and professional. Present amendments which are ambiguous, prone to litigation and which run contrary to the foundation of Partnership laws will discourage citizens from adopting Partnership structure to conduct business.

The Income-tax Settlement Commission has been abolished with effect from 1st February. 2021 and no application for settlement will be accepted from that date. Clauses 54 to 65 of the Finance Bill, 2021 are relevant to deal with the consequential arrangements proposed to be made to deal with the pending settlement applications. A new institution, to be known as the Dispute Resolution Committee (DRC in short), is proposed to be set up by adding a new Chapter XIX-A, with only one section 245MA, to lay down its constitution and scope of work. It is not a substitute for the Settlement Commission but an institution within the Income-tax Department to resolve disputes arising during the course of regular assessment proceedings. We propose to deal with these two subjects separately in the following paragraphs.

(i) Abolition of Income-tax Settlement Commission (ITSC in short)

  1. Clause 59 of the Finance Bill, 2021 discontinues the ITSC by inserting sub-section (5) to section 245C of the Act to provide that no application for settlement shall be filed on or after 1st February, 2021. The pending settlement applications will also not be dealt with by the existing Settlement Commission because it stands abolished from the same date (clause 56 amending section 245B of the Act). This is despite the fact that the terms of assignment of the existing Vice-Chairmen/Members of the Commission have not expired and they are available to dispose of the settlement applications pending before the Commission. Instead, vide clause 55 of the Bill, an interim Board (s) will be constituted by the Central Board of Direct Taxes, New Delhi (CBDT in short) each consisting of three officers of the rank of Chief Commissioners of Income-tax to dispose of the pending settlement applications. The existing members of the Commission are also of the rank of Chief Commissioner of Income-tax, the only difference being that they were appointed from a panel of senior most Chief Commissioners by the Revenue Secretary in the Ministry of Finance, Government of India, but the members in the Interim Board (s) to dispose of the pending settlement applications will be appointed by the Central Board of Direct Taxes. Option has been given to the applicants to withdraw their pending settlement applications in view of section 245M(1) of the Act within three months of the commencement of Finance Act – 2021 by sending an intimation to the Assessing Officer in prescribed manner.

  2. There has also been a similar Settlement Commission in existence for indirect taxes i.e. for Customs and Central Excise set up almost simultaneously with the Income-tax Settlement Commission. That Commission has not been abolished and will continue to be in operation.

  3. The computation of tax liability and its payment through settlement by way of confession, compromise or dispute resolution has been prevalent in most of the countries of the world for a very long time. More specifically, in UK, it has been in vogue for about 100 years since 1923. Provision of this nature has also been in existence in USA, Canada, France, Germany and in several other counties. This is popularly known as the confession method of computation of income-tax liability of a person. Under this method, the taxpayer is required to voluntarily declare his true and correct income, pay the tax and interest thereon and cooperate with the Income-tax Department for ascertaining if the disclosure of income has been true and full. He then becomes entitled to waiver fully or partly from the levy of penalty and immunity from criminal prosecution. The objective is to collect due taxes from a recalcitrant taxpayer expeditiously without spending the scarce investigation sources of the Income-tax Department and providing only one chance during the life time of the taxpayer.

  4. In India, the computation of income and tax liability by settlement was introduced on the basis of the recommendations of the Direct Tax Enquiry Committee, popularly known as the Wanchoo Committee after the name of the Committee’s Chairman, Mr. Justice N.N. Wanchoo, the retired Chief Justice of the Supreme Court of India. The Committee gave its final report on 24th December, 1971 and the process of computation of income and tax liability by settlement by setting up the Settlement Commission was introduced in the Income-tax Act vide Taxation Laws (Amendment) Act, 1975 w.e.f. 1st April, 1976. Initially, there was only one Bench located at Delhi but with the increase in the popularity of the Commission and growth of applications for settlement, more and more Benches were set up. Before its recent discontinuation with effect from 1st February, 2021, the ITSC has had seven functioning Benches, three at Delhi, two at Mumbai and one each at Kolkata and Chennai.

  5. No reason has been given either in the speech of the Hon’ble Finance Minister or in the Explanatory Memorandum to the Finance Bill, 2021 for the abolition of the Commission. It was providing an option to the assessees to settle their tax disputes expeditiously within 18 months of the filing of the settlement application rather than going in for prolonged and ruinous tax litigation. Besides, as stated above, very senior Departmental officers of the rank of Chief Commissioners of Income-tax, used to hear and dispose of the settlement applications. One can only surmise that the reason for abolishing the Settlement Commission may be that the Central Government does not wish to continue with the policy of the taxpayers involved in searches and surveys getting settled their cases through the Commission and generally obtaining immunity from penalty and prosecution. Instead, the Government appears to be determined to prosecute such tax evaders to effectively curb the evil of tax evasion.

  6. Be that as it may, there does not appear to be any justification for abandoning the working of the Commission abruptly with effect from 1st February, 2021. The provisions in the Finance Bill, 2021 ought to have been made effective from 1st April, 2021 as the changes in the annual budget for administration of direct taxes are generally made on financial year basis. Even otherwise, the legal validity of this provision from 1st February, 2021 appears to be debatable as the Bill was introduced in the Lok Sabha on that date and is not enforceable as law till it is passed by both the Houses of the Parliament and assent to it is given by the Hon’ble President of India. Doubtlessly, the Parliament has the power to make a law effective from a retrospective date but it being a substantive provision materially affecting adversely the rights of the taxpayers, it ought to have been enforced through an Ordinance by the President of India if at all the Government was keen to discontinue the functioning of the Settlement Commission from 1st February, 2021 and not allowing it to dispose of even the settlement applications pending before it after that date despite the availability of adequate manpower and the requisite infrastructure for this purpose. This provision has even prevented the passing of orders of settlement in cases which had been heard before 1st February, 2021 but written orders could not be dictated due to difficulties caused by the spread of Covid epidemic thereby causing avoidable difficulties to such applicants. They will also suffer financially by being required to present and argue their settlement applications once again and that also before a differently constituted Interim Board(s). At the very least, the pending settlement applications may have been required to be disposed off by the existing Benches of the Settlement Commission since members with experience of dealing with them are available and their tenure of office has not expired.

  7. The proposed discontinuation of cases by settlement also appears to be a retrograde step. It will increase tax disputes and more importantly, it will increase the size of the unpaid income tax because of the non-payment of tax demands raised by the income-tax authorities in the course of regular assessments which will be generally disputed in appeals involving prolonged tax litigation.

  8. If the main objective of disbanding the Commission with effect from 1st February, 2021 was to provide a deterrent against tax evasion by criminally prosecuting the tax evaders in search and seizure cases, it could be achieved by launching criminal prosecution proceedings in selected cases soon after the search or survey. The Settlement Commission would then get denuded of its power to grant immunity from criminal prosecution to such applicants because of the specific prohibition contained in the first proviso to section 245H(1) of the Act which specifically provides that no immunity from prosecution shall be granted by the Settlement Commission in cases where the proceedings for the prosecution for any such offence stood already instituted against an applicant before the date of receipt of the settlement application u/s 245C.

  9. The inability to launch criminal prosecution in big cases of tax frauds would also not have been any hindrance for the continuation of the Settlement Commission. As stated above, its discontinuance will not only increase tax litigation but may also encourage non-payment of taxes in search and survey cases and thus contribute significantly to the growth of income tax arrears.

(ii) Constitution of Dispute Resolution Committee (DRC)

  1. A new Chapter XIX-AA has been inserted in the Act with one section 245MA. It provides for the constitution of one or more DRCs in certain cases to be specified by the Board for specified taxpayers who may opt for dispute resolution. The disputes in only those cases where the returned income is Rs. 50 lakhs or less and the aggregate amount of variation to the income of an assessee by the Assessing Officer is proposed to be Rs. 10 lakhs or less will be eligible to get the disputes in their cases resolved by the institution of DRC. Although, the composition of the DRC and its work procedure will be specified by the Central Government in exercise of the powers conferred under sub-section (1) of section 245MA, it is likely to consist of two or three Commissioners of Income-tax as its functions in essence will be similar to those of a CIT (Appeals).

  2. An assessee will be eligible to take the benefit of this provision only if he fulfills the specified conditions prescribed in the Explanation to Section 245MA notably; it is not a case of search or survey or involves double taxation relief u/s 90 or 90A of the Act or where criminal prosecution has not been launched under the Income-tax Act or a case involving any of the economic offences such as Conservation of Foreign Exchange And Prevention Of Smuggling Activities Act, 1974, punishable under the Indian Penal Code or Prevention of Corruption Act, 1988 or Prohibition of Benami Property Transactions Act, 1988, or Prevention of Money Laundering Act, 2002 or Unlawful Activities (Prevention) Act, 1967.

  3. It can be argued that an assessee falling in the excluded categories does not deserve sympathy but even for included categories, the qualifying conditions of eligibility of returned income of only upto Rs. 50 lakhs and the addition to the disclosed income being limited to Rs. 10 lakhs or less is too small to make this institution attractive or useful for a large number of income tax payers. More so, the recent inflationary pressures in the economy would further make the institution of the DRC eligible for a small number of taxpayers.

  4. For eligible assessees, the DRC will have the powers, under sub-section (2) of section 245MA, to reduce or waive any penalty and to grant immunity from criminal prosecution for any offence punishable under the Income-tax Act.

  5. The Central Government has been empowered under sub-section (3) of section 245MA to make a scheme for the constitution of such a Committee with the object of imparting greater efficiency, transparency and accountability by (i) eliminating the interface between the DRC and the taxpayer to the extent “technologically feasible”; (ii) introducing functional efficiency and (iii) introducing the dynamic jurisdiction.

  6. Thus, it appears that the DRC will also consider and decide all tax disputes in a faceless manner as in the case of regular assessments and appeals before the Commissioners of Income-tax (Appeals) and the Income-tax Appellate Tribunal, largely on the basis of written submissions. However, the use of the words “technologically feasible” in sub-section (3) permits personal interaction through video conferencing. Since the decisions of DRC would be final, it will be desirable that hearing in physical form may also be permitted in the interest of justice.

  7. The scope of DRC appears to be rather limited for some other reasons also. The mandatory limit of addition being Rs. 10 lakhs or less in aggregate and the income returned being Rs. 50 lakhs or less will make the DRC applicable to a very small number of taxpayers. The limit of Rs. 10 lakhs of addition, in particular, with small tax effect, vis-à-vis the cost of representation before the DRC through written submissions or video conferencing will itself outweigh the benefit that can be expected from the Committee. In such eligible cases, it may perhaps be more advantageous and cost effective to seek immunity from imposition of penalty and prosecution by opting for making an application to the Assessing Officer u/s 270AA of the Act under which, on payment of disputed tax, the assessee becomes entitled to the waiver of penalty and prosecution. Even in the normal course, it may not be desirable from the point of view of deterrence to spend time and energy on levying penalty and initiating prosecution in such small cases involving returned income of upto Rs. 50 lakhs and additions upto Rs. 10 lakhs.

Recommendations

  1. In the opinion of this author, it is highly desirable to avoid tax disputes. But this objective can be achieved by identifying the issues where such disputes are common and issuing clear and detailed public circulars clarifying those points. In most of other countries notably, USA, UK, Japan and Germany, they have the system of issuing detailed instructions on interpretation of statutory provisions by which income tax disputes can be prevented. In our country also, similar system was started as early as in 1898 and has been working quite satisfactorily for about 100 years. But in recent years, its scope has been narrowed down to largely issuing public circulars following the introduction of the annual Finance Act. The taxpayer’s right to get Board’s interpretation on a particular provision in the Income-tax Act has practically been given up and delegated to the Authority for Advance Rulings, an institution with limited scope for interpretation and that institution has also been discontinued by the proposed amendment of sections 245N and 245-O of the Act by this Finance Bill, 2021 with effect from a date to be notified by the Central Government in the Official Gazette. Instead it is being replaced by a Board for Advance Rulings consisting of two members of the rank of Chief Commissioner of Income-tax as may be nominated by the Board. The interpretation of a legal provision has to have the effect of law to be followed by all the taxpayers and Department Officers. The proposed authority will not be effective as it will not have the advantage of the advice of the Ministry of Law which has the legal expertise and is the fountain head of making laws and interpreting the provisions for the various Departments of the Central Government. In the past, Board’s instructions on interpreting the legal provisions used to be issued in consultation with the Ministry of Law. On very important issues, the Secretary of the Ministry of Law used to consult the Attorney General of India.

  2. In our opinion, it is necessary that the ruling or interpretation of the legal provisions should be issued by the CBDT in consultation with the Ministry of Law and should be in the public domain for compliance by the taxpayers as per the practice followed in the past. That may reduce tax litigation in a more effective manner than by the DRC or by getting a ruling from the proposed Board for Advance Rulings.

No professional practicing before the Assessing Officer or the Commissioner of Income tax (Appeal), (CIT(Appeal)) can ever forget instances of waiting outside the room of the concerned officer for hours together, with bags overflowing with books of account, vouchers and other documentary evidence and often being told to come back again the next day because the officer was busy with some important work or had more important hearings or was generally unavailable that day.

One cannot forget the times when numerous hearings would ensue and the file of the officer would be riddled with hundreds and thousands of papers and often one would be disappointed to receive an assessment order without much discussion on the taxpayer’s contentions and entailing huge additions to income, divorced from the facts on record.

  1. The senior officers were helpless and could not do much to mitigate the harassment since the law gave enormous powers to the Assessing Officer to enforce attendance of the taxpayer and seek any information that he deemed fit for the purpose of assessment.

Allegations of high handedness and corruption were commonplace and it was perceived that nothing in the department moved without consideration or personal relationships.

Successive Governments, though aware of this malaise were unable to provide succor and the taxpayers continued to suffer, often silently, due to the fear of retribution.

  1. An out of the box thinking was required for putting an end to this wasteful, time consuming and rather demeaning exposure of taxpayers before the field officers which the Hon’ble Prime Minister, Shri Narendra Modi did by introducing and implementing the concept of faceless assessment.

  2. Today, barring matters before the Central Circles, Transfer Pricing Division, and International Tax Division, assessment proceedings in all other cases are conducted through the faceless route wherein, the Assessing Officer’s identity in terms of his name and location is unknown; the scrutiny is based on information flagged in accordance with risk management strategy formulated by the Board and the assessment is sought to be confined to examining the flagged information only. The taxpayer is required to furnish the required information sitting in his office and uploading it through the portal and the assessment order is to be passed only after the he is put to notice to explain the unresolved issues. There is a window of opportunity of personal hearing provided by way of video hearing if the taxpayer is able to tender credible and compelling reasons.

  3. The above process is also sought to be replicated before the CIT (Appeal). In respect of proceedings before the CIT (Appeal), most in the professional community believe that for a fair and a meaningful opportunity of being heard, the window of virtual hearing must be provided on mere askance by the assessees.

Income tax law is very complex. There are detailed factual explanations which involve complex cross referencing with documentary evidence and thereafter the need to show how the facts of the taxpayer’s case are similar to the facts in respect to the decisions and judgments relied upon.

No matter how well one expresses himself in English, there can be no substitute to explaining the nuances of complex issues face to face, either in person or through the virtual mode. A situation whereby questions that could possibly remain unanswered while reading a submission can be obviated during a virtual hearing leading to a better understanding of the facts of the case and enabling the Commissioner in arriving at a factually correct decision.

  1. Besides, India has 22 official languages and English is a language which is learnt over the years and that too by a fortunate few. Faceless appeals before the CIT (Appeal) pre-supposes an expertise in written English language. There is a vast majority of competent professionals who can better express themselves in Hindi or their naturally spoken language rather than English. Is it fair to insist that they either submit in writing in flawless English or suffer the consequences by way of an adjustment to the income of their clients due to their inability to effectively communicate in English in spite of having a good and a deserving case. Certainly income tax proceedings are not undertaken to punish a taxpayer. They are invoked to determine the real income in accordance with the provisions of the Income Tax Act. Therefore, if justice has to be seen to done, it is extremely important that, whenever requested, an opportunity of virtual hearing be allowed. This will ensure that the orders passed are reasoned and are after proper understanding of the facts and the legal provisions.

Besides, the principle of natural justice mandates a fair, transparent and a meaningful hearing. Mere filing of written submissions along with documentary evidence can never be considered as a complete substitute to a face to face hearing.

  1. I am afraid that very soon, after the initial euphoria and the enthusiasm of making the faceless appeal process in the form that exists today a success begins to peter out and the Commissioners grow wary of reading hundreds of pages of submissions and perusing reams of documents, orders will be passed by taking the safer and easier route of agreeing with assessing officer and consequently litigation will only proliferate and the harassment in terms of recovery, penalty and prosecution would continue. This wonderful reform would have failed just because the window of virtual hearing could not be provided.

  2. On 1st February, 2021, after being nearly one hour into the speech, when the Hon’ble Finance Minister, started to read para 158 of her budget papers and stated that for ease of compliance and to reduce discretion, the Income Tax Appellate Tribunal (ITAT) will also become faceless and when personal hearing is needed, it shall be done through video conference, our hearts sank.

The professional community across the board was of the view that with the Tribunal becoming faceless, justice would be the inevitable casualty.

  1. The ITAT, referred to as the mother of all Tribunals, came into existence in the year 1941 and ever since its formation, it epitomizes fair, equitable and expeditious justice. It is the final fact finding quasi-judicial authority having the trappings of a Court. It is independent, in as much as, it is only administratively controlled by the Ministry of Law and there is not even an iota of interference from any quarter when it comes to passing of orders.

In fact, there is no system of writing annual confidential reports (ACR) of the Members of the Tribunal after the Madras High Court in the case of Uttam Bir Singh Bedi, (Writ Petition No.7715 of 2010) held that the President of the ITAT has no power or authority to write the ACRs of the Members. It was further held that being a judicial body, the ITAT should have judicial autonomy and therefore, the President cannot act like a Reviewing Authority.

  1. The taxpayers have full faith in this Institution as more than 70% of its decisions are accepted. Even the higher courts accept and approve most of its decisions.

The Members who are selected have rich and varied experience in the field of law and accounts and the Institution through the open court mechanism, referred to as ‘in public hearings’ dispenses justice freely and dispassionately day in and day out.

The professionals, the departmental representatives and the Hon’ble Members of the Tribunal deliberate in an informal manner in the open court and are not bound by the strict rules of evidence. The facts are assiduously gone into and doubts are allayed then and there through intensive questioning and cross questioning. Assistance of other counsels present in the open court is also taken and the prime emphasis is on understanding the facts.

Ample opportunity is given to the counsels to express their views and hearings are concluded only after the facts have been effectively and conclusively explained. Almost 40 to 50% of the cases are decided and pronounced then and there in the open court.

  1. The orders passed by the Tribunal have won accolades across the cross section of society. I would not be doing justice to this article if some of the encomiums showered on the ITAT are not reproduced here for the benefit of the readers.

Late Sh. Pranab Mukherjee, Former President and Finance Minister of India

“Over the last more than seven decades, the ITAT has shown exemplary diligence in dealing with intricate domestic as well as international taxation issues rendering decisions which balance the interests of the taxmen and the citizens. The tribunal has been adjudicating disputes in the field of direct taxes in a fair and impartial manner. It has been discharging its functions not only to the satisfaction of the Executive but also that of the taxpayers at large.”

Late Sh. Arun Jaitley, Former Finance Minister and Senior advocate, Supreme Court of India

“It is trite position that ITAT, being an appellate authority under the Direct Tax laws, has acquitted itself admirably considering that it has to cope with a complex maze of case laws as well as several amendments made each year in the Income Tax Act.

ITAT has conducted itself in an unbiased and fair manner in the discharge of its duty of adjudicating disputes under direct tax laws and is held in high esteem by the taxpaying fraternity as well as Revenue Department.”

Justice Mr. Sanjay Kishan Kaul, Supreme Court of India on the occasion of Platinum Jubilee Celebrations for the Tribunal on 17th December, 2015

“This tribunal, which was one of the oldest judicial bodies in the country, founded in the pre-independent India of 1941, when there was no independent forum to adjudicate matters under the Income-Tax Act, with its motto “Sulabh Nyay, Satwar Nyay” meaning “Easy justice, Swift Justice”, has been systematically adhering to the aforesaid principles and imparting justice – inexpensive, expedient, accessible and free from technicalities – adjudicating intricate tax related issues at the hands of experts having vast knowledge on the subject.”

Shri J. S. Ranganathan, Formerly Judge, Supreme Court of India; Member, Law Commission of India & Chairman, AAR on the occasion of Platinum Jubilee Celebrations for the Tribunal

“The vast expansion in the number of benches of the Tribunal and of the institutions before it over the years no doubt speaks of its need as well as its great popularity. But, more than numbers, it is quality of the output (now running into several tones of legal journals every year) that is the true measure of its contribution to tax jurisprudence. Interpretations of tax legislations with the frequency of amendments and the complexity of problems it posted was always difficult enough. The economic prosperity of India and the expansion of its commerce, the vast increase in global trade with the interaction of different currencies, the evolution of innovative transactions in international trade and increasing resort to internet, e-mail and transactions on the electronic media have exposed the Tribunal to new vistas of knowledge and the evolution of new legal concepts. The Tribunal has successfully attempted not only to match the speed of its disposals to the pace of the institutions but also risen to meet the fresh challenges.”

Justice Mr Y.V. Chandrachud, former Chief Justice of India

“…The ITAT is a model administrative Tribunal whose illustrious example and commendable performance may well be emulated by similar other tribunals in different disciplines. There is uniform praise in the manner in which the Tribunal functions and I suppose it is one of the few quasi-legal institutions which is not plagued by the problem of arrears….”

  1. Section 255 sought to be introduced by the Finance Bill, 2021 seeks to improve efficiency, transparency and accountability by converting the proceedings before this Institution from the open and ‘in public hearing mode’ to a faceless mode. Interface between the Members of the Tribunal and the parties in dispute is sought to be eliminated. Optimal utilization of resources is sought to be achieved and the concept of dynamic jurisdiction is to be brought in.

The ensuing paras will show that all the parameters and the objectives that this proposed section seeks to achieve are already being met and whatever else is sought to be achieved can be done by tweaking the existing procedures instead of resorting to this rather disruptive action of converting the proceedings to the faceless mode.

As far as the efficiency is concerned, pendency is a benchmark for measuring the same and statistics show that the total number of cases pending before the Tribunal are only 75,000 which is quite clearly a manageable number if the pending vacancies of Members are filled up. Matters are disposed of by the Tribunal within a year of the appeal being filed and not much time is taken to conclude the hearings. The delay in hearings, if any, is primarily attributable to lack of adequate number of Departmental Representatives and the near negligible assistance they get from the field formations which can be improved.

As far as transparency goes, there can be nothing better than an open court hearing where all deliberations take place in the presence of the public. In the Tribunal both the Department and the taxpayers through their counsels address their arguments openly and in an informal manner.

We fail to understand how filing written submissions through faceless mode would bring about greater transparency. In fact, this would make the system entirely opaque.

A Court cannot be likened to a machine where raw material is inserted and the final product comes out as expected. Complex issues involving facts and finer aspects of law can never be explained through written submissions alone. They have to be explained in person and face to face so that any doubt or misgivings are allayed then and there. Therefore, in my view transparency which is the hallmark of this Tribunal would be an inevitable casualty in a faceless hearing mode envisaged by the Government.

As far as accountability goes, the next higher authority, which is the High Court, is the best judge of the orders passed by the Tribunal. They set right the orders passed by the Tribunal and the fact that 90% of the orders are approved is reflective of the faith the higher appellate authority has in the Tribunal.

As a suggestion, in order to further improve accountability within the existing system, the mechanism of using video recording of the hearing, which is already in place, can be formalized and put to use. The video recording can be relied upon by the Department, the assessee and the Hon’ble Members so that the facts stated during the hearing are duly considered while passing orders and are not missed out. This will ensure that both the Department and the assessee are reassured that all their arguments have been registered and will find place in the orders passed by the Tribunal.

  1. The principle of audi alteram partem which essentially means that no one is to be condemned unheard, has not been derived through the Constitution of India. It has developed over time through the evolution of mankind. The right to be heard has to be meaningful, real and not illusory. This right has to be to the satisfaction of the aggrieved i.e., the Department or the assessee. Surely the objective of the Government is best served when the taxpayers are convinced that the tax payable by them is justified and is mandated by the law.

In my view the faceless system will seriously jeopardize this principle which is the bedrock of a free, fair and a transparent judicial system.

I believe that hearings can be made more effective and meaningful within the existing system itself by accepting written submissions and continuing to allow oral submissions and also by giving statutory recognition to the video recording in every hearing. Representation through mere filing of submissions will be counterproductive and will leave a large section of the litigating public dissatisfied and aggrieved. The principles of natural justice in terms of the right to be heard will be compromised and the higher courts will invariably set aside matters to the Tribunal to be decided after affording a meaningful opportunity.

“It is easier for an assessee to persuade an assessing authority to his point of view by removing his doubts and by answering his questions at a personal hearing, than by merely availing of the cold effect of a written representation.” This was held in the case of Ram Saran Das Kapur reported in 77 ITR 298(P&H) at page 303. The above settled principal of natural justice is also echoed by Hon’ble Apex Court in case of Automotive Tyre Manufactures Association reported in 263 ELT 481(SC) at para 59

  1. The highest court of the land, through their various judgements, have held the ITAT to be a Court. In the case of Ajay Gandhi reported in 265 ITR 471, it was held that the Appellate Tribunal is the same as the court of appeal under CPC and its powers are identical to that of an Appellate court.

In fact, in the case of ITAT v. V.K. Aggarwal reported in 235 ITR 175, before the Supreme Court, the Department conceded that the ITAT is a Court performing judicial functions. The department had initially contended that the Income-tax Appellate Tribunal was not a Court, and was also not a Court subordinate to the Supreme Court. Hence the Supreme Court had no Jurisdiction to issue a suo-moto notice of contempt in respect of a matter pertaining to the Income-tax Appellate Tribunal. However, subsequently, the counsel for the department conceded that the Income-tax Appellate Tribunal did perform judicial functions and was a Court subordinate to the High Court. The statute also in terms of section 255(6) specifically vested powers of Court under CPC to the ITAT for the purposes of conducting the proceedings before it; and also deemed it to be a civil court for the purposes of Cr.PC.

Since the Tribunal is indubitably a court, wouldn’t the Governments intervention by prescribing the mode and manner of representation tantamount to interference in its fairness and independence and making it an adjunct of the executive.

  1. A court of justice is a public forum. Open courts foster public confidence and ensure that the Judges apply the law in a fair and impartial manner. It is through publicity that the citizens are convinced that the court renders even-handed justice, and it is, therefore, necessary hearing trial should be open to the public.

The Supreme Court in the case of Naresh Shridhar Mirajkar v. State of Maharashtra, 1966 SCR (3) 744 was of the opinion that public confidence in the administration of justice is of such great significance that there can be no two opinions on the broad proposition that in discharging their functions as judicial tribunals, courts must generally hear cases in open and must permit the public admission to the court-rooms.

The Supreme Court while hearing the case of Swapnil Tripathi v. Supreme Court of India, (Writ Petition (Civil) No. 1232 OF 2017) on the issue of live streaming of its proceeding held that that access to justice can never be complete without the litigant being able to see, hear and understand the course of proceedings first hand. The Court also acknowledged that the principle of open court hearings would have to be adhered when rules for live streaming of court proceedings are made.

There can no denial to the fact that Tribunal has been a public forum and proceedings before it has been through an open court mechanism. Any attempt to guillotine this mechanism would be nothing short of taking away the voice of the taxpayers, as decision making would be behind closed doors which would be a retrograde step.

  1. Article 145(4) of the Constitution of India provides that no judgment shall be delivered by the Supreme Court other than in open court. It further, provides that no report shall be made under Article 143 other that in accordance with an opinion also delivered in open court.

When the Constitution of India mandates the highest court of the land to pronounce judgments in the open court, it is manifest that the lower courts must also exhibit the same transparency to ensure that the confidence of the public as to the independence and fairness of the judiciary remains paramount.

  1. In the common-law system which India follows, decisions are relied upon as precedents, and there are rules and policies with just as much authority as a law passed by a legislature. This system of stare decisis is sometimes referred to as “judge-made law,” as the law (the precedent) is created by the judge, not by a legislature.

Judges are generally expected to follow earlier decisions, not only to save themselves the effort of working out fresh solutions for the same problems each time they occur but also, and primarily, because the goal of the law is to render uniform and predictable justice. Fairness demands that if one individual is dealt with in a certain way today, then another individual engaging in substantially identical conduct under substantially identical conditions tomorrow or a month or year hence should be dealt with in the same way.

The legal pronouncements made by the Appellate Tribunal have a binding precedent as is in the case of higher courts.

Hence it is of utmost importance that the decisions by the Tribunal are well reasoned, replete with facts and contentions raised by both parties and the law is interpreted in accordance with the principles of interpretation and the precedents are duly considered and applied.

To interpret law is a huge responsibility cast on the Tribunal and it is my belief that the same can be effectively discharged only through deliberations and discussions in an open court. Seeking decisions only through written submissions will have a deleterious effect on the development of law and will lack the aspect of humanness and equity.

  1. Article 14 of the Constitution of India grants “right to equality” to any person within the territory of India, which includes the right to be treated equally before law and/or equally protected by the laws within the territory of India. It may be appreciated that, other than the Income Tax Appellate Tribunal, there is no proposal to prescribe similar faceless mode of conducting proceedings to any other Tribunal in the country. The ITAT therefore has been clearly discriminated from other Tribunals while the judicial functions imposed on it remains onerous and complex. Such discrimination, in my view, is not only discrimination vis-a-vis the ITAT, but also discrimination against citizens of the Country by providing them a different mode of representation for administration of other laws vis-à-vis tax laws. Such discrimination can, therefore, be considered as violative of ‘right of equality’ enshrined in Article 14 of the Constitution of India.

  2. I often wonder how efficient would the faceless mode be? Currently, matters are decided in a few hearings in the open court once the pleadings in the form of paper books and submissions are completed. The faceless mode would involve filing of submissions by the assessee and submissions by the Department followed by counter submissions by the assessee or the Department over a period of time. It would then be expected from the Hon’ble Members to peruse the submissions of the assessee and the Department and then the counter submissions of both the parties alike and then arrive at a conclusion. And all this without the assistance of the counsels to explain complex facts and to allay any doubts. This would be a near impossible task and would compromise on the quality of the orders.

  3. Faceless hearings before CIT (Appeal) were somewhat justified because they used to take place in a closed door environment with only the counsel and CIT(Appeal) being present. The department was rarely represented through its officers. This was the main cause of harassment and resentment because the hearings were in camera and not public. The Courts all across the world owe their success to in public hearings. Transparency is manifest in a public hearing and the scope of discretion is also minimal. The case laws cited and the facts narrated have necessarily to be incorporated in the order and due consideration is given to the same.

  4. The present rules of the ITAT are salutary in as much as, rule 33 provides that the proceedings shall be open to the public and the Tribunal in its discretion may direct that proceedings before it in a particular case will not be open to the public.

Admittedly, the Tribunal is a creation of the Income-tax Act and the Act empowers the Government to frame rules. However, this power should be used carefully and by visualizing the long term effects of a decision. Faceless mode can happen with the swish of a wand but the consequences of this decision could be disastrous. An Institution which has been built brick by brick over 79 years and is doing extremely well should not be dismantled in this manner.

The fallacies in the existing system should be removed to make it more efficient rather than experimenting with a system where what the assessee does not know what happens after submissions have been filed.

  1. Section 255 recently introduced permits the use of technology in the ITAT to the extent possible. Let all filings be online; let the software decide the constitution of benches; let there be a uniform transfer policy of the Members of the Tribunal and let there be video recording of all hearings to ensure that all pleadings are effectively addressed in the orders. This will effectively deal with the word ‘discretion’ referred to by the Hon’ble Finance Minister in her speech referred elsewhere in this article.

  2. I would also suggest that one needs to wait for at least two years to see the results of the working of the faceless system introduced before the CIT (Appeals) before putting in place a similar system for the Tribunal.

  3. The Tribunal functions as an open court and is efficient, effective and enjoys the confidence of the taxpayers and professionals alike.

Kindly do not destroy it merely because the mantra of faceless appeals sounds good.

Faceless cannot be a panacea to redress all the ills in a judicial forum.

I. Reopening of Assessment : Section 147 to 151

“If you are losing at a game, change the game”

  1. The Finance Bill 2021 vide clauses 35 to 40 and 42 to 43 made a major shift in reassessment provision.The Finance Bill has lowered the time limit for reopening of assessment to 3 years from 6 years earlier. While for cases involving income escaping assessments amounts to or likely to amount Rs 50 lakh and above, 10 years old cases can be reopened. The Second major shift in the reassessment provision was inclusion of search assessments. In, significant changes to the taxation process, among other tax measures, the FM recommended a paradigm change to the provisions relating to “Assessment in case of search or requisition viz. Section 153A to 153D”. The third major change is that “to disclose fully and truly all material facts”is done away with. The fourth major change is incorporation of sec 148A provision which is a replica of Guidelines rendered by G K N Drive shaft decisions of Supreme Court with certain modifications in process to be followed. Lastly the fifth major change is that reopening shall now be based on “information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment”. Explanation 1 to sec 148 provides meaning to the above phrase.

  2. The Chairman of Central Board of Direct Taxes (CBDT), the apex decision making body for income tax, said the rationalisation of reopening of cases announced in Budget would bring in more certainty to taxpayers. “What was a heavily litigated area, we have tried to rationalise it to the extent that it is no longer left to the discretion of assessing officer. It would be more of information-based attempt to reopen the cases. It would be primarily based on data analytics and risk assessment which the system throws up which would lead to reopening of the assessment,”

  3. The scope and effect of a reopening of assessment was settled to great extent after various judgments of the Supreme Court and High courts. Reassessment is one of the distinguishing weapons in the armoury of the Department, empowers the Assessing Officer to assess, reassess or recompute income, turnover etc, which has escaped assessment. However earlier the maximum extent the dept could reopen assessment was upto 6 years, however now the same shall be upto 10 years exception is 50 lacs limit. Inspite of various guidelines laid down by courts, dept constantly prefer to disobey the same leading to quashing of the notice by Courts and Tribunal. To overcome the same and streamline the procedure for reopening assessment the earlier provisions are amended. To my experience maximum cases which are reopened involves income escaping above 50 lacs, thus finality to an assessment will not be till 10 years in such cases. To my view this will bring uncertainty as the sword of reopening will be hanging till 10 years now.

  4. The new proposed provision sec 147 reads as under :

    “147. If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).

    Explanation.—For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, irrespective of the fact that the provisions of section 148A have not been complied with.”.

Thus on perusal of the proposed section 147 it is noticed that there are no proviso now except one explanation which is earlier Explanation no 3 with modification. Once assessment or reassessment or re-computation has started the Assessing officer is proposed to be empowered (as at present) to assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceeding under this procedure notwithstanding that the procedure prescribed in proposed section 148A was not followed before issuing such notice for such income

  1. Now there is no such requirement of “to disclose fully and truly all material facts”, it is done away in the new regime. The Assessing officer may reopen an completed assessment subject to the proposed provision of sec 148 to 153. Further the section provides a fresh condition to be fulfilled by Assessing Officer before reopening i.e. sec 148A.

  2. The proposed sec 148 reads as under :

    “148. Before making the assessment, reassessment or recomputation under section 147, and subject to the provisions of section 148A, the Assessing Officer shall serve on the assessee a notice, along with a copy of the order passed, if required, under clause (d) of section 148A, requiring him to furnish within such period, as may be specified in such notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139:

    Provided that no notice under this section shall be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the Assessing Officer has obtained prior approval of the specified authority to issue such notice.

    Explanation 1.—For the purposes of this section and section 148A, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means,— (i) any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time; (ii) any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.

    Explanation 2.—For the purposes of this section, where,— (i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A, on or after the 1st day of April, 2021, in the case of the assessee; or (ii) a survey is conducted under section 133A in the case of the assessee on or after the 1st day of April, 2021; or (iii) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner, that any money, bullion, jewellery or other valuable article or thing, seized or requisitioned in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or (iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee, the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person.

    Explanation.3—For the purposes of this section, specified authority means the specified authority referred to in section 151.”.

  3. On perusal of the new provision sec 148 it is noticed that now the Assessing officer shall serve the notice u/s. 148 alongwith a order copy passed u/s. 148A clause (d)[ i.e order disposing of objection/reply of assessee to reopen the assessment]

  4. Further the section provides that “….no notice under this section shall be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment….”

    Explanation 1 to sec 148 provides meaning to the above i.e In the case of the assessee for the relevant assessment year following shall be treated as information ;

    1. any information flagged in accordance with the risk management strategy formulated by the Board from time to time;

    2. any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment has not been made in accordance with the provisions of this Act.

  5. On perusal of Memorandum Explaining to Finance Bill the reason behind the change is noticed as under :

    “Due to advancement of technology, the department is now collecting all relevant information related to transactions of taxpayers from third parties under section 285BA of the Act (statement of financial transaction or reportable account). Similarly, information is also received from other law enforcement agencies. This information is also shared with the taxpayer through Annual Information Statement under section 285BB of the Act. Department uses this information to verify the information declared by a taxpayer in the return and to detect non-filers or those who have not disclosed the correct amount of total income. Therefore, assessment or reassessment or re-computation of income escaping assessment, to a large extent, is information-driven.

    In view of above, there is a need to completely reform the system of assessment or reassessment or re-computation of income escaping assessment and the assessment of search related cases.”

  6. Thus now reopening will be based on information flagged by system. The flagging would largely be done by the computer based system. What would be risk management strategy formulated by the Board needs to be seen. However the Assessing officer will have to apply his mind to the same in accordance with proposed sec 148A. In the present regime we have seen lot of inconsistencies in information driven reassessment, the challenge will be still there. The order disposing of the same shall be tested by the courts based on such information. Correctness of the same shall always be a factual aspect which shall differ from case to case bases. Pre condition laid down in sec 148 A will have to be satisfied before proceeding any further in the matter.

  7. Prior approval of specified authority is also required to be obtained before issuance of such notice by the Assessing Officer.

  8. Further as per the proposed amendment sec 153A to 153D will no longer be applicable for search assessment in respect of search initiated u/s. 132 on or after 1 April 2021. Assessments or reassessments or in re-computation in cases where search is initiated under section 132 or requisition is made under 132A, after 31st March 2021, shall be under the new procedure.

  9. On perusal of the Memorandum the reasons for doing away with sec 153A to sec 153D of the Act are stated as under :

    “…..These provisions were introduced by the Finance Act, 2003 to replace the block assessment under Chapter XIV-B of the Act. This was done due to failure of block assessment in its objective of early resolution of search assessments. Also, the procedural issues related to block assessment were proving to be highly litigation-prone. However, the experience with this procedure has been no different. Like the provisions for block assessment, these provisions have also resulted in a number of litigations……”

  10. Further, in search, survey or requisition cases initiated or made or conducted, on or after 1st April, 2021, it shall be deemed that the Assessing officer has information. Interestingly, the concept of dual assessments seems to be revived again as the pending assessments now on the date of search shall not abate.

  11. The Apex Court in the case of GKN Driveshafts (India) Ltd. v. D.C.I.T. (2003) 259 ITR 1 (SC)has laid down the procedure to challenge the reassessment proceedings. When a notice under section 148 of the Income-tax Act, 1961, is issued, the proper course of action;

    (at present) ;

    1. is to file the return,

    2. if he so desires, to seek reasons for issuing the notices.

    3. The assessing officer is bound to furnish reasons within a reasonable time.

    4. On receipt of reasons, the assessee is entitled to file objections to issuance of notice,

    5. the assessing officer is bound to dispose of the same by passing a speaking order.

    6. the assessee if desires can file a writ challenging the order or can proceed with the assessment. However the assessee has still a right to challenge the reopening of assessment after the assessment order is passed, before appellate authority.

  12. The new provision sec 148A reads as under:

    “148A. The Assessing Officer shall, before issuing any notice under section 148, —

    1. conduct any enquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment;

    2. provide an opportunity of being heard to the assessee, with the prior approval of specified authority, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

    3. consider the reply of assessee furnished, if any, in response to the show-cause notice referred to in clause (b);

    4. decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148, by passing an order, with the prior approval of specified authority, within one month from the end of the month in which the reply referred to in clause (c) is received by him, or where no such reply is furnished, within one month from the end of the month in which time or extended time allowed to furnish a reply as per clause (b) expires:

    Provided that the provisions of this section shall not apply in a case where, —

    1. a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of the assessee on or after the 1st day of April, 2021; or

    2. the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any money, bullion, jewellery or other valuable article or thing, seized in a search under section 132 or requisitioned under section 132A, in the case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

    3. the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any books of account or documents, seized in a search under section 132 or requisitioned under section 132A, in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee.

    Explanation.—For the purposes of this section, specified authority means the specified authority referred to in section 151.”.

  13. The new proposed section 148A of the Act proposes that before issuance of notice the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering his reply, the Assessing Office shall decide, by passing an order, whether it is a fit case for issue of notice under section 148 and serve a copy of such order along with such notice on the assessee. The Assessing Officer shall before conducting any such enquiries or providing opportunity to the assessee or passing such order obtain the approval of specified authority. However, this procedure of enquiry, providing opportunity and passing order, before issuing notice under section 148 of the Act, shall not be applicable in search or requisition cases.

  14. The Courts have consistently warned the department not to harass taxpayers by Reopening assessments in a mechanical and casual manner. The courts have consistently held that the pre condition are jurisdiction conferring on the AO to reopen the assessment and their non fulfilment renders the initiation itself ab-initio void The AO’s were also directed to strictly comply with the law laid down in GKN Driveshafts (supra) as regards disposal of objections to reopening assessment:

    Pr. CIT v. Samcor Glass Ltd. (Delhi); www.itatonline.org;

    CIT v. Trend Electronics( 2015) 379 ITR 456 (Bom.)(HC).

  15. According to me the legal position shall continue in the new regime in view of sec 148A of the Act. Assessing officer should consider and dispose off the assessee objection and serve the order on assessee. The reopening should be based on information. The AO is expected to deal with the assessee’s objection vis a vis the information received and pass a speaking order. The AO has to apply his mind to the information so as to come to an independent conclusion that income has escaped assessment during the year.

  16. The time limitation for issuance of notice under section 148 of the Act is proposed to be provided in section 149 of the Act and is as below:

    1. in normal cases, no notice shall be issued if three years have elapsed from the end of the relevant assessment year.

    2. Notice beyond the period of three years from the end of the relevant assessment year can be taken only in a few specific cases.

    In specific cases where the Assessing Officer has in his possession evidence which reveal that the income escaping assessment, represented in the form of asset, amounts to or is likely to amount to fifty lakh rupees or more, notice can be issued beyond the period of three year but not beyond the period of ten years from the end of the relevant assessment year;

  17. Another restriction has been provided that the notice under section 148 of the Act cannot be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit prescribed under the provisions of clause (b), as they stood immediately before the proposed amendment.

  18. The specified authority for approving enquiries, providing opportunity, passing order under section 148A of the Act and for issuance of notice under section 148 of the Act are proposed to be —

    1. Principal Commissioner or Principal Director or Commissioner or Director, if three years or less than three years have elapsed from the end of the relevant assessment year;

    2. Principal Chief Commissioner or Principal Director General or where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General, if more than three years have elapsed from the end of the relevant assessment year.

Key Points

  1. Prior approval of specified authorities is required for any such enquiry u/s.148A of the Act.

  2. Speaking order for section 148A is required to be passed.

  3. Procedure under section 148A shall not be applicable in case of search, survey or requisition cases initiated or made or conducted.

  4. In case proceeding u/s. 148A are stayed, the period of limitation for issuance of the notice u/s 148, would be extended by 7 days if the available time limit is of less than 7 days.

  5. Once the reassessment proceeding u/s. 147 is initiated and subsequently some issue has been noticed by the Assessing Officer, for that subsequent issue, no requirement to comply with the provision of section 148A.

  6. Substitution of Section 151 [Sanction for Issue of notice]

  7. Reopening shall be based on information flagged by the computer system.

II. GOODWILL

The Finance Bill 2021 Clause 7,18 and 20 proposed certain amendment in stand of the department in regards to claim of depreciation. A business/professional set up which is very successful would generate a lot of goodwill/reputation in the market. This reputation being an intangible benefit associated with the performance of the business is very subjective to value. If successful businesses are sold in a transaction, the seller obviously charges a premium on account of the transfer of reputation/goodwill which will benefit the buyer. Such premium was recognised in monetary terms in the books of accounts as “goodwill”. There used to be a controversy regarding whether this acquired goodwill is a depreciable asset for tax purposes. This controversy was resolved in favour of taxpayers by the Supreme Court in the case of CIT v. Smifs Securities Ltd. wherein it was held that “Goodwill” is an asset on which the benefit of depreciable can be claimed. Such transactions then became a very tax efficient tool in the hands of the buyers. However, with a view to overrule this decision, Budget 2021 now proposes to amend section 32 to exclude goodwill. Hence, goodwill shall no longer be a depreciable asset.

Brief Background

Section 2 Clause (11) defines block of assets to mean a group of assets falling within a class of assets comprising, tangible assets, being buildings, machinery, plant or furniture and intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.

Section 32 of the Act relates to depreciation. Sub-section (1) of the said section provides for deduction on account of depreciation on tangible assets (Building, machinery, plant and furniture) and intangible assets (know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature) acquired on or after the 1st day of April, 1998 which are owned, wholly or partly by the assessee which are used wholly and exclusively for the purpose of business and profession while computing the income under the head Profits and gains of business or profession‘.

Further, Explanation 3 to sub-section (1) provides that for the purposes of this subsection, the expression “assets” shall mean to be tangible assets, being buildings, machinery, plant or furniture and intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

Section 50 of the Act provides for conditions for the applicability of provisions of section 48 and 49 for computation of capital gains in case of depreciable assets where the capital asset is an asset forming part of a block of asset in respect of which depreciation has been allowed under this Act.

Section 55 of the Act provides meaning of terms “adjusted”, “cost of improvement” and “cost of acquisition” for the purposes of sections 48 and 49 of the Act. In relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy rights, stage carriage permits or loom hours, it is defined to mean the purchase price if it is acquired by purchase. In other cases it is nil except when it is covered by sub-clauses (i) to (iv) of sub-section (1) of section 49.

It is seen that Goodwill of a business or a profession has not been specifically provided as an asset either in the definition under clause (11) of section 2 of the Act or in section 32 of the Act.

The question whether goodwill of a business is an asset within the meaning of section 32 of the Act and whether depreciation on goodwill is allowable under the said section, is an issue which came up before Hon‘ble Supreme Court in the case Smiff Securities Limited [(2012) 348 ITR 302 (SC)]. Hon‘ble Supreme Court answered the question in affirmative. Thus, as held by Hon‘ble Supreme Court, Goodwill of a business or profession is a depreciable asset under section 32 of the Act.

However, there are other sections of the Act which are relevant for calculation of depreciation under section 32 of Act. These are as under: Sixth proviso the section 32 of the Act mandates that in a case of succession/amalgamation/demerger during the previous year, depreciation is to be calculated as if the succession or amalgamation or demerger has not taken place during the previous year and apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.

Explanation 2 of sub-section (1) of section 32 of the Act provides that the term written down value of the block of assets shall have the same meaning as in clause (c) of sub-section (6) of section 43 of the Act.

Clause (c) of sub-section (6) of section 43 of the Act, with respect to block of assets, inter-alia, provides that the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year is to be increased by the actual cost of any asset falling within that block, acquired during the previous year.

Sub-section (1) of section 43 of the Act which defines Actual cost as actual cost of the assets to the assessee. Explanation 7 to this section covers a situation where in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company. It clarifies that in this situation, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business.

Explanation 2 of clause (c) of sub-section (6) of section 43 of the Act also covers a situation where in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company. It also clarifies that in this situation, the actual cost of the block of asset in the hand of the amalgamated company would be written down value of that block in the immediate preceding previous year in the case of amalgamating company as reduced by depreciation actually allowed in that preceding previous year.

Thus, while Hon‘ble Supreme Court has held that the Goodwill of a business or profession is a depreciable asset, the actual calculation of depreciation on goodwill is required to be carried out in accordance with various other provisions of the Act, including the ones listed above. According to department once we apply these provisions, in some situations (like that of business reorganization) there could be no depreciation on account of actual cost being zero and the written down value of that assets in the hand of predecessor/amalgamating company being zero.

However, in some other cases (like that of acquisition of goodwill by purchase) there could be valid claim of depreciation on goodwill in accordance with the decision of Hon‘ble Supreme Court holding goodwill of a business or profession as a depreciable asset.

According to Memorandum explaining the provisions of Finance Bill 2021 Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, according to department there may not be a justification of depreciation on goodwill in the manner there is a need to provide for depreciation in case of other intangible assets or plant & machinery.

The Finance Bill has decided to propose that goodwill of a business or profession will not be considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation. In a case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains under section 48 of the Act subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the assessment year 2021-22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill.

Therefore, to give effect to the above decision, it has been proposed to,

  1. amend clause (11) of section 2 of the Act to provide that block of asset‘ shall not include goodwill of a business or profession;

  2. amend clause (ii) of sub-section (1) of section 32 of the Act to provide that goodwill of a business or profession shall not be considered as an asset for the purpose of the said clause and therefore not eligible for depreciation. Further, it is also proposed to amend Explanation 3 to sub-section (1) of the said section to provide that goodwill of a business or profession shall not be considered as an asset for the said sub-section.

  3. amend section 50 of the Act to provide that in a case where goodwill of a business or profession formed part of a block of asset for the assessment year beginning on the 1st April, 2020 and depreciation has been obtained by the assessee under the Act, the written down value of that block of asset and short term capital gain, if any, shall be determined in the manner as may be prescribed.

  4. amend section 55 of the Act by substituting clause (a) of subsection (2) to provide that in relation to a capital asset, being goodwill of a business or profession, or a trade mark or brand name associated with a business or profession, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours,—

    1. in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and

    2. in the case falling under sub-clause (i) to (iv) of sub-section (1) of section 49 and where such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and

    3. in any other case, shall be taken to be nil

  5. provide that in case of goodwill of business or profession acquired by the assessee by way of purchase from a previous owner (either directly or through modes specified under sub-clause (i) to (iv) of sub-section (1) of section 49) and any deduction on account of depreciation under section 32 of the Act has been obtained by the assessee in any previous year preceding the previous year relevant to the assessment year commencing on or after the 1st April, 2021, then the cost of acquisition will be the purchase price as reduced by the depreciation so obtained by the assessee before the previous year relevant to assessment year commencing on 1st April, 2021.

These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

AMENDMENT IN SEC 45

Under the existing provisions of section 45(4), any profits and gains from the transfer of capital asset by the firm to a partner on account of dissolution or reconstitution is chargeable to the firm under the head capital gains. The transaction will be taxable in the previous year in which the transfer takes place. Further, for the purpose of computation of capital gains, the fair market value of the asset transferred shall be considered as the full value of consideration.

In PCIT v. R.F. Nangrani HUF, 93 taxmann.com 302, the Bombay High Court held that amount received by retiring partner on retirement from firm on account of goodwill shall not be subjected to capital gains tax, to the partner. In the case CIT-III, Pune v. Riyaz A. Sheikh, 41 taxmann.com 455, the same view has been taken.

This view is also backed by the Apex Court in the case of Commissioner of Income-tax v. R. Lingamallu Raghukumar, 124 Taxmann 127 has held that excess amount received by the assessee on retirement from two partnership firms was not assessable to capital gains tax, since there was no transfer of any assets as contemplated by expression “transfer” as defined u/s 2(47).

Proposed Amendment:

Sub-section (4) of section 45 of the Income-tax Act is proposed to be substituted by the Finance Bill 2021 inter alia amongst other amendment .

  • The amendment states that in determining the capital account balance of the specified person, any increase on account of revaluation of any asset or due to self-generated goodwill or any other self-generated asset has to be excluded.

The terms “self-generated goodwill” and “self-generated asset” mean goodwill or asset, as the case may be, which has been acquired without incurring any cost for purchase or which has been generated during the course of the business or profession;

An important point arising out of the amendment is that in determining the capital account balances of the partners prior to the dissolution or reconstitution, any increase on account of revaluation of any asset or due to self-generated goodwill or any other self-generated asset has to be excluded.

Insertion of sub-section (4A)

Apart from the amendment discussed above, a new sub-section (4A) is sought to be inserted. The proposed amendments in this regard are as follows:

  • Further, in determining the capital account balance of the specified person, any increase on account of revaluation of any asset or due to self-generated goodwill or any other self-generated asset has to be excluded.

  • Any capital asset, representing capital account balance of the partners received by the partners will be taxable to the firm. This provision is likely to bring into tax ambit consideration received for goodwill by partners on retirement / reconstitution.

  • Any revaluation exercise done by the firm prior to such dissolution / reconstitution, whereby there is an increase in the value of any asset will have no bearing in determination of capital account balances. Further, any increase on account of self-generated goodwill or any other self-generated asset will also have to be excluded in the process.

  • While amended section 45(4) is applicable only in case of receipt of capital assets by the partners of the firm, the new sub-section proposed brings into tax ambit any money received by the partner in excess of the capital account balances.

  • In determination of value of consideration received, the fair market value of the asset received has to be taken into consideration. However, in the context of proposed section 45(4A), to determine the cost of acquisition to the firm, the capital account balance of the partners excluding the effect of upward revaluation to assets, or self-generated goodwill etc. has be excluded.