The Finance Bill, 2022, continues to make changes to the Income-tax Act, year on year, bringing with it, amendments and introduction of new provisions, to tackle with the ever-growing scope of income-generation and tax-evasion by tax- payers. Heraclitus, a Greek philosopher, has been quoted as saying “change is the only constant in life.” The tax statute is one of the many tools by which this change is implemented. Such change/ implementation of new tax laws or change in tax laws are made due to several reasons; some to reduce the hardship of the tax-payer and some to contain the persons from escaping the tax net and some for increasing the revenue/funds of the government. In this article the focus would be on the provisions which are/seem beneficial.

The following are the beneficial provisions introduced this year:

1. Exemption of amount received for medical treatment and on account of death due to COVID-19 – Sections 56(2)(x) and s. 17(2)

2. Socio-economic welfare measures Extension of the last date for commencement of manufacturing or production, under section 115BAB, from 31.03.2023 to 31.03.2024 – S. 158BAB

3. Extension of date of incorporation for eligible start up for exemption – S. 80IAC

4. Facilitating strategic disinvestment of public sector companies – S. 79(1)

5. Tax Incentives to International Financial Services Centre (IFSC) – s. 10(4E), 10(4F) & 10(4G) read with section 80LA(1A) ; 56(viib), 80LA(2)(d).

6. Incentives to National Pension System (NPS) subscribers for state government employees – S. 80CCD

7. Condition of releasing of annuity to a disabled person – S.80DD

8. Litigation management when in an appeal by revenue an identical question of law is pending before jurisdictional High Court or Supreme Court. – S. 158AB (Sunset provision for s. 158AA)

Relaxations due to COVID

Exemption of amount received for medical treatment and on account of death due to COVID-19 – Sections 56(2) (x) and s. 17(2)

The period of corona virus since 2019 has been a period of trauma and pain for many. A few have survived the pandemic and a few have succumbed. However, all of them affected have incurred unexpected expenditure to protect themselves as well as their loved ones. This unexpected expenditure was sourced from available funds or borrowed funds or funds received under different names; but for the same purpose. In order to provide the relief to the affected, the government has proposed to insert and amend s.17(2) and 56(2)(x) respectively.

Section 17(2) defines perquisites to be the value of any benefit provided to the employee which is not cash or cash equivalent. It is proposed to insert a new sub-clause in the proviso to state that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in respect of any illness relating to COVID-19 subject to such conditions, as may be notified by the Central Government, shall not be forming part of “perquisite”. The value actually incurred will be exempt in case of medical expenditure. However, if any of the employee’s family member dies due to Covid-19, the amount received will be exempt without any limit.

Section 56(1)(x) is amended to exempt the amount of expenditure incurred on treatment of illness related to covid-19. However, if any sum received is not wholly expended on the treatment of the person or their family members, the same shall be taxable in the year of receipt. Further, if such sum is received due to death caused in the family of the person, exemption amount shall be the amount received from employer(without limit) or any other person(upto 10 lakhs from all persons within 12 months from the date of death).

This is a welcome and much needed move from the government since tax is levied to strengthen government for ensuring public welfare and national development and not to exploit a situation.

Socio-economic welfare measures

Extension of the last date for commencement of manufacturing or production, under section 115BAB, from 31.03.2023 to 31.03.2024 – S. 158BAB

Section 115BAB of the Income-tax Act provides for an option of concessional rate of taxation @ 15 % for new domestic manufacturing companies provided that they do not avail of any specified incentives or deductions and fulfil certain other conditions.

Sub-section (2) of section 115BAB of the Act contains the conditions required to be fulfilled by such companies. Clause (a) of said sub-section (2) provides that a new domestic manufacturing company is required to be set up and registered on or after 01.10.2019, and is required to commence manufacturing or production of an article or thing on or before 31st March, 2023.

The intent of the introduction of section 115BAB was to attract investment, create jobs and trigger overall economic growth. However, the cumulative impact of the persistence of the COVID-19 pandemic has resulted in some delay in setting up/registration of new domestic companies and the commencement of manufacturing or production by such companies, if they have been set up and registered. In order to provide relief to such companies, it is proposed to amend section 115BAB so as to extend the date of commencement of manufacturing or production of an article or thing, from 31st March, 2023 to 31st March, 2024.

This amendment will take effect from 1st April, 2022

This amendment is in line with the philosophy of Chanakya quoted as under:

“Governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower without causing any harm.” Similarly, even though the economy is hit, the revenues of the government have been hit, it is only just that such burden is bourn by all and not transferred on the shoulders of the tax-payers.

Extension of date of incorporation for eligible start up for exemption – S. 80IAC

The existing provisions of the section 80-IAC of the Act inter alia, provide for a deduction of an amount equal to one hundred percent of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years, beginning from the year of incorporation, at the option of the assesses subject to the condition that,-

1. the total turnover of its business does not exceed one hundred crore rupees,

2. it is holding a certificate of eligible business from the Inter-Ministerial Board of Certification, and

3. it is incorporated on or after 1st day of April, 2016 but before 1st day of April 2022.

Due to Covid Pandemic there have been delays in setting up of such units. In order to factor in such delays and promote such eligible start- ups, it is proposed to amend the provisions of section 80-IAC of the Act to extend the period of incorporation of eligible start-ups to 31st March, 2023.

3. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.

Other Amendments

Facilitating strategic disinvestment of public sector companies – S. 79(1): Section 79 of the Act provides for carry forward and set-off of losses in case of certain companies. Sub-section (1) of the said section restricts the carry forward of loss when there is a change in shareholding of a company, where public are not substantially interested, against income of the previous year, unless on the last day of the previous year, the shareholders of the company carrying less than fifty-one per cent of the voting power were holding fifty-one per cent or more of the voting power on the last day of year or years in which the loss was incurred. Sub-section (2) of the said section provides certain circumstances in which the provisions of sub-section (1) shall not apply.

There are case laws in favour and a few in contradiction w.r.t. whether the benefit of carry forward & set-off of losses in case wherein the ultimate beneficial ownership has not undergone change, be allowed or not. This ambiguity has now been addressed and amending section 79.

It is proposed to amend section 79 of the Act to facilitate the strategic disinvestment of public sector companies by providing that the provisions of sub-section (1) of section 79 shall not apply to an erstwhile public sector company subject to the condition that the ultimate holding company of such erstwhile public sector company, immediately after the completion of strategic disinvestment, continues to hold, directly or through its subsidiary or subsidiaries, at least fifty one per cent of the voting power of the erstwhile public sector company in aggregate.

Prior to the amendment, judgments of the High Court of Delhi, Karnataka, etc., have already laid down the law with respect to carry forward of losses when beneficial ownership does not change. The legislature has formalised this interpretation by amending the provision.

Tax Incentives to International Financial Services Centre (IFSC) – s. 10(4E), 10(4F) & 10(4G) read with section 80LA(1A) ; 56(viib), 80LA(2)(d).

An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centres deal with flows of finance, financial products and services across borders. London, New York and Singapore can be counted as global financial centres. Many emerging IFSCs around the world, such as Shanghai and Dubai, are aspiring to play a global role in the years to come. Finance Minister Arun Jaitley, had announced in the Union Budget 2015 that India’s first IFSC’s would be set up in GIFT City in Gujarat. Gujarat International Finance Tec-City (GIFT City) would be the country’s first IFSC, with which top bourses BSE and NSE signed MOUs for setting up International exchanges there. However, BSE already started India International exchange on January 9, 2017. Over the past few years several tax concessions have been provided to units located in International Financial Services Centre (IFSC) under the Act to make it a global hub of financial services sector. In order to further incentivise operations from IFSC, it is proposed to introduce the following amendments:

1. Amendment to clause (4E) of section 10: To extend the exemption under the said clause to the income accrued or arisen to or received by a non-resident as a result of transfer of offshore derivative instruments or over-the-counter derivatives entered into with an Offshore Banking Unit of an International Financial Services Centre, referred to in sub- section (1A) of section 80LA.

2. Amendment to clause (4F) of section 10: To exempt the income of a non-resident by way of royalty or interest, on account of lease of a ship in a previous year, paid by a unit of an International Financial Services Centre, as referred to in sub-section (1A) of section 80LA, if the unit has commenced its operations on or before the 31st March, 2024.

3. Amendment to clause (4G) of section 10: To exempt any income received by a non- resident from portfolio of securities or financial products or funds, managed or administered by any portfolio manager on behalf of such non-resident, in an account maintained with an Offshore Banking Unit, in any International Financial Services Centre, referred to in sub- section (1A) of section 80LA, to the extent such income accrues or arises outside India and is not deemed to accrue or arise in India.

4. Amendment to the Explanation to clause (viib) of section 56: Section 56 provides exceptions such as venture capital undertaking/company/Specified fund. Prior to the insertion, the specified fund which was incorporated as a company/ undertaking, etc., registered as category I or II Alternative Investment Fund, was only regulated under the Securities and Exchange Board of India. Now the amendment provides that specified fund shall also include Category I or a Category II Alternative Investment Fund which is regulated under the International Financial Services Centres Authority Act, 2019.

5. Amendment to clause (d) of sub-section (2) of section 80LA: Section 80LA provides for

Deductions in respect of certain incomes of Offshore Banking Units and International Financial Services Centre. Clause (d) has been inserted to provide that in addition to the income arising from the transfer of an asset being an aircraft, the income arising from the transfer of an asset, being a ship, which was leased by a unit of the International Financial Services Centre to any person shall also be eligible for deduction under section (1A) of the said section, subject to the condition that the unit has commenced operation on or before the 31st day of March, 2024.

These amendments will take effect from 1st April, 2023

Incentives to National Pension System (NPS) subscribers for state government employees – S. 80CCD

Section 80CCD specifies the deductions available in respect of contribution to pension scheme of Central Government. Under the existing provisions of the Act, any contribution by the Central Government or any other employer to the account referred to in section 80CCD of the Act (NPS account), shall be allowed as a deduction to the assesses in the computation of his total income, if it does not exceed 14% of his salary where such contribution is made by the Central Government. This limit is presently 10% of his salary where such contribution is made by any other employer. The State Governments were given an option to raise the contribution to 14% w.e.f 01.04.2019 on their own volition, based on their own internal approvals and notifications, without seeking the approval of the Pension Fund Regulatory and Development Authority. In order to ensure that the State Government employees also get full deduction of the enhanced contribution by the State Government, it is proposed to increase the limit of deduction under section 80CCD of the Act from the existing ten per cent to fourteen per cent in respect of contribution made by the State Government to the account of its employee.

This amendment will take effect retrospectively from 1st April, 2020 and will accordingly apply in relation to the assessment year 2020-21 and subsequent assessment years; so as to ensure no additional tax liability arises on any contribution made in excess of 10% during such time.

This is a welcome move by the government since the option given to increase the limit of deduction to 14%. It helps government employees meet their retirement goals and removes the disparity between the central govt. employees and the state government employees.

A question may arise as to whether the contribution made by other employers should also have an increased limit. However, since there is a wage/salary disparity between government and private sector employees, the current limits seem appropriate in terms of claim of deduction.

Condition of releasing of annuity to a disabled person – S.80DD

Section 80DD specifies the deductions available in respect of maintenance including medical treatment of a dependant who is a person with disability. The existing provision of section 80DD, inter alia, provide for a deduction to an individual or HUF, who is a resident in India, in respect of (a) expenditure for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability; or (b) amount paid to LIC or any other insurer or administrator or specified company in respect of a scheme for the maintenance of a disabled dependant. Sub-section (2) of the aforesaid section provides that the deduction shall be allowed only if the payment of annuity or lump sum amount is made to the benefit of the dependant, in the event of the death of the individual or the member of the HUF in whose name subscription to the scheme has been made. Sub-section (3) of the aforesaid section provides that if the dependant with disability, predeceases the individual or the member of the HUF, the amount deposited in such scheme shall be deemed to be the income of the assessee of the previous year in which such amount is received by the assessee and shall accordingly be chargeable to tax as the income of that previous year.

In the Writ Petition No. 1107 of 2017 Ravi Agrawal versus Union of India and Another, Justice A.K. Sikri observed that that there could be harsh cases where handicapped dependants may need payment of annuity or lump sum basis even during lifetime of their parents/guardians. It was further observed that the Centre may take into consideration all the aspects, including those where a disabled dependant might need payment on annuity or lump sum basis even during the lifetime of the parents or guardians.

Therefore, in order to remove this genuine hardship, it is proposed to allow the deduction under the said section also during the lifetime, i.e., upon attaining age of sixty years or more of the individual or the member of the HUF in whose name subscription to the scheme has been made and where payment or deposit has been discontinued. Further, it is proposed that the provisions of sub-section (3) shall not apply to the amount received by the dependant, before his death, by way of annuity or lump sum by application of the condition referred to in the proposed amendment. This amendment will take effect from 1st April, 2023.

The government has always been vigilant and taken notice of the hardships caused to the taxpayers. Similarly, in the present case, hardships caused to handicapped dependents, which cannot be fathomed by others, needing payment of annuity or lump sum basis during lifetime of their parents/guardians, have been considered.

Litigation management when in an appeal by revenue an identical question of law is pending before jurisdictional High Court or Supreme Court. – S. 158AB (Sunset provision for s. 158AA) 

Section 158AA of the Act provides that when the Commissioner or Principal

Commissioner is of the opinion that any question of law arising in the case of an assessee is identical with a question of law arising in his case for another assessment year, which is pending in appeal before the Supreme Court against an order of High Court, which was in favour of assessee, he may direct the Assessing Officer to make an application to the Appellate Tribunal stating that an appeal on the question of law in the relevant case may be filed when the decision on the question of law becomes final in the other case, subject to the acceptance of the same by the assessee.

In order reduce the amount of litigation, it is now proposed that a procedure be provided when an appeal by revenue is pending on an identical question of law even before the jurisdictional High Court. Therefore it is proposed to insert a new section 158AB in the Act. A collegium would decide whether any question of law arising in the case of an assessee is identical with a question of law already raised in his case or in the case of any other assessee for an assessment year, which is pending before the jurisdictional High Court under section 260A or the Supreme Court in an appeal under section 261 or in a special leave petition under article 136 of the Constitution, against the order of the Appellate Tribunal or the jurisdictional High Court, as the case may be, in favour of such assessee (“other case”). The Collegium may then decide and intimate the Commissioner or Principal Commissioner not to file any appeal, at this stage, to the Appellate Authorities. Further, the Commissioner or Principal Commissioner shall, on receipt of a communication from the collegium, direct the Assessing Officer to make an application to the Appellate Tribunal or jurisdictional High Court, as the case may be, in the prescribed form within sixty days from the date of receipt of the order of the Commissioner (Appeals) or within one hundred and twenty days from the date of receipt of the order of the Appellate Tribunal, as the case may be, stating that an appeal may be filed when the decision on the question of law becomes final. During this procedure, an opportunity of hearing must be given to the Assessee for its acceptance.

In case the order of the Commissioner (Appeals) or the order of the Appellate Tribunal, as the case may be, is not in conformity with the final decision on the question of law in the other case, as and when such order is received, the Commissioner or Principal Commissioner may direct the Assessing Officer to appeal to the Appellate Tribunal or the jurisdictional High Court, as the case may be, against such order.

“Collegium” shall comprise of two or more Chief Commissioners or Principal Commissioners or Commissioners of Income- tax, as specified by the Board in this regard.

The government has time and again brought new enactments/provisions to reduce litigation and simplify the tax laws. Be it Vivad se Vishwas, Kar vivad samadhan scheme, tax effect limits for filing appeal by the department, etc. Even the proposed provision will ensure that multiplicity of appeals by department are avoided. Section 158A provides for such rights to the Assessee to claim that identical question of law is pending before High Court or Supreme Court.

With the introduction of section 158AB, a sunset clause is proposed to be inserted in sub-section
(7) of section 158AA to provide that no direction shall be given under the said sub-section on or after 1st April, 2022.

This amendment will take effect from 1st April, 2022.

Even though the amendments to provide benefit to the Assessees may not be many in number, however, it shows the approach of the government in making an effort to identify hardships faced by the tax-payers and resolve the same. It is also in line with the overall objective of a government to tax which must be to strengthen the government to ensure public welfare and national development. The public must not be exploited by imposing heavy taxes, more than one’s ability to pay.

Introduction of a scheme for taxation of virtual currency or cryptocurrency and other digital assets, to be known as “Virtual Digital Assets” (“VDA”) has to be one of the biggest highlights of the Finance Bill, 2022 (“Bill”). Acknowledging the large-scale crypto trading that is taking place within the country, the Government has proposed to tax income generated from such transfer and trade of VDA at a rate of 30%. While some kind of regularisation of the income earned from trading of VDA is a welcome move, people from the field have expressed concern against such a high rate of tax. The Government has also announced the roll out of Central Bank Digital Currency (“CBDC”) to be issued by Reserve Bank of India (“RBI”) from the next Financial Year 2022-23 which shall be at par with the physical currency. Time is ripe for the Parliament to enact the Cryptocurrency Bill, 2022, which would bring further clarity to the legality of owning all types of cryptocurrencies in India. This, coupled with a fixed tax regime, would mark a milestone in digitalisation of the modern Indian economy.

What is cryptocurrency and NFT?

As per the Oxford Dictionary, a cryptocurrency is defined as “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”. It is not a traditional ‘currency’ but is a virtual or digital representation of money’s worth and not something which is available in a tangible and physical form. Cryptocurrency is based on block chain technology. Block chain technology is a distributed ledger which is open and records all transactions in code. In a simpler sense it is a kind of cheque book that’s distributed across countless computers all across the world.1

The Merriam-Webster Dictionary defines Non- fungible Token (“NFT”) as “a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership (as of a specific digital asset and specific rights relating to it)”.2 Ethereum.org, the online portal for one of the leading cryptocurrencies
– Ethereum, explains that NFTs are used to represent ownership of unique items, such as art, collectibles, and even real estate. NFTs can only have one owner at a time, which means no one can modify the record of ownership or copy/paste a new NFT into existence.3Thus, NFT is a token that is permanently linked to a piece and is encrypted by the artist’s signature, which validates the piece’s ownership and authenticity. NFT can be created out of any digital content.

The Bill proposes to group all kinds of virtual assets under the common head of VDA. This will include what is commonly known as crypto/virtual currency (except any national or foreign currency), NFTs and any other VDAs which the Central Government shall notify. Even though the Bill defines VDA to mean a digital representation of value, the Finance Minister has clarified in a post-budget interview that “a currency is a currency only when it is issued by the Central Bank, even if it is a crypto. But anything which is outside of that, loosely all of us refer to as cryptocurrency but they are not currency”.4

Proposed legislature on VDAs in India The latest draft legislation on virtual currency viz. Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“Cryptocurrency Bill, 2021”) is still not available in the public domain. However, as per description provided, the Cryptocurrency Bill, 2021 seeks to prohibit all private cryptocurrencies in India while allowing for certain exceptions that promote the technology of cryptocurrency. It also creates a framework for digital currency that will be issued by the RBI.5 News reports suggest that, by way of the Cryptocurrency Bill, 2021 the government may impose a ban only on dealing in “private cryptocurrencies” in India, however, private cryptocurrency are not yet defined. The Cryptocurrency Bill, 2021 is also expected to provide a framework for the issue of digital currency, i.e., the CBDC through the RBI, which could be used as legal tender.

The Cryptocurrency Bill, 2021 was to be considered during the November, 2021 winter session of the Parliament but it was postponed to be taken up later. However, neither was it listed for debate during the recent 2022 budget session of the Parliament, as it is a complex subject and it will require more time, a Senior Finance Ministry Official has said. The Government is also awaiting technical inputs from the RBI after the pilot launch of its digital currency.6

Until the Cryptocurrency Bill, 2021 becomes an Act, we can only rely on the judgement of the Hon’ble Supreme Court in case of Internet and Mobile Association of India v. RBI [(2020) 10 SCC 274] which set aside the “Statement on Developmental and Regulatory Policies” issued by RBI on April 5, 2018.

Legislative intent behind amendments to the Income Tax Act, 1961 with respect to VDAs

India is one of the biggest markets for trading of cryptocurrencies and other digital assets in the world, while a specialised piece of legislation is still at discussion stage, the Government wanted to bring within its tax net all the unregulated income generated from such trade and transfers. The Budget Memorandum states that virtual assets are experiencing rising popularity and a substantial increase in trading volume.7 Similarly, the Finance Minister was quoted in a post-budget interview that the government is exercising its sovereign right to tax such transactions and profit making.8

Proposed Amendments to the Income Tax Act, 1961

The following amendments to the Income Tax Act, 1961 (“Act”) are proposed to be introduced through the Bill:

1. A new clause i.e., (47A) which defines VDA is proposed to be inserted in section 2 of the Act. As per the said clause, a VDA is proposed to mean (a) any information or code or number or token (not being Indian or Foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transactions or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically; (b) a non-fungible token (means such digital assets as notified by the Central Government) and; any other token of similar nature; (c) any other digital assets as the Central Government may by notification in the Official Gazette specify; are included in the definition. However, the Central Government can notify such assets which shall not be a part of VDA for the purpose of this section.9

   This means that virtual digital assets are classified as a capital asset for the purpose of the Act. Accordingly, section 45 of the Act would be attracted and any profits or gain arising from such transfer would be chargeable to income tax under the head “Capital Gain” and shall be deemed to be the income of the previous year in which the transfer took place.

   Investors are required to pay income tax based on the nature of VDAs transactions. If there is an intention of doing frequent trades and high volumes, gains from the VDAs will be taxed as “business income”. However, if the intention is primarily to hold them and earn longer- term appreciation then gain from such VDAs will be taxable as “capital gain”.

2. Section 56(2)(x) provides taxability of any sum of money or immoveable property received with or without consideration under the heading “Income from other sources”. As per the proposed amendment, the term “property” as defined in Explanation to clause (vii) shall include VDA. This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the Assessment Year 2023-24 and subsequent assessment years.

   The Explanation to clause (vii) defines the term “property” as the capital asset of the assessee for the purpose of this section. Thereby, if one receives VDA as a gift, he/she will be liable to pay tax under the head “Income from other source” u/s 56 of the Act.

3. Section 115BBH is proposed to be introduced with effect from the 1st day of April, 2023. Accordingly, where the total income of an assessee includes any income from the transfer of any VDA, income tax shall be chargeable at the rate of 30% on such transfer, along with the amount of income tax which the assessee would have been chargeable on income as reduced by the income arising on transfer of VDAs. Further, as per sub- section (2), (a) no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee; (b) no set off of loss from transfer of the VDA shall be allowed to be set-off with any other income or to be carried forward to succeeding assessment years.

   With effect from 1st April, 2023; transfer of VDAs would attract the levy of income tax at the flat rate of 30%. This would mean the benefit of slab rate is not available to a person. Further, deduction is available only for the cost of acquisition. Similarly, loss arising from VDAs would be set off from the income of VDAs and not from any other income. No carry forward of any losses from transfer of VDAs is permitted.

4. Section 194S is proposed to be introduced with effect from the 1st day of July, 2022. Thus, any person responsible for paying to a resident any sum by way of consideration for transfer of a VDA, shall at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to 1% of such sum as income tax thereon, known as Tax Deducted at Source (“TDS”) or Withholding Tax. However, where consideration is in kind or partly in kind, the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of the VDA.

   This implies that tax has to be deducted on transfer of VDAs to the resident at the rate of 1% of such sum. The liability to deduct tax will prevail even when consideration is in kind or partly in kind. Thus, any person making the payment shall ensure that tax has been paid in respect of such consideration. Further, no tax is to be deducted in case the payer is the specified person or the aggregate of such value of a consideration to a resident is less than Rs 50,000 during the financial year. In any other case, the said limit is proposed to be Rs 10,000 during the financial year.

Representation made to the Government:

In an era of digitalization, the Government has recognized cryptocurrencies as VDAs and proposed to tax the profit earned through transactions involving VDAs by enforcing the above-mentioned proposed amendments. However, bringing crypto transactions within the higher tax bracket has put a lot of investors in discontent. The major stakeholders of the cryptocurrency industry have decided to seek a revision of the tax rate from the government. This proposal will be headed by the Blockchain and Crypto Assets Council (“BACC”).10 The two major concerns being faced by the crypto industry include (i) a grievance against the tax rate being fixed at 30%, instead suggesting that it be brought at par with other asset classes depending on the income levels of the investors; (ii) another concern revolves around TDS implications, since it will add a huge compliance burden upon crypto exchanges, which will have to produce records at every transaction.

Comparison with existing global tax regimes

While cryptocurrencies and NFTs are being taxed for the first time in the Indian economy, virtual assets have been defined as subject to tax in various jurisdictions around the world. A few regulations have been highlighted below, comparing the proposed taxation and imposition of withholding tax in India vis-a-vis prevalent practises in other economies,

1. USA

   Cryptocurrencies are treated as property in the US and regulated under the categories of capital assets. Consequently, any gains on the sale of the virtual currency are taxed by the Internal Revenue Service (“IRS”) as capital gains. “Virtual currency” is defined as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency but is not given the status of legal tender.11 This understanding is broadly similar to the definition of VDAs under the Bill in India.

   In juxtaposition to the Indian decision to impose a single tax rate upon transfer of VDAs, the US regime imposes taxes in a range from 0% to 37%, depending upon whether the virtual currency was held short-term, for a period of less than 12 months or long-term.12 Additionally, tax is also imposed upon mining of virtual currency in the US, whereas no such provision has been provided in India so far.

   While India has categorically prohibited set off of losses from transfers involving VDAs, any losses arising in the US can be set off upto $3,000.13

2. UK

   While there is no specific tax imposed on cryptocurrencies in the UK, profits made on transactions involving cryptocurrencies are either taxed as capital gains or income tax in the hands of individuals. A manual published by Her Majesty’s Revenue & Customs (“HMRC”) explains the term “cryptoassets” to include cryptographically secured digital representations of value or contractual rights that can be transferred, stored, traded electronically, using some form of Distributed Ledger Technology.14 When compared to the definition of VDAs proposed in India, it is uncertain whether cryptoassets in the UK shall include NFTs since HMRC has not issued any guidance on the same.

   Individuals belonging to the UK, are liable to income tax on cryptoassets received from their employers as a form of non- cash payment and any mining, transaction confirmation or airdrops.15 An individual who is trading may reduce their income tax liability by offsetting any losses from their trade against future profits or other income, or may carry it forward16, contrary to the proposal in India. The tax rates range from 20% to 45% based upon each slab17, rather than a fixed rate as proposed vide the Bill in India.

   With regard to capital gains tax in the UK, cryptoassets or tokens are classified as assets and attract capital gains tax when disposed of for profit.18 The tax- free allowance for capital gains tax is £12,300, gains above which will be taxed at 10% upto the basic rate tax band, if available, and 20% on gains at the higher and additional tax rates.19

3. Canada

   The taxation of cryptocurrencies in Canada is different from the above countries, since cryptocurrencies are taxed as either business income or capital gains, and when cryptocurrencies are used to pay for goods or services, the transaction is taxed with GST, in the form of a barter. The Canada Revenue Agency (“CRA”) defines cryptocurrency as a digital representation of value that is not legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it and operates independently from a central bank.20

   While, in Canada, possessing or holding cryptocurrencies is not a taxable event, disposition of cryptocurrencies by way of sale, gift, conversion to currency, etc. is taxable. If the same is carried on repeatedly for commercial reasons with the intention to create profits, it is likely that the disposition would be taxed as business income at rates extending from 15% to 33%,21 or if not carried out repeatedly as a commercially viable option, then it would be taxed as capital gains on 50% of any profits on the disposition.22 This is vastly different from the proposal envisogned for taxing VDAs in India at a fixed rate.

4. Germany

   The regulations relating to cryptocurrencies in Germany are far more relaxed than global standards, and cryptocurrencies are treated as private assets or “Privatvermögen”, attracting individual slabs of income tax rather than capital gains. Germany may be considered as a crypto tax haven due to low tax rates and exemption benefits. The country is further set to notify a new law regulating cryptocurrencies in March, 2022.23

   One of the most attractive features of Germany’s tax regime is that no tax is imposed on a sale or transfer of cryptocurrency after one year of holding and neither does a requirement for reporting such a transaction exist. With regard to sale within a year of purchase, profits made upto 600 euros are tax exempt on individual sales.24 The tax slabs range from 0% to 45%. Mining is also taxable on an income net expense basis. Further, losses arising from cryptocurrency transactions may be set off or carried forward25, which is not the case in India.

5. Australia

   The Australian Taxation Office (“ATO”) refers to a cryptocurrency as a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain, without involvement of a central bank.26 In comparison to this, the proposed definition in the Indian context is far wider and includes NFTs. Taxation of cryptocurrency transactions in Australia falls mainly under the two heads of business income and capital gains, however, reporting is to be undertaken for all types of transactions.27 When a transaction, which is commercial in nature is made with an intention to generate profits, it would generally be liable to tax as business income, including mining.28 Whereas a capital gains tax event occurs when cryptocurrency is disposed of, in the manner of a sale, gift, trade, exchange,etc. If the currency is held for the period of 1 year prior to disposing it of, 50% of the capital gains would be exempt from tax.29 the tax rates range from 0% to 45%.30 This is in stark contrast to the proposal in India to tax any transaction involving transfer of VDAs, irrespective of its value.

Conclusion

Although the proposed amendments sought to be brought about vide the Bill in India, are a step forward in the right direction, mere taxation of VDAs will not imply that they have been granted legal status since the Indian Income Tax Department also taxes illegal incomes. Therefore, a more holistic view must be awaited from the Indian government, which may be seen upon passage of the Cryptocurrency Bill, 2021 as well as the introduction of the official CBDC by the RBI.

https://economictimes.indiatimes.com/topic/ india-cryptocurrency-bill

https://economictimes.indiatimes.com/ markets/cryptocurrency/digital-tax-fine-but- what-about-crypto-money-laundering-via-dark- web/articleshow/89399578.cms

https://economictimes.indiatimes.com/ markets/cryptocurrency/budget-gives-crypto- some-clarity-but-more-importance-to-digital- rupee/articleshow/89297455.cms

https://economictimes.indiatimes.com/ t ec h / te c hn o l og y /c r yp t o- e xc h a ng e s- to-brief-policymakers-on-tds-tangles/ articleshow/89372406.cms

https://www.google.com/amp/s/ indianexpress.com/article/explained/ virtual-digital-assets-vs-digital-currency- explained-7752936/lite/

https://indianexpr ess.com/article/ business/budget/budget-interview-nirmala- sitharaman-7752334/

 

1. https://www.taxsutra.com/dt/experts-corner/cryptocurrency-regulations-lessons-us.

2. https://www.merriam-webster.com/dictionary/NFT.

3. https://ethereum.org/en/nft/.

4. https://indianexpress.com/article/explained/virtual-digital-assets-vs-digital-currency-explained-7752936/.

5. https://prsindia.org/sessiontrack/winter-session-2021/session-alert.

6. https://economictimes.indiatimes.com/news/economy/policy/crypto-bill-likely-to-miss-budget-session-as-govt-seeks- time-to-build-consensus/articleshow/88962285.cms.

7. Memorandum explaining the provisions in the Finance Bill, 2022.

8. https://indianexpress.com/article/business/budget/budget-interview-nirmala-sitharaman-7752334/.

9. https://www.indiabudget.gov.in/doc/memo.pdf

10. https://www.moneycontrol.com/news/business/cryptocurrency/revision-on-crypto-tax-on-the-cards-industry-to-take-it-up-with-the-center-8053881.html/amp.   

11. https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies.

12. https://www.forbes.com/sites/shehanchandrasekera/2021/03/09/whats-your-tax-rate-for-crypto-capital-gains/?sh=6f9403771e20. 

13. https://time.com/nextadvisor/investing/cryptocurrency/cryptocurrency-tax-guide/.

14. https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto10100.

15. https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto20050.

16. https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto21300.

17. https://www.etctax.co.uk/individuals/tax-on-cryptocurrency/crypto-assets/.

18. https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto22100.

19. https://www.etctax.co.uk/individuals/tax-on-cryptocurrency/crypto-assets/.

20. https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html. 

21. https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/taxes-quebec/taxes-quebec-2/5.html.

22. https://financialpost.com/fp-finance/cryptocurrency/crypto-gains-can-come-with-a-hefty-and-unexpected-tax-bill.

23. https://www2.deloitte.com/at/de/blog/deloitte-tax-blog/2021/taxation-of-crypto-currencies-in-the-draft-of-the-ecosocial-tax-reform-law-2022-part-i.html. 

24. Sections 22 and 23(3), German Income Tax Act (Einkommensteuergesetz) referred to in https://tokentax.co/guides/ crypto-taxes-in-germany/.

25. https://tokentax.co/guides/crypto-taxes-in-germany/, wherein reference is made to german draft, available at: https:// bundestag.de/resource/blob/704904/16d8ee9f5216e150cb012b65906cd0c7/WD-4-054-20-pdf-data.pdf.

26. https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/.

27. https://www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Cryptocurrency-and-tax/.

28. https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically- bitcoin/?page=3#Cryptocurrency_businesses.

29. https://www.news.com.au/finance/money/tax/ato-warns-bitcoin-cryptocurrency-investors-cant-avoid-paying-tax/news-story/6aeabd5774cd3e583e85c0cdfae1880b.

30. https://www.ato.gov.au/rates/individual-income-tax-rates/.

Finance Bill 2022 presented by Hon. Union Finance Minister, seeks to lay the foundation and give a blue print to steer the economy over the Amrit Kal of the next 25 years- from India at 75 to India at 100. It has continued the fundamental tenets which include transparency of financial statement and fiscal position, reflect the government’s intent, strengths and challenges. The Hon. Finance Minister has done a fair job by presenting a progressive and expansionary budget with a little room for disappointment and focus on agriculture, health sector, infrastructure and startup (including digital advancement).

1.1 So far as the Direct Tax Proposals of the Bill are concerned, the same can be divided into 4 broad divisions namely Voluntary Compliance, Socio-Economic Welfare Measures, Widening-Deepening Tax Base and Phasing out exemptions- Rationalization. The proposals relating to the public charitable trust and institution, fall under the last category. The focus has been to provide clarification to the existing provisions and rationalize the procedural provisions, removing intra- regime anomalies and ensuing effective monitoring. The Proposals relating to the provisions pertaining to the charitable trust and institution may be divided in two regimes viz. amendments relating to the provisions concerning public charitable trust which are hither to govern under section 11 to 13 of the Act (fort short “the first regime”) and the institutions governed under clause-(23C) of section 10 of the Act (for short “the second regime”). The proposals are in continuation of the amendments made a few years back.

2.0 Effective Monitoring and Implementation

1. At present, there is no specific provision under the Act providing for the books of account to be maintained by such trust or institutions. Therefore, in order to ensure proper implementation and monitoring both the exemption regimes, it is proposed to amend clause – (b) of sub-section (1) of section 12A of the Act and 10th Proviso to section 10(23C). It is proposed that where the total income of any trust or institution under the both regimes as computed under the Act without giving effect to the provisions of section 10(23C) or section 11 & 12, exceeds the maximum amount which is not chargeable to tax, such trust or institution shall keep and maintain books of accounts and other documents in such form and manner and at such place as may be prescribed. This amendment will take effect from 1st April 2023 and will accordingly apply to A.Y. 2023-24 and subsequent AYs.

2. In view of the above said proposal, the trust or institution under both the regimes would be required to maintain books of accounts for the period commencing from 1st April 2022 in the prescribed form and manner. Since, the charitable trust registered under local public charitable act are also required to maintain their books of accounts as prescribed therein, this proposal may result into maintaining either two sets of books of accounts or make necessary changes in the set up followed hitherto.

3. Moreover, this proposal directs the books of accounts and other documents to be kept and maintain where the total income in any previous year exceed the exemption limit, without giving effect to section 11 & 12. But, in case when such total income exceed the exemption limit during the course of any previous year, whether such trust or institution would be required to keep and maintain books of accounts from that day onwards. It is suggested that the compliance to this proposal may be difficult in such cases so that the compulsory books of accounts may be provided only in a case where such total income has exceeded the exemption limit in the immediately preceding year. We find, similar provision u/s. 44A(2) of the Act.

4. This proposal will streamline the format of books of accounts and relieve the trust from filing audit report in form- 10B. However, it appears that there is no corresponding proposal to levy penalty in case of failure to keep and maintain the prescribed books of accounts under this clause.

3.0 Changes in accumulation provisions

1. Under the existing provisions, a trust or institution is required to apply 85% of its income during the previous year and in case it is unable to so apply, it is allowed to accumulate such income for a period not exceeding 5 years subject to fulfillment of the conditions. The section-11(3) also provides for the specific year in which the accumulated income will be subjected to tax in case of different types of violations which inter alia provides that if the accumulated income is not applied within 5 years, it shall be taxed in the 6th year. There are no corresponding such specific provisions in the second regime.

2. Therefore, in order to bring consistency in the provisions of two exemption regimes, it is proposed to amend section-11(3) to provide that any income as referred to in sub-section-(2) which is not utilized for the purposes for which it is so accumulated or set apart shall be deemed to be the income of such person of the previous year being the last previous year of the period for which the income is accumulated or set apart but not utilized for the purposes specified. Similar provision relating to accumulation and failure to apply such accumulated income is proposed to be inserted by way of Explanation-(3) and Explanation-(4) to Third Proviso to section 10(23C).

3. It is further proposed to insert Explanation-(5) to the Third Proviso of section-10(23C) to enable the AO to allow trust or institution under the second regime in circumstances beyond their control to apply such accumulated income for such other purpose in India as is specified in the application by such person subsequent to fulfillment of specified condition. These other purposes, are required to be in conformity with the objects for which the trust or institution is established

4. In case of second regime institutions, it is proposed that the any accumulated income shall not be deemed to be the income of the previous year in which the following event takes place:

   • Income is applied for purposes other than the objects of the trust or the income ceases to remain accumulated/set apart.

   • Income ceases to remain invested/ deposited in any specified modes.

   • Income is transferred to any other trust under the first or second regime.

   • Income is not utilized for the purpose for which it is accumulated/set apart within the specified period.

5. These amendments will take effect from 01st April 2023 and will apply in relation to AY 2023-24 and onwards.

4.0 Proposals relating to payments to specified persons

1. Under section 13(3) of the Act, where the income or any part thereof or property or any trust under the has been applied directly or indirectly for the benefit of specified person, such income or part of income or property shall be deemed to be the income of such person of the previous year in which it is applied. Similar provision is now proposed by inserting 21st Proviso in clause-10(23C) to the effect that where income or part of income or property has been applied directly or indirectly, such income shall be deemed to be the income of such person of the previous year in which it is so applied.

5.0 Proposals relating to accreted income on winding up or dissolution

1. Chapter-XII-EB provides for accreted income of the trust in certain cases. At present, it applies to the trust of the First regime. Accordingly, when a trust is voluntarily wound up or dissolved or converted into or merged with a non- charitable organization, a specified levy in the nature of exit tax is chargeable on the amount accreted at the time of such event. However, such provisions do not apply to the institution under the second regime.

2. Accordingly, it is now proposed to amend the provisions of section-115TD, 115TE and 115TF to make them applicable to any trust or institution under the second regime as well.

6.0 Filing of return of income by institution under section 10(23C)

1. Under the existing provisions, in case of the trust under the first regime, failed to furnish return of income u/s. 139(4A) within the time allowed, then provisions of section 11 & 12 are not applicable. However, there is no similar provision in the second regime.

2. Hence, it is now proposed to insert 20th proviso to section 10(23C) to the effect that for the purpose of exemption under this clause, the institution under the second regime shall furnish return of income for the previous year as per section 139(4C) within the prescribed time. This provision will apply in relation to AY 2023-24 and onwards.

7.0 Allowing certain expenditure in case of denial of exemption

1. In order to avail exemption of income by the trust or institution under the Act, various conditions have been prescribed so that there is a need for clear provisions for computing income in case of non- compliance. There is also lack clarity on computation of taxable income for such non-compliance. Hence, it is proposed to provide for the same so as to achieve consistency and avoid disputes. Some of the provisions under which exemption is not available are, say, failure to get books of accounts audited or non-filing of return by trust under first regime or having commercial receipts in excess of 20% of the annual receipts in violation of proviso to section 2(15).

2. It is proposed to insert sub-section (10) in section 13 to provide that where the provisions of sub-section (8) are applicable to any trust under first regime or such trust violates the conditions prescribed in section 12A(1)(b)/(ba), its income to be chargeable to tax shall be computed after allowing deduction for non-capex incurred in India for objects of the trust subject to fulfillment of conditions. The specified violation is proposed to be defined in case of the first regime say

   • Income of the trust is applied for purposes other than objects of the trust

   • Trust has applied its income for private religious purposes and not for the benefit of general public.

   • Activity carried out by the trust is non-genuine or not in accordance with the conditions of registration.

   • Trust has not complied with requirements of any other law.

3. So far as the trust under second regime are concerned, it is proposed to insert 22nd proviso to section 10(23C) which provides that where there is violation of the conditions prescribed under 10th or 28th proviso, its income shall be chargeable to tax after allowing deduction for the expenditure other than capex incurred in India for the objects of the trust subject to the conditions.

8.0 Taxation of certain income at special rate

1. The Bill proposes to make a benevolent provision in respect of the taxation of the trust in certain cases. These proposals requires such income resulting on account of violations to be taxed at a special rate at 30% under the proposed new section 115BBI. The intention of the legislature appears that denial of exemption to the trust on account of small violation of income results into hardship and there is also ambiguity about the taxation of such income.

   • The trust or institution under the second regime are not required to pass on any unreasonable benefit to the specified persons as per the present section 13(1)(c) in which case, the entire exemption is being denied irrespective of the benefit passed on. Therefore, it is proposed that only that part of the income which has been applied in contravention of the provisions of section 13(1)(c) shall be liable to be included in the total income.

   • Similarly, in case of violation under section 13(1)(d) relating to the investment in specified modes, it results into denial of the entire exemption to the trust irrespective of the amount of investment in non-specified modes. Therefore, it is proposed to amend this clause to provide that only that part of the income which has been invested in violation shall be liable to be included in the total income.

   • Under the present provisions, where the trust is not able to comply with the provisions relating to accumulation for a period of 5 years, such accumulated income which could not be so applied shall be deemed to be the income of the trust.

9.0 Taxation of voluntary contribution for renovation and repairs of religious places

1. This Bill provides one more beneficial proposal in relation to the donations for renovation and repairs of temples, mosques, gurudwaras, churches etc. notified under 80G(2)(b). The proposed Explanation- 3A to section 11(1) brings about clarity in respect of such donation as to be treated as corpus donation or like any other voluntary contribution to be applied and or accumulated for 5 years.

   • The proposed Explanation -3A provide that in case of the aforesaid trust or institution, any sum received as a voluntary contribution for the purpose of renovation or repair of such religious place may at the option of the trust form part of the corpus subject to the condition such as it shall apply such corpus only for the purpose it is received, it shall not apply such corpus for making contribution or donation to any person and maintain such corpus as separately identifiable and invest in the specified notes as per section-11(5).

   • The proposed Explanation-3B to section 11(1) makes provision in respect of violation of the conditions specified in the proposed Explanation-3A by way of amount of such contribution shall be deemed to be its income of the previous year during which the violation takes place.

   • Similar provision is proposed to be inserted by way of Explanation- 1A to the third proviso of section -10(23C).

   • It also seeks to insert Explanation- 1B in respect of violation of the conditions stated in the proposed Explanation-1A.

2. It may be noted that the above said amendments are proposed to take effect retrospectively from A.Y. 2021-22 and subsequent years. Therefore, in case the trust or institution has received donations for repairs and renovation of religious places during the previous year relevant to A.Y .2021-22, it will have to examine whether the conditions prescribed under the newly inserted Explanations are fulfilled so as to claim the benefit. It appears that there could be difficulty to comply with the condition of maintaining such corpus separately identifiable.

10.0 Conclusion

After examining the proposed amendment of Finance Bill 2022 relating to the public charitable trust or institutions, it appears that the object of bringing consistency, ensuing effective implementation and rationalization, have been achieved to a large extent and the beneficial provisions to tax the income arising on account of violations, would go a long way in giving impetus to the activities of the trust. The thrust to penalize the non-genuine trust is also a welcome step.

1. The Finance Act 2021 made a major shift in reassessment provision. The Finance Act 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. Now the Finance Bill 2022 vide Clause 44 proposed to insert a new proviso under the first proviso to the effect that approval to issue notice under the said section 148 shall not be required where the Assessing Officer, with the prior approval of the specified authority has passed an order under clause (d) of section 148A that it is a fit case to issue a notice under the said section.

   It is also proposed to amend Explanation 1 to the said section to provide that for the purposes of the said section and section 148A of the Act, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means, —

   1. any information 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; or

   2. any audit objection 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; or

   3. any information received under an agreement referred to in section 90 or section 90A of the Act; or

   4. any information made available to the Assessing Officer under the scheme notified under section 135A; or

   5. any information which requires action in consequence of the order of a tribunal or a court.

   It is further proposed to amend clause (ii) of Explanation 2 of the said section to omit the reference of sub-section (5) of section 133A.

   It is also proposed to amend Explanation 2 to the said section to provide that 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 where 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.

   These amendments except for amendment in Explanation 2 will take effect from 1st April, 2022. The amendment in Explanation 2 will take effect from 1st April, 2021.

4. The Finance Bill 2022 vide clause 45 seeks to propose amendment in section 148A : Conducting inquiry, providing opportunity before issue of notice under section 148 :

   The existing Clause (b) of the section 148A provides that an opportunity of being heard shall be provided to the assessee, with prior approval of specified authority. It is proposed to omit the requirement of approval of specified authority in clause (b).

   It is further proposed to insert a new clause (d) in the proviso to the said section to provide that the provisions of the said section shall not apply in cases where the Assessing Officer has received any information under the scheme notified under section 135A, pertaining to income chargeable to tax escaping assessment for any assessment year in the case of the assessee.

5. The Finance Bill, 2022 vide clause 46 proposes to insert new Section 148B: Prior Approval For Assessment, Reassessment Or Recomputation in Certain Cases:

   It is proposed to insert new section which provide that no order of assessment or reassessment or recomputation under the Act shall be passed by an Assessing Officer below the rank of Joint Commissioner, except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director, in respect of an assessment year to which clause (i), clause (ii), clause (iii) or clause (iv) of the Explanation 2 to section 148 apply.

6. The Finance Bill, 2022 vide clause 47 proposes to amend Section 149 : Time limit for notice :

   The said section 149 provides the time limit for issuance of notice under section
   149 for assessment, reassessment or recomputation of income.

   It is proposed to amend the clause (b) of sub-section (1) of the section 149 to provide that no notice under section 148 shall be issued for the relevant assessment year after three years but prior to ten years from the end of the relevant assessment year unless the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of :

   1. an asset; or

   2. expenditure in respect of a transaction or in relation to an event or occasion; or

   3. an entry or entries in the books of account, which has escaped assessment amounts to or likely to amount to fifty lakh rupees or more.

   It further proposed to insert a new sub-section (1A) in the section 149 to provide that notwithstanding anything contained in sub-section (1) of the said section, where the income chargeable to tax represented in the form of an asset or expenditure in relation to an event or occasion of the value referred to in clause (b) of sub-section (1) of the said section, has escaped the assessment and the investment in such asset or expenditure in relation to such event or occasion has been made or incurred, in more than one previous years relevant to the assessment years within the period referred to in clause (b) of sub-section (1) of the said section, notice under section 148 shall be issued for every such assessment year for assessment, reassessment or recomputation, as the case may be.

   It is also proposed to amend the first proviso to sub-section (1) of the section
   149 to provide that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if a notice under section 148 or section 153A or section 153C could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of subsection (1) of section 149 or section 153A or section 153C, as the case may be, as they stood immediately before the commencement of the Finance Act, 2021.

   These amendments except for amendment in first proviso to subsection (1) of Section 149 will take effect from 1st April, 2022. The amendment in first proviso to subsection (1) of Section 149 will take effect from 1st April, 2021.

7. The scope and effect of the new provision is yet to be tested before Courts and Tribunal, however within 1 year of bringing the new scheme for reassessment the government had to bring again clarification, insertion of new explanation, proviso, sub sections etc. Inspite of various guidelines laid down by courts while dealing with the erst while provisions, dept constantly preferred 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 were amended by Finance Act 2021 and now further amendment by Finance Bill 2022. To my reading of the provision finality to an assessment will not be till next 10 years. To my view this will bring more uncertainty as the sword of reopening will be hanging till 10 years now.

INTRODUCTION

With a view of promoting voluntary tax compliance and reducing litigation, the Finance Bill, 2022 has introduced a novel sub- section (8A) to Section 139 of the Income Tax Act, 1961 (hereinafter referred to as the Act) which provides for filing a Return of Income known as Updated Return of Income over and above the Original Return of income, revised return of income and belated return of income. According to the speech of the Finance Minister this provision is introduced in view of the income tax department’s robust framework whereby it has various information about taxpayers transactions, an additional opportunity is to be granted to the taxpayer who realize that they have committed omissions or mistakes in correctly estimating their income for tax payment to correct such errors subject to payment of additional tax. This updated return can be filed within two years from the end of the relevant assessment year. It is believed that the proposal for updated return over a period longer than that is provided in the existing provisions of Income-tax Act would on the one hand bring use of huge data with the IT Department to a logical conclusion resulting in additional revenue realization and on the other hand, it will facilitate ease of compliance to the taxpayer in a litigation free environment.

EXISTING PROVISIONS

Section 139 of the Act is related to the provisions for filing of Income Tax Return by taxpayers. The object of section 139 of the Act is to give reasonable time to the taxpayer to file a correct statement of his income within the duration specified under the Act. Sub- section (1) of section 139 of the Act casts responsibility on the taxpayer to furnish a return within a definite time period or up to a particular date, that is, the due date which as per this section means:

1. for an assessee who is a company or a person (other than a company) whose accounts are required to be audited under this Act or under any other law for the time being in force, it is 31st day of October of the assessment year;

2. for an assessee who is required to furnish a report under section 92E, it is 30th day of November of the assessment year; and

3. for any other assessee, it is 31st day of July of the assessment year.

Alternatively, sub-section (4) of section 139 of the Act facilitates filing of a belated return after the expiry of due date, if such return is furnished before 3 months prior to the end of the relevant assessment year or before the completion of assessment, whichever is earlier. Similarly, sub-section (5) of section 139 of the Act provides the taxpayer an opportunity to revise the return filed under sub-section (1) or sub-section (4) in case of any omission or wrong statement, after due date, which is to be filed 3 months before the end of the assessment year or before the completion of assessment, whichever is earlier.

To sum up, existing Section 139 provides an additional time of approximately 5 months to an individual assessee, 2 months to a company/auditable case and 1 month to an assessee who enters into an international transaction or specified domestic transaction respectively, in a financial year to file belated or revised return. However, this additional timeline for filing a revised/belated return may not be adequate when we factor in utilization of huge information and data available. The proposed Amendment seeks to give additional time.

PROPOSED AMENDMENTS WITH REFERENCE TO

I. A new sub-section (8A) in section 139 is proposed to be introduced to provide for furnishing of updated return under the new provisions in section 139, ––

• Time limit to file Updated Return of Income.

  Any person, whether or not he has furnished a return under sub-section (1), sub-section (4) or sub-section (5), for an assessment year (herein referred to as the relevant assessment year), may furnish an updated return of his income or the income of any other person in respect of which he is assessable under the Act, for the previous year relevant to such assessment year, within twenty four months from the end of the assessment year. Such return shall be furnished in the prescribed form and manner and shall contain prescribed particulars.

  Thus, an updated return of income can be filed by any person i.e. individual, corporate entity, partnership firm etc. Further, even if such person has filed a return previously for the relevant assessment year, such person can still file Updated Return of Income.

• Eligibility.

  1. The proposed sub-section (8A) of section 139 shall not apply if the updated return :

     • is a return of a loss or

     • has the effect of decreasing the total tax liability determined on the basis of return furnished or

     • results in refund or increases the refund due on the basis of return furnished

     Thus, an updated Return of Income can be filed only when there is a tax outflow for the Assessee and cannot be filed if Assessee believes that he has wrongly offered any income for tax.

  2. A person shall not be eligible to furnish an updated return under the proposed sub-section (8A) of section 139, if: ––

     1. search has been initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of such person.

     2. a survey has been conducted under section 133A, other than subsection (2A) of that section, in the case such person.

     3. a notice has been issued to the effect that any money, bullion, jewellery or valuable article or thing, seized or requisitioned under section 132 or section 132A in the case of any other person belongs to such person.

     4. a notice has been issued to the effect that any books of account or documents, seized or requisitioned under section 132 or section 132A in the case of any other person, pertain or pertains to, or any other information contained therein, relate to, such person.

     The above ineligibility is for the assessment year relevant to the previous year in which such search is initiated or survey is conducted or requisition is made and two assessment years preceding such assessment year. Thus, if survey is conducted on 31/1/2022 then the person in whose case the survey is conducted will become ineligible to furnish the Updated Return of Income for A.Y. 2022-2023 and the preceding two Assessment Years 2020-2022 and 2020-2021.

  3. No updated return shall be furnished by any person for the relevant assessment year, where,

     1. an updated return has been furnished by him under the proposed subsection (8A) of section 139 of the Act for the relevant assessment year.

     2. any proceeding for assessment or reassessment or recomputation or revision of income under the Act is pending or has been completed for the relevant assessment year in his case.

     3. the Assessing Officer has information in respect of such person for the relevant assessment year in his possession under the Prevention of Money Laundering Act, 2002 or the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 or the Prohibition of Benami Property Transactions Act, 1988 or The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 and the same has been communicated to him, prior to the date of his filing of return under the proposed sub-section (8A) of section 139 of the Act.

     4. information for the relevant assessment has been received under an agreement referred to in sections 90 or 90A of the Act in respect of such person and the same has been communicated to him, prior to the date of his filing of return under the proposed sub-section (8A) of section 139 of the Act.

     5. any prosecution proceedings under Chapter XXII have been initiated for the relevant assessment year in respect of such person, prior to the date of his filing of return under the proposed sub-section(8A) of section 139 of the Act.

     6. he is a person or belongs to a class of persons, as maybe notified by the Board in this regard.

  Thus, an updated return for an assessment Year can be filed only once.

II. It has also been proposed to amend sub-section (9) of section 139 to provide that a return filed under the proposed sub-section (8A) of the said section 139 shall be defective unless such return is accompanied by the proof of payment of tax as required under the proposed section 140B.

III. A new section 140B has been proposed to provide for the tax required to be paid for opting to file a return under the proposed provisions i.e. sub-section (8A) of section 139 of the Act as under :

1. Where no return furnished earlier:

   Where no return of income under sub- section (1) or sub-section (4) of section 139 has been furnished by an assessee, he shall before furnishing the return under sub-section (8A) of section 139, be liable to pay :

   – the tax due together with interest and fee payable under any provision of the Act for any delay in furnishing the return or any default or delay in payment of advance tax, alongwith the payment of additional tax.

   The tax payable shall be computed after taking into account the following:-

   1. the amount of tax, if any, already paid as advance tax;

   2. any tax deducted or collected at source;

   3. any relief of tax claimed under section 89;

   4. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India;

   5. any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section; and (vi) any tax credit claimed to be set off in accordance with the provisions of section 115JAA or section 115JD.

2. Where Return is furnished.

   In the case of an assessee, where, return of income under sub-section (1) or sub- section (4) or sub-section (5) of section 139 (referred to as earlier return) has been furnished by an assessee, he shall before furnishing the return under sub-section (8A) of section 139, be liable to pay – the tax due together with interest and fee payable under any provision of this Act for any delay in furnishing the return or any default or delay in payment of advance tax, along with the payment of additional tax, as reduced by the amount of interest paid under the provisions of the Act in the earlier return,.

   The tax payable shall be computed after taking into account the following:-

   1. the amount of relief or tax, referred to in sub-section (1) of section 140A, the credit for which has been taken in the earlier return;

   2. tax deducted or collected at source, in accordance with the provisions of Chapter XVII-B, on any income which is subject to such deduction or collection and which is taken into account in computing total income and which has not been claimed in the earlier return;

   3. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India on such income which has not been claimed in the earlier return;

   4. any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section on such income which has not been claimed in the earlier return;

   5. any tax credit claimed, to be set off in accordance with the provisions of section 115JAA or section 115JD, which has not been claimed in the earlier return.

   The aforesaid tax shall be increased by the amount of refund, if any, issued in respect of such earlier return.

3. Additional Tax.

   The Additional tax, payable at the time of furnishing the return under sub-section (8A) of section 139, shall be – equal to twenty-five per cent of aggregate of tax and interest payable if such return is furnished after expiry of the time available under sub-section (4) or sub- section (5) of section 139 and before completion of period of twelve months from the end of the relevant assessment year. However, if such return is furnished after the expiry of twelve months from the end of the relevant assessment year but before completion of the period of twenty-four months from the end of the relevant assessment year, the additional tax payable – shall be equal to fifty per cent of aggregate of tax and interest payable if such return is furnished after the expiry of twelve months from the end of the relevant assessment year but before completion of the period of twenty- four months.

   For the purposes of computation of “additional income-tax”, tax shall include surcharge and cess, by whatever name called, on such tax.

4. Interest u/s 234B, 234A & 234C.

   It is further provided that notwithstanding anything contained in the Explanation 1 to section 234B, in the cases where an earlier return has been furnished, interest payable under section 234B shall be computed on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid falls short of the assessed tax, where, “assessed tax” means the tax on the total income as declared in the return to be furnished under sub- section (8A) of section 139, after taking into account the following:

   1. the amount of relief or tax, referred to in sub-section (1) of section 140A, the credit for which has been taken in the earlier return;

   2. tax deducted or collected at source, in accordance with the provisions of Chapter XVII-B, on any income which is subject to such deduction or collection and which is taken into account in computing such total income and which has not been claimed in the earlier return;

   3. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India on such income which has not been claimed in the earlier return;

   4. any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section on such income which has not been claimed in the earlier return;

   5. any tax credit claimed, to be set off in accordance with the provisions of section 115JAA or section 115JD, which has not been claimed in the earlier return. The aforesaid tax shall be increased by the amount of refund, if any, issued in respect of such earlier return.

   Where no earlier return has been furnished, the interest payable under section 234A shall be computed on the amount of the tax on the total income as declared in the return under sub-section (8A) of section 139. Further, interest payable under section 234C, where an earlier return has not been furnished, shall be computed after taking into account the income furnished in the return under sub-section (8A) of section 139 as the returned income. At the same time, for the computation of additional tax above, the interest payable shall be interest chargeable under any provision of the Income-tax Act, on the income as per return furnished under sub-section (8A) of section 139, as reduced by interest paid in the earlier return, if any. However, the interest paid in the earlier return shall be considered to be nil if no earlier return has been furnished.

IV. It is proposed to amend Section 276CC

which provides for prosecution for failure to furnish Return of Income u/s 139(1) or in response to Notice u/s 142(1), 148, 153A. Accordingly if an Assessee furnishes a valid Updated Return u/s 139(8A) then such person will not be prosecuted.

EFFECTIVE DATE

These amendments will take effect from 1st April, 2022.

FURTHER ANALYSIS

The proposed amendment has received mixed reactions from the taxpayers. The levy of additional tax has received some criticism particularly on the ground that paying additional tax is like paying penalty even for genuine and bonafide omissions. Also, it is felt that reduction of litigation is a two-way street. Thus, by disqualifying persons from filing updated returns in case of Search/Survey which tends to result in litigations which last for years is a failure on the part of Government of it’s commitment to reduce litigation. Though some of the concerns are legitimate, but these concerns are also misplaced and perhaps based on wrong understanding of the main objective of the proposed amendment. Perusal of Section 139(8A) shows that it is silent about any specific circumstances for filing an Updated Return unlike Section 139(5) which provides that a Revised Return of Income can be filed if assessee discovers any omission or any wrong statement in the original Return of Income. However, the Finance Minister in her speech has stated as under

“121. India is growing at an accelerated pace and people are undertaking multiple financial transactions. The Income Tax Department has established a robust framework of reporting of taxpayers’ transactions. In this context, some taxpayers may realize that they have committed omissions or mistakes in correctly estimating their income for tax payment. To provide an opportunity to correct such errors, I am proposing a new provision permitting taxpayers to file an Updated Return on payment of additional tax. This updated return can be filed within two years from the end of the relevant assessment year.”

From the above, one can infer that this provision is mainly for an Assessee who has not correctly estimated his income or committed some mistake in estimating income or a calculated omission i.e. an Assessee who has applied his mind to his income and have initially come to a conclusion that particular income is not taxable. However, subsequently such Assessee believes that the income is taxable or may be taxable and wants to avoid litigation and penal consequences. Then such an Assessee would have an opportunity to pay additional tax and avoid litigation. Of-course this is not to say that genuine omissions or non-filing of Return of Income can’t be regularized by an updated return but the Government expects such genuine omissions or genuine wrong statements to be corrected by filing revised returns.

Further, on a holistic reading of Section 139(8A) the underlying scheme of said Section appears to be based on the concept of “Detection”. In-other words if the Income Tax department detects any income not offered to tax before the same is voluntarily disclosed by an Assessee then the Government doesn’t desire to extend this scheme. Thus, in light of this concept of prior detection of income of assessee not offered to tax, the various disqualifications appear to be on parity and also justified.

However, there are certain issues which the Government may consider positively to strengthen the updated return scheme such as :

• An Assessee in whose case Assessment proceedings commence becomes ineligible to file an updated return. A notice u/s 143(2) to commence Assessment proceedings is required to be issued within three months from the end of the financial year in which return is furnished. Thus, in case of Assessee who are scrutinised almost every year, there will be a very small windoe to file updated return and this provision would hardly be of any utility.

• To treat every person in whose case there has been a Search or survey as ineligible to file updated Return seems unreasonable. In case of such a person if no incriminating material is found during the course of Search or Survey then such person should become eligible to file updated return.

• Reopening of Assessment should be permitted to be done only after expiry of time period for filing updated return. This is because if a Reopening is initiated within two years then Assessee becomes ineligible to file updated return. In the alternative, Assessee should be permitted to file updated return in regard to items not covered by the reopening notice.

CONCLUSION

The proposed amendment by the Government is part of the “nudge approach”. In a Nudge the public policy–makers arrange decision–making contexts in ways to promote behaviour change in the interest of individual citizens as well as that of society. In the present context the Government wants to motivate the taxpayer towards the desired objective of voluntary tax compliance, starting with filing of correct tax returns. However, only time will tell whether levying of hefty additional tax will promote the expected behaviour change.

(Bonus & dividend stripping, reduction in goodwill, definition of slump sale)

1. Dividend and bonus stripping transaction in securities and units 
   EXISTING PROVISION :- Presently as per Sec. 94 of the act where the owner of any securities
   (securities includes stocks and shares) sells or transfers those securities, and buys back or reacquires the securities (original securities or similar securities, securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities), then, if the result of the transaction is that any interest (interest includes a dividend) becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of Sec. 94(1), be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.

   If the result of any transaction relating to such securities or the income thereof is that, in respect of such securities within such year, either no income is received by him or the income received by him is less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, then the income from such securities for such year shall be deemed to be the income of such person.

   If it is proved to the satisfaction of the Assessing Officer that there has been no avoidance of income-tax, or that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the such nature, then this provision will not be attracted.

Section 94(7) states that, “Where—

1. any person buys or acquires any securities or unit within a period of three months prior to the record date;

2. such person sells or transfers—

   1. such securities within a period of three months after such date; or

   2. such unit within a period of nine months after such date;

3. the dividend or income on such securities or unit received or receivable by such person is exempt,

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax”.

Section 94(8) states that, “Where—

1. any person buys or acquires any units within a period of three months prior to the record date;

2. such person is allotted additional units without any payment on the basis of holding of such units on such date;

3. such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b),

then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer”.

As per Explanation ‘(aa) “record date” means such date as may be fixed by—

1. a company for the purposes of entitlement of the holder of the securities to receive dividend; or

2. a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to clause (35) of section 10, for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be’.

As per explanation (d) “unit” shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB. (i.e. “unit” means unit of a mutual fund specified under clause (23D) of section 10 or of the Unit Trust of India),

Sec. 10(23D) states unit of mutual fund as :-

“(i) a Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder;

 (ii) such other Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India and subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in this behalf.

Explanation.—For the purposes of this clause,—

1. the expression “public sector bank” means the State Bank of India constituted under the State Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new Bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 and a bank included in the category “other public sector banks” by the Reserve Bank of India;

2. the expression “public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956;

3. the expression “Securities and Exchange Board of India” shall have the meaning assigned to it in clause (a) of sub-section
   (1) of section 2 of the Securities and Exchange Board of India Act, 1992”;

PROPOSED AMENDMENT going to be applicable from A.Y. 23-24:-

1. Existing provisions of Sec. 94(8) were applicable only to units of mutual funds, now it is proposed to extend to securities (stocks and shares) also.

2. It is proposed to substitute Explanation “aa”, to specify “record date” means such date as may be fixed by—

   1. a company;

   2. a Mutual Fund or the Administrator of the specified undertaking or the specified company referred to in the Explanation to clause (35) of section 10; or

   3. a business trust defined in clause (13A) of section 2; or

   4. an Alternative Investment Fund defined in clause (b) of sub- regulation (1) of regulation 2 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992,

   for the purposes of entitlement of the holder of the securities or units, as the case may be, to receive dividend, income, or additional securities or units without any consideration, as the case may be’,

3. It is proposed to substitute clause (d), the following clause shall be substituted, namely:––

‘(d) “unit” shall mean,––

1. a unit of a business trust defined in clause (13A) of section 2;

2. a unit defined in clause (b) of the Explanation to section 115AB; or

3. beneficial interest of an investor in an Alternative Investment Fund, defined in clause (b) of sub-regulation
   (1) of regulation 2 of the

Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, and shall include shares or partnership interests.

EFFECT OF ABOVE PROPOSALS

Earlier Sec. 94(8) was applicable to only units of mutual fund specified U/s 10(23D) or units of Unit Trust of India, now it is proposed that Sec. 94(8) shall be applicable to securities (stocks and shares) also.

The existing provisions of Sec. 94(8) of the Act do not apply to bonus stripping undertaken in case of securities, now the proposed amendment seeks to include such bonus stripping also.

Sec. 94(8) also proposes to be applicable to units of Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) or Alternative Investment Funds (AIFs) by amending definition of units.

ITAT Bangalore in the case of DCIT v. Shri B.G. Mahesh in ITA No. 450/Bang/2012 and CO No. 99/Bang/2012 and ITAT Bangalore in the case of Lalit Kumar Raichur v. ITO, Bangalore on 15-3-2017 vide ITA No. 2100/Bang/2016 (AY 2009-10) held that provision of Sec. 94(8) is not applicable to bonus stripping transactions in securities, it is applicable only to units. Now these judgments are overruled by this proposed amendment.

The proposed amendment to provisions of Sec. 94(7) of the Act, pertaining to dividend stripping, are also going to be made applicable to the units of new pooled investment vehicles such as InvIT or REIT or AIFs.

Since dividend income has already become taxable in the hands of recipient w.e.f. A.Y. 2021-22 and Section 115-O has been abolished, therefore transactions where clause (c) of Sec. 94(7) does not attract, loss equal to amount of dividend shall not be denied.

It is further proposed to substitute clause (aa) of the Explanation to the said section, so as to substitute the definition of the expression “record date” to mean such date as may be fixed by a company, or a Mutual Fund or the Administrator of the specified undertaking or the specified company referred to in the Explanation to clause (35) of section 10; or a business trust as defined in clause (13A) of section 2; or an Alternative Investment Fund as defined in clause (b) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, for the purposes of entitlement of the holder of the securities or units, as the case may be, to receive dividend, income, or additional securities or unit without any consideration, as the case may be.

2. Withdrawal of concessional rate of taxation on dividend income under section 115BBD

EXISTING PROVISIONS :-

Sec. 115BBD of the act states, “(1) Where the total income of an assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of—

1. the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen per cent; and

2. the amount of income-tax with which the assessee would have been chargeable had its total income been reduced by the aforesaid income by way of dividends.

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing its income by way of dividends referred to in sub-section (1).”

PROPOSED AMENDMENT A.Y. 2023-24 :-

To amend section 115BBD of the Income-tax Act relating to tax on certain dividends received from foreign companies.

The said section, inter-alia, provides that in case of an Indian company whose total income includes any income by way of dividends declared, distributed or paid by a foreign company, in which the said Indian company holds twenty-six per cent. or more in nominal value of the equity share capital, such dividend income shall be taxed at the rate of fifteen per cent.

It is proposed to insert a new sub-section (4) to provide that the provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April, 2023 i.e. from A.Y. 2023-24.

This amendment will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years

EFFECT OF ABOVE PROPOSAL

Section 115BBD of the Act provides for a concessional rate of tax of 15 % on the dividend income received by an Indian company from a foreign company in which the said Indian company holds 26 % or more in nominal value of equity shares (specified foreign company).

This rate was aligned to the rate of tax provided under section 115-O of the Act.

Finance Act, 2020 abolished the dividend distribution tax provided in section 115-O to, inter-alia, provide that dividend shall be taxed in the hands of the shareholder at applicable rates plus surcharge and cess.

In order to provide parity in the tax treatment in case of dividends received by Indian companies from specified foreign companies vis a vis dividend received from domestic companies, it is proposed to amend section 115BBD of the Act to provide that the provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April, 2023

Therefore now dividend received by Indian companies from specified foreign companies will not be entitled at concessional rate of 15%. However the said dividend is already deductible U/s 80M.

Sec. 80M of the act states as under :-

“(1) Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company or a foreign company or a business trust, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company or foreign company or business trust as does not exceed the amount of dividend distributed by it on or before the due date.

(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

Explanation.—For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.]”.

3. Reduction of Goodwill from block of assets to be considered as ‘transfer’

EXISTING PROVISION :-

Special provision for computation of capital gains in case of depreciable assets.

Sec. 50- “Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :—

1. where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :—

   1. expenditure incurred wholly and exclusively in connection with such transfer or transfers;

   2. the written down value of the block of assets at the beginning of the previous year; and

   3. the actual cost of any asset falling within the block of assets acquired during the previous year,

   such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

2. where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short- term capital assets:

[Provided that in a case where goodwill of a business or profession forms part of a block of asset for the assessment year beginning on the 1st day of April, 2020 and depreciation thereon 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 such manner as may be prescribed.]” this proviso was inserted from 1-4-2021 i.e. from A.Y. 2021-22.

From the assessment year 2021-2022, goodwill of a business or profession is not considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation.

In 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.

CBDT had issued rule 8AC vide notification No. 77/2021 dt. 7-7-2021, sub-rule 3 to 5 of which states:-

“(3) Where the reduction under sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, for the previous year relevant to the assessment year commencing on the 1st day of April, 2021, exceeds the aggregate of the following amounts, namely:-

1. the written down value of the block of assets at the beginning of the previous year relevant to the assessment year commencing on the 1 st day of April, 2021 without giving effect to reduction under sub-item (B) of item (ii) of sub- clause (c) of clause (6) of section 43; and

2. the actual cost of any asset falling within the block of assets “intangible”, other than goodwill, acquired during the previous year relevant to the assessment year commencing on the 1st day of April, 2021, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(4) Without prejudice to the provisions of sub- rule (3) and section 55, where the goodwill of the business or profession was the only asset in the block of asset “intangible” for which depreciation was obtained by the assessee in the assessment year beginning on the 1st day of April, 2020, and the block of asset ceases to exist on account of there being no further asset acquired during the previous year relevant to the assessment year commencing on the 1st day of April, 2021 in that block, there will not be any capital gains or loss on account of the block of asset having ceased to exist.

(5) The capital gains or loss on transfer of goodwill, during the previous years relevant to the assessment year 2021-22 or subsequent assessment years, shall be determined in accordance with the provisions of section 48, section 49 and clause (a) of sub-section (2) of section 55.”

PROPOSED AMENDMENT going to be applicable w.r.e.f. A.Y. 2021-22 :-

When the amendment was carried out through the Finance Act 2021, consequential amendment was carried out in section 50 of the Act by insertion of a proviso to clause (2) of that section.

A further consequential amendment required is being proposed now.

Accordingly, it is proposed to clarify that for the purposes of section 50 of the Act, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, shall be deemed to be transfer.

Since the amendment to the effect that goodwill of a business or profession is not a depreciable asset has been made applicable from assessment year 2021-2022 the above amendment will take effect retrospectively from 1st April 2021 and will accordingly apply in relation to the assessment year 2021-22 and subsequent assessment years.

4. PROVISIONS RELATING TO SLUMP SALE

EXISTING PROVISIONS

Sec. 2(42C) “slump sale” means the transfer of one or more [undertaking, by any means,] for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Explanation 1.—For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA).

Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.]

[Explanation 3.—For the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47);]

PROPOSED AMENDMENT w.r.e.f. A.Y. 2021- 22 :-

Slump sale is defined in clause (42C) of section 2 of the Act, as the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to individual assets and liabilities in such sales.

Vide the Finance Act, 2021, the definition of “slump sale” was amended to expand its scope to cover all forms of transfer under slump sale.

However, in the last sentence of the definition of slump sale there is reference to the word “sales”, now it is proposed to substitute the word, ‘sales’, with the word, ‘transfer’, in Sec. 2(42C) w.r.e.f. A.Y. 2021-22.

EFFECT OF ABOVE PROPOSAL :- Sales word does not include transfer, but transfer includes sales and exchange etc. as defined U/s 2(47), therefore transfer word is substituted in place of the word sale.

The Government has framed Scheme for Assessment in faceless manner with a view to eliminate human interface between the tax payers and the Department to the extent technologically feasible and provide for optimal utilisation of resources and for making team-based assessment with dynamic jurisdiction. For this purpose, faceless assessment scheme, 2019 was notified. Subsequently vide Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 Section 144B was inserted to provide the procedure for faceless assessment w.e.f. 01.04.2021. Vide Finance Bill, 2022 Section 144B is proposed to be amended / substituted. The Scheme for assessment, however, continues to be same by and large, subject to certain amendments. The Scheme after the proposed amendments will be as under:

Scheme of faceless assessment after proposed amendments

1. All assessment for determination of income on assessment, re-assessment or re-computation under sub-section (3) of section 143 or u/s 144 or u/s 147 in cases as may be specified by the Board shall be completed in faceless manner.

2. A case shall be assigned to a specific Assessment Unit (AU) through an automated allocation system and intimation shall be given to the assessee that his case shall be completed in accordance with procedure laid down u/s 144B of the Act.

3. A notice shall be served on the assessee though NaFAC u/s 143(2) or u/s 142(1) and the assessee may file his response to the notice within the date specified therein.

4. NaFAC shall forward the response to AU.

5. The AU to whom the case is assigned may make a request though NaFAC for:-

   1. Obtaining such further information, documents or evidence from the assessee or any other person, as it may specify.

   2. Conducting of inquiry or verification by Verification Unit (VU);

   3. Seeking technical assistance in respect of determination of Arms’ length price, valuation of property, withdrawal of registration, approval or exemption or any other technical matter by referring to Technical Unit (TU).

6. Where a request is made for obtaining information or documents or evidence from the assessee, a notice shall be issued to the assessee for the same and the assessee shall file his response to such notice within the time specified therein or such time as may be extended on the basis of application in this regard to NaFAC. Response received from the assessee shall be forwarded to the AU. In case no response has been received from the assessee NaFAC shall intimate such failure to AU.

7. Where request was received for making reference to VU or TU, NaFAC shall assign the same to a VU or TU though an automated allocation system and report received from VU or TU will sent to AU.

8. In case no response to the notice u/s 143(2) or 142(1) was earlier received from the assessee the AU through NaFAC serve a notice u/s 144 giving an opportunity to show cause why assessment should not be made to the best of its judgement. The Assessee has to give its response within the time specified in the notice or within the time, as may be extended on the basis of application, in this regard. Response received from the assessee shall be forward by the NaFAC to AU and in case no response is received the NaFAC shall intimate the AU accordingly.

9. The AU after considering all the relevant material available on record will prepare in writing: –

   1. An income or loss determination proposal where there is no variation and send the same to NaFAC; or

   2. Shall prepare a show cause notice stating the variation in the income of the assessee calling upon him to submit as to why the proposed variation should not be made.

10. In case of variation proposed by AU, show cause notice shall be served on the assessee for giving his response within the time specified therein or such time, as may be extended on the basis of application, in this regard. Response received shall be forwarded by NaFAC to the AU. In case assessee fails to give response, same shall be intimated to the AU.

11. The AU after considering the response in this regard though NaFAC shall prepare an income or loss determination proposal and send the same to NaFAC.

12. NaFAC on receipt of income or loss determination proposal, whether with variation or without variation may: –

    1. convey to the AU to prepare draft order in accordance with income or loss determination proposal; or

    2. assign the income or loss determination proposal to a RU though an automated allocation system for conducting review of such proposal.

13. The RU shall conduct review of the Income or loss determination proposal assigned to it by NaFAC and shall prepare and send its review report to NaFAC. Same shall be sent by NaFAC to same AU which had prepared the Income or loss determination proposal.

14. The AO after considering the review report shall accept or reject some or all the modifications proposed therein and after recording the reasons in case of rejection of such modification shall prepare a draft order.

15. The draft order prepared by AU shall be sent to NaFAC.

16. NaFAC in the cases covered by Section 144C shall serve the draft order on the assessee and in other cases shall convey to the AU to pass the final assessment order.

17. The final assessment order received from AU shall be served on the assessee along with notice for penalty proceedings and demand notice determining demand or refund, as the case may be.

18. Where the draft order has been sent to the assessee in terms of section 144C the final order shall be made as per procedure laid down under above section.

19. The Scheme also provides that AU having regard to the nature and complexity of accounts can also after recording its reasons refer the case to NaFAC for conducting special audit in terms of section 142(2A) of the Act. In such a case as per procedure provided in sub-section (7) of section 144B of the Act the Pr. CIT in-charge of NaFAC shall forward the reference received from AU to Pr. CIT having jurisdiction over such case and shall inform the AU accordingly and will also transfer the case to jurisdictional AO. In such case assessment shall be competed accordingly.

20. In case there is a variation proposed by the AU and an opportunity is provided to an assessee, the assessee or his authorised representative may request for personal hearing so as to make his oral submissions. In case such request has been made, the Income Tax Authority of relevant Unit shall allow such hearing through NaFAC through video conferencing or though video telephony to the extent technologically feasible, in accordance with the procedure laid down by the Board.

21. NaFAC after completion of assessment shall transfer all the electronic records of the case to the AO having jurisdiction over the said case for such action as may be required under the provisions of this Act.

22. Since the record after completion of assessment will be transferred to the jurisdictional AO, all subsequent action, such as, rectification, appeal effect, recovery of demand etc. will be taken by the jurisdictional AO.

Variation in the proposed Scheme as compared to earlier Scheme and in provisions of Section 144B

1. Now there are no Regional Faceless Assessment Centres. Earlier AU were under ReFAC now same are directly under NaFAC.

2. Under the old Scheme 1st notice was required to be replied within 15 days from the date of receipt of notice. Now there is no specific time limit and notice is to be replied within the date specified therein.

3. The scope of technical unit has been specifically provided so as to include technical assistance in respect of determination of arms’ length price, valuation of property, withdrawal of registration, approval or any other technical matter.

4. In the earlier Scheme after collecting the necessary details the AU had to prepare draft assessment order and same was to be sent to NaFAC. On receipt of the draft order NaFAC may either advise the AU to finalise the assessment, in case there is no variation or provide an opportunity to the assessee in case there is variation or assign the draft assessment order to a RU.

   In the proposed Scheme instead of draft order the AU will prepare income or loss determination proposal where there is no variation and it will be sent to NaFAC. In a case of variation a show cause notice stating the variation shall be served on the assessee through NaFAC. After receipt of reply to show cause notice AU shall prepare income or loss determination proposal.

   After the receipt of income or loss determination proposal whether without variation or with variation, NaFAC may on the basis of guidelines issued by the Board convey the AU to prepare the draft order or assign the proposal to review unit through an automated allocation system for conducting review of such proposal.

5. As per the proposed Scheme the RU shall submit its report on the income or loss determination proposal and such report shall be sent to AU which has the power to accept or reject all or some of the modifications proposed by the RU. As per the language it appears that review unit will have power to consider only variation proposed by AU and in case RU suggest for deletion of any variation AU will have power to reject the same. As per the earlier scheme RU had power to make any variation either for increase or decrease in variations and report of RU was to be sent to different AU and revised draft was to be prepared on the basis of modifications proposed by the RU and there after another opportunity was to be provided to the assessee for such variations which are prejudicial to the interest of assessee. Since, as per the proposed Scheme only the variations will be proposed by AU in respect of issues on which show cause notice was earlier given and review unit will have no power to make any new variation, no further opportunity has been provided for to the assessee.

6. Under the old scheme there was option of the Chief Commissioner of Assessment Unit to grant personal hearing or not to the assessee or to his authorised representative. Under the amended Scheme opportunity shall be provided, if ask for.

7. Sub-section (9) of section 144B which was providing that in case the order has not been passed as per scheme same shall be deemed to be non-est is proposed to be deleted w.e.f 01.04.2021.

Issues / suggestions

1. In regard to response to 1st notice earlier 15 days time was available to the assessee. Now the assessee has to reply within the time specified in the notice, which may be less than 15 days. There is no provision for extension of the time also. In the 1st notice it is stated that in respect of what issues case has been taken for security and clarification is required on these issues and in case of big corporates details / documents required for submitting clarification may be voluminous. Therefore, there should be provision for allowing 15 days time in the notice subject to further extension on making the application by the Assessee.

2. As per the Scheme it appears that after examining the details a show cause notice will be given for variation and there can be no further increase in the variations. If it is so, it is a welcome step. It would also mean that RU will have no power to propose any new variation. In that case one issue, however, arises that why a reference is necessary to the RU even in the case where there is no variation proposed by AU. In case RU also has power increase the amount of variation or to propose variation on new point, why opportunity to the assessee should not be given.

3. Report of a RU as per the proposed scheme will be sent to the same AU and AU has the power to reject any modification proposed by RU. Though it is understood that RU will only suggest for deletion of a variation since there is no power to propose any variation but still why the report of RU should not be considered by another AU as was the earlier position.

4. Even in cases where variation has been proposed NaFAC can direct the AU to prepare the draft order and assessment will be finalised accordingly. It is reasonable and justified that all the cases where variation has been proposed, income or loss determination proposal should be referred to the RU. It will keep check on the powers of AU and variations proposed will be examined by another officer.

5. The Scheme provides power to AU to reject the modification proposed by RU. Unless the proposal is considered by different AU there should be no power to reject the modification proposed by RU.

6. After finalisation of assessment, order is to be prepared by AU and same will be served through NaFAC on the assessee along with determination of demand or refund. It has been the experience in the cases of assessments last year that in many cases determination of demand or refund was not in accordance with income determined in the final assessment order. It is necessary that there should be some mechanism provided in the Scheme for checking of determination of demand or refund pursuant to the order of assessment.

7. Pursuant to deletion of sub-section (9) of section 144B regarding the non-est status of assessment order, in case procedure is not followed it is understood that the assessment order shall be deemed to be valid even if proper procedure is not strictly followed. It can, however, be said that in case principles of natural justice are not followed, the order can be said to be invalid and in such cases the courts would normally provide an opportunity to the department to make fresh assessment after following the principle of natural justice. Indirectly, it will amount to provide second inning to the department and time limit will also stand extended for making the assessment. Unless provisions are required to be strictly followed there is bound to be violation of principles of natural justice by the department. Hence, earlier provision was justified and would have enforce the completion of assessment in accordance with the procedure. It is dilution of intention expressed while introducing the scheme of faceless assessment. The provisions of sub-section(9) were in line with the demand of professional organisations like ours that the department should be held accountable for their actions of omission and commission.

Introduction

The Hon’ble Union Finance Minister Nirmala Sitharaman has presented the Union Budget 2022-23 on 1st February, 2022 with an aim to boost growth amid continued disruption from Covid-19 and rising inflation. In the Finance Bill 2022, significant changes have been proposed relating to Income Tax. We are dealing with amendments relating to Survey, Search and Seizure, in this article.

1. Insertion of New Section 79A: No set off of losses consequent to Survey, Search, and Requisition

   1. Sections 70 to 80 contain specific provisions relating to set off or carry forward of losses and set off of unabsorbed depreciation while computing the income under various heads and with respect to different classes of persons.

   2. The Memorandum explaining the provisions of Finance Bill, 2022 states that in some cases, assessees claim set off of losses or unabsorbed depreciation, against undisclosed income corresponding to difference in stock, undervaluation of stock, unaccounted cash payment etc. which is detected during the course of search or survey proceedings. At present there is no provision in the Act to disallow such set-off and no distinction is made between undisclosed income which was detected owing to Survey, Search & Seizure or Requisition proceedings and income assessed in scrutiny assessment in the regular course of assessment, though for incomes falling in section 68, section 69, section 69B etc. such restriction is there.

   3. The Memorandum has also stated that allowing the adjustment of undisclosed income detected as a result of search or requisition or survey against the loss or unabsorbed depreciation is resulting in short levy of tax. The proposed provision of non-adjustment of loss or unabsorbed depreciation against undisclosed income detected as a result of search or requisition or survey would help in ensuring that proper tax is paid on income detected due to a search or survey and also result in increased deterrence against tax evasion.

   4. With this backdrop, the Finance Minister has proposed to insert a new section 79A to provide that notwithstanding anything contained in the Income tax Act, where consequent to a Search initiated under section 132 or a Requisition made under section 132A or a Survey conducted under section 133A, [other than under section 133A(2A)], the total income of any previous year of an assessee includes any undisclosed income, NO set off, against such undisclosed income, of any loss, whether brought forward or otherwise, or unabsorbed depreciation under section 32(2) shall be allowed to the assessee under any provision of the Income tax Act in computing his total income for such previous year.

   5. Definition of the term “undisclosed income” as proposed for the above purpose:

      1. Any income of the previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a Search under section 132 or a Requisition made under section 132A or a Survey conducted under section 133A, other than that conducted under section 133A(2A), which has—

         1. not been recorded on or before the date of search or requisition or survey, in the books of account or other documents maintained in the normal course relating to such previous year; or

         2. not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search or requisition or survey, or

      2. any income of the previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the previous year which is found to be false and would not have been found to be so, had the search not been initiated or the survey not been conducted or the requisition not been made.

   The proposed amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.

2. Prior Approval of superior authority proposed to be reinstated again before passing of the assessment order consequent to search, survey and requisition

   Under the new schema of Search assessments which was inserted by the Finance Act 2021 in Section 147 to Section 151, there was no provision of prior approval of superior authority before passing of such assessment order(s). Therefore, an Assessing Officer in search and seizure case can pass the order without seeking any prior approval of the superior authorities. This was in strange contrast to the erstwhile law on search and seizure assessments wherein Section 153D mandated that a prior approval is necessary for a valid assessment under Section 153A.

   The Finance Bill 2022, has proposed to insert a new section 148B to provide that NO order of assessment or reassessment or recomputation shall be passed by an Assessing Officer below the rank of Joint Commissioner, except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director, in respect of assessments consequent to search, survey and requisition to reduce avoidable inaccuracies.

   It has been proposed that this amendment will take effect from 1st April, 2022.

   The intent of making it mandatory that the assessments of search cases should be made with the prior approval of superior authority, so that the superior authority apply their mind on the materials and other attending circumstances on the basis of which the officer is making the assessment and after due application of mind and on the basis of seized materials, the superior authority have to approve the Assessment order. Approval of assessment in search cases is to entrust the duty which the Addl. CIT/ Joint CIT, with his experience and maturity of understanding should scrutinize the seized documents and any other material forming the foundation of Assessment.

3. Enhancement of the period of limitation of framing search assessments

   For Searches initiated on or after 1st April, 2021, the period of limitation for framing assessments is as provided in Section
   153. It has been proposed to amend section 153, by inserting a new clause to provide for exclusion of the period of limitation for the purpose of assessment, reassessment or re-computation, (not exceeding 180 days) commencing from the date on which a search is initiated under section 132 or a requisition is made under section 132A and ending on the date on which the books of account or other documents, or any money, bullion, jewellery or other valuable article or thing seized under section 132 or requisitioned under section 132A, as the case may be, are handed over to the Assessing Officer having jurisdiction over the assessee, in whose case such search is initiated or such requisition is made or to whom any money, bullion, jewellery or other valuable article or thing seized or requisitioned, belongs to or to whom any books of account or documents seized or requisitioned, pertains or pertain to, or any information contained therein, relates to.

   It has been proposed that this amendment will take effect retrospectively from 1st April, 2021.

4. Certain proposed amendments/ insertions in order to align the scheme of search assessments with the intent of the Income tax Act

   The Finance Bill 2022 has proposed to amend section 132(8) to make the provisions of that section also applicable to assessment or reassessment or re- computation under section 143(3) or section 144 or section 147, as the case may be.

   The Finance Bill 2022 has also proposed to amend clause (i) of section 132B (1) as well as section 132B(4) to provide that these provisions shall also apply to assessment or reassessment or recomputation.

   These amendments will take effect from 1st April, 2022.

5. Some proposed amendments/ insertions to correct the inadvertent drafting errors

   1. Period of Deemed escapement of Income for preceding 3 Assessment Years removed : Finance Bill 2022 has proposed to omit Explanation 2 of section 148 – the reference to 3 assessment years preceding the assessment year relevant to the year of search.

      The Finance Act, 2021, had under the newly substituted Section 148 viz. “Issue of Notice where income has escaped assessment.” Explanation 2 has been brought into place to cover search, survey or requisition cases initiated or made or conducted, on or after 1st April, 2021, wherein it shall be deemed that the Assessing officer has 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 requisition is made or any material is seized or requisitioned or survey is conducted. Further it is pertinent to mention that the newly inserted Section 148A provides that before issuance of notice under Section 148, 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 under section 148 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, the proviso to section 148A states 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.

      Since there is an interplay between Section 148 and Section 148A, if an Assessing Officer desires to go beyond three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated, whether he or she is duty bound to follow the procedure laid down in Section 148A of conducting enquiries, providing opportunity and passing order before issuing notice(s) under section 148 of the Act for such assessment years beyond the three assessment years. The change proposed by the Finance Act, 2022 will remove the confusion.

   2. The first proviso to section 148 inserted w.e.f. 1st April, 2021 provides that “No notice under section 148 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 A.O. has obtained prior approval of the specified authority to issue such notice.”

   3. After the first proviso to section 148 a new proviso has been proposed to be inserted to provide further that “NO such approval shall be required where the A.O. with the prior approval of the Specified Authority has passed an Order under clause (b) of section 148A to the effect that it is a fit case to issue a notice under this section.” This amendment will take effect from 1st April, 2022.

   4. Proposed Amendment to First Proviso to Section 149(1) : The Finance Bill, 2022 has proposed to amend the First Proviso to section 149(1) so far as no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if a notice under section 148 or section 153A or section 153C could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of section 149 or section 153A or section 153C, as the case may be, as they stood immediately before the commencement of the Finance Act, 2021. This amendment will take effect retrospectively from 1st April, 2021.

   5. Proposed Insertion in Section 153B: The Finance Bill, 2022 has proposed to insert sub- section (4) in section 153B to provide that nothing contained in the said section shall apply to any search initiated under section 132 or requisition made under section 132A on or after the 1st April, 2021. This amendments will take effect retrospectively from 1st April, 2021.

6. Clarity on application of provisions of Penalty under section 271AAB, where search has been initiated

   1. Anomaly prior to introduction of Finance Bill 2022: It is pertinent to mention here that after the introduction of new scheme of search assessment by virtue of Finance Act, 2021, Section 153A has been made inoperative for searches initiated on or after 1st April, 2021. For such searches initiated on or after 1st April, 2021, the return shall be filed under section 148 only and not under section 153A. However, an enabling necessary amendment to this effect has not been made in the definition of “Specified Date” under Section 271AAB so far as to also include a return filed under section 148 in Search and Seizure cases. Due to this, there was lack of clarity on application of penalty provisions of “Section 271AAB: “Penalty where search has been initiated” in case of searches initiated on or after 01st April, 2021.

   2. With a view to overcome this anomaly, the Finance Bill, 2022 has proposed to amend the definition of “specified date” in Explanation in clause (a) to section 271AAB to make it also applicable to a notice issued under section 148 or under section 153A in case where search is initiated on or after 1st April, 2021.

   This amendment will take effect from 1st April, 2022.

7. Rationalization of the provisions of sections 271AAB, 271AAC and 271AAD

   1. Sections 271AAB, 271AAC and 271AAD of the Income tax Act under Chapter XXI contain provisions which give powers to the Assessing Officer to levy penalty in cases involving undisclosed income in cases where search has been initiated u/s 132 or otherwise, or for false entry etc. in books of account.

   2. Under Chapter XXI of the Act which deals with penalties, Commissioner (Appeals) has concomitant powers with Assessing Officer to levy penalty in eligible cases under section 270A, section 271, section 271A, section 271AA, section 271G, section 271J which deal with deliberate concealment, non-disclosure and omission by an assessee to evade tax.

   3. Similarly, sections 271AAB, 271AAC, 271AAD penalise actions pertaining to undisclosed income, unexplained credits or expenditures, or deliberate falsification or omission in books of accounts. Therefore, in order to improve deterrence against non- compliance among tax payers, the Finance Bill, 2022 has proposed to amend the sections 271AAB, 271AAC and 271AAD by enabling the Commissioner (Appeals) also to levy penalty under these sections, like the Assessing Officer.

   These amendments will take effect from 1st April, 2022.

8. Income Tax authorities for the purposes of section 133A

   1. Section 133A enables an Income-tax authority to enter any place of business or profession or charitable activity within his jurisdiction to verify the books of account or other documents, cash, stock or other valuable article or thing, which may be useful for or relevant to any proceeding under the Income Tax Act. Explanation to section 133A provides the definition of an Income tax authority for the purposes of section 133A.

   2. Through Taxation and Other Laws (Amendment and Relaxation of Certain Provisions) Act, 2020, the Explanation was amended to provide that any the Income tax authority who is subordinate to the Principal Director General of Income-tax (Investigation) or the Director General of Income-tax (Investigation) or the Principal Chief Commissioner of Income-tax (TDS) or the Chief Commissioner of Income-tax (TDS), as the case may be shall only be considered as Income-tax authorities for the purposes of section 133A.

   3. The Finance Minister has now proposed to amend the said Explanation to section 133A to provide that Income tax authority shall be sub-ordinate to Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner, as the case may be, specified by the Board.

   This amendment will take effect from 1st April, 2022.

Suggestion: The widening of the meaning of Income tax authority for the purpose of section 133A will virtually empower A.O. and all officials which was restricted to officials sub-ordinate to concerned high authority in Investigation Wing and TDS Wing only. The Finance Minister should revisit the amendment and restrict the scope as was hitherto provided. It is well known that taxpayers are unnecessary likely to be harassed if all authorities are empowered to conduct survey under section 133A.

The first and apparent feeling which one gathers on a bare look at the Finance Bill – 2022 is overwhelming. More than 150 amendments are sought to be carried out through 84 clauses that are spread over 80 pages. The Explanatory Memorandum accentuates the stupendous feeling when one looks at its 109 pages. The amendments almost cover the entire gamut of the Income Tax Act, 1961. Large scale changes have been made for revising the schemes of Faceless Assessment, Reopening and Re-assessments and taxation of Charitable Trusts and Institutions, including providing for special rates of taxation. Innovative provisions are introduced for taxation of income on transfer of Virtual Digital Assets and also for filing an ‘updated return’ and an ‘modified return’ and for denial of set-off of losses against ‘undisclosed income’. Far reaching changes have been made in the matters of deduction of business expenditure and in respect of procedure for mergers and acquisitions. Regulatory amendments have been made in Chapter VIA and XVIIB for TDS / TCS. All of these provisions are discussed in detail by eminent authors and writers in specially devoted articles and write – ups in this volume of ‘The AIFTP Journal’. Significantly, no changes in the rates are proposed for taxing the total income for A.Y. 2022- 2023 and 2023-2024, but for a few changes in relation to the levy of surcharge.

The present government prides itself on consciously not introducing any amendment with retrospective effect so as to burden the tax payers. It took pains taking measures to ensure that the perceived damage caused by the retrospectivity of vodafone amendments was minimized, if not altogether neutralized. It’s therefore highly disturbing to know that there is a sea change in this self – imposed discipline when one reads the Finance Bill, 2022 which contains a good number of amendments that are proposed with retrospective effect for imposing additional burden on the tax payers, some of which dates back to A.Y. 2005-06 and many of which are introduced with a customary prescription of ‘for removal of doubts’, giving an impression that the law as is now being proposed was always there in the text. Again no chances are missed to introduce, now regulatory confusion, to increase the scope of litigation by providing, at the same time, that ‘the provisions shall come into effect from 1st April, 2022/2023’. Introducing retrospective provisions is a shot in the arms of those who thrive on litigation; such provisions have a serious destabilizing impact on economy and introduces a trust deficit that takes a reasonably long time to repair.

Most of the other provisions are proposed to be introduced with effect from 1st April, 2022 and are intended to apply for A.Y. 2022-23 and onwards and are therefore partially retroactive is as much as they would apply to the affairs, commencing on or after 01.04.2021. These provisions would have impact on determination of total income for the year and also on the interest payable on the unpaid advance tax. Very little time of the ongoing financial year is left available for the tax payer to manage or rearrange his affairs.

A good number of court decisions, most of which are favorable to tax payers delivered by apex courts are sought to be overruled by the proposed amendments and as noted earlier, with retrospective effect, in some cases. Such amendments, besides being highly disrespectful of the courts of the country and of the tax payers, puts into reverse gear the financial planning of those affected by such destabilizing and mindless action of the Parliament.

Proposing changes or complete reversal of the amendments and the schemes, within a short period of less than a year, clearly conveys the lack of homework by the Minister and her advisor. It’s beyond comprehension that how large scale provisions introduced with a lot of fanfare ignoring the apprehensions of the tax payers and their advisors, are sought to be reversed within a short time. Proposed substitution of s. 144B, introduced just the previous year, is a classic case on the point.

The another case on point is the proposed overhaul of the Scheme of Re-opening and Re- assessment, again within a short time of less than one year of its introduction. Far reaching changes are now proposed which makes anyone seriously suspect the wisdom and bonafide of all those connected with unleashing and imposing incessant amendments that destabilize the well settled law and procedure.

The amendments of the Finance Act 2021 has flooded the courts with litigation of unparalleled quantum within a short time of their introduction, prompting the courts to act with alacrity to knockdown the amendments and assessments, at times by bulk disposals of thousands of petitions, all over the country. It is sincerely hoped that the authorities will be able to generate enough manpower to meet the challenges of the set aside orders that would require reframing within a short time provided by the courts.

The proposal to tax an income, on transfer of a digital virtual asset, at a flat rate of tax without allowing any deduction for an expenditure and allowance and without permitting the set-off of losses appears to be a proposal that could have been deferred for deriving a better understanding of the concept of the Digital Assets and of the responses of the tax fraternity of the world. In its present form, as proposed, it would generate numerous issues that could have been avoided with some patience and discretion. It surely is a tax, the time of which has yet not arrived.

Very interesting provisions have been introduced in the form of the permissions to file the Updated Return of Income and Modified Return of Income. The former opens up a possibility to own up the mistakes and make up for the same within a fairly wide window of time, hither to not available, on payment of additional tax without attracting any penalty of the fear of prosecution. The procedural challenges or deficiencies would surely be addressed to in the times to come. The permission to file the modified return in cases of amalgamation and demerger, is a tacit acceptance of the direction of the Supreme Court to make sense of the procedural difficulties faced in assessments, on succession of companies. In both these cases, it is desirable that the parallel amendments are carried out in the scheme of assessment and reassessment as a logical extension of the new permission to file the return of income.

There is an urgent need to address the issue of generating a hand-some capital expenditure that would be the key driver of the economy in the times to come. The legislature, without wasting this opportunity, should ensure that sufficient tax incentives are provided for an all-round growth, on the lines of s. 32AC and s. 32AD of the Act. Likewise, there is also a need to address the serious malady caused on account of very harsh provisions of s. 115TD of the Act.

The Finance Bill 2022 provides a pleasant surprise where the ministry, in the Explanatory Memorandum on more than two occasions, acknowledges the errors committed in drafting the Finance Act, 2021, confirming the old adage; to err is human and to admit the error is divine. It is said that no news is good news and the Finance Minister has in COVID – 19 times, suppressed the need to raise much needed revenue by not raising the rates of taxes.

It gives me immense pleasure to communicate with you again with the festive season around starting with Mahashivratri and followed by Dev Deepavali.

Friends, I am sure we must have completed our Tax Audit work within the recently concluded due date and must be busy with our deadlines relating to filing of GST Audit and Income Tax Returns.

Friends, Our Honorable Finance Minister Smt. Nirmala Sitharaman presented her Budget in the Parliament on 1st February, 2022. Kindly join me in congratulating her for presenting a dynamic budget which will ensure reforms and development and not falling to the Political pressures on account of the impending elections. The announcement of the introduction of India’s own digital currency is a welcome move and the provisions relating to taxation of digital assets would certainly put all speculations relating to the same to rest.

I would also like inform that as per the International Monetory Fund’s World Economic Outlook Update for January, 2022 India’s GDP has grown at the rate of 9% in 2021 as against -7.3% in 2020 and it has further projected a growth of 9% for 2022 and 7.1% in 2023, making India the fastest growing economy in the world surpassing China. It is a good opportunity for the professional brethren to expand our areas of practise in view of the positive economic outlook.

I had the occasion to connect personally with the Office Bearers at the recently concluded Budget Analysis session cum felicitation hosted by the Eastern Zone. I am glad that all the zones are doing their best in conducting local seminars both physically and virtually and have ensured imparting of continuous education to our members as is the motto of our Federation.

The First NTC with NEC is proposed to be held in Kolkata on 26th and 27th February, 2022 along with a Ganga Sagar Tour, The East Zone Chairman, Mr. Sanjeev Anwar and Conference chairman Mr. Achintya Bhhatacharya and Conference Secretary Mr. Vivek Agarwal along with the Eastern Zone team have put in their best efforts to make it successful and I have also been informed that the response as far as registration goes is also tremendous. I look forward to meeting you at Kolkata.

The Second NTC with NEC is proposed to be held at Surat in April, 2022, the details will be shared shortly by the Western Zone team lead by Mr. Mitish Modi, Chairman, Western Zone. The International Tour Committee led by Mr. Sanjay Kumar is also actively working on finalising a venue and the tour schedule and the Tour would tentatively be held in May or June, 2022.

I once again wish that you all enjoy a good festive season and join us in celebrating “AZADI KA AMRIT MAHOTSAV”

With Best Wishes

D. K. Gandhi
National President, AIFTP