PUNE BRANCH OF WIRC OF ICAI. DIRECT TAX PROVISIONS OF FINANCE (No. 2) BILL 2014 CA Ketan L. Vajani 16 th July, 2014

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2 PUNE BRANCH OF WIRC OF ICAI DIRECT TAX PROVISIONS OF FINANCE (No. 2) BILL 2014 CA Ketan L. Vajani 16 th July, 2014

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4 Rates of Taxes No change in Tax Rates Basic Limit for Individual Rs. 2,50,000/- Basic Limit for Senior Citizens Rs. 3,00,000/- No Change in limit for Very Senior Citizens Continues at Rs. 5,00,000/- Section 87A continues

5 Rates of Tax No changes 10% on Non-corporates having income exceeding Rs. 1 Crore continues Surcharge for domestic companies not changed 5% if the Income is more than 1 Crore but less than 10 Crores 10% if the income is more than 10 Crores Surcharge for foreign companies not changed 2% if the Income is more than 1 Crore but less than 10 Crores 5% if the income is more than 10 Crores Surcharge on DDT, MAT, AMT and Tax on Securitisation Trust and on Buy-back of 10% No change in Education Cess

6 Benevolent Amendments Interest on borrowed funds for self occupied property limit raised to Rs. 2 Lakhs Ceiling of 80C increased to Rs Lakhs PPF investment limit also raised Consequential amendment in section 80CCE 80CCD contribution to pension scheme made available to individuals employed by other than Central Government prior to Central Government employer needs to be employed on or after Maximum investment eligible for 80CCD Rs 1 Lakh. 80-IA completion dates extended upto

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8 Investment Allowance 32AC Existing Provision Sub-section (1) - Company engaged in manufacture or production of article or thing eligible to 15% of cost of new asset as deduction if the investment in the new asset is more than Rs. 100 Crore during to Deduction available for A.Y and

9 Investment Allowance 32AC Proposed Amendment Sub-section (1A) - If a company acquires and installs new asset costing Rs. 25 Crores or more during a year 15% of the actual cost of new asset will be allowed as deduction No deduction under (1A) if deduction permissible under sub sec. (1) for A.Y Double deduction ruled out. Deduction under this sub section available upto A.Y Sunset clause (1B)

10 Sr. No Particulars P.Y P.Y P.Y P.Y Remarks Investment Deduction Nil Investment Deduction Nil Investment Deduction Investment Deduction Nil Nil - - Investment Deduction Nil Investment Deduction Nil Deduction u/s. 32AC(1) Deduction u/s. 32AC(1A) Deduction u/s. 32AC(1) No deduction under either of sub-section Deduction u/s. 32AC(1A) Deduction under both the sub sections

11 Section 35AD Introduced by Finance Act 2009 w.e.f. A.Y Capital Expenditure in respect of specified businesses are allowable as deduction (except on land, goodwill and financial instrument) Specified Business will now also include Laying and operating a slurry pipeline for the transportation of iron ore : Setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines. Date of commencement for these two new businesses shall be on or after

12 Section- 35AD Asset for which deduction is allowed shall be used only for specified business for 8 years beginning with the year in which the asset is acquired or constructed sub section (7A) If asset is used for any other purpose during 8 years then Deduction allowed as reduced by Notional Depreciation u/s. 32 shall be treated as Business Profit for the year of default Exception where the asset is demolished, destroyed, discarded, or transferred and therefore taxed u/s. 28(vii) If the company becomes sick company during this period of 8 years. No amendment in section 28

13 Section 35AD and 10AA If a company has claimed a deduction u/s. 35AD it is not allowed to claim deduction under chapter VI-A part C Now proposed that the company will also not be eligible to claim deduction u/s. 10AA (SEZ units) Similarly sub section (10) is proposed in section 10AA to provide that if deduction is claimed under section 10AA then no deduction allowed u/s. 35AD

14 Corporate Social Responsibility Section 135 of Companies Act 2013 CSR applicable if (a) Net Worth more than 500 Crore (b) Turnover more than 1000 Crore (c) Net Profit more than 5 Crore 2% of Net Profit to be spent on CSR Permissible CSR expenses listed in Schedule VII of Companies Act

15 Section 37(1) Expln. 2 Expenditure incurred on activities relating to CSR shall not be deemed to be an expenditure incurred for the purpose of business or profession Reasons in Memorandum CSR is application of income Objective of CSR Deduction would mean subsidizing 1/3 rd of CSR by Government CSR expenses may be allowed u/s. 30 to 36

16 Section 40(a)(i) Disallowance of payments made to non residence without deduction of tax or non payment of tax after deduction within prescribed time. Time available for payment within FY or upto time as per TDS Rules Now time limit extended to due date as per 139(1) similar to 40(a)(ia) Disallowance and not 30% as per 40(a)(ia)

17 Section 40(a)(ia) Disallowance for non deduction of tax or non payment within prescribed time limit Entire expenses are disallowable Now disallowance restricted to 30% Applies to payments specified Not applicable to Salaries etc.- Now made applicable to any sum payable to a resident to which TDS provisions apply Proviso which permits deduction in subsequent year also modified to provide that deduction in subsequent year will be 30% Issue : Disallowance in A.Y. 100% - payment of tax in F.Y Deduction will be only 30%

18 Section 44AE Existing Provision Proposed Amendment Heavy Vehicle Other Heavy Vehicle goods than goods Rs. 5,000/- per month or part when the vehicle is owned or Higher amount Rs. 4,500/- per month or part when the vehicle is owned or Higher amount Rs. 7,500/- per month or part when the vehicle is owned or Higher amount

19 Explanation to Section 73 Business of Purchase and sale of shares of other company in the hands of a company is treated as speculative business Exceptions Gross total income is mainly consisting of incomes under other heads Company whose principal business is banking or granting of loans and advances Normal business loss though delivery based treated as speculative Paharpur Cooling Towers Ltd. Vs. ACIT (2011) 338 ITR 295 (Cal) R. P. G. Industries Ltd. Vs. CIT (2011) 338 ITR 313 (Cal) Exception now provided for company whose principal business is trading in shares

20 Alternate Minimum Tax AMT applicable where Regular tax payable is less than 18.5% of adjusted total income. Adjusted Total Income = Total Income + Deduction under chapter VIA part C + Deduction u/s. 10AA Investment Linked Deduction are now proposed to be subjected to AMT Adjusted Total Income shall also be increased by Deduction claimed u/s. 35AD as reduced by notional depreciation u/s. 32 on the same.

21 AMT Tax Credit Section 115JD provides for Tax Credit in respect of AMT paid for 10 years Tax Credit can be adjusted in a year where Normal tax exceeds AMT As per section 115JEE, the provisions of the entire chapter becomes inapplicable in a case where There is no deduction under chapter VIA C or 10AA Adjusted Total Income < 20 Lakhs No Credit can be claimed in subsequent years Now set right by introduction of sub section (3) credit will be allowed even in such a situation

22 Dividend Distribution Tax Calculation of Dividend Distribution Tax will be made after grossing up of Dividend Memorandum : presently tax is calculated with reference to Net amount (after reduction of DDT) It shall be calculated at gross amount Amendment made with effect from (Dividend declared, distributed or paid prior to this date will be under old rate) Similar amendment made in section 115R for Income distribution by Mutual Funds

23 Dividend Distribution Tax Particulars Dividend Distributed Tax to be applied on Tax Surcharge Current Position Amended Position Education Cess Total

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25 Short Term Capital Asset Section 2(42A) period of holding 36 months Short period 12 months available for shares, listed securities, unit of UTI or MF & Zero Coupon Bond Now shorter period not permissible for unlisted shares and units of debt oriented Mutual Fund Memorandum : Purpose was to allow shorter period was to encouraging investment on stock market where prices of the securities are market determined. Issue : What about the debt funds redeemed from to ? Not Retrospective but Retroactive Fixed Maturity Plans

26 Tax on LTCG Section 112 For LTCG on listed securities, unit or zero coupon bond, option available to assessee to pay 20% with indexation or 10% without indexation. This option will now be available for only listed securities (other than a unit) or zero coupon bond Option for Units taken away will suffer 20% subject to indexation

27 Section 45 (5) Interim Award Original compensation - taxable in the year of receipt of the compensation Enhanced compensation also taxable in the year of receipt Enhanced compensation reduced Income to be recomputed Interim Orders Money is not received unconditionally contingent in nature Not in nature of Income Chief CIT & Another Vs. Smt. Shantavva (2004) 267 ITR 67 (Kar) CIT Vs. T. Girija Ammal (2006) 282 ITR 614 (Mad) Anil Kumar Forma HUF & Others Vs. CIT (2007) 289 ITR 245 (Mad) Now provided that Interim compensation will be taxed in the year in which the final order of court, Tribunal or authority is passed

28 Section 2(14) Definition of Capital Asset amended Any security held by a Foreign Institutional Investor which has invested in such securities in accordance with SEBI regulation will be capital asset for the FII Mauritius entities benefited FIIs having PE benefited FIIs who do not have PE may or may not be benefited Desirable clarity about PMS investment also not addressed

29 Advance Retained - current position Section 51 Advance Received and retained shall be reduced from the cost of acquisition / WDV / FMV At the time of subsequent transfer reduced cost will be allowed to be deducted Advance will be taxed indirectly in the year of subsequent transfer Capital Receipt not in the nature of income No capital gain in absence of transfer

30 Advance Retained - Amendment Section 56(2) clause (ix) inserted Advance received will be treated as Income from other sources in the year of receipt if Money is forfeited and Negotiations do not result in transfer Consequential amendment in section 51- If income assessed u/s. 56(2)(ix) then cost will not be reduced at the time of future transfer Section 2(24) Income definition altered to cover section 56(2)(ix) Prepones Tax Liability to the year of receipt of advance Difficulty in case of subsequent refund of money due to litigation

31 Section 54 and 54F Exemption available for investment in a residential house - a whether means one? ITO Vs. Ms. Sushila M. Jhaveri (2007) 107 ITD 321 (Mumbai)(SB) Houses in different localities a vs. any CIT Vs. D. Ananda Basappa (2009) 309 ITR 329 (Kar) a to be read with residential and not with house Clause 13 of General Clauses Act singular includes plural CIT Vs. K. G. Rukminiamma (2011) 331 ITR 211 (Kar.) CIT Vs. Syed Ali Adil (2013) 352 ITR 418 (AP) CIT Vs. Gita Duggal (2013) 357 ITR 153 (Del.) Haridas Naik Bom HC (itatonline.org) (order dated ) Contra view - Pawan Arya Vs. CIT (2011) 49 DTR 123 (P & H)

32 Section 54 and 54F No condition that the new house shall be in India - Mrs. Prema P. Shah Vs. ITO (2006) 100 ITD 60 (Mum.) Contra view Leena J. Shah Vs. ACIT (2006) 6 SOT 721 (Ahd) Amendment in both sections - Exemption will be available for investment in One residential house in India Memorandum : object was to allow investment in one house in India Amendment w.e.f. A.Y

33 Sec 54 and 54F - Issues Assessee has purchased multiple houses prior to Two units used as a single house whether qualify Flat No. 701 and 702 / 3 rd floor and 5 th floor / A wing and C wing Five Houses sold and Five purchased each house against one sale Section 54 whether available Rajesh Keshav Pillai Vs. ITO (2011) 44 SOT 617 (Mum) Dy. CIT Vs. Ranjit Vithaldas (2012) 137 ITD 267 (Mumbai)

34 Section 54EC Investment shall be made within 6 months Asset Transferred on Capital Gain Rs Crore - Rs. 50 Lakhs invested on and Rs. 50 Lakhs invested on Whether exemption will be Rs. 1 Crore or Rs. 50 Lakhs Restriction is per financial year Aspi Ginwala & Others Vs. Asst. CIT & Others (2012) 52 SOT 16 (Ahd.) ITO Vs. Ms. Rania Faleiro (2013) 142 ITD 21 (Panaji) Discrimination against assessees earning capital gains in first half of the financial year Asst. CIT Vs. Raj Kumar Jain & Sons (HUF) (2012) 50 SOT 213 (Jaipur)

35 Section 54EC Amendment Amendment Maximum exemption available Rs. 50 Lakhs Even where more than one capital asset is transferred, exemption will be maximum Rs. 50 Lakhs for each A.Y. Earlier limit of Rs. 50 Lakhs on investment during the year Now limit on exemption for an assessment year Object to promote investment in Infrastructure whether achieved or defeated? 15/07/2014 Vajani & Vajani 35

36 CHARITABLE TRUSTS & INSTITUTIONS

37 Section 11 / 10(23C) Income derived from trust property should be applied for charitable purposes If not applied it can be accumulated as prescribed If accumulated income is not applied as per the conditions prescribed then the same is deemed to be taxable income of the trust or institution If income becomes taxable due to non application and the income is qualifying for exemption u/s. 10, trusts claim the exemption for the said income Similar situation for institutions registered u/s. 10(23C)

38 Section 11 / 10(23C) Amendment : Once a trust or institution is registered u/s. 11, such trust or institution can not claim exemption under section 10 except agricultural income or section 10(23C) Institutions registered u/s. 10(23C) will not qualify for exemption under any other clauses of section 10 except agricultural income

39 Depreciation no more application Depreciation on asset is application of income even if the capital investment in asset has been treated as application in the year of acquisition DIT (E) Vs. Framjee Cawasjee Institute (1993) 109 CTR (Bom) 463 CIT Vs. Market Committee, Pipli (2011) 330 ITR 16 (P & H) CIT Vs. Shri Gujarati Samaj (2011) 64 DTR 76 (MP) Memorandum : Double benefit is claimed Depreciation claimed remains to be applied for charitable purpose Amendment : Income to be applied for charitable purpose shall be income without considering depreciation claim Purpose of Depreciation is replacement of asset Non allowance of depreciation will lead to erosion of corpus of trust.

40 Registration Section 12A If a trust or institution has been granted registration under section 12AA, the exemption u/s. 11 and 12 shall be available to all the earlier years which are pending before the AO as on the date registration Condition : The objects and activities of such trust or institution in that earlier year shall be same as those at the time of registration No action to be taken u/s. 147 merely for the reason of not registered u/s. 12AA for earlier year. No benefits if registration applied but refused or cancelled.

41 Cancellation of Registration Power given to Commissioner to cancel registration u/s. 12AA if it is found that Activities are not as per section 11 or 12 Funds are invested in contravention of section 13 (1) No cancellation if there was a reasonable cause for the default in activities or investments

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43 Business Trusts Business Trusts will mean Infrastructure Investment Trust or Real Estate Investment Trust Trusts would raise capital by way of issue of units which will be listed on stock exchange Income bearing asset would be held by way of controlling interest in SPVs

44 Business Trust section 115UA Income distributed by BT to its unit holders (UH) will have same nature and same proportion in the hands of the unit holders as in the hands of the trust Total Income of a BT will be taxed at MMR subject to 111A and 112 If income received by UH is of the nature of interest from SPV, then such income will be charged to tax in the hands of UH BT will provide a statement to UH for the purpose of classification of income etc which is distributed

45 BT consequential amendments For computing the period of holding of a unit of a business trust, allotted pursuant to transfer of share or shares as, the period for which the share or shares were held by the assessee shall be included. section 2(42A) Income of a business trust by way of interest received or receivable from a special purpose vehicle will not be included in the total income of the business trust. 10 (23FC) Distributed income by UH from BT (other than interest from SPV) shall be exempt in the case of UH. 10 (23FD)

46 BT consequential amendments LTCG on transfer of unit of BT will be exempt 10(38) If however units were acquired by transfer of shares then the exemption will not be available If units are acquired by transfer of shares of SPV to BT, then this will not be considered as Transfer and no capital gain tax will apply accordingly. Section 47 In such a situation the cost of the shares of SPV will be treated as cost of the units of BT

47 BT consequential amendments If units of BT are transferred as Short Term Asset concessional rate of 15% will apply section 111A This will not apply if the units are acquired by transfer of shares of SPV If Income of a Non resident UH is consisting of interest from SPV it will be 5% - 115A BT will be required to file Return of Income 139(4E)

48 BT consequential amendments Interest payable by SPV to BT will not be subject to TDS u/s. 194A If BT distributes income out of interest income then TDS will be required to be made by BT section 194LBA For Non Resident 5% For Resident 10% Interest on ECB by BT will be subject to 5% - 194LC STT will be payable on units of BT in simliar manner as shares in a company

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50 TDS - 194DA /200 / 200A New section 194DA introduced TDS on sum issued under Life Insurance Policy (including bonus) in a case where the maturity amount received is not qualified for exemption u/s. 10(10D) 2% - Threshold Limit 1 Lakh Section 200 (3) proviso inserted with a view to enable filing correction statement of TDS Section 200A amended to provide that correction statement will be processed

51 Section 201 Assessee in Default Present Time Limit for passing order U/s. 201(1) Two years from end of FY where the assessee has filed the TDS statements Six years from the end of the FY where no TDS statements are filed Reasons given in Memorandum Processing by system No application of mind Default in deduction not reflected in statements hence 2 years not relevant Limit of reassessment u/s. 147 is six years from end of A.Y. hence one year less available for treating assessee in default Needs to be aligned Section 201(3) amended New Time Limit in all cases Seven years from the end of FY

52 International Transaction 92B Purchase, Sale, Lease, Providing of services between AEs where atleast one of them is Non resident Transaction between unrelated party are treated as International Transaction in certain situations - sub section (2) Doubt prevalent : whether the unrelated party shall be non resident for the purpose of sub section (2) Amendment made : Even if the unrelated party is not a non resident, the transaction will be treated as International Transaction

53 Advance Pricing Agreement Section 92CC permits CBDT to enter into APA for determination of ALP or the manner of computation of ALP The APA entered will be valid for five subsequent years Many countries are having roll back provisions for determination of ALP Amendment : Earlier 4 years period can also be covered under APA

54 Procedures Mutual Funds, Securitisation Trust, Venture Capital Company and Venture Capital Funds are now made liable to file Returns even if their income is not taxable. Section 145 : Amendment : Instead of Accounting Standards the section now provides for Income computation and disclosure standards Relief from maintaining separate accounts for compliance with Tax Accounting Standards

55 Power of Survey Power of Survey is now extended for the purpose of verifying that tax has been deducted or collected in accordance with TDS provisions He can for this purpose enter an office or place of business on or after sunrise but before sunset For this survey the Authorities do not have power to impound books of accounts or documents He can however put identification marks or take extracts

56 Reference to Valuation Officer Reference to Valuation Officer can be made even if the books of accounts of the assessee are not rejected Reference can be made to ascertain fair value of any asset, property or investment. Valuation officer will consider evidences produced by assessee and then ascertain value Valuation officer shall issue his report within 6 months of reference to him AO may consider the report for the purpose of assessment or Reassessment Time taken by valuation officer will be ignored for computing time limit section 153 and 153B.

57 Section 153C Assessment will be made in the hands of the third party only if the AO is satisfied that the books of accounts or documents or assets seized or requisitioned have a bearing on the determination of total income of third person. Manish Maheshwari Vs. ACIT (2007) 289 ITR 341 (SC) section 158BD All Cargo Global Logistics Ltd. Vs. DCIT (2012) 137 ITD 287(Mum)(SB) - 153C

58 Interest u/s. 220 Interest levied u/s. 220 Provision is there to reduce the interest when some appeal effect etc reduces the amount of tax No provision to increase interest in a case where subsequent appeal or revision proceedings increases tax liability of the assessee Interest can not be levied from the date of original assessment Vikrant Tyres Ltd. Vs. ITO (2001) 247 ITR 821 (SC) SMS Scholemann Siemag A.G. Vs. DCIT & Another (2001) 250 ITR 97 (AP)(FB) Amendment made to provide for such increase in interest u/s. 220

59 Section 269SS & 269T Transactions to be made by Account Payee Cheque / Drafts Now provided that if the Transaction is through electronic clearing system through a bank account will be treated as done in compliance with sections. Transactions by Journal entries Not addressed CIT Vs. Triumph International Finance (India) Ltd. (2012) 345 ITR 270 (Bom)

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61 Vajani & Vajani Chartered Accountants Phone : / Handphone : caketanvajani@gmail.com