The Finance Minister, Shri Arun Jaitley presented the budget for 2018-19 in Parliament on 1-2-2018. The Finance Bill 2018 has been passed, with some procedural amendments suggested by the Finance Minister, by Parliament without any debate. The Finance Act, 2018 has received the assent of the President on 29th March, 2018. Some of the important amendments in the Income-tax Act applicable to the return of income to be filed for assessment year 2019-20 have been discussed.

Section 10 – Exemptions

• Tax free withdrawal from NPS

The existing provision of section 10(12A) of the Act, provides exemption to employees to the extent of 40% of the pension payable at the time of closure or opting out from the National Pension System Trust. The withdrawals by an employee contributing to NPS, referred to in section 80CCD, on closure of account or opting out of the scheme is exempt from tax to the extent of 40%. Such benefit of exemption u/s. 10(12A) is extended to all other persons who are subscribers to the NPS from the Assessment Year 2019-20.

• Charitable/educational institutions, etc.

The existing provisions of section 10(23C) provides for certain receipts to be tax free. A third proviso to section 10(23C) provides for computation of application of income in case of any fund or trust or institution or any university or other educational university or any hospital or medical institution referred u/s. 10(23C) (sub clauses iv, v, vi or via).

The provisions of section 10(23C) and section 11 have been amended w.e.f. Assessment Year 2019-20 to provide for certain restrictions while computing the income applied for objects of the trust. It is now provided that restriction on cash payment u/s. 40A(3)/(3A) and consequences of non-deduction of tax at source u/s. 40(a)(ia) will apply to these trusts. Section 40(a)(ia) deals with disallowance of an expenditure in case of non – deduction of tax source. Section 40A(3) and 40A(3A) deal with disallowance of expenditure in respect of which payment is made otherwise than by way of account payee cheque or an account payee bank draft or electronic banking exceeding ₹ 10,000. All these sections applied to computation of total income under the head “Profits and Gains of Business or Profession”.

The existing TDS provisions, under chapter XVII-B, are applicable to Charitable Trusts. But the provisions of section 40(a)(ia) were not applicable to the Charitable Trusts since section 40(a)(ia) was applicable under chapter – IV for computation of business income and the income tax provisions are applicable to charitable trusts are under chapter III of the Act therefore the section 40(a) (ia) was not applicable to Charitable Trusts. Therefore there was no disallowance in case of the defaults under Chapter XVII-B for TDS provisions. Since the charitable Trusts are not engaged into any business activity, it was argued that these sections would not apply while computing the income of charitable trusts. THE Bombay High Court in the case of Bombay Stock Exchange Ltd vs. Dy. DIT (Exp) (2014) 52 taxman.com 29 / (2015) 228 Taxman 195 has decided that provisions of section 40(a)(ia) are not applicable to Charitable trusts.

The amended section now applies to charitable trusts also and if there is non-compliance of section 40(a)(ia) dealing with TDS provisions or sections 40A(3)/(3A) dealing with expenditure in cash appropriate adjustment would be made to the application of income while computing the total income of trusts. Section 11 and section 10(23C) are amended for giving effect to the above provisions. Therefore, with effect from Assessment Year 2019-20 the provisions of section 40(a)(ia) will as it is (mutatis mutandis) apply to Charitable Trusts. It means the present provisions and any future amendments, circulars, changes, clarifications, notifications, litigations, case laws, disputes, interpretation of this section will also apply accordingly.

In other words any payment in excess of ₹ 10,000/- made to a person, in a day, otherwise than by account payee cheque/bank draft will not be considered as application of income to the object of the trust. Similarly, in case any payment is made to a person by way of salary, brokerage, interest, professional fee, rent etc. on which the tax is required to be deducted at source under Chapter XVII of the Income tax Act and the tax is not so deducted or paid to the Government, the same will not be considered as application of income to the extent provided in section 40(a)(ia). The provisions of section 40(a)(ia) provides that 30% of such payment will not be allowed as deduction. Thus, 30% of the amount paid by trust without deduction of tax will not be considered as application of income to the object of the trust.

A careful reading of Explanation 3 shows that it involves following steps:

• Apply section 40(a)(ia)/40A(3)/40A(3A) in computing the income chargeable under the head “Profits and Gains of Business or Profession”.

• Check whether a disallowance/addition to income could be made under the said sections.

• If disallowance/addition could be made, then, apply the said sections in computing the amount of application of income for the purpose of section 11(1)(a)/(b).

• The said sections should be applied mutatis mutandis.

• On account of the words ‘mutatis mutandis’, even if disallowance or addition under section 40(a)(ia)/40A(3)/40A(3A) cannot be made in some cases, the quantum of application of income can still be adjusted under Explanation 3. The other view is that if no disallowance could be made then, no adjustment could be made to the quantum of application of income.

Insertion of Section 10(6D) – Non-Resident earning Royalty Income or Fees for Technical Services from National Technical Research Organisation

New clause (6D) is added to section 10 to provide exemption from tax to non-resident earning income from Royalty or Fees for Technical Services from National Technical Research Organisation.

It is provided that any income arising to a non-resident, not being a company, or a foreign company by way of Royalty or Fees for Technical Services rendered in India or outside India from National Technical Research Organization (NTRO) is exempt from tax.

Section 195 requires a person to deduct tax at the time of payment or credit to a non-resident. Given the business exigencies of the National Technical Research Organisation (NTRO), section 10 is amended so as to provide that the income arising to non-resident, not being a company, or a foreign company, by way of royalty from, or fees for technical services rendered in or outside India to, the NTRO will be exempt from income tax. Consequently, NTRO will not be required to deduct tax at source on such payments.

The amendment will take effect from 1st April 2018 and will, accordingly, apply in relation to the Assessment Year 2018-19 and subsequent Assessment Years.

Income from Salary

Section 16 & 17 have been amended with respect to standard deduction to salaried employees and withdrawals of exemption pertaining to medical reimbursement.

• All salaried employees (including pension earner) will now be allowed standard deduction of ₹ 40,000/- while computing income from salary. The clause (ia) has been inserted in section 16. This clause provides standard deduction from Assessment Year 2019-20. The amount of deduction will be ₹ 40,000/- or amount of Salary whichever is less.

• At present, exemption is given to employee in respect of reimbursement of medical expenditure incurred up to ₹ 15,000/- while computing perquisites u/s. 17. Section 17(2) has been amended to withdraw the exemption pertaining to reimbursement of medical expenditure. This amendment is applicable from the Assessment Year 2019-20. The other existing exemptions which are available for different medical facilities (i.e., Medical facility to employees in government hospitals and approved hospitals, payment of medical insurance premium by employer) will continue.

• At present, section 10(14)(i) read with Rule 2BB, an employee is eligible for deduction up to ₹ 1600/- p.m. by way of transport allowance while computing income from salary. The Finance Minister in his budget speech – para 151 the benefit of exemption of 1500/- p.m. will be withdrawn from the Assessment Year 2019-20 as standard deduction is now allowed. The transport allowance up to ₹ 3,200/- p.m. to differently abled persons will continue to be exempt as per item no. 11 of table to Rule 2BB(2).

• The net effect of the above amendment will be that a salaried employees will get additional deduction of ₹ 5,800/- in the computation of salary income.

Section 54EC – Capital Gains not to be charged on investment in certain Bonds

The provision of section 54EC provides for exemption in respect of capital gains on investment in certain bonds. The existing provision of section 54EC provides as under:

• The section provides that gains arising from the transfer of a long term capital asset, invested in the long term specified asset at any time within a period of six months after the date of such transfer, shall not be charged to tax subject to certain condition specified in the said section. Presently, exemption is provided in respect of any long term capital asset. In other words, the benefit is available in respect of any long term asset including sales/transfer of shares, units of mutual fund, compensation received on surrender of tenancy rights, goodwill or other movable assets.

• Clause (ba) of the explanation to the section 54EC defines expression “long term specified asset” for making any investment under the said section on or after 1-4-2007 to mean any bond, redeemable after three years issued on or after the 1-4-2007 by the National Highways Authority of India (NHAI) or by the Rural Electrification Corporation Limited (RECL) or any other bond notified by the Central Government in this behalf. In other words, there is a lock in period of 3 years for such investments.

The section 54EC is amended w.e.f. Assessment year 2019-20 and provides as under:

• The said section is amended so as to provide that capital gains arising from the transfer of a long term capital asset, being land or building or both, invested in the long term specified asset at any time within a period of six months after the date of such transfer, the capital gains shall not be charged to tax subject to certain conditions, specified in the said section. The section now restricts the exemption only in respect of capital asset being land or building or both. In other words, the benefit of Section 54EC can be claimed only if the long term capital gains is from sale of immovable property i.e., Land, building or both, on or after 1-4-2018. This benefit cannot be claimed in respect of long term capital gains on any other capital asset in Assessment Year 2019-20 or thereafter.

• The amended section provides that investment in specified bond made on or after 1st April, 2018 will be redeemable after 5 years as against 3 years provided in respect of such bonds issued before 1st April, 2018. In other words there is a lock in period of 5 years instead of 3 years. Please note that amended section provides for investments made on or after 1-4-2018. Thus, even if the capital gains has accrued on or before 31st March, 2018 but investment in specified bonds is made on or after 1-4-2018 then the bonds will be redeemable after 5 years.

Thus, the amendments:

• Restrict the scope of capital asset, gain from which may be exempt, to land or building or both;

• Enlarge the period of redemption from 3 years to 5 years; and

• Enlarge the lock-in-period from 3 years to 5 years.

Section 115R – Tax on Distributed Income to Unitholders

The section 115R deals with the tax on distributed income to holders of the units in mutual funds. Section 115R is amended w.e.f. 1-4-2018. As per the existing provisions of section 115R any income distributed to unitholder of equity oriented fund is not chargeable to tax. Now new section 112A provides for levy of 10% tax on capital gains arising to unit holder of equity oriented funds, in excess of one lakh rupees. Section 115R has been amended to provide for dividend distribution tax @10% by the mutual fund at the time of distribution of income by equity oriented funds. This amendment has been made with a view to provide level playing field between growth oriented funds and dividend paying funds, in the wake of new capital gain tax regime for the unit holders of equity oriented funds.

Conversion of inventory into capital assets or such inventory is treated as capital assets

The existing provisions of section 45(2) of the Income-tax Act provides for chargeability of capital gains arising from conversion of capital asset into stock-in-trade. It provides that on such conversion there will be no tax liability. The tax is payable only when the stock-in-trade is sold. However, there is no tax liability for conversion of inventory into capital assets.

Section 28 is amended w.e.f. Assessment Year 2019-20 by inserting a new clause (via) to provide that “the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner” shall be chargeable to income tax under the head “Profits and Gains of Business or Profession”. It would mean that on conversion of stock-in-trade into a capital asset, the difference between the cost and the market value on the date of such conversion will be taxable as business income. The same will be taxable even if the stock-in-trade is not sold. The difference between the fair market value and the cost of stock-in-trade being notional amount will be deemed to be the income liable to tax.

Section 49 is also amended to provide that where capital gains arise on a sale of above capital asset (such converted capital asset) the cost of acquisition of such capital asset shall be deemed to be the fair market value adopted u/s. 28(via) on conversion of a stock-in-trade into capital assets. Section 49 is amended to give above effect by inserting a clause (9) w.e.f. Assessment Year 2019-20.

As regard the period of holding of such converted capital asset, it is provided that in such a case the period of holding of such converted capital asset shall be reckoned from the date of conversion of stock-in-trade into capital asset. The necessary amendment is made in section 2(42A) being definition of a short term capital asset. This amendment is effective from Assessment Year 2019-20.

The amendment is made in section 43(1) dealing with ‘actual cost’, it is provided that if the said capital asset (after conversion of stock-in-trade into capital asset) is use for the business or profession, the fair market value on the date of such conversion shall be treated as cost of the capital asset. The necessary amendment is made by inserting a new explanation (1A) in section 43(1) of the Income-tax Act. The depreciation on such cost can be claimed by the assessee.

The amendment covers inventory which is ‘converted into’ or ‘treated as’ a capital asset, having regard to the expression used in the section, it appears that the amendment covers actions voluntarily taken by the assessee and does not cover the involuntary acts such as forced sterilization or blockage of asset. The issue arises whether the withdrawal from business would be covered by the amendment? It appears that the ratio of Supreme Court judgment in the case of Sir Kikabhai Premchand v. CIT 24 ITR 506 may not apply post amendment. It is important to note that the Supreme Court in this case held that in case of withdrawal of stock-in-trade from business the assessee was entitled to value it at cost price and was not bound to credit the Business with his market price for ascertaining his assessable profits for the year. When a stock in trade is withdrawn from business it could be either consumed as personal assets or held as a capital assets. The amended provision u/s. 28(via) covers a case of inventory being converted into capital assets or treated as capital assets. Therefore, it appears that when a person withdraws stock-in-trade from business, the act of withdrawal could itself be regarded as conversion/treatment as capital assets.

Long term capital gains on transfer of quoted Shares & Securities

As per the existing provisions as provided u/s. 10(38), the long term capital gains on transfer of quoted shares and securities is exempt if security transaction tax (STT) is paid on acquisition as well as on transfer through stock exchange transactions. The amendment is made to provide that such exemption would not be applicable if the transfer takes place after 1-4-2018. Thereby, gains on sale of listed securities are no longer exempted. A new scheme of taxation is introduced in respect of these long term capital assets. Now, under the new section 112A tax on such long term capital gains on transfer of such shares and securities, on or after 1-4-2018 will be payable @10%. The rationale for this scheme is explained by the Finance Minister in para 155 of his budget speech.

The new section 112A is inserted in the Income- tax Act applicable from the Assessment Year 2019-20.

• The section provides that the long term capital gains arising from the transfer of a long term capital asset being equity share in a company or a unit of equity oriented fund or a unit of business trust (referred to as a specified assets) shall be taxed at 10% (plus applicable surcharge and cess) of such capital gains exceeding one lakh rupees. If the long term capital gain in any financial year is less than one lakh rupees, no tax is payable on such capital gain.

• The aforesaid long term capital gains tax is not payable if the specified assets are sold on or before 31-3-2018. This tax is payable only on sale of such specified assets on or after 1-4-2018.

• The concessional rate of 10% will be applicable to such long term capital gains if the following conditions are satisfied.

a) Quoted Equity Shares on which STT is paid on acquisition as well as on sale. If such shares are acquired before 1-10-2004 the condition for payment of STT on acquisition will not apply. The Central Government has issued the notification No. 60/2018 dated 1-10-2018 u/s. 112A (4) identifying non-STT acquisition of equity shares which shall be eligible for 10% tax rate on LTCG on sale.

b) Units of Equity Oriented Fund of a Mutual Fund and Business Trust on which STT is paid at the time of redemption of the units. The above condition of payment of STT will not apply where the transaction is entered into in an International Financial Services Centre.

• The Cost of acquisition (COA) of specified assets for the computing capital gains in such cases is provided u/s. 55(2)(ac). The same is as under –

The cost of acquisitions in respect of the long term capital asset acquired by the assessee before the 1st day of February, 2018, shall be deemed to be the higher of –

a) The actual cost of acquisition of such asset; and

b) The lower of –

I. The fair market value of such asset; and

II. The full value of consideration received or accruing as a result of the transfer of the capita asset.

The expression ‘Fair Market Value’ as at 31-1-2018 is defined in explanation to section 55(2)(bc) to mean the highest price quoted on recognised stock exchange. If there was no trading of a particular script on 31-1-2018 then the highest price quoted on that script immediately prior to 31-1-2018. In the case of units of equity oriented mutual fund not quoted on the stock exchange the NAV as on 31-1-2018 will be considered as FMV.

In other words, if the above specified assets are acquired before 1-2-2018 the cost of acquisition shall be computed as per formula, given in section 55(2)(ac). According to this formula, the cost of acquisition of the specified assets acquired on or before 31-1-2018 will be the actual cost. However, if the actual cost is less than the fair market value of the specified assets as on 31-1-2018, the fair market value of the specified assets as on 31-1-2018, will be deemed to be the cost of acquisition.

Further, if the full value of consideration on sale/transfer is less than the above fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition.

The section has a fair grandfathering provision and the same is applicable to shares acquired before 1-2-2018. The cost of acquisition for computing capital gains can be higher than the amount actually paid to acquire the shares if, the fair market value of such shares as on 31st January, 2018 is higher than the actual cost. These would, however, not permit claim of loss if full value of consideration is less than the fair market value i.e., in a situation where both full value of consideration and FMV are higher than the cost of acquisition, because full value of consideration shall be deemed to be the cost of acquisition in such a case.

It is to be noted that in respect of the specified assets purchased on or after 1-2-2018, the formula given in section 55(2)(bc) will not apply for determining the actual cost of such specified assets. In such cases the actual cost of specified assets will be deducted from the sale price as per the third proviso to section 48 and the benefit of the indexation will not be available.

Simply, entire gain accrued on listed shares and equity oriented mutual fund up to 31-1-2018 continues to remain exempt. The exemption continues to be applicable up to 31-3-2018. The impact is summarised as under:

Particulars	1	2	3	4
Original COA	100	100	100	100
FMV on 31-1-2018	120	120	80	110
Sale price post  31-3-2018	150	110	110	80
Revised COA	120	110	100	100
Long Term Capital Gains	30	0	10	-20

• The benefit of deduction under chapter VIA shall be allowed from the gross total income as reduced by such capital gains. Similarly, the rebate under section 87A shall be allowed from the income tax on the total income as reduced by tax payable on such capital gains.

• For the purpose of this section, the expression “Equity Oriented Fund” means a fund set up by a mutual fund specified u/s. 10(23D) which satisfies the following conditions.

— If such a fund invests in units of another fund which is traded on the recognised Stock Exchange –

– A minimum of 90% of the proceeds are invested in units of such other fund and

– Such other fund has invested 90 of its funds in equity shares of listed domestic companies.

— In cases of mutual funds, other than referred above, minimum 65% of the total proceeds of the fund are invested in equity shares of listed domestic companies.

• It is to be noted that the Foreign Institutional Investors (FII) to which section 115AD applies will have to pay tax on long term capital gains arising on sale of quoted shares/units as specified in section 112A. In the case of FII also, the rate of tax on such long term capital gains will be 10% in respect 
of such gain in excess of one lakh rupees.

Business Income

Compensation received for modification/termination of business contract

Under the existing provisions of the Act, certain types of compensation receipts are taxable as business income under section 28. However, the existing provisions of clause (ii) of section 28 is restrictive in its scope as far as taxation of compensation is concerned; a large segment of compensation receipts in connection with business and employment is out of the purview of taxation leading to base erosion and revenue loss.

W.e.f. 1-4-2018 (AY 2019-20) a new sub-clause (e) has been added to section 28(ii) to bring into tax net gains / receipts in the nature of compensation arising out of termination / modification of a contract related to business of the assessee.

‘Section 28 (ii) Any compensation or other payment, due to or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business’.

The amended section 28 of the Act to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its business shall be taxable as business income. It is further provided that any compensation received or receivable, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable under section 56 of the Act.

The amendment will enable tax authorities to tax compensation received or receivable in connection with the termination or modification of the terms of any contract shall be taxable as business income. Thus, by way of this amendment, compensation, even if capital in nature, is sought to be taxed if it arises on termination or modification of a contract relating to business.

A new clause (xi) is inserted in section 56(2) from Assessment Year 2019-20 to provide that any compensation received by any employee on termination or modification of the terms and conditions of the contract of employment on or after 1-4-2018 shall be taxable as Income from Other Sources.

CBDT vide Circular No. 8/2018 dated 26-12-2018 explained the purpose and objective of enacting the provisions of taxability of compensation in connection with termination or modification of contracts.

The Memorandum states that the section will include revenue receipts as well as capital receipts. Hence, it will include compensation for loss of source of income. The cases of termination resulting in loss of employment or cessation of business are distinguishable from the cases of cancellation of a contract which are of a trading nature or are entered with the course of business. In view of the aforesaid amendment the following payments which were hitherto regarded as exempt shall now be taxable.

• Compensation received by assessee on termination of consultancy agreement on principal and principal basis.

• Premature termination of distributor ship.

• Agreement to manufacture on a principal- to-principal basis

• Compensation to give up right to purchase and/or operate hotel under an agreement.

Further, there is an on going controversy as to whether the term ‘business’ includes profession and accordingly it is a moot point as to whether the amendment covers compensation upon termination or modification of any term relating to a profession.

Trading in agriculture commodity derivatives

As per the existing provisions of section 43(5) considers a transaction of trading in commodity derivatives carried in a recognised association which is chargeable to commodities transaction tax (CTT) as non-speculative. Since, there is no CTT payable on transaction on agriculture commodity derivatives, the section is amended w.e.f. Assessment Year 2019-20 to provide that in case of trading in agriculture commodity derivatives, the condition of chargeability of CTT shall not apply.

Income Computation and Disclosure Standards (ICDS)

Section 145 of the Income-tax Act authorised the Central Government to notify ICDS. The ICDS were notified through Finance (No. 2) Act, 2014 vide notification dated 31-3-2015 effective from Assessment Year 2016-17. However, subsequently some amendments were carried out and amended ICDS were notified w.e.f. Assessment Year 2017-18 followed by frequently asked questions (FAQ’s) on ICDS issued by the CBDT vide circular dated 23-3-2017. There are total 10 ICDS issued by the CBDT dealing with Accounting Policies, Valuation of Inventories, Construction Contracts, Revenue Recognition, Tangible Fixed Assets, Effect of Changes in Foreign Exchange, Government Grants, Securities, Borrowing Cost and ICDS relating to Provisions, Contingent Liabilities & Contingent Assets.

Section 145(2) provides that income from business or profession and income from other sources should be computed in accordance with the ICDS. The ICDS applies to all assessees (other than an individual or HUF who is not required to get their accounts audited u/s. 44AB) who follows the mercantile system of accounting for computation of income from business or profession and income from other sources.

Each ICDS as mentioned above in its preamble provides that in case of conflict between the provision under the Act and ICDS, the provision of Act shall prevail. Surprisingly, certain provisions of ICDS contained recognition of income and manner of computation of income including non-recognition of loss for computing taxable income which are not consistent either with the settled judicial pronouncements or not specifically provided under the Act.

In this regard, the Delhi High court in the case of Chamber of Tax Consultants v. Union of India 252 Taxman 77 has struck down some of the ICDS and held that the power to enact a law was an essential legislative power that could be exercised only by Parliament and not by the executive. The Delhi High Court also read down some of the ICDS partially holding them to be contrary to the judicial precedents or the provisions of the Income-tax Act.

The Delhi High Court has held the following ICDS to be ultra-vires the Income-tax Act and has been struck down.

• ICDS I – Accounting Policies

• ICDS II – Valuation of Inventories

• ICDS VI – Effects of Changes in Foreign Exchange Rates

• ICDS VII – Government Grants

• ICDS VIII – Securities (Part A)

Further, the Delhi High Court has held the following ICDS to be ultra-vires the Act and therefore struck down.

• Para 10(a) and 12 of ICDS III – Construction Contracts

• Paras 5 & 6 of ICDS IV – Revenue Recognition

• Para 5 of ICDS IX – Borrowing Costs.

Considering the skepticism around validity of ICDS and the recent judicial pronouncements the clarity was expected in the Finance Bill 2018 on the legal sanctity and applicability of ICDS. It was also anticipated that the amendment will be brought into the Act itself to maintain the Constitutional validity of ICDS.

In order to overcome the effect of the judgment of Delhi High Court, the various specific provisions are made in the Act itself and that too with retrospective effect from the Assessment Year 2017-18. The amendments are made in sections 36(1)(xviii), 40A(13), 43AA, 43CB, 145A and 145B with retrospective effect from Assessment Year 2017-18. These new provisions now validate the objectionable provisions of ICDS which were struck down by the Delhi High Court.

The amendments are as under.

• Marked-to-Market (MTM) loss

The existing provision of the Act does not contain any specific provision or a section on treatment of MTM losses. MTM primarily refers to the accounting methodology for reporting assets at their fair value having regard to its market price on the date of the Balance Sheet. The issue regarding the treatment of MTM losses has been a matter of litigation in the past. CBDT has also issued an instruction on treatment of MTM losses on derivative transactions. These have resulted in further litigation since the taxpayers relied on various judicial precedents including Apex Court ruling in the case of Woodward Governor, to claim the MTM losses as tax deductible.

As per ICDS VI, MTM losses relating to forward exchange contract is allowable as deduction provided the contracts are not intended for trading or speculation purpose or contracts entered for firm commitment or highly probable forecast transaction etc. In order to bring the aforesaid provision of ICDS under the Act, the amendment is made to section 36(1) of the Act, by inserting new clause (xviii) to provide for deduction of MTM losses or other expected loss as computed in accordance with the ICDS VI. Further, the amendment is made to section 40A by inserting a new sub-section (13) to provide that no deduction/allowance of any MTM loss or other expected losses shall be allowable except those which are allowable as per the provisions of section 36(1)(xviii).

Therefore, the taxpayers who were earlier claiming deduction of MTM losses on such forward contracts based upon the certain judicial precedents shall now not be able to claim such deduction as per the amended provisions of section 40A(13) of the Act.

The amendment is made in section 36 dealing with computation of business income. It does not apply to the computation of income under the head ‘Income from Other Sources’. ICDS applies to computation of income from other sources also. However, section 40A(13) would apply while computing the income under the head income from other sources as section 58(2) lays down that section 40A shall apply in computing the income chargeable under the said head as they apply in computing business income. Accordingly, the said loss may not be allowable in computing income under the Other Sources head.

• Valuation of Inventories and Securities

The existing provision of Section 145A provides that while computing the business income, a tax payer is required to follow inclusive method for valuation of inventories, purchase and sales. Such provision is applicable in respect of goods and not in respect of services.

ICDS II provides specific treatment for valuation of inventories to be valued at lower of actual Cost or Net Realisable Value. Further, ICDS VIII provides for treatment for computing gain on securities and its valuation. The amendment in the Act is made in a such way that it substitute existing section 145A so as to incorporate the existing provision of aforesaid ICDS under the Act.

The existing provision of section 145A provides for inclusion of the amount of any tax, duty, cess or a fee actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of the valuation of purchases and sale of goods and inventory. The new section 145A retains the above provision and also extends it to valuation of services. Therefore, the services are required to be valued inclusive of taxes which have been paid or incurred by the assessee.

In case of securities held as inventory, it shall be valued as follows.

• Securities not listed or listed but not quoted on recognised stock exchange – To be valued at actual cost initially recognised in accordance with the ICDS II.

• Listed securities – To be valued category wise at actual cost or Net Realisable value whichever is lower as per the provision of ICDS VIII.

• Foreign Exchange fluctuation

The existing provision of the Act, does not contain any specific provision for treatment of foreign exchange fluctuation except for section 43A which provides that any exchange gain or a loss at the time of making the payment in respect of assets acquired from a country outside India, the amount by which the liability so increased or reduced shall be added to or as the case may be deducted from the actual cost of the assets.

The amendment is made by inserting new section 43AA to provide that (subject to provisions of section 43CA) any gain or a loss arising on account of effect of change in the foreign exchange rates in respect of specified foreign currency transaction shall be treated as income or loss which shall be computed in the manner provided in the ICDS. The specified foreign currency transaction including those relating to

Monetary items	Recognised as income or expenses in the previous year.
Non-Monetary Items	Exchange difference shall not be recognised as income or expenses in that year.
Translation of Financial Statements of Foreign operation	Losses and gains arising by valuation of monetary assets and liabilities of the foreign operation could be recognised as income or expenses
Forward exchange contracts	Exchange, difference on a forward contract shall be recognised as income or expenses in the previous year in which the exchange rates (however, forward contract should not be entered for trading or speculation purpose. Besides it should also not be entered into to hedge the foreign currency risk of firm commitment or highly probable forecast transaction)
Foreign Currency Translation Reserves (FCTR)	Balance in FCTR account as on April 2016 may be recognised as income or loss to the relevant Assessment Year 2017-18.

• Taxability of certain income – Section 145B

The applicable ICDS provides for taxability of certain income even before they are accrued. In order to validate the provisions of ICDS the corresponding provisions have been incorporated in the new section 145B from the Assessment Year 2017-18. Section 145B provides as under.

• The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.

The existing law does not provide for time of taxability of income in the nature of price escalation or export incentives or income arising on account of escalation of price in contract. There has been a judicial precedents including Supreme Court in the case of Excel Industries – 358 ITR 295 wherein it was held that, export incentive income is taxable in the year in which the incentive claim is accepted by the Government and right to receive the payment accrues in favour of the taxpayer. As per the ICDS IV, the claim of escalation of price and export incentive shall be recognised at the time when there is a reasonable certainty of its ultimate collection. The term ‘reasonable certainty’ has not been defined. In order to incorporate such provision under the Act section 145B(2) has been inserted to provide that any claim for escalation of price or export incentive is taxable in the year in which reasonable certainty of its realization is achieved.

• Income referred to in sub-clause (xviii) of clause (24) of section 2 i.e., subsidy, grant, cash incentive etc. shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year.

As per the ICDS VII which provides for recognition of Government Grants and provides that recognition of Government Grants shall not be postponed beyond the date of actual receipt. The Delhi High Court in the case of Chamber of Tax Consultants held that these provisions of ICDS VII in absence of any specific provision in the Act conflicts with the accrual system of accounting and are accordingly ultra-vires the Act.

In order to bring certainty to the issue the amendment is made by inserting new section 145B(3) and provides that any income such as subsidy, grant, cash incentives, duty drawback or other income of a similar nature received from Central or State Government or any other authority in cash or in kind shall be chargeable to tax in the year in which it is received, if it is 
not charged to tax for any earlier previous year.

• Interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received.

• Computation of Income from Construction and Service Contract

The existing provision in the Act does not Govern the taxability of income arising from construction contracts and the taxability of same was governed by the accounting principles either on completed contract method or percentage of completion method (POCM). These issues are also covered by the judicial precedents. Further, the 
taxability of ‘retention money’ including timing has been a matter of significant litigation in the past.

ICDS III, requires the taxpayer to follow POCM. The contract revenue has been defined to include retention money. The ICDS further provides that contract cost shall be reduced by incidental income not being in the nature of interest, dividend or capital gains.

ICDS IV, dealing with revenue recognition, provides for applicability of POCM for recognizing income from service contracts.

The Act is amended to insert new section 43CB. The said section provides that profit arising from construction contract or a contract for providing services shall be determined on the basis of POCM except for certain service contracts (where the duration of such service contracts is not more than 90 days or a contract involving indeterminate number of acts over a specific period of time which shall be determined on the basis of straight line method), in accordance with ICDS notified u/s. 145(2) of the Act.

The above amendment overruled the following decisions wherein it was held that retention money does not accrue to an assessee until and unless the defect liability period is over and the engineer in charge certify that no liability is attached to the assessee.

i) CIT v. Simple Concrete Piles India (P) Ltd. (1988) 179 ITR 8

ii) CIT v. P & C Construction (P) Ltd. (2009) 318 ITR 113

iii) Amarshiv Construction (P) Ltd. v. DCIT (2014) 367 ITR 659 and

iv) DIT v. Ballast Nedam International (2013) 355 ITR 300.

Besides, this amendment further provides that contract cost shall not be reduced by incidental income in the nature of interest, dividend and capital gains. This is contrary to the decision of the Supreme Court in CIT v. Bokaro Steel Limited (1999) 236 ITR 315, wherein it was held that if an assessee receives any amounts which are inextricably linked with the process of setting up of its plant and machinery, such receipts would go to reduce the cost of its assets.

Section 56(2)(x) – Transfer of capital assets by a holding company to its wholly owned subsidiary company

As per section 56(2)(x) of the Act where any person receives in any property without consideration or for a consideration which is less than its fair market value, the difference between the fair market value and the value at which the property received will be taxable as income from other sources in the hands of recipient. However, there are certain exceptions provided by way of proviso that such provision is not applicable in respect of certain transaction not regarded as transfer u/s. 47 of the Act.

Presently, the transfer of capital asset by a company to its subsidiary company and the transfer by subsidiary company to the holding company had not been included within the exemption category so as to keep it out of the purview of section 56(2)(x). Clause IX of the fourth proviso is now amended from the Assessment Year 2018-19 to provide that the provisions of section 56(2)(x) will not apply to any transfer of capital asset by a holding company to its wholly owned subsidiary company or any transfer of a capital asset by a wholly owned subsidiary company to its holding company as referred to in clause (iv) and (v) of section 47.

Deemed Dividend

Dividend income is taxable under the head ‘Income from Other Sources’. The distributions by the closely held companies by way of loans or advances to shareholders or other concerns held by shareholders is deemed as ‘dividends’ in certain cases as per provisions of section 2(22)(e) of the Act. Currently, deemed dividend as per section 2(22)(e) are taxed ideally in the hands of recipient and not subject to Dividend Distribution Tax (DDT) u/s. 115-O in the hands of company. The other dividends declared by the company suffer DDT and the shareholders are also required to pay tax @10% if the amount of dividend exceeds ₹10 lakh. Whereas, deemed dividend u/s. 2(22)(e) were taxable in the hands of individual shareholders and were eligible for slab rate benefit. There was a matter of debate and there has been long drawn litigation whether this deemed dividend can be taxed in the hands of the related party if it is not a shareholder of the company.

In order to plug the anomaly created by the introduction of the 10% tax on dividend in the hands of shareholders and to bring the certainty in taxation of deemed dividend, the amendments are made u/s. 115-O to shift the taxability of deemed dividend referred to section 2(22)(e) from shareholders to distributing company. It is now provided that the companies giving such loans or advances will pay the tax @ 30% plus surcharge and cess w.e.f. 1-4-2018 on distribution or a payment of deemed dividend referred to section 2(22)(e) of the Act. Consequently, the shareholders and the related party receiving such loans will not be required to pay tax on such deemed dividend. The consequential amendments is made u/s. 115Q to expand the scope of section 115-O to deemed dividend.

Accumulated profits to be increased in case of amalgamation

Distribution to shareholders as per section 2(22) of the Income-tax Act are considered as dividend only to the extent of accumulated profit of the distributing company. The definition of the accumulated profit is given in the explanation to section 2(22). The amendment is made w.e.f Assessment Year 2018-19 and a new explanation (2A) has been added to provide that the accumulated profits (whether capitalised or not) or loss of accumulated company, on date of amalgamation, shall be added/deducted to/from the accumulated profits of the amalgamating company. The amendment is introduced with a view to discourage tax neutral amalgamations carried out by the profit-rich companies with loss making companies for avoidance or reduction of taxes on dividends.

The amendment neutralises the judgment in Asstt. CIT v. Gautam Sarabhai Trust No. 23, 81 ITD 677 (AHD) in which it was held that the accumulated profits, whether capitalised or not, of the amalgamating companies, which were separate independent entities, cannot be treated as accumulated profits or capitalised profits of amalgamated company. The judgment was rendered in the context of section 2(22)(d) of the Act.

The amendment will require an amalgamated company to keep track of the capitalised profits of amalgamating company.

Rationalisation of provisions relating to cash credit, unexplained investment etc.

Section 115BBE provides for tax on income referred to in sections 68 or 69 or 69A or 69B or 69C, 69D at a higher rate of 60% in situations wherein income under the said section have been declared suo motu by the assessee in the return of income furnished u/s. 139 or such income has been assessed by the assessing officer. As per the existing provision of section 115BBE (2) in case the income under the given sections is suo-motu declared by the assessee in the return of income, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act. Meaning thereby, the deduction/set-off of loss can be claimed if the AO had made an adjustment under the given sections.

Section 115BBE (2) has now been amended with retrospective effect from Assessment Year 2017-18 to provide that even in cases where income added by the assessing officer includes income referred to in the above sections, no deduction in respect of any expenditure or allowance or setoff of any loss shall be allowed to the assessee under any provision of the Act in computing the income referred to in these sections. This amendment is made to prevent the abuse of law.

Deductions

Section 80-AC – Deductions in respect of certain incomes not to be allowed unless return is filed by the due date

Under the existing provision of Section 8OAC, it provides that deduction under sections 80-IA, 80-lAB, 80-TB, 80-IC, 80-ID and 80-IE is not available if return of income is submitted by the assessee after the due date of submission of return of income specified under section 139(1). This burden is not cast upon assessee’s claiming deductions under several other similar deduction provisions.

In view of the above, the scope of section 80AC has been extended to provide that the benefit of deduction under the entire class of deductions under the heading “C.—Deductions in respect of certain incomes” (sections 80H to 80 RRB) in Chapter VIA shall not be allowed unless the return of income is filed by the due date. This provision is applicable with effect from the Assessment Year 2018-19.

If an assessee does not file his return of income within due date as specified u/s. 139(1), there is violation of section 80-AC, and accordingly he will not be entitled to avail deduction under various sections under the aforesaid chapter. As per section 119 of the Act, CBDT has power to condone the delay in filing of return of income in certain cases for avoiding genuine hardship. Accordingly, CBDT may authorise any income tax authority by issuing an order to admit an application or claim for any exemption, deduction, refund or any other relief under this Act.

Section 80-D – Health insurance premium and medical treatment

As per the existing provisions the amount paid for health insurance premium (or preventive health checkup of senior citizen) are allowed as deduction u/s. 80D up to ₹ 30,000/-. Further, in case of super senior citizens the said section also provides for deduction of medical expenditure within overall limit of ₹ 30,000/-. The monetary limit has been extended so as to provide that the deduction of ₹ 50,000/- in aggregate shall be allowed to senior citizen in respect of medical insurance or preventive health checkup or medical expenditure. The amendment is effective from the Assessment Year 2019-20.

In case of single health insurance policy having cover of more than 1 year, deduction u/s. 80D shall be allowed on a proportionate basis for the number of years for which health insurance cover is provided, subject to specified monetary limit.

Section 80-DDB – Medical treatment for specified diseases

Under the existing provision of section 80-DDB a deduction is allowed for medical treatment of a specified disease or ailment in Rule 11DD. In the case of senior citizen this deduction is allowed up to ₹ 60,000/-. In the case of very senior citizen the limit for this deduction is ₹ 80,000/-. The section 80-DDB is amended from Assessment Year 2019-20 revising the limit for senior citizen including very senior citizen to ₹ 1,00,000/-.

Section 80-JJAA – Deduction in respect of employment of new employees

The existing provision of section 80JJAA provides for deduction of 30% [in addition to the normal deduction of 100% u/s. 37(1)] in respect of salary and other emoluments paid to eligible new employees who have been employed for a minimum period 240 days of emoluments in a year is relaxed to 150 days in case of apparel industry. The section 80JJAA has been amended for Assessment Year 2019-20 extending this concession to footwear and leather industry.

The above deduction is available for the period of 3 consecutive years from the year in which new employee is employed. The amendment in the section now provides that where the new employee is employed in a particular year for less than 240/150 days but in the immediately succeeding year such employee is employed for more than 240/150 days, he shall be deemed to have been employed in succeeding year. In such case, the benefit of these section can be claimed in such succeeding years and also in the immediately 2 succeeding years.

Section 80-TTB – Deduction in respect of Interest on Deposits in case of Senior citizens

As per the existing provision of section 80TTA, individual and HUF is eligible for deduction of ₹ 10,000/- in respect of interest received on saving a/c with a bank, co-operative bank or a post office. By an amendment of section 80TTA it is now provided that the said section will not apply to senior citizen from Assessment Year 2019-20.

In order to provide additional benefit to senior citizen being individual whose age is 60 years or more, a new section 80TTB is inserted from Assessment Year 2019-20. The section provides for deduction in case of a senior citizen up to ₹ 50,000/- in respect of interest on any deposit being saving, recurring deposit, fixed deposit etc. with a bank, co-operative bank or post office. The bank, co-operative bank or post office would not be required to deduct tax at source u/s. 194A from the interest up to ₹ 50,000/- on such deposits. The non-resident senior citizens are outside the purview of this section.

In case of assessment of a specific private trust which is having a beneficiary who is a senior citizen with a determinate share, deduction u/s. 80-TTB can be claimed so far as the trust is assessed in the status of individual.

Section 80 IAC: Incentives to Start-ups

The existing provision of section 80IAC provides for deduction to eligible Start-ups. The scheme provides for 100% deduction of profit of an eligible start up for 3 consecutive years out of the 7 years beginning from the year of its incorporation. This section is amended with retrospective effect from Assessment Year 2018-19. The condition for eligibility of these exemption has been relaxed as under:

Provisions applicable before the amendment (i.e. for the assessment year 2017-18)	Provisions applicable after the amendment  (i.e. from the assessment year 2018-19)
• Eligible start-up is a company/LLP which is incorporated on or after April 1, 2016 but before April 1, 2019.	The benefit of section 80-IAC would be available to a start-up which is incorporated on or after April 1, 2016 but before April 1, 2021.
• The total turnover of its business does not exceed ₹ 25 crore in any of the previous years beginning on or after April 1, 2016 and ending on March 31, 2021.	The total turnover of its business does not exceed ₹ 25 crore in the previous year relevant to the assessment year for which deduction is claimed under section 80-IAC
• It is engaged in the eligible business which involves innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property	The definition of eligible business has been expanded to provide that the benefit would be available if it is engaged in innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation.

Rates of Taxes

• There is no change in tax rate or tax slab in case of non-corporate assessees. There is no change in the rates of surcharge applicable to all assessees. There is no change in the rebate from tax allowable u/s. 87(A) of the Income-tax Act.

• The existing education cess levied of 2% and secondary & higher education cess of 1% on tax payable has been replaced by new cess called ‘Health & Education Cess’ @4% of the tax payable by all the assessees. This is applicable from the Assessment Year 2019-20.

Corporate Tax

A. Presently, where the total turnover or gross receipt of a company does not exceed ₹ 50 crore in Financial Year 2015-16 the tax rate is 25% w.e.f. Assessment year 2019-20. It is provided that where the turnover or gross receipt of a company does not exceed ₹ 250 crore in Financial Year 2016-17 the rate of tax will be 25%. This will benefit many small & medium size companies incentivise non-corporate entities like sole proprietor, firms etc. to opt for corporate form of entity. Apart from the above there is no change in corporate tax rates except increase in cess from 3% to 4%.

B. In case of domestic company which is newly setup on or after 1-3-2016, which companies with the provision of the section 115BA, the rate of tax is 25% at the option of the company.

C. In call other cases the rate of tax will be 30%

D. As regards foreign companies, there are no change in the rates of tax and surcharge. The rate of cess is increased from 3% to 4% as stated above.

There is no change in rates of minimum alternate tax (MAT) chargeable to companies. In absence of any relief under MAT, it is important to consider these provisions since the gap between the normal income tax @25% and MAT @18.5% on book profit is at the lowest level.

• There is no change in rate of AMT. in case of unit owned by a non-corporate assessee located in an International Financial Service Center (IFSC) the rate of AMT payable u/s. 115JC in respect of income derived in foreign currency has been reduced from 18.5% to 9% plus surcharge and cess.

• The exemption on long term capital gains on sale of listed shares and equity oriented mutual funds have been abolished. There is a levy of tax on long term capital gains on transfer of shares & units of equity oriented mutual fund on which STT is paid. By insertion of new section 112A, it is now provided that in respect of transfer of such shares or units on or after 1-4-2018, the long term capital gains in excess of ₹ 1,00,000/- will be taxable @10% plus surcharge and cess. Further, the gain accrued up to 31-1-2018 have been grand fathered.

• Section 115O is amended to levy tax @30% plus surcharge and cess on closely held company in respect of any loan given to related party covered u/s. 2(22)(e). Hitherto the tax was payable by the person receiving such loan u/s. 2(22)(e). This burden is now shifted to the company giving such loan and the person receiving such loan would not be liable to pay any tax from Assessment Year 2019-20.

• Section 115R has been amended to provide for levy of tax on mutual fund in respect of income distributed to unitholders of equity oriented mutual fund. The tax rate is 10% plus surcharge and cess.

Type of Assessee	Income up to ₹ 50 lakh	Income exceeding ₹ 50 lakh to ₹ 1 crore	Income exceeding ₹1 crore to  ₹ 10 crore	Income above ₹ 10 crore
Domestic company having t/o in FY 2016-17 not exceeding ₹ 250 crore.	26%	26%	27.82%	29.12%
Domestic Company covered u/s. 115BA	26%	26%	27.82%	29.12%
Other Domestic Company	31.2%	31.2%	33.384%	34.944%
Foreign Companies	41.6%	41.6%	42.432%	43.68%
Firms including LLP’s	31.2%	31.2%	34.944%	34.944%
Individuals, HUF etc.	31.2%	34.32%	35.88%	35.88%

There is no reduction in tax liability of other entities like Firm or LLP. These may promote Firm or LLP’s to opt for conversion into company. However, it is to be noted that in view of lack of relief for Dividend Distribution Tax and tax on Receipt of dividend, the company will effectively suffer a higher tax burden on repatriated income as compare to LLP.