THE CHAMBER OF TAX CONSULTANTS

Transcription

1

2 THE CHAMBER OF TAX CONSULTANTS MANAGING COUNCIL President Manoj Shah Vice President Yatin Desai Hon. Secretaries Hitesh Shah Paras Savla Hon. Treasurer Avinash Lalwani Immediate Past President Parimal Parikh Members Ajay Singh Apurva Shah Ashit Shah Ashok Sharma Atul Bheda Haresh Kenia Hinesh Doshi Jayant Gokhale K. Gopal Keshav Bhujle Ketan Vajani Kishor Vanjara Ninad Karpe Vijay Bhatt Vipul Choksi Vipul Joshi Yatin Vyavaharkar Special Invitees Bhavesh Vora Mahendra Sanghvi Sujal Shah V. H. Patil LAW & REPRESENTATION Chairman Vipul Joshi Co-Chairman Mahendra Sanghvi Vice-Chairman Shailesh Bandi Ex-Officio Manoj Shah Yatin Desai Convenors Krish Desai Amrit Porwal Past President V. P. Verma Ajit Rohira Advisor Y. P. Trivedi K. K. Ramani Office Bearers Hitesh Shah Paras Savla MG Council Members Apurva Shah Jayant Gokhale Members Atul Suraiya C. N. Vaze Devendra Jain Durgashankar Sharma Kiran Shah Manish Gadia Mayank Shah Nitin Potdar Niranjan Doshi Nikita Badheka Rajen Gada Sunil Ramani Shailesh Sheth Shilpa Sharma Sanjay Buch Shruti Shah Sharad Abhyankar V. R. Ghelani

3

4 Post Budget Memorandum on Finance Bill 2013 Section 10 (10D) Sr. No. As per the Bill Issue Suggestions Justification 1. As per Clause 4(I)(ii), the amount received under keymen insurance policy post its assigning to the keyman with or without consideration is proposed to be taxed in the hands of keyman (assignee) Amount paid by the keyman at the time of assignment of the policy and also all premium paid post assignment, if any be allowed as deduction. Assignment of the keyman insurance policy may have been done on payment of certain consideration. Such consideration should be allowed as deduction while computing taxable income. Further, any premium paid by the keyman (assignee) should also be allowed as deduction. This is on the basis of Real Income Theory as well as the concept of taxing income and not gross receipts. 1 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

5 S. 43CA, 56 (2), 194LA Sr. No. As per the Bill Issue Suggestions Justification A. Clause 8 proposing to insert S. 43CA to provide that where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset) being land or building or both, is less than the stamp duty value thereof, the stamp duty value of the said asset shall be deemed to be the full value of the consideration received or accruing as a result of such transfer. a) Delete the Proposed section b) If at all it is felt that the proposed section should be inserted then the words asset (other than capital asset) being land or building or both, be replaced with the words stock-in-trade being land or building or both,. Also, it be clarified that the section does not apply to transfer of an under-construction building because the consideration charged for an underconstruction building a) The proposed section will charge artificial income to taxation. It is a settled principle that only real income needs to be taxed. Since the section applies to transfer by an assessee of land or building or both (other than a capital asset) it will also affect the assessees who are dealing in real estate business or are builders / developers. In business, the consideration charged depends on various factors including liquidity at the time of agreement to transfer, the perceived market conditions in future, alternative opportunities available for deployment of funds, immediate requirement of funds, etc. In the circumstances, it may not always be correct to expect that the assessee should always transfer the asset at stamp duty value. 2 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

6 depends on a multitude of factors like, the possibility of the plans being approved, the stage at which the project is when the transfer is being negotiated, the requirement of funds by the transferor, etc. Also, it should be provided that when such an assessee purchases stock-in-trade being land or building or both for a consideration which is lower than the stamp duty value thereof then the stamp duty value thereof will be regarded as its cost for the purposes of computing the profits of the business. Also, when such an assessee purchases the land or building or both for a consideration which is lower than the stamp duty value there is no provision in the statute to allow deduction of the amount of difference between the stamp duty value of land or building or both so purchased and the amount of consideration paid for purchase of the same. While the seller of such land or building or both would have been charged to tax u/s 50C or u/s 43CA on the stamp duty value of the asset as its full value of consideration. Also, the proposed section as it is worded would cover even transfer of agricultural land. 3 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

7 B. Clause 9 proposing to amend S. 56 (2) (vii) (b) This clause provides that where an individual or a HUF receives, from any person other than a relative, any immovable property without consideration, the stamp duty value of such property is chargeable to tax as income of the recipient. However, if the immovable property is received for a consideration which is lower than the stamp duty value of the immovable property, then under the present provisions the difference is not chargeable u/s. 56 (2) (vii) (b). Clause 9 of the Finance Bill, 2013 proposes to amend S. 56(2)(vii)(b) to provide that in addition to what is now provided when an individual or a HUF receives from any person, other than a relative, any immovable property for a consideration which is Delete the proposed amendment Alternatively, at least to keep a safe margin, say about 15%. a) A similar provision was inserted by the Finance Act, 2009 w.e.f Considering the difficulties such provision is likely to cause, the Finance Act, 2010 deleted this provision with retrospective effect. b) The provision as it is proposed is likely to cover cases of even agricultural land purchased for a consideration less than the stamp duty value thereof. Also, disputes are likely to arise as regards the year in which the amount will be chargeable. Considering the wide variety of ways in which the transactions of immovable property are structured, it will be debatable as to whether the actual physical possession be regarded as receipt of the immovable property or the registration thereof in favor of the purchaser be regarded as receipt of the immovable property. Also, in cases of purchase of an under construction property, it will be difficult to keep a track of 4 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

8 less than the stamp duty value of such immovable property, then the difference between the stamp duty value and the amount of consideration shall be chargeable to tax as income of the person receiving such immovable property. the year in which the possession has been received. c) As a concept the regard stamp duty valuation, which is different for difference status, as the ultimate barometer for evaluating fair price, that too without any margin, is fallacious. In any case, taking into account the complex nature of the structure of some transactions in immovable properties, vis a vis the stamp duty valuation may not necessarily be reflective of actual or correct consideration, much less fair consideration. d) Most importantly, there already exists a provision, Section 50C, to take care of such a situation. To tax both, the seller and the purchaser, for the same amount, that too taxing artificial income, is against the concept of taxation. e) Courts have held that stamp duty valuation is not necessarily reflective of true market value. Therefore, there should be adequate margin of error, say 15%, in this regard. 5 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

9 C. Clause 42 proposing to insert S. 194 IA Section 194 IA: TDS on transfer of certain immovable properties. a) Delete the proposed section 194 IA. b) Reporting of such transactions and mention of PAN can be implemented by ensuring that the Registrar should not register such document unless the parties have a valid PAN. Alternatively, a simple registration process can be started where the parties, having a valid PAN, before registering their document are required to register the transaction online with a view to ensure that all transactions of immovable property are reported. The online registration will verify a) Para 145 of the speech of the Finance Minister mentions that transactions in immovable properties are usually undervalued and underreported; one-half of the transactions do not carry the PAN of the parties concerned. With a view to improve the reporting of such transactions and the taxation of capital gains, TDS at the rate of one per cent on the value of the transfer of immovable property has been proposed to be applied where the consideration exceeds Rs. 50 lakhs. b) Section 194IA applies to all persons. Even a non-resident, individuals not carrying on any business or profession, widow, senior citizens, housewives, etc. purchasing an immovable property will be required to obtain PAN, TAN, deduct tax at source, pay the same, file quarterly statements, etc. The term `immovable property has been defined to 6 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

10 the correctness of the PAN. Acknowledgement of such online registration should be required to be attached with the document. It can be provided that without such an acknowledgement the Registrar shall not register the document. Having a PAN can be made compulsory before purchase of immovable property. c) The proposal needs to be enacted then suitable provisions be made in the provisions dealing with TDS Chapter to provide that persons who are otherwise not required to deduct tax at source under the provisions of the Act i.e. mean any land (other than rural agricultural land) or any building or part of a building. c) It may be mentioned that a similar provision was proposed to be introduced by Finance Bill, Realizing the difficulties that were likely to arise in the implementation of the said provision, the Finance Act, 2012 did not have the provision proposed by clause 73 of the Finance Bill, Further, the objective of undervaluation is adequately taken care of by the provisions of Ss. 50C and 56(2)(vii). d) It is suggested that also considering the difficulties and the hardship which proposed S. 194IA is likely to create, the proposal should be dropped. An individual who purchases the immovable property once in his life time also will be required to obtain TAN, file quarterly statements, issue TDS certificates, etc. Thereafter, such individual will not be having any other obligation to deduct tax at source under the provisions of 7 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

11 cases where the individuals and HUFs do not carry on any business, can obtain a temporary TAN only for the purposes of this Section and which TAN will be automatically cancelled, without any further act on the part of the tax payer, at the end of the financial year in which it was taken. Also, it should be provided that in case there are multiple transferors / transferees the section will be attracted only if the share of consideration of each transferor / transferee exceeds the sum of Rs. 50 lakhs. Also, to avoid any litigation the definition of immovable property should the Act. However, since he will be holding TAN, notices will be sent to him and proceedings initiated which may subsequently have to be dropped. e) Alternatively, as provided in the Finance Bill, 2012, in such cases, the normal TDS provisions should be dispensed with and, instead, a single page challan should be prescribed. f) Further, the threshold for applicability of this section is Rs. 50 lakhs. The monetary limit is the same throughout the country. Taking into account the highly inflated real estate market, the limit is low; at least for Tier I & II cities. 8 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

12 be brought in line with what is provisions of S. 50C and S. 56(2)(vii) viz. immovable property means land (other than agricultural land) or building or both and not what is now provided. d) And section 197 should be suitably amended to allow lower Tax or NIL Tax deduction for section 194- IA. e) The threshold limit be increased. Alternatively, higher limits be prescribed for Tier I & II cities. 9 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

13 Sr. No International Tax Provisions Sections 90, 90A, 96 and 115A Amendment as per draft Suggestion Justification 5. Section 90 & Section 90A: Inserted Ss (5) : (5) The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein. The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be subject to other provisions of the act or DTAC, as the case may be. Circular No. 789, dated issued by the board clarified that wherever the certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence, as well as beneficial ownership for applying DTAC accordingly. The said circular specified the mode of proof of residence of an entity in Mauritius. This circular was upheld by the Supreme Court in Azadi Bachao Andolan. Later, Circular No. 1 of 2003 clarified Circular No. 789, stating that where there are issues regarding dual residency of an entity claiming 10 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

14 benefits of India-Mauritius DTAC, the benefits will be given according to Para 3 of Article 4 of the DTAC, i.e., depending on where the entity's place of effective managment is situated. While the current wording leaves doubts on applicability of the Tax Residency Certificate, the suggested wording can ensure that the tax residency certificate will in essence be subject to applicable laws. The suggested wording merely restates the legal position, as was mentioned in Circular 1 of Sec.96 (1). An Impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it (1). An Impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it- Present GAAR provisions are applicable to all types of transactions, both commercial and non-commercial. 11 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

15 (a). creates rights or obligations, which are not ordinarily created between persons dealing at arm s length; (b). results, directly or indirectly, in the misuse or abuse of the provisions of this Act; (c). lacks commercial substance or is deemed to lack commercial substance u/s.97, in whole or in part; or (d). is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes. (a) in the context of business (i) lacks commercial substance or is deemed to lack commercial substance u/s.97, in whole or in part ; (ii) is entered into or carried out, by means or in a manner, which are not ordinarily employed for bona fide business purposes (b) in a context other than business, it is entered into,or carried out, by means or in a manner which are not ordinarily employed for bona fide purposes, (c) in any context (i) creates rights or obligations, which are not ordinarily created between persons dealing at arm s length; (ii) results, directly or indirectly, in the misuse or abuse of the provisions of this Act; A non-commercial arrangement in some cases may not suffice the commercial substance test. For example, a person may earn a tax benefit after his residential status has changed to nonresident. In such cases, even though he may be able to prove the bona fide reasons of his shifting his residence (employment, family, retirement, health-care, etc.), he may not be able to justify the commercial substance for his change in residential status. The tax officer can apply GAAR in such cases, even though the intention may not be to avoid tax. Therefore, the tests to determine an Impermissible Arrangement must be different for business transactions and non-business transactions. Commercial substance test must apply to only business transactions; while the bonafide manner test should apply to non- 12 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

16 business transactions. Present tests may lead to unnecessary litigation. A similar distinction is available in the South African GAAR which provides for different tests to be applied for business transactions and non-business transactions. 7 Section 115A In section 115A of the Income-tax Act, in sub-section (1), in clause (b), for sub-clauses (A), (AA), (B) and (BB), the following subclauses shall be substituted with effect from the 1st day of April, 2014, namely: (A) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of twenty-five per cent.; There are 3 alternatives for suggested modifications: Retain the tax rate on income of a nonresident in the nature of Royalty and Fees for Technical Services at 10%. Justification for each alternative suggestion is as under: 1. The rate of tax on Royalty and FTS earned by a non-resident was reduced to 10% vide Finance Act, While presenting the Finance Bill, 2005 to the Lok Sabha, in his budget speech, Finance Minister Shri P. Chidambaram has said the following: To encourage technological upgradation, I propose to reduce the withholding tax on technical services from 20 per cent to 10 per cent. 13 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

17 (B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of twenty-five per cent.; and It is important to note that even today, India is in need of foreign technology and technical know-how. Further, most of the agreements in relation to import of technology / technical know-how provide for consideration which is net of Indian taxes. In such a case, the entire increase in tax rate will have to be borne by the Indian resident importing such technology / technical know-how. Due to grossing up of tax in most of the agreements, the actual tax burden on the Indian resident would be even higher than 25%. Rise in the rate of tax on Royalty and FTS would significantly discourage import of such technology and technical know-how, which could affect the infrastructural and economic development of the Country. 14 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

18 The higher tax rate of 25% may be made applicable to transactions with non cooperating jurisdictions as notified under section 94A of the Act. 2. Presently, the tax rate of 10% on gross income deems the profit element in the transaction taxable in India to be 25% of the gross amount payable, given the foreign company pays 40%. A rise in the tax rate to 25% would imply a deemed profit element of 62.5% taxable in India in such transactions. This does not appear to be a fair presumption. On broad analysis of the 84 Double Tax Avoidance Agreements ( DTAA ) entered into by India with other countries, it is noted that more than half of the DTAA prescribe a rate of 10% for taxation of Royalty and FTS. Accordingly, with the rise in the tax rate under section 115A, residents of such countries will have to now claim the relief of lower tax rate under the DTAA. This results in unnecessary hardship, especially with new regulations with respect to Tax Residency Certificate. 15 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

19 The proposed rate of tax should be made applicable to payment of income in the nature of Royalty and FTS under agreements signed after 01 April, In fact, only while eight treaties have a withholding tax rate of 20% or higher, and only one treaty (Brazil) has a rate of 25%. 3. This would be fair to the agreements which have already been entered factoring the tax rate as 10% as in their case, such a significant rise in the tax rate could lead to significant mismatch in the cash flows which in-turn could affect the business of parties to the such agreements. 16 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

20 Sr. No. Provision Suggestions Justification 8. Insertion of new Section 32 AC Deduction is allowed to companies engaged in the business of manufacture on production of any article or thing and invests a sum more than Rs. 100 Crores in new plant & machinery other than ship or aircraft and excludes few items of plant & machinery. The deduction is allowable if company acquired and installs new asset after but before The deduction proposed to be allowed is 15% of the actual cost of plant & machinery. It is further provided how deduction will be granted in two years. a) The deduction should not be restricted to companies. The same should be allowed to all assessee. b) The limit of more than Rs. 100 Crore is too high. It should be 10 Crore so that small sector assessees can also get benefit. As stated in finance ministers speech the provision is sought to be made to attract new investment and quicken the implementation of projects. He has also said no large economy can become truly developed without a robust manufacturing section. Looking to the objects the suggestions requires to be considered. 17 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

21 Sr. No. Issue Justification As per draft 9 Insertion of Section 80EE The benefit of this deduction is being extended only to individuals. Suggestion The benefit of this deduction should also be extended to all entities who has income under the Chapter Income From House Property The benefit of this Section is over and above the benefit of deduction u/s 24, Therefore the benefit should be made available to all the assessee's. The proposed new section 80EE seeks to provide that in computing the total income of an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential house property. It is also provided that the deduction shall be subject to the fulfillment of the following conditions:- 18 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

22 (i) the amount of loan sanctioned for acquisition of the residential house property does not exceed Rs. 25,00,000/-; The Limit of the Loan Sanctioned is very Low and should be Increased to Rs. 2 crores in major cities and Rs. 1 crores in other places. (iii) the value of the residential house property does not exceed Rs. 40,00,000/-; The limit of the residential House is set very Low and should be increased atleast upto Rs. 2.5 Crores in major cities and Rs crores in other places. (iv) the assessee does not own any residential house property on the date of sanction of the loan. 19 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

23 It is also provided that where a deduction under this section is allowed for any assessment year, in respect of interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provisions of the Income-tax Act for the same or any other assessment year. It should be Clearly provided that the deduction under this section is in addition to the deduction of Rs. 1,50,000/- in respect of the loans for self Occupied property u/s 24 of the I. T. Act. Remove sub-section 4 Though this has been provided in the Memorandum, the section does not provide for the same. Therefore by making a provision in the section itself, it will Clarify the Position and also avoid undue harassment to the Tax payers from the unnecessary litigation 20 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

24 Sr. No. Issues 115-0, 115QA, 115QB, 115QC & 10(34A) BUY BACK OF SHARES as per draft Provision Suggestion Justification 10. Sec 115O - provides for removal of cascading effect of DDT by allowing a deduction to the extent that dividend is received from a subsidiary and tax is paid u/s 115BBD. Suggested that the word 'subsidiary' be removed from (i)(b) and the benefit be given to the extent that the dividend has been taxed u/s 115BBD. there is a concessional rate of tax of 15% in case dividend is received from a company abroad in which an Indian company holds 26% or more equity capital. However the cascading effect reduction in Section 115O is available only to the extent of dividend received from a subsidiary. In cases where there is a investment between 26% and 50% a similar deduction is not given and there seems to be no basis for such bias. The said section, if amended, will encourage companies having investments abroad to bring back the profits by way of dividends. 21 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

25 11. Sec 115QA - 115QC and 10(34A) dealing with buyback of shares - A company which buyback its shares (not being listed shares) will pay distribution tax of 20% on the difference between sale price and issue price and the gain on buyback thereafter will be tax free to the shareholder. These provisions should be deleted. The Tax Provisions for taxation of gains from buyback of shares are already adequately codified. Earlier, buybacks were construed as deemed dividends - and this was subsequently clarified by specifically excluding it from the definition u/s 2(22). Levy of a distribution tax is almost like moving back to an earlier system of tax which was specifically given up. 22 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

26 The Companies Act 1956 (CA56)permits a company to choose between distributing its profit by way of dividend to all shareholders or by way of buying back shares of some shareholders and thereby enhancing value for other shareholders. Since the CA56 permits this as a valid decision, there is no case for the ITA 61 to discourage such transactions. The said amendment fails to realise that a dividend is paid to all shareholders but a buyback may be done from only some shareholders - and this being permitted under corporate law should be allowed under tax law as well. 23 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

27 A shareholder may have purchased the shares at a price which is higher than issue price and at that stage, a capital gains tax was already levied on the seller. When a buyback is done, no credit is given for this higher cost base and hence the Tax Department is recovering a lager tax than what is due on the total gain made between all participants. Without prejudice to the same:- the distribution tax rate must be reduced to 15% to being it in line with DDT u/s 115O If it is believed that buyback is used as a method to avoid distribution of dividend, then there is no case to have a tax rate which is higher than that as is applicable to dividends and hence the rate should be reduced to 15%. 24 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

28 The rate of tax is higher than that which is available to a Non Resident investor whose capital gains is taxable at 10%. The rate is also higher than the rate applicable to resident individuals since they pay a tax based on appreciation over indexed cost. the tax should be levied on sale price less indexed issue price Some element of deduction must be given to take cognisance of intervening inflation and hence the same indexation which shareholder would have got must be given to the company if the tax rate is to be retained at 20%. 25 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

29 Amendment to Section 132B of the Income-tax Act Sr. No. Issue : Amendment to Section 132B of the Income-tax Act Justification As Per Draft 12. Clause 31 of the Finance Bill seeks to insert Explanation 2 to section 132B so as to provide that for the purpose of the section the term existing liability shall not include advance tax payable in accordance with the provisions of Part C of Chapter XVII. Suggestion It is suggested that the above amendment proposed by Clause 31 of the Finance Bill shall please be dropped. In many cases, it may so happen that assets of the assessee are seized during the course of search and assessee is not in a position to make payment of advance tax due to the seizure of the assets by the department. The seized assets are normally not released immediately. Due to this amendment, the seized assets would not be allowed to be appropriated against the advance tax liability of the assessee which was hitherto permissible due to the view taken by various courts. The assessee would need to make arrangements for funds to pay advance tax to avoid the interest u/s. 234B and 234C, which would be an onerous task for the assessee. Further if the assessee could not make such arrangements, then it would result in additional liability towards interest under 26 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

30 these sections. As per the Explanatory Memorandum to the Finance Bill, the legislative intent behind this amendment is to ensure the recovery of outstanding tax /interest /penalty and also to provide for recovery of taxes /interest /penalty, which may arise subsequent to the assessment pursuant to search. Accordingly the intent is to protect the interest of revenue in collecting the tax, interest and penalties arising due to the search. However, it is humbly submitted that this interest would not get jeopardized even without the amendment. This is because the settled principal that the seized assets should first be appropriated against the liability in pursuance of search and the balance if any could only be appropriated towards the advance tax liability of the assessee. In view of this, it is submitted that the proposed amendment is not necessary and at the same time it may cause undue hardships to the assessee in bonafide cases and hence this amendment shall be dropped. 27 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

31 Amendment to Section 139 of the Income-tax Act Sr. No. Issue : Amendment to Section 139 of the Incometax Act Justification As Per Draft 13 Clause 32 of the Finance Bill seeks to amend Explanation to sub-section (9) of section 139 dealing with the provisions relating to Defective Return so as to provide that the return of income shall be regarded as defective unless the tax together with interest, if any, payable in accordance with the provisions of Section 140A, has been paid on or before the date of furnishing of the return Suggestion It is suggested that the above amendment proposed by Clause 32 of the Finance Bill shall please be dropped. If a return is treated as defective the same is treated as non-est. This can result in tremendous hardships like (a) the unabsorbed losses claimed in the return will not be allowed to be carried forward (b) the due date of return will be missed resulting in levy of penalty u/s. 271B (c) If the return is filed at the time when the same is getting time-barred as per section 139(4), it will not be possible to file the return at all (d) levy of interest u/s. 234A (e) levy of penalty u/s. 271F etc. In many cases, it may so happen that the assessee is not having sufficient money to make the payment of taxes and interest before filing the Return of Income. A classic example may be a case of deemed income like 50C, etc and where the capital gains are assessed to tax on receipt of just small portion of consideration on transfer of immovable property due to operation of section 2(47)(v). There might be many such examples for the above proposition. This amendment will create additional burden on the assessee to make payment of taxes and interest before filing the Return of Income failing which the return is 28 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

32 likely to be treated as defective. Further, though the provisions of section 139(9) allows time of fifteen days to an assessee to rectify the defect before the return is treated as defective, this will be of little help since the amendment requires the assessee to make the payment of entire tax on or before filing the return. Accordingly this new type of defect will never be possible to be cured by the assessee. Though it is correct that non-payment of tax as per provisions of section 140A of the Act is a fault with the assessee, it is humbly submitted that this fault is not committed by any assessee willingly. Further due to the levy of interest u/s. 234B and 234A, this default is already getting penalized by way of levy of interest and hence no one really does this intentionally. In a good legislation, the penalty for default can not be out of proportion to the fault committed and hence there is no reason to treat the return as defective specially when the assessee bears the cost of interest for failure to make the payment on time. In view of this, there is a very good case to avoid such amendment which would create tremendous hardship to the assessee in a case where he is genuinely facing financial difficulty. 29 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

33 Sr. No. Issues as per budget proposal Suggestion Justification 14. CTT be leviable on sale of commodities derivatives at 0.01 percent and the same is payable by the Seller Suggested that section 43 (5) (d) should be suitable amended altered so as to allow the loss on so called speculative transactions in commodities futures & options which are routed through recognised commodity exchanges in elcetronic format on which CTT is paid. 1. Since CTT is being charged on sale of Commodities Derivatives, it acts as a substantial evidence as regards to the genuinity of transactions entered into through a recognised commodities exchange and audit trail is avilable to department. 2. Assessees suffering genuine losses in commodities futiures & option already face severe cash crunch and are not in position to pay taxes on speculative transactions disallowed u/s Fundamental Principal of taxing real income takes a back seat when real losess are disallowed on the pretext of deeming the same as speculative transaction. 4. When losses in Futures & Options transactions of securities are allowed as business loss there is no justification of differential treatment being meted out to commodities futures & options. 30 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

34 Sr. No. Issues as per draft Suggestion Justification 15. Section 10(23FB) Securitiies and Exchange Board of India (SEBI) has replaced the SEBI (Venture Capital) Regulations with the SEBI (Alternative Investment Funds) Regulation, 2012 from 21 May, The Income-tax Act, 1961 (Act) currently exempts income of Venture Capital Fund (VCF) / Venture Capital Company (VCC) from investment in a venture capital undertaking and provides for taxability in hands of the investors instead of VCC/VCF. The existing VCFs and VCCs regulated by the erstwhile, VCF Regulations, as they stood prior to getting repealed by the SEBI AIF Regulations shall continue to avail the pass through status. The tax pass The tax pass-through status has not been extended to all pooling vehicles/funds including Category II AIFs, Category III AIFs and other Category I AIFs such as infrastructure funds, Small and Medium Enterprise funds etc. which may not necessarily fall within the definition of a VCF or a VCC as defined under the AIF Regulations. It is suggeseted that the tax pass through status be granted to all categories of AIF's. Since specific tax regime has not been provided for all categories of AIF. Category II and category III, AIF and its investors will have to rely on other provisions of the Income-Tax, Act 1961 (Act) for the purpose of interpretations and for ascertaining their tax liabilities. This would lead to unnecesssary litigation. 31 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

35 through status has been extended to VCFs registered as Category -I AIF under the SEBI AIF regulations subject to certain conditions. SEBI AIF regulations provide for listing of shares or units of AIF. However, one of the conditions for exemption under section 10(23FB) is that the shares should not be listed on the stock exchange. Thus, it should be clarified as to how the tax pass-through for the fund and its investors would be provided if the shares or units of the AIF are listed. The conditions prescribed in section 10(23FB) should be in consonance with SEBI regulations. The uncertainity of taxation on listing of the shares will leave room for litigation and may discourage listing of funds. 32 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

36 The income of the mutual fund is exempt from the tax under section 10(23D) of the Act. However, the tax department has raised demands on various mutual funds in respect of its investments in pass through certificates (PTC). The proposed insertion of new chapter in respect of taxation of securtisation trust and consequent amendments in section 10 of the Act in respect of exemption of tax in respect of income of securitisation trust and its investors has brought relief to the securitisation trust specially, mutual funds investment in PTC. However, the proposed amendment will take effect from financial year and onwards. The proposed amendments should be made effective retrospectively. This will eliminate the pending litigation for the previous years especially in case of mutual funds. 33 P a g e POST BUDGET MEMORANDUM 2013 SUGGESTIONS ON DIRECT TAXES

37 NOTES

38

39 ABOUT CTC The Chamber Of Tax Consultants