Direct Tax Laws PAPER FINAL COURSE STUDY MATERIAL. Volume II. Assessment Year [Relevant for May 2014 and November 2014 examinations]

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1 FINAL COURSE STUDY MATERIAL PAPER 7 Direct Tax Laws Assessment Year [Relevant for May 2014 and November 2014 examinations] Volume II BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

2 This study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the standard text book(s). In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein they may write to the Director of Studies. All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material. All rights reserved. No part of this book 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. Revised Edition : October, 2013 Website : bosnoida@icai.in Department/ : Board of Studies Committee ISBN No. : Price : ` 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. Typeset and designed at Board of Studies. Printed by : Sahitya Bhawan Publications, Hospital Road, Agra October/2013/25,000 Copies (Revised) ii

3 SYLLABUS Level of Knowledge: Advanced knowledge Objectives: (a) (b) Contents: PAPER 7 : DIRECT TAX LAWS (One paper Three hours 100 Marks) To gain advanced knowledge of the provisions of direct tax laws, To acquire the ability to apply the knowledge of the provisions of direct tax laws to various situations in actual practice. I. The Income-tax Act, 1961 and Rules thereunder (90 marks) II. The Wealth-tax Act, 1957 and Rules thereunder (10 marks) While covering the direct tax laws, students should familiarise themselves with considerations relevant to tax management. These may include tax considerations with regard to specific management decisions, foreign collaboration agreements, international taxation, amalgamations, tax incentives, personnel compensation plans, inter-relationship of taxation and accounting, with special reference to relevant accounting standards and other precautions to be observed to maximise tax relief. Further, they should have a basic understanding about the ethical considerations in tax management and compliance with taxation laws. Note If new legislations are enacted in place of the existing legislations relating to income tax and wealth tax, the syllabus will accordingly include such new legislations in the place of the existing legislations with effect from the date to be notified by the Institute. iii

4 A WORD ABOUT STUDY MATERIAL Direct tax laws is one of the core competence areas of the Chartered Accountants. A thorough knowledge of direct tax laws is, therefore, necessary for the students of the CA Final course. In the Final course, Direct Tax Laws constitutes Paper 7. Students are expected to acquire advanced knowledge of the provisions of direct tax laws after undergoing this course and apply such knowledge to various situations in actual practice. The first part of this Study Material deals with income-tax. There are 28 chapters under incometax. The second part of this Study Material is on wealth-tax. There are 3 chapters under wealthtax. The subject matter in this study material is based on the law as amended by the Finance Act, 2013, and applicable for A.Y In this study material, efforts have been made to present the complex direct tax laws in a lucid manner. The Study Material on Direct Tax Laws is made in three volumes for ease of handling by the students. Volume I contains Chapters 1 14 of Income-tax, and Volume II contains Chapters of Income-tax and Chapters 1 3 of Wealth-tax. Volume III is the Practice Manual. The taxation laws in our country undergo many amendments. In order to help the students to update their knowledge relating to the statutory and judicial developments in the field of direct and indirect tax laws, the Board of Studies brings out, every year, two publications, namely Supplementary Study Paper and Select Cases in Direct and Indirect Tax Laws. This is an essential read for all our students. A word of advice to the students please make it a habit of referring to the bare acts as often as possible. This will not only facilitate the process of understanding the law and the sequence of sections in these Acts, but will also equip them with the professional expertise that is expected. The main features of this edition of the Study Material are - The amendments made by the Finance Act, 2013 and incorporated in this study material have been tabulated chapter-wise with the corresponding section reference and given as Significant Amendments in this Edition in the next two pages. In the Study Material, the latest amendments i.e., the amendments made by the Finance Act, 2013 and notifications and circulars issued between and have been given in bold and italics. Tabular presentations and diagrams have been inserted at the relevant places for explaining the amendments. The new illustrations as well as the illustrations which have undergone changes due to these amendments have been given in a shaded background. Feedback form is given at the end of the Study Material. The students are encouraged to give their feedback/suggestions. These features would aid the students in the learning process. Finally, we would welcome suggestions to make this book more helpful and student-friendly. In case you need any further clarification/guidance, you may send your queries at priya@icai.in Happy Reading and Best Wishes! iv

5 SIGNIFICANT AMENDMENTS INCORPORATED IN THIS EDITION Chapter No. Income-tax 14. Double taxation relief Particulars Section Requirement of Tax Residency Certificate (TRC) to contain prescribed particulars dispensed with 90 & 90A 15. Transfer Pricing Advance Pricing Scheme prescribed 20. Income tax authorities Application of seized assets for recovery of advance tax payable not allowed 21. Assessment procedure Return of income filed without payment of self-assessment tax (along with interest) under section 140A considered defective Scope of reasons for directing special audit of accounts amplified Exclusion of a certain time period in computing the period of limitation, in a case where the direction under section 142(2A) is challenged before a court Exclusion of a certain time period in computing the period of limitation, where more than one reference for exchange of information is made in a particular case Extended time limits for completion of assessment or reassessment in cases where reference is made to TPO to apply irrespective of the date of reference to TPO under section 92CA(1) or the date of passing of order under section 92CA(3) Notification of class of cases, where compulsory issue of notice for assessing or reassessing the total income of immediately preceding six assessment years is not required 24. Appeals and revision Sitting or Retired Judge of High Court with at least 7 years of such service eligible for appointment as President of Appellate Tribunal 92CC 132B 139(9) 142(2A) 153 & 153B 153 & 153B 153 & 153B 153A & 153C 252(3) v

6 28. Provisions for deduction and collection of tax Deduction of tax at source on payment of gas transportation charges by purchaser of natural gas to the seller of gas Tax to be deducted from payment on transfer of certain immovable property other than agricultural land Concessional rate of TDS in respect of interest from Government securities or rupee-denominated bonds of an Indian company payable to a Foreign Institutional Investor (FII) or a Qualified Foreign Investor (QFI) Tax not to be deducted on specified payments to notified entities Authorised Person under Foreign Exchange Management Act, 1999 to be the person responsible for paying for the purpose of tax deduction at source under Chapter XVII and section 285 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 infrastructure bonds to non-corporate non-residents and foreign companies TCS provisions to also be attracted on cash sale of any coin or any other article weighing 10 gms or less, if the consideration exceeds Rs. 2 lakh 25. Penalties Higher penalty for failure to furnish Annual Information Return in response to notice under section 285BA(5) 194C 194-IA 194LD 115A, 115AD, 195, 196D 197A(1F) AA 206C(1D) 271FA Wealth tax 1. Levy of Wealth-tax Urban land to exclude land outside the specified urban limits, as redefined and land classified as agricultural land in the records of the Government and used for agricultural purposes, even if it falls within specified urban limits 2(ea) 3. Assessment Procedure Introduction of provisions for enabling electronic filing of annexureless return of net wealth 14A & 14B CBDT empowered to frame rules for implementing the provisions of 46(2) section 14A & 14B Note: In the above table the amendments/additions have been indicated against the chapters where they have been primarily dealt with at length. Some of the amendments may have also been referred to or discussed in other related chapters. vi

7 Volume 2 INCOME TAX CONTENTS CHAPTERS 1 14 of Income Tax are in Volume 1. CHAPTER 15 : DOUBLE TAXATION RELIEF 15.1 Concept of Double Taxation Relief Types of relief Double taxation relief provisions under the Act Taxation of business process outsourcing units in India Concept of Permanent Establishment Taxing Foreign Income Meaning of important terms CHAPTER 16 : TRANSFER PRICING AND OTHER PROVISIONS TO CHECK AVOIDANCE OF TAX 16.1 Meaning of the term Arm s Length Principle Significance of Arm s Length Principle Practical difficulties in application of ALP The Indian Scenario Transfer of income to non-residents Transactions in securities Specific anti-avoidance measures in respect of transactions with person located in Notified Jurisdictional Area CHAPTER 17 : FOREIGN COLLABORATION 17.1 Introduction Tax liability based on residential status vii

8 17.3 Choice of place where income is to be received Choice of method of accounting Choice of form of business organisation Taxability of different kinds of income Tax treatment of payments made for expenses, etc Other factors Assessment of foreign collaborators Deduction of tax at source from non-resident s income CHAPTER 18 : BUSINESS RESTRUCTURING 18.1 Introduction Forms of business restructuring Amalgamation Demerger Conversion of sole proprietary business into company Conversion of partnership firm into company Conversion of a private company or unlisted public company into a LLP Slump sale Buy Back of Shares Capital Reduction Redemption of preference shares Conversion of debentures into shares Conversion of an Indian branch of foreign company into an Indian Subsidiary company CHAPTER 19 : TAXATION OF E-COMMERCE TRANSACTIONS 19.1 What is e-commerce? Issues and problems in taxing e-commerce transactions How business is transacted through e-commerce Permanent establishment in e-commerce situations viii

9 19.5 Determination of the nature of income Conclusion CHAPTER 20 : INCOME TAX AUTHORITIES 20.1 Appointment and control Jurisdiction of Income-tax Authorities Powers of Income-tax Authorities CHAPTER 21 : ASSESSMENT PROCEDURE 21.1 Return of income Compulsory filing of return of income Interest for default in furnishing return of income Option to furnish return of income to employer Income-tax return through computer readable media Specified class or classes of persons to be exempt from filing Return of Income Return of loss Belated return Return of income of charitable trusts and institutions Return of income of political parties Mandatory filing of returns by scientific research associations, news agency, trade unions, etc Mandatory filing of returns by universities, colleges, etc Revised return Particulars required to be furnished with the return Particulars to be furnished with return of income in the case of an assessee engaged in business or profession Defective return Permanent Account Number (PAN) Scheme for submission of returns through tax return preparers ix

10 21.19 Power of CBDT to dispense with furnishing documents etc. with the return and filing of return in electronic form Authorised signatories to the return of income Self assessment Inquiry before assessment Audit under section Power of Assessing Officer to make a reference to the valuation officer Assessment Power of Joint Commissioner to issue directions in certain cases Provision for constitution of Alternate Dispute Resolution Mechanism Valuation of inventory Income escaping assessment Sanction for issue of notice Other Provisions Time limit for completion of assessment /reassessment Limitation period for completion of assessment / reassessment Assessment procedure in case of search or requisition Rectification of mistakes Other amendments Notice of demand Intimation of loss CHAPTER 22 : SETTLEMENT OF TAX CASES 22.1 Settlement Commission Definition of Case Application for settlement of cases Procedure on receipt of application Power of Settlement Commission to order provisional attachment to protect revenue x

11 22.6 Re-opening of completed proceedings Jurisdiction and powers of the Settlement Commission Power to grant immunity from prosecution and penalty Abatement of proceeding before the Settlement Commission Order of Settlement Commission to be conclusive Recovery of settled amount Bar on subsequent application for settlement Proceedings to be judicial proceedings Order to be conclusive CHAPTER 23 : ADVANCE RULINGS 23.1 Introduction Definitions Authority for Advance Rulings Vacancies, etc., not to invalidate proceedings Application for advance ruling Procedure on receipt of application Applicability of advance ruling Advance ruling to be void in certain circumstances Powers of the Authority Procedure of Authority CHAPTER 24 : APPEALS AND REVISION 24.1 Appealable orders before Commissioner (Appeals) Appeals to the Appellate Tribunal Effect to the decision of the Supreme Court and of the NTT Appeal to High Court Appeal to the Supreme Court Provision for avoiding repetitive appeals xi

12 24.7 Revision by the Commissioner Doctrine of partial merger and doctrine of total merger CHAPTER 25 : PENALTIES 25.1 Introduction Penalties Penalty not leviable in certain cases Extension of scope of concealed income Penal provisions on undisclosed income found during the course of search Tabular Summary of penal provisions on undisclosed income found during the course of search Penalty in the case of firm Penalty for failure to furnish Annual Information Return Procedure for assessment of penalties Reduction or waiver of penalty and interest Power of Commissioner to grant immunity from penalty Time limits for imposition of penalty CHAPTER 26 : OFFENCES AND PROSECUTION 26.1 Summary of offences and prosecution Power of commissioner to grant immunity from prosecution Presumption with regard to assets, books of accounts Presumption as to culpable mental state Prosecution to be made at the instance of the Chief Commissioner or Commissioner Proof of entries in records or documents Disclosure of particulars by public servants Constitution of Special Courts and Offences triable by Special Courts Trial of offences as summons case Application of Code of Criminal Procedure, 1973 to proceedings before Special Court xii

13 CHAPTER 27 : MISCELLANEOUS PROVISIONS 27.1 Mode of taking or accepting loans and deposits Mode of repayment of certain deposits Special Bearer Bonds Transfers to defraud revenue void Provisional attachment to protect the interest of the revenue Service of notice Authentication of notice and other documents Non-Resident liaison office required to submit statement in prescribed form to the Assessing officer Submission of statements by producers of films Annual Information Return Publication of information Appearance by registered valuers Appearance by authorised representative Rounding off of income, tax etc Receipt Indemnity Power to tender immunity from prosecution Cognizance of offences and bar of suits in Civil Courts Certain laws not to apply Return of income, etc. not to become invalid Notice deemed to invalid in certain circumstances Presumption as to assets, books of account, etc Concessions for encouraging participation in the business of prospecting for, extraction, etc. of mineral oils Authority empowered to grant approval under the Act deemed to have power to withdraw the approval granted Act to have effect pending legislative provisions for charge of tax xiii

14 27.26 Rules Schedules to the Income-tax Act, CHAPTER 28 : DEDUCTION, COLLECTION AND RECOVERY OF TAX 28.1 Deduction and collection of tax at source and advance payment Direct Payment Deduction of tax at source Certification for deduction at lower rate No deduction in certain cases Miscellaneous provisions Tax collection at source Advance payment of tax Scheme of mandatory interest Collection and recovery of tax - other methods Refunds WEALTH TAX CHAPTER 1 : LEVY OF WEATH TAX 1.1 Levy of wealth tax Applicability Definitions Deductibility of tax liabilities Chargeability Deemed wealth Exemptions CHAPTER 2 : VALUATION UNDER WEALTH TAX ACT, Valuation of assets Valuation of assets other than cash xiv

15 2.3 Valuation of immovable property Global method of valuation of business Interest in firm or association of persons Life interest Jewellery Other assets CHAPTER 3 : ASSESSMENT PROCEDURE 3.1 Administration Assessment procedure Assessment in special cases Penalties Settlement of cases Appeals and revision Collection and refund Prosecution Search and seizure Miscellaneous provisions xv

VOLUNTARY DISCLOSURE SCHEME [CA P N SHAH]

VOLUNTARY DISCLOSURE SCHEME [CA P N SHAH] 1 BACK GROUND In his Budget Speech on 29 th February, 2016, the Finance Minister has listed 9 objectives for his tax proposals. One of the objectives relates to