FINAL COURSE SUPPLEMENTARY STUDY PAPER DIRECT TAX LAWS AND INDIRECT TAX LAWS

Transcription

1 FINAL COURSE SUPPLEMENTARY STUDY PAPER DIRECT TAX LAWS AND INDIRECT TAX LAWS [A discussion on amendments made by the Finance (No.2) Act, 2014, Budget Notifications and other important Circulars/ Notifications issued between 1 st May, 2013 and 30 th April, 2014] (Relevant for students appearing in May, 2015 and November, 2015 examinations) BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of the Institute of Chartered Accountants of India. Permission of the Council of the Institute is essential for reproduction of any portion of this paper. Views expressed herein are not necessarily the views of the Institute. i

2 This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of the Institute of Chartered Accountants of India with a view to assist the students in their education. While due care has been taken in preparing this Supplementary Study Paper, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not responsible in any way for the correctness or otherwise of the amendments published herein. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher. Website : Department/Committee : Board of Studies bosnoida@icai.org Price : ISBN No. : Published by : The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi , India Printed by : Typeset and designed at Board of Studies. ii

3 A WORD ABOUT SUPPLEMENTARY Direct Tax Laws and Indirect Tax Laws are amongst the extremely dynamic subjects of the chartered accountancy course. The level of knowledge prescribed at the Final Level for the subjects is advanced knowledge. For attaining such a level of knowledge, the students not only have to be thorough with the basic provisions of the relevant laws, but also need to constantly update their knowledge of statutory and judicial developments. The Board of Studies has been instrumental in imparting theoretical education to the students of Chartered Accountancy Course. The distinctive characteristic of the course i.e., distance education, emphasizes the need for bridging the gap between the students and the Institute and for this purpose, Board of Studies provides a variety of educational inputs for the students. One of the important inputs of the Board on taxation is the Supplementary Study Paper in Direct and Indirect Tax Laws for the Final students. The Supplementary Study Papers are annual publications that contain a discussion on the amendments made by the Annual Finance Acts and Notifications/Circulars in income-tax, wealth-tax, excise, service tax and customs laws. They are very important to the students for updating their knowledge regarding the latest statutory developments in the respective areas mentioned above. A lot of emphasis is being placed on these latest amendments in the Final examinations. The amendments made by the Finance (No.2) Act, 2014, Budget Notifications and other important Notifications/Circulars issued between 1 st May, 2013 and 30 th April, 2014 have been incorporated in this Supplementary Study Paper 2014, which is relevant for students appearing in May, 2015 and November, 2015 examinations. The Supplementary Study Paper 2014 has been divided into chapters to facilitate co-relation with the Study Material. The chapter reference given in the Supplementary Study Paper corresponds to the parallel chapter number of the Study Material. The related sections, however, have been grouped together and explained in the same chapter in the Supplementary Study Paper to facilitate interlinking and reading of interconnected provisions. Illustrations have been given, wherever possible, to aid better understanding of the amendments. The amendments made by way of notifications/circulars issued after 30 th April, 2014 and which are relevant for May, 2015 and November, 2015 examinations will be given in the Revision Test Paper (RTP) for May, 2015 and November, 2015 examinations, respectively. In case you need any further clarification/guidance with regard to this publication, please send your queries relating to direct tax laws at priya@icai.in and queries relating to indirect tax laws at smita@icai.in. Happy Reading and Best Wishes for the forthcoming examinations! iii

4 DIRECT TAX LAWS

5 DIRECT TAX LAWS AMENDMENTS AT A GLANCE FINANCE (No.2) ACT, 2014 S.No. Particulars Section I Income-tax A. Basic Concepts 1. Rates of income-tax B. Incomes which do not form part of total income 2. Registered trusts and institutions which are eligible for exemption under sections 11 to 13 not allowed to claim exemption under any of the clauses of section 10, other than exemption available under clauses (1) and (23C) of section Disallowance of depreciation on commercial lines in respect of a capital asset, cost of acquisition of which has been claimed as application of income 4. Meaning of Substantially financed by the Government for the purpose of exemption under sub-clauses (iiiab) and (iiiac) of section 10(23C) 5. Power of Principal Commissioner/Commissioner to cancel registration of trust or institution expanded 6. Taxability of anonymous donations exempt from applicability of maximum marginal rate of tax 7. Registration granted to trust or institution to also be applicable to earlier years in specific cases C. Income from house property 8. Increase in deduction for interest on loan borrowed for acquisition or construction of self-occupied house property D. Profits and gains of business or profession 9. Manufacturing companies investing more than ` 25 crore in new plant and machinery in any previous year during the period from to entitled to investment allowance@15% 10. Expansion of scope of specified business eligible for investment linked deduction 11. Capital asset in respect of which deduction under section 35AD has been claimed to be used for specified business for a period of eight years 11(7) & 10(23C) 11 & 10(23C) 10(23C) 12AA 115BBC 12A 24(b) 32AC 35AD 35AD 1

6 12. Assessees claiming investment linked deduction under 35AD section 35AD not eligible to claim exemption under section 10AA 13. Disallowance of CSR expenditure Remittance of TDS on payments to non-residents permitted 40(a)(i) to be made on or before the due date of filing of return of income for avoiding disallowance of related expenditure under section 40(a)(i) during the previous year 15. Expansion of scope of section 40(a)(ia) to cover all 40(a)(ia) expenditure/payments on which tax is deductible under Chapter XVII-B and restriction of quantum of disallowance thereunder to 30% of sum paid 16. Speculative transaction to exclude eligible transaction in 43(5) respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax (CTT) 17. Uniform amount of presumptive income from each goods 44AE carriage, whether heavy goods vehicle or other than heavy goods vehicle E. Capital Gains 18. Income arising from transfer of security by a foreign portfolio 2(14) investor (FPI) characterized as capital gains 19. Period of holding of units of debt oriented mutual fund and 2(42A) unlisted securities, to qualify as a long-term capital asset, increased from more than 12 months to more than 36 months 20. Benefit of concessional rate of tax@10% on long-term 112 capital gains (without indexation) not to be available in respect of units of debt-oriented fund and unlisted securities 21. Compensation received in pursuance of an interim order 45(5) deemed as income chargeable to tax in the year of final order 22. Transfer of Government security outside India by a nonresident 47 to another non-resident not a transfer for charge of capital gains tax 23. Rise in Consumer Price Index (Urban) to be the basis for 48 notification of Cost Inflation Index 24. Exemption under section 54 and 54F to be available for investment in one residential house situated in India 54 & 54F 2

7 25. Maximum investment in bonds of NHAI and RECL, out of 54EC capital gains arising from transfer of one or more capital assets during a financial year, restricted to ` 50 lakhs, irrespective of whether the investment is made in the same financial year or in the subsequent financial year or both F. Income from other sources 26. Advance forfeited due to failure of negotiations for transfer 56(2), 2(24) & 51 of a capital asset to be taxable as Income from other sources G. Set-off and Carry Forward of Losses 27. Transaction in respect of trading in shares on a recognised 73 stock exchange by a company, the principal business of which is the business of trading in shares, not a speculative transaction H. Deductions from Gross Total Income 28. Increase in the limit of deduction under section 80C 80C & 80CCE 29. Benefit under section 80CCD extended to private sector 80CCD employees without condition regarding date of joining being on or after 1 st January, Extension of sunset clause for tax holiday under section IA(4) IA for power-sector undertakings I. Assessment of various entities 31. Scheme of taxation for Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (Invit) [New Chapter XII- FA] 32. Dividends received by Indian companies from specified foreign companies to be entitled to concessional rate of tax without restriction of benefit to a particular assessment year(s) 33. Assessees claiming investment linked tax deduction under section 35AD covered within the ambit of AMT 34. Credit for AMT to be available even in a year when the adjusted total income is not more than ` 20 lakh and there is no claim for deduction under section 10AA or Chapter VI- A or section 35AD 115UA, 2(42A), 10(23FC)/(23FD), 10(38), 47(xvii), 49(2AC), 111A, 115A, 139(4E), 194A, 194LBA & 194LC 115BBD 115JC 115JEE 3

8 35. Dividend and income distribution tax leviable on gross 115-O & 115R dividend / income and not on the net dividend / income distributed to shareholders and unit holders J. Transfer Pricing and Other Provisions to check avoidance of tax 36. Deemed International Transaction 92B(2) 37. Introduction of Range Concept for determination of arm s 92C(2) length price 38. Provision for roll back in APA Scheme 92CC K. Income tax authorities 39. Principal Director General of Income-tax, Principal Chief Commissioner of Income-tax, Principal Director of Incometax and Principal Commissioner of Income-tax included under income-tax authorities specified under section CBDT empowered to issue orders for relaxation of fee leviable under section 234E for failure to deliver TDS/TCS statements within the prescribed time 41. Increase in time period specified under section 133A for retaining books of accounts and documents impounded without the approval of the higher authorities to align the same with the time period under section 131(3) 42. Scope of section 133A expanded to include exercising the power of survey to verify whether tax has been deducted or collected at source in accordance with the relevant provisions of the Act 43. Prescribed income-tax authorities empowered to call for information L. Assessment procedure 44. Return of income of mutual funds, securitization trusts, venture capital companies/funds to be filed mandatorily 116, 117, 2(34A)/(34B)/ 2(34C)/(34D), 2(15A)/(16)/(21) 119(2)(a) 133A(3) 133A(2A) 133C 139(4C), 115R(3A) & 115TA(3) 45. Verification of return of income Expansion of scope of section 142A and provision of time limit for submission of report by the Valuation Officer to the Assessing Officer 47. Income computation and disclosure standards to be notified under section 145(2) 142A, 153 & 153B 145(2) 4

9 48. Assessing Officer having jurisdiction in respect of other 153C person to proceed under section 153A only if he is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to in section 153A(1) M. Settlement Commission 49. Increase in scope of definition of Case in respect of which 245A an assessee can make an application to the Settlement Commission N. Advance Ruling 50. Residents falling within such class or category of persons 245N notified by the Central Government can file an application to AAR 51. Strengthening the constitution of AAR 245-O O. Penalties 52. Transfer Pricing Officer included as competent authority to 271G levy penalty under section 271G 53. Assessing Officer specified as the competent authority to 271H levy penalty under section 271H P. Offences and Prosecution 54. Failure to produce accounts and documents referred to in 276D notice under section 142(1) or comply with direction under section 142(2A) to attract both imprisonment and fine Q. Miscellaneous Provisions 55. Use of electronic clearing system through a bank account included as a permissible mode of acceptance and repayment of loans and deposits 56. Maximum period of extension of provisional attachment : Two years or sixty days after the date of order of assessment or reassessment, whichever is later 57. Obligation to furnish statement of financial transaction or reportable account R. Deduction, Collection & Recovery of Tax 58. Tax to be deducted on non-exempt payments made under life insurance policy 269SS & 269T 281B(2) 285BA, 271FA & 271FAA 194DA 5

10 59. Enabling provision for deductor to file correction statement and for processing of correction statement so filed 60. Revision of time limit for passing an order under section 201(1) 61. Non-applicability of higher rate of TDS under section 206AA in respect of tax deductible under section 194LC on payment of interest on long-term bonds to non-corporate non-residents and foreign companies 62. Validity of notice of demand till the disposal of appeal by the last appellate authority or disposal of proceedings II Wealth tax 63. Increase in scope of definition of Case in respect of which an assessee can make an application to the Settlement Commission 200 & 200A 201(3) 206AA(7) 220(1A) 22A(b) 6

11 1 BASIC CONCEPTS RATES OF TAX AMENDMENTS BY THE FINANCE (No.2) ACT, 2014 Section 2 of the Finance (No.2) Act, 2014 read with Part I of the First Schedule to the Finance (No.2) Act, 2014, seeks to specify the rates at which income-tax is to be levied on income chargeable to tax for the assessment year Part II lays down the rate at which tax is to be deducted at source during the financial year from income subject to such deduction under the Income-tax Act, 1961; Part III lays down the rates for charging income-tax in certain cases, rates for deducting income-tax from income chargeable under the head "salaries" and the rates for computing advance tax for the financial year i.e., A.Y Part III of the First Schedule to the Finance (No.2) Act, 2014 will become Part I of the First Schedule to the Finance Act, 2015 and so on. Rates for deduction of tax at source for the F.Y from certain income Part II of the First Schedule to the Act specifies the rates at which income-tax is to be deducted at source under sections 193, 194, 194A, 194B, 194BB, 194D and 195 during the financial year These rates of tax deduction at source are the same as were applicable for the F.Y Surcharge would be levied on income-tax deducted at source in case of non-corporate nonresidents and foreign companies. If the recipient is a non-corporate non-resident, surcharge@10% would be levied on such income-tax if the income or aggregate of income paid or likely to be paid and subject to deduction exceeds ` 1 crore. If the recipient is a foreign company, surcharge@ (i) 2% would be levied on such income-tax, where the income or aggregate of such incomes paid or likely to be paid and subject to deduction exceeds ` 1 crore but does not exceed ` 10 crore; and (ii) 5% would be levied on such income-tax, where the income or aggregate of such incomes paid or likely to be paid and subject to deduction exceeds ` 10 crore. Surcharge would not be levied on deductions in all other cases. Also, education cess and secondary and higher education cess would not be added to tax deducted or collected at source in the case of a domestic company or a resident non-corporate assessee. However, education and secondary and higher education on income-tax plus surcharge, wherever applicable, would be added to tax deducted at source in cases of noncorporate non-residents and foreign companies.

12 Rates for deduction of tax at source from "salaries", computation of "advance tax" and charging of income-tax in certain cases during the financial year Part III of the First Schedule to the Act specifies the rate at which income-tax is to be deducted at source from "salaries" and also the rate at which "advance tax" is to be computed and income-tax is to be calculated or charged in certain cases for the financial year i.e., A.Y It may be noted that education and secondary and higher education would continue to apply on tax deducted at source in respect of salary payments. The general basic exemption limit for individuals (men and women)/hufs/aops/bois and artificial juridical persons has been increased from ` 2,00,000 to ` 2,50,000. The basic exemption limit of ` 2,50,000 for senior citizens, being resident individuals of the age of 60 years or more but less than 80 years has also been increased to ` 3,00,000. Resident individuals of the age of 80 years or more at any time during the previous year would continue to be eligible for the higher basic exemption limit of ` 5,00,000. The tax slabs are shown hereunder - (i) (a) Individual/ HUF/ AOP / BOI and every artificial juridical person Level of total income Where the total income does not exceed ` 2,50,000 Where the total income exceeds ` 2,50,000 but does not exceed ` 5,00,000 Where the total income exceeds ` 5,00,000 but does not exceed ` 10,00,000 Where the total income exceeds ` 10,00,000 Nil Rate of income-tax 10% of the amount by which the total income exceeds ` 2,50,000 ` 25,000 plus 20% of the amount by which the total income exceeds ` 5,00,000 ` 1,25,000 plus 30% of the amount by which the total income exceeds ` 10,00,000 (b) For resident individuals of the age of 60 years or more but less than 80 years at any time during the previous year Level of total income Where the total income does not exceed ` 3,00,000 Where the total income exceeds ` 3,00,000 but does not exceed ` 5,00,000 Where the total income exceeds ` 5,00,000 but does not exceed ` 10,00,000 Nil Rate of income-tax 10% of the amount by which the total income exceeds ` 3,00,000 ` 20,000 plus 20% of the amount by which the total income exceeds ` 5,00,000

13 Where the total income exceeds ` 10,00,000 ` 1,20,000 plus 30% of the amount by which the total income exceeds ` 10,00,000 (c) For resident individuals of the age of 80 years or more at any time during the previous year Level of total income Where the total income does not exceed ` 5,00,000 Where the total income exceeds ` 5,00,000 but does not exceed ` 10,00,000 Where the total income exceeds ` 10,00,000 Nil Rate of income-tax 20% of the amount by which the total income exceeds ` 5,00,000 ` 1,00,000 plus 30% of the amount by which the total income exceeds ` 10,00,000 (ii) Co-operative society There is no change in the rate structure as compared to A.Y Level of total income (1) Where the total income does not exceed ` 10,000 (2) Where the total income exceeds ` 10,000 but does not exceed ` 20,000 (3) Where the total income exceeds ` 20,000 Rate of income-tax 10% of the total income ` 1,000 plus 20% of the amount by which the total income exceeds ` 10,000 ` 3,000 plus 30% of the amount by which the total income exceeds ` 20,000 (iii) Firm/Limited Liability Partnership (LLP) The rate of tax for a firm for A.Y is the same as that for A.Y i.e., 30% on the whole of the total income of the firm. This rate would apply to an LLP also. (iv) Local authority The rate of tax for a local authority for A.Y is the same as that for A.Y i.e. 30% on the whole of the total income of the local authority. (v) Company The rates of tax for A.Y are the same as that for A.Y (1) In the case of a domestic company 30% of the total income (2) In the case of a company 40% of the total income

14 other than a domestic company However, specified royalties and fees for rendering technical services (FTS) received from Government or an Indian concern in pursuance of an approved agreement made by the company with the Government or Indian concern between and (in case of royalties) and between and (in case of FTS) would be chargeable to Surcharge The rates of surcharge applicable for A.Y are as follows - (i) Individual/HUF/AOP/BOI/Artificial juridical person/co-operative societies/local Authorities/Firms/LLPs Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 10% of income-tax computed in accordance with the provisions of para (i)/(ii)/(iii)/(iv) above or section 111A or section 112. Marginal relief is available in case of such persons having a total income exceeding ` 1 crore i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore. (ii) Domestic company (a) In case of a domestic company, whose total income is > ` 1 crore but ` 10 crore Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable at the rate of 5% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore. Example Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is ` 1,01,00,000 and the total income does not include any income in the nature of capital gains. Answer The tax payable on total income of ` 1,01,00,000 of X Ltd. computed@ 31.5% (including surcharge@5%) is ` 31,81,500. However, the tax cannot exceed ` 31,00,000 (i.e., the tax of ` 30,00,000 payable on total income of ` 1 crore plus ` 1,00,000, being the amount of total income exceeding ` 1 crore). Therefore, the tax payable on ` 1,01,00,000 would be ` 31,00,000. The marginal relief is ` 81,500 (i.e., ` 31,81,500 - ` 31,00,000).

15 (b) In case of a domestic company, whose total income is > `10 crore Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 10% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 10 crore should not be more than the amount of income exceeding ` 10 crore. Example Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is ` 10,01,00,000 and the total income does not include any income in the nature of capital gains. Answer The tax payable on total income of ` 10,01,00,000 of X Ltd. computed@ 33% (including surcharge@10%) is ` 3,30,33,000. However, the tax cannot exceed ` 3,16,00,000 [i.e., the tax of ` 3,15,00,000 (31.5% of ` 10 crore) payable on total income of ` 10 crore plus ` 1,00,000, being the amount of total income exceeding ` 10 crore]. Therefore, the tax payable on ` 10,01,00,000 would be ` 3,16,00,000. The marginal relief is ` 14,33,000 (i.e., ` 3,30,33,000 - ` 3,16,00,000). (iii) Foreign company (a) In case of a foreign company, whose total income is > ` 1 crore but `10 crore Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable at the rate of 2% of income-tax computed in accordance with the provisions of paragraph (v)(2) above or section 111A or section 112. Marginal relief is available in case of such companies i.e., the additional amount of incometax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore. (b) In case of a foreign company, whose total income is > `10 crore Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 5% of income-tax computed in accordance with the provisions of para (v)(2) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over `10 crore should not be more than the amount of income exceeding ` 10 crore. Note Marginal relief would also be available to those companies which are subject to minimum alternate tax under section 115JB, in cases where the book profit (i.e. deemed total income) exceeds ` 1 crore and ` 10 crore, respectively.

16 Education cess / Secondary and higher education cess on income-tax The amount of income-tax as increased by the union surcharge, if applicable, should further be increased by an Education cess on income-tax, calculated at the rate of 2% of such income-tax plus surcharge, wherever applicable. Further, Secondary and higher education cess on income-tax of income-tax and surcharge, wherever applicable, is leviable to fulfill the commitment of the Government to provide and finance secondary and higher education. Education cess, including SHEC, is leviable in the case of all assessees i.e., individuals, HUFs, AOP/BOIs, artificial juridical persons, co-operative societies, firms, LLPs, local authorities and companies. No marginal relief would be available in respect of such cess. Applicability of surcharge and cess on distribution tax Surcharge@10% would be leviable on distribution tax levied under sections 115-O, 115-QA, 115R and 115TA. Further, education cess@2% and secondary and higher education cess@1% would be leviable on the distribution tax inclusive of surcharge. Section Particulars Rate of tax Effective rate of tax 115-O Tax on distributed income of domestic companies by way 15% % of dividend 115QA Tax on distributed income of domestic company for 20% 22.66% buyback of shares 115R Tax on distributed income of mutual funds - Distribution by debt funds to individuals and HUFs 25% % - Distribution by debt funds to other persons 30% 33.99% - Distribution by infrastructure debt funds to noncorporate non-residents and foreign companies 5% 5.665% 115TA Tax on income distributed by securitization trusts - Distribution to persons exempt from tax Nil Nil - Distribution to individuals and HUFs 25% % - Distribution to other persons 30% 33.99% Note The dividend and income referred to in section 115-O and 115R, respectively, have to be first grossed up by applying the rates of tax mentioned in column (3) above. Thereafter, the effective rates of tax under section 115-O and 115R mentioned in column (4) above have to be applied on gross dividend/income to compute the additional income-tax payable by domestic companies and mutual funds, respectively, under section 115-O and 115R. For detailed understanding, please refer to point (e) of Chapter 13 Assessment of Various Entities of this Supplementary Study Paper, wherein this aspect has been discussed with the aid of an example.

17 3 INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME AMENDMENTS BY THE FINANCE (No.2) ACT, 2014 CHARITABLE TRUSTS AND INSTITUTIONS S. No. Particulars (a) Registered trusts and institutions which are eligible for exemption under sections 11 to 13 not allowed to claim exemption under any of the clauses of section 10, other than exemption available under clauses (1) and (23C) of section 10 Sections : 11(7) & 10(23C) Effective from : A.Y Issue Need for amendment Amendment In the case of charitable trusts and institutions, the rationale of providing exemption is to ensure that income derived from the property held under trust is applied and utilised for the object or purpose for which the institution or trust has been established. However, many registered trusts or institutions claiming benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. Consequently, when the income becomes taxable, the trusts and institutions resort to claiming exemption under general Once an institution or trust voluntarily opts for the special dispensation under sections 11, 12 and 13, it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions. Allowing such flexibility has adverse effects on the objective for which these sections were enacted. Section 11 has been amended to provide that where a trust or an institution has been granted registration for purposes of availing exemption thereunder, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than exemption of agricultural income under section 10(1) and exemption available under section 10(23C)].

18 provisions of section 10 and thus, avoid tax on such income. As a result, the very purpose of requirement of application of income etc. in respect of income derived from property under trust is defeated. This issue also arises in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. Section 10(23C) also has similar conditions of accumulation and application of income, investment of funds in prescribed modes etc. Likewise, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 [except exemption under section 10(1) in respect of agricultural income]. (b) Disallowance of depreciation on commercial lines in respect of a capital asset, cost of acquisition of which has been claimed as application of income Sections: 11 & 10(23C) Effective from: A.Y Issue Both section 11 as well as section 10(23C) provide exemption in respect of income applied to acquire a capital asset for promoting the objects of the trust. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed due to which only the net amount after deduction of depreciation is required to be applied for charitable purposes. In effect, the amount of depreciation is not required to be applied for charitable purposes. Resultantly, trusts and institutions resort to claiming dual benefit of the same expenditure (namely, expenditure on acquisition of capital asset) under the existing law. Need for amendment The allowance of dual benefit is not in accord with the true intent of law. Amendment Sections 11 and 10(23C) have been amended to provide that income for the purposes of application shall be determined without allowing any deduction for depreciation or otherwise in respect of any asset, the cost of acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.

19 (c) Meaning of Substantially financed by the Government for the purpose of exemption under sub-clauses (iiiab) and (iiiac) of section 10(23C) Section: 10(23C) Effective from: A.Y Issue Income of certain educational institutions, universities and hospitals which exist solely for educational purposes or solely for philanthropic purposes, and not for purposes of profit and which are wholly or substantially financed by the Government are exempt under section 10(23C). Need for amendment There is no definition of the phrase substantially financed by the Government under the Income-tax Act, 1961, which has led to litigation resulting in varying decisions of judicial authorities, based upon the other provisions of the Income-tax Act, 1961 and other Acts on which they have placed reliance. Amendment An Explanation has, therefore, been inserted after section 10(23C)(iiiac) to clarify that if the government grant to a university or other educational institution, hospital or other institution during the relevant previous year exceeds a percentage (to be prescribed) of the total receipts (including any voluntary contributions), of such university or other educational institution, hospital or other institution, as the case may be, then, such university or other educational institution, hospital or other institution shall be considered as being substantially financed by the Government for that previous year. (d) Power of Principal Commissioner/Commissioner to cancel registration of trust or institution expanded Section: 12AA Effective from: Issue Under section 12AA, the registration once granted to a trust or institution shall remain in force until it is cancelled by the Commissioner. Section 12AA(3) provides the Need for amendment On account of the restrictive interpretation of the powers of the Commissioner under section 12AA, registration Amendment In order to rationalise the provisions relating to cancellation of registration of a trust, sub-section (4) has been inserted in section 12AA. It provides that where a trust or an institution has been granted registration, and

20 following two circumstances in which the Commissioner can cancel the registration of the trust : (a) (b) the activities of the trust or institution are not genuine; or the activities are not being carried out in accordance with the objects of the trust or institution. The Commissioner is empowered to cancel the registration only if either or both the above conditions are met, and not otherwise. The powers of Commissioner to cancel registration are, therefore, highly curtailed. of such trusts or institutions continues to be in force and these institutions continue to enjoy the beneficial regime of exemption, even if they have not properly applied their income for charitable purposes or diverted such income for benefit of certain interested persons or invested their funds in prohibited modes. subsequently it is noticed that its activities are being carried out in such a manner that, (i) its income does not enure for the benefit of general public; (ii) it is for benefit of any particular religious community or caste; (iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or (iv) its funds are invested in prohibited modes, then, the Principal Commissioner or the Commissioner may cancel the registration of such trust or institution. However, if the trust or institution proves that there was a reasonable cause for the activities to be carried out in the above manner, the registration shall not be cancelled. (e) Taxability of anonymous donations exempt from applicability of maximum marginal rate of tax Section : 115BBC Effective from: A.Y Issue Section 115BBC provides for levy of tax at 30% in case of certain assessees, being university, hospital, etc. on the amount of aggregate anonymous donations exceeding 5% of the total donations received by the assessee or ` 1 lakh, whichever is higher. Need for amendment The correct method of computation is to reduce the income by the amount of anonymous donations which has actually been taxed at the rate of 30%. Amendment Section 115BBC has been amended to provide that the income-tax payable shall be the aggregate of (i) the amount of income-tax on the aggregate of anonymous donations received in excess of 5% of the total donations received by the assessee or

21 On account of the mechanism of aggregation of tax provided in section 115BBC, while is levied on the amount of anonymous donations exceeding the threshold, the remaining tax is chargeable on total income after reducing the entire amount of anonymous donations. one lakh rupees, whichever is higher; and (ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of the anonymous donations received in excess of 5% of the total donations received by the assessee or ` 1 lakh, as the case may be. Example Income from property held under trust is ` 6 lakh. The voluntary contributions received by a trust is ` 20 lakh, which includes anonymous donations of ` 4 lakh and corpus donations of ` 5 lakh. The trust has applied ` 10 lakh to purchase a building on for meeting its objective. Compute the tax liability of the trust for A.Y Answer Particulars ` ` Income from property held under trust 1 6,00,000 Voluntary contributions 20,00,000 Less: Corpus donations (not taxable) 5,00,000 15,00,000 Less: Anonymous donations (taxable@30% under section 115BBC) [` 4,00,000 ` 1,00,000] 3,00,000 12,00,000 18,00,000 Less: 15% of income eligible for retention/ accumulation without conditions 2 2,70,000 15,30,000 1 Depreciation on building is not allowable since cost of acquisition of building has been claimed as application of income. It is assumed that depreciation on building has not been charged while computing income from property held under trust. 2 A view is taken that 15% of ` 1 lakh, representing the amount of anonymous donations exempt from applicability of 30% tax, is also eligible for retention/accumulation without conditions in line with other voluntary contributions. A contrary view may also be possible due to the language used in section 13(7), that such anonymous donations chargable to tax at normal rates are not eligible for retention/accumulation. If this view is taken, ` 2,55,000, being 15% of ` 17,00,000 has to be set apart (instead of ` 2,70,000, being 15% of ` 18,00,000).

22 Less: Purchase of building for the purpose of the trust 10,00,000 Total Income (excluding anonymous donations 5,30,000 The tax payable by the trust would be the aggregate of (i) ` 90,000, being income-tax calculated@30% on ` 3 lakh (i.e., ` 4 lakh ` 1 lakh); and (ii) ` 31,000, being income-tax calculated at normal rates on ` 5.30 lakh (i.e., ` 5,30,000). The total tax payable would be ` 1,24,630 (` 1,21,000 plus cess@3%) (f) Registration granted to trust or institution to also be applicable to earlier years in specific cases Section: 12A Effective Date: Issue Under section 12A, a trust or an institution can claim exemption under sections 11 and 12 only after registration under section 12AA has been granted. Also, in case of trusts or institutions which apply for registration after 1st June, 2007, the registration shall be effective only prospectively. Non-application of registration for the period prior to the year of registration causes genuine hardship to charitable organisations. Need for amendment On account of nonregistration, tax liability gets attracted in those years even though they may otherwise be eligible for exemption due to compliance with other substantive conditions. The present provisions of the Act also do not permit condonation of delay in seeking registration. Amendment In order to remove the genuine hardship and provide relief to the trusts, section 12A has been amended. Circumstance when exemption would be granted for an earlier assessment year: In case where a trust or institution has been granted registration under section 12AA, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration. Condition for grant of such exemption: The objects and activities of such trust or institution in the relevant earlier assessment year should be the same as those on the basis of which such registration has been granted.

23 Reassessment proceedings not to be initated for earlier years due to reason of non-registration: No action for reopening of an assessment under section 147 shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration under section 12AA for the said assessment year. Non-availability of above benefits to a trust or institution in certain cases: The above benefits would, however, not be available in case of any trust or institution which at any time had applied for registration and the same was denied or a registration granted to it was cancelled at any time under section 12AA. SIGNIFICANT NOTIFICATIONS/CIRCULARS 1. Notification of foreign company for claiming exemption under section 10(48) [Notification No. 64/2013, dated ] Income received by a foreign company in India in Indian currency from sale of crude oil, any other goods or rendering of services, as may be notified by the Central Government in this behalf, to any person in India is exempt under section 10(48). For this purpose, the foreign company, as well as the arrangement or agreement, should be notified by the Central Government having regard to the national interest. The foreign company should not be engaged in any other activity in India, except receipt of income under such arrangement or agreement. Accordingly, vide this notification, the Central Government, having regard to the national interest, has notified for the purposes of the said clause, the National Iranian Oil Company, as the foreign company and the Memorandum of Understanding entered between the Government of India in the Ministry of Petroleum and Natural Gas and the Central Bank of Iran on the 20th January, 2013, as the agreement subject to the condition that the said foreign company shall not engage in any activity in India, other than the receipt of income under the agreement aforesaid. The Notification is deemed to be effective from 20 th January, 2013.

24 2. Taxability of Awards received by a Sportsman [Circular No. 2/2014 dated ] The CBDT had issued Circular No.447 on 22nd January, 1986 clarifying that awards received by a sportsman, who is not a professional, will not be liable to tax in his hands as the award will be in the nature of a gift and/or personal testimonial. This Circular was applicable when the gift was not taxable in the hands of the recipient. Thereafter, in the year 2005, there was a fundamental change in the manner of treatment of gift through insertion of sub-clauses (xiii), (xiv) and (xv) of section 2(24). Corresponding amendments were also made in section 56(2) by insertion of clauses (v), (vi) and (vii), thereby making an amount of money or immovable property received without consideration taxable subject to provisions of these clauses. Consequently, the CBDT has, through this Circular, clarified that Circular No.447 had become inapplicable w.e.f , since the statutory provisions have overridden the same. It may however be noted that, in terms of provisions of section 10(17A), Central Government approves awards instituted by Central Government, State Government or other bodies as also the purposes for rewards instituted by Central Government or State Government from time to time. Tax exemption can be sought by eligible persons in respect of awards or rewards covered by such approvals. 3. Clarification regarding disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year [Circular No. 5/2014, dated ] The Finance Act, 2001 had introduced section 14A, with retrospective effect from 1 st April, 1962, to provide that no deduction shall be allowed in respect of expenditure incurred relating to income which does not form part of total income. A controversy has arisen as to whether disallowance can be made by invoking section 14A even in those cases where no income has been earned by an assessee, which has been claimed as exempt during the financial year. The CBDT has, through this Circular, clarified that the legislative intent is to allow only that expenditure which is relatable to earning of income. Therefore, it follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether such income has been earned during the financial year or not. The above position is clarified by the usage of the term includible in the heading to section 14A [Expenditure incurred in relation to income not includible in total income] and Rule 8D [Method for determining amount of expenditure in relation to income not includible in total income], which indicates that it is not necessary that exempt income should necessarily be included in a particular year s income, for triggering disallowance. Also, the terminology used in section 14A is income under the Act and not income of the year, which again indicates that it is not material that the assessee should have earned such income during the financial year under consideration.

25 In effect, section 14A read along with Rule 8D provides for disallowance of expenditure even where the taxpayer has not earned any exempt income in a particular year. 4. Taxability of partner s share, where the income of the firm is exempt under Chapter III / deductible under Chapter VI-A [Circular No. 8/2014 dated ] Section 10(2A) provides that a partner s share in the total income of a firm which is separately assessed as such shall not be included in computing the total income of the partner. In effect, a partner s share of profits in such firm is exempt from tax in his hands. Sub-section (2A) was inserted in section 10 by the Finance Act, 1992 with effect from consequent to change in the scheme of taxation of partnership firms. Since A.Y , a firm is assessed as such and is liable to pay tax on its total income. A partner is, therefore, not liable to tax once again on his share in the said total income. An issue has arisen as to the amount which would be exempt in the hands of the partners of a partnership firm, in cases where the firm has claimed exemption/deduction under Chapter III or Chapter VI-A. The CBDT has clarified that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Therefore, the entire profit credited to the partners accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes Nil in the hands of the firm on account of any exemption or deduction available under the provisions of the Act.

26 5 INCOME FROM HOUSE PROPERTY AMENDMENT BY THE FINANCE (No.2) ACT, 2014 Increase in deduction for interest on loan borrowed for acquisition or construction of selfoccupied house property [Section 24(b)] Effective from: A.Y (i) Section 24 provides for two deductions from Net Annual Value of house property, namely, statutory deduction at 30% of NAV under clause (a) thereof and interest payable on capital borrowed for acquisition, construction, repair, renewal or reconstruction of house property under clause (b) thereof. (ii) In case of self-occupied house property, the annual value is Nil and the only deduction available is in respect of interest on borrowed capital. Consequently, the interest deduction would represent the loss from such house property during the relevant previous year. (iii) The second proviso to clause (b) of section 24 provides that such interest deduction shall be restricted to ` 1,50,000 in case of capital borrowed for acquisition and construction of selfoccupied property. (iv) Taking into consideration the appreciation in the value of house property and the increased cost of finance, the second proviso to clause (b) of section 24 has been amended to increase the maximum amount of deduction on account of interest on capital borrowed for acquisition and construction of self-occupied property to ` 2,00,000. Example Mr. Rajesh purchased a residential house property for self-occupation at a cost of ` 30 lakh on , in respect of which he took a housing loan of ` 24 lakh from Punjab National Bank@11% p.a. on the same date. Compute the eligible deduction in respect of interest on housing loan for A.Y and A.Y under the provisions of the Income-tax Act, 1961, assuming that the entire loan was outstanding as on and he does not own any other house property. Answer Particulars ` For A.Y (i) Deduction under section 24(b) ` 2,20,000 [` 24,00,000 11% 10/12]

27 Restricted to 1,50,000 (ii) Deduction under section 80EE (` 2,20,000 `1,50,000) 70,000 For A.Y (i) Deduction under section 24(b) ` 2,64,000 [` 24,00,000 11%] Restricted to 2,00,000 (ii) Deduction under section 80EE (` 1,00,000 ` 70,000, allowed as deduction in P.Y ) 30,000 Note - In this case, Mr. Rajesh is entitled to deduction under section 80EE, in addition to deduction under section 24(b) since (1) the loan is sanctioned by Bank of India, being a financial institution, during the period between and ; (2) the loan amount sanctioned is less than ` 25 lakh; (3) the value of the house property is less than ` 40 lakh; (4) he does not own any other residential house property.