Pre-Budget Memorandum­ 2014 (Direct Taxes The Institute of Chartered Accountants of India

PRE-BUDGET MEMORANDUM - 2014
DIRECT TAXES
THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA
NEW DELHI
The Institute of Chartered Accountants of India
Page ii                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
PRE-BUDGET MEMORANDUM - 2014
DIRECT TAXES
1.1    The Council of the Institute of Chartered Accountants of India considers it a privilege to
submit this Pre-Budget Memorandum - 2014 on Direct Taxes to the Government. The
memorandum contains suggestions for the consideration of the Government while
formulating the tax proposals for the year 2014-15.
1.2    The suggestions have been broadly categorized under the following heads:
Part I     : Suggestions for improving Tax Administration and Compliance
Part II : Suggestions relating to the provisions of Income-tax Act, 1961
Part III : Suggestions relating to the provisions of Wealth-tax Act, 1956
1.3    The suggestions are given Chapter wise and are intended to serve the following purpose:
I.       Improve tax collection.
II.      Reduce/minimize litigations
III.     Rationalization of the provisions of direct tax laws.
IV.      Removal of administrative and procedural difficulties relating to Direct Taxes
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INDEX
Sr. No                                       Suggestion                                     Page
No.
PART I: Suggestions for improving Tax Administration and Compliance
1.             Definition of the term "accountant" in the Direct Taxes Code, 2013                   3
2.             First Schedule ­ Surcharge                                                           7
3.             Rates of Taxation                                                                    7
4.              Foremost requirement -Respect the "Taxpayer"                                     12
5.              Targets for collection of taxes-Not essential                                    13
6.              Verification of all income-tax returns                                           13
7.              TCS @1% on sale of all motor vehicles                                            15
8.              Forms of Income tax return to incorporate details of tax payments                16
made under other legislations
9.              Consolidation of multiple reports to be issued by Chartered accountants          17
in a single format
10.             Generation of Form No. 15G, 15H ,60 and 61 through system                        17
11.             A single ITR form to replace all ITR forms                                       18
12.             Procedure for surrender of PAN                                                   18
13.             Creation of online grievance portal                                              19
14.             Extension of last date of Payment of tax due to Public holiday - Circular        20
No. 676 dated 14.01.1994 read with Section 10 of the General clauses
Act, 1897
15.             Issues arising from applicability of Companies Act, 2013:
(a) One person Company (OPC):                                                    20
(b) Reopening of accounts on Court's/ Tribunal order under section 130           22
of the Companies Act, 2013:
(c) Reference of Schedule VI of the Companies Act, 1956 to be                    23
substituted with Schedule III of the Companies Act, 2013:
(d) Difference in the definition of "related party" in Companies Act, 2013       23
and Income tax Act,1961:
(e) Depreciation Transition Provisions-Impact on MAT                             23
(f) Amalgamation                                                                 24
(g) Amalgamation and Demergers ­ Limitation on powers for                        25
assessment of cases dealing with Amalgamation and Demergers
effected under the new Companies Act, 2013.
16.             Corporate Social Responsibility Costs                                            27
17.             Differential Stamp duty charges being paid by CA's and Advocates on              27
letter of authority for representing the client
18.             Gaps in electricity generations                                                  28
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19.           Allowability of Interest paid under Income tax Act, 1961                 28
20.           Issues regarding PAN allotment                                           28
21.           AIR information in "My Account" facility                                 30
22.           Applicability of SA -700 on form of audit reports                        31
23.           Foreign tax credit guidelines                                            32
24.           Issues arising from Notification No 67/2013, dt 2-9-2013 amending        33
Rule 37BB of IT Rules, 1962 wrt Foreign Outward Remittances-Form
15CA & Form 15CB
25.           Number of Returns and payment schedule should be curtailed               34
26.           Extension of time limit for filing of TDS Return                         35
27.           Challan correction mechanism                                             35
28.           (a) Difficulties in obtaining old paper refunds                          36
(b) Refunds not delivered due to change in address                       36
(c) Issue of Refunds in case of legal heirs                              37
(d) amount to be directly paid into the bank accounts of the assessees   37
29.           Audit of TDS returns                                                     37
30.           Monetary limits in the Income-tax Act, 1961                              38
PART II : Suggestions relating to the provisions of Income-tax Act, 1961
CHAPTER ­I     PRELIMINARY
31.         Definition of "amalgamation" in section 2(1B)                               43
32.         Books of accounts in electronic mode-Section 2(12A)                         44
33.         a) Section 2(15)- Definition of charitable purpose                          45
b) Activities of Governmental authorities be treated as activities for      47
charitable purpose
c) Mandatory application of income by charitable trusts/ institutions       48
under section 10(23C)
34.        Deemed Dividend-section -2(22)(e)                                           50
35.        Section 3-Definition of Previous year                                       51
CHAPTER ­II       BASIS OF CHARGE
36.            Scope of Royalty Income ­ Section 9(1)(vi) of Income-tax Act, 1961       55
37.            Carry forward of excess foreign tax credit                               58
CHAPTER ­III      INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME
38.            Leave Travel Concession/Assistance ­ Replacement of "Calendar            61
year" by "Financial year"
39.           CER Sale to be treated as Capital Receipt                                61
40.           Section 10(10D) TDS in respect of maturity of Insurance policies which   62
are taxable under section 10(10D)
41.           Definition of "Keyman Insurance Policy" ­ Section 10(10D)                63
42.           Section 10(13)- Payment from approved superannuation fund                65
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43.         Annual receipts" under section 10(23C)                                              66
44.         Tax policy for MGNREGA, SSA, NRHM                                                   67
45.         Income-tax exemption for securitization trusts, levy of distribution tax on         69
income distributed by such trusts under section 10(23DA)
46.         Section 10(23FB) Tax exemption for Alternative Investment Funds ­                   74
Venture Capital Funds
47.         Section 10(26) ­ Exemption to Scheduled Tribes in specified areas ­                 82
time for removal
48.         Income of minors ­ to increase exemption limits under section 10(32)                82
49.         Section 10B ­ Exemption to newly established 100% EOUs ­ should                     82
be extended to STPIs registered units
CHAPTER IV      COMPUTATION OF TOTAL INCOME
50.          Disallowance of expenditure incurred in relation to income not                      87
includible in total income under section 14A of the Act:
PART A-         SALARIES
51.          Deduction to salaried assesses- Payment for notice period                           89
52.          Deduction for Employee Stock Option Cost                                            90
53.          Medical reimbursements for retired employees                                        91
PART C-         INCOME FROM HOUSE PROPERTY
54.          Deduction u/s 24(a) of the Income-tax Act, 1961                                     92
55.          Deduction for ground rent other than u/s 24(a)                                      92
56.          Interest on borrowed Capital                                                        93
PART D          PROFIT AND GAINS OF BUSINESS AND PROFESSION
57.          (a) Depreciation on books used by professionals                                    94
(b) Section 32 -Depreciation in case of slump sale                                 94
(c) Incentive for installation of Solar Power generating devices                   96
(d) Depreciation on "Oil Well"                                                     97
58.         Additional Depreciation u/s 32(1)(iia)                                             98
59.         Section 35(1)(ii) and 35(1)(iii)- Removal of discrimination u/s 80GGA             101
60.         Deductibility of R&D expenditure incurred by software development                 101
companies under Section 35(2AB)
61.         Expenditure on Specified Business under section 35AD                              102
62.         (a) Capital raising expenses                                                      103
(b) Amortization of Capital expenditure                                           103
63.         Deduction for payments under Voluntary Retirement Scheme ­ Section                104
35DDA:
64.         Due date for crediting the contribution of employees to the respective            104
fund­Section 36(1)(va) read with Section 2 (24)(x)
65.         NPA calculation for NBFCs                                                         106
66.         Section 40(a)(iib) - Disallowance of certain payments made by State               107
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Government Undertaking (SGU)
67.     Required clarification in respect of applicability of section 40A(3)        108
68.     Explanation 5 to Section 43(1) ­ "building" to be replaced by               108
"assets"
69.     Section 43A ­Exchange fluctuation loss due to sharp fall in Rupee           109
value
70.     Provision for leave salary ­ Section 43B(f)                                 112
71.     Section 43CA ­Special provision for full value of consideration for         113
transfer of assets other than capital assets in certain cases.
72.     Amendment in Section 43D and Rule 6EA with reference to Non-                115
Scheduled Co-op Banks
73.     (a) Section 44AA-Monetary limits to be withdrawn                            116
(b) Rule 6F-Upward revision of limit of Rs.1,50,000                         117
(c) Rule 6F(2)(iv) ­ requires to be dispensed with                          118
74.     Section 44AD-Presumptive Income ­ Some Issues                               119
(a) Maintenance of Books of Account                                         119
(b) Eligible Business                                                       119
(c) Applicability of section 44AD                                           121
75.     Revision in date of determination of Fair Market Value                      122
76.     Limited Liability Partnership (LLP)-                                        122
(a) Merger and Amalgamation of Limited Liability Partnership to be
Revenue Neutral.
(b) Taxability on conversion of firm into LLP Clarification required        122
(c) Consequential amendment required in section 47(xiiib)                   123
77.     Section 49 -Cost of acquisition with reference to certain modes of          124
acquisition
78.     Forfeiture of Advance Money u/s 51                                          125
79.     Section 54- Investment in residential house                                 126
80.     Certification of deductions claimed under section 54, 54F, 54EC etc         126
81.     Withdrawal of deposit from capital gain scheme account                      127
82.     Issue on capital gain arising on the transfer of land in respect of joint   128
development agreement
83.     Section 54EC-Capital gain not to be charged on investment in certain        131
bonds
84.     Exemption under section 54 & 54F                                            131
85.     Capital gain on transfer of residential property to be taxed in certain     141
cases- Section 54GB
PART F      INCOME FROM OTHER SOURCES
86.      Definition of the term relative- Explanation to Section 56(2) (vii)         144
87.      Section 56(2)(vii)(b) ­ Immovable property received for inadequate          145
consideration
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88.         Exclusion of rights shares/ fresh issue of shares from the ambit of            145
section 56(2)(viia)
89.          Valuation of shares- Section 56(2)(viib)                                       146
CHAPTER VI      AGGREGATION OF INCOME AND SET OFF OR CARRY
FORWARD OF LOSS
90.         Onus of proof in respect of cash credits consisting of share application       149
money, share capital, share premium etc-Section 68
91.         Rationalization of section 69C                                                 150
92.         Section 72- Carry forward and set off                                          150
93.         Tax incentives under Section 72A in respect of Amalgamation or                 150
Demerger (to be extended to all businesses):
94.         Section 73A -set-off of losses of specified business against non               151
specified business
95.          Review of section 78(1)                                                        151
CHAPTER VIA     DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME
PART B          DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
96.          Section 80CCG- Rajiv Gandhi Equity Linked Savings Scheme                       155
97.          Preventive health check up-Section 80D                                         156
98.          Increase in limit of deduction u/s 80DD & 80U                                  157
99.          Section 80EE - Deduction in respect of interest on loan taken for              157
residential house property
100.        Deduction u/s 80G ­ to liberalise the exemptions by enhancing ceilings         159
specified
101.        Donations made of any sum exceeding ten thousand rupees in cash-               161
sections 80G and 80GGA
102.         Limits of House Rent Allowance (HRA) & 80GG:                                   161
PART C          DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
103.         a) Section 80IA ­ Unit-wise deduction should be allowed                        163
b) Extension of sunset clause under section 80-IA                              163
c) Benefit u/s 80IA shall be allowable to the resulting / amalgamated          164
company in case of demerger / amalgamation
104.        Incentivizing investments in respect of agricultural infrastructure            167
105.        (a) Section 80JJAA ­ Deduction in respect of employment of new                 168
workmen
(b) Section 80JJAA ­ Deduction in respect of employment of new                 169
workmen
106.         Deduction in respect of royalty on books ­ Section 80QQB                       169
PART CA         DEDUCTIONS IN RESPECT OF OTHER INCOME
107.         Deduction in respect of interest on deposits in savings account- Section       171
80TTA.
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CHAPTER IX      DOUBLE TAXATION RELIEF
108.         Applicability of Education Cess and Secondary and Higher Education           175
Cess ­double taxation Avoidance Agreement
CHAPTER X       SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX
109.         a) Domestic Transfer Pricing [DTP] ­ Sections 92, 92BA, 92C, 92CA,           179
92D & 92E
b) Guidance in respect of benchmarking of Directors remuneration             180
c) Arm's Length Price vs Ordinary Profits                                    180
d) Increase in the threshold limit of Rs. 5 crore                            180
e) Documentation Requirements                                                180
CHAPTER X-A     GENERAL ANTI AVOIDANCE RULES
110.         GAAR                                                                         183
CHAPTER XII     DETERMINATION OF TAX IN SPECIAL CASES
111.         Removal of anomalies in sections 111A & 112                                  187
112.         Sec.115- Inter Corporate Dividend Distribution Tax (DDT)                     187
113.         Section 115A Rate of TDS on income by way of royalty or Fees for             188
technical services
114.         Anonymous donations under section 115BBC                                     190
CHAPTER XII-B   SPECIAL PROVISIONS RELATING TO CERTAIN COMPANIES
115.         Tax Credit u/s 115JAA & 115JD read with section 115JB & 115JC                195
116.         Book Profit Tax (MAT) on Scientific Research Expenditure                     195
117.         Section 115JB Minimum Alternate tax                                          196
CHAPTER XII-F   SPECIAL PROVISIONS RELATING TO TAX ON INCOME
RECEIVED FROM VENTURE CAPITAL COMPANIES AND
VENTURE CAPITAL FUNDS
118.        Due date of furnishing statement in Form No.64 under section 115U            201
read with Rule 12C
CHAPTER XIII    INCOME TAX AUTHORITIES
PART C          POWERS
119.         Section 132- Search and seizure                                              205
CHAPTER XI      PROCEDURE FOR ASSESSMENT
120.         (a) Due date of filing of return in section 139(1) for partners other than   211
working partners
(b) Section 139-Enlarging the scope                                          212
121.        Revised return - Section 139(5)                                              213
122.        Guidelines for the empanelment of auditors under section 142(2A)             213
123.        Special audit - section 142(2A)                                              214
124.        Hardship arising out of the Apex Court's decision in Goetze (India) Ltd.     216
v. CIT (2006) 284 ITR 323 (SC)
125.        Mistake apparent from record                                                 217
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126.        Credit of Tax Collected at Source relating to earlier years (for which        218
Assessm ents are already over & time period mentioned in Sec 155(14)
has elapsed) demanded by the Government authorities at a later date
CHAPTER-XVII    COLLECTION AND RECOVERY OF TAX
127.         Different Methods of accounting followed by the deductor and deductee         223
128.         Need to strengthen the validation system of FORM 26AS                         225
129.         Applicability of TDS on genuine provisions on estimate basis without          226
bills
130.        Synchronization of Section 192 & Section 15 of Income Tax Act                 228
131.        TDS under Section 194AInterest payments to NBFC                               228
132.        Payment of hire purchase installments under an hire purchase                  229
agreementapplicability of tax deduction u/s 194A or 194I
133.        Section 194C-Defination of the term "work"                                    230
134.        Section 194H-Deduction of tax at source from income in the nature of          230
commission or brokerage
135.        Clarification regarding TDS on Commission to a partner under section          230
194H read with section 40(b)
136.        Section 194I-TDS on rental income                                             231
137.        Section 194IA-TDS on transfer of immovable property                           232
138.        Fees for professional or technical services- Section 194J                     234
139.        Section 194J Claim of TDS on income declared on cash basis                    235
140.        Section 194LC-Income by way of interest from Indian Company                   236
141.        TDS on interest on NRO account                                                237
142.        Section 195-Time limit for - Issuance of "general or special order"           237
143.        Validity of Certificate issued u/s 197                                        238
144.        Section 200- Furnishing of TDS returns                                        238
145.        Mismatch on account of punching of data                                       239
146.        Provision for rectification and appeal of intimation under section 200A       240
147.        TDS demand u/s 200A                                                           241
148.        Time limit for TDS assessments of payments made to non residents              242
149.        Consequences of failure to deduct or pay TDS- section 201(1A)                 242
150.        Section 206AA ­ Requirement of furnishing of PAN for deduction of tax         243
at source
PART C          ADVANCE PAYMENT OF TAX
151.         Section 208-Revision of Limit of advance tax                                  246
PART F          INTEREST CHARGEABLE IN CERTAIN CASES
152.         Interest u/s 234C for newly formed Firms and Companies                        247
PART G          LEVY OF FEE IN CERTAIN CASES
153.         Fees under section 234E                                                       248
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CHAPTER XIX-A   SETTLEMENT OF CASES
154.         Once in life time Settlement Commission                                  253
155.         Section 245ASettlement Commission                                        253
156.         Restoration of the provisions of erstwhile Section 245E                  254
CHAPTER XIX­B   ADVANCE RULINGS
157.         Introduction of Advance ruling for residents                             259
CHAPTER XX      APPEALS & REVISION
158.         Delay by Assessing Officer in issuing Order giving effect to             263
Orders of higher Appellate authorities, and also delay in issuing
refunds arising out of such Order
CHAPTER XX-B    REQUIREMENT AS TO MODE OF ACCEPTANCE, PAYMENT OR
REPAYMENT IN CERTAIN CASES TO COUNTERACT EVASION
OF TAX
159.        Inclusion of payments and receipts made through the modes like           267
RTGS, NEFT, EFT and ECS as valid modes of fund transfers under
sections 269SS and 269T of the Income-tax Act, 1961
CHAPTER XXI     PENALTIES IMPOSABLE
160.         Initiation of penalty proceeding in every assessment order               271
161.         Penalty where search has been initiated- Section 271AAB                  272
162.         Rationalization of Section 271D & 271E                                   272
163.         Penalty for failure to furnish TDS/TCS statements-Section 271H           273
CHAPTER XXIII   MISCELLANEOUS
164.         Signing of notices under Section 282A                                    277
165.         Omission of section 282B-Document Identification Number                  277
166.         Section 285BA(3) Information to be furnished in the Annual Information   278
Return
PART III        SUGGESTIONS RELATING TO THE PROVISIONS OF WEALTH-
TAX ACT, 1956
167.        Taxable Wealth ­ to exempt motor cars                                    283
168.        Increment in Cash Limit                                                  284
169.        Enhancement of the Basic Exemption limit                                 285
ANNEXURE I                                                               286
ANNEXURE II                                                              289
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PART I
SUGGESTIONS FOR IMPROVING TAX
ADMINISTRATION AND COMPLIANCE
The Institute of Chartered Accountants of India
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DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                        Suggestion
No
1.    Definition of    The Institute of Chartered             Difference in scope of service of
the       term   Accountants of India (ICAI) is a       CA, CS and CWA
"accountant"     statutory body established by the      a) Section 2(2) of the Chartered
in the Direct    Chartered Accountants Act, 1949        Accountants Act, 1949 permits a
Taxes Code,      for the regulation of the profession   chartered       Accountant      to
2013             of Chartered Accountants in India      conduct a financial audit or
exclusively form to regulate in the    issue certificates based on
matter of accounts on audit and its    financials of an assessee.
professionals.     The ICAI has        b) Section 2(2) of the Cost and
achieved recognition as the            Works Accountant Act,1959
premier accounting body in India       restricts the domain of services
and today it is the second largest     of cost accountant to services
accounting body in the world.          relating to costing or auditing of
However, the proposed definition       cost accounting and related
of "Accountant" under clause           statements only. A Cost
320(2) of the Direct Taxes Code,       Accountant is in no case eligible
2013 which includes the "Cost          to conduct a financial audit.
Accountants"     and     "Company      The argument that such
Secretaries" has been a cause of       activities can be included in the
major concern to the entire            residuary clause also will not
profession. Before the Code            hold good since residuary
enacts into a Bill and then law of     clause cannot go beyond the
the land, we would like to place on    main function like a doctor
record our anguish and concern         cannot be called to do the job of
not only for the profession but for    an advocate.
the country as a whole since           b) The Company Secretaries
issuance of audit certificates by      Act, 1980 restricts the domain of
persons who have not authorized        services of Company Secretary
to do so by the Acts of Parliament.    to secretarial services relating
With regard to the definition of the   to Companies only. A Company
Secretary is in no case eligible
term "Accountant" in the Direct
to conduct a financial audit or
Taxes Code Bill, 2010, the
issue certificates based on
Standing Committee had made the
accounts of a company or any
following observations and had
other assessee. In fact the
suggested widening of the
Income tax Act covers a wide
definition of the term "Accountant"
range of assessees other than
on the request made by ICSI and
companies also like individuals,
ICWAI:                                 HUF,       firms,    Co-operative
"17.9 The Committee observed           societies and so on.
that the Ministry's reasoning for
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Sr.      Section              Issue/Justification                   Suggestion
No
non-inclusion         of   related There is no doubt that ICAI is a
professionals in the definition of premier body formed by MCA
accountant is a very strict        only     to    train    chartered
construction of the term. In the   accountants to gain expertise in
view of the Committee, the         accounting and auditing ICAI.
suggested       amendment     may  There is much more which can
provide the Small and Medium       be elaborated like difference in
Enterprises (SMEs) a wider and     the focus of the syllabi on the
cost effective scope for selection basis of which expertise is
of professionals and will be an    tested, effective steps taken by
important      initiative towards  ICAI to ensure the quality of
simplified tax compliance regime.  audit, guidance provided by ICAI
The Ministry may therefore re-     in the field of auditing and
consider the suggestion to widen   accounting and the like.
the scope of the definition of     However, it is felt that the very
"accountant"."                     fact that the mother Act itself
Observations of the Ministry of does not allow the Cost
Finance                            Accountants and Company
Secretary to conduct audit is
Although, the Institute of Cost
good     enough      ground    to
Accountants and Institute of
convince one that the definition
Company      Secretaries      have
of "Accountant" does not
suggested inclusion of terms "Cost
require any change.
Accountant"     and      "Company
Secretary" in the definition of
"accountant", the Ministry of
Finance had not accepted their
suggestion on the ground that
"an accountant for the purposes of
tax matters is required to deal with
all financial matters and audit all
financial ledgers, books, records
and statements of a company or
firm etc whereas a cost accountant
deals primarily with estimates of
cost for projects and monitoring
the project to ensure that these are
within the budget. Therefore, a
cost accountant may not have the
expertise to deal with all the
financial statements and matters.
Further, the question here is not of
giving privilege to any particular
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Sr.      Section              Issue/Justification              Suggestion
No
profession rather the most suited
profession for dealing with the
matters relating to direct taxes has
to be assigned the work.
Accordingly, the suggestion is not
acceptable.
Under clause 304(3) (F) of the
DTC, the Board may prescribe any
person with specified educational
qualification to act as an
authorized representative. The
same procedure is followed under
the current Act. Accordingly, this
will be considered at the time of
framing of subordinate legislation."
As per the Report of the Standing
Committee on Finance on Direct
Taxes Code Bill, 2010 the Ministry
of Finance had protested this
change. We, by way of our letter
dated 16-05-2012 had appreciated
the stand taken by the Ministry of
Finance in this regard. A copy of
the same is enclosed for your
reference. Since the provisions of
the proposed Direct Taxes Code
are not in alignment with the view
of the Ministry of Finance, it is
difficult to understand the reason
of change of opinion of the Ministry
of Finance.
Recognization of all three
professionals by the Companies
Act, 2013
Audit of Financial Accounts is the
exclusive domain of chartered
accountants is a well known fact
and is even recognized by the
Companies Act, 2013(as also the
erstwhile Act of 1956). Section
141(1) clearly provides that a
person shall be eligible for
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The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                   Suggestion
No
appointment as an auditor of a
company only if he is a chartered
accountant. While considering the
domains       of     other      two
professionals, section 143(14) of
the said Act also provides that the
provisions of section 143 shall
mutatis mutandis apply to:
(a)     the cost accountant in
practice conducting cost audit
under section 148; or
(b)     the company secretary in
practice conducting secretarial
audit under section 204.
It may be noted that the Ministry of
Corporate affairs is very clear
about the domains of all the three
professionals and has, thus,
assigned the right task to the right
professional who are suppose to
carry out the assigned task in a
professional manner.
Implications of Conduct of audit
by non-chartered accountants
Conducting of tax audit by non-
chartered accountants having
limited knowledge of the principles
of accounting, auditing and tax
procedures thereof would result
into complexities not only for the
assessees as also for the
Government including but not
limited to inaccurate computation
of income, leading to leakage of
revenue. While processing the
data provided by the Income-tax
Department in respect of tax audits
conducted        by      chartered
accountants, it was observed that
a number of tax audit reports were
filed by the assessees by quoting
wrong membership details of the
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Sr.     Section               Issue/Justification                       Suggestion
No
Chartered Accountants. The fact of
alleged misuse of membership
details of chartered accountants
was also reported to CBDT vide
letter no. DTC/2011-12/Rep-07,
dated 16th December, 2011 and
subsequently vide Letter no.
DTC/2012-13/Rep-09,            dated
15th June, 2012. As per our
knowledge, action has been taken
against those assessees who
avoided getting their accounts
audited and tried escape tax. The
Ministry may be very well aware of
the tentative figure of the involved
revenue leakage. Such cases are
a LIVE examples of the
implications of getting the tax audit
done by "Cost Accountants" and
"Company Secretaries" who do not
have expertise to do the same and
are thus as good as fake audits.
2.      First          The Finance Act, 2013 levied a          Since the intent of the Ministry
Schedule ­     surcharge@10% on an individual          of Finance, while introducing
Surcharge      with total income exceeding Rs.1        these additional surcharges,
crore and for corporate (domestic       was to limit it only for the
companies), surcharge@10% only          financial year 2013-14, these
if, the total income exceeded           surcharges should be abolished
Rs.10 crores. While levying this        from the financial year 2014-15
additional surcharge the Finance        and onwards
Minister in his speech had
mentioned that the additional
surcharges will be in force for only
one year, that is Financial Year
2013-14.
3.      Rates of       With regard to rates of taxation for    In       line     with       the
Taxation       individual   and     HUFs,      the     recommendations       of     the
Parliamentary Standing Committee        Standing Committee on Finance
on Direct Taxes Code had                on DTC and for the reasons
observed the following:                 mentioned therein, the following
tax slabs are suggested:
"When the present Income Tax Act
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was enacted way back in 1961, the          Slab (lakhs)      Tax rate
per capita income of this country was
extremely low. During the course of        0-3               Nil
five decades of the working of the         3-10              10%
Income Tax Act, the national per
capita income has increased multifold,     10-20             20%
widening the scope for taxing various      beyond 20         30%
incomes. At the same time, the
absolute number of poor has also
increased manifold, warranting much
larger government outlays. The
aspirations of the people for better
living standards and their expectation
from government to deliver the same
has also simultaneously increased. It
is therefore, necessary that these
challenges in a growing economy and
a developing society are kept in mind,
while formulating a new Direct Tax
Law.
84. A Direct Tax by definition is a levy
on the income A Direct Tax by
definition is a levy on the incomes,
profits and wealth earned and
generated by individuals and entities.
Thus, a direct tax by its very nature
and scope cannot be imposed on
everybody. It has necessarily to be a
focussed levy which should reflect
and tap the rising incomes and
prosperity in a growing economy. The
tax rates and structure should
therefore be tailored in a way that will
ensure sufficient buoyancy and
dynamism. As the economy expands
and diversifies, the tax policies cannot
remain caught in a time-warp. Ways
and means of augmenting revenue
would have to be found not merely by
broadening the base but also by
deepening the trunk to tap both
potential as well as concealed
incomes and wealth. In this regard,
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there are three distinct categories of
income, which require to be tapped or
brought to book, namely (a)
untaxed/non-taxed      income;     (b)
potential income; (c) concealed
income.
85. On the whole, the Committee
would expect the tax policy and
procedures to be fair, just and
equitous, bringing fiscal stability at
least over the medium-term, obviating
the need to make changes in rates
structure etc. during every Budget.
Fiscal stability together with certainty
will no doubt go a long way in
sustaining economic growth and
development. Needless to say,
governance standards would, in the
final count, determine the efficacy and
the credibility tax policies carry with
taxpayers.
86. The Committee find from the
information made available that tax
collected in the income slab of 0-10
lakh is Rs. 21,094 crore and the total
number of taxpayers is about 2.76
crore; while the corresponding figures
for the income slab of 10-20 lakh is
Rs. 10,185 crore with only 3.35 lakh
taxpayers; the same for the more than
20 lakh income slab is Rs. 53,170
crore tax collected with a mere 1.85
lakh taxpayers. The Committee further
find that in the income slab of 0-2
lakh, the number of taxpayers is
around 2.02 crore, which decreases to
56.73 lakh in the next income slab of
2-4
lakh. With regard to the percentage of
taxpayers in different income slabs, it
is 89% (0-5 lakh), 5.5% (5-10 lakh),
4.3% (10-20 lakh) and 1.3% (above
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20 lakh). On the corporate tax side,
the tax collected in the slab of 0 to
100 crore is Rs. 44,016 crore, Rs.
23,421 crore in 100-500 crore slab;
and Rs. 54,558 crore in the above 500
crore slab. The extent of revenue
foregone for the above slabs has
been found to be Rs. 23,200 crore,
Rs. 11,779 crore and Rs. 27,895 crore
respectively. The figures mentioned
above only seek to confirm the view
that the tax structure and the
prevailing tax regime is regressive ­
both for individual as well as
corporate tax payers. The Committee
desire that the character of the tax
regime should change and it should
be made more progressive. This
would entail greater relief for small
taxpayers ­ both individuals and
corporate and moderately higher rates
for taxpayers in the higher bracket.
87. The Committee find it astonishing
that almost 90% comprise of
individual taxpayers in the 0-5 lakh
income slab without commensurate
tax yield; which translates into nearly
3 crore assesees. In a belated
recognition of this paradox, the
Department has exempted taxpayers
in the lower income slab (0-5 lakh)
from filing tax returns, thereby
reducing       the       Departments
processing burden. The Committee
find it absurd that the Department
should diffuse their energies and
spread their resources thin over
handling such a large number of
individuals with low income potential.
The argument that more taxpayers
have to be brought within the tax net
for widening the tax base can hold
water only to the extent that this
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approach brings in more taxpayers
and tax revenue from the higher
income brackets, rather than simply
adding to the numbers in the lower
segments.
88. Keeping in view the inflationary
trends in the economy and the
imperative to leave more disposable
incomes in the hands of individual tax
payers, particularly those in the lower
income bracket, the Committee would
recommend that the tax slab attracting
,,nil rate, that is, full exemption from
tax on income should be raised to
three lakhs from the proposed two
lakhs. Higher exemption limit may be
considered for women and senior
citizens. The age for senior citizens
should be relaxed from 65 years to 60
years. As reasoned earlier, higher
exemption limit would go a long way
in minimising the compliance and
transaction costs of the Income Tax
Department, which can now focus
their attention and re-orient their
resources on the higher income
groups, untaxed or concealed
incomes, and categories and sectors
that are avoidance or evasion prone.
The revenue gap, if any, could be
easily bridged by way of stringent
measures to curb and bring to book
unaccounted money and through
realisation of huge tax arrears and by
way of savings from the proposed
transition to the investment-linked
incentive / exemption regime.
89. Thus, in the light of reasons cited
above and in pursuance of the well-
recognised and widely accepted
rationale of moderate tax rates
inducing better tax compliance and
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with a view to giving some relief to the
small tax payers, the Committee
would recommend the following
revised tax slabs :
Slab (lakhs)           Tax rate
0-3                     Nil
3-10                    10%
10-20                   20%
beyond 20               30%
4.     Foremost         The revenue of the Government of           The taxpayers should be given
requirement -    India is sourced through taxation,         due respect and be treated as a
Respect the      be it direct taxes/indirect taxes at       client. In fact there should be a
"Taxpayer"       central / state level. Even though         system where the taxpayer
the "taxpayer" is the only source of       paying tax, beyond a certain
revenue, he is not respected by            limit, is provided priority
the Department. In fact, he is             services. Like the taxpayer
harassed and looked upon with              contributing tax more than 25
suspicion. The shift of the                Lakhs may be issued a Gold
Department from manual to                  card, like wise taxpayers
electronic and formation of CPC,           contributing more than 1 crore
Bengluru and CPC(TDS) is                   may be issued a Platinum card.
remarkable, but the taxpayers are          These cards may have certain
still facing issues and feel               services attached to them like
harassed as they are unable to             home service for preparation or
find solution to system generated          renewal of AADHAR card / ration
issues. Taxpayers who share a              card/ driving license/passport
part of their income with the              etc and the like. For other
government as a partner in nation          taxpayers, services like online
building are not getting their due         grievance portal, instant posting
respect. Today the taxpayer wants          of all related orders in the
to comply with legal requirements          account of the assessee, proper
and wants a hassle free life.              sitting arrangements in the
However, still they are viewed as          Income tax offices and the like
tax evaders. In all private                be provided. This attitude
organizations, the client who is the       towards taxpayers, if adopted,
source of income is highly valued.         would undoubtedly improve tax
In fact priority services are              compliance thereby increasing
provided to members who add on             the tax base.
more to the income of the
organization. The government of
India should treat the "taxpayer" as
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its client since he is the only
source of revenue.
5.     Targets    for    India adopts a progressive system       Since a majority portion of
collection of     of taxation where the tax rate          direct taxes is paid to the credit
taxes-Not         depends on the level of income          of the Government through TDS
essential         earned during a financial year.         and advance tax, it is suggested
Taxes paid by the taxpayers are         that no targets should be set by
utilized for the betterment of the      the Department for collection of
nation as a whole. Since a majority     taxes.     In     fact,    internal
portion of direct taxes is paid to      mechanism is to be developed
the credit of the Government            to ensure adherence of the
through TDS and advance tax, the        timelines mentioned in the
possibility of evasion of tax gets      Citizens      charter    of     the
meager in the private sector. Also,     Department with regard to
today the assessee wants to             performance of services and
voluntarily comply with the existing    adherence to the timelines
laws to avoid any hassles. In such      should be made as a part of
a scenario, it is difficult to          performance appraisal of the
understand as to why targets are        concerned.
set for Assessing Officers for
collection of tax. The Government
is not a profit making organization.
It is belongs to the people of India,
works for the people and is formed
by the people of India. In order to
achieve the yearly targets, all
means, fair and unfair, are being
adopted. There have been
instances which have been
reported to us as to how, in order
to complete targets the genuine
assesses are being harassed. This
creates an unhealthy environment.
One cannot enforce on collection
of taxes when there is no income
and then the taxpayer has to go
round and round to get a refund of
the extra taxes paid by him.
6.     Verification of   There are classes of persons who        Since non verification of
all income-tax    are filing income tax returns but       admissibility     of      basic
returns           are not declaring their income          deductions provided in sections
properly. Either the income is          80C, 80D and 24(b) have huge
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suppressed or various deductions        revenue impact, it is imperative
are being claimed which are not         to      have     a    certification
legally permissible.      With the      /verifications of all claims of
increase in the work of the             deductions under section 80C,
Department it is not practicable to     80D, 24(b) and the like. In this
scrutinize each and every return.       verification, not only the
Taking into consideration this          arithmetical accuracy but the
aspect the person filing the return     admissibility of the claim
takes a calculated risk. Further,       regarding      the    expenditure
basic deductions provided by the        incurred, income earned or
Act like section 80C (Rs.1,             investment made on the basis of
00,000), section 80D (15,000),          the evidence collected from
section 24(b)(Rs.1,50,000) being        various sources will also be
claimed by the individuals and          verified. Since this work is
HUFs, in large numbers, have            voluminous, the same will also
huge revenue impact. To check on        be required to be out-sourced
the admissibility of the claim for      preferably to the professionals
deduction, no proof of investment       understanding the law better
is called for by the assessee.          and who are in a position to
Today as per e-filing website there     identify the grey areas.
are 2.79 crore assessees who            (SUGGESTION TO          IMPROVE
have filed return for ITR-1,2,3,4       TAX COLLECTION)
and 4S online for the AY 2013-14
and are thus expected to have an
income of Rs.5,00,000 or more.
Considering the slab rate of 10%,
the minimum revenue impact is
2,70,000*10.3%*2.79 crore is
approximately Rs. 77600 crores.
In case the applicable rate of tax is
20.6%, the revenue impact is
approx. 155180 crores. In case
the applicable rate of tax is 30.9%,
the maximum revenue impact is
Rs. 232770 crores.
To address this, it is important that
all the returns filed are thoroughly
checked and cross-verified with
the information collected through
AIR and other sources by the
Department. This process is
entirely different from the scrutiny
process. In this verification, not
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only the arithmetical accuracy but
the admissibility of the claim
regarding       the     expenditure
incurred, income earned or
investment made on the basis of
the evidence collected from
various sources will also be
verified. Since this work is
voluminous, the same will also be
required to be out-sourced
preferably to the professionals
understanding the law better and
who are in a position to identify the
grey areas. Although the chartered
accountants,      through     whom
approx 85% of the returns are
filed, ensure the correctness of the
claim, the law does not recognizes
the same. Thus, the chartered
accountant is questioned by the
assessee, when documents are
asked for. In the interest of the
revenue, it is imperative to have a
certification    of    claims      of
deductions under section 80C,
80D, 24(b) and the like.
This process once started will
ensure        better        voluntary
compliance as every taxpayer
filing the return would be aware
that the return being filed would be
subject to a verification process
and he cannot afford to take the
liberty of making adjustments
which are legally impermissible.
7.     TCS @1% on       India was the sixth largest motor       In order to prevent evasion of
sale of all      vehicle/car manufacturer in the         taxes, Tax @1% of ex-showroom
motor vehicles   world in 2012. The sales of motor       price should be allowed to be
vehicles have increased manifold        collected by the seller of high
times since 2009. In fact the           value cars, say, cars having
domestic motor vehicle sale that        value above Rs. 10 Lakhs, from
has been recorded in the year           the ultimate consumer. The
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2013 is 18.10 million units in which   consumer may however, be
comprise of:                           allowed to take credit of tax so
Passenger Vehicles: 1.81 million       collected in his return of income
units,                                 after furnishing details of
source of income in the relevant
Commercial Vehicles: 0.69 m,
ITR form.        The procedure
Two-wheelers: 14.36 m,                 followed in respect of section
Three-wheelers: 0.50 m                 206(ID) i.e. TCS on jewellery and
It may have been noticed that the      bullion may be adopted.
number of motor vehicles cars          (SUGGESTIONS TO INCREASE
owned       are     generally    not   THE TAX BASE)
commensurate with the income of
the person offered to tax. Further,
possibility of use of black money to
purchase high value cars also
cannot be ruled out.
In order to track information about
the source of the income of the
person seller of high value cars,
say motor vehicles of value above
10 Lakhs, may be required to
collect tax at source @1%. The
assessee may, however, be
allowed to take credit of tax so
collected in his return after
furnishing details of source of
income in the relevant ITR form.
The procedure followed in respect
of section 206(ID) i.e. TCS on
jewellery and bullion may be
adopted.
8.     Forms         of   Income tax return forms are such       It is suggested that the forms of
Income       tax   that they have reasons to capture      income tax shall incorporate all
return        to   some Information about other tax       the relevant details of tax
incorporate        payments like service tax, VAT         payments made under other
details of tax     etc. The return form should be         legislations like central excise,
payments           made more elaborate so as to give      VAT, service tax etc.
made under         comprehensive information about        (SUGGESTIONS TO INCREASE
other              the other indirect taxes paid.         THE TAX BASE)
legislations       Thereafter, the said information be
shared     with     the    relevant
Department of the Government for
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verification. This will ensure that
the data being reported by the
assessee matches with the data
provided by him in other
Departments. In the long run, it
will improve the quality of the data
being received in the return forms
as the assessee will not take the
risk of mentioning the wrong data.
9.     Consolidation     As per the current provisions, an      Multiple reports of audit/
of     multiple   assessee has to file multiple audit    certificates     of     chartered
reports to be     reports in different formats as per    accountants be compiled and a
issued      by    the statutory requirements. For a      single form of audit/ certificate
Chartered         simplified tax regime, a single        be prepared. The said format
accountants       audit form should be introduced        may have multiple annexures
in a single       which      will   incorporate    or    i.e. existing formats in different
format            consolidate multiple audit reports/    sections.
certificates required to be issued     (SUGGESTIONS          FOR
under various sections of the          REMOVING    ADMINISTRATIVE
Income-tax Act, 1961.                  AND           PROCEDURAL
DIFFICULTIES RELATING TO
DIRECT TAXES)
10.    Generation of     Form No.15G/15H is a form of           Since there is no central system
Form No. 15G,     declaration that has been              to locate multiple forms 60, 61,
15H ,60 and 61    prescribed for those persons who       15G and 15H, filled by a
through           desire to receive certain specified    particular     person,     it    is
system            income without deduction of tax at     suggested that the filing of the
source. These forms can be used        same be made electronic. On
only if the aggregate income of the    the basis of particulars received
person making declaration does         from these form No, the banks
not exceed the maximum amount          should be mandated to punch
not chargeable to tax.                 the said particulars in the e-form
Form No.60/61 are used by              which will generate a unique
persons who do not have a              number.     The      details    so
Permanent account number and           furnished may be then used for
who      have     entered     into     analyzing and taking action
transactions specified under Rule      against those persons who have
114B      of   the     Income-tax      given false declaration to avoid
Rule,1962.                             payment of taxes. This system if
put in place will ensure genuine
usage of these forms.
The purpose of existence of these
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No
forms is mainly to avoid (SUGGESTION TO INCREASE
inconvenience to senior citizens THE TAX BASE)
and other persons who's income
chargeable to tax is below the
maximum amount not chargeable
to tax and those who do not have
a PAN. These forms are however
being misused, since there is no
mechanism to track and control
those persons who wrongly fill the
form to avoid deduction of tax at
source. Today, every branch of a
bank      collects    Form     No.
60/61/15G/15H and does not
deduct tax at source on FDs
having interest below 10,000. This
gives a way to the assessee to
have FDs in multiple branches
with interest below 10000 and
escape tax deduction at source by
furnishing the relevant form.
11.    A single ITR       At present, we have different ITR       A single ITR form instead of ITR
form          to   forms for different assessees           1,2,3,4,5,6,7 should be prepared.
replace all ITR    which make filing of ITR a              The common fields in all ITR can
forms              cumbersome task. There should           be clubbed and Income under
be a single form for all the            the various heads of income is
assessees so that filing of return      restricted in form of Annexures.
will be done in a simplified &          The assessee should click and
effective manner.                       fill only the annexure which is
relevant for him. This would
amount to simplification in true
sense.
12.    Procedure for      In case of firms, who have              It is suggested that procedure
surrender of       discontinued their business still       for surrender of PAN &
PAN                have to file return u/s 139(1), since   exemption from filing of return
no procedure has been prescribed        of income in respect of Firms
for surrender of PAN by the             having business discontinued,
discontinued firms. Due to this         may be prescribed. With this,
firms are liable to penalty u/s 271F    firms may be saved from penalty
at any time.                            u/s 271F.
.                                       (SUGGESTIONS                FOR
RATIONALIZATION        OF   THE
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PROVISIONS OF DIRECT TAX
LAWS)
13.    Creation     of   At present, no online grievance         It is suggested that an online
Online            handling mechanism is in                grievance portal for speedy
grievance         existence to resolve the difficulties   resolution   of   queries      of
portal            being faced by assessees relating       assesses be created. If required,
to TDS or E-filing of income-tax        the ICAI would extend its full
returns. To enable the assessees        support in developing the said
to seek early resolution of their       grievance portal.
queries within a short span of
time, it is suggested that an online
portal may be created wherein the
assessee        can     post      his
complain/query relating to his own
returns and which are answered
by the respective Assessing
Officer. The system may have
following features:
a) The query not replied within a
specified period of time is
escalated to higher authority
say Assistant Commissioner,
then to Deputy Commissioner
and so on according to the
hierarchy.
b) Once the issue is resolved the
assessee should be allowed
to reopen his query if he is not
satisfied with the response
received and has further
submissions to make.
c) The assessee should be able
to check the status of his
grievance online.
d) SMS and email alert may be
given at the time of receipt of
grievance and at the time of
disposal of grievance.
In this regard, we wish to mention
that the Institute of Chartered
Accountants      of    India     is
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successfully operating an online
grievance portal "E-Sahaayataa"
to cater to the queries of
approximately 10 Lakh students
and 2 Lakh members. All the
officials of the ICAI are mapped in
the portal to ensure that all
unanswered         grievances  are
escalated to higher levels. Since
the inception of this system in
June 2010, ICAI has successfully
answered approximately 98,000
queries.
14.       Extension of    Considering the provisions of           It is suggested that the Circular
last date of    section 10 of the General Clauses       No. 676 dated 14.01.1994 be
Payment of      Act, 1987 the Board had through         revised in the light of existing
tax due to      Circular    No.      676       dated    scenario. The circular should
Public          14.01.1994 clarified that if the last   clearly provide as to whether or
holiday     -   day for payment of any instalments      not the due date shall be
Circular No.    of advance tax is a day on which        deemed to be extended by one
676     dated   the receiving bank is closed, the       day if the last date is a public
14.01.1994      assessee can make the payment           holiday.
read     with   on the next immediately following       (SUGGESTIONS          FOR
Section 10 of   working day, and in such cases,         REMOVING    ADMINISTRATIVE
the General     the mandatory interest leviable         AND           PROCEDURAL
clauses Act,    under sections 234B and 234C of         DIFFICULTIES RELATING TO
1897            the Income-tax Act, 1961 would          DIRECT TAXES)
not be charged.
Considering the change in the
functioning of the Department,
assessees and the banking system
in India, it is felt that the said
circular needs revision.
Issues arisingSection 2(62) of the Companies               It is suggested that OPC should
15.
from          Act, 2013 has introduced the                 be treated like any other
applicability of
concept of "One Person Company"              company for taxation purposes.
Companies     which means a company which                  The concept of separate legal
Act, 2013:    has only one person as a member.             entity of OPC should be
a) One person Section 2(31) of the Income-tax              followed for Income tax and
Company    Act, 1961 which defines person               Wealth tax both. However a
(OPC):     has to be amended to include                 specific clarification may be
inserted in the income tax act as
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within its ambit an OPC.                  to allowability of remuneration
Section 2(68) of the Companies            paid by OPC to member.
Act, 2013 defines          "private       (SUGGESTIONS          FOR
company" to mean a company                REMOVING    ADMINISTRATIVE
having a minimum paid-up share            AND           PROCEDURAL
capital of one lakh rupees or such        DIFFICULTIES RELATING TO
higher paid-up share capital as           DIRECT TAXES)
may be prescribed, and which by
its articles,--
(i) restricts the right to transfer its
shares;
(ii) except in case of One Person
Company, limits the number of its
members to two hundred:
Provided that where two or more
persons hold one or more shares
in a company jointly,  they
shall, for the purposes of this
clause, be treated as a single
member:
Provided further that--
(A) persons who are in the
employment of the company; and
(B) persons who, having been
formerly in the employment of the
company, were members of the.
company while in that employment
and have continued to be
members after the employment
ceased, shall not be included in
the number of members; and
(iii) prohibits any invitation to the
public to subscribe for any
securities of the company;
From the above it can be inferred
that one person company will be
required to comply with the
provisions applicable to private
Limited    Company.     However,
section 18 of the Companies Act,
2013 provides for conversion of
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companies already registered from
one class to other class under that
Act. This implies an OPC can be
converted into a Private limited or
a public Limited Company
provided that conditions are
fulfilled.
b) Reopening      b) Section 130 of the Companies         a) A provision is inserted to
of accounts       Act, 2013 provides for now              provide that in cases where the
on     Court's/   provides for revision of the books      financial statements have been
Tribunal order    of accounts and the financial           revised by virtue of section 130
under section     statements of the Company on            of the Companies Act, 2013, no
130 of the        application made by the Central         refund shall be granted in case
Companies         Government, the Income tax              such revision has the effect of
Act, 2013:        Authorities, the SEBI and any           lowering of profits of the
other statutory regulatory body or      company.
authority or any person concerned.      b) A specific provision is
Such revision can however be            required in the Income tax act to
done on an order by a court of          take care of adjustments
competent jurisdiction or the           required in taxable income due
Tribunal to the effect that the         to revision of accounts. The
relevant earlier accounts were          provision may be in line of
prepared in a fraudulent manner or      Section 155 of the Act.
the affairs of the company were
mismanaged during the relevant
period, casting a doubt on the
reliability   of   the    financial
statements. Before passing the
order notice of the same will be
given to the Income tax authorities.
This revision may, however, give
rise to three situations namely, no
effect on the profits, higher profits
or lower profits. These profits have
a direct impact on the computation
of income of Companies due
applicability of section 115JB of
the Income tax Act, 1961. In case
the profits are higher, the
Department can issue a notice
under section 147 of the Income
tax Act. The issue will arise where
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Sr.        Section               Issue/Justification                        Suggestion
No
the profits were inflated by the
company and due to the reopening
of accounts, the actual profits are
lowered. The company is such
case may apply for refund by filing
a revised return of income within
the time limit prescribed under
section 139(5) of the Income-tax
Act, 1961.
c)   Reference     The Companies Act, 2013                  Consequential amendments be
of Schedule VI     provides     for     the   General       made in the Income tax Act,
of         the     instructions for preparation of          1961 and the Reference of
Companies          "Balance Sheet" and "Statement of        Schedule VI of the Companies
Act, 1956 to       Profit and Loss" of the Company in       Act, 1956 be substituted with
be substituted     Schedule III. The references made        Schedule III of the Companies
with Schedule      in the Act to Schedule VI of the         Act, 2013.
III   of   the     erstwhile Companies Act, 1956 are
Companies          to be substituted accordingly.
Act, 2013:
d) Difference      The concept of related party is          There is a need for alignment in
in         the     relevant for defining "specified         the scope of related parties in
definition of      domestic       transactions"    and      Companies Act, 2013 with that
"related           "international Transactions" in the      of the Income-tax Act, 1961
party"      in     Income-tax Act, 1961.          The
Companies          Companies Act, 2013 also defines
Act, 2013 and      "covered transactions" and "related
Income     tax     party" However, the definition in
Act,1961:          both the cases is different.
e) Depreciation    Sch. II of the Companies Act 2013        It is suggested that a specific
Transition         requires depreciation to be              provision be introduced u/s.
Provisions-        charged in books of accounts             115JB to provide for that so
Impact on MAT      calculated as per new useful life        much amount of carrying cost of
specified in the schedule. Note 7        asset as has been adjusted
to part C of Sch II is providing that    against opening balance of
in case of an asset whose usefull        retained earnings, shall, for the
life is nil, its carrying amount is to   purpose of computing book
be recognized in opening balance         profit under Sec. 115JB, be
of retained earnings.                    allowed as deduction.
This means that so much amount
shall not routed through P & L
statement but shall be adjusted
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The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                       Suggestion
No
directly in balance sheet. In case
of companies covered by MAT,
this shall have an adverse impact
in the sense that this much
amount shall not be available for
adjustment against book profit.
f) Amalgama-      a) Sec. 72A of the Act, which          a) It is suggested that sectoral
tion                 deals with treatment of             restrictions u/s 72A may be
unabsorbed       losses     and     removed and provisions of this
unabsorbed depreciation, in         section be made applicable for
case of amalgamation, is            all the sectors.
restrictive in its application.
Presently benefits of Sec.
72A are available only to
company owning industrial
undertaking or a ship or a
hotel or banking company.
Due to this restriction, other
sectors       namely service
sector and real estate sectors
are not eligible for benefits in
the form of handing over of
loss from one company to
another.
b) Presently MAT credit u/s.           Act needs to be amended so as
115JAAcan not be carried            to allow carry forward of MAT
forward by the amalgamated          Credit in the hands of
company.                            amalgamated for remaining
number of years.
c) Section 56(2)(vii)(c)(ii) applies   It is suggested that a proviso on
when an individual or HUF           the lines of clause (viia) be
receives     shares      for    a   introduced for the purpose of
consideration which is less         clause (vii) (c )(ii) also.
than fair market value of the
shares     by     an      amount
exceeding Rs. 50000. Similar
rule apply for a firm or closely
held company by virtue of
Sec. 56 (2) (viia). In case of
Section 56 (2) (viia), it has
been specifically provided that
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The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                      Suggestion
No
this clause is not applicable
when shares have been
received         by way    of
amalgamation covered u/s.
47. No such exclusion is
applicable for Section 56
(2)(vii)(c)(ii).
d) Companies Act, 2013 has           Clause (vi) of Section 47 need to
permitted amalgamation of         be amended in order to make
Indian company with foreign       amalgamation      with    foreign
company.            However       company also a tax neutral
exemption from capital gains      transaction. Similar amendment
u/s. 47 of the Income tax act     is required in clause (vii) of
is available only when            Section 47 also, so that
amalgamated company is an         shareholders are not taxed
Indian Company.                   when shares of amalgamated
company are received          and
amalgamated company is not an
Indian company.
g)             In recent times, tax litigation in     Therefore, since now under the
Amalgamation relation to amalgamation and             Companies Act, 2013, at the
and            demerger has increased many            time of approval of Scheme,
Demergers ­    folds. Certain examples of such        adequate representation has
Limitation on  litigations are as under:              been given to the Income Tax
powers for     a. Tax benefits of amalgamation        department,        corresponding
assessment of       and demerger have been            amendments should be made in
cases dealing       denied on the ground that the     Income-tax Act, 1961 (may be by
with                assessee has not fulfilled the    way of introduction of a
Amalgamation        conditions      stated    under   separate     chapter      or    by
and                 section2 (1B) in case of          introducing new section dealing
Demergers           amalgamation and section 2        with these kind of assessments)
effected under      (19AA) in case of demerger;       to the effect that the tax issues
the new                                               under the Income Tax Act, 1961
b. Litigation as to whether the
Companies                                             relating                        to
transaction is in the nature of
Act, 2013.                                            amalgamations/demergers in the
amalgamation, demerger or
hands     of    the     transferor
slump sale under the Income
company, transferee company
Tax Act;
and the shareholders of
c. In certain cases, the Tax         transferor/transferee company
department has alleged that       should be examined and
the scheme was a Tax
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                           Page 25  
The Institute of Chartered Accountants of India
Sr.       Section             Issue/Justification                      Suggestion
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avoidance device;                 adjudicated     by     the   tax
d. Issues relating to carry forward   department at the stage of
of unabsorbed losses in the        making representation itself. In
hands of transferee company,       such a case, the Assessing
availability of credit for TDS     Officer shall not be allowed to
and advance tax paid by the        re-examine and re-adjudicate
transferor company on behalf       the     issues     relating   to
of transferee company, etc.        amalgamation or demerger at
the time scrutiny assessment or
e. In certain cases, the AO has
reassessment.
invoked provisions of Section
28(iv) in the hands of
amalgamated company on the The said amendment would
ground that the amalgamated have following positive effects:
company        has    acquired a. Reduction in tax litigation
Reserve & Surplus from its        in          respect        of
amalgamating company under        amalgamations/demergers;
the scheme of amalgamation.
b. The Assessees would be
The same was considered as a
saved from hardship of the
perquisite by the AO and taxed
double scrutiny ­ one at the
under section 28(iv) of the
time of filing of the scheme
Income Tax Act after the
and second at the time of
scheme has been approved by
assessment.
the High Court.
c. Certainty as to the tax
Now, under Section 230(5) of
treatment in relation to
the Companies Act, 2013, it is
amalgamations            and
mandatory for the companies to
demergers, which will lead
send a notice of amalgamation
improvement of investors'
and demerger to the income-tax
sentiment;
department. Under the old
Companies Act, 1956, such        d. Safeguard of shareholder's
notice was not mandatorily          interest since they would
required. Hence, now, such          be aware about potential
notices would ensure that the       tax exposures to them and
income tax department can           the company in respect of
make a representation in            the amalgamation and
relation to the amalgamations       mergers        and     would
and demergers before the            consider the same while
same is approved.                   voting in respect of the
same;
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Sr.      Section               Issue/Justification                        Suggestion
No
16.    Corporate         Corporates are currently involved      It is suggested that:
Social            in various areas of social             a) a     deduction    of    the
Responsibility    responsibility/community                  expenditure on community /
Costs             development as part of nation             social development (both
building. Further, the concept of         capital and revenue) be
Corporate Social Responsibility           introduced,      specifically
Costs has been introduced under           covering critical areas like
Companies Act, 2013. The                  education, health, animal
expenditure is mandatory in its           husbandry,             water
nature and as such it is a statutory      management,           women
levy. Accordingly it deserves tax         empowerment,         poverty
deduction. Even though it may be          alleviation      and rural
covered under Section 37 it               development.
deserves for a specific section in
b) Even in cases where a
Section 36. Allowing tax deduction
company has its own trust
may encourage corporate to incur
or foundation, the deduction
expenditure more then minimum
in respect of expenditure
prescribed limit. Providing suitable
incurred for CSR activities
tax incentives in respect of such
should be allowed.
Corporate Social Responsibility
Costs to accelerate the process        c) Such expenses, however,
and to ensure that the country can        should be subject to a limit
reach the goal of being a                 say 5% of total income.
developed nation in the near future    d) CSR expenditure is allowed
is the need of the hour.                  by way of donation to Prime
Minister Relief Fund/ Trust
registered       u/s.    80G/
associations approved u/s.
35AC . If deduction of CSR
expenditure is not allowed ,
this shall be discriminatory
for those corporates, who
may like to carry out CSR
activities on their own.
(SUGGESTIONS         FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
17.    Differential      For representing the client, an        In order to bring uniformity in
Stamp      duty   advocate is being charged a fee of     Court fees for both Chartered
charges being     Rs.5/- per Letter of Authority while   Accountants & Advocates for
paid by CA's      a Chartered Accountant has to pay      their representing the client
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 27  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                        Suggestion
No
and               Rs.100/- per Letter of Authority. In   before Income-tax Authorities,
Advocates on      Maharashtra, in respect of             section 288 which provides
letter      of    representing    the     client    by   "appearance by authorized
authority for     Chartered Accountants, the Court       representative"    should     be
representing      fees is governed by the provisions     amended to provide for the fees
the client        of Bombay Stamp Act, according         to be charged for authorisation.
to which the Letter of Authority       (SUGGESTIONS         FOR
must be accompanied by a Court         RATIONALIZATION OF THE
fee of Rs.100/- or a stamp paper       PROVISIONS OF DIRECT TAX
valued Rs.100/-                        LAWS)
18.    Gaps        in    In order to provide Environmental      It is suggested that concessions
electricity       friendly solutions and Low cost        or additional tax benefits may
generations       availability of electricity to end     also be provided where a new
user, alternate & clean energy         building (resident/ commercial/
resources may be promoted more         hotel etc) installs a solar energy
by              way              of    devices & rain harvesting
additional exemptions/incentives if,   instruments.
the project gets completed on          (SUGGESTIONS         FOR
time.                                  RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
19.    Allowability of   Presently, interest paid by the        Interest paid by the assessees
Interest paid     Government to an assessee is           to the Government under
under Income-     chargeable to tax. However,            various sections of the Income
tax Act, 1961:    interest paid by the assessee to       Tax Act should be allowed as
the Government under various           deduction in computing total
sections is not allowed as             income. If the assessee does
deduction while computing the          not have business income,
total income. Interest paid by the     interest should be allowed
assessee is for the use of money       under the head `Income from
by him and is compensatory in          other Sources'.
nature.                                Alternatively, the   interest
received by the assessee on
refund should be exempt from
tax.
20.    Issues            For filing of return, it is mandatory It is suggested that :
regarding         to have PAN.A person applying for a) The person entrusted with
PAN allotment     PAN has to give his details in a           the work of verification
prescribed form & the same will be         should possess sufficient
allotted to him by the Income Tax          knowledge & understanding
Department. Earlier, when the              of the provisions of the
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The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                     Suggestion
No
assessee identification system          Income-tax Act so as to
was based on "GIR Number"               complete the assigned work
i.e."General      Index     Register    in a timely manner.
Number" that used to be allotted, b) If the application of the
"Free of Cost", by the concerned        applicant is withheld by
Income Tax Officer who had a            NSDL, NSDL should inform
jurisdictional authority to assess      the applicant the reasons
the assessee.                           thereof.
Later on this was switched over to c) If        there     are      any
the era of "Permanent Account           queries/doubts       regarding
Number", under the authority of         details provided in form no.
new Section 139A, substituting the      49A, NSDL should clarify the
old one, by Finance Act, 1995,with      same with the applicant.
effect from 1-7-1995 and by
d) CBDT should fix a time limit
insertion of New Rule 114, by
for issuance of PAN &
replacing the old Rule 114, with
delivery of PAN card & also
effect from 1-4-1976.
should take appropriate
Due to the some reasons, this           actions      against    undue
function of receiving applications      delays in allotment of PAN.
and allotment of Permanent
Account Number and issue of PAN
Card transferred to NSDL. With
this switch over, now the
applicants were required to pay
requisite amount, as prescribed by
the authorities, along with the PAN
application.
Making     an    application for
allotment of the Permanent
Account Number and incurring
"COST" for that is "unfair and
unjust" to the applicant. It is the
proprietary/statutory function of
the Income Tax Department to
allot the same "Free of Cost", as
the same has been the normal
part of its function, empowered
by the Income-tax Act, 1961.
Moreover, there are some
hardships being faced by the
persons applying for PAN. One of
the hardships is that the allotment
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                          Page 29  
The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                        Suggestion
No
of PAN is not done in a timely
manner. Though there is no time
limit prescribed under any of the
provisions of Income-tax Act
regarding issuing PAN & PAN card
but it is essential for the Income
Tax Authority to issue PAN & PAN
card within a prescribed time
period- In the case of The
Honorable Calcutta High Court in
the case of Chandrakant Kandalal
Sheth vs. Union of India & Ors.
[255 ITR407] it has been held that
three months period can be
construed as the maximum time
period for issuance of PAN &
delivery of PAN card & if the
concerned authority finds that
PAN cannot be given quickly, it
must give the reason therefore at
the earliest.
21.    AIR              Section 285BA requires various          It is suggested that the AIR
information in   entities    to     furnish    Annual    information of the assessee may
"My Account"     information return with regard to       be allowed to be reflected under
facility         specified financial transactions in     "My Account" Facility provided
a prescribed form to the Income         by Department in CPC portal.
tax authorities. In order to bring in
more transparency, the AIR
information of the assessee may
be allowed to be reflected under
"My Account" Facility provided by
Department in CPC portal. A
consolidated      view     of     the
transactions entered into by the
assessee, would also enable the
professionals handling the tax
matters of the assessee, to guide
the assessee regarding the
probable compliance of the
relevant provisions of the Income-
tax Act with regard to the said
transactions, leading to correct
payment of taxes.
Page 30                                         Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                       Suggestion
No
22.    Applicability    The ICAI had pursuant to the           The suggested draft format of a
of SA -700 on    issuance of the Revised SA 700,        clean report has been submitted
form of audit    "Forming      an    Opinion    and     to the Under Secretary (TPL-III),
reports          Reporting        on       Financial    CBDT vide its letter No.
Statements", prescribed a revised      ICAI/DTC/2013-14/Rep-25 dated
format of the auditor's report on      7th     February,   2014.    The
financial statements.                  modifications in the report i.e.
As per SA 700 an auditor shall         qualification, adverse opinion,
modify the opinion in the audit        disclaimer of opinion, may be
report when:                           reported     by   the     auditor
accordingly.
a) the auditor concludes that,
based on the audit evidence            (SUGGESTIONS          FOR
obtained, the financial statements     REMOVING    ADMINISTRATIVE
as a whole are not free from           AND           PROCEDURAL
material misstatements                 DIFFICULTIES RELATING TO
DIRECT TAXES)
b) the auditor is unable to obtain
sufficient    appropriate    audit
evidence to conclude that the
financial statements as a whole
are      free    from     material
misstatement
Considering the materiality and
the pervasiveness of the effects or
possible effects on the financial
statements, the auditor may issue
a modified report with a:
a) Qualified opinion
b) Adverse Opinion
c) Disclaimer of Opinion
Also, SA 700 requires the auditor
to clearly lay down management's
responsibility     and     auditor's
responsibility. This revised format
has been made effective in
respect of audits of financial
statements for periods beginning
on or after 1st April 2012.
Considering the fact that SA700 is
applicable      to    non-corporate
entities also, ICAI had suggested
certain changes vide its letter No.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 31  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                   Suggestion
No
ICAI/DTC/2013-14/Rep-25
dated 7th February, 2014 to
the Under Secretary (TPL-III) in
Format of Form No. 3CB so as to
enable our members to comply
with guidelines issued by its
Council.
23.    Foreign    tax   Clause 207 relates to foreign tax It is suggested that detailed &
credit           credit allowable to an assessee, clear guidelines on foreign tax
guidelines       being a resident in India in any credit should be introduced.
financial year on income which is
taxed in India as well as outside
India. The said clause further
provides that where the assessee
is required to pay Indian income-
tax in respect of an income which
has been taxed in any specified
territory or other country with
which India has an agreement
under clause 291, the foreign tax
credit shall be allowed in
accordance with the agreement
entered into with such specified
territory or country. Where there is
no such agreement, the tax credit
shall be determined at the Indian
rate of tax or the rate of tax of the
other country, whichever is lower.
The credit, in either case shall not
exceed the Indian income-tax
payable in respect of income
which is taxed outside India and
the Indian income-tax payable on
total income of the assessee.
The existing foreign tax credit
guidelines are not sufficient to deal
with various foreign tax credit
issues. Hence, detailed guidelines
should be introduced to bring
clarity.
Page 32                                         Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                      Suggestion
No
24.    Issues arising   Ministry of Finance has recently       Since     "Advance     payment
from             amended Income tax Rules vide          against imports" and "Payment
Notification     Notification No 67/2013, dated 2-      towards imports-settlement of
No 67/2013, dt   9-2013 with regard to Foreign          invoice" are routine payment
2-9-2013         Outward Remittances and Form           made by the importers, they
amending         15CA &15CB. This notification is       may be included in the specified
Rule 37BB of     in supersession of an earlier          list.
IT Rules, 1962   Notification No 58/2013, dated 5-      (SUGGESTIONS          FOR
wrt    Foreign   8-2013.                                REMOVING    ADMINISTRATIVE
Outward                                                 AND           PROCEDURAL
Remittances-                                            DIFFICULTIES RELATING TO
Rule 37BB provides for the
Form 15CA &                                             DIRECT TAXES)
method/procedure to be followed
Form 15CB
while furnishing of information in
case any payment is made to non-
resident which is chargeable to
tax. Notification No. 67/2013, dt 2-
9-2013 provides through an
explanation a list of 28 payments
where there is no need to file form
15CA/15CB. As per the earlier
Notication no 58/2013, dated 5-8-
13, there were a total of 39
payments in the specified list
which were required to furnish
information in Part B of the Form
No.15CA. Payments which are not
there in the new specified list are
as below:
(i)    Advance payment against
imports
This is a routine payment made by
the importers. Non exclusion of
such payment from specified list is
unnecessarily      increasing  the
compliance      burden      of the
assessees. Further, it may lead to
harassment at the time of
assessment.
(ii)   Payment towards imports-
settlement of invoice
As     mentioned    above,     such
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                             Page 33  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                        Suggestion
No
payment is also made in a routine
manner by the importers.
Similarly, other payments which
were earlier in the specified list of
Not No 58/2013, dt 5-8-13 but not
included in new specified list of
Not No 67/2013, dt 2-9-2013 and
thereby increasing the compliance
burden of assesses unnecessarily
are as follows:
(iii) Imports by diplomatic
missions
(iv) Payments for surplus
freight or passenger fare
by     foreign      shipping
companies operating in
India
(v) Freight on imports -
Shipping companies
(vi) Freight on exports -
Shipping companies
(vii) Booking of passages
abroad       -     Shipping
companies
(viii) Freight on imports -
Airlines companies
(ix) Payments          for      life
insurance premium
(x) Freight        insurance       -
relating to import and
export of goods
(xi) Other general insurance
premium
25.    Number of         Even in the e-filing era, the           For the convenience of the tax
Returns and       assessees are overburdened with         payers it is suggested that the
payment           the compliances to be made with         number of returns and payment
schedule          regard to filing of returns and         schedule to be filed by the
should be         payment schedules. An assessee          assessee should be curtailed
curtailed         is required to file quarterly returns   appropriately.
relating to TDS on salaries,
Page 34                                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                          Suggestion
No
Quarterly returns relating to TDS         (SUGGESTIONS          FOR
on amounts other than salary,             REMOVING    ADMINISTRATIVE
and quarterly returns relating to         AND           PROCEDURAL
TCS. These are in addition to the         DIFFICULTIES RELATING TO
Income tax return form which is to        DIRECT TAXES)
be filed on annual basis. Due to
errors in the punched data or for
some other reason, the assessee
is required to file correction
statements or revised return
which is also a cumbersome
process.
Apart from this there is a payment
schedule to be followed in respect
of TDS/TCS, advance tax, Self
assessment tax and so on. This is
too cumbersome.
26.    Extension of     As the filing of e-TDS returns is an       It is suggested that due date for
time limit for   onerous task, it is very difficult for     furnishing of the TDS returns
filing of TDS    assessees to collate and compile           may be extended to 30 days
Return           all the voluminous data/information        from the end of the quarter
for filing of TDS returns within 15        instead of 15 days.
days from the end of the relevant          (SUGGESTIONS          FOR
quarter. Further, as the payment           REMOVING    ADMINISTRATIVE
challans from banks reach the              AND           PROCEDURAL
deductors by 10th of the next              DIFFICULTIES RELATING TO
month, it become all the more              DIRECT TAXES)
difficult to file returns within a short
span of time.
27.    Challan          Considering the fact that several          It is suggested that challan
correction       mistakes were being reported               Correction Mechanism be made
mechanism        which occurred on account of               applicable to all types of
wrong punching of data in the              challans including challans for
OLTAS by the banks, the CBDT               online payments, payments of
introduced     a    new      challan       wealth tax etc.
correction mechanism for paper             (SUGGESTIONS          FOR
based payments of income tax.              REMOVING    ADMINISTRATIVE
The said system has been                   AND           PROCEDURAL
appreciated by the assessees.              DIFFICULTIES RELATING TO
Since, inadvertent mistakes can            DIRECT TAXES)
occur while paying the income tax
online also, it is felt that challan
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                  Page 35  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                       Suggestion
No
correction system be made
applicable to challans in respect of
online payments of income tax
also.
28.    a) Difficulties   Presently, the refund, if exceeds      It is suggested that old paper
in             Rs. 1 lacs requires approval from      refunds not exceeding Rs.1
obtaining      the higher authorities. Apart from     lakh, issued by the department
old paper      these, re-issue of old paper           and not received by the
refunds        refunds, already issued by the         assessees, may not require
department         before        the   approval from higher authorities
implementation of Refund Banker        and must be left to the
Scheme but not received by the         Assessing Officers for disposal.
assessee, also requires approval       This will help in reducing the
from the higher authorities. The       pending grievances of non-
second part of the administrative      receipt of old paper refunds.
steps in refund cases have             (SUGGESTIONS          FOR
become        very      cumbersome     REMOVING    ADMINISTRATIVE
procedures and at the same time        AND           PROCEDURAL
also increases the responsibilities    DIFFICULTIES RELATING TO
of the higher authorities. Moreover,   DIRECT TAXES)
refunds in such cases often
delayed by more than 6 months
inspite of furnishing of bank pass
book and the indemnity bond by
the assessee in support of refund
not received by them.
b) Refunds        The assessees frequently change        To handle such cases, it is
not            their addresses due to several         suggested that once the return
delivered      reasons like change in job,            has been processed by CPC, the
due     to     marriage etc. However, in majority     file should be transferred to
change in      of cases they are unable to get        respective Assessing Officer,
address        their refund cheque due to             with whom the assessee can
changed address. Even if they          interact to resolve the issues in
disclose the current address in the    the processing of return, non
Income-tax return, the refund          receipt of refund cheque and so
cheque often goes to the older         on.
address and thus remains               (SUGGESTIONS          FOR
undelivered.                           REMOVING    ADMINISTRATIVE
AND           PROCEDURAL
DIFFICULTIES RELATING TO
DIRECT TAXES)
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Sr.      Section                Issue/Justification                        Suggestion
No
c) Issue of        New set of guidelines can be           It is suggested that in case of
Refunds         issued for granting refund of tax to   refunds of an amount not
in case of      the legal heirs of deceased            exceeding Rs. 50,000 which are
legal heirs     assesses. Most of the refund           payable to legal heirs of
claims are pending for several         deceased      assessee,     the
months as the department               condition of obtaining Court
software (AST) requires Court          Order be relaxed and refund be
Order for payment of refund.           given as per the discretion of
Minimum period of disposal of          the Assessing Officer.
order by Court is about 2 years.       (SUGGESTIONS          FOR
Obtaining Court Order can be           REMOVING    ADMINISTRATIVE
relaxed for refunds not exceeding      AND           PROCEDURAL
Rs.50,000/- and refund can be          DIFFICULTIES RELATING TO
given as per the discretion of the     DIRECT TAXES)
Assessing Officer.
d) Refund          The speed and the amount of            It is suggested that the refunds
amount to       refunds that have been granted by      in respect of all returns (e-filed
be directly     the Department in last few years       returns as well as manual
paid into       have been commendable. In order        returns)       be      mandatorily
the bank        to be further be effective and         deposited         directly    into
accounts        assessee friendly, it is suggested     assessee's bank account within
of     the      that the refunds in respect of e-      maximum time limit of 6 months
assessees       filed returns as well as manual        from filing of returns
returns be issued directly into        (SUGGESTIONS          FOR
assessees bank account within          REMOVING    ADMINISTRATIVE
maximum time limit of 6 months         AND           PROCEDURAL
from filing of returns. This would     DIFFICULTIES RELATING TO
solve the problem of undelivered       DIRECT TAXES)
refund cheques and also save on
interest which is paid by the
Government on delayed refunds.
29.    Audit of TDS       A major portion of the revenue by      It is suggested that an
returns            way of income-tax is recovered         independent audit provision
through deduction of tax at source.    may be inserted to provide for a
For furnishing the information         comprehensive audit of all the
required under revised clause 27       TDS returns filed with the
of Form No.3CD, an in-depth            Department. Appropriate forms
verification of the TDS returns is     of audit report can be
necessary.                             prescribed to certify about the
correctness of the quarterly TDS
returns. This will enable the
Department to rest be assured
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 37  
The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                       Suggestion
No
about the correctness of the
TDS returns filed as well as the
remittance of the tax deducted
at source to the credit of the
Central Government.
(SUGGESTIONS         FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
30.    Monetary         The monetary limits for all            Considering the Cost inflation
limits in the    exemptions or deductions were          Index (CII) of the year in which
Income-tax       provided long back. In has been        the various monetary limits
Act, 1961        long since the same have been          under the Income-tax Act,1961
revised considering the prevailing     were last revised and the CII of
inflationary conditions in India. An   the year 2013-14, an effort has
effort has been made to compile        been made to make a
all such monetary limits with the      comparative statement of the
Cost inflation index (CII) of the      present limit and the figure of
year in which they were last           tentative limit, had the CII been
revised and the CII of the year        applied to them, has been
2013-14 to arrive at the figure of     prepared. The same is given as
tentative present limit. The same      an annexure to this memoranda.
is given as an Annexure to this        It is suggested that the present
memorandum.                            monetary limits be revised
upwards appropriately.
Page 38                                        Pre-Budget Memorandum­ 2014 (Direct Taxes)  
PART II
SUGGESTIONS RELATING TO THE PROVISIONS
OF INCOME-TAX ACT, 1961
The Institute of Chartered Accountants of India
CHAPTER I
PRELIMINARY
Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 41  
The Institute of Chartered Accountants of India
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr.       Section               Issue/Justification                         Suggestion
No
31.   Definition    of   The Finance Act, 2012 had               (a) Since, these amendments
"amalgamation"     amended Sections 47(vii) and            are clarificatory in nature and
in section 2(1B)   Section 2(19AA) of the Income-tax       are proposed to remove the
Act. As per the Explanatory             conditions       which      were
Memorandum to the Finance Bill          impossible to fulfill, it is
2012, the purpose of aforesaid          suggested to make them
amendments is as under:                 applicable with retrospective
In a case where a subsidiary            effect i.e. from the date when
company amalgamates into the            the above conditions were
holding company, it is not possible     inserted in the said sections i.e.
to satisfy one of the conditions i.e.   for Section 47 (vii) with effect
the amalgamated company (the            from 1st April 1967 and for
holding company) issues shares          Section 2(19AA) with effect from
to the shareholders of the              1 April 2000.
amalgamating              company       (b)     Section 2(1B)(i) may be
(subsidiary company), since the         amended        appropriately      to
holding company is itself the           provide that all the property of
shareholder of the subsidiary           the amalgamating company or
company and cannot issue shares         companies (other than assets
to itself.                              like shares, debentures etc. held
Similarly, in the case of a             by any amalgamating company
demerger there is a requirement         or companies in another
under section 2(19AA)(iv) that the      amalgamating        company       or
resulting company has to issue          companies)                    before
the shares to the shareholders of       amalgamation becomes the
the demerged company on a               property of the amalgamated
proportionate basis. However, it        company        by      virtue     of
is not possible to satisfy this         amalgamation. Corresponding
condition where the demerged            amendment may also be made
company is a subsidiary company         in Clause (ii) of section 2(1B).
and the resulting company is the        (SUGGESTIONS         FOR
holding company.                        RATIONALIZATION OF THE
Therefore, it is proposed to amend      PROVISIONS OF DIRECT TAX
the provisions of section 47(vii)       LAWS)
and 2(19AA) so as to exclude the
requirement of issue of shares to
the shareholder where such
shareholder       itself  is    the
amalgamated company or the
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                  Page 43  
The Institute of Chartered Accountants of India
Sr.       Section                 Issue/Justification                        Suggestion
No
resulting company.
Further, section 2(1B) of the
Income-tax Act, 1961 provides for
the definition of "amalgamation"
which, inter alia, states that all the
property of the amalgamating
company          or       companies
immediately         before         the
amalgamation        becomes        the
property of the amalgamated
company         by      virtue      of
amalgamation.
This may lead to hardship in a
case where the two amalgamating
companies have cross holdings. In
such a case, on amalgamation the
shares held by the amalgamating
companies in each other are
cancelled out and thus the
requirement of transfer of all
assets to the amalgamated
company will never be fulfilled.
This seems to be an inadvertent
error in drafting and thus needs to
be amended appropriately.
32.   Books          of   The existing income tax laws do          Section 2(12A) defining books
accounts       in   not specifically clarify or permit       or books of accounts should
electronic mode-    the maintenance of books of              clearly state that the books
Section 2(12A)      accounts in electronic form              maintained in digital form would
instead of physical books / print        also be considered as books of
outs                                     accounts for the purposes of
the Act. The assessees may
scan the original documents
With the IT and telecom revolution
and subsequently be permitted
and the consequent digitization in
to destroy the same as they
the past decade, the economies
would be available only in
globally are moving towards a
digitized form.
paperless environment and there
is an increasing reliance on the
digitized records.                       The permission to maintain the
books in electronic form should
be given to companies beyond a
Further, as the companies are
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The Institute of Chartered Accountants of India
Sr.       Section                Issue/Justification                       Suggestion
No
increasing in size, the volume of      certain prescribed size & scale
documents       generated       has    of operations. Consequential
increased manifold and there are       amendments may be made and
logistic issues is maintaining the     rules prescribed, as deemed
documents such as invoices,            necessary to provide guidance
contract, ledgers, etc in a physical   and check points to prevent
format.                                misuse.
Maintaining books of account in        (SUGGESTIONS         FOR
electronic mode, would not only        RATIONALIZATION OF THE
free the precious and ever             PROVISIONS OF DIRECT TAX
shrinking office space of the          LAWS)
corporates but also ensures better
data storage & IT enabled Record
management sorting, Indexing,
Bar Coding at document & file
level to ensure speedy retrieval.
It may be noted that Section 6 to
Section 8 of the Information
Technology Act 2000 permits use
of electronic records and use of
electronic signature while dealing
with Government or its agencies.
Thus, Government itself accepts
the electronic mode while dealing
with it.
However, the Section 9 of the said
Act does not enforce the
electronic form and hence in the
absence of a suitable amendment
to the Act, it may not be possible
to use the electronic records as
envisaged by the Information
Technology Act, 2000.
33.   a) Section           a)       Though as per section        Rs.25 lakhs may be the basic
2(15)- Definition   2(15),      "charitable    purpose"    exemption limit, and receipts in
of     charitable   includes the advancement of any        excess of Rs.25 lakhs may be
purpose             other object of general public         subject to tax at maximum
utility, however, the advancement      marginal rate after deducting
of any other object of general         the related expenditure.
public utility would not be a          (SUGGESTIONS TO REDUCE /
"charitable purpose", if it involves   MINIMIZE LITIGATIONS)
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                               Page 45  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                   Suggestion
No
carrying any activity in the nature
of trade, commerce or business or
rendering any service in relation to
any trade, commerce or business
for a cess, fee or any other
consideration irrespective of the
nature of use or application or
retention of the income from such
activities.
In order to provide relief to the
genuine hardship faced by
charitable organizations which
receive marginal consideration
from such activities, the Finance
Act, 2010 had provided that the
benefit of exemption will not be
denied to the institutions having
object of advancement of general
public utility, even where they are
engaged in the activity of trade,
commerce or business or
rendering any service for a cess or
fee, provided the aggregate value
of receipts from such activities
does not exceed Rs.10 lakh in the
year       under      consideration.
Therefore, in effect, "advancement
of any other object of general
public utility" would continue to be
a "charitable purpose", if the total
receipts from any activity in the
nature of trade, commerce or
business, or any activity of
rendering any service in relation to
any trade, commerce or business
does not exceed Rs.10 lakh in the
previous year. The said limit of
Rs.10 lakhs was increased to
Rs.25 lakhs by the Finance Act,
2011 with effect from A.Y. 2012-
13. Accordingly, if the receipts
from such activities are Rs.25
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Sr.       Section                Issue/Justification                        Suggestion
No
lakhs or less, it would continue to
be a charitable purpose.
However, if the receipts from such
activities are Rs.25 lakhs or more,
the trust would lose its "Charitable"
status.     Also, the "charitable"
status of the trust or institution is
likely to change every year
depending on whether or not its
receipts exceed Rs.25 lakhs in
that year.
In order to overcome this difficulty,
instead of denying exemption in
cases where the receipts exceed
the specified limit, the exemption
limit may be fixed at Rs.25 lakhs
and receipts over this limit may be
subject to the maximum marginal
rate after deducting the related
expenditure i.e., the net receipts
over and above Rs.25 lakhs may
be subject to maximum marginal
rate.
b) Activities of    b)       Proviso to section 2(15) of   It is suggested that section
Governmental       the Income-tax Act provides that        2(15) be amended to provide a
authorities be     in case the receipt from any trade,     third proviso to the effect that
treated       as   commerce, business or services          the first proviso shall not apply
activities   for   related thereto exceeds to Rs 25        to a governmental authority
charitable         Lacs, it would not be treated as        carrying any function entrusted
purpose            charitable purpose under the head       to a municipality under article
"advancement of general public          243W of the Constitution. In
utility". As a consequence the          effect, for such government
provisions of section 11 and 12 of      authorities,    even     if   the
the income tax act will not apply.      activities incidental thereto
It may be noted that the                result in receipts of an amount
Development authorities or urban        exceeding Rs 25 lacs it should
improvement trust are carrying the      be considered as incurred for
activities of the municipalities as     advancement of general public
provided in the Article 243W in         utility.
Schedule XII of the Constitution of     Also, as in case of service tax
India. They are termed as               Notification 25/2012 dated 20th
Governmental authority as per
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 47  
The Institute of Chartered Accountants of India
Sr.       Section               Issue/Justification                       Suggestion
No
Notification 25/2012-Service tax        June     2012,      the  term
dated 20th June 2012.                   "governmental authority" may
The aforesaid notification provides     be defined in the Income-tax
a negative list of services i.e.        Act, 1961 as under:
services which are exempt from          " `Governmental Authority'
the applicability of the service tax.   means a board, or an authority
Para 39 of the said circular            or any other body established
exempts       services      of     a    with 90% or more participation
governmental authority by way of        by way of equity or control by
any activity in relation to any         government and set up by an
function entrusted to a municipality    Act of the Parliament or a State
under article 243W of the               Legislature to carry out any
Constitution from applicability of      function entrusted to a
service tax.                            municipality under article 243W
Since governmental authorities are      of the Constitution."
carrying on activities in relation to   (SUGGESTIONS         FOR
any function entrusted to a             RATIONALIZATION OF THE
municipality under article 243W of      PROVISIONS OF DIRECT TAX
the Constitution, in line with the      LAWS)
provisions of service tax, their
activities should atleast be
considered as being carried for
"charitable purpose" under the
provisions of the Income-tax Act,
1961. This may done by amending
the definition of "charitable
purpose" through insertion of third
proviso to the effect that the first
proviso shall not apply to the
activities of a governmental
authority carrying any function
entrusted to a municipality under
article 243W of the Constitution.
Also, as in case of service tax, the
term     governmental      authority
should be defined in the Income
tax Act, 1961.
Such clarity in law would reduce
avoidable litigations in this regard.
c)    Mandatory   a)     The amendment by the             Section 10(23C)     should be
application of    Finance Act, 2002 requires              amended     to      specifically
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The Institute of Chartered Accountants of India
Sr.      Section                Issue/Justification                       Suggestion
No
income       by    mandatory application of income       exclude 'corpus donations'
charitable         by charitable trusts/institutions     from the requirement of
trusts/            including those enjoying benefits     mandatory     application of
institutions       under section 10(23C) to its          income by such trusts/
under section      objects, subject to accumulation      institutions.
10(23C)            of not more than 15% of its           (SUGGESTIONS         FOR
income including income from          RATIONALIZATION OF THE
voluntary contributions. Similar      PROVISIONS OF DIRECT TAX
provisions under section 11(1)        LAWS)
read with section 12(1) exclude
'corpus donations' (voluntary
contributions made with a specific
direction that they shall form part
of the corpus of the trust or
institution) from the mandatory
requirement of application of the
income. No such provision has
been made in section 10(23C).
This will compel the Institutions
coming within the scope of section
10(23C) to apply even their
corpus donations to the day to-
day activities for getting the
exemption. This will be prejudicial
to them because they cannot build
up the corpus fund.
b) Provisions under section 11(1)      Depreciation on assets acquired
read with section 12(1) exclude       out    of     corpus      donations
'corpus donations' (voluntary         (voluntary contributions made
contributions made with a specific    with a specific direction that they
direction that they shall form part   shall form part of the corpus of
of the corpus of the trust or         the trust or institution) should be
institution) from the mandatory       treated as application of income.
requirement of application of the     (SUGGESTIONS         FOR
income. On the same lines,            RATIONALIZATION  OF  THE
depreciation on assets acquired       PROVISIONS OF DIRECT TAX
out of such corpus funds should       LAWS)
be treated as application of
income.
c) Section 11(1) and section           Since section 10 provides for
10(23C)      require    mandatory     incomes which do not form part of
application of income by charitable   total income, like dividend from
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 49  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                        Suggestion
No
trusts/institutions to its objects,    mutual funds etc such incomes
subject to accumulation of not         should be exempted from the
more than 15% of its income. The       mandatory      provisions      of
income to be applied includes          application under section 10(23C)
income which is otherwise exempt       and 11(1).
under section 10 of the Income tax     (SUGGESTIONS         FOR
Act, 1961 like dividend income,        RATIONALIZATION  OF  THE
dividend from mutual funds.            PROVISIONS OF DIRECT TAX
Since section 10 provides for          LAWS)
incomes which do not form part of
total income, such incomes should
be exempted from the provisions
of application under section
10(23C) and 11(1).
34.   Deemed           According to section 2(22)(e), any      a)    Firstly, it would be in the
Dividend-        payment by a company, not being         interest of justice that genuine
section        - a company in which public are           & bonafide transactions of loan
2(22)(e):        substantially interested, of any        or advance should not be
sum, by way of advance or loan to       treated as deemed dividend. To
a shareholder (holding not less         effectuate this, a provision
than 10% of voting power) or to a       should be introduced that if the
concern in which such shareholder       loan or advance is not repaid
is a member or partner having           within a certain period, it should
substantial interest shall be           be taxed as deemed dividend in
treated as deemed dividend to the       the year in which such certain
extent     company      possesses       period expires. In this way,
accumulated profits & shall be          bonafide assessee with an
taxable in the hands of                 intention to repay loan would
shareholder or concern, as the          get excluded & those with an
case may be.                            intention of never repaying will
The logic behind insertion of this     get taxed.
provision is to tax transactions       b)    Secondly, whenever the
coloured as loans or advances in       loan or advance is to be taxed
an attempt to avoid dividend           as a deemed dividend in the
distribution tax by the payer & also   hands of recipient, tax should
avoiding tax in the hands of the       not be levied on the entire
recipient. But the same is causing     amount of loan or advance
difficulty in genuine and bonafide     (provided there are sufficient
cases. For example, for the            accumulated     profits).  Tax
purpose of diversifying into new       should be levied only on that
business activities by a group, a      proportion of the loan or
new entity is often formed &           advance/ accumulated profits
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Sr.       Section                Issue/Justification                       Suggestion
No
therefore,     management          is   having      regard    to    the
common. So the conditions of            shareholding percentage of the
section 2(22) (e) are satisfied. It's   concerned shareholder. This is
natural that the new entity will        for the very simple reason that
borrow funds from existing entity       a particular shareholder does
to meet its funding requirements &      not have a right on the entire
will repay when it becomes self         accumulated profits of the
sufficient.                             company & his right is
The provision u/s 2(22) (e) is          restricted to his shareholding
based on the blanket assumption         only.
that there is an attempt to avoid
tax & the bona fide assessee will
also get crushed under this.
Therefore, there is a strong need
to amend the provisions of this
section so that the genuine
assessee shall be relieved.
35.   Section       3-   In    Income-tax      Act, 1961         In line with the provision of
Definition    of   "Assessment Year" defined in            section 320(92) read with
Previous year      Section 2(9) "Assessment Year"          section 2 of the Direct Taxes
means the period of twelve              Code, 2013 the concept of
months commencing on the 1st            "previous       year"     and
day of April every year.                "assessment year" may be
"Previous Year" is defined in           replaced with the "financial
Section 3 of the Income-tax Act,        year" to mean as below:
1961 to mean "for the purpose of        "financial year" as per Direct
this Act, "previous year" means         Taxes Code,2013 means--
the financial year immediately          (a) the period beginning with the
preceding the assessment year.          date of setting up of a business
There is no difference in the           and ending with the closure of
period of Assessm.ent Year &            the business or the 31st day of
Previous Year since both are            March following the date of
financial year/Income Year for          setting up of such business,
accounting purpose.                     whichever is earlier;
A normal income tax assessee            (b) the period beginning with
does     not     understand  the        the date on which a source of
difference    of     wording  of        income newly comes into
Assessment Year (AY) & Previous         existence and ending with the
Year/ Accounting Year (AY) and          closure of the business or the
gets confused in presenting his         31st day of March following the
details, while paying Advance           date on which such new source
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 51  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                     Suggestion
No
Income tax, TDS or filing the        comes       into      existence,
return of income Tax. Everybody      whichever is earlier;
considers Assessment Year (AY),      (c) the period beginning with the
previous     year    (PY)    and     1st day of the financial year and
Accounting Year (A Y) as same.       ending with the date of
To avoid misunderstanding or         discontinuance of the business
confusion among Income Tax           or      dissolution    of     the
payers (Assesses) and for            unincorporated       body      or
keeping the records, the concept     liquidation of the company, as
of     "previous    year"     and    the case may be;or
"assessment year" may be             (d) the period of twelve months
replaced with the "financial year"   commencing from the 1st day of
of "previous year". Even though,     April of the relevant year in any
the said suggestion has been         other case;
considered while framing the
Direct Taxes Code, to simplify the
law, it would be appropriate to
bring the change in the Income-
tax Act itself.
Page 52                                       Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
CHAPTER II
BASIS OF CHARGE
Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 53  
The Institute of Chartered Accountants of India
Page 54                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                    Suggestion
No
36.    Scope      of a)       Various      retrospective It is suggested that
Royalty       amendments with effect from 1st 1) Payments                        for
Income      - June, 1976 were made to section           copyrighted article like
Section       9(1)(vi) dealing with royalty             shrink-wrapped software
9(1)(vi)   of income.Internationally,          as       as also payments made
Income-tax    evidenced by OECD Commentary              by      distributors      of
Act, 1961     as also books of eminent experts,         software be specifically
the following two basic principles        excluded       from      the
with regard to software payment           definition of "royalty".
are recognized and well settled:
2) Infact `Explanation 4'
i) The proposition that "right to         inserted by the Finance
use a copyright" is different from        Act, 2012 should be
"right to use a copyrighted article"      deleted from Section
is recognized and it is only the          9(1)(vi):
`right to use a copyright' which is
Such an amendment to remove
covered within the definition of
the clarificatory retrospective
royalty.
amendment made by Finance
ii) The distributor of computer Act, 2012 would positively
software does not pay to exploit impact the sentiment of the
any rights in the software but only software industry and also
for acquisition of the software for uphold        the     constitutional
further circulation. In view of validity.
these, payments made by a
distributor to the copyrighter
holder are in the nature of
business income and not royalty
income.
Also,     `Packaged       /Canned
Software' means ready-made
software that could be sold off the
shelf. Sale of such software
products represent sale of
copyrighted articles as against a
copyright i.e. such transactions
represent     sale   of     goods.
Packaged software has been held
to be `Goods' even by the
Supreme Court in case of TCS
vs. State of AP (271 ITR 401).
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                           Page 55  
The Institute of Chartered Accountants of India
The Central Board of Excise and
Customs        ("CBEC")        has
recognized             `Information
Technology Software' as `Goods'
and classified the same as
Central Excise Tariff Item 8523
80 20 in Schedule I to the Central
Excise Tariff Act, 1985. Further,
`Packaged        Software/Canned
Software' is       recognized as
`Goods' for the purposes of
Central Excise Law by the CBEC,
which is another wing of the
Ministry of Finance. These facts
lead to the conclusion that
`Packaged        Software/Canned
Software' are in the nature of
`Goods' and the legislation also
recognizes the same.
Given      the    above,      it  is
recommended that a specific
amendment be made to the
Income tax Act to exclude
`Packaged/ Canned Software'
from the purview of `royalty'
defined under Section 9(1)(vi).
Further, in certain cases, these
software         products        are
downloadable from the internet
and not necessarily delivered in
tangible media such as a CD or a
DVD. However, irrespective of the
mode of delivery, the fact remains
that what is sold is a `copyrighted
article' and not a `copyright'.
b) Exclusion of packaged               To bring utmost clarity, it is
software from applicability of         also suggested that a
TDS under Section 194J of the          specific amendment be
IT Act:                                made to Section 194J of the
Circular13/2006 dated 13.12 2006       IT Act to exclude sale of
issued by the CBDT states that         software products from the
TDS shall be applicable only           ambit of tax withholding. In
when there is a `contract for work'    this regard, it is suggested
and not where there is a `contract     that the following provision
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The Institute of Chartered Accountants of India
for sale'. This proposition has        be included in Section 194J
also been upheld in various            of the Act:
judicial precedents like BDA           Amendment required
Limited vs. ITO (TDS) 281 ITR 99
"194J. (1) Any person, ...
(HC Bom), CIT vs. Dabur India
Limited (283 ITR 197) (HC Del).        Provided that no deduction
shall be made under this
Considering the facts and
section--
arguments above, it is clear that
transaction       of   sale      of     (A) ...
`Packaged/Canned Software' is a         (B) ...
`contract for sale' as against a        (C) from any sums, if
"contract     for    work'     and          credited or paid for the
consequently, should not attract            transfer of a computer
TDS provisions. It is relevant to           software (including the
note that `Packaged/Canned                  granting of a licence),
Software' is also subject to excise         along with or without a
duty. There are no other goods in           computer or computer-
India which are subject to both             based equipment or for
excise duty and TDS.                        ancillary services such
An amendment to the Income tax              as up gradation or
Act to exclude `Packaged/Canned             subscriptions, which
Software' from the purview of               does      not    involve
`royalty' would automatically               transfer of all or any
exclude the transactions from the           rights in respect of any
purview of Section 194J of the IT           copyright."
Act and would help resolve the
withholding tax issue faced by
traders     of     hardware    with
embossed software.             The
distribution network and channel
partners for off the shelf
packaged software also deal with
hardware like computers, desktop
etc. The packaged software is
mostly sold along with the
hardware, on the same invoice.
There is no obligation of TDS on
any hardware items, and the
traders are finding it confusing
and difficult to discharge the TDS
obligation arising out of the sale
of          the          `Packaged
Software/Canned           Software'.
Resolution of the definition of
royalty to exclude `Packaged
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                            Page 57  
The Institute of Chartered Accountants of India
Software/Canned Software' would
also help traders and boost ease
of business.
Separately, Software Ancillary
Services such as Upgrade Fees,
Subscriptions, etc. which do not
involve transfer of rights, or grant
of license but involve only
payments of consideration for
services is not `Royalty' for the
purposes of Section 194J read
with Section 9(1)(iv) Explanation
2 of the IT Act. Clarification may
be issued that AMC's, Upgrade
Fees, Subscriptions, etc. which
do not involve transfer of rights,
or grant of license, but involve
only payments of consideration
for services is not "Royalty" for
the purposes of Section 194J
read with Section 9(1)(iv)
Explanation 2 of the IT Act and
that such transaction are not
liable for TDS under Section 194J
of the IT Act.
37.       Carry forward    The Income-tax Act, 1961               It is suggested that assessees
of      excess   allows for set off in respect of       be permitted to carry forward
foreign    tax   foreign taxes paid on overseas         (say for five years) such
credit           income. However, in case of            unutilized credit (in USA such
loss/inadequate profits, no set        relief is granted vide section
off may be possible. In the            904(c) of Federal Tax Act) for
current economic scenario of           adjustment in future years.
the global economy, business           (SUGGESTIONS         FOR
outlook has become extremely           RATIONALIZATION OF THE
uncertain and results have             PROVISIONS OF DIRECT TAX
become very volatile.                  LAWS)
Page 58                                           Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
Chapter III
INCOMES WHICH DO NOT FORM PART OF
TOTAL INCOME
Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 59  
The Institute of Chartered Accountants of India
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                       Suggestion
No
38.    Leave Travel     As per the provisions of section       To be in line with the concept of
Concession/      10(5) of the Income-tax Act,           "financial year" adopted by
Assistance -     1961, an exemption of the value        other provisions of the Income
Replacement      of           leave           Travel    tax Act, it is suggested that the
of "Calendar     Concession/Assistance received         concept of calendar year should
year"       by   by the employee from his               be replaced with financial year
"Financial       employer is provided subject to        (April ­ March)
year":           fulfillment     of      prescribed     (SUGGESTIONS TO REDUCE /
conditions. Rule 2B provides for       MINIMIZE LITIGATIONS)
the specified conditions to be
fulfilled. One of the conditions is
that the exemption can be
availed only in respect of two
journeys performed in a block of
four CALENDER YEARS.
The concept of "Calendar year"
was introduced in the year prior
to 1989 when there was no
uniform Previous Year. Since
1989 uniform Previous Year has
been introduced i.e. April ­
March. To be in line with the
concept of "financial year"
adopted by other provisions of
the Income tax Act, it is
suggested that the concept of
calendar year should be replaced
with financial year (April ­ March)
i.e. the calculation of block period
shall be shifted from Calendar
year to Financial Year.
39.    CER Sale to be   Carbon credit is an incentive          This credit should be treated as
treated     as   available to the Industries            capital receipt free from any
Capital          reducing CO2 emission by               taxes. Alternatively, the amount
Receipt          investing in energy efficient          spent should be eligible for
technologies. In the present day       deduction under section 10AA,
scenario, the cost of putting          80IA, 80IB, 80IC etc.
additional technology for clean        (SUGGESTIONS                  FOR
development mechanism is               RATIONALIZATION        OF     THE
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                 Page 61  
The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                      Suggestion
No
relatively high. The incentive is   PROVISIONS OF DIRECT TAX
given to relatively offset the      LAWS)
additional cost of Investments in
such Capex. Further, this credit
can be viewed as an incentive,
which      augments     country`s
foreign exchange earnings.
40.    Section           Section 10(10D) provides for        It is suggested:
10(10D) TDS in    non-taxability of sum received      (a)     that a provision relating
respect      of   from maturity of insurance          to TDS should be inserted in
maturity     of   policies. However, following are    Chapter XVIIB to cover such
insurance         some exceptions to this:            payments where the exemption
policies which    (a) any sum received under          under section 10(10D) is denied
are     taxable   section      80DD(3)        or      to the recipient of income from
under section     80DDA(3)(Substitutedby section      insurance companies.
10(10D)           80DD by Finance Act,2003)or      (b)     that where the premium
(b) any sum received under paid is above 10% or 20%, as the
Keyman Insurance Policy.         case may be, of capital sum
(c) any sum received under an assured, the premium paid
insurance policy issued after certificate (receipt) issued by
01.04.2003, but on or before insurance companies for the
31.03.2012 in respect of which purpose of 80C should clearly
premium payable for any of the mention that the qualifying
years during the term of policy amount for 80C deduction in
exceed 20% of actual capital sum respect of such premium paid is
assured.                         only up to 10%/20% as the case
may be, of capital sum assured.
(d) any sum received under an
insurance policy issued on or (c)        Instead of any sum
after 01.04.2012 in respect of received being made chargeable
which premium payable for any to income tax, only the sum,
of the years during the term of which is in excess of the
the policy exceeds 10% of the premium payments made by the
actual sum assured.              insured to the insurer should be
considered as income exigible to
(e) any sum received under an
tax. Suitable clarifications may
insurance policy issued on or
be made accordingly.
after 01.04.2012 in respect of
which premium payable for any (SUGGESTION TO IMPROVE TAX
of the years during the term of COLLECTION)
the policy exceeds 15% of the
actual sum assured, in case the
policy is issued on or after
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The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                       Suggestion
No
1.4.2013 for insurance of life of
the person referred to in section
80U and section 80DDB.
Any sum received by the
beneficiary on maturity of
insurance policies in above-
mentioned cases is taxable.
However, there are no provisions
under chapter XVIIB to deduct
tax at source from the sum being
paid to the beneficiaries in such
cases due to which many policy
holders getting maturity from
insurance companies without
payment of taxes.
41.    Definition   of   Any sum received under a              It is, therefore, suggested that in
"Keyman           Keyman insurance policy is not        cases where keyman insurance
Insurance         exempt under section 10(10D).         policy is assigned to the
Policy"       -   The meaning of "Keyman                employee, the employer should
Section           Insurance Policy" given in            not be made liable to deduct tax
10(10D)           Explanation 1 to section 10(10D)      at source. The insurance
was amended by Finance Act,           company may be vested with the
2013 to include such policy           obligation to deduct tax at
which has been assigned to a          source in respect of such
person at any time during the         payments.
term of the policy, with or without    (SUGGESTIONS        FOR
consideration". This amendment        RATIONALIZATION OF THE
is effective w.e.f. 1.4.2014 (i.e.    PROVISIONS OF DIRECT TAX
A.Y.2014-15).                         LAWS)
The effect of this amendment is
to deny the benefit of exemption
in respect of maturity proceeds
of keyman insurance policy
which has been assigned to a
person during the term of the
policy, whether with or without
consideration, by including the
assigned policy within the
definition of "Keyman insurance
policy".
The issues under consideration
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 63  
The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                        Suggestion
No
and suggestions thereof in this
regard are as follows ­
a)       Consequent       to     the
amendment in the definition of
"Keyman insurance policy", the
maturity proceeds received by
the person to whom the policy is
assigned, becomes taxable as
"Profits in lieu of salary" under
section 17(3)(ii). Since any
salary due from an employer or a
former employer to an assessee
in the previous year, is
chargeable under section 15 and
the definition of salary under
section 17(1) includes "profits in
lieu of salary", it appears that the
employer       or     the    former
employer, as the case may be,
would be required to deduct to
tax at source under section 192
at the time of payment. It is
practically difficult for the
employer or former employer to
deduct tax at source on payment
received by the employee
directly from the insurance
company.
b)       Further,   the      entire    b) It is suggested that section
proceeds would be subject to tax       17(3)(ii) may be appropriately
under section 17(3)(ii) in the         amended to provide that tax
hands of the person to whom the        would be levied only to the
policy is assigned, whereas only       extent of such difference, or in
the premium paid by the                the alternative, deduction for
employer on which deduction            surrender value may be provided
has been claimed         less the      for under section 16. In such a
surrender value paid by the            case, the employer can deduct
employee to the employer at the        tax at source on the differential
time of assignment should be           amount treated as "profit in lieu
subject to tax, since the same         of salary" at the time of
represents the actual benefit          assignment.
availed by the assignee.               Further,   in   any   case,   the
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The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                       Suggestion
No
maturity proceeds received on
death of the assignee should be
kept out of the tax net. This
benefit is similar to the
exemption given in respect of
life insurance policies, where the
annual premium paid exceeds
10% of minimum sum assured.
42.    Section 10(13)-   Section 10(10AA) provides for         Section 10(13) may be amended
Payment from      exemption for payment received        to exempt commuted value
approved          as cash equivalent of leave           received by an employee from
superannuatio     salary in respect of earned leave     the    superannuation      corpus
n fund            period at the time of retirement      standing to his credit at the time
whether superannuation or             of voluntary retirement, by
otherwise.                            including    the    words       "or
Section 10(13) provides for           otherwise" in line with section
exemption with regard to              10(10AA) of the Income tax Act,
payment from an approved              1961.
superannuation fund. Section          (SUGGESTIONS                  FOR
10(13)(ii) of the Act provides for    RATIONALIZATION OF THE
exemption in the hands of the         PROVISIONS OF DIRECT TAX
employee in respect of the            LAWS)
amount received on commutation
of the annuity in case of
retirement at or after a specified
age or becoming incapacitated
prior to such retirement. This
provision however does not
cover commutation of an annuity
paid on voluntary retirement of
the employee.
Section 10(10AA) as mentioned
above has taken care of such
case by using the terminology "or
otherwise". Since the intention of
the law makers is clear by the
wordings of section 10(10AA),
section 10(13)(ii) may be
appropriately      amended       to
include the words "or otherwise".
This will provide relief to genuine
taxpayers who are taking
voluntary retirement.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 65  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                           Suggestion
No
43.    Annual           "Under section 10(23C)(iiiad)               It is suggested that "Annual
receipts"        and (iiiae) of Income-tax Act, it is        Receipts" be clearly defined as
under section    provided that the income of                 income of        the hospitals/
10(23C)          University/Educational                      educational institutions arising
institutions/hospitals/            other    regularly/every     year      but
institutions specified therein will         excluding value of donation
be exempt provided they comply              received in kind by way movable
with the conditions stipulated              assets,                     land,
therein. Also it is provided that           hospitals/educational
"aggregate annual receipts" of              equipment, sale consideration
such institutions shall not exceed          received on disposal of land,
the amount of annual receipts as            shares or other movable
may be prescribed.             Though       property,    hospital/educational
annual receipts have been                   equipment etc.
prescribed as Rs.1 crore vide               Further, it may be specifically
Rule 2BC of Income-tax Rules,               provided that donations received
the word "annual receipts" have             towards corpus by way of land,
not been defined in the Income-             movable assets are excluded
tax Act.                                    from computation of "Annual
It is not clear as to whether:              Receipts" as prescribed under
(a) for        computing        "annual     Rule 2BC of Income-tax Rules.
receipts" only the receipts of        (SUGGESTIONS TO REDUCE /
such       institutions       from    MINIMIZE LITIGATIONS)
educational/hospital
activities alone are to be
considered each year;
(b) Certain receipts of such
institutions that are not
received on annual basis
e.g. receipts from sale of
property, equity shares and
other        proceeds            on
divestment are to be
excluded          from          the
computation of "annual
receipts";
(c) In certain cases where such
charitable            institutions
receive donations in kind in
the form of land, movable
assets etc. whether "annual
receipts" would exclude such
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The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                        Suggestion
No
receipts since they are not
received annually.
44.    Tax policy for   The National Rural Health              The provisions of Section
MGNREGA,         Mission (NRHM) of the Ministry         10(23C) (iiiac) of the Income-tax
SSA, NRHM        of Health & Family Welfare was         Act, 1961 may be applicable to
launched on 12th April, 2005 by        such societies for getting
the Government of India to             exemption from levy of Income
improve medical facilities in rural    Tax which are reproduced
areas in the country. The NRHM         below:
seeks to provide accessible,            "Any      hospital     or     other
affordable and quality health          institution for the reception and
care to the rural population,          treatment of persons, suffering
particularly vulnerable sections.      from      illness     or      mental
NRHM aims to reduce the                defectiveness      or     for    the
Maternal Mortality Ratio (MMR),        reception and treatment of
Infant Mortality Rate (IMR) and        persons during convalescence
the Total Fertility Rate (TFR). It     or of persons requiring medical
also envisages increasing public       attention      or    rehabilitation,
spending on health from 0.9% to        existing solely for philanthropic
2-3% of the GDP with improved          purposes not for profit and
arrangements for community             which is wholly or substantially
financing and risk pooling. The        financed by the Government"
NRHM has provided an umbrella
As per the above provisions a
under which the existing
notification may be issued
Reproductive and Child Health
granting exemption to all the
Programme (RCH) and various
Societies registered at State &
National      Disease      Control
District level being funded by
Programmes (NDCPs) have
Govt. (Central/ State) otherwise
been incorporated.
a specific exemption should be
The Ministry of Health & Family        provided to such societies w.e.f.
Welfare is implementing National       the date of the formation of such
Rural Health Mission as a              societies/ launching of the
Centrally Sponsored Scheme             programme. This may not be
(CSS). As against a Central            applicable not only for societies
Sector Scheme, a CSS is funded         formed for implementation of
by the Govt. of India and              Health Programme but also for
implemented by and in the              other programmes such as
States. For the Scheme's               Education & National Aids
implementation, the funds are          Control Programmes, where also
routed as Grants-in-Aid from the       the funds are routed through
Govt. of India to the State Health     societies.
Societies and District Health
As per the existing provisions of
Societies/        Sub       district
Section 12A of the Income Tax
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                 Page 67  
The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                       Suggestion
No
formations.                           Act, 1961 each State and District
As per the existing provisions of     Health Societies are eligible to
the Income-tax Act, 1961, all the     get tax exemption if they comply
States and District Health            the conditions and procedure as
Societies are required to get         laid down under Section 12A &
themselves registered under           12AA of Act which provides of
`Section 12AA' and required to        getting Registration of the
file the return of income. Further,   Society and filling a regular
as per the provisions of the          Income Tax Return as per the
Income-tax Act, 1961 each such        provisions of the Income Tax
society should spend 85% of the       Act.
grant received during the year        Recently introduced section
within the same year and if the       empowers         the       Central
unspent balance is more than          Government to notify for 100%
15% of the grant received the         exemption u/s 10(46) if covered
same becomes taxable. Under           under the provisions of this
the NRHM, States/ Districts           section and the SHS and DHS
when unable to utilise the entire     falls under such category, it is
Grant within the year of receipt      therefore      suggested       that
have to carry forward the same        exemption be granted to all SHS
for the ensuing financial year(s).    and DHS so that the same is
The NRHM programme is an              made available to all at least
ongoing programme and funds           from the current financial year
unspent are being utilised in         so that from the Assessment
subsequent years, as absorptive       Year 2012-12 these societies are
capacity increases.                   exempted from filling the Income
Taxing the unspent balances           Tax Return or even if they are
therefore in effect reduces funds     required to file the return they
available for implementation of       can do so as per the directions
the Mission and is a retrograde       to be given in the Notification.
measure adversely impacting the       (SUGGESTION FOR REDUCE/
programme and expenditure in          MINIMIZE LITIGATIONS)
such a critical social sector as
health.
Several representations have
been from State of Tamil Nadu,
Karnataka & Himachal Pradesh
requesting to get exemption to
the State & District Health
Societies from the levy of
Income-tax, as either they are
not getting registration u/s 12AA
of Income-tax Act, 1961 or if got
registered being tax imposed on
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The Institute of Chartered Accountants of India
Sr.      Section                Issue/Justification                       Suggestion
No
the unspent balances.
45.    Income-tax         The securitization trust has so far   Instead of distribution tax model,
exemption for      been treated as a pass through        a complete pass through model
securitization     vehicle for tax purposes i.e. all     identical to existing regime be
trusts, levy of    the income of the securitization      made applicable to Venture
distribution       trust has been offered to tax by      Capital Funds/Venture Capital
tax on income      its investors (unless the investor    Companies        under     section
distributed by     is tax exempt viz., a mutual          10(23FB) read with section 115U,
such      trusts   fund). This is consistent with the    since the participation in PTCs
under section      tax rules that apply to trusts        is largely restricted to well
10(23DA)           under the tax law which               regulated financial institutions.
prescribes a single level tax on a    (SUGGESTIONS TO REDUCE /
trust's income (i.e. tax is levied    MINIMIZE LITIGATIONS)
either on the trustee or on the
beneficiaries).    The     interest
income arising to such trusts
from securitized debts is taxed
directly in the hands of the
contributories.
The tax implications may be
summarized as follows:-
If contributory is a Mutual
Fund, it will be entitled to
exemption under section
10(23D).
Any other contributory can
claim      deduction     for
corresponding      expenses
against such income (eg.
interest and overheads)
Contributories can claim
credit of TDS, if any, made
by the borrower
However, due to disputes
regarding the person on whom
tax incidence lies, tax demands
were raised on the securitization
trusts rather than the investors,
by treating such trusts as AOPs.
In order to set at rest such
controversies, the Finance Act
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                                Page 69  
The Institute of Chartered Accountants of India
Sr.      Section                Issue/Justification                 Suggestion
No
2013 :
Exempted the securitization
trust from tax on income
earned.
Imposed a distribution tax
on income distributions by
the securitization trust @
25% in case of distributions
to individuals and HUFs and
@ 30% in other cases.
Distribution tax will not be
payable       on      income
distributed       by      the
securitization trust to a
person in whose case
income, irrespective of its
nature and source, is not
chargeable to tax under the
Act (viz. mutual funds).
Exempted the investors in
the securitization trust from
taxation       on     income
distributions received.
The above mentioned provisions
have, however, created certain
problems        or     securitized
structures in vogue on account of
the following reasons:
(a) The exemption to the
investors        in      the
securitization trust means
that investors (other than
exempt investors such as
mutual funds) in pass
through certificates (PTCs)
will now earn exempt
income instead of taxable
income as was the case
hitherto. This implies that
the investors would not be
able to set-off expenditure/
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The Institute of Chartered Accountants of India
Sr.     Section              Issue/Justification              Suggestion
No
losses against income
earned from PTCs in view of
provisions of section 14A
which prohibits deduction of
any expenditure incurred in
relation to exempt income.
This may result in the entire
transaction         becoming
unviable for investors, which
is illustrated below.
If the investor is a bank investing
Rs.100 crores in a Securitized
debt yielding interest @ 10% p.a.
Assuming, that the bank's own
cost of borrowing is say 8% p.a.,
its tax liability on interest income
from securitized debt pre and
post amendment and profit after
tax will be as follows :-
Particul          Pre      Post
ars               amen     amen
dmen     dmen
t        t
Interest (A)      10.00    10.00
income            Cr       Cr
@ 10%
on Rs.
100 Cr
distribut
ed by
Securiti
sed
Trust
Less:             N.A.     3.00
Distribut                  cr
ion tax
paid by
the
trust@3
0% on
gross
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                  Page 71  
The Institute of Chartered Accountants of India
Sr.       Section                Issue/Justification                     Suggestion
No
income
Net               10.00      7.00
income            Cr         Cr
distribut
ed
Less :- (B)       8.00       8.00
Interest          Cr         Cr
expendit
ure @
8% on
Rs. 100
Cr
Net         C=    2.00       (1.00)
income      (A-   Cr         Cr
B)
Tax
payable
By       (D)      0.60       -
Investor          Cr2
@ 30%1
on net
income
Profit/(L (C-     1.40       (1.00)
oss)      D)      Cr         Cr
after tax                    Not
allow
ed to
be
set-
off on
acco
unt of
sectio
n
14A.
The above illustration highlights
1
Surcharge and cess ignored for the sake of simplicity
2
30% of Rs. 2.00 Cr
Page 72                                                 Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
Sr.     Section              Issue/Justification              Suggestion
No
that a structure which was
commercially viable prior to
amendment made by Finance
Act, 2013 may have the effect of
becoming unviable solely due to
change in the basis of incidence
of taxation.
It may be noted that the financial
sector works on spread between
yield from investments and own
cost of borrowing. Tax on gross
income at a rate ordinarily
applicable to net income may
severely impact the spread and
make securitization structures
commercially unviable defeating
the object of SEBI and RBI
guidelines       for       orderly
development of securitization
market.
(a)   The trading of PTCs (most
PTCs        are       tradable
instruments) also creates
dual points of taxation (i.e.
at the time of distribution of
income by the securitization
trusts and at the time of
realization of gain when the
PTC itself is sold for a
profit) which seems to be
unintended.
(b)   Ambiguity also arises for the
borrower while evaluating
withholding obligation at the
time of payment of interest.
Since the securitization trust
is assessable as a separate
tax entity and not a mutual
fund or bank exempt from
withholding, the borrower
will be required to withhold
tax unless the trust provides
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                  Page 73  
The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                     Suggestion
No
NIL withholding certificates.
The securitization trust will
be required to file return to
claim refund of such TDS.
The securitization trust is
able to set off TDS credit
against distribution tax
payable by it.
(c) There is no grandfathering
provided      for   existing
securitized trusts. Hence,
any income distributed by
existing securitized trusts
on or after 1 June 2013 will
also be subject to the new
tax regime.
46.    Section           a) The Finance Act, 2012 (a) The pass-through status
10(23FB) Tax      provided an exemption to              may be extended atleast, to
exemption for     venture capital funds (VCFs) with     cover all sub-categories of
Alternative       a corresponding direct tax            Category I AIFs (i.e. not only
Investment        charge on the investors on the        to venture capital funds but
Funds         ­   income earned by the fund from        also to SME Funds, social
Venture           its investments.       The VCF        venture funds, infrastructure
Capital Funds     Regulations were repealed on 21       funds), in line with the
May, 2012 with the simultaneous       assurance held out explicitly
introduction of the SEBI              by AIF Regulations.
(Alternative Investment Funds) (b) From             a        long-term
Regulations        2012      (AIF     perspective, it is best to
Regulations). Funds raised            maintain an alignment of the
under the VCF Regulations were        tax laws and the AIF
resultantly grandfathered.            Regulations to mitigate the
AIF Regulations now regulate all      need to constantly update
privately pooled investment           the tax law for changes in
vehicles which collect funds from     Regulations so as to not
investors for investments in          artificially stifle the AIFs.
accordance with a predefined In fact, the Finance Act, 2012
investment policy for the benefit had removed the sectoral
of its investors. AIF Regulations restrictions imposed on VCUs by
cover a much broader ambit of the Income-tax Act, 1961 on the
funds and categorize them into ground          that      since    SEBI
broadly three categories:         regulates the working of VCF,
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The Institute of Chartered Accountants of India
Sr.     Section              Issue/Justification                      Suggestion
No
Category I AIF ­ these are funds     VCC & VCU, there is no
which invest in start-up or early    necessity of having separate
stage ventures or social ventures    conditions under the Income-tax
or SMEs or infrastructure or other   Act, 1961 imposing sectoral
sectors or areas which the           restrictions on the VCUs.
government      or      regulators   Therefore,      multiplicity      of
consider    as      socially    or   conditions        in       different
economically desirable.              regulations in respect of the
Category I AIF presently has 4 same entities should be avoided.
sub-categories, namely, venture Hence, additional conditions
capital funds, SME Funds, social should not be imposed under the
venture funds and infrastructure Income-tax Act, 1961 to qualify
funds. Investment norms have for tax benefit.
been prescribed for each of the (c) As regards condition of
sub-categories to ensure that the        disqualification on account
fund      allocates     substantial      of investment in associate
majority of its capital to the           VCU, it is suggested that
target focus. The stated intent of       disqualification from pass
Category I AIF is to cover AIFs          through status may be
that are generally perceived to          restricted to income arising
have positive spillover effects on       from associate VCU only.
economy and for which the SEBI/          Further, to remove any
Government/ other regulators             ambiguity, it may also be
might       consider      providing      clarified that if breach of any
incentives or concessions. The           condition is subsequently
Explanation to Regulation 3(4)(a)        rectified, the pass through
of AIF Regulations which                 status may be restored.
clarified this aspect also clarified
(SUGGESTIONS                   FOR
that such funds which are formed
RATIONALIZATION OF THE
as trusts or companies shall be
PROVISIONS OF DIRECT TAX
construed as VCF/VCC as
LAWS)
specified under section 10(23FB)
of the Act. The said Explanation
is reproduced below:
"Explanation. For the purpose
of this clause, Alternative
Investment Funds which are
generally perceived to have
positive spillover effects on
economy and for which the
Board or Government of India or
other regulators in India might
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 75  
The Institute of Chartered Accountants of India
Sr.      Section             Issue/Justification                   Suggestion
No
consider providing incentives or
concessions shall be included
and such funds which are formed
as trusts or companies shall be
construed as venture capital
company or venture capital fund
as specified under sub-section
(23FB) of Section 10 of the
Income-tax Act, 1961"
Category II AIF is a residual
category and covers AIFs for
which no specific incentives or
concessions are given by the
Government/ other regulators.
Category II AIF will cover classic
private equity funds and debt
funds.
Category III AIFs are AIFs which
employ diverse or complex
trading strategies and may
employ      leverage    including
through investment in listed or
unlisted derivatives. Category III
AIF will cover hedge funds or
funds which trade with a view to
make short term returns. Similar
to Category II AIF, no specific
incentives or concessions are
given by the Government/ other
regulators.
The AIF Regulations provide that
Category I AIF which are formed
as trust/ company shall be
construed as venture capital
company/ venture capital fund
under s. 10(23FB) of the Act (and
will hence be eligible for the
basis of taxation described above
ie direct tax charge on the
investors).
The Finance Act, 2013 had
granted tax exemption and
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The Institute of Chartered Accountants of India
Sr.     Section               Issue/Justification              Suggestion
No
corresponding direct tax charge
on the investors to only the
Venture Capital Fund sub-
category of Category I AIFs.
Further, three conditions have
been imposed on AIFs in order
to be covered within the ambit of
section 10(23FB), namely:
(i)     The units/shares of the AIF
should not be listed on a
recognised            stock
exchange.
(ii)    The AIF should not have
invested in associated
companies as defined.
(iii)   The AIF should have
invested not less than
2/3rd of its investible funds
in      unlisted       equity
shares/equity           linked
instruments of domestic
unlisted companies.
The first two of the above
conditions are imposed only in
the tax law (listing of AIFs is
permitted under the AIF
Regulations after the final close
of the fund subject to conditions
and investment in associated
companies is permitted subject
to obtaining a majority investor
consent).
The tax implications on account
of this    amendment is as
follows ­
(a) VCCs/VCFs registered prior
to 21st May 2012 under VCF
regulations is impacted by
the proposed amendment.
They continue to be eligible
for pass through taxation
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                   Page 77  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                   Suggestion
No
under section 115U.
(b) The impact on AIFs
registered on or after 21st
May 2012 under AIF
Regulations is summarized
as follows :-
Ca      Sub-       Tax status in
teg     catego     an event AIF is
ory     ries       registered on
which      or after 21 May
qualify    2012
for
pass
throug
h
status
I       VCF        Will qualify as
being      VCC/VCF
trust or   under
compa      s.10(23FB) but,
ny         subject        to
compliance of 3
additional
conditions viz.,
VCC/VCF
should remain
unlisted
Should invest >
2/3rd investible
funds         in
unlisted equity
shares/equity
linked
instruments of
VCUs
Should      not
invest       in
associate VCU
I       SME        Will not qualify
Fund        as (and, will
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The Institute of Chartered Accountants of India
Sr.     Section              Issue/Justification              Suggestion
No
Social cease to be)
Venture VCC/VCF
Fund      under
Infrastr s.10(23FB) and
ucture    consequently
Fund      will not be
eligible for pass
through
taxation despite
being identified
as        socially
desirable
having positive
spillover effects
on the economy
and eligible for
other
concessions
from
Government/SE
BI
Will         be
governed     by
normal rules of
taxation     as
applicable   to
relevant nature
of entity
II    Generally   Will not qualify
includes    as    VCC/VCF
Private     under
equity      s.10(23FB)
and debt
funds
III   Generally
includes
hedge
funds
(c) Even for new VCCs/VCFs
which are registered under
AIF            Regulations,
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                  Page 79  
The Institute of Chartered Accountants of India
Sr.      Section             Issue/Justification                   Suggestion
No
compliance        with    three
additional tax conditions
referred earlier is necessary
to be eligible for pass
through taxation. In case of
breach of any of the
conditions, VCC/VCF will be
governed normal rules of
taxation as applicable for
ordinary company or trust. A
clarification is required as to
whether tax status of
VCC/VCF will be restored if
the breach is subsequently
rectified.
(d) Another concern on account
of the proposed provisions
is that if a VCC/VCF makes
an investment in one
associate VCU, would it
lose its pass-through status
despite the fact that all
other VCUs in which it has
invested are not its
associates.
(e) When normal rules of
taxation are applied as a
consequence               of
disqualification from pass
through taxation, issues
such as double taxation
and/or levy of DDT and/or
applicability of withholding
may       arise    due    to
interposition of VCC/VCF
between VCU and investor.
b)    Earlier  under    Section It is suggested that section
10(23FB) of Income-tax Act, any 10(23FB) be reworded as
income of a Venture Capital follows:
Company (VCC) or Venture            "Any income of a venture
Capital Fund (VCF) set up to
capital company or venture
raise funds for investment was
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The Institute of Chartered Accountants of India
Sr.     Section              Issue/Justification                    Suggestion
No
exempt from taxation. However,          capital fund from investment
in 2007, this was amended and           set up to raise funds for
the scope of VCC / VCF was              investment in a venture
narrowed down to select sectors         capital undertaking."
and the exemption from income
(SUGGESTIONS         FOR
tax was limited to "any income of
RATIONALIZATION OF THE
a VC company or VC fund from
PROVISIONS OF DIRECT TAX
investment in a venture capital
LAWS)
undertaking".
The sectoral restriction stands
removed in Union Budget 2012
which was a welcome move.
However, the tax exemption still
remains limited to "any income of
a VC company or VC fund from
investment in a venture capital
undertaking". Keeping in mind
the growing importance of VC
funds in infrastructure and also in
other important sectors of our
economy, the previous wording
of "set up to raise funds for
investment" needs to be restored
in place of "from investment"
under Section 10(23FB).
A change in the wording from
"any income of a VC company or
VC fund from investment" to "any
income of a VC company or VC
fund set up to raise funds for
investment" will enable the VCC /
VCF to undertake analysis /
study necessary to evaluate the
project viability as well as to
render other services for the
projects in which investments are
made. Restricting the wording to
"any income of a VC company or
VC fund from investment"
severely restricts the tax
exemption thus affecting the
commercial viability of the VCC /
VCF.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                          Page 81  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                      Suggestion
No
47.    Section 10(26)     Section 10(26) which provides        Considering the development of
­ Exemption to     exemption to the members of          the areas mentioned in section
Scheduled          Scheduled Tribes residing in         10(26), it is suggested that the
Tribes       in    specified areas was introduced in    exemption       provided      be
specified          the year 1974. This exemption        withdrawn gradually withdrawn.
areas ­time for    was basically provided for the       Section 10(26) may be amended
removal            development of persons residing      to provide that only members
in backward areas and to enable      having income up to, say Rs 20
them to have more disposable         lakhs, are exempt from taxation.
income in their hands. In current
scenario, even these areas have
been developed and people
residing therein have high
disposable incomes. It is thus
suggested that this exemption be
gradually withdrawn.
48.    Income        of   At present income of minors          It is suggested that this should
minors - to        included in the hands of parents     be raised to at least Rs.10,000/-
increase           is exempt to the extent of           for each minor child.
exemption          Rs.1,500/- for each minor. The       (SUGGESTIONS         FOR
limits    under    average expenditure to meet          RATIONALIZATION OF THE
section 10(32)     cost      of       a      minor's    PROVISIONS OF DIRECT TAX
education/health/living expenses     LAWS)
which has gone up considerably
in recent years, limit of
Rs.1,500/- fixed is woefully
inadequate.
49.    Section 10B ­      Earlier section 10B provided for     Explanation 2(iv) should be
Exemption to       special provisions in respect of     suitably amended to grant 100%
newly              newly established 100% Export        EOU status to STPI registered
established        Oriented Units. The exemption        unit.
100% EOUs ­        provided was limited to 90% of       (SUGGESTIONS TO REDUCE/
should      be     such profits and gains as is         MINIMIZE LITIGATIONS)
extended    to     derived from export of articles or
STPIs              things or computer software for a
registered         period of 10 consecutive
units              assessment years. Although
exemption under this section is
not available wef AY 2012-13,
there is a major issue on what is
100% EOU.
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The Institute of Chartered Accountants of India
Sr.     Section             Issue/Justification               Suggestion
No
Clause (iv) of explanation 2
which defines 100% EOU is as
follows:
"hundred per cent export-
oriented undertaking" means
an undertaking which has been
approved as a hundred per cent
export-oriented undertaking by
the Board appointed in this
behalf     by     the    Central
Government in exercise of the
powers conferred by section 14
of the Industries (Development
and Regulation) Act, 1951 (65 of
1951), and the rules made under
that Act.
No Board has been appointed
under this section till now.
Instead of Board, Ministry of
Information technology and
communications     of    Central
government     has    appointed
Software Technology Park of
India to license 100% to claim
deduction u/s 10B. This has
created unnecessary litigation
between       assessee       and
department. A sword is hanging
on     all    STPI    registered
undertakings who have claimed
deduction u/s 10B. . An
amendment in this regard will
avoid harassment to software
companies who have claimed
section 10B deduction by using
STPI approval.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                  Page 83  
The Institute of Chartered Accountants of India
Page 84                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
CHAPTER IV
COMPUTATION OF TOTAL INCOME
Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 85  
The Institute of Chartered Accountants of India
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr.       Section              Issue/Justification                     Suggestion
No
50.    Disallowance of    As per the existing provisions of      It is suggested that:
expenditure        section 14A of the Act, no a) Only those expenses which
incurred      in   deduction shall be allowed in          are directly related to
relation      to   respect of expenditure incurred by     earning of exempt income
income       not   a taxpayer in relation to income       shall be disallowed.
includible    in   which does not form part of the
b) Further,       the      overall
total    income    total income under the Act.
maximum limit of expense
under section      Further, Section 14A of the Act
to be disallowed should not
14A of the Act:    states that the provisions of this
exceed the tax payable on
section shall also apply in cases
exempted income earned.
where an assessee claims that no
expenditure has been incurred by c) Overall maximum limit of
him in relation to income which        expense to be disallowed in
does not form part of the total        case of dividend income
income under this Act.                 earned      from      holding
strategic investment in
In this regard, a method has been
group companies shall be
prescribed under rule 8D of the
capped.
Income-tax Rules, to calculate the
amount of disallowance for the (SUGGESTIONS                     FOR
purpose of section 14A of the Act. REMOVING       ADMINISTRATIVE
As per the prescribed method in AND                   PROCEDURAL
rule 8D, the disallowance for the  DIFFICULTIES     RELATING     TO
purpose of section 14A is          DIRECT    TAXES)
aggregate of the following:
a)   Amount of expenditure
directly relating to exempted
income.
b)   Amount of interest expenses
not directly attributable to
any particular income- in the
proportion of average value
of investments (whose
income is exempt) to
average of total assets.
c)   Half percent of average
value of investments (which
generate exempt income)
Rule 8D has created genuine
hardships for tax payers, as the
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                            Page 87  
The Institute of Chartered Accountants of India
Sr.       Section               Issue/Justification                 Suggestion
No
calculation basis under rule 8D is
arbitrary. In many cases, the
disallowance calculated as per
rule 8D method exceeds the
amount of total exempted income
earned during the year.
This is because of the following
reasons:
Firstly, the interest expense,
which does not form part of
exempted        income,     is
disallowed.
Secondly, while working out
half percent of the average
investments,      all    the
investments in shares/mutual
funds are considered.
Thirdly, this method does not
demarcate             between
investments      that    have
generated or not generated
income during the year.
Lastly, no distinction has
been made for companies
earning dividend income due
to      holding      strategic
investments      in     group
companies and very little
expenditure is attributable to
earn such dividend income.
Page 88                                       Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
PART A-SALARIES
DETAILED SUGGESTIONS
Sr.       Section                Issue/Justification                    Suggestion
No
51.    Deduction to       As per the prevalent norm, the       It is suggested that said
salaried           employees are required to serve      anomaly may be resolved and
assesses-          notice within the stipulated time    appropriate provisions be
Payment      for   before leaving the organisation.     inserted so that income from
notice period      The notice period, however,          notice      period     pay   is
varies from organisation to          chargeable in the hands of ex-
organisation. For example, in an     employer and deduction of the
organisation the notice period       amount of notice period pay
may be 90 days or an employee        paid be made available to the
has to pay 90 days salary amount     employee as he has not
to the organisation as an            effectively     received   that
employee may get a better job        income.
opportunity       in      another    (SUGGESTIONS         FOR
organisation wherein he is           RATIONALIZATION OF THE
required to join within 30 days.     PROVISIONS OF DIRECT TAX
Accordingly the employee has to      LAWS)
give 30 days notice in old
organisation, and pay for short
notice of 60days.
Generally the contract of service
also provides that in case the
employer is not satisfied with the
performance of the employee he
may terminate his services by
giving a notice of 30 days or 30
days salary. In case the employer
suspends the employee with
immediate effect he pays an
amount equivalent to 30 days
salary and claims deduction
thereof. Such amount becomes
taxable in the hands of the
employee. However, in case the
employee is required to pay
notice period salary, no deduction
of such amount paid is allowed to
him. If the new employer agrees
to bear the brunt of notice period
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                            Page 89  
The Institute of Chartered Accountants of India
Sr.         Section               Issue/Justification                      Suggestion
No
pay, say of 60 days in above
example, the said amount will be
included in the total income of the
employee and tax will be
deducted thereon even if such
income belonged to the ex-
employer and is taxable in his
hands. Thus, in effect the
assessee will be liable to pay tax
on 14 months salary i.e. salary for
more than 12 months without any
deduction available to him.
52.       Deduction for   Grant of Employee Stock Option is      Necessary amendment may be
Employee        one of the accepted and widely         made in Income-tax Act or
Stock Option    followed        practices      for     circular should be issued by the
Cost            remunerating the employees.            CBDT to allow deduction for
Detailed guidelines have been          ESOP cost being employee
prescribed by SEBI in this regard.     remuneration cost.
Further, the SEBI guidelines and       (SUGGESTIONS         FOR
Accounting Standards, provides         RATIONALIZATION OF THE
for accounting of difference           PROVISIONS OF DIRECT TAX
between option price and market        LAWS)
value of security of the date of
grant as employee remuneration
cost. Under Income-tax Act,
difference between the fair market
value of shares and exercise price
is treated as income in the hands
of the employees. Recently, Delhi
Tribunal in the case of Ranbaxy
(39 SOT 17) has taken a view that
ESOP cost is not allowable as
deduction. Thus, the situation is
that for levy of tax on employee,
ESOP is income but the same is
not allowed as deduction in the
hands of the employer company. .
Page 90                                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                    Suggestion
No
53.   Medical            Under section 17 of the Income-      It is suggested that the
reimbursements     tax Act, medical reimbursements      provisions of section 17 be
for      retired   to employees are exempted from       amended to include retired
employees:         tax up to Rs.15,000 per annum.       employees for the tax benefit
Further, the expenditure incurred    on medical reimbursements /
by the employer for the medical      hospitalization expenditure in
treatment of the employees and       approved hospitals.
his family in approved hospitals is (SUGGESTIONS               FOR
also not treated as a perquisite in RATIONALIZATION OF THE
the hands of the employee. PROVISIONS OF DIRECT TAX
However, this tax benefit is not LAWS)
available to retired employees.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                          Page 91  
The Institute of Chartered Accountants of India
PART C-INCOME FROM HOUSE PROPERTY
DETAILED SUGGESTIONS
Sr.        Section              Issue/Justification                     Suggestion
No
54.       Deduction u/s   a) Section 25B provides that the     Section 25AA be suitably
24(a) of the    arrears of rent received after       amended to provide that
Income-tax      allowing a deduction of 30% will     unrealised rent subsequently
Act, 1961:      be taxable as Income from House      realised shall after deducting a
property. Further, section 25AA      sum equal to thirty percent of
also provides for taxation of        such amount shall be deemed
unrealised rent subsequently         to be income chargeable under
charged to income-tax. Even          the head "Income from House
though the nature of income being    property"
charged to tax in both cases is      (SUGGESTIONS         FOR
similar, the deduction of 30% is     RATIONALIZATION OF THE
not allowed in case of unrealised    PROVISIONS OF DIRECT TAX
rent subsequently received. It       LAWS)
may be noted that had the rent
been realised earlier in normal
course deduction of 30% would
have been allowed under section
24(a). This discrimination seems
to be inadvertent omission and
thus needs rectification.
b) Huge lease rent is generally      Considering the cost involved
paid if the land is taken on lease   in payment of lease rents, it is
and the building is constructed by   suggested that ground rent
the assessee. However, section       shall be allowed as separate
24 of the Income-tax Act, 1961       deduction while computing
does not provide any deduction       income under the head "Income
from income from house property      from House property".
for an amount so paid by the         (SUGGESTIONS         FOR
assessee.                            RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
Deduction for      At present, there is no provision    It is suggested that ground rent
55.
ground    rent     for allowing deduction towards       shall be allowed as deduction in
other than u/s     ground rent paid in computation of   addition to section 24(a)
24(a)              income from house property & the
(SUGGESTIONS               FOR
same has been merged into
Page 92                                         Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                      Suggestion
No
24(a).Ground rent shall be              RATIONALIZATION OF THE
allowed as deduction in addition        PROVISIONS OF THE INCOME-
to section 24(a) deduction since        TAX ACT)
24(a) mainly focuses on repairs &
maintenance. The logic behind
this suggestion is that the repairs
by way of 30% standard deduction
cannot accommodate a huge
lease rent which may have to be
paid if the land is taken on lease &
building is constructed by the
assessee.
Interest     on Keeping in mind the prices of the       Therefore, it is suggested that
56.
borrowed         house properties and also the          the deduction in respect of
Capital :        rate of interest on housing loan, it   interest on housing loan in case
is felt that the deduction under       of self occupied property
section 24(b) in respect of            should be increased from Rs.
Interest on borrowed capital for       1.5 Lakhs to Rs. 3 Lakhs
self-occupied property is very
(SUGGESTIONS         FOR
less.
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                             Page 93  
The Institute of Chartered Accountants of India
PART D-PROFIT AND GAINS OF BUSINESS AND
PROFESSION
DETAILED SUGGESTIONS
Sr.        Section                Issue/Justification                      Suggestion
No
57.    a) Depreciation      Books are very important tools        In view of the above, it is
on books used        used by professionals to carry on     suggested        that        the
by professionals     their     profession.       Though    depreciation      on      books
expenditure on purchase of            purchased by professionals be
books is no doubt capital in          restored to its original rate of
nature, the books purchased by        100 per cent
professionals' have a very short      (SUGGESTIONS         FOR
shelf life of around a year or        RATIONALIZATION OF THE
sometimes even less, due to the       PROVISIONS OF DIRECT TAX
fast pace of developments in          LAWS)
their respective fields, be it
medicine or engineering or law or
accountancy. Depreciation was
always allowed on books at 100
per cent till 1st April, 2003, from
which date, by the amendment to
Appendix I to the Income-tax
Rules, 1962, the rate of
depreciation has been reduced to
60 per cent for books not being
annual publications. This has
created numerous difficulties and
hardship for professionals who
need to capitalize each and
every book purchased by them
though its value may not be very
significant. It has resulted in
additional book-keeping for these
professionals. Also, the revenue
does not gain from such an
amendment as the expenditure
on books by professionals would
not be material.
b) Section 32 - The proviso to section 32                  a) Section 32   may    be
Depreciation in provides that the aggregate                   amended to clarify the
Page 94                                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
Sr.       Section               Issue/Justification                   Suggestion
No
case of slump deduction,     in    respect     of         legal position as to
sale          depreciation      of     buildings,         whether depreciation can
machinery, plant or furniture,              be claimed on the basis of
being tangible assets or know-              proportionate number of
how,       patents,    copyrights,          days by the transferor and
trademarks, licenses, franchises            the transferee company in
or any other business or                    case of slump sale also
commercial rights of similar                considering the proviso to
nature, being intangible assets             section 32 read with
allowable to the predecessor and            section 170 of the Act.
the successor in the case of             b) Due to practical and
succession referred to in clause            administrative difficulties,
(xiii) and clause (xiv) of section          there may be a time gap
47 or section 170 or to the                 between holding of the
amalgamating company and the                asset and using the asset
amalgamated company in the                  so transferred. To avoid
case of amalgamation, or to the             genuine difficulties in such
de-merged company and the                   cases, instead of the
resulting company in the case of            words, "used by them", the
de-merger, as the case may be,              words "held by them" may
shall not exceed in any previous            be substituted in the
year the deduction calculated at            proviso to section 32.
the prescribed rates as if the
(SUGGESTIONS TO REDUCE /
succession or the amalgamation
MINIMIZE LITIGATIONS)
or the de-merger, as the case
may be, had not taken place, and
such      deduction    shall     be
apportioned       between       the
predecessor and the successor,
or the amalgamating company
and the amalgamated company,
or the de-merged company and
the resulting company, as the
case may be, in the ratio of the
number of days for which the
assets were used by them.
The following issues may be
considered    for    appropriate
amendment in the law :
a) An issue arises whether
depreciation can be
claimed on the basis of
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No
proportionate number of
days by the transferor
and      the   transferee
company in case of
slump sale considering
the proviso to section 32
read with section 170 of
the Act.
b) As per the current
provisions of proviso to
section      32      the
depreciation can be
claimed on the basis of
proportionate number of
days for which the
assets were used by the
predecessor and the
successor,     or    the
amalgamating company
and the amalgamated
company, or the de-
merged company and
the resulting company,
as the case may be.
Due to practical and
administrative
difficulties, there may be
a time gap between
holding of the asset and
using the asset so
transferred. To avoid
genuine difficulties in
such cases, instead of
the words, "used by
them", the words "held
by them" may be
substituted in the proviso
to section 32.
c) Incentive for    Presently, the whole country is     It is suggested that an
installation of     confronted with the problem of      incentive may be given in the
Solar      Power    power cut. In order to curb this    Income-tax Act, 1961 for
generating          problem, solar power generating     installation of solar power
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No
devices             devices may be installed, the            generating device. In other
cost of which is also affordable.        words, 100% depreciation may
An incentive provided by the             be allowed to Companies in
Income-tax Act for installation of       respect of installation of such
such devices would motivate              devices. A deduction of the
people to take initiative and            amount so invested may also
would in turn enable the                 be given to Individuals and
Government to tackle the power           HUFs who install such devices
problem effectively.                     including salaried class.
(SUGGESTIONS         FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
d) Depreciation     As per the provisions of the             In order to avoid unnecessary
on "Oil Well"       Income-tax Act, the "oil well" is        litigations, it is suggested that
considered as a "Building" and           necessary amendment be
not Plant and machinery and              made in the Income tax Act to
depreciation is accordingly,             classify oil well as a plant and
allowed at rate of 10%.                  machinery.
In the exploration of Oil and Gas,       (SUGGESTIONS TO REDUCE /
drilling of oil is a major activity      MINIMIZE LITIGATIONS)
and Oil well is a key "Plant and
machinery" for Oil and gas
exploration. Since, the inclusive
definition provided in the notes
forming part of Appendix-I "Table
of rates at which depreciation is
admissible"       provides        that
"building"      includes       roads,
bridges, wells and tubewells, the
Oil wells are also being given a
treatment of a "building" rather
than a "plant and machinery".
There is a vast difference
between a normal well and an `oil
well'. As it is understood in
common paralance, well is a
hollow made to hols and
preserve the water and it is lined
by bricks and cement. However,
an oil well is significantly different
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No
and more scientific and serves
larger purpose than a water or
tube well. Oil wells are not
normal wells since development
of the same requires special
equipment and knowledge skill.
An oil well is made up of various
machineries and cememting is
just the process to strengthen the
structure of such well and
therefore, oil wells cannot be
considered as a building.
It may be noted that a special
rate of depreciation @60% is
available for mineral oil concerns
in clause 8(xii) of the aforesaid
appendix as depreciation on
"plant and machinery". Since the
intention of the lawmakers is to
promote oil industry, it is felt that
the definition of "building" is
being misinterpreted to include
"oil wells" .
58.    Additional          With a view to give a boost to the      It is suggested that an express
Depreciation u/s    manufacturing       sector,     the     provision may be incorporated
32(1)(iia)          Finance Act, 2002 allowed a             in the Act for the allowance of
deduction of a further sum equal        the remaining 10% additional
to fifteen per cent of the actual       depreciation in the next year
cost of such machinery or plant         so that a number of litigations
acquired and installed after a          may be avoided.
specified date in the case of a         (SUGGESTIONS TO REDUCE /
new industrial undertaking in the       MINIMIZE LITIGATIONS)
previous year in which it begins
to manufacture or produce any
article or thing or in the case of
an existing industrial undertaking
in the previous year in which it
achieves substantial expansion
by way of increase in the
installed capacity by not less than
twenty five per cent.
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No
In order to give a thrust to
investment in manufacturing
sector, the limit for increase in
installed capacity was reduced
from 25% to 10% by the Finance
Act (No.2),2004.
Further, in order to encourage
new investment, the Finance Act,
2005 increased the initial
depreciation on new machinery
and plant to 20 per cent. from 15
per cent. The requirement of
creating a minimum increase of
10 per cent. in installed capacity
for availing the initial depreciation
was also          eliminated. This
amendment accordingly, applied
in relation to assessment year
2006-07 and subsequent years.
From all the above amendments,
the intention of the lawmakers
was clear i.e. encouraging the
investment in the business of
manufacture or production of any
article or thing. The Finance Act,
2013 further extended the benefit
of this section to the business of
generation or generation and
distribution of power.
As mentioned above additional
depreciation      under    section
32(1)(iia) is admissible @ 20% on
the cost of the new investments.
However, the same is reduced to
10% in case of additions which
are used for less than 180 days
in the year of acquisition. There
is no express provision for the
allowance of the remaining 10%
in the next year.
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As mentioned earlier, section
32(1)(iia) was introduced in the
Act with a specific purpose /
object of providing relief to
assessees who make investment
in the new plant and machinery.
The section therefore has to be
interpreted keeping in view the
intent and purpose for which it
was introduced. It is a cardinal
rule of interpretation that a
beneficial provision should be
given a liberal and purposive
interpretation so as to fulfill the
object of the legislation and
comply with the legislative intent.
The Delhi Bench of the Tribunal
in the case of DCIT v/s. Cosmo
Films       Ltd.     [ITA       No
2831/Del/2007] inter-alia had
examined the provisions of
section 32(1) as to whether the
balance additional depreciation
under section 32(1)(iia) can be
claimed in the succeeding year.
The Tribunal held in favour of the
assessee and allowed the claim
of the balance additional
depreciation in the subsequent
year to the assessee. It observed
that this provision has been
directed towards encouraging
industrialization by allowing
additional benefit to the tax
payers setting up new industrial
undertakings/making           more
investment in capital goods.
Thus, these are incentives aimed
to boost new investments in
setting up and expanding the
units.
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No
59.    Section 35(1)(ii)     In case of assessees having             Deduction at an enhanced
and     35(1)(iii)-   `Income from Business or                percentage be provided in
Removal         of    Profession', donations to the           section     80GGA        to   all
discrimination        institutions approved u/s 35(1)(ii)     assessees      in    line    with
u/s 80GGA             and 35(1)(iii) are eligible for         deduction provided in section
deduction @ 175% of the amount          35(1)(ii) and 35(1)(iii) which is
of donation. However, in case of        available to an assessee
assessees not having `Income            having income from business
from Business or Profession',           or profession.
donations to the institutions           (SUGGESTIONS         FOR
approved u/s 35(1)(ii) and              RATIONALIZATION OF THE
35(1)(iii)    are   eligible   for      PROVISIONS OF DIRECT TAX
deduction under section 80GGA           LAWS)
@100% of the amount of
donation only.
In fact, this mistake crept in at
the time of amendment of
Section 35(1)(ii) and (iii) w.e.f. 1-
4-2000 without corresponding
and simultaneous amendment in
section 80GGA. This was an
inadvertent omission which
needs to be rectified by making
the necessary amendment in
Section 80GGA so as to allow an
enhanced deduction to other
assessees also. In fact, other
assessees who do not have
Business/ Professional income
deserve to be encouraged more
to invest for such purposes.
60.    Deductibility of      The Income-tax Act provides for         A clear policy on what
R&D                   a weighted deduction of 200% of         constitutes R&D activities in
expenditure           the expenditure incurred on             the software product industry
incurred      by      scientific research on in-house         to be issued to DSIR. Attached
software              research and development facility       is a document which defines
development           on obtaining an approval from the       R&D in a software product
companies             Department of Scientific and            industry, which may be
under                 Industrial Research ("DSIR"). To        considered. In line with the
Section 35(2AB)       be eligible for such deduction, the     attached document, it is
Companies should be engaged in          suggested that R&D in the
the activity of manufacturing or        software product industry be
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No
producing an article/ thing.          notified / clarified
While it is fairly arguable that      (Annexure II)
development       of     software
products qualifies as 'production'
of article or thing, there is no
clarity in the Income tax Act.
While a few software product
development company have been
recognised by DSIR, there have
been reservations in granting
approval due to ambiguity of R&D
in software development
61.    Expenditure on      Section 35AD was introduced           It is suggested that following
Specified           with effect from A.Y. 2010-11 to      businesses are required to be
Business under      switch over from profit linked        covered under this provision
section 35AD        incentives to investment linked       and to achieve this, the
incentives         under        the   following     sub-clauses     be
Income-tax Act, 1961 as the           added after sub-clause (viii) of
profit based incentives were          clause (c) of sub-section (8) of
distorting     the     tax   base.    section 35AD:
Investment based incentives do        "(ix) Power generation and
not put the Government in a           Distribution
disadvantageous position as
(x) Petroleum & petrochemicals
these incentives only postpone
the payment of taxes and give         (xi) Steel
relief to the tax payers in the       (xii)Cement
initial years by granting deduction   (Xiii) Port Facilities
for the CAPEX which would have        (Xiv) Telecommunication and
been otherwise allowed by way of      allied services"
depreciation over a longer period.
Granting of section 35AD
Accelerated deductions @150%          benefit to the aforesaid sectors
were allowed under Section            will ensure rapid development
35AD of the Income-tax Act for        of infrastructure across the
specified core businesses with        country,        creation      of
effect from A.Y. 2010-11 with a       employment opportunities and
view      to    creating    rural     easy flow of foreign funds for
infrastructure. This incentive        the debt ridden sectors.
should be provided to other core      Considering the need for
businesses as well, which are         greater      penetration    and
essential for the growth of the       infrastructure development in
economy. Apart from the new           such areas enhanced rate of
entities incurring expenditure,
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No
even existing entities incurring      deduction (1.5 times) under
capital expenditure for substantial   35AD (1A) for the capital
expansion of these essential core     expenditure.
activities incurred by existing
entities should also be allowed
the accelerated deductions as
substantial capital infusion is
required periodically to sustain
their viability.
62.    (a)     Capital     Expenses incurred for raising         Section     35D    should    be
raising             capital are being treated as          amended to allow deduction
expenses            capital in nature and no              for all expenses incurred by an
deduction is allowed in tax           assessee for raising capital in
assessment.       Section     35D     five equal installments over a
provides for deduction in respect     period of five years.
of some of the expenses, over a
period of five years, subject to
(SUGGESTIONS         FOR
conditions and limits. Raising
RATIONALIZATION OF THE
capital is necessary activity for
PROVISIONS OF DIRECT TAX
carrying out the business activity.
LAWS)
Not allowing deduction of
expenses for raising capital
increases cost of carrying out the
business and adversely affects
the competitiveness of the
business
(b) Amortization    Cash outflows by way of capital       It is suggested that provisions
of       Capital    expenditure logically reduce the      may be incorporated in the Act
expenditure         income.      However,      certain    to allow amortisation of such
preliminary expenditure allowed       capital expenditures which are
to be amortised under section         essential to run the business.
35D , there is no provision in the    (SUGGESTIONS         FOR
act for amortization of capital       RATIONALIZATION OF THE
expenditure like fees paid for        PROVISIONS OF DIRECT TAX
increase in authorized share          LAWS)
capital and payment made
towards        elimination      of
competition        etc.      Such
expenditures being capital in
nature cannot be charged to
revenue as there is no provision
for claiming these expenses in
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No
computing the income. As a
result there is a difference
between real income & taxable
income.
63.    Deduction for       Under Section 35DDA, deduction       Section 35DDA(1) may be re-
payments under      @ 1/5th of the amount paid to the    worded as follows:
Voluntary           employees is allowed in respect      "Where an assessee incurs any
Retirement          of payments made to employees        expenditure in any previous
Scheme        ­     under     voluntary    retirement    year by way of payment of any
Section 35DDA:      schemes. Thus, the deduction         sum to an employee in
is allowed over a period of 5        connection with his voluntary
years. This section covers           retirement or purchase of an
"payment of any sum to an            annuity from an insurance
employee at the time of his          company to cover such
voluntary retirement."       Many    payments, in accordance with
companies      have    structured    any scheme or schemes of
different schemes to give            voluntary retirement, 1/5th of
voluntary retirement to their        the amount so paid shall be
employees. Some of them are          deducted.............."
in the nature of monthly pension
(SUGGESTIONS         FOR
or payments spread over a few
RATIONALIZATION OF THE
years. Many corporate would like
PROVISIONS OF DIRECT TAX
to fund these monthly pension,
LAWS)
etc. by purchasing an annuity
with LIC/any other insurance
company. It is submitted that
when the annuity is purchased
for covering such payments,
deduction @ 1/5th shall be
allowed under Section 35DDA of
the Income-tax Act, 1961.
64.    Due date for        Section 2(24)(x) of the Act, inter   It is suggested that the due
crediting the       alia defines "Income", to include    date defined under Explanation
contribution of     any sum received by the              to Section 36(1)(va) shall be
employees to        employer from its employees' as      amended and accordingly the
the respective      contribution towards certain         due date shall mean the due
fund­Section        specified     funds.    However,     date for filing return of income
36(1)(va) read      deduction for such income are        under section 139(1), thereby
with Section 2      available       under     section    bringing it at par with the due
(24)(x):            36(1)(va), provided that the         date     specified     for    the
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Sr.       Section                Issue/Justification                    Suggestion
No
contributions collected by the       Employer's contribution under
employer are credited to the         Section 43B of the Act.
respective fund within the due       (SUGGESTIONS         FOR
date specified under the relevant    RATIONALIZATION OF THE
legislation of the fund.             PROVISIONS OF DIRECT TAX
The employee's contribution          LAWS)
credited to the employees
account in the relevant fund after
the due date specified under
section 36(1)(va) are disallowed
to the employer. Further, any
payments made by the employer
after the due date is also NOT
allowed as a deduction in the
year of payment. This causes
undue hardship to the assessee
especially during the economic
turbulence.
Further,       the Employer's
contribution made after the due
date specified under the relevant
social security legislation but
deposited within the due date of
filing return of income are
allowed under the Act by virtue of
Section 43B.
It may be noted that the statutory
laws under the respective
contribution      schemes    have
provisions to levy interest,
penalty etc. for the delayed
payment. Hence, disallowing a
genuine business expenditure
merely on the ground that it has
been paid after relevant due date
is not justified.
On the subject there have
various conflicting judgments.
Where Honble Uttarakhand High
Court and Honble Delhi High
Court have considered the due
date under section 36(1)(va) to
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No
be read in sync with the due date
mentioned in section 43B,
Honble Gujarat High Court has
given a different view.
To remove the hardship caused
to the assessee and to reduce
avoidable litigations, it is
suggested that deduction be
allowed on the employee's
contribution made before the due
date of filing the return of
income.
65.    NPA calculation     Under section 36(1)(viia) of           NBFCs may also be include in
for NBFCs           Income-tax Act, only the banks         Sec. 36(1)(viia) so that the
and financial institutions (FIs) are   benefits are also extended to
allowed      a     deduction      on   infrastructure       financing
provisions for bad and doubtful        NBFCs.
debt. A deduction of 7.5% of           (SUGGESTIONS         FOR
gross total income is allowed as       RATIONALIZATION OF THE
expenses for banks, if provision       PROVISIONS OF DIRECT TAX
for bad and doubtful debts is          LAWS)
made as per RBI directions, and
for FIs the figure is 5%.
It is pertinent to note that even
the foreign banks are allowed the
benefits under this section of
Income tax Act, but the NBFCs
are excluded, and this despite
the fact that both NBFCs and
banks are regulated by similar
guidelines and there is in fact no
material difference between the
businesses carried out by NBFCs
and banks.
In absence of specific inclusion of
NBFCs in section 36(1)(viia),
"provision for NPA" made in
terms of RBI prudential norms
does not constitute an expense
for purposes of Income tax Act.
So entire provisioning as per RBI
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Sr.        Section                Issue/Justification                      Suggestion
No
prudential norms is disallowed for
purposes of computing taxable
income of NBFCs. Thus, NBFCs
are subjected to higher taxation,
and     hence      are     at    a
disadvantageous position vis-à-
vis banks and other FIs.
As the Government itself
considers NBFCs to be a vital
channel for credit delivery
especially to the under-privileged
segments of the society, it is
essential          that       such
discriminations between NBFCs
and banks be eliminated. This
inconsistency may be resolved by
including NBFCs also in Sec.
36(1)(viia) so that the benefits
are      also       extended    to
infrastructure financing NBFCs.
66.    Section 40(a)(iib)   Section 40(a)(iib) provides that      In order to provide level
- Disallowance of    SGU will not be entitled to           playing field to different
certain payments     deduction of certain payments in      business units in matter of
made by State        the nature of royalty, licence fee,   computation      of   business
Government           service fee, privilege fee, service   income, the amendment may
Undertaking          charge or any other fee or charge     be    re-considered.       The
(SGU)                made to State Government in           payments made by SGU to the
computing income from business        Government are likely to be
or profession.                        subject to transfer pricing
Section 40(a)(iib) also defines the   regulation under section 92BA
class of entities that will be        read with section 40A(2).
considered as SGU. One of the         In fact, the provisions of
classes covered within the            section 40A(2) may be suitably
definition of SGU is a company in     amended to ensure that the
which State Government holds          impugned     expenditure     is
more than 50% equity.                 subjected to transfer pricing
Denial of deduction to such SGU,      scrutiny,      rather     than
which has private participation,      disallowing the expenditure
may      create     discriminatory    which may result in inequity
treatment       between        two    between undertakings which
enterprises ­ one of which has        have more than 50% State
Government holding and those
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No
49% as compared to 51% private        having less than 50% State
participation. While disallowance     Government holding.
will be made only in the case of      (SUGGESTIONS         FOR
the SGU, though both the entities     RATIONALIZATION OF THE
may make identical pay-outs to        PROVISIONS OF DIRECT TAX
the State Government.                 LAWS)
67.    Required             Payments made beyond Rs.              It is suggested that a
clarification in     20,000 to a person in a day           clarification may be issued to
respect of           otherwise by an account payee         clarify whether direct deposit
applicability of     cheque drawn on a bank or an          into the account of the
section 40A(3)       account payee bank draft is a         recipient in excess of Rs.
disallowed expense and is also        20,000/- by the debtor be
required to be specifically           subject to disallowance u/s
reported in the tax audit report by   40A(3) of the Income-tax Act,
the auditor. Certain difficulties     1961.
are being faced with regard to        (SUGGESTIONS TO REDUCE /
the applicability of Section          MINIMIZE LITIGATIONS)
40A(3) in respect of payments
directly deposited into the
account of the recipient by the
payer located at a far place, in
excess of Rs. 20,000/-. The said
deposit directly in the account by
the payer is being disallowed and
is being reported in the tax audit
report. The Central Banking
system (CBS) in India allows
deposit and withdrawal from any
place in India. As the amount is
being deposited in the banking
channel through proper source,
the same should not be
disallowed under section 40A(3).
A clarification may be issued in
this regard.
68.    Explanation 5 to     Section 43 deals with actual cost.    In line with the other
Section 43(1) ­      There are 14 explanations             explanations to section 43(1), it
"building" to be     provided in section 43(1)             is suggested that the term
replaced      by     describing the method of              "Assets" be used instead of
"assets"             computation of actual cost of         the   term     "building"     in
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Sr.       Section                Issue/Justification                      Suggestion
No
asset under different situations.     Explanation 5 to section 43(1) .
Explanation (5) deals with actual
cost in respect of building
previously used by the assessee
for     certain     purposes      &
subsequently       brought     into
business        or      profession.
According to this explanation, the
building so brought in should be
notionally depreciated & the
resultant WDV as at the date of
introducing the building into
business shall be deemed to be
the actual cost.
While all other explanations use
the term "asset" or "capital
asset", Explanation 5 uses the
term "building" instead of
"assets". It has therefore been
held that this explanation would
not apply to all other assets other
than building.
69.    Section 43A -       Section 43A was inserted in the       It is suggested that Section
Exchange            Income-tax Act, 1961 by Finance       43A be amended to allow
fluctuation         Act of 1967, which permitted          Capitalization of such foreign
loss due to         Capitalization    of    Foreign       exchange loss even for
sharp fall in       Exchange Fluctuation Loss in the      domestically acquired asset.
Rupee value         borrowing used for acquisition of     (SUGGESTIONS         FOR
assets outside India. The             RATIONALIZATION OF THE
exchange fluctuation loss on          PROVISIONS OF DIRECT TAX
borrowings used for domestically      LAWS)
acquired assets is not permitted
to be capitalized for tax
purposes.
The last financial year saw
Rupee depreciate significantly
against the US $ severely
impacting the industry particularly
those who have exposure to
External Commercial Borrowings
(ECBs) and Foreign Currency
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No
Convertible Bonds (FCCBs).
The provisions of Section 43A
are similar to the provision
contained in Schedule III to the
Companies Act, 2013. As per
`instructions in accordance with
assets should be made out' as
contained in Schedule VI, vide
notification No. GSR 129 dated 3-
1-1968, the following instructions
were inserted:-
"Where the original cost
aforesaid and additions and
deductions thereto, relate to any
fixed asset which has been
acquired from a country outside
India, and in consequence of a
change in the rate of exchange
at any time after the acquisition
of such asset, there has been an
increase or reduction in the
liability of the company, as
expressed in Indian currency, for
making payment towards the
whole or a part of the cost of the
asset or for repayment of the
whole or a part of moneys
borrowed by the company from
any person, directly or indirectly
in      any   foreign    currency
specifically for the purpose of
acquiring the asset (being in
either case the liability existing
immediately before the date on
which the change in the rate of
exchange takes effect), the
amount by which the liability is so
increased or reduced during the
year, shall be added to, or, as
the case may be deducted from
the cost, and the amount arrived
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No
at after such addition or
deduction shall be taken to be
the cost of the fixed asset."
The above provisions were
deleted vide notification no.
GSR 226(E), dated 31-03-2009
w.e.f. 31-03-2009.
The Schedule VI has been
amended vide Notification No.
SO 447(E) dt. 28-2-2011 w.e.f. 1-
4-2011. In the revised Schedule
VI (as also the New Schedule
III to the Companies Act, 2013) ,
under the heading "General
Instructions" Sr. No. 1 it is stated
as under:
"Where compliance with the
requirements of the Act including
Accounting       Standards     as
applicable to the companies
require any change in treatment
or disclosure including addition,
amendment, substitution or
deletion in the head/sub-head or
any changes inter se, in the
financial      statements       or
statements forming part thereof,
the same shall be made and the
requirements of the Schedule VI
shall stand modified accordingly."
The Accounting Standards have
been notified vide notification
GSR 739(E) dt. 7-12-2006. For
the above purpose the relevant
Accounting Standard is AS-11
`The Effects of Changes in
Foreign Exchange Rates'
Para 46 and Para 46A of AS-11
were inserted vide notification no
G.S.R. 225(E) dated 31st March,
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Sr.       Section                Issue/Justification                     Suggestion
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2009 and G.S.R. 914(E) dated
29th        December,        2011
respectively. The effect of these
notifications is that foreign
exchange difference on foreign
loans can be capitalized to the
cost of the depreciable assets
even if the assets are acquired in
India. No distinction is made
whether the assets are imported
or are purchased within India.
70.    Provision     for   Section 43B(f) provides for          Clause (f) of section 43B may
leave salary ­      deduction in respect of any sum      be deleted. Further, deduction
Section 43B(f)      payable by the employer as           for provision made towards
leave salary on payment basis        leave salary liability based on
only. At the time of insertion of    actuarial valuation may be
section      43B(f),  Accounting     allowed.
Standard-15 "Employees benefit"      Alternatively, on the lines of
was not into existence. As per       gratuity and pension funding,
the AS-15, leave salary can be       necessary provisions may be
differentiated as "short term        included in the Income-tax Act
benefit" and "long term benefit".    for funding of the leave salary
Short term benefits are allowed      liability and deduction should
to be expensed off during the        be allowed on such funding.
year. However, long term
(SUGGESTIONS         FOR
benefits are treated as "defined
RATIONALIZATION OF THE
benefits plans" and are valued on
PROVISIONS OF DIRECT TAX
actuarial valuation. It may be
LAWS)
noted that the said AS is also
notified under the Companies Act
by National Advisory Committee
on Accounting Standards and is
required to be mandatorily
followed by all companies.
Allowing deduction in respect of
long terms benefits arising due
paid leave only on payment basis
may be inappropriate. Thus, it is
suggested that the deduction for
leave salary liability may not be
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linked to actual payment.
71.    Section 43CA - This section provides for                   a) The section in its present
Special            adoption of stamp duty value in         form may not be desirable and
provision for full case of transfer of land or             may lead to structuring of
value          of building or both held as stock-in-       transactions.     Thus,     the
consideration      trade. Several issues that              provision of this section needs
for transfer of              may crop up due to            to be reconsidered.
assets      other implementation of this section in        (SUGGESTIONS         FOR
than      capital its present form and suggestions         RATIONALIZATION OF THE
assets in certain thereof are as under:                    PROVISIONS OF DIRECT TAX
cases.             a)        This          amendment       LAWS)
encourages structuring of real
estate transactions in such a
manner to circumvent increased
tax liability arising on account of
adoption of stamp duty value. For
example- Having agreed to sell
the property at Rs. 80 Lakhs, as
against the value of Rs. 100
Lakhs considered for stamp duty
purposes, the transaction may be
structured      to    record    the
transaction value at Rs.100
Lakhs with a rebate of Rs. 20
Lakhs.
b) This provision results in          b) Suitable provisions may be
double taxation of income,since,      incorporated in the statute so
the difference between the stamp      that the same income is not
duty      value     and     actual    subject to tax twice.
consideration would be taxable in
the hands of the seller. However,
the buyer can claim only the
actual cost as deduction while
computing his business income
or capital gains arising at a later
point of time when he sells the
asset.
c) This section provides for          c) It may be clarified as to
adoption of stamp duty value on       whether the term "otherwise
the date of agreement, where the      than by way of cash" would
date of agreement is different        include transfer by book
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Sr.       Section                Issue/Justification                       Suggestion
No
from the date of registration,         entries, transfer by Hundi,
provided at least a part of the        promissory notes etc. and
consideration has been received        transfer     by    exchange
on or before the date of               agreement.
agreement by any mode
otherwise than by way of cash. In
this context, it may be clarified
whether "otherwise than by way
of cash" would include transfer
by book entries, transfer by
Hundi, promissory notes etc. and
transfer by exchange agreement.
d) Further, in a case where the        d) It may be clarified as to
year of agreement and the year         whether the tax liability would
of registration are different, a       arise in the year of agreement
clarification is required as to        or year of registration or the
whether the tax liability would        year in which possession is
arise in the year of agreement or      obtained.
year of registration or the year in
which possession is obtained.
e) Since only capital assets are       e) It is suggested that
excluded from the applicability of     agricultural land be specifically
this section, agricultural land        excluded from the ambit of this
which is not included in the           provision
definition of capital asset may fall
within the scope of this section.
Therefore, specific exclusion of
agricultural land from the ambit
of this provision may be provided
for.
f) This section provides for           f) It is suggested that the term
adoption of stamp duty value in        "transfer"     be    specifically
case of "transfer" of land or          defined for the purposes of
building or both held as stock-in-     section 43CA.
trade. It may be noted that the
definition of term "transfer" in
section 2(47) is in relation to a
capital asset only. The intended
scope of coverage of the term
"transfer" for the purpose of
section 43CA needs to be
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Sr.       Section                Issue/Justification                      Suggestion
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defined.
g) Para 12A of the Form No.3CD g) A specific clause may be
i.e. Statement of particulars included in Form No. 3CD in
required to be furnished under respect of such transactions.
section 44AB of the Income-tax
Act, 1961 requires reporting of
particulars of capital assets
converted into stock-in-trade. A
similar clause to report the
particulars of transfer of land or
building or both held as stock-in-
trade for a consideration less
than the stamp value may also
be included in Form No.3CD.
h) Section 43CA provides that         h) A similar provision for
the stamp duty value may be           adopting stamp duty value on
taken as on the date of the           the date of agreement for
agreement for transfer instead of     transfer instead of the date of
the date of registration, provided    registration be inserted in
at least a part of the                section 50C also
consideration for transfer has
been received by any mode other
than cash on or before the date
of agreement
72.    Amendment in        Section 43D provides for              (i)     The words "or Non-
Section 43D and     taxability of interest on Bad and     Scheduled Banks" be inserted
Rule 6EA with       doubtful debts only when such         in the section 43D of the
reference    to     interest is credited to Profit and    Income-tax Act, 1961 and Rule
Non-Scheduled       Loss Account or when such             6EA of the Income-tax Rules,
Co-op Banks         interest is actually received,        1962 be amended suitably
whichever is earlier. Section 43D     w.e.f. 01.04.2006 and relevant
is applicable only to public          to A.Y. 2007-08.
financial institutions, scheduled     (ii)    In Rule 6EA (a)(i) the
bank,         State       Financial   words `six months' be replaced
Corporation, State Industrial         by "three months".
Investment Corporation etc. As
(SUGGESTIONS             FOR
co-operative banks are not
RATIONALIZATION OF THE
scheduled banks they are not
PROVISIONS OF DIRECT TAX
covered by the provisions of this
LAWS)
section.
Further, Rule 6EA which is
related to Section 43D talks
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Sr.       Section                Issue/Justification                     Suggestion
No
about Scheduled banks only.
Because section 43D and Rule
6EA do not take care of Non-
Scheduled Co-operative banks,
these      banks    are     treated
differently than Scheduled banks.
Thus, is discriminatory to the
Non-Scheduled         Co-operative
banks.
Further, it may be noted that Rule
6EA recognises a borrowing as a
Bad and Doubtful debt only if
certain specified conditions are
noticed in the accounts of the
borrower for a period of six
months or more. However, the
RBI has changed this period of
six months to 90 days i.e. three
months. Rule 6EA should also be
amended to be in line with the
RBI guidelines in this regard.
73.    (a) Section 44AA-   a) Section 44AA provides for          Section 44AA may be amended
Monetary limits     maintenance of accounts by            appropriately and the limit of
to be withdrawn     certain persons carrying on           income of Rs.1,20,000 and
business or profession to enable      turnover of Rs.10 Lakhs in any
the assessing officer to compute      one of the three immediately
his total income in accordance        preceding previous years may
with the provisions of the Act.       be     withdrawn     for   the
Sub-section (2) to section 44AA       assessees      carrying     on
provides for certain monetary         business and declaring income
limits for income or turnover of      as per the provisions of
business       or      profession     section 44AD and 44AE.
(i.e.income            exceeding      (SUGGESTION          FOR
Rs.1,20,000 or sales or turnover      RATIONALIZATION OF THE
exceeding Rs.10 Lakhs)which           PROVISIONS OF THE INCOME
triggers maintenance of books of      TAX ACT, 1961)
accounts. Further, the assessees
which declare their income from
business to be lower than
deemed profits under section
44AE, 44AD, 44BB and 44BBB
are also required to maintain
books of accounts in accordance
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Sr.       Section                Issue/Justification                       Suggestion
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with the provisions of section
44AA.
The Finance Act, 2009 made a
major amendment in section
44AD and brought within it ambit
all assessees carrying on
businesses except the business
covered under section 44AE,
agency business, assessees
having commission or brokerage
income. As per the provisions of
section 44AD read with section
44AA, only those assesses who
declare their income lower than
8% of total turnover or gross
receipts    and whose income
exceeds the maximum amount
which is not chargeable to tax,
are required to keep and maintain
books of accounts.
As a result the assessee having a
turnover below 1 crore and
declaring income on presumptive
basis at 8% should not be
required to maintain books of
accounts as per the provisions of
section      44AA.     Since     the
monetary limits (as mentioned
above) provided in section
44AA(2) are not in alignment with
the limit of Rs.1 crore as provided
in section 44AD, difficulty is being
faced by assessees carrying on
business as they are required to
maintain books of accounts if
their income from business or
profession exceeds Rs.1,20,000
which is even below the
maximum amount not chargeable
to tax.
(b) Rule 6F-        b) Rule 6F of the Income-tax           Considering the prevailing
Upward revision     Rules, 1962 provides for books         inflationary conditions in India,
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Sr.        Section                 Issue/Justification                        Suggestion
No
of    limit      of   of accounts and other documents         the limit of Rs. 1,50,000
Rs.1,50,000           to be kept and maintained by            provided in the proviso to Rule
persons carrying on certain             6F
professions. The proviso to Rule        (1) needs an appropriate
6f(1) provides that this rule will      upward revision say Rs.
not apply in relation to any            5,00,000. Rule 6F may be
previous year if the total gross        accordingly amended.
receipts from the profession do
not exceed Rs.1,50,000 in any
(SUGGESTION          FOR
one of the three years
RATIONALIZATION OF THE
immediately      preceding        the
PROVISIONS OF THE INCOME
previous year. This limit of
TAX ACT, 1961)
Rs.1,50,000 was enhanced long
back in the year 2000
considering     the      inflationary
trends at that point of time.
Considering     the     prevailing
inflationary conditions in India,
this limit needs an appropriate
upward revision say Rs.5,00,000.
Rule 6F may be accordingly
amended.
(c) Rule 6F(2)(iv)    Rule 6F(2) provides the books           Clause (iv) to Rule 6F(2) clause
­ requires to be      and other documents to be               was inserted in the year 1983.
dispensed with        maintained by the professionals.        Since then, there has been
Sub-clause (iv) of Rule 6F(2)           phenomenal change in the
requires maintenance of carbon          working of the businesses.
copies of bills exceeding Rs 25.        Nowadays, the billing is
computerized and the value of
transactions being entered into
has increased manifold times.
Thus, this clause should be
dispensed with.
In case the same is continued,
the value of minimum bill
amount of Rs. 25 should be
increased to Rs.1000.
74.    Section 44AD-         Section 44AD was introduced
Presumptive           w.e.f. 01/04/2011 i.e. from AY
Income ­ Some         2011-12. According to the
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Sr.       Section                Issue/Justification                     Suggestion
No
Issues              provisions, in case of an eligible
assessee engaged in eligible
business, income shall be
deemed equal to a sum @8% of
the turnover or higher income as
per books. Section 44AD is
applicable to any business
except the business of plying,
hiring or leasing goods carriages
referred to in section 44AE and
whose total turnover or gross
receipts in the previous year
does not exceed an amount of
Rs. 1 crore.
a) Maintenance      The general interpretation taken     The section may be amended
of Books of      from the reading of the section is   or suitable provision be
Account          that once a deemed income            inserted so as to clarify the
@8% is returned u/s 44AD, the        intentions of the section. The
assessee will not be required to     erstwhile sub-section 4 read as
maintain any accounts as             under:
required u/s 44AA.                           "The provisions of
There is a provision u/s 44AD(5),            section 44AA and 44AB
that if the income is less than 8%           shall not apply in so
then books will be required to be            far as they relate to the
maintained and audited. Unlike               business referred to in
the provision in the erstwhile               the sub section (1) and
44AD(4), there is no direct                  in    computing       the
positive provision in present                monetary limits under
section 44AD to the effect that              those sections, gross
section 44AA and section 44AB                receipts or as the case
will not apply and that the                  may be, the income
turnover covered under section               from the said business
44AD will be excluded for the                shall be excluded."
purposes of calculating the
turnover u/s 44AB.
Such ambiguity has developed
confusions and apprehensions in
the minds of the assessees who
are covered by the section.
b) Eligible         As per the section 44AD eligible     a) Section 44AD may be
Business         business means:                         amended to clarify whether
i)   Any business except the            the receipts of Rs.1 crore
business of plying, hiring or      under section 44AD intend
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Sr.       Section                Issue/Justification                      Suggestion
No
leasing goods carriages             to cover the receipts of a
referred to in section 44AE;        single       business       or
and                                 aggregate receipts of all
ii)   Whose total turnover or             businesses. As singular
gross receipts, in the              includes        plural,      a
previous year does not              clarification is required in
exceed an amount of one             this regard. The difficulty
crore rupees.                       being faced can be
illustrated by way of
following example:
Suppose an assessee "A" is
engaged in four different
businesses. The individual
turnover       of      each     his
businesses are as under:
a) Business I (Retail trade of
cloth)           RS. 30 Lakhs
b) Business II (Manufacturing
of tyres)        Rs. 25 Lakhs
c) Business III (Running a
sweet shop) Rs. 35 Lakhs
d) Business IV (Advertising
agency)          Rs. 15 Lakhs
The aggregate turnover of all
four businesses amount to Rs.
105 Lakhs. In such a situation,
if the assessee opts for section
44AD for all four businesses, a
clarification      is      required
whether or not he will be liable
to get his accounts audited
under section 44AB of the
Income-tax Act, 1961.
b)        The provisions of
section 44AD should not be
made applicable for all
businesses. The scope of
section 44AD may be clearly
defined to cover particular
businesses only. Further, in
such a case, the treatment
regarding        set     off     of
unabsorbed depreciation of the
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Sr.       Section                Issue/Justification                      Suggestion
No
non-eligible business against
the profits of eligible business,
also be clearly laid down.
c)       Further, it may also be
clarified      whether        the
provisions of section 44AD
would be applicable for loss
making        business       and
businesses having income
below taxable limit.
c) Applicability The Finance Act, 2012 had It is suggested that Instead of
of section       inserted sub-section (6) with         inserting sub-section 44AD(6),
44AD             retrospective effect from 1st         the definition of "eligible
April, 2011 to clarify that the       business" be amended to
presumptive tax provisions under      exclude professions, agency
section 44AD shall not be             business and business in
applicable to, inter alia, persons    respect of which the earnings
earning income in the nature of       are in the form of commission
commission or brokerage or            or brokerage.
persons carrying on an agency
business.
Further, the section 44AD(6)
apparently seems to exclude the
applicability to persons carrying
on profession, agency business
and earning commission or
brokerage. It is possible that
such persons have other
businesses        eligible      for
presumptive taxation under
section 44AD. Therefore, it is
suggested that the definition of
"eligible business" be amended
to exclude professions, agency
business and business in respect
of which the earnings are in the
form      of    commission       or
brokerage.
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PART E-CAPITAL GAINS
Sr.       Section               Issue/Justification                        Suggestion
No
75.    Revision    in     As per the existing provisions of       The date for determination of
date        of     the Act, in case of specified           fair market value should be
determination      capital assets acquired before 1st      revised to a relatively recent
of Fair Market     April, 1981, the cost of acquisition    time frame (such as 1st April,
Value              for such assets for the purpose of      2001) instead of 1st April, 1981.
capital gain can be taken either
the fair market value of such asset
prevailing on 1st April, 1981 or the
actual cost of such asset. The
determination of fair market value
as of 1st April, 1981 especially for
land becomes arbitrary & leads to
litigation. Hence, there is a need
to      revise    the    date     for
determination of fair market value.
76.    Limited            LLP though named as Limited             It is suggested that similar
Liability          Liability Partnership but for all       provision need to be inserted
Partnership        practical purposes it is a body         for LLP allowing merger and
(LLP)-             corporate       having  perpetual       demerger and amalgamation to
(a) Merger         succession. As business grows           be revenue neutral.
and                there      will      be  merger,        (SUGGESTIONS         FOR
Amalgamation       amalgamation, demerger of LLP's         RATIONALIZATION OF THE
of       Limited   as well. At present merger and          PROVISIONS OF DIRECT TAX
Liability          amalgamation of companies is            LAWS)
Partnership to     Revenue neutral.
be      Revenue
Neutral.
(b) Taxability     The Finance Act (No.2), 2009            In view of the above, it is
on conversion      introduced the taxation scheme          suggested that a specific
of firm into       relating to Limited liability           provision be incorporated in the
LLP-               Partnerships. It provided that a        Income-tax Act, 1961 itself
Clarification      "limited liability partnership" and a   clearly specifying that the
required           general partnership be accorded         conversion from a general
same tax treatment. i.e. taxation       partnership firm to an LLP will
in the hands of the entity and          have no tax implications.
exemption from tax in the hands         (SUGGESTIONS         FOR
of its partners. Accordingly, the       RATIONALIZATION OF THE
definition of the term `firm' was       PROVISIONS OF DIRECT TAX
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Sr.      Section              Issue/Justification                       Suggestion
No
amended to include within its          LAWS)
meaning a limited liability
partnership.
The memoranda explaining the
introduction of such taxation
scheme for LLPs also provided
the following:
"As an LLP and a general
partnership is being treated as
equivalent (except for recovery
purposes) in the Act, the
conversion from a general
partnership firm to an LLP will
have no tax implications if the
rights and obligations of the
partners remain the same after
conversion and if there is no
transfer of any asset or liability
after conversion. If there is a
violation of these conditions, the
provisions of section 45 shall
apply."
Although,      the     memoranda
provided that the conversion from
a general partnership firm to an
LLP will have no tax implications,
no specific provision clarifying the
same has been incorporated in
the Income-tax Act, 1961.
(c)              The existing section 47 (xiiib)        One fallout of the new Company
Consequential    provides that no capital gains         Act is that lot many companies
amendment        tax is payable on conversion           are now converting themselves
required    in   of a private limited or unlisted       to LLP. With a view to
section          public company into LLP subject        popularize the concept of LLP
47(xiiib)        to certain conditions. Proviso (e)     and also in view of the fact that
states that this provision will not    such provision should apply to
apply if the total sales, turnover     all cases of revenue neutral
or gross receipts in the               conversions from one form of
business of any of the three           entity to another form of entity,
preceeding years exceed Rs. 60         there should be no threshold on
lacs. Since this is an amendment       turnover, to avail the benefit
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Sr.       Section               Issue/Justification                       Suggestion
No
to facilitate conversion of private    under section 47(xiiib).
limited companies and unlisted         (SUGGESTIONS         FOR
companies into LLPs, ideally,          RATIONALIZATION OF THE
there should be no restriction on      PROVISIONS OF DIRECT TAX
the turnover to avail the benefit of   LAWS)
section 47(xiiib). It may also be
noted that the parent Act i.e.
Limited Liability Partnership
Act       2008,     allows     this
conversion without any such
restrictions.
77.    Section 49 -       Section 2(42A) defines the term        Section 49(1)(iii)(e) to be
Cost          of   `short term capital asset'. Clause     amended to include reference
acquisition        (i) (b) of Explanation 1 to Section    to demerger which is exempt
with reference     2(42A) provides that in case a         under Section 47(vib) and (vic).
to       certain   capital asset becomes the              (SUGGESTIONS         FOR
modes         of   property of the assessee in the        RATIONALIZATION OF THE
acquisition        circumstances mentioned on             PROVISIONS OF DIRECT TAX
Section 49(1), there shall be          LAWS)
included the period for which the
asset was held by the previous
owner. Further, Section 49(1)
refers to certain modes of
acquisition wherein the cost
would be substituted by the cost
of the previous owner.
Section     49(1)(iii)(e)   covers
corporate restructurings such as
amalgamations, but does not
include a reference to a
demerger. As a consequence,
where a capital asset of the
demerged company is transferred
to a resulting company, the
resulting company would not get
the benefit of a period of holding
of the demerged company.
The government recognized the
importance of demergers in the
corporate sector and introduced
various amendments to the Act
vide Finance Act 1999 to facilitate
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Sr.      Section              Issue/Justification                     Suggestion
No
corporate restructurings through
demergers. The Memorandum
explaining the provisions of the
Finance Bill 1999 had specifically
stated that the amendments have
been made on the principles that
the demergers should be tax
neutral and should not attract any
additional tax liability.
However, the omission of Section
47(vib) and (vic) in Section
49(1)(iii)(e) would mean that when
a capital asset is transferred to
the resulting company in a
scheme of demerger, holding
period of the capital asset would
commence from the date of
demerger and period for which the
capital asset was held by the
demerged company would not be
considered.
Accordingly,     the     resulting
company would not enjoy the
holding period of the demerged
company for the capital assets
transferred in the demerger, as
are available for other corporate
restructurings      such        as
amalgamations. To that extent, a
demerger would not be tax neutral
transaction.
It seems that the omission of
demerger sections in Section
2(42A) r.w. Section 49(1)(iii)(e)
seems inadvertent and no in sync
with the objective of the
introduction of the amendments
as stated in the Memorandum.
78.    Forfeiture of    Section 51 provides for deduction    In order to provide relief to the
Advance          of actual amount (without            assessee, any forfeited money
Money u/s 51     indexation) of advance or other      in respect of any long term
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Sr.       Section              Issue/Justification                        Suggestion
No
money received and retained by         capital asset should be allowed
the assessee on previous               to be deducted after Indexation,
occasions of negotiating the sale      if any, from date of forfeiture to
of capital asset, from Cost of         the date of sale.
Acquisition and indexation is done     (SUGGESTIONS         FOR
thereafter based on the CII for the    RATIONALIZATION OF THE
year in which the asset was            PROVISIONS OF DIRECT TAX
acquired/ first held by the            LAWS)
assessee . The assessee in effect
is deprived of the full benefit of
indexation which may not be
correct intent of the law.
79.     Section 54-      Several disputes are in existence      It is suggested that a provision
Investment in     as to whether an assessee can          be      introduced      whereby
residential       buy more than one house under          acquisition of more than one
house             provisions of section 54 of the        house be eligible for exemption
Income-tax Act, 1961. In the           u/s 54.
recent times High Courts and           (SUGGESTIONS         FOR
ITAT have taken a consistent           RATIONALIZATION OF THE
view that in order to avail the        PROVISIONS OF DIRECT TAX
exemption u/s 54 of the Act,           LAWS)
investment in a "residential
house" is required to be made.
Here a residential house means a
"dwelling unit", which may
encompass more than one flat or
living places, if all of them
together are meant for one family
for living together. It is submitted
that permitting investment of the
sale proceeds in more than one
house properties when the need
of housing is increasingly felt due
to increase in population, would
be a step in the right direction.
Even otherwise, investment upto
Rs. 50, 00, 000 is encouraged
and allowed u/s 54EC of the Act.
80.    Certification     a) At present deductions u/s 54,       It is suggested that the
of deductions     54F, 54EC etc. are not subject to      assessee claiming deduction
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Sr.      Section              Issue/Justification                      Suggestion
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claimed under    any audit or certification. The       exceeding a specified amount
section    54,   possibility that the assessee         under the provisions of section
54F, 54EC etc    claims inaccurate amount of           54, 54F, 54EC etc may be
deduction under such provisions       required to obtain a certificate
cannot be ruled out. In order to      from a Chartered Accountant
reduce such possibility of            certifying the accuracy of the
furnishing      of     inaccurate     claim.
particulars by the assessee and       (SUGGESTIONS         FOR
further to reduce the burden of       RATIONALIZATION OF THE
the Department in scrutinising        PROVISIONS OF DIRECT TAX
such claims made by the               LAWS)
assessee in his return, it is
suggested that such provisions
may be amended to require the
assessee to obtain a certificate
from an Accountant certifying the
accuracy of the claim. Further, a
ceiling may be created for
deductions u/s 54, 54F, 54EC etc.
that deduction amount in excess
of Rs. 30 lakhs in aggregate may
be certified by a Chartered
Accountant.
81.    Withdrawal of    b) Section 54, 54B, 54D, 54F and      Since there is no check on the
deposit from     54G allows the assessee to            withdrawal from capital gain
capital  gain    deposit      capital      gain/sale   scheme account and utilisation
scheme           consideration, as the case may        thereof for specified purposes,
account          be, not appropriated by the           the provision is being misused
assessee for the purchase of a        and leading to avoidance of tax.
new asset as per the provisions of    In order to prevent the misuse,
the respective section, in an         tax @1% should be deducted at
capital gain scheme account with      source from any withdrawal
a bank/institution as may be          from the capital gain scheme
specified    by      the   Central    account. To avail the credit of
Government. In order to claim         the tax so deducted, the
exemption under the respective        assessee should be required to
sections, the amount is required      make appropriate disclosures in
to be deposited before the due        the ITR form.
date of filing return of income       (SUGGESTION TO INCREASE
under section 139(1). The amount      THE TAX BASE)
so deposited is to be utilised
within the specified period for the
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specified purpose. In case the
same is not done, the exemption
of capital gain so provided earlier
is withdrawn and the amount
becomes chargeable to tax after
the expiry of the specified period.
Since there is no check on the
withdrawal from capital gain
scheme account and utilisation of
the amount so withdrawn for
specified purposes, the provision
is being misused and leading to
avoidance of tax. In order to
prevent the misuse, tax @1%
should be deducted at source
from any withdrawal from the
capital gain scheme account. To
avail the credit of the tax so
deducted, the assessee should be
required to make appropriate
disclosures in the ITR form.
82.    Issue       on    Section 2(47) of the Act defines       In view of the above, capital
capital   gain    `transfer' in relation to a `capital   gains should be taxed in the
arising on the    asset'. Clause (v) to section 2(47)    previous year in which the
transfer    of    states that transfer includes          constructed area is received by
land         in   "any transaction involving the         the land owner. In case of joint
respect     of    allowing of the possession of          development agreement, the
joint             any immovable property to be           land owner is normally not
development       taken or retained in part              entitled    to   receive     any
agreement         performance of a contract of           consideration at the time he
the nature referred to in section      hands over possession of land
53A of the Transfer of Property        for development. Exception to
Act, 1882".                            this effect may be provided in
section 2(47) or section 45 in
Accordingly,    the    transaction
the manner in which in case of
where, the land owner enters into
conversion of capital asset into
a JDA with the developer,
stock in trade, the capital gain
transferring the rights over the
is taxable in the Previous year
property to the developer in some
in which the stock is sold and
cases [as held in Chaturbhuj
not in the Previous Year in
Dwarkadas Kapadia v CIT (260
which it is converted into stock
ITR 491)], falls under the
in trade.
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definition of transfer u/s 2(47)(v)   Further, the period for making
and capital gain arises in the year   investment      for     availing
of transfer of property to the        exemption under sections 54EC
developer pursuant to entering of     etc should be reckoned from
JDA. Instantly, this is an            the date of handing over the
arrangement entered into which        possession and not the date of
has the effect of handing over the    JDA.
possession, thus the transfer isThere       should      be     no
said to have been taken place onapprehensions         that    the
the date of entering into such  assessees         might      take
agreement. However, the same    advantage of this method and
has caused a lot of hardship to delay obtaining letter of
the assessees due to following  possession from the builder
reasons:                        indefinitely. Safety rules can be
a. In many cases projects are placed by mentioning that
not even started for several occupancy certificate given by
months or years and the the municipal authorities can be
landowner is required to pay treated as the date of handing
the capital gain tax at the over of possession.
agreement stage itself.
b. In some cases builders have
left the projects half way
through and landowners
have suffered both ways- by
not getting the built up area
on time and ending up paying
taxes at the time of handing
over of possession of land.
c. The landowner has no
choice of taking benefit of
Section 54, 54F or 54EC by
investing in other properties
or capital gain bonds as he
receives no money at the
time of handing over of
possession of land.
d. At the time of handing over of
possession of land, the
Landowner has no money
even if he wants to pay the
taxes.
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e. In some cases Landowners
have paid taxes and the
projects have been stalled,
and the time for filing of
revised returns is over.
Landowners have no remedy
in such cases.
f.   At present there is no
computation mechanism for
calculation of such capital
gain. Should the Landowner
compute          the        Sale
consideration at Registration
Value of the Land or should
he calculate it by estimating
the cost of construction for
the Builder. Cost cannot be
estimated correctly and this
result in revision of the capital
gain amounts at the time of
scrutiny and it gives lot of
room for reopening of cases.
g. A situation may arise where
the builder sells and registers
a portion of undivided share
in land in favour of buyers in
relation to built up area falling
to his share before the
building is complete. The
Landowner will not be able to
postpone capital gain on the
portion sold as conveyance
deed is being executed. He
will have to offer to tax capital
gain arising out of the sale
consideration mentioned in
the Sale Deed.
However, if the landowner
sells undivided share in the
retained area and registers a
sale deed for undivided share
in land or for semi-finished
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structure before the building
is ready for occupation,
capital gain arising on this
transaction will have to be
offered to tax separately as
and when sale deeds are
registered or property is
handed over, whichever is
earlier. This transaction has
nothing to do with the capital
gain arising out of the
Development Agreement.
h. Builder is handed over the
possession only for the
purpose of construction,
which cannot be construed as
transfer of title to him as long
as the Landowner does not
get possession of his built up
area.
83.    Section 54EC-    Section 54EC provides that the         a)      As the financial year
Capital gain     capital gains arising from the         may differ from assessee to
not to be        transfer of a long term capital        assessee, it is suggested that
charged     on   assets will be exempt, if the whole    the term "financial year" be
investment in    or part of the capital gain, is        substituted with the term
certain bonds    invested in the long term specified    "previous year".
assets at any time within a period     b)       Considering         the
of six months after the date of        inflationary conditions in the
transfer. Further, proviso to this     economy,      it   is    further
section provides exemption shall       suggested that the said limit of
be     available     only     when     Rs.50 Lakhs may be raised to
investment made in long term           Rs. 1 crore.
specified asset by an assessee
(SUGGESTIONS         FOR
during any financial year does not
RATIONALIZATION OF THE
exceed Rs. 50,00,000/-.
PROVISIONS OF DIRECT TAX
LAWS)
84.    Exemption     a) Under Section 54 of the                a) In order to avoid avoidable
under section Income-tax Act, if an assessee            litigation, a Circular on the said
54 & 54F      who has earned a Capital Gain on          subject be issued clarifying that
sale of a residential house, has,         in a case where an assessee
within the prescribed period,             has entered into a Registered
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purchased or constructed another       Agreement for Purchase of a
residential house, then, to the        residential flat in an "OAS" and
extent of the cost of the new          the assessee has paid more
residential house, no tax in           than 50% of the cost of the
respect of such Capital Gain is        residential flat within the period
payable. There is a similar            prescribed in Sections 54 and
provision under Section 54F under      54F and has, within a further
which the Capital Gains arising on     period of three years obtained
transfer of ANY long term capital      actual possession of the
asset will also be exempt from         residential flat on payment of
tax, if the assessee has, within the   its full price, the assessee shall
prescribed period, purchased or        be       deemed        to    have
constructed a residential house, to    "constructed" a `residential
the extent of the cost of such new     house' within the meaning of
residential house.                     Sections 54 and 54F on the date
A considerable volume of litigation    on which the Agreement for
has arisen in the past on the issue    Purchase has been registered
as to `when' exactly an assessee       and the exemption under the
can be considered to have              said Sections will be available
purchased or constructed a new         to the assessee to the extent of
residential house and also on the      the aggregate cost of the
issue as to whether the                residential flat agreed to be
acquisition of the new residential     purchased.
flat in an Ownership Apartments        (SUGGESTIONS TO REDUCE /
Scheme (OAS) or a Co-operative         MINIMIZE LITIGATIONS)
Housing Society is "purchase" or
"construction". This distinction is
important because, the prescribed
time limits for both are different.
The above controversy has been
set at rest by the CBDT in relation
to the acquisition of a flat by an
allottee under the self-financing
scheme (SFS) of the Delhi
Development Authority (DDA) by
issuing the Circular No. 471 of
15.10.1986. The Circular has
clarified that in case of allotment
of a flat by the DDA under the
SFS, the allotment by DDA will be
treated as "construction" of a
residential house and that the
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"construction" shall be deemed to
have been made on the date of
allotment of the flat on payment of
the first installment of the price of
the flat even though, full price of
the flat has not been paid.
It is submitted that acquisition of a
residential flat in an Ownership
Apartments' Scheme (OAS), the
plans of which have been
approved by all the authorities
whose approval is necessary
under the law, should be treated
on par with acquisition of a flat
under the SFS of the DDA. On a
parity of reasoning, the exemption
under Sections 54 and 54F should
be available to an assessee who
has entered into an agreement for
purchase of a residential flat with
a Real Estate Developer (RED)
and he will be deemed to have
`constructed' the new residential
house on the date on which the
Agreement for Purchase has been
registered with the Registering
Authority after payment of the
amount payable on signing the
Agreement. To avoid misuse of
the exemption, a further condition
may be imposed that if the person
has not paid to the RED more
than 50% of the purchase price of
the residential flat within the
period prescribed under Sections
54 and 54F for "construction" of a
new residential house, and/or, has
not got actual possession of the
residential flat on payment of full
purchase price of the flat within a
further period of three years after
the expiry of the prescribed
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period, the exemption shall be
withdrawn. The exemption will be
to the extent of the total cost of
the residential flat as per the
Agreement for Purchase. The
presumption is that the RED
constructs     the     Ownership
Apartment on behalf of the flat
owners.
The preponderant view taken by
many Tribunals and Courts in
several decided cases supports
the submission made in the
precedent para. See "Shashi
Verma V. CIT 224 ITR 106(MP),
CIT V. R.L. Sood 245 ITR 727
(DEL), Hilla Wadia . CIT 216 ITR
376 (BOM). However, some
Tribunals and Courts have taken a
different view. As there have been
conflicting Judgements on the
issue, many Assessing Officers
(AO) take the view that the
exemption is available only if the
actual possession of the new
residential house has been taken
after payment of the entire cost of
the residential house within the
prescribed period. Some have
also taken a view that when an
assessee joins an "OAS" he is
"purchasing" a flat and not
constructing a flat. Such a view
causes considerable unjustified
hardship to the assessees and
has resulted in a lot of avoidable
litigation.
The aforesaid view taken by some
Assessing Officers strikes at the
very root of the intention of the
Parliament in enacting the
Sections 54 and 54F for giving the
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much needed relief to assessees
who need to change a residential
house for various genuine and
valid reasons, and they have no
option but to join on "OAS". It is
evident that they do not earn a
real capital gain on sale of the first
residential house when they have
to necessarily utilize that capital
gain for acquiring the new
residential flat. The real estate
prices have been continuously on
the increase. Therefore, the new
residential flat will usually cost
more than the sale price of the
one sold. When a person books a
flat in a large OAS, he cannot be
sure that the scheme will be
completed within the period
prescribed in Sections 54 and
54F. In most case, large OAS take
a longer period for completion
than the one prescribed for
`construction' in Sections 54 and
54F.
It has been an `oft declared' policy
of the Government to take all
steps necessary to reduce
litigation because of the very large
number of pending cases with the
Supreme Court and the High
Courts. On this issue, there has
been considerable avoidable
litigation because of differing
interpretations taken by AOs,
Tribunals and Courts on the
question whether acquisition of a
residential flat in an OAS is
`purchase' or `construction' and
when        the   `purchase'      or
`construction' can said to have
taken place.
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Sr.       Section               Issue/Justification                         Suggestion
No
b) A major issue which needs              b) The issue "whether or not
clarification from the Department is      exemption can be claimed under
whether or not exemption can be           Sections 54 and 54F when capital
claimed under Sections 54 and 54F         gains derived from transfer of a
when capital gains derived from           single residential property is
transfer of a single residential          used for purchasing multiple
property is used for purchasing           residential properties" requires
multiple residential properties.          clarification by the Board. Since
In ITO vs. Sushila Jhaveri 292 ITR        there are several judgments on
(AT) 1 (Mum)(SB), Hon'ble Special         the issue, an appropriate and
Bench of Mumbai ITAT held that            comprehensive clarification in
where more than one unit are              this regard, will not only reduce
purchased which are adjacent to           the existing litigations but will
each other and are converted into         also minimize future litigations
one house for the purpose of              on the issue.
residence by having common                (SUGGESTIONS TO REDUCE /
passage, common kitchen, etc.,            MINIMIZE LITIGATIONS)
then, it would be a case of
investment in one residential house
and consequently, the assessee
would be entitled to exemption. The
assessee making Investing made in
two flats located at different
localities in Mumbai will be entitled
to exemption in respect of
investment in one house only of her
choice. It was further held that the
expression "a residential house" in
sections 54 and 54F means one
residential house.
In     Karnataka        High     Court
in CIT v. D.                   Ananda
Basappa [2009] 180 Taxman 4 the
taxpayer transferred a residential
building and invested the long-term
capital gain in acquisition of two
residential flats situated side by side
by means of two separate
registered sale deeds and claimed
exemption for both the residential
units acquired. Both the units were
in the occupation of two different
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Sr.      Section               Issue/Justification              Suggestion
No
tenants. The Court held that the
apartments were situated side by
side and the builder had made
necessary modifications to make
them one unit by fixing opening
door in between those two
apartments. The mere fact that
when the Inspector visited the
premises they were occupied by
two different tenants was not a
ground to hold that the apartments
were not one residential unit. The
aspect of one registered sale deed
or more than one deed could not be
determinative of the building being
considered as one residential unit
or otherwise.
The Court referred to section 13 of
the General Clauses Act, 1897
wherein it is declared that whenever
the singular is used for a word, it is
permissible to include the plural.
The expression 'a' residential house
should be understood in a sense
that building should be of residential
nature and 'a' should not be
understood to indicate a singular
number. In CIT v. Smt.Jyothi K.
Mehta [2011] 12 taxmann.com
440 (Kar.) decision was given on
similar lines.
In the case of CIT vs. Gita Duggal
(ITA No. 1237/2011); Delhi
High Court (decided on February
21, 2013), the assessing officer
disallowed the exemption in respect
of one floor out of two floors
constructed by the assessee
through a developer since the the
floors were independent of each
other and self-contained and
therefore they cannot be considered
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Sr.       Section               Issue/Justification                   Suggestion
No
as one unit of residence.
Accordingly, he held that the
assessee was not eligible for the
exemption under Section 54.
The Delhi High Court held the
following:
" Section 54/54F uses the
expression "a residential house".
The expression used is not "a
residential unit". This is a new
concept introduced by the
assessing officer into the section.
Section 54/54F requires the
assessee to acquire a "residential
house" and so long as the assessee
acquires a building, which may be
constructed, for the sake of
convenience, in such a manner as
to
consist of several units which can, if
the need arises, be conveniently
and independently used as an
independent        residence,     the
requirement of the Section should
be taken to have been satisfied.
There is nothing in these sections
which require the residential house
to be constructed in a particular
manner. The only requirement is
that it should be for the residential
use and not for commercial use. If
there is nothing in the section which
requires that the residential house
should be built in a particular
manner, it seems to us that the
income tax authorities cannot insist
upon that requirement. A person
may construct a house according to
his plans and requirements. Most of
the houses are constructed
according to the needs and
requirements          and        even
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Sr.      Section              Issue/Justification              Suggestion
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compulsions. For instance, a
person may construct a residential
house in such a manner that he
may use the ground floor for his
own residence and let out the first
floor having an independent entry
so that his income is augmented. It
is quite common to find such
arrangements, particularly post-
retirement. One may build a house
consisting of four bedrooms (all in
the same or different floors) in such
a manner that an independent
residential unit consisting of two or
three bedrooms may be carved out
with an independent entrance so
that it can be let out. He may even
arrange for his children and family
to stay there, so that they are
nearby, an arrangement which can
be mutually supportive. He may
construct his residence in such a
manner that in case of a future
need he may be able to dispose of
a part thereof as an independent
house. There may be several
such considerations for a person
while constructing a residential
house. We are therefore, unable to
see how or why the physical
structuring of the new residential
house, whether it is lateral or
vertical, should come in the way of
considering the building as a
residential house. We do not think
that the fact that the residential
house      consists   of    several
independent units can be permitted
to act as an impediment to the
allowance of the deduction under
Section 54/54F. It is neither
expressly nor by necessary
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Sr.       Section               Issue/Justification                      Suggestion
No
implication prohibited."
Since there are several judgments
on the issue, a clarification in this
regard may be issued by the Board.
An appropriate clarification in this
regard, will not only reduce the
existing litigations but will also
minimize future litigations on the
issue.
c)       The proviso to section It is suggested that the
54F(1) provides that the nothing inconsistency in the sub-
contained in this sub-section shall section(2) and proviso to the
apply where (a) the assessee (ii) sub-section(1) and may be
purchases any residential house, removed to avoid unnecessary
other than the new asset within a litigations.
period of one year after the date of In fact, in order to promote
transfer of the original asset.       construction of    residential
Further, section 54F(2) provides houses, the time limit of 3 years
that where an assessee purchases, for completion of construction
within the period of two years after should be removed.
the date of the transfer of the
original asset, or constructs, within
the period of three years after such
date, any residential house, the
income from which is chargeable
under the head "Income from house
property", other than the new asset,
the amount of capital gain arising
from the transfer of the original
asset not charged under section 45
on the basis of the cost of such new
asset as provided in clause (a), or,
as the case may be, clause (b), of
sub-section (1), shall be deemed to
be income chargeable under the
head "Capital gains" relating to
long-term capital assets of the
previous year in which such
residential house is purchased or
constructed.
It may be noted that the proviso to
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Sr.      Section                Issue/Justification                        Suggestion
No
sub-section (1) discourages the
assessee to purchase a new house
within a period of one year and sub-
section (2) discourages the
assessee to purchase a new house
within a period of two years. There
seems to be inconsistency between
the two provisions of the same
section.
85.    Capital gain on    The Finance Act, 2012 had              It is suggested:
transfer     of    inserted a new section 54GB to         a)      The    benefit    under
residential        exempt long-term capital gains on      section 54GB may be extended
property to be     transfer of a residential property,    to long-term capital gains on
taxed         in   being a house or a plot of land,       sale of any capital asset which
certain cases-     owned by an individual or HUF, if      is invested in the equity of a
Section 54GB       the net consideration on sale of       new start-up SME company for
property, is invested in equity of a   purchase of new plant and
new start-up SME company in the        machinery within the prescribed
manufacturing sector which is          time.
utilised by the company to
b)     Investment in existing
purchase       new     plant    and
SME company may also be
machinery.
considered for the purpose of
Since this section was introduced      such exemption.
with a view to incentivise
c)      Further, investment in
investment in the Small and
LLP which satisfies the
Medium Enterprises (SME) in the
condition of SME enterprises
manufacturing sector as per the
may also be permitted, subject
National Manufacturing Policy
to conditions as may be
announced by the Government in
necessary. Restrictive clauses
2011, the benefit of exemption
may be inserted in line with the
under section 54GB should not be
appropriate clauses of the
restricted to capital gains from
proviso to section 47(xiiib).
sale of residential house and plot
of land alone, but should be           d)        The restricted time limit
extended to long term capital          for acquiring new plant and
gains derived from other capital       machinery         will      create
assets also.                           difficulties and, therefore, it is
suggested       that     the SME
This exemption under section
company may be allowed to
54GB can be claimed subject to
make such investment in new
the following conditions.
plant and machinery within a
(i)     The investee company           period of 2 years from the date
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Sr.       Section              Issue/Justification                       Suggestion
No
should qualify as a Small or          on which the assessee makes
Medium SME under the Micro,           the investment in its equity
Small and Medium Enterprises          shares.
Act, 2006.                            e)       The period of 5 years
(ii)   The company should be          for retaining the equity shares
engaged in the business of            may be reduced to 3 years, in
manufacture of an article or a        line with the requirement under
thing.                                section      54EC.      Suitable
(iii)    SME company should be        exceptions      for    takeover/
incorporated within the period        merger/ amalgamations etc.
from 1st of April of the year in      may also be provided.
which capital gain arises to the      f)       Similarly, lock-in-period
assessee and before the due           for plant and machinery
date for filing the return by the     acquired by the SME company
assessee u/s 139 (1).                 may be reduced from 5 years to
(iv)     The assessee      should     3 years.
hold more than 50% of the             g)     It may be clarified that
share capital or the voting right     the net consideration after
after the subscription in the         deduction of tax at source @1%
shares of a SME company.              may be required to be invested,
Sometimes in case of capital          so that there is no cash flow
intensive SME , a single co-owner     mismatch.
may not be able to fund the said      h)        In case of a Sale of joint
SME from his own share of sale        property , the condition
proceeds of the property sold         regarding holding of more than
which will prevent formation of a     50% of the share capital of the
new SME so as to achieve the          SME company by the assessee
desired objects.                      should be deemed to have been
(v)      The assessee will not be     fulfilled if the co-owners of the
able to transfer the above shares     said property hold more than
for a period of 5 years. It may       50% of the Share Capital of the
be noted that the lock-in period      SME company.
under section 54EC is only 3          (SUGGESTIONS         FOR
years.                                RATIONALIZATION OF THE
(vi)      The company will have to    PROVISIONS OF DIRECT TAX
utilize the amount invested by the    LAWS)
assessee in the purchase of new
plant and machinery within a
period of one year from the date
of subscription in equity shares of
an eligible company. If the entire
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amount is not so invested before
the due date of filing the return of
income by the assessee u/s 139,
then, the company will have to
deposit the amount in the scheme
as notified by the Central
Government. Thereafter, Central
Government issued Notification
No 44/2012, Dt 25-10-2012 in this
regard.
(vii)    The above new plant and
machinery acquired by the
company cannot be sold for a
period of 5 years.
(viii)   The above scheme of
exemption granted in respect of
capital gains on sale of residential
property will remain in force up to
31.3.2017.
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PART F-INCOME FROM OTHER SOURCES
DETAILED SUGGESTIONS
Sr.       Section              Issue/Justification                         Suggestion
No
86.    Definition of      Under the existing provisions of       Suggestions:
the       term     section 56(2)(vii), any sum or         (i) The provisions of clubbing
relative-          property received by an individual           of income as contained in
Explanation to     or     HUF       for    inadequate           Chapter V of the Income-
Section 56(2)      consideration        or      without         tax Act, 1961 should not be
(vii)              consideration is deemed as                   attracted once the sum of
income and is taxed under the                money or value of assets
head `Income from other sources'.            are subject to tax under
However, in case of any                      section 56(2) in the hands
individual, receipts from specified          of the recipient.
relatives are excluded from the        (ii) Lineal descendents of
purview and hence, are not                   brothers and sisters of self
taxable.                                     and spouse may also be
The Explanation to section                    included in the definition
56(2)(vii) was amended by the                 of "relative" in line with the
Finance Act, 2012 so as to                    provisions of section 13(3).
provide that any sum or property        (iii) The application of the
received without consideration or             provision should also be
inadequate consideration by an                extended to the relatives of
HUF from its members would also               the members of HUF.
be excluded from taxation.
(SUGGESTIONS                   FOR
The provisions of clubbing of          RATIONALIZATION OF THE
income as contained in Chapter V       PROVISIONS OF DIRECT TAX
of the Income-tax Act, 1961 are        LAWS)
attracted in respect of income
from any sum of money or value
of assets transferred to a non-
relative. Once the sum of money
or value of assets are subject to
tax under section 56(2) in the
hands of the recipient, the income
from such assets should not be
subject to the clubbing provisions
contained in Chapter V.
Further, it may be noted that, in
relation to an "individual", the term
relative, as it stands at present,
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Sr.      Section               Issue/Justification                        Suggestion
No
does not include nieces and
nephews. This may not be the
legislative intent as they also form
part of the close circle of relatives
and accordingly have been
considered as "relative" in the
Direct Taxes Code Bill, 2010 and
2013.
87.    Section           This section was amended by the         It is, therefore, suggested that
56(2)(vii)(b) ­   Finance Act, 2013 to bring within       immovable property transferred
Immovable         its scope immovable property            for inadequate consideration be
property          received       for      inadequate      kept outside the scope of
received for      consideration,      where       the     section 56(2)(vii).
inadequate        difference between the stamp            (SUGGESTIONS                FOR
consideration     duty value of land or building or       RATIONALIZATION OF THE
both and the actual consideration       PROVISIONS OF DIRECT TAX
exceeds Rs.50,000.                      LAWS)
This amendment has lead to
double taxation of the differential
amount i.e. the difference
between the stamp duty value
and the actual consideration
would be taxable in the hands of
the buyer as "Income from other
sources" under section 56(2)(vii)
and "Capital Gains" in the hands
of the seller on account of
adoption of stamp duty value as
full value of consideration for
transfer of property as per section
50C.
88.    Exclusion of      Clause (viia) was inserted under        It is suggested that rights
rights shares/    sub-section 2 of section 56 of the      shares and fresh issue of
fresh issue of    Income-tax Act, 1961 by the             shares be excluded specifically
shares from       Finance Act, 2010. The said             from the ambit of these
the ambit of      clause provides that the transfer       provisions
section     56    of shares of a company without           (SUGGESTIONS             FOR
(2)(viia)         consideration or for inadequate         RATIONALIZATION OF THE
consideration would attract the         PROVISIONS OF DIRECT TAX
provisions of section 56(2), if the     LAWS)
recipient is a firm or a company.
The purpose is to prevent the
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Sr.       Section              Issue/Justification                   Suggestion
No
practice of transferring unlisted
shares at prices much below their
fair market value.
Though the intent of the
legislature may not be to bring
rights shares within the ambit of
these provisions however, a strict
interpretation of the provisions as
inserted in the Act, brings rights
shares within the mischief of
these provisions.
89.    Valuation of      The Finance Act, 2012 had (i) A proviso similar to the
shares-           inserted clause (viib) in section     proviso       to     section
Section           56(2) to provide that if the          56(2)(viia)    should     be
56(2)(viib)       consideration for shares is in        incorporated in section
excess of the fair value of the       56(2)(viib) as well. Further,
shares,       the       aggregate     the proviso should also
consideration received in excess      cover transactions not
of the fair value determined as       regarded as transfer under
per method prescribed or              sections 47(vi) and 47(vib).
substantiated by the company to (ii) Valuation Report from an
the Assessing Officer based on        `Accountant'     may      be
the value of its assets, would be     admissible so as to
taxable as the income of a closely    determine the fair market
held company.                         value of unquoted equity
The      detailed     suggestions     shares.
regarding the draft rule which (SUGGESTIONS                   FOR
prescribes for determination of RATIONALIZATION OF THE
fair market value of shares was PROVISIONS OF DIRECT TAX
submitted by ICAI to the Board.    LAWS)
In furtherance to the same, it is
submitted that the provisions of
this clause should not apply to
any such property received by
way of a transaction not regarded
as transfer under clause (via) or
clause (vic) or clause (vicb) or
clause (vid) or clause (vii) of
section 47. Such exemptions
have been provided in relation to
section 56(2)(viia).
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CHAPTER VI
AGGREGATION OF INCOME AND SET OFF OR
CARRY FORWARD OF LOSS
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DETAILED SUGGESTIONS
Sr.       Section                Issue/Justification                      Suggestion
No
90.    Onus of proof       The Finance Act, 2012 had made        First proviso to section 68
in respect of       amendments in section 68 to           should be re-worded to provide
cash      credits   provide that in case the amount       that the source of funds in the
consisting     of   credited consists of share            hands     of    the     resident
share               application money, share capital      shareholder is to be explained
application         or share premium, then, the           by the ASSESSEE Company or
money, share        explanation offered by the            the investor to the satisfaction
capital, share      assessee company shall not be         of the Assessing Officer.
premium etc-        deemed to be satisfactory, unless     (SUGGESTIONS         FOR
Section 68          the resident shareholder also         RATIONALIZATION OF THE
offers an explanation about the       PROVISIONS OF DIRECT TAX
nature and source of such sum so      LAWS)
credited to the satisfaction of the
Assessing Officer.
The       Memorandum         while
explaining    the     amendments
proposed by the Finance Bill,
2012, clearly mentioned that
section 68 is amended to provide
that the nature and source of any
sum credited, as share capital,
share premium etc., in the books
of a closely held company shall
be treated as explained only if the
source of funds is also
EXPLAINED BY THE ASSESSEE
COMPANY in the hands of the
resident shareholder.
It may be noted that as per the
memorandum, the intention of the
lawmakers is to place onus of
proving the source of funds in the
hands of the resident shareholder
on the ASSESSEE Company.
However, the language of the
proviso to section 68 has been
worded otherwise, placing the
onus of explaining the source of
funds in the hands of resident
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Sr.       Section               Issue/Justification                     Suggestion
No
shareholder on the shareholder
itself.
91.    Rationalization    As per Section 69C if an             The above mentioned provision
of section 69C     assessee has incurred any            results in double taxation.
expenditure for which he has         Therefore, it's suggested that
offered no explanation is deemed     the provision of section 69C
to be the income of the assessee,    may be reviewed & deleted in
not allowed as deduction under       the interest of justice.
any head of income.
92.    Section     72-    At present under the provisions of   It is suggested that the brought
Carry forward      section 72 of the Income-tax Act,    forward business loss may be
and set off        brought forward business loss        allowed to be set off against
can be set off against profits and   short-term capital gain under
gains of business or profession      section 50 in subsequent
carried on by an assessee up to      assessment years.
subsequent 8 assessment years.       (SUGGESTIONS         FOR
Where any surplus arises from        RATIONALIZATION OF THE
sale of the capital asset forming    PROVISIONS OF DIRECT TAX
part of block of assets in respect   LAWS)
of which depreciation has been
allowed (either because the block
of assets ceases to exist or
because      the     consideration
received exceeds the value of
block), such surplus is regarded
as "short-term capital gain" under
section 50 of the Income tax Act,
1961.
93.    Tax incentives     The tax benefits under section a) In the interest of the public
under Section      72A in respect of amalgamation        at large, the benefit of
72A in respect     or demerger are currently limited     section 72A may be
of                 to industrial undertakings or a       extended to all businesses
Amalgamation       ship, hotel, aircraft or banking. It  including financial services
or Demerger (to    is suggested that in the current      particularly NBFC's.
be extended to     liberalized      and       buoyant b) Further, the provisions of
all businesses):   environment where various new         section 72A may be
sectors are growing at a rapid        simplified    specially   in
pace, this benefit should now be      respect of the conditions
extended to all businesses            applicable      for      the
including financial services.         amalgamating company like
losses / depreciation being
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Sr.       Section               Issue/Justification                      Suggestion
No
unabsorbed for at least
three years and holding
assets         on      the
amalgamation date upto ¾
of the book value of fixed
assets held two years prior
to the said date.
(SUGGESTIONS         FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
94.    Section 73A -      All specified businesses eligible     It is suggested that section 73A
set-off      of    for investment based incentives       should be modified to allow the
losses       of    u/s 35AD are capital intensive.       losses of specified business
specified          Business houses commencing            under section 35D to be set off
business           any specified business have to        against    profits    of   other
against non-       divert      funds     from    other   businesses.
specified          businesses to the specified
business           business. When other businesses
contribute        towards       the
establishment of a specified
business, it is imperative that the
losses of specified business are
allowed to be set off against
profits of other business.
95.    Review        of   Section 78 deals with the             It is suggested that the same
section 78(1)      provisions of carry forward and       shall be allowed to be
set off of losses in case of change   considered either in the hands
in the constitution of firm or on     of the firm or the partner so as
succession. Sub-section 78(1)         to remove the genuine hardship
does not allow the firm to carry      of assessee.
forward and set off the share of
loss attributable to the retired or
deceased partner. Also, by virtue
of provisions of section 10(2A) the
income (which includes loss) is
not allowed to be considered in
the hands of the person being a
retiring partner of the firm.
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The Institute of Chartered Accountants of India
CHAPTER VIA
DEDUCTIONS TO BE MADE IN COMPUTING
TOTAL INCOME
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The Institute of Chartered Accountants of India
PART B-
DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
DETAILED SUGGESTIONS
Sr.       Section              Issue/Justification                        Suggestion
No
96.     Section          The deduction available in the first    Appropriate amendments may
80CCG- Rajiv     year for investment by a new equity     be made to clarify the real
Gandhi Equity    investor, having gross total income     intent     of    the   proposed
Linked           of up to Rs.10 lakh, in listed equity   amendment i.e. whether Long
Savings          shares or listed units of equity        term capital gains taxable under
Scheme           oriented funds under the Rajiv          section 112 and Short term
Gandhi Equity Savings Scheme,           capital gains taxable under
2013 , is extended to a new retail      section 111A needs to be
investor having gross total income      excluded for determining the
of up to Rs.12 lakh, for a period of    limit of Rs.12 Lakhs.
three consecutive assessment            (SUGGESTIONS         FOR
years      beginning     with    the    RATIONALIZATION OF THE
assessment year relevant to the         PROVISIONS OF DIRECT TAX
previous year in which the listed       LAWS)
equity shares or listed units of
equity oriented fund were first
acquired.
Further, as per section 112(2),
where the gross total income of an
assessee includes any income
arising from the transfer of a long-
term capital asset, the gross total
income shall be reduced by the
amount of such income and the
deduction under Chapter VI-A shall
be allowed as if the gross total
income as so reduced were the
gross total income of the assessee.
Similar provision is contained in
section 111A as well.
According to these provisions, the
"gross total income" as reduced by
such capital gains would be the
"gross total income" for the purpose
of all deductions under Chapter
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The Institute of Chartered Accountants of India
Sr.       Section               Issue/Justification                        Suggestion
No
VIA. Since deduction under section
80CCG falls under Chapter VIA,
this provision would also imply that
for determining the threshold limit of
Rs.12 lakh for availing the benefit
under this section, the capital gains
taxable under section 112 & 111A
are to be excluded.
97.    Preventive        Section 80D was amended by               It is suggested that section 80D
health check      Finance Act, 2012 to provide for         be appropriately amended to
up-Section        deduction of up to Rs.5,000 in           provide for a deduction of Rs.
80D               aggregate for preventive health          5,000 for preventive health
check-up of the assessee, his            check-up of any member of the
family and parents. This is within       family, which is in addition to
the overall limit specified under        the existing limits under that
section 80D.                             section for medical insurance
At present, there is a limit of          premium paid.
Rs.15,000 in respect of medical          (SUGGESTIONS         FOR
insurance premium of self,               RATIONALIZATION OF THE
spouse and dependent children            PROVISIONS OF DIRECT TAX
and Rs.15,000 in respect of              LAWS)
premium paid for parents. The
above limit would be Rs.20,000
instead of Rs.15,000, where any
of the persons insured are above
the age of 60 years.
With the rising cost of medical
treatment, it is necessary to have
an adequate insurance coverage
for all members of the family. The
cost of insurance coverage is also
increasing, and with the increase
in service tax with effect from
1.4.2012, the medical insurance
products have become dearer.
Therefore, the deduction of
Rs.5,000 for preventive health
check-up should be available in
addition to the existing deduction
for mediclaim premium
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Sr.      Section              Issue/Justification                       Suggestion
No
98.    Increase in      In view of the increase in            It is suggested that the limit
limit of         following      costs,     maximum     specified in section 80DD & 80U
deduction u/s    deduction in respect of medical       be enhanced suitably.
80DD & 80U       treatment of a dependent who is a      (SUGGESTIONS              FOR
person with disability u/s 80DD       RATIONALIZATION OF THE
and deduction for persons with        PROVISIONS OF DIRECT TAX
disability like total blindness or    LAWS)
mental retarded or physically
handicapped person u/s 80U,
should be enhanced suitably:
(a) Increase in medical cost;
(b) Increase in travelling cost;
Increase in minimum wages and
difficulty        in        getting
nurses/attendants      who      are
charging not less than Rs.
10,000/- even in B/C type cities
99.    Section 80EE -   Section 80EE provides for             Therefore, ideally, the benefit
Deduction in     additional deduction of up to Rs. 1   under section 80EE may be
respect     of   lakh under Chapter VIA in respect     extended to interest on the loan
interest    on   of interest on housing loan           taken for the first house
loan taken for   sanctioned by a bank or housing       property        acquired         or
residential      finance company during the            constructed, irrespective of the
house            period between 1.4.2013 and           whether the housing loan is
property         31.3.2014 for acquisition of          sanctioned before or after
residential house property.           1.4.2013. In any case, the
The issues emerging from the          deduction of Rs.1,50,000 in
provision are as follows-             respect      of     self-occupied
property was introduced fifteen
It may be clarified that
years back and keeping in mind
interest on loan taken for
the inflationary conditions, the
construction of residential
additional      deduction        of
house property also qualifies
Rs.1,00,000 should be extended
for the additional deduction
in respect of all loans, albeit for
i.e. the term "acquisition"
the first house property.
includes "construction" as
Further, instead of providing
well.
the same as a deduction under
As per sub-section (2) of            Chapter VIA only for A.Y.2014-
section 80EE, in case interest   15 and A.Y.2015-16, the same
payable for the P.Y.2013-14      may be provided by way of
is less than one lakh rupees,    insertion of another proviso to
the balance amount shall be      section 24(b) for the sake of
allowed in A.Y.2015-16.          consistency.
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Sr.       Section             Issue/Justification                 Suggestion
No
It may be noted that deduction (SUGGESTIONS         FOR
under section 80EE is an RATIONALIZATION OF THE
additional deduction, over and PROVISIONS OF DIRECT TAX
above the deduction allowable LAWS)
under section 24. Therefore, only
if the total interest exceeds
Rs.1,50,000, the benefit under
section 80EE itself would be
available. If the interest payable
is less than Rs.1,00,000, as
required in this sub-section, no
benefit under section 80EE would
be available even during the
P.Y.2013-14. Since the entire
interest would be deductible
under section 24 itself.
Therefore, sub-section (2) of
section 80EE may be reworded
to provide that in case "the
deduction allowable under this
section" for the P.Y.2013-14 is
less than one lakh rupees, the
balance amount shall be
allowed in the A.Y.2014-15.
Further, in case of extension
of benefit to interest on loan
taken       for    construction,
whether interest on a new
loan sanctioned during the
said period to repay an earlier
loan in respect of a house
property under construction
would      be     eligible   for
deduction is another issue
requiring clarification.
The section, in its present
form, does not extend the
benefit to interest on housing
loans taken from employer,
unless the employer happens
to be a bank or financial
institution.
The restriction of eligibility for
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The Institute of Chartered Accountants of India
Sr.      Section              Issue/Justification                        Suggestion
No
deduction under this section
to housing loans sanctioned
on or after 1.4.2013 results in
inequity vis-à-vis persons
whose home loans were
sanctioned before 1.4.2013 in
respect of the first house
property. It is possible that in
many cases where loan is
sanctioned prior to 1.4.2013
in respect of the first house
property, the amount is yet
to be disbursed or even if the
amount is disbursed, the
person is yet to receive
possession of the property.
Considering the high cost of
acquisition      of      house
properties in metro cities, the
threshold limit of Rs.40 lakhs
and         Rs.25         lakhs,
respectively, for the cost of
property and loan sanctioned,
for availing the benefit of
section 80EE is impracticable
and non-workable. Further,
since the banks generally
give loan upto 85%-90% of
the cost of property, the
threshold for loan should be
appropriately increased to at
least Rs. 35 Lakhs.
Further, the threshold limit of
Rs.25 lakhs is in relation to loan
sanctioned.       Loan disbursed
would be a more realistic criterion
for fixing a threshold, since the
entire loan sanctioned may not be
disbursed in all cases.
100.   Deduction u/s    There are many charitable               It is suggested that the ceiling
80G      -  to   institutions all over India backed      of 10% on gross total income be
liberalise the   up by dedicated people serving          withdrawn.
exemptions by    the cause of poor, downtrodden,         (SUGGESTIONS               FOR
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Sr.       Section               Issue/Justification                     Suggestion
No
enhancing         handicapped - both physically and        RATIONALIZATION OF THE
ceilings          mentally,       deserted   women,        PROVISIONS OF DIRECT TAX
specified         children, orphans, destitute and         LAWS)
aged helpless people. Even
though        there    are   many
magnanimous donors who are
willing to contribute to these
humanitarian        causes   after
ensuring that their donations are
properly utilised, the overall
ceiling of 10% of gross total
income u/s 80G impedes their
way to contribute liberally and
encourage more and more
institutions.
It is needless to mention that the
Government alone cannot achieve
the socialistic goal of upliftment of
downtrodden. Hence, there is a
need to encourage and nurture
these dedicated, service minded
institutions. Since hundreds of
institutions of this kind are in the
field and the willing donors with
large heart being limited, it is but
essential to remove the ceiling so
that at least the donors who want
to serve the cause of humanity
will not be tied up with such
artificial restrictions. This freedom
may even induce them to be more
generous        in     meeting     the
requirements of these institutions.
In this context, it is pertinent to
note that the Income Tax
Department has enough scope to
exercise control over these
institutions    while      granting
recognition, issuing and renewal
of exemptions u/s 80G and lastly
while assessing these institutions.
The provisions of Section 11(5)
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Sr.      Section               Issue/Justification                        Suggestion
No
relating to investment of their
funds also work as a check to
avoid misuse etc.
Also, the concept of Corporate
social responsibility introduced by
the Companies Act, 2013 reflects
that welfare activities from private
participation are being promoted.
In light of the same, it is
suggested that the ceiling of 10%
under section 80G may be
withdrawn.
101.   Donations         Sub-section (5D) was inserted in       It may be clarified as to whether
made of any       section 80G and sub-section (2A)       the limit of Rs.10,000 is
sum               was inserted in section 80GGA to       applicable in respect of each
exceeding ten     provide that no deduction shall be     individual     contribution     or
thousand          allowed under these sections in        aggregate contributions to an
rupees       in   respect of donation of any sum         institution or to all institutions
cash- sections    exceeding Rs.10,000 unless such        covered under section 80G(2)
80G        and    sum is paid by any mode other          and       section       80GGA(2),
80GGA             than cash.                             respectively
It is not clear from the language      (SUGGESTIONS         FOR
of these sub-sections as to            RATIONALIZATION OF THE
whether the limit of Rs.10,000 is      PROVISIONS OF DIRECT TAX
applicable in respect of each          LAWS)
individual contribution or with
respect     to    the   aggregate
contribution made by a person
during a year to an institution or
to all institutions covered under
section 80G(2) or 80GGA(2).
102.   Limits    of      As per the provisions of section       Considering the prevailing
House Rent        10(13A), least of the following is     inflationary conditions in India,
Allowance         exempt from tax in case a              it is suggested that the limits of
(HRA)     &       salaried   employee       receives     both house rent deduction u/s
80GG:             House rent allowance from his          80GG and House rent allowance
employer:                              u/s 10(13A) be reviewed and
i) House rent Allowance actually       enhanced.
received ii) rent paid ­ 10% of
salary iii) 40%/50% of salary and
For non-salaried persons, the
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                               Page 161  
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Sr.       Section              Issue/Justification                  Suggestion
No
deduction for house rent paid is
given under section 80GG
wherein Rs. 2000 p.m or 25% of
total income for the year,
whichever is less is allowed to an
assessee..
Considering     the     prevailing
inflationary conditions in India,
there is a need to review and
enhance the limits of both house
rent deduction u/s 80GG and
House rent allowance u/s
10(13A).
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PART C-
DEDUCTIONS IN RESPECT OF CERTAIN INCOMES
DETAILED SUGGESTIONS
Sr.        Section              Issue/Justification                          Suggestion
No
103.   a) Section 80IA    Plain reading of section 80IA            A      specific     clarification/
­     Unit-wise    gives the impression that                provision should be made in
deduction          deduction under section 80IA is          section 80 IA itself to provide
should       be    available 'unit wise'. But,              that deduction under section
allowed            nowadays, losses of other units          80lA is 'UNIT SPECIFIC'. For
are clubbed to deny deduction            each unit deduction under
under section 80IA of the Income-        section    80IA    should       be
tax Act, 1961 on the reasoning           separately calculated.
that all units constitute one single     (SUGGESTIONS TO REDUCE/
business. Since total income from        MINIMIZE LITIGATIONS)
eligible     business     is    loss,
deduction under section 80IA is
disallowed (Even when loss of
other unit has been set off against
profit of non eligible business
income).      This     practice     is
discretionary in nature. An
assessee/company          who       is
claiming deduction under section
80IA from one unit cannot start
another unit of similar business as
the initial losses of new unit will
get adjusted with the profits of old
unit However, if the new unit is
started by another assessee/
company ,old unit will not suffer
any disallowance under section
80IA.      This     put      existing
assessee/company                 into
disadvantageous position vis-à-
vis new assessee/company. Many
Tribunal benches (Bangalore,
Mumbai etc.) have already
rejected this practice.
b)   Extension     The terminal date for power              In order to ensure clarity and
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Sr.       Section              Issue/Justification                      Suggestion
No
of      sunset    sector undertakings to set up,        certainty as regards the period
clause under      start transmission or distribution    within which the undertaking
section 80-IA     or      undertake       substantial   should be set-up or within
renovation is to be extended by       which       it   should     start
one year i.e. from 31.3.2013 to       transmission etc. the terminal
31.3.2014. In fact, the terminal      date may be extended till such
date has been extended several        time the country has acquired
times in the last few years           self-sufficiency in the supply of
power i.e. the terminal date may
be kept open-ended.
(SUGGESTIONS         FOR
RATIONALIZATION OF THE
PROVISIONS OF DIRECT TAX
LAWS)
c) Benefit u/s    Section 80-IA of the Income-tax       The original position, under
80IA shall be     Act, 1961 provides exemption          which the transferee company
allowable to      from income tax on infrastructure     enjoys the benefit in case of a
the resulting /   projects subject to specified         demerger or amalgamation, may
amalgamated       conditions in order to encourage      be reinstated.
company in        investment in these areas. Sub-       (SUGGESTIONS         FOR
case         of   section (12) provides that in case    RATIONALIZATION OF THE
demerger      /   of demerger or amalgamation, the      PROVISIONS OF DIRECT TAX
amalgamation      benefits to the undertaking under     LAWS)
Section 80-IA will continue in the
hands of the transferee company
and will cease in the hands of the
transferor company.
However, as per sub-section
(12A) inserted by the Finance Act,
2007 the benefits will cease, if
there is a transfer in a scheme of
amalgamation or demerger, on or
after 1st April, 2007.        The
unfortunate     result    of  this
amendment is that neither the
transferor nor the transferee
company will enjoy the benefit of
80-IA in case there is an
amalgamation or demerger.
The original position, under which
the transferee company will enjoy
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Sr.      Section                Issue/Justification             Suggestion
No
the benefit in case of a demerger
or amalgamation, needs to
reinstated based on the following
reasons:
(i)    Incentives of this nature
have     been     traditionally
linked to a unit/undertaking/
investment, and not to an
entity. It is logically so,
because the objective is to
incentivize an investment
regardless of which entity
houses that investment.
(ii)    Amalgamations              or
demergers are restricted
forms of transfer which are
also subject to (i) stringent
guidelines as prescribed in
the Income-tax Act, 1961
and (ii) Court supervision
and approval. The benefits
under 80IA used to be
allowed in the hands of the
transferee companies in
such restricted forms of
transfer.    Such rationale
remains valid even now and
the benefits under Section
80IA may therefore, continue
to be available in the hands
of the transferee, like in the
past, prior to insertion of
Sub-section (12A) in the
Finance Act 2007.
(iii) The benefits of this section,
rightly, covers a long span of
15/20 years as infrastructure
projects by nature take a
long time to give economic
returns corresponding to
their risks. In such a long
span of time, the dynamic
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                    Page 165  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                   Suggestion
No
and ever changing market
place, especially in a
growing economy like India,
will necessitate a company
to undergo many changes
(amalgamation or demerger
being some of these) in
order to continue to operate
efficiently.    Removal of
benefits like that of 80IA
would lead to economic
inefficiencies by preventing
necessary amalgamations or
demergers.
(iv) The amendment therefore is
an undue constraint and may
even defeat the original
purpose of encouraging
infrastructure       projects
(especially given the long
span of time), which are
necessary building blocks of
our economy.
The concept of an amalgamation
or       demerger         deserving
appropriate treatment is well
recognized under the Income-tax
Act, 1961 which rightly provides
for several benefits for such
transactions including exemption
from capital gains tax. Further,
fiscal benefits similar to 80IA like
those under Sections 80IB, 80IC
or 10A of the Income-tax Act,1961
continues to be available, rightly,
even after any amalgamations or
demergers, and these have not
been deleted.       Extending the
timelines for some of these
benefits years, in the Finance Act
of 2011 clearly underscores and
reiterates their importance.
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Sr.      Section               Issue/Justification                           Suggestion
No
104.   Incentivizing    There is an urgent need to invest         The tax incentives may take the
investments      heavily in building up of a viable        following forms:
in respect of    and efficient infrastructure in the       i.    deduction of proportionate
agricultural     agriculture sector in India. This               profits for the total value of
infrastructure   would necessitate building up of                turnover arising from such
proper                 computerized             computerized
infrastructural     facilities     and          infrastructural facilities (in
electronic        highways          for         line with the provisions of
procurement, dissemination of                   section 80IA read in
best      agricultural       practices,         conjunction with section
weather information, storage                    80HHC) for purposes of
practices etc. as well as offering              simplification            and
the best possible price to the                  avoidance of disputes.
farmers. Also, this would result in
ii.   deduction of the total
cutting down intermediaries/
expenditure incurred, both
middlemen and thereby reduce
capital and revenue, for
the transaction costs.
creating              such
Section 80IA of the Income-tax                  infrastructure (similar to
Act, 1961 provides for deduction                the provisions of section
in respect of profits/ gains from               35).
industrial undertakings engaged in
(SUGGESTIONS         FOR
infrastructure development. This
RATIONALIZATION OF THE
covers road, bridge or rail,
PROVISIONS OF DIRECT TAX
highway projects, water projects,
LAWS)
ports, airports, telecommunication
services, industrial parks and
power generation. The definition
of infrastructure should be
extended      to     include rural
infrastructure like:
Village kiosks housing IT
infrastructure like computers,
VSATs,      Modems,      smart
cards, projectors, screens etc.
Support infrastructure like
solar-panels, UPS, Batteries
etc. at these locations.
Water harvesting facilities like
check dams, wells ponds and
other       rain   harvesting
structures.
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Sr.       Section              Issue/Justification                       Suggestion
No
Storages including farmer
facility center housing training
centers, cafeteria, health
clinic,     pharmacy,      bank
counters and necessary
parking area.
Green houses and poly
houses.
105.   (a)   Section     As per the current provisions, any     It is suggested that the
80JJAA      ­     Indian company engaged in the          amendment so made be
Deduction in      manufacturing of any article or        dropped in view of the above
respect    of     thing, gets a deduction of 30% for     anomalies. It is recommended
employment        new workmen employed during            to state that the section should
of       new      the given year for three               be     modified      to    cover
workmen           consecutive years including the        `employees employed by the
year of employment.          It is     industrial undertaking'
proposed to restrict this deduction
to only those companies who
have a "factory" as defined under
the Factories Act, 1948. Further
any factory acquired by way of
amalgamation or hive off, etc.
would not be eligible for these
benefits. This provision would
harm software industry which is
the largest earning amongst
others.
In the given scenario, when the
economy needs a boost from the
corporate world and employment
opportunities could assist in
accelerating overall growth and
development of the nation.
Under     such       circumstances,
proposing restrictions on such
employment opportunities is unfair
and therefore we suggest that this
proposal be dropped in view of
the below difficulties that may be
faced:
There should be clarity to the
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Sr.      Section              Issue/Justification                      Suggestion
No
effect that what is the
meaning    of  the  term
`workmen' and the term
`employee'
Deduction perfected in terms
of old section 80JJAA for and
upto AY 2013-14 should be
available for residual years
even in absence of specific
grandfathering
It is suggested that the blue
collared employees who
support the organization while
being outside the factory
premises may be considered
as "employed in such factory"
Clarity is required where the
taxpayer who is not registered
under the Factories Act,
whether he may be granted
deduction under this section
(b)   Section    Section 80JJAA which grants           It is suggested that a suitable
80JJAA      ­    deduction of an amount equal to       clause be added in Form 3CD
Deduction in     30% of wages paid to new regular      requiring the tax auditor to
respect    of    workmen employed in industrial        certify the particulars of new
employment       undertaking which is engaged in       regular workmen employed and
of       new     "manufacture or production of         the additional wages paid to
workmen          article or thing" was amended by      them to ensure the correctness
the Finance Act, 2013 to provide      of claim under section 80JJAA.
that deduction shall be allowed to    (SUGGESTIONS TO REDUCE /
an Indian company which is            MINIMIZE LITIGATIONS)
engaged in "manufacture of
goods in a factory" and where
new regular workmen are
employed by the taxpayer in such
factory.
106.   Deduction in     a) Section 80QQB provides for a       Since this does not appear to
respect   of     deduction of income up to             be the intention, it is suggested
royalty   on     Rs.3,00,000/- in respect of royalty   that clause (b) of the
books      ­     or copyright fees or lump sum         Explanation to the section
Section          consideration in respect of a         should be amended by deleting
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Sr.       Section              Issue/Justification                      Suggestion
No
80QQB             book. The term book is defined         the word 'commentaries' from
as, inter alia, not including          the list of exclusions.
commentaries. The intention            (SUGGESTIONS         FOR
appears to be to grant deduction       RATIONALIZATION OF THE
in respect of all books of literary,   PROVISIONS OF DIRECT TAX
artistic or scientific nature. It is   LAWS)
possible that many books of
scientific nature may be regarded
as commentaries, and may not
qualify for the deduction.
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The Institute of Chartered Accountants of India
PART CA-
DEDUCTIONS IN RESPECT OF OTHER INCOME
DETAILED SUGGESTIONS
Sr.      Section                Issue/Justification                       Suggestion
No
107.   Deduction     in   Section 80TTA was inserted by          Interest on all types of deposits
respect      of    the Finance Act, 2012 to provide       may also be included within the
interest     on    deduction of up to Rs.10,000 in        scope of section 80TTA.
deposits      in   the hands of individuals and           (SUGGESTIONS         FOR
savings            HUFs in respect of interest on         RATIONALIZATION OF THE
account-           savings account with banks, post       PROVISIONS OF DIRECT TAX
Section            offices and co-operative societies     LAWS)
80TTA.             carrying on business of banking.
However, it is unlikely that
salaried individuals would keep
their entire savings in a savings
bank account, which earns a
much lower rate of interest as
compared to term deposits. They
are likely to transfer some portion
of their savings to several
deposits to earn comparatively
better returns. Therefore, since
the money is anyway kept within
the banking channels, it is
suggested to include all types of
deposit interest within the ambit of
section 80TTA.
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The Institute of Chartered Accountants of India
CHAPTER IX
DOUBLE TAXATION RELIEF
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DETAILED SUGGESTIONS
Sr.      Section                Issue/Justification                       Suggestion
No
108.   Applicability     Under the Income-tax Act, 1961,           Appropriate amendment in
of Education      Education cess and Secondary and          the Act as well as ITR forms
Cess        and   Higher education cess are imposed         may be made to clarify that
Secondary         on account of the provisions              EC & SHEC should not be
and      Higher   contained in sub-section (12) of          applicable on the rates
Education         Chapter III of the Annual Finance         specified under DTAA.
Cess -Double      Act which provides the rates of            (SUGGESTIONS TO REDUCE
taxation          income-tax. The education cess is to      / MINIMIZE LITIGATIONS)
Avoidance         be calculated on the amount of
Agreement         income-tax as specified in sub-
sections (1) to (10) of the said
Chapter. However, none of these
sub-sections deal with the rate
specified in DTAA, which becomes
leviable by virtue of the provisions of
section 90A(2).Therefore, the moot
issue is whether the Education cess
and     Secondary       and     Higher
education cess would be applicable
where the rates specified in the
respective       DTAA        becomes
applicable by virtue of the beneficial
provisions contained in section
90A(2).
It may be noted that at the time
when a Double taxation avoidance
agreement is entered, the intention
is to arrive at an all inclusive fixed
rate of tax.
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The Institute of Chartered Accountants of India
CHAPTER X
SPECIAL PROVISIONS RELATING TO
AVOIDANCE OF TAX
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr.      Section                Issue/Justification                     Suggestion
No
109.   a) Domestic       a) The Finance Act 2012 has           There is clearly a need for
Transfer             introduced DTP in spite of         harmonization of the different
Pricing [DTP] ­      existing provisions under the      thresholds for the related party
Sections 92,         Act which empower the              definitions' in the sections
92BA, 92C,           Assessing Officer (AO) to          40A(2),92A(2) and 80A read with
92CA, 92D &          disallow         unreasonable      section 35AD(8). Necessary
92E                  expenditure            incurred    amendments in this regard may
between related parties            be appropriately made.
(Section 40A) or re-compute
the income of assessees
availing           profit-linked
deductions if there are
transactions with related
parties or other undertakings
of the same assessee
(Sections 80A, 80-IA, similar
Chapter VI-A deductions or
section     10AA).        These
transactions are presently
benchmarked against fair
market value. In this regard
the following points require
consideration:
Harmonization of the "related
party" definitions: Presently,
three     different     sections
referred to in section 92BA
and section 92A of the Act
have different thresholds for
determination of the `related
party' definitions' which are
as under:
Substantial Interest ­ Not
less than 20% of voting
power ­Explanation (b) to
Section 40A(2)
Associated Enterprises - Not
less than 26% of voting
power ­ Section 92A(2)(a)
& (b)
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                            Page 179  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                      Suggestion
No
Associated Person - Not less
than 26% of voting power ­
Section 80A read with
section 35AD(8)
b) Guidance in b) Presently, there is no                Since payment of directors`
respect     of    guidance in respect of                remuneration is subject to DTP
benchmarking      benchmarking      of     the          provisions, it is suggested that
of   Directors    Directors` remuneration.              there should be no restrictions
remuneration                                            on Directors' remuneration
based on profits computed
within the limits as specified
under the Companies Act &
also necessary guidance for
benchmarking in respect of the
same should be provided.
c)       Arm's c) Section 80IA(8) deals with            Conceptually,            `price
Length Price      "ordinary profits" whereas            principles' cannot apply for
vs     Ordinary   transfer pricing compliance           benchmarking of `profits'.
Profits:          refers to the "Arm`s Length
Price" of the transactions.
d) Increase in    d) The threshold limit of 5 crore     In order to ensure that only
the threshold         is too low for applicability of   substantial transactions are
limit of Rs. 5        the     Domestic     Transfer     covered    under    the   DTP
crore                 Pricing provisions                provisions, the threshold limit
should be raised to Rs. 50
crore.
e) Currently, APA provisions          The same should also be made
are being made applicable to      applicable    to    domestic
only           international      transactions covered by DTP
transactions.                     provisions
e)                f) Where      the    volume of        It is suggested that the
Documentation         specified             domestic    maintenance of documentation
Requirements:         transactions is below the         as required for transfer pricing
threshold      limit,     the     should not be applicable.
maintenance                 of    Alternatively a threshold limit
documentation as required         of 25 crore be introduced for TP
for transfer pricing should       documentation requirements.
not be applicable.
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The Institute of Chartered Accountants of India
CHAPTER X-A
GENERAL ANTI AVOIDANCE RULES
Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 181  
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr.      Section             Issue/Justification                    Suggestion
No
110.   GAAR             GAAR provisions will undoubtedly   To ensure that, the extra
have far reaching implications.    ordinary powers are not
exercised by revenue officers
arbitrarily or de hors the key
objects behind introduction of
GAAR, it is very important that
the apprehensions of the
taxpayers are addressed at the
earliest.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                        Page 183  
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The Institute of Chartered Accountants of India
CHAPTER XII-
DETERMINATION OF TAX IN SPECIAL CASES
Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 185  
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Page 186                          Pre-Budget Memorandum­ 2014 (Direct Taxes)  
The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                        Suggestion
No
111.   Removal     of   At present, Long Term Capital           It is suggested that appropriate
anomalies in     Gain is taxed @ 20% in                  provisions be made in the Act
sections 111A    pursuance of the provisions of          whereby the tax liability of an
& 112            section 112.Whereas, in case of         individual    whose      taxable
individual assessee having normal       income consists of only long
income the rate of tax upto RS. 5,      term or short term capital gain,
00,000 is only 10%.This leads to a      should not in any case, exceed
situation where in case if one's        the amount of tax liability
gain from transfer of long term         calculated deeming the capital
capital asset is below Rs. 5,           gain as regular income. This
00,000 then also he is required to      can be done by making the
pay tax @ 20% plus cess as per          provisions of Section 111A &
section 112 whereas his tax             112 optional.
liability otherwise would be much
lesser.
Similar is the situation in case of
Short Term Capital Gain by way of
sale of equity shares as provided
u/s 111A, where the tax rate is
15% which is more than the
minimum rate of tax payable by
the individuals.
112.   Sec.115- Inter   The Finance Act, 2008 amended           For the reasons given, it is
Corporate        the provisions of section 115-O to      suggested that the system of
Dividend         eliminate the hardship of double        tax credit for the dividend
Distribution     taxation arising on account of          distribution tax paid by the
Tax (DDT)        cascading effect of DDT in case of      subsidiary companies against
inter-corporate dividend. This is a     the dividend distribution tax
step in right direction. However,       payable by the respective
the same mitigates the hardship         holding companies at all levels
partially. The real objective should    be introduced.
be to eliminate the cascading
effect of DDT in case of inter
corporate receipt & distribution of
dividend. The amendment made
in the section is very restrictive as
it confines to receipt and
distribution of dividend only at one
level. It applies only to dividend
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                             Page 187  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                       Suggestion
No
received by holding company from
its subsidiary and that too it
applies to only one level. In view
of this, the double taxation of DDT
continues in all other situations of
inter-corporate      receipt     and
distribution of dividends. For
commercial and other legitimate
business needs, inter-corporate
shareholding         is       almost
unavoidable.
Therefore, amendment in section
115O is required to eliminate the
double taxation arising on account
of cascading effect of DDT in all
such cases. Alternatively, the
amendment should not be
confined to one level of Holding -
Subsidiary relationship. The same
should cover all the levels.
It may be noted that in view of the
business requirements, which
necessitate the formation of
subsidiaries, the domestic tax
system needs to be tuned in
alignment         with      business
requirements. In fact, this problem
was recognized in the Income-tax
Act itself in old Section 80M which
provided mechanism to avoid
double taxation in such cases.
113.   Section 115A-     The Finance Bill, 2013 amended         It is recommended that the
Rate of TDS       section 115A and substituted new       erstwhile tax rate of 10% on
on income by      sub-clauses (A) and (B) in clause      payments made to non-
way of            (b) for sub-clauses (A), (AA), (B)     residents towards income in the
royalty or        and (BB), to increase rate of tax      nature of Royalty and Fees for
Fees for          from 10% to 25% on payments            Technical Services (`FTS') be
technical         made to non-residents towards          retained as the same will also
services          income in the nature of Royalty        be in line with the rate which is
and Fees for Technical Services        provided in majority of the tax
(`FTS').                               treaties.
Page 188                                        Pre-Budget Memorandum­ 2014 (Direct Taxes)  
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Sr.      Section               Issue/Justification             Suggestion
No
The        above         proposed
unreasonable increase in rate of
tax merits reconsideration for the
reasons stated under:
The Hon'ble Finance Minister in
his budget speech had stated that
the rate of tax on royalty in the
Income Tax Act is lower than the
rates provided in a number of
Double         Tax       Avoidance
Agreements (`DTAAs') and the
above proposal is aimed at
correcting this anomaly.
In this regard, it may be noted that
India has entered into DTAAs with
almost 84 countries and an
analysis of the rate of tax on
royalty/FTS in all these DTAAs
are as below:
Sr.     Countries      Rate of
No.                      tax
1         49           10%
2.         16           15%
3         5            20%
4.         2           22.5%
From the above table, it can be
observed that in almost 60% of
the countries with which India has
a DTAA, the rate of tax on
royalty/FTS is 10%. There are just
2 countries where the rate of tax
is higher than 20%. It should also
be noted that trade dealings with
these countries is also very
miniscule as compared to major
trading partners where the rate of
tax is 10% under the respective
DTAA.
Therefore, increase of rate of
taxation of Royalty/FTS on the
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                   Page 189  
The Institute of Chartered Accountants of India
Sr.       Section               Issue/Justification                      Suggestion
No
premise of aligning the same with
the rates under the DTAAs is not
justifiable.
114.   Anonymous         Section       115BBC         taxes     To clarify the intention of the
donations         anonymous donations at a flat          statute, it is suggested that
under section     rate of 30%. The Finance (No.2)        section 115BBC(1)(ii) may be
115BBC            Act, 2009 had introduced an            re-worded as follows:-
exemption limit for taxation of        " the amount of income-tax with
anonymous donations received by        which the assessee would have
charitable trusts and institutions.    been chargeable had his total
Accordingly, the total tax payable     income been reduced by the
by such trusts/institutions would      aggregate       amount       of
be:                                    anonymous donations received
(i)    Tax @30% on anonymous           WHICH ARE SUBJECT TO TAX
donations exceeding the         IN CLAUSE (i) ABOVE."
exemption       limit as        (SUGGESTIONS         FOR
calculated above; and           RATIONALIZATION OF THE
(ii)   Tax on the balance income       PROVISIONS OF DIRECT TAX
i.e. total income as reduced    LAWS)
by the aggregate of
anonymous          donations
received.
The exemption would be the
higher of the following:
(i)    5% of total donations
received           by the
trust/institution or
(ii)   Rs.1,00,000
Thus, a clarification is required as
to whether the intention of the
statute is to altogether exempt
this amount from income-tax or to
bring it to tax at normal rates of
income-tax.
The issue is explained by way of
an illustration:
Total donation = Rs.10 lacs
Anonymous donations = Rs.3 lacs
Exemption under section 115BBC
= Rs.1 lac (i.e. higher of Rs.1 lakh
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Sr.      Section              Issue/Justification              Suggestion
No
or 5% of 10 Lakhs i.e. Rs. 0.50
lakhs)
Balance anonymous donations =
Rs.3 lakhs ­ Rs.1 lakhs= Rs.2
lacs is taxable@ 30% under
section 115BBC.
Balance taxable income = Rs.10
lac ­ Rs.3 lac = Rs.7 lacs would
be subject to normal    rates of
tax.
The balance income of Rs.7 lakhs
would be exempt only if it is
applied for specified charitable
purposes.
The language of the section, as it
reads at present, exempts Rs.1
lakh unconditionally i.e. no
application is required for the
purposes of total exemption from
tax.
It is felt that this may not reflect
the correct intention of the
legislature. The amount of Rs.1
Lakh, exempt under section
115BBC, should also be required
to be applied for specified
purposes for claim of total
exemption from tax.
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The Institute of Chartered Accountants of India
CHAPTER XII-B
SPECIAL PROVISIONS RELATING TO CERTAIN
COMPANIES
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DETAILED SUGGESTIONS
Sr.      Section                Issue/Justification                         Suggestion
No
115.   Tax Credit u/s    Minimum Alternate tax and                 It is suggested that for setting
115JAA       &    Alternate Minimum tax is paid u/s         off of MAT credit, a fresh period
115JD     read    115JB & 115JC of the Act                  of 10 years be allowed after the
with   section    respectively. The amount of tax           completion of period of
115JB & 115JC     credit so determined under                exemption in section 10A to
section 115JAA and 115JD is               10C and deduction in section
carried forward and set off in            80IA to 80ID under normal
accordance with the provisions of         provisions of the Act provided
these sections but such carry             it is the exclusive business of
forward is not allowed beyond 10th        the assessee.
assessment year immediately               (SUGGESTIONS         FOR
succeeding the assessment year            RATIONALIZATION OF THE
for which tax credit becomes              PROVISIONS OF DIRECT TAX
available.                                LAWS)
In case of an assessee who is
entitled to claim the exemption u/s
10A to 10C and deduction u/s
80IA to 80ID, the said amount of
tax credit is eligible for set off only
after the expiry of the 10th
Assessment year in which such
exemption and deduction allowed
accordingly. However, in effect
the purpose of making available
the tax credit gets defeated, as
tax credit is not utilized by those
companies up to 10 assessment
years and carry forward of the
Income tax paid on book profit
under this section, is not allowed
to be set off beyond 10th
assessment year immediately
succeeding the assessment year
for which tax credit become
available
116.   Book Profit      Presently, while computing the             In order to promote in-house
tax (MAT) on     `Book Profit' under Section 115JB,         R&D in India, the amount of
Scientific       the amount of weighted deduction           weighted deduction u/s 35(2AB)
Research         u/s 35(2AB) is not deducted. In            may be allowed to be deducted
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Sr.       Section               Issue/Justification                        Suggestion
No
Expenditure       the past, similar adjustment in         while computing       tax   under
respect of export profits under         115JB.
Section 80HHC was permitted for         (SUGGESTIONS         FOR
purposes of computation of `Book        RATIONALIZATION OF THE
Profit' under Section 115JB.            PROVISIONS OF DIRECT TAX
LAWS)
117.   Section            a)        Disallowance of provision    Clause (i) of Explanation 1 to
115JB-             for diminution in value of any         section 115JB may be amended
Minimum            asset for computation of "book         as follows-
Alternate tax      profit", it appears, is to be made     "(b) the amounts carried to any
in every class of company.             reserves, by whatever name
However, in case of banking            called [other than a reserve
companies the Government may           specified under section 33AC
give a relook and consider             and a reserve created and
applicability of the disallowance      allowed in accordance with the
provision to a banking company.        provisions of section 36(1)(viii)]
This is because of the fact that in    (i) the amount or amounts set
computation of business income         aside    as    provision       for
under normal provision, deduction      diminution in the value of any
in respect of provision for bad        asset (other than provision for
debts is allowed under express         bad and doubtful debts allowed
provision contained in section         as a deduction u/s 36(1)(viia))"
36(1)(viia) subject to the limit
specified in the said section. If      (SUGGESTIONS TO REDUCE/
provision for bad debts is allowed     MINIMIZE LITIGATIONS)
as deduction in computation of
business income under normal
provision, there does not appear
to be any cogent reason for
disallowing      the     same     in
computation of "book profit" under
section 115JB. Similarly, any
special reserve created in
accordance with the provisions of
section 36(1)(viii) also does not
require any disallowance in
computation of book profit under
section 115JB.
b)      The Government had Clauses (b) and (e) of
notified revised Schedule VI Explanation 1 may be deleted
(which is same as Schedule III of with effect from 1st April, 2012.
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Sr.      Section               Issue/Justification              Suggestion
No
in the Companies Act, 2013) (SUGGESTIONS TO REDUCE /
providing new formats for MINIMIZE LITIGATIONS)
presentation of Balance Sheet
and Profit & Loss A/c. The
changes in Revised Schedule
which may be of relevance to
MAT are omission of Part III,
moving of `below the line
adjustments' to Balance Sheet
and changes in certain disclosure
items.
The Finance Act, 2012 has
omitted reference to Part III of
Schedule VI since Revised
Schedule VI does not contain Part
III. However, other consequential
amendments are also necessary
consequent to notification of
Revised Schedule VI, which were
not addressed in the Finance Act,
2012.
As per Revised Schedule VI (and
also Schedule III of the
Companies Act, 2013), the profit
and loss account prepared as per
Part II does not include
appropriation to reserves and
proposed      dividend.   These
appropriations have to be
disclosed by way of Notes to
Accounts forming part of the
Balance Sheet.
Explanation 1 to section 115JB
provides that the book profit
means the net profit as shown in
the profit and loss account for the
relevant previous year, as
increased by the amounts
referred to in clauses (a) to (i)
thereunder, if the same is debited
to profit and loss account.
Since as per Revised Schedule VI
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Sr.       Section               Issue/Justification                 Suggestion
No
(as also Schedule III of the
Companies Act, 2013), the profit
and loss account prepared as per
Part II does not include
appropriation to reserves and
proposed dividend, Clause (b) of
Explanation 1 providing for adding
back of amount carried to any
reserves, by whatever name
called, and Clause (e) of
Explanation 1 providing for adding
back of the amount or amounts of
dividends paid or proposed may
be deleted with effect from 1st
April, 2012 i.e. Assessment Year
2012-13, being the date of
applicability of Revised Schedule
VI.
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CHAPTER XII-F
SPECIAL PROVISIONS RELATING TO TAX ON
INCOME RECEIVED FROM VENTURE CAPITAL
COMPANIES AND VENTURE CAPITAL FUNDS
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DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                      Suggestion
No
118.   Due date of      Section 115U(2) read with Rule        To enable the investor of
furnishing       12C requires that the person          VCC/VCF being an individual, to
statement in     responsible for crediting or          declare his income from
Form     No.64   making payment of the income on       VCC/VCF in his return of
under section    behalf of a Venture Capital           income bu 31st July, the due
115U      read   Company (VCC) or a Venture            date of furnishing statement
with Rule 12C    Capital Fund (VCF) and the            under Rule 12C should be
VCC/VCF       shall    furnish   a    changed to "30th June" from
statement in Form No. 64 to the       "30th November".
person liable to tax in respect of
such income by 30th November of
the financial year following the
previous year during which such
income is distributed.
Difficulty is faced by assessees
who have to file their return of
income by 31st July of the
assessment year. Since income
received by the investor is taxable
in his hands, he has to declare his
income in his return of income.
However, the certificate is
received by them by 30th
November, which causes genuine
difficulty to him.
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The Institute of Chartered Accountants of India
CHAPTER XIII
INCOME TAX AUTHORITIES
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The Institute of Chartered Accountants of India
PART C-POWERS
DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                        Suggestion
No
119.   Section   132-   a)       After search, as per          Since cash is seized at the time
Search    and    amended provision by the               of search and lying in PD
seizure          Finance Act 2010, where                account of CIT, such cash after
assessee files application with        adjusting existing tax liabilities,
Settlement      Commission      for    may be permitted to be adjusted
settlement of his cases, the cash      against the tax due as per
seized during search be permitted      settlement petition. Suitable
to be adjusted against the tax due     amendment / instruction is
as per the offer made by the           required to be given to the
assessee in the settlement             authorities in the matter since
application. It may be mentioned       they are not permitting such
that as per the provision              adjustment for want of clarity.
contained in this regard, the          (SUGGESTIONS TO REDUCE /
assessee has to make additional        MINIMIZE LITIGATIONS)
disclosure of income in the
settlement petition and pay
additional tax of Rs.50 Lakhs
before filing the application with
the Settlement Commission.
b)       Under      the    existing    In view of above, it is suggested
provisions, the applicant is           that the limit of additional tax of
allowed the benefit of filing          Rs. 50 lakhs be removed and
application before the Settlement      the provisions of section 245C
Commission subject to the limit of     appropriate amended be made
additional tax of Rs. 50 lakhs         in respect of persons who are
whereas the said benefit is            covered under search along
available to specified person if the   with the main searched party
additional tax exceeds Rs. 10          but are not the main applicant
lakhs. Therefore, a person whose       under clause (i) of Proviso to
case is connected with the main        Section 245C of the Income-tax
searched party but is not covered      Act, 1961 in Chapter XIX-A,
in the meaning of specified            Settlement of Cases.
person cannot file application
before        the       Settlement
Commission unless the additional
tax exceeds Rs. 50 lakhs.
It is significant to note that the
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Sr.       Section              Issue/Justification                         Suggestion
No
actions are initiated u/s 153A or
153C of the Act in consequence
to search conducted on the
applicant. The condition imposed
of Rs. 50 lakhs of additional tax
for filing the application in case of
non-specified         person       is
unreasonable as the proceedings
in the case of non-specified
person are merely as a result of
search in case of the main
applicant. It is important to note
that the Settlement Commission
will assess the correct income in
any case and therefore imposing
the limit of Rs. 50 lakhs is very
harsh for the cases which are
searched together and centralized
also by the Income Tax
Department.
c)       Section 132B provides for      In view of the practical difficulty
application       of seized     or      being faced, it is suggested that
requisitioned asset. The first          a provision like 132(5) [omitted
proviso to section 132B(1)(i)           by Finance Act, 2002] which
provides that where the person          provided      for     provisional
concerned makes an application          assessment be introduced and
to the Assessing Officer within 30      the asset be released after
days from the end of the month in       releasing the amount due as per
which it was seized for the             provisional assessment.
release of asset and the AO is          (SUGGESTIONS TO REDUCE /
satisfied about the explanation         MINIMIZE LITIGATIONS)
provided regarding the source of
asset, the asset is released after
recovery of the amount of any
existing liability.
Further, second proviso to section
132B(1)(i) provides that such
asset or a portion thereof shall be
released within a period of 120
days from the date on which last
of the authorizations for search
under section 132 or for
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Sr.      Section              Issue/Justification              Suggestion
No
requisition under section 132A as
the case may be, was executed.
Even after release of Instruction
No. 11/2006, dated 1-12-2006
practical difficulty is being faced
by assessees as the asset is not
released upto the completion of
assessment.
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The Institute of Chartered Accountants of India
CHAPTER XIV-
PROCEDURE FOR ASSESSMENT
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DETAILED SUGGESTIONS
Sr.        Section                Issue/Justification                        Suggestion
No
120. (a) Due date of       As per the Explanation 2 to             In order to resolve the difficulty
filing of return in   section 139(1), due date for filing     being faced by partners other
section 139(1) for    return of income is 30th                than working partners, it is
partners      other   September of the AY in respect of       suggested that wherever the
than       working    a working partner of a firm whose       firm is liable to get its accounts
partners              accounts are required to be             audited, the due date for filing
audited under this Act or under         return of income under section
any other law for the time being        139(1) of the Income-tax Act,
in force. While partners, other         1961, may be extended to 30th
than working partners, are              September of the AY for all
required to file return of income       partners of the firm including
by 31st July of the AY. It has been     non-working partners of the
observed that difficulties are          firm.
being faced by partners other           Also, like Companies, all firms
than working partners as their          are mandatorily required to file
Income-tax return form requires         return of income, thus the due
them to mention the capital             date of filing return of income
balance. It is imperative to note       for all such firms should be in
that it becomes quite difficult for     line with the companies
the partner other than working          irrespective of whether or not
partner to mention such capital         the accounts are required to be
balance on 31st March in the firm       audited.
(liable to get its accounts audited
(SUGGESTIONS                  FOR
and file its return by 30th
RATIONALIZATION OF THE
September) in his return, until the
PROVISIONS OF DIRECT TAX
audit of such firm is completed.
LAWS)
Thus, it is suggested that said
difficulty may be resolved.
It may also be noted that Finance
Act, 2005 brought the firms at par
with companies by amending
section 139(1)(a) making it
mandatory for all firms to file their
return of income before the due
date. Since both of them are
mandatorily required to file return
of income irrespective of the
quantum of income, the due
dates of filing return of income for
both should also be at par.
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Sr.        Section              Issue/Justification                Suggestion
No
(b) Section 139-    The scope of filing return of   The scope of filing return of
Enlarging    the    income should be widened.       income should be widened so
scope                                               as to include in its ambit the
persons entering into the
following transactions:
A person having foreign
tour twice in a block of
three years or thrice in a
block of five years should
file his/her return of income
mandatorily.
A person having huge
agriculture income or is in
a possession of large
agriculture land should
also come within a purview
of return of income.
A person paying electricity
expense above certain limit
(say Rs. 36000 pa)
A person paying school
fees above specified limit
(say Rs. 72000 pa) should
also come under the scope
of return of income.
If the aggregate amount
deposited in the current
account exceed certain
limit (say Rs. 30,00,000)
then provisions of filing of
return should apply to that
person mandatorily.
The person has AIR
transaction should also
come under the scope of
return of income, and if
he/she not file return of
income then penalty u/s
271F should be levied
instead of giving notice for
filing return of income.
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Sr.       Section               Issue/Justification                       Suggestion
No
Cash withdrawals from
saving bank account above
certain limits should also
takes place in the annual
information return.
(SUGGESTION TO WIDEN THE
TAX BASE)
121. Revised return -    a) Section 139(5) provides for         It is suggested that section
Section 139(5)      filing of revised return in cases      139(5) may be amended to
where return has been furnished        provide that the revised return
under section 139(1) or in             can be filed even in the case of
pursuance of notice under section      belated return.
142. There is no provision of filing   (SUGGESTIONS         FOR
revised return in case where           RATIONALIZATION OF THE
return is filed belatedly under        PROVISIONS OF DIRECT TAX
section 139(4).                        LAWS)
122. Guidelines    for   For the purpose of conducting          Specific guidelines for the
the empanelment     special audit under section            appointment of auditor under
of auditors under   142(2A) of Income-tax Act, 1961        section 142(2A) by Chief
section 142(2A)     (corresponding clause 151 of the       Commissioner                   or
Direct Taxes Code Bill, 2010), the     Commissioner may be issued.
auditor is nominated by Chief          The said guidelines may
Commissioner or Commissioner.          provide for conditions like
Presently, no specific guidelines      experience of the auditor in the
have been issued by the                relevant field, number of years
authorities to enable the Chief        of experience, number of
Commissioners                   or     partners etc. Further, in order
Commissioners to take an               to maintain quality of work and
informed decision. Considering         to        provide       equitable
the fact, that the tasks involves      distribution    of    work,     a
auditing of complex accounts,          restriction on the number of
some specific guidelines taking        such audits by a particular
into account the experience of         auditor in a particular year may
the auditor in the relevant field      be imposed.
etc may be issued by CBDT.             (SUGGESTIONS         FOR
Further, in order to maintain          RATIONALIZATION OF THE
quality of work and to provide         PROVISIONS OF DIRECT TAX
equitable distribution of work, a      LAWS)
restriction on the number of such
audits in a particular year may be
imposed.
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Sr.        Section               Issue/Justification                      Suggestion
No
123. Special audit -      Section 142(2A) was amended by         It is suggested that no change
section 142(2A)      Finance Act, 2013 apparently to        is required in the existing
amplify the scope of special audit     section, since it adequately
i.e. the Assessing Officer now         takes care of all cases of
has the power to direct a special      complexities, including doubts
audit, having regard to volume of      about the correctness of
transactions, doubts about the         accounts and multiplicity of
correctness of the accounts,           transactions.
multiplicity of transactions in the    (SUGGESTIONS TO REDUCE /
accounts or specialized nature of      MINIMIZE LITIGATIONS)
business activity of the assessee.
So far, the "nature and
complexity of the accounts" was
the necessary and sufficient
criterion for directing special
audit.
The new section 142(2A) appears
to have the effect of enlarging the
scope      of     special     audit
considerably.     The scope of
reasons for invoking the powers
under section 142(2A) to direct
the assessee to get the accounts
audited by an accountant have
been substantially increased.
Empowering        the    Assessing
Officer to invoke tax audit under
section 142(2A) merely due to the
"volume       of    accounts"     or
"multiplicity of transactions" may
have the effect of bringing each
and every case within the ambit
of special audit. Each and every
gas station, share broker, retailer,
agency business and the like may
fall within the purview of this
section solely on account of the
"volume       of    accounts"     or
"multiplicity of transactions".
Also, as these expressions are
highly subjective, they are prone
to adoption of very low threshold
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Sr.       Section               Issue/Justification              Suggestion
No
to trigger the application of this
provision. This may cause undue
hardship      to    even      those
assessees who genuinely ensure
compliance with the provisions of
law. Further, the specialized
nature of business activity of the
assessee, like say electricity or
insurance business, in our
opinion, cannot be a standalone
reason for directing special audit.
Special audit, as the name
suggests, should be invoked only
in exceptional circumstances,
which is the reason why the
existing section aptly confines
that it is the nature and
complexity of accounts which has
to be considered while directing
such audit. There should be a
distinction between regular audit
and special audit. The scope of
special audit cannot be increased
to such an extent that majority of
the assessees, whose accounts
have already been audited, are
once again subject to a special
audit merely due to, say, volume
of accounts being more in case of
large enterprises. The special
audit is more in the nature of
investigation or due diligence,
and therefore, needs to be
directed only in exceptional cases
having regard to the nature and
complexity of accounts.
Further, this may increase the
possibility of some Assessing
Officers resorting to special audit
since it gives them an extended
time     for   completing     their
assessment.
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Sr.        Section               Issue/Justification                     Suggestion
No
124. Hardship arising     a)       In the above-mentioned       Appropriate amendments may
out of the Apex      case the assessee filed its return    be made to enable the
Court's decision     of income for the relevant            assessee to get relief during
in Goetze (India)    assessment year without claiming      the assessment proceedings
Ltd. v. CIT (2006)   a particular deduction. Later on,     under section 143(1) and
284 ITR 323 (SC)     it sought to claim the deduction      section 144 by methods
by way of a letter addressed to       otherwise than by way of filing
the Assessing Officer.         The    a revised return.
deduction was disallowed by the       (SUGGESTIONS TO REDUCE /
Assessing Officer on the ground       MINIMIZE LITIGATIONS)
that there was no provision under
the Act to make amendment in
the return of income by making an
application at the assessment
stage without revising the return.
The assessee had relied upon
the decision of the Apex Court in
National        Thermal      Power
Company Ltd. v. CIT (1998) 229
ITR 383, to contend that it was
open to the assessee to raise the
points of law even before the
Appellate Tribunal. In that case,
it was held that the Tribunal had
jurisdiction to examine a question
of law (raised for the first time),
which arose from the facts as
found      by     the   income-tax
authorities and which have a
bearing on the tax liability of the
assessee.
The Supreme Court held that this
decision does not in any way
relate to the power of the
Assessing Officer to entertain a
claim for deduction otherwise
than by filing a revised return.
Therefore, the assessee can
claim deduction only by filing a
revised return.
The above-mentioned decision of
the Apex Court has unsettled
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Sr.        Section               Issue/Justification                      Suggestion
No
many a case law and has caused
unintended hardship to the
assessees
b) No deduction is permitted to       Provisions of section 80A(5)
an assessee under section 10AA        should be modified to permit
and Part C of Chapter VIA if the      filing of new claim by the
assessee fails to make a claim in     assessee in the course of
the return of income. This            assessment, even without filing
provision is very harsh and           of revised return of income.
disentitles the assessee to           This will remove unintended
legitimately    claim    otherwise    hardship.
legally allowable deductions due      (SUGGESTIONS TO REDUCE /
to technical reasons. In many         MINIMIZE LITIGATIONS)
cases, failure to make claim in
return may be inadvertent and
mere omission. There are wide
powers given to the Income tax
Authorities under the Income-tax
Act to reopen / review / rectify
assessment       if   any     error
prejudicial to the interest of the
Revenue is found.
Also in the case of Goetze (India)
Limited Vs CIT (284 ITR 323) the
Apex Court has held that it is
necessary for an assessee to
revise its return of income for
raising any new claim which is not
raised in the original return of
income.
Mistake apparent   Even after due efforts taken by       The Assessing Officers may be
125.
from record        the Government to ensure              given appropriate instructions
compliance relating to filing of      to      accept      rectification
TDS returns by the deductors, the     applications under section 154
defaults on behalf of deductors       in cases where Form No. 26AS
continue for one or the other         reflects the entries relating to
reason. This deprives the             TDS but the same has not been
deductee from claiming the Tax        claimed in the return of income.
so deducted in his return of          (SUGGESTIONS        FOR
income filed before due date of       REMOVING ADMINISTRATIVE
filing return. However, situations    AND          PROCEDURAL
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Sr.        Section               Issue/Justification                       Suggestion
No
do arise where the returns are DIFFICULTIES RELATING TO
belatedly filed or a correction DIRECT TAXES)
statement has been filed at a later
date by the deductor resulting into
a credit in Form No. 26AS of the
deductee at a later date say after
the time limit of filing a revised
return has also expired.
Considering the fact that such an
omission in the return of income,
duly supported by the entries of
Form No. 26AS, is a mistake
apparent from record, it is
suggested that the Assessing
Officers may be intimated to
accept the rectification application
under section 154 in such cases.
This will surely be helpful in
removing     the      administrative
hindrances being faced by the
assessees as well as the
Government.
126. Credit of Tax        Many            government/semi-       It is suggested that considering
Collected       at   government authorities (viz.           the hardship being faced by
Source relating      Mining Department) have been           assessees in respect of cases
to earlier years     demanding TCS of earlier years         mentioned        above,      the
(for        which    for which assessments have             department should give credit
Assessm     already been completed, since          for such TDS/TCS even if the
ents are already     they had not collected the TCS in      assessments       have     been
over     &   time    the those relevant years. After        completed and also the period
period               making payments of TCS the             mentioned u/s 155(14) has
mentioned in Sec     certificates for the same are          expired.
155(14)       has    issued in current year giving          (SUGGESTIONS         FOR
elapsed)             reference of expenditure incurred      RATIONALIZATION OF THE
demanded by the      by payer for earlier financial         PROVISIONS OF DIRECT TAX
Government           years.                                 LAWS)
authorities at a     As per the provision of section
later date:          155(14) "the credit of TDS/TCS
certificates is available to
assessee within 2 years from the
end of the assessment year in
which       such   income      is
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Sr.       Section               Issue/Justification              Suggestion
No
assessable" but since the
payment & certificates are
received after the above
mentioned period, it is difficult to
get the credit for the same. The
demand at such later date itself is
causing undue hardship to the
assessee and further the credit
for the same is not available to
the assessee because the
assessments have already been
completed. Hence, department
should give credit for such
TDS/TCS        even     if       the
assessments        have       been
completed and also the period
mentioned u/s 155(14) has
expired.
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The Institute of Chartered Accountants of India
CHAPTER-XVII-
COLLECTION AND RECOVERY OF TAX
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PART B-
DEDUCTION AT SOURCE
DETAILED SUGGESTIONS
Sr.        Section               Issue/Justification                         Suggestion
No
127.   Different          One of the important reasons for         TDS should not be linked with
Methods      of    mismatch of TDS claimed and              the year of income or the year
accounting         TDS as per Form 26AS is                  of receipt. Credit for TDS may
followed by the    adoption of different method of          be given on the basis of the
deductor    and    accounting (i. e. Cash or                claim made by the assessee
deductee           Mercantile) by the deductor and          irrespective of the assessment
deductee. Various situations that        year in which income is
may arise have been explained            received or income is offered to
below by means of examples:              tax. There should be a clear
i) Deductor­ Mercantile system           differentiation between amount
of accounting                            deducted and amount claimed.
The TDS not claimed in a
Deductee­Cash         system       of
particular year due to any
accounting
reason may either be allowed to
If the deductor follows mercantile       be claimed in the any other
system of accounting, the tax            assessment year or to be
would be deducted at source and          refunded to the deductee. The
deposited in the year in which           total TDS claimed and the
provision is made. Whereas the           balance, if any, may be
deductee following the cash basis        reflected in Form 26AS. Form
of accounting, would offer the           No. 26AS should be made as a
income and claim TDS in the year         bank pass book where the
in which the amount is actually          unclaimed credit is allowed to
received by him. For example             be carried forward for claiming
audit fees paid to a Chartered           in the next year.
accountant's firm by a company.
In such a case it is difficult for the
deductee to claim TDS as the
TDS certificate is issued in
respect of the year other than the
year in which it is claimed.
Also in some cases, the receipts
may be spread over in two or
more years. In such cases, there
is difficulty in getting credit of TDS
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Sr.        Section               Issue/Justification                  Suggestion
No
in second and subsequent year in
which      amount     is    actually
received, as the physical Original
copy of TDS certificate was
already filed with the Department
at the time of getting the TDS
credit in 1styear and on
subsequent        receipts,     the
assessee would not be able to
produce the Original TDS
certificate.
(ii) Deductor­ Cash system of
accounting
Deductee ­ Mercantile system
of accounting
There is a provision to take the
credit of TDS in the year in which
income is assessable to tax. If for
any reason, TDS certificate has
not been furnished; such
certificate can be produced within
two years u/s 155 of the Income-
tax Act. But issue generally arises
when the following situation
occurs:
In case of a deductee who
maintains books of accounts on
mercantile basis. The amount due
to him in respect of a government
contract is accounted for in his
books of accounts in a particular
year and advance tax/ self
assessment tax is paid by him in
respect of that income. However,
the government which maintains
books of account on payment
basis pays the amount after two
years after deducting tax at
source. In such a case, the
assessee would neither be
entitled to claim credit of TDS in
the year of receipt as the income
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Sr.       Section               Issue/Justification                     Suggestion
No
has already been offered to tax in
an earlier year nor he would be
able to get refund of tax paid by
him as the time to file revised
return may also have expired.
This amounts to payment of tax
twice to the government.
128.   Need        to    Form 26AS contains:                  In view of above, it is suggested
strengthen the    a) Details of tax deducted on        that      the      details     of
validation           behalf of the taxpayer by         TDS/TCS/Advance Tax/Refund
system      of       deductors.                        etc should be feeded by both
FORM 26AS:                                             PAN and Name or PAN and Date
b) Details of tax collected on
of Birth (DOB) or PAN and Date
behalf of the taxpayer by
of Incorporation (DOI) as well,
collectors
of the deductee and the same
c) Advance tax/self assessment       should be validated.
tax/regular assessment tax,
On validation, if there is any
etc. deposited by the
mis-match in combination of
taxpayers (PAN holders)
PAN and Name/DOB/DOI of the
d) Details of paid refund deductee then an immediate
received during the financial alert browser with beep
year                          showing the error should
e) Details of the High value appear on the feeder's screen.
Transactions in respect of Further, it should be re checked
shares, mutual fund etc.      that the correct amount is being
The Tax Credit Statement (Form uploaded in correct account &
26AS) is generated wherein valid to the correct assessee & the
PAN has been reported in the same is correctly reflected in
TDS statements. Assessee can Form 26AS.
view       the      details     of Proper      validation     system
TDS/TCS/Advance Tax/ Self should be adopted while
Assessment tax etc. in Form uploading data regarding Form
26AS from Income Tax website. 26AS so as to curb the problem
Form 26AS is of great of mis-match of actual data and
convenience to the assessee as the data reflecting in FORM
he can view all the above 26AS.This               suggestion     will
mentioned details at one place.    reduce      the     number      of
But at the same time, there are    rectification   applications   u/s
number of hidden hurdles that are 154 of Income Tax Act, 1961
being faced by both- the assessee and also strengthen the trust &
and Income Tax department on faith among the assessee that
account      of   mis-match     of the details reflecting in FORM
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Sr.        Section               Issue/Justification                       Suggestion
No
amount/details as per FORM            26AS are correct
26AS       and     the     actual     (SUGGESTIONS         FOR
amount/details                 of     REMOVING ADMINISTRATIVE
TDS/TCS/Advance          Tax/Self     AND           PROCEDURAL
Assessment Tax and investment         DIFFICULTIES RELATING TO
exceeding Rs. 2,00,000 made by        DIRECT TAXES)
the assessee in securities during
the relevant assessment year.
Due to mis-match of tax details,
the Income Tax department is
issuing letters/notices to the
assessee regarding details of
TDS/TCS         etc.     resulting
harassment and unwanted mental
tension to the assessee.
129.   Applicability of   Currently tax is deductible even in   It is suggested that the
TDS on genuine     cases where payment is not made       provision of TDS should not be
provisions on      and the amount is credited in the     made applicable on entries
estimate basis     books of the assessee as              made by assessees, which are
without bills:     provision for expenses or as          merely provision for expenses
suspense account or by any other      for work completed/ services
name. Very often, such provisions     rendered but for which bills
or credits are made by the            have not been received. TDS
assessees to follow accrual           may be imposed only on such
system of accounting so that true     credit entries to the party
and fair state of affairs the         accounts which are supported
business is reflected in the books    by bills / invoices.
and to ensure that all revenues       Alternatively,
and expenses are appropriately
It is suggested that the
matched.      This     does     not
deductor should be allowed to
necessarily mean liability has
issue separate Form No. 16A for
crystallized or the amount has
Provision made for expenses.
become due. Very often exact
numbers are not available and the     Alternatively,
provisions / credits are made         As suggested earlier , a system
based on best estimates available     on the lines of bank pass book
with the assessee. As per the         be introduced in the Form No.
current position, the assessee is     26AS, wherein the credit not
required to deduct tax on such        taken in a particular year is
provisions even before the            carried forward to next year for
bill/invoice has been received.       claiming against the tax
This often leads to excess            payable of next year.
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Sr.       Section               Issue/Justification                    Suggestion
No
deduction of tax, disputes with the    (SUGGESTIONS         FOR
vendor         and         extensive   REMOVING ADMINISTRATIVE
reconciliation. Further, this causes   AND           PROCEDURAL
great amount of confusion              DIFFICULTIES RELATING TO
between the assessee and the           DIRECT TAXES)
vendor if the provisioning by the
assessee and invoicing by the
vendor fall in two different
financial years.
The CBDT has through Circular
No.-01/2012 dt-09.04.2012, made
it mandatory for all deductors to
issue TDS certificate in Form No.
16A generated and downloaded
from TIN website for deduction of
tax at source made on or after
01.04.2012. Since it has to be
downloaded from the TIN website,
all the data for entire quarter gets
generated in a single certificate
based upon TDS return filed by
the assessee. Prior to this
circular, most of the deductee,
who were following cash system
of accounting, used to get
separate Form 16A from the
deductor for Provision made for
expenses and accordingly, they
were getting TDS credit easily
(that means, in the last quarter the
deductee were getting two Form
16A, one for payment made and
the     other     for    provision).
The problem arises when the
deductor is following accrual
method of accounting and the
deductee is following cash method
of accounting. In the last quarter,
the deductor would deduct tax at
source on Provision made for
expenses and it would get
reflected in Form 16A of the
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The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                      Suggestion
No
deductee. Now the deductor
cannot issue separate Form 16A
for provision made for expenses
which he could issue earlier.
Accordingly, it would create lot of
hardship
for deductees to claim the TDS
credit of the same in the year
when they receive the said
amount.
130.   Synchronization    Section 192 relating to TDS on        Section 192 relating to TDS on
of Section 192     salary to be synchronized with the    salary to be synchronized with
& Section 15 of    provisions of the charging section    chargeable section 15 so that
Income Tax Act     15 of the Income-tax Act, 1961.       TDS can be deducted at the
time of accrual or received
whichever      is    earlier or
alternatively section 15 can be
amended to tax salary income
at the time of receipt only.
131.   TDS      under     Section 194A(3)(iii)(a) provides      a)      To provide relief to the
Section 194A-      that the tax on interest other than   genuine      taxpayers   paying
Interest           interest on securities is NOT         interest to NBFC's, it is
payments    to     required to be deducted by a          suggested that the section
NBFC               person responsible for paying the     194A(3)(iii)(a) be amended to
same to a resident, if the income     treat NBFC's at par with other
is credited or paid to any banking    banking companies.
company to which Banking           b)       Further, in order to
Regulation Act, 1949 applies or    ensure compliance of the
any co-operative society engaged   provisions of the Act for timely
in the business of banking         collection of taxes provisions of
(including a co-operative land     Tax collection at source be
mortgage bank).                    made applicable to NBFC's in
It may be noted that Section 194A respect of such interest.
does not treat Non- Banking (SUGGESTION TO IMPROVE
Financial Institutions (NBFCs) at TAX COLLECTION)
par with the Banking companies
or Co-operative Banks. Due to
this,    the       middle    class
businessmen who have borrowed
money      from     NBFC's     are
disallowed interest paid on the
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The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                     Suggestion
No
same due to non-deduction of tax
at source under section 194A of
the Income-tax Act, 1961. It is
suggested that section 194A
should not apply to NBFCs as:
(a) NBFCs principal business is
of lending money under
various products just like
Banking Company or a co-
operative Bank.
(b) There is no mechanism for
deduction of tax on interest
paid by the assessees as the
NBFCs collect cheques of
EMI for the tenure of loan.
(c) NBFCs are also regulated by
RBI just like Banking
Company and a Co-operative
Bank.
Considering the fact that there is
no mechanism for deduction of tax
on interest paid by the assessees
as the NBFCs collect cheques of
EMI for the tenure of loan, the
non-compliance of the provisions
of this section is inevitable. The
said provision creates problem for
the assessee who has borrowed
money as he is unable to claim
deduction in respect of said
interest due to operation of
section 40(a)(ia).
132.   Payment of hire    Under the existing tax deduction     Specific amendment shall be
purchase           provisions, it has not been          made to exclude requirement of
installments       specifically provided whether        deduction of tax in the finance
under an hire      payment of hire purchase             charge u/s 194A or 194I.
purchase           installments would attract tax
agreement-         deduction. The hire purchase
applicability of   installments comprise of principal
tax deduction      & hire finance charge element.
u/s 194A or 194I
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                            Page 229  
The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                       Suggestion
No
133.   Section 194C-      As per the existing provisions of      In order to will avoid genuine
Defination    of   the Act, the `work' for the purpose    and avoidable      hardship to
the term "work"    of deduction of tax at source on       assessee for claiming refund of
payment to contractors has been        TDS, it is suggested that the
defined to include "manufacturing      definition of "work" under
or supplying a product according       section 194C in the above
to the requirement or specification    clause should be modified as
of customer by using material          "manufacturing or supplying a
purchased from such customer".         product according to the
The above provision has resulted       requirement or specification of
in deduction of tax by companies       a customer by using all/
wherein even a small component         significant material purchased
is supplied on free of cost basis or   from that customer"
otherwise to the supplier and
supplier in turn supplies the final
product along with the component
supplied to the customer.
134.   Section 194H-      In telecom industry, margins           It is suggested that the
Deduction of       earned by the distributors on sale     distributors     of    recharge
tax at source      of recharge vouchers are very low      vouchers should exempted
from income in     and the distributors sustain only      from compliance requirement
the nature of      on     account     of    volumes.      u/s 194H provided (a) TDS is
commission or      Deduction of tax at source @ 10%       deducted on gross margin at
brokerage:         u/s 194H leads to hardship,            the first level; and (b) Annual
compliance burden and huge             Information Return is filed by
costs.                                 the person taking benefit of
such an exemption.
Further, the rate of TDS u/s
194H should be reduced to 1%.
135.   Clarification      In case of partnership firms           On the lines of the provisions of
regarding TDS      Section 40(b)(i), provides that        section 194A, section 194H be
on Commission      "remuneration" shall mean any          amended to provide           that
to a partner       payment of salary, bonus,              Commission paid by the
under section      commission or remuneration by          Partnership firm to its partners
194H read with     whatever        name        called.    would not be liable to Tax
section 40(b)      Considering a partner and              deducted at source under
partnership firm as one entity, the    section 194H.
provisions of tax deduction at         (SUGGESTIONS TO REDUCE /
source under section 192 have          MINIMIZE LITIGATIONS)
not been made applicable on
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The Institute of Chartered Accountants of India
Sr.       Section               Issue/Justification                        Suggestion
No
payment of such remuneration, as
the same is not taxable under the
head "Salaries". Also, the
provisions of TDS under section
194A are not applicable to
interest (other than interest on
securities) credited or paid by a
firm to a partner of the firm.
Section 194H provides for tax
deduction at source in respect of
commission or brokerage. On the
lines of section 192 and 194A,
there is a need to clarify that
Commission      paid    by    the
Partnership firm to its partners
would not be liable to Tax
deducted at source under section
194H.
136.   Section 194I-     As per the provisions of section       Considering the increase in the
TDS on rental     194I the tax is to be deducted at      basic exemption limit for
income            source @10% in respect of              general assessees and senior
income by the way of rent for any      citizens, it is suggested that the
use of land or building or furniture   exemption limit of Rs. 1,80,000
or fixture etc. The proviso to         in respect of TDS on rent under
section 194I further provides that     section 194I be enhanced
no tax be deducted in case the         appropriately.
total rent paid in a financial year    Further, the provisions of
does not exceed Rs.1,80,000/-.         section 197A should be made
Considering the general basic          applicable only to those
exemption limit of Rs.2,00,000/-       assessees who do not own
for the Assessment year 2013-14        more than one house property
and for Senior Citizens of             and whose total income does
Rs.2,50,000/- the present limit of     not exceed the maximum
Rs.1,80,000/- seems to be too          amount not chargeable to tax.
low, especially for those Senior
(SUGGESTIONS         FOR
Citizens whose source of income
RATIONALIZATION OF THE
is only rent. Hence, the limit of
PROVISIONS OF DIRECT TAX
Rs. 1,80,000/- under section 194I
LAWS)
may be increased appropriately.
Further, the provisions of section
197A should be made applicable
only to those assessees who do
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 231  
The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                       Suggestion
No
not own more than one house
property and whose total income
does not exceed the maximum
amount not chargeable to tax.
This will prevent misuse of the
provisions of section 197A and
section 194I.
137.   Section 194-IA-    Tax is to be deducted@1% on           (SUGGESTIONS         FOR
TDS on transfer    consideration for transfer of         RATIONALIZATION OF THE
of immovable       immovable property, other than        PROVISIONS OF DIRECT TAX
property           agricultural land. However, no tax    LAWS)
is to be deducted if the                Section     194I    may     be
consideration for transfer of           appropriately    modified   to
immovable property is less than         require the transferee or the
Rs. 50 lakhs.                           payee, as the case may be, to
The issues emerging from this deduct tax at source from the
section are as under:                   consideration paid or credited
a) In a large number of cases, to the transferor.
loan is taken by the transferee
from a bank or financial
institution, employer etc. for
purchase      of       immovable
property. In such cases, the
payment is not made directly
by the transferee to the
transferor, except for the down
payment. The major part of the
consideration is paid by the
bank, financial institution etc. to
the transferor, either in
instalments or lump sum.
b) Further, the provisions for tax It is suggested that section 197
deduction are causing hardship    may be amended to permit the
to those sellers who claim full   assessee       to     make      an
capital gains exemption by        application to the Assessing
investing the capital gains or    Officer for issuing a certificate
the net consideration, as the     for no deduction of tax or
case may be, in the manner        deduction of tax at a lower rate.
provided in section 54, 54F,      In the alternative, the seller may
54EC etc., since in such cases,   be permitted to give a
there would be no tax liability   declaration to the Assessing
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The Institute of Chartered Accountants of India
Sr.       Section                Issue/Justification                        Suggestion
No
on account of capital gains. Officer and furnish a copy of
Further, for the purposes of the same to the buyer
section 54F and 54GB, the
entire net consideration is
required to be invested, which
poses a difficulty, since tax
would already have been
deducted from the net
consideration
c) The assessees may face                a)    To   ensure     effective
practical hardship in applying        compliance of the provisions of
the TDS provision, in case            section 194IA the aforesaid
where the consideration is in         issues may be clarified at the
kind (which is common practice        earliest.
in real-estate sector). For e.g.,  b) Also, in order to overcome
a      land-owner       transfers  the difficulties in cases where
development rights to a            remittance and taxability arises
developer for agreed built-up      in different years, a system of
area in consideration.             pass book be introduced in
d) Dual TDS implications on the Form No.26AS wherein the
same transaction in such cases balance of unutilized credit be
may lead to practical difficulties allowed to be carried forward
as in the said case, both the
land-owner as well as the
developer would be liable for
TDS on the same transaction.
e) Hardship is also likely to be
faced in cases where the
property is purchased jointly,
as it is not clear whether the
threshold limit of Rs. 50 lakhs
is to be applied to each owner
or to the total consideration for
the property.
f)   If the payment is being made in
installments, like in the case of
construction linked payments,
then the point of time when tax
deduction and tax remittance
should be made requires
clarification. In such cases,
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                               Page 233  
The Institute of Chartered Accountants of India
Sr.        Section                Issue/Justification                   Suggestion
No
there     may      be    several
installment payments based on
the stage of completion.
Consequently, if tax is required
to be deducted in respect of
each payment, whether a
single remittance can be made
at the stage of tax deduction in
respect of the last payment or
multiple     remittances     are
required at each stage is an
issue which needs to be
addressed.
g) In case of non-compliance due
to non-furnishing of PAN, the
provisions of section 206AA
would be attracted. At present,
credit for tax deducted under
section 206AA is not being
reflected in Form No. 26AS,
even if deductee submits his
PAN subsequently. This issue
needs to be addressed so that
credit of tax deducted and
remitted is not denied to
genuine assessees.
h) The tax department may face
the difficulty of relating different
challans to the year of reporting
of income by the transferor.
For instance, the capital gains
may be chargeable to tax in the
year of transfer whereas
deduction of tax at source may
have taken place in a different
year.
138.   Fees         for   The amendment to section 194J a) Section 194J be amended to
professional or    by the Finance Act, 2012 requires   provide an independent
technical          deduction of tax at source @ 10%    limit of Rs.30,000, above
services-          on any remuneration or fees or      which remuneration or fees
Section 194J       commission, by whatever name        or commission to director
called, to a director of a company, may be subject to tax
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The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                       Suggestion
No
other than those on which tax is          deduction at source.
deductible under section 192       b) Section     40(a)(ia)  be
However, the independent limit of     amended to include within
Rs.30,000 each provided for           its scope payment to a
under section 194J in respect of      director on which tax
other payments covered therein,       deductible at source has
namely, royalty, fee for technical    not been deducted .
services, fee for professional (SUGGESTIONS                 FOR
services and non-compete fees, RATIONALIZATION OF THE
as a threshold, beyond which TDS PROVISIONS OF DIRECT TAX
@ 10% would be attracted, is not LAWS)
being provided in respect of
director's remuneration. This
unintended inequity may be
removed.
Further,          corresponding
amendment is required in section
40(a)(ia)     to provide      for
disallowance in case of non-
deduction or short-deduction of
tax at source.
139.   Section 194J-      Under Section 194J of the              In order to overcome the above
Claim of TDS on    Income-tax Act, 1961, tax is           situation and the inconsistency,
income             deductible and payable at the time     it is suggested that the system
declared     on    of credit or payment, whichever is     on the lines of bank pass book
cash basis         earlier. TDS is one of the modes       be introduced in the Form No.
of recovery of tax. It is well known   26AS, wherein the credit not
that most of the professionals         taken in a particular year is
follow `Cash Basis' of accounting.     carried forward to next year for
As per the provisions of Section       claiming against the tax
199 read with Rule 37BA, the           payable of next year.
credit for TDS is allowable to the     (SUGGESTIONS         FOR
deductee in the year in which the      RATIONALIZATION OF THE
corresponding income is offered        PROVISIONS OF DIRECT TAX
for taxation. Rule 37BA further        LAWS)
provides that if the receipts of the
fees are spread over more than
one year, the credit for TDS will
also be spread over such years in
which the income is received and
taxed. In view of this, it is
absolutely incorrect and against
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 235  
The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                    Suggestion
No
the provisions of Section 199 read
with Rule 37BA to claim the credit
for T.D.S. on the basis of Form
No. 26AS. The Departmental
Software developed for the
processing of ITR does not take
care of the provisions of section
199 read with Rule 37BA in case
of assessees following Cash
Basis of accounting and there is a
clear inconsistency. This results in
credit for prepaid taxes not being
given correctly and fully as per the
claim made which are, otherwise,
as per the provisions of law.
140.   Section 194LC-     The Finance Act, 2012 had          In order to bring out the real
Income by way      inserted section 194LC to provide  intent of the law, it is suggested
of interest from   that the interest income paid by   that the section 194LC(2)(ii)
Indian Company     specified company to a non-        may be reworded to provide
resident shall be subjected to tax that the interest referred to in
deduction at source at the rate of sub-section (1) shall be the
5%. Section 115A was also          income by way of interest
amended to provide that such       payable by the specified
income will be taxed at the rate ofcompany "IF such interest does
5%.                                not exceed the amount of
Section 194LC(2)(ii) provides that interest calculated at the rate
for the purpose of deduction of approved by the Central
tax at source at the rate of 5%, Government in this regard,
the interest payable by the having regard to the terms of
specified company to a non- the loan or the bond and its
resident, not being a company or repayment"
a foreign company, shall be the (SUGGESTIONS TO REDUCE /
income payable by the specified MINIMIZE LITIGATIONS)
company TO THE EXTENT TO
WHICH SUCH INTEREST DOES
NOT EXCEED the amount of
interest calculated at the rate
approved      by    the    Central
Government in this regard, having
regard to the terms of the loan or
the bond and its repayment.
It is imperative to note that usage
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The Institute of Chartered Accountants of India
Sr.        Section                Issue/Justification                      Suggestion
No
of the term "To the extent to
which such interest does not
exceed" may be interpreted to
mean that in case the borrowings
are made at a rate higher than the
rate approved by the Central
Government, the interest income
on the difference will be
chargeable to tax at the rate of
20%. As per the explanatory
memorandum, this amendment
was made in order to augment
long-term low cost funds from
abroad. It is felt that this is an
inadvertent mistake and thus
needs to be reworded.
141.   TDS on interest     Presently, Indian residents who       Commercial banks may be
on        NRO       earn interest on their Indian bank    instructed by proper authority,
account             accounts are liable to pay TDS on     not to deduct TDS on NRO
amounts over and above Rupees         account interest upto 10,000
10,000. However when it comes         per annum.
to NRIs they are not allowed this
benefit on their NRO accounts. All
interest earned in NRO accounts
is subject to a TDS rate of a
whopping 30%.
In majority cases, the NRE's are
not able to file for refunds due to
small amount as the cost of filing
is more than deduction.
142.   Section     195-    Section 195(2) provides where a       It is suggested that an
Time limit for -    payer considers that whole of the     appropriate time limit say thirty
Issuance       of   sum being paid to a non-resident      (30) days may be imposed for
"general       or   is not chargeable to tax, he may      passing such general or special
special order"      make an application to the            order by the Assessing officer.
Assessing Officer to determine by     Further, where an application is
general or special order, the         rejected the Assessing Officer
appropriate portion of the sum so     may be required to pass a
chargeable.                           speaking order after providing a
It may be noted that no time limit    reasonable opportunity of being
of passing such order has been        heard to the applicant.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 237  
The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                       Suggestion
No
prescribed in the Act, which (Suggestions for rationalization
causes undue hardship in genuine of the provisions of Direct Tax
cases.                           Laws)
143.   Validity      of   The Certificate under section 197      a) the application may be
Certificate        is at present issued with a validity      allowed to be made atleast
issued u/s 197     date from the date of issue.              before 30th June of the
Though the assessee is applying           financial year i.e. within
in the month of April, i.e., at the       three       months        of
beginning of the financial year, the      commencement       of    the
certificate is issued much late.          financial year for before
The date of issue is taken as the         planning for advance tax.
validity date owing to which, the      b) Such application should be
deductors are deducting the tax           disposed off within 30 days.
for     the    earlier   part     of
(SUGGESTIONS         FOR
income/payments.        By      any
RATIONALIZATION OF THE
reasonable estimate, an assessee
PROVISIONS OF DIRECT TAX
cannot have taxable income for
LAWS)
some part of the financial year
and exempt income for remaining
part of the year.
144.   Section     200-   Section 200 provides for the           Since the details are already
Furnishing of      payment of TDS and filing of TDS       available with the deductor at
TDS returns        Returns. The Income Tax Law            the time of payment of taxes,
requires payment of TDS every          the e-challan itself can be so
month by 7th of the following          designed that it captures all the
month and by 30th April of the         details at that time. The details
Assessment year for tax deducted       so submitted at that time may
in the month of March of the           respectively be reflected in the
Previous year. The said payment        Form 26AS of all deductees.
is to be made under various codes      (SUGGESTIONS TO REMOVE
as per the sections under which        ADMINISTRATIVE
the tax is deducted. Currently, the    DIFFICULTIES)
payment under each code is to be
made under a separate challan
which requires filling up the same
PAN, TAN, name, address etc
details over and over again. This
is clubbed with the internet
connection problems and it
becomes a very cumbersome job
especially for the small and
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Sr.       Section               Issue/Justification                     Suggestion
No
medium assessees.
Practically, for payment of tax so
deducted details of parties with
PAN and section under which it is
to be deducted is maintained.
However, except the section
under which tax is required to be
deducted, no other detail is
required to be mentioned in the
challan. The statement containing
all such details is to be submitted
for every quarter. This leads to
duplication of work and also a
cumbersome task of furnishing so
many statements and challans.
145.   Mismatch     on   The non-government deductors          In continuation of the above
account      of   majorly comprise of non-corporate     suggestion, the following is
punching     of   sector which is not very              suggested :
data              organized. Approximately less that
To avoid such data mismatch, it
6000 assessees are listed        is necessary to have a PAN/TAN
companies who take the help of   master file for each and every
professionals to file statements of
deductor.     CPC(TDS)      may
TDS/TCS in time. Approximately,  prepare a software freely
6,60,000 assessees are private   downloadable for all deductors
limited Companies, but majority of
wherein deductor may fill in the
them are family organizations or details like name, PAN and the
organizations among the friends  applicable      section/s    for
registered as Private Limited    deduction (it may be one
companies under Companies Act.   section or more than one).This
Further, last year there were    temporary master file may then
approximately 18,00,000 tax auditbe     uploaded     back.   The
asseessees. This clearly reflectsCPC(TDS) may verify the details
that more than 66% of the        so submitted and provide the
assessees who are liable to      deductor with error details, if
deduct TDS are non-corporate     any. The deductor may then
entities comprising of Individuals,
rectify the errors and resubmit
HUFs, firms etc. In addition to  it. The process goes on unless
above, certain non corporate and the Department agrees with the
NGOs are also mandatorily liable data provided by the deductor.
to deduct TDS.                   The final data so generated may
The data entry in the non- be stored as a master file for
corporate sector is majorly done that deductor in the database of
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Sr.        Section                 Issue/Justification                       Suggestion
No
by persons who are not even            the Department.
graduates. This has infact lead to     The deductor while making
the problem of huge mismatch of        payment every month through
data of the deductees. There are       e-challan will click on the
clerical errors like wrong punching    section for which payment is to
of name details, PAN details,          be made. Once a particular
Section under which data is            section is clicked, all the
punched and the like.                  parties registered under that
section will appear. The
deductor may accordingly, fill
the details of amount and
submit the same along with the
payment      of     taxes.  The
deductees for which not tax has
been     deducted      may    be
reflected/prefilled as "0". This
will on one hand enable the
deductor to save time on
rechecking his details at the
time of quarterly filing of TDS
returns and on the other hand
provide monthly credit details
in the Form 26AS of the
deductee. Since the data will be
downloaded from TAN/PAN
master     verified     by   the
Department, there will be "0"
mismatch situation, which is
the need of the hour.
(SUGGESTIONS TO REMOVE
ADMINISTRATIVE
DIFFICULTIES)
146.   Provision      for   Under section 200A, an intimation      The     provisions    amending
rectification and    is generated specifying the            section 154, 156 and 246A to
appeal          of   amount payable or refundable           provide for rectification and
intimation           after processing of the TDS            appeal of intimation under
under section        statement. However, there was no       section 200A and deeming such
200A                 provision      for     appeal     or   intimation as notice of demand
rectification of such intimation and   may be given effect to
such intimation was also not           RETROSPECTIVELY.
deemed as a notice of demand.          (SUGGESTIONS               FOR
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Sr.       Section               Issue/Justification                        Suggestion
No
Therefore, the Finance Act, 2012 RATIONALIZATION OF THE
had provided that such intimation PROVISIONS OF DIRECT TAX
would be deemed as a notice of LAWS)
demand under section 156.
Further, the intimation generated
after processing TDS statement
shall be subject to rectification
under section 154.             Such
intimation is also appealable
under section 246A. However,
these amendments were made
effective only from 1st July, 2012.
Since these amendments were
necessitated on account of the
genuine hardship being faced by
the assessees, the provisions
incorporated to remove such
hardship should be given
retrospective effect.
147.   TDS demand         a)       It has been observed         Some mechanism may be
u/s 200A           that intimations are being served     developed to check the quoting
under      section    200A     on     of wrong PAN in TDS quarterly
deductors, stating demands due        statement at the time of
to short deduction of tax at          validation of the TDS return, i.e.
source. In majority of cases          the moment the return is being
these demands arise due to            filed.
wrong quoting of PAN in TDS           (SUGGESTIONS         FOR
quarterly statements filed by         REMOVING ADMINISTRATIVE
deductor/DDO. These demands           AND           PROCEDURAL
involve a huge amount on              DIFFICULTIES RELATING TO
penalty has also been levied.         DIRECT TAXES)
b)      With regard to demand         In respect of TDS demands
raised in respect of earlier years,   pertaining to earlier years, the
the notice of demand so raised        process of obtaining the FUV
only specifies the amount of          files for verification should be
demand raised without any             made user friendly. The FUV file
details. In case the deductor         should be mandatorily provided
requires the details of the           to the deductor at his registered
demand he is required to obtain       email id so that the deductor
a FUV file from the Department        does not have to visit the
office. The file so received is       Income tax office for the same.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 241  
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Sr.        Section                Issue/Justification                        Suggestion
No
then verified by the deductor and      (SUGGESTIONS         FOR
thereafter the discrepancies, if       REMOVING ADMINISTRATIVE
any, are brought to the notice of      AND           PROCEDURAL
the Department. This is a              DIFFICULTIES RELATING TO
cumbersome process and is              DIRECT TAXES)
required to be made user
friendly.
148.   Time limit for      Presently, there is no time limit       It is suggested to fix a specific
TDS                 specified by the Act for initiating &   time limit for initiating &
assessments of      completion of TDS proceedings           completing TDS proceedings
payments made       u/s 201 of the Act in respect of        u/s 201 of the Act in respect of
to         non      payments made to non- residents.        payments      made      to  non
residents           Thus, the TDS returns are               residents which should not be
scrutinized by the assessing            more than 4 years from the
officers for past years without any     relevant financial year.
limit, which has resulted into
enormous difficulty for the
assessee       as    it    becomes
practically difficult to store &
retrieve data beyond four years of
filing of TDS returns.
149.   Consequences        As per the provisions of section    It is suggested that interest u/s
of failure to       201(1A), interest is charged on     201(1A) should be charged on
deduct or pay       monthly basis. Even for delay in    daily basis and not on monthly
TDS-      section   payment or deduction of tax at      basis or if the interest is to be
201(1A)-:           source by one day, interest is      charged on monthly basis delay
charged for the whole month.        should be rounded off to the
Under clause (ii) of section near month and the present
201(1A), interest is payable at the system of considering fraction
rate of one and one-half percent of month as full month should
for every month or part of a month be dispensed with.
on the amount of such tax from It is further suggested that
the date on which such tax was interest under clause (ii) of
deducted to the date on which section 201(1A) should be
such tax is actually paid. Delay charged for the delay FROM
from the due date of payment to THE DUE DATE OF PAYMENT
the date of actual payment is not TO THE ACTUAL DATE OF
considered. For e.g. if the tax was PAYMENT.
deducted on 01/09/2012 the same (SUGGESTIONS                     FOR
has to be paid by 07/10/2012. If RATIONALIZATION OF THE
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The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                        Suggestion
No
the tax was paid on 08/10/2012 PROVISIONS OF DIRECT TAX
i.e. only one day delay, interest LAWS)
for the two month will be charged
i.e.    from     01/09/2012       to
08/10/2012. It is suggested that
the delay from the due date of
payment to the date of actual
payment should be considered for
the purpose of calculating interest.
Further, since all the returns of
TDS are now days processed
electronically and interest is
calculated by the computer, there
is no procedural hurdle in
charging interest on daily basis,
infact charging the same on daily
basis will provide relief to the
taxpayers. It may be noted that in
all the indirect tax laws interest is
charged on daily basis. Since the
TDS is a routine business work,
delay of one-two days in payment
is not abnormal and punishing for
such delay by charging interest for
the whole month may not be
appropriate.
150.   Section 206AA ­    Section      206AA     reads    as      A proviso should be inserted in
Requirement of     "Notwithstanding          anything      section 206AA to the effect that
furnishing    of   contained in any other provisions       the provisions of this section
PAN          for   of this act, any person entitled to     shall not be applicable in
deduction of tax   receive any sum or income or            respect of the assessee who is
at source.         amount on which tax is deductible       not    required    to    obtain
under chapter XVIIB, (hereinafter       Permanent Account Number
referred as deductee) shall             under section 139A.
furnish his PAN to the Deductor         (SUGGESTIONS TO REDUCE /
failing which tax shall be              MINIMIZE LITIGATIONS)
deducted at higher of three rates
specified in section 206AA".
This section however, does not
takes into account the situation
where payee is not required to
take PAN as per the provisions of
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                               Page 243  
The Institute of Chartered Accountants of India
Sr.        Section               Issue/Justification                  Suggestion
No
Section 139A or such payment is
not taxable in India (in case of
Non -Residents).
Due to applicability of this section
residents, who are not required to
obtain PAN as per section 139A,
will also have to take PAN. As this
section has a non-obstanate
clause, payer has no option but to
deduct TDS at a higher rate to
comply with the provisions of the
said section, though may not be
the intention of the legislature.
As no exception has been made
as regards the payments to a non-
Resident, it is assumed that
section 206AA is applicable to the
payment made to a non-resident
also. However, as per the
provisions of Rule 114C(1)(b) of
the Income-tax Rules, 1962,
specifying the class or classes of
persons to whom the provisions of
section 139A (PAN) shall not
apply, non-resident is not required
to get PAN allotted in his name.
Further, it may be noted that
Section 195(5) of Direct Taxes
Code Bill, 2010 reads as
follows:-
"Notwithstanding anything in this
Code, the appropriate rate
referred to in subsection (1) shall,
in a case where the deductee has
failed to furnish his permanent
account number to the deductor
(except where the deductee is not
required to obtain permanent
account number under section
292), be the higher of following
rates, namely:--
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Sr.       Section              Issue/Justification               Suggestion
No
(a)    twenty per cent.; and
(b) the rate specified in sub-
sections (2), (3) or sub-section
(4), as the case may be."
In line with the provisions of
proposed section 195(5) supra
those assessees who are not
required to obtain PAN should be
exempted from the provisions of
section 206AA of the Income-tax
Act, 1961.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                    Page 245  
The Institute of Chartered Accountants of India
PART C-ADVANCE PAYMENT OF TAX
DETAILED SUGGESTIONS
Sr.       Section              Issue/Justification                      Suggestion
No
151.   Section 208-      The Finance Act, 2009 raised the       The limit to pay advance tax
Revision    of    limit to pay advance tax under         under section 208 be raised
Limit       of    section 208 to Rs.10,000.              appropriately/-  Infact,  any
advance tax       Considering      the    inflationary   assessee whose advance tax
conditions prevailing in the           payable does not exceed
country, it is felt that the same      Rs.30,000 should be allowed to
limit needs to be revised upwards      pay full amount in the last
so that the amount payable in one      instalment.
instalment of the advance tax          (SUGGESTIONS         FOR
exceeds at least Rs. 5,000. The        RATIONALIZATION OF THE
present amount of Rs. 3,000 is too     PROVISIONS OF DIRECT TAX
low. Infact, any assessee whose        LAWS)
advance tax payable does not
exceed Rs.30,000 should be
allowed to pay full amount in the
last instalment.
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The Institute of Chartered Accountants of India
PART F-INTEREST CHARGEABLE IN CERTAIN CASES
DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                      Suggestion
No
152.   Interest  u/s    As per the provisions of section      It is suggested that the
234C      for    207 and section 211, the              Departmental Software needs to
newly formed     assessee is liable to pay the         be suitable amended so that
Firms    and     advance tax on the `Current           firm and companies are not
Companies        Income' of the assessee. This         required to pay interest on the
presupposes the existence of the      short payment of instalment of
assessee. In view of this, interest   advance tax u/s 234C for the
u/s 234C cannot be charged for        period when they were not in
the instalments of advance tax        existence.
due before the date of coming into    (SUGGESTIONS         FOR
existence of a Firm or a Company.     RATIONALIZATION OF THE
In spite of this, the Departmental    PROVISIONS OF DIRECT TAX
Software processing the ITR does      LAWS)
not take care of such a situation
and interest u/s 234C is being
charged in a routine manner.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                           Page 247  
The Institute of Chartered Accountants of India
PART G-LEVY OF FEE IN CERTAIN CASES
DETAILED SUGGESTIONS
Sr.       Section             Issue/Justification                    Suggestion
No
153.   Fees     under a) The matters relating to           It is suggested that
section 234E   TDS/TCS in a government              a) the time limit to file quarterly
department is handled by persons     TDS return for non-government
with reasonably good education       deductors be also increased to
background.            Appropriate   30 days as available to the
computer training is also given by   government deductors. With
the Government to them for day to    this change there will be neither
day functioning of the system.       a revenue loss nor any hardship
Accordingly, the records are well    to the deductees.
maintained and seemingly there
b) It is highly appreciable that
should be no issues for them in
the Government has taken an
timely furnishing the statement of
open mind while considering
TDS/TCS within 30 days from the
the problems of e-filing of
end of the quarter. However, in
statement of TDS /TCS and has
comparison to the same, the non-
extended the time only for
Government deductor who is a
Government deductors. In fact,
business man may not necessarily
considering the difficulties
be even a graduate. The non-
being faced by the government
government deductors majorly
deductors, this circular was a
comprise of non-corporate sector
step in the right direction. Since
which is not very organized.
the above difficulty equally
Approximately less that 6000
applies for other deductors
assessees are listed companies
also, one time amnesty is
who take the help of professionals
sought for all deductors with
to file statements of TDS/TCS in
regard to all TDS statements
time. Approximately, 6,60,000
pertaining to FY 2012-13 and FY
assessees are private limited
2013-14 to be submitted on or
Companies, but majority of them
before a cutoff date to be
are family organizations or
decided appropriately.
organizations among the friends
registered as Private Limited
companies under Companies Act.
Further, last year there were
approximately 18,00,000 tax audit
asseessees. This clearly reflects
that more than 66% of the
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Sr.      Section              Issue/Justification              Suggestion
No
assessees who are liable to
deduct TDS are non-corporate
entities comprising of Individuals,
HUFs, firms etc. In addition to
above, certain non corporate and
NGOs are also mandatorily liable
to deduct TDS.
It has been brought to the notice
of ICAI that 15 days time limit is
too short for the same causing
genuine hardship to the deductor,
who has to deduct tax, pay tax
through challan, collect the same
from the bank, prepare the
TDS/TCS       statements       and
thereafter submit the same to TIN
Centre, which may not always be
located in the near vicinity. Also,
the levy of fees under section
234E has been a matter of great
concern.
It is highly appreciable that the
Government has taken an open
mind while considering the
problems of e-filing of statement
of TDS /TCS and has extended
the time only for Government
deductors. In fact, considering the
difficulties being faced by the
government        deductors,     this
circular was a step in the right
direction. Since the above
difficulty equally applies for other
deductors also, one time amnesty
is sought for all deductors with
regard to all TDS statements
pertaining to FY 2012-13 and FY
2013-14 to be submitted on or
before a cutoff date to be decided
appropriately.
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                   Page 249  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                         Suggestion
No
b) According to the provisions of     It is suggested to follow day
section 234E, where a person fails    wise slab system & it may be
to deliver or cause to be delivered   taken as:
a statement within the time
prescribed then he shall be liable
Period of         Max. Fees u/s
to pay, by way of fee, a sum of
Default               234E
Rs. 200 for every day during
which the failure continues. But                    Rs. 500/- or tax
the amount of fee shall not exceed                  amount,
the amount of tax deductible or                     whichever is
collectible, as the case may be.       Upto 15 Days higher, but
subject to
maximum of
Considering the hardships being                     Rs. 20,000/-.
faced by the taxpayers due to
Rs. 1000/- or
various reasons, penal fees for
tax amount,
late filing of TDS returns need to
From 15          whichever is
be changed to period wise/ slab of
Days to 1        higher, but
days instead of current system.
Month            subject to
maximum of
Rs. 20,000/-.
Rs. 1000/- + Rs.
200/- per day or
From 1           tax amount,
Month            whichever is
Onwards          higher, but
subject to
maximum of
Rs. 20,000/-.
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The Institute of Chartered Accountants of India
CHAPTER XIX-A
SETTLEMENT OF CASES
Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 251  
The Institute of Chartered Accountants of India
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DETAILED SUGGESTIONS
Sr.      Section               Issue/Justification                      Suggestion
No
154.   Once in life       Presently, for resolution of tax     Assessees should be given the
time Settlement    disputes government allows an        freedom to settle disputes
Commission         assessee to approach the             through       this     settlement
Settlement Commission only           commission         without     the
once and that too when the case      restriction of this `once in a
is pending before the Assessing      lifetime' conditionality. Also the
Officer (AO). If the case has        assessee should be given the
escalated to a level above           freedom to settle at any point
Assessing Officer, the once in a     of time (i.e. at any level ­ AO
lifetime window also gets            and above) of the dispute.
closed. This is leading to non       (SUGGESTIONS                  FOR
settlement of disputes and           REMOVING ADMINISTRATIVE
delaying of revenue collection       AND                PROCEDURAL
and costly litigation.               DIFFICULTIES RELATING TO
DIRECT TAXES)
155.   Section 245A-     Section 245A defines "case" to        It is suggested that (i) Proviso
Settlement        mean any proceeding for               of section 245(b) along with the
Commission        assessment under the Act, of any      Explanation (i) be omitted.
person in respect of any              (SUGGESTIONS TO REDUCE /
assessment year(s) which may          MINIMIZE LITIGATIONS)
be pending before an Assessing
Officer on the date on which
application for settlement of case
is made. It further provides that a
proceeding for assessment or
reassessment or re-computation
under section 147, shall not be a
proceeding for assessment.
Before the enactment of Finance
Act, 2007, no such exclusion was
provided for in this sub-section
and    the     proceedings    for
assessment or reassessment or
re-computation under section 147
were also considered as a
proceeding for assessment.
There are large number of cases
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                             Page 253  
The Institute of Chartered Accountants of India
Sr.       Section               Issue/Justification                         Suggestion
No
which fall under section 147. In
order to reduce further litigations,
it is suggested that the
proceedings under section 147
may not be excluded from the
definition of "case".
156.   Restoration of     section 245E of the Act was              It is suggested that the
the provisions     inserted in year 1975, amended           provisions of erstwhile section
of     erstwhile   in 1984, 1987 and the provisions         245E be restored in Chapter
Section 245E       were made inapplicable for               XIX-A, Settlement of Cases for
applications filed on or after 01-       proper and justified disposal of
06-2007. The existing provisions         cases of applicants.
of statute reads as under:
"If the Settlement Commission is
of the opinion (the reasons for
such opinion to be recorded by it
in writing) that, for the proper
disposal of the case pending
before it, it is necessary or
expedient to reopen any
proceeding connected with the
case but which has been
completed under this Act by any
income-tax authority before the
application under section 245C
was made, it may, with the
concurrence of the applicant,
reopen such proceeding and
pass such order thereon as it
thinks fit, as if the case in relation
to which the application for
settlement had been made by the
applicant under that section
covered such proceeding also.
Provided that no proceeding shall
be reopened by the Settlement
Commission under this section if
the period between the end of the
assessment year to which such a
proceeding relates and the date
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Sr.      Section               Issue/Justification              Suggestion
No
of application for settlement
under section 245C exceeds nine
years.
Provided     further    that no
proceeding shall be reopened by
the Settlement Commission
under this section in a case
where an application under
section 245C is made on or after
the 1st day of June, 2007."
The provisions of this section
empowered       the     Settlement
Commission to reopen the
previously              completed
proceedings in respect of
assessment year(s) other than
the year(s) for which application
was filed by the applicant where
it is necessary or expedient for
proper disposal of the case.
The section also provided
limitation to such powers of the
Settlement Commission i.e. re-
opening must be with the
concurrence of the applicant and
the power cannot extend to a
period beyond nine years (as
amended in year 1987) from the
end of the assessment year to
which such proceeding relates.
However, with the insertion of
new scheme of settlement before
the Settlement Commission w.e.f.
01-06-2007, this section was
made        inapplicable       for
applications filed on or after 01-
06-2007.
The inapplicability of this section
placed    restriction    on     the
Settlement Commission to limit
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                    Page 255  
The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                Suggestion
No
the settlement to the year(s) in
respect of which application has
been filed by the applicant
thereby depriving the applicant
from relief in respect of other
preceding completed assessment
years(s) on the same issue or
same modus operandi.
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CHAPTER XIX­B
ADVANCE RULINGS
Pre-Budget Memorandum­ 2014 (Direct Taxes)                         Page 257  
The Institute of Chartered Accountants of India
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The Institute of Chartered Accountants of India
DETAILED SUGGESTIONS
Sr.      Section               Issue/Justification                        Suggestion
No
157.   Introduction of   In order to provide the facility of     It is suggested that the same
Advance ruling    determining the tax liability of        scheme should be introduced
for residents     non- residents in advance and           for resident's tax purposes
with a view to avoid disputes in        also. In case of residents also,
respect of assessment of income         it has been observed that
tax liability in the case of non-       assessee          takes       one
residents, a scheme of advance          interpretation of law and
ruling was introduced by Finance        executes      the    transactions
Act, 1993.The scheme enables            which is denied by the
the non-resident to obtain, in          department causing hardship of
advance, a binding ruling from the      paying taxes which he thought
authority for advance ruling on         is not actually payable.
issues which could arise in             Further, in order to avoid
determining their tax liabilities.      unnecessary application, the
Time consuming and expensive            scheme can be so framed that
litigation can, then be avoided.        only transactions involving
Such issues may relate to               certain threshold of tax
transactions      undertaken       or   implication can apply say
proposed to be undertaken by the        transactions      having      tax
non-resident      applicant.     The    implications of Rs. 1 crore or
Scheme has been very successful         more or TDS implications of
in avoiding tax-litigation in case of   Rs.50     Lakhs      or    more.
non- residents.                         Alternatively, a fee for advance
ruling can be fixed in a way that
small      and      unnecessary
applications are avoided.
(SUGGESTIONS TO REDUCE/
MINIMIZE LITIGATIONS)
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The Institute of Chartered Accountants of India
CHAPTER XX
APPEALS & REVISION
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DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                   Suggestion
No
158.   Delay       by    It has been experienced that       It is suggested that time
Assessing         when any order of higher           limits for issuing the Order
Officer      in   appellate      authorities    is   giving effects and Refund
issuing           received, and moreover when        Orders should be stipulated
Order giving      the order is in favour of the      in the Act. If the order
effect       to   assessee,      the    Assessing    provides        for      fresh
Orders       of   officer delays in issuing the      modification        of     the
higher            Order giving effect to such        assessment,       the    same
Appellate         appellate orders. Due to this      should be given effect to
authorities,      delay, the refund arising from     within 12 months from the
and       also    such appellate orders also gets    end of the month in which it
delay        in   delayed.                           is     received      by    the
issuing           Secondly, it is also observed      Commissioner.
refunds           that in most of the cases the      Also the Interest on Refunds
arising out of    issuing of Refund Cheques/         should be calculated up to
such Order:       Warrants are purposefully          the date of actual issuing of
delayed and the interest on        Refund warrants and not only
such refunds, as per the           up to the date of granting the
provisions of the Income-tax       refund/date of Order (as per
Act, is calculated only up to      the existing provisions of the
the date of issue of               Act)
Assessment order / Order            (SUGGESTIONS TO REDUCE
Giving effects to appellate        / MINIMIZE LITIGATIONS)
orders.      This results in,
assessee being deprived of
interest on the delayed refunds
and also assessee does not
earn any interest on the
Interest on Refunds for the
period of such delay of issuing
of refund warrants by the
Assessing officers.
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CHAPTER XX-B
REQUIREMENT AS TO MODE OF ACCEPTANCE,
PAYMENT OR REPAYMENT IN CERTAIN CASES
TO COUNTERACT EVASION OF TAX
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DETAILED SUGGESTIONS
Sr.      Section               Issue/Justification                  Suggestion
No
159.   Inclusion of      a) Section 269SS of the Income­   a) It is suggested that mode of
payments and      tax Act, 1961 requires that       transfers like RTGS, NEFT, EFT,
receipts made     acceptance of any loan or deposit ECS etc. be included as valid
through the       exceeding     Rupees       twenty modes of fund transfers under
modes      like   thousand may be made only by an   section 269SS and 269T of the
RTGS, NEFT,       account payee cheque or an        Income­tax        Act,     1961.
EFT and ECS       account payee bank draft.         Alternatively,    section   may
as        valid   Further, Section 269T of the      provide    for   any   mode   of
modes of fund     Income­tax Act, 1961 requires payment other than cash on the
transfers         that the repayment of any loan or lines of section 80D.
under             deposit exceeding Rupees twenty (SUGGESTIONS                  FOR
sections          thousand may be made only by an RATIONALIZATION OF THE
269SS      and    account payee cheque or an PROVISIONS OF DIRECT TAX
269T of the       account payee bank draft.         LAWS)
Income-tax
However,      now-a-days      many
Act, 1961
banking transactions take place
by way of Net banking facilities
that include Real Time Gross
Settlement (RTGS), National
Electronic Funds Transfer (NEFT),
Electronics Funds Transfer (EFT)
and Electronic Clearing Service
(ECS). Use of payment gateways
for online transactions as well as
credit cards is also on the rise. In
fact section 80D which provides
for deduction in respect of medical
insurance premium permits any
mode of payment other than cash.
Similar    provision     may     be
incorporated in section 269SS and
section 269T.
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The Institute of Chartered Accountants of India
CHAPTER XXI-
PENALTIES IMPOSABLE
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DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                       Suggestion
No
160.   Initiation of    Assessing officers initiate penalty   (1) Suitable remedial measures
penalty          proceedings in each and every         should be incorporated in the
proceeding in    assessment order in view of           Act providing relief to the
every            Honble Supreme Court judgement        genuine hardship faced by the
assessment       in case of Dharmender Textile         assessees on account of
order:           306 ITR 277 [2008], irrespective      imposition of penalty even
of the fact whether or not there is   where there is no concealment
any actual concealment of Income      of income.
or furnishing of inaccurate           (2) Further, in respect for
particulars of income by the          pending cases, to reduce
assessee. It has been noticed         litigations, it is suggested that a
that even in cases where there is     scheme on the lines of Kar
difference in interpretation of       Vivad      Samadhan        Scheme
provisions or wherever there are      (KVSS) may also be introduced.
two views arising, the penalty        It is suggested that in cases
proceedings are initiated. This is    where addition made is NOT
causing undue hardship to the         more than 50% of income or
assessees who have to file            Rs.10,00,000 whichever is less:
separate appeal for dropping of
a) Penalty under section
such penalty proceedings leading
271(1)(c) may be dropped.
to prolonged litigation
b) 50% of the interest levied
may be waived off.
c)     No further appeals should
be allowed to be filed
either by the Department
or by the assessee similar
to existing provisions of
Central Excise.
(3) Where unexplained money,
income or expenditure is
identified during the course of
assessment or unidentified
income not falling under
section 68 and 69 is identified
and added it shall be
chargeable to tax at maximum
marginal rate.
(SUGGESTIONS TO REDUCE /
MINIMIZE LITIGATIONS)
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The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                         Suggestion
No
161.   Penalty where     Section 271AAB provides for             Sub-section     (3)  may     be
search     has    imposition of penalty@10% on            amended to provide that the
been initiated-   undisclosed income found during         prosecution provisions under
Section           the course of search and admitted       sections 274 and 275 would
271AAB            at the stage of search.                 apply in relation to penalty
Undisclosed income not admitted         levied only under clause (c) of
at the stage of search but              this sub-section, and not in
disclosed in the return of income       respect of cases covered under
filed after the search to attract       clauses (a) and (b).
penalty @ 20%. These are                (SUGGESTIONS         FOR
covered under clauses (a) and (b)       RATIONALIZATION OF THE
of section 271AAB. In other             PROVISIONS OF DIRECT TAX
cases, i.e. cases covered under         LAWS)
clause (c), penalty to range
between 30% to 90% of
undisclosed income.
Sub-section (3) provides that the
prosecution provisions under
sections 274 and 275 would apply
in relation to penalty levied under
this section.
However, it may not be justified to
execute prosecution proceedings
where a person has disclosed
such income in the course of
search or before filing his return of
income.         Therefore,        the
prosecution provisions should be
made applicable only in respect of
cases covered under clause (c).
162.   Rationalization   As per section 271D & 271E, if a        To restrict the levy of penalty to
of     Section    person accepts/repay in loan or         the maximum marginal rate of
271D & 271E       deposit, as the case may be in          tax i.e. 30% or the slab rate
contravention with the provisions       applicable to the assessee
of section 269SS/269T, he shall         instead of 100% of the amount
be liable to pay, by way of             of loan or deposit taken or
penalty, a sum equal to the             repaid in violation of provisions
amount of loan or deposit.              u/s 269SS & 269T
The penal provisions of section
271D & 271E may be restricted to
maximum marginal rate of tax i.e.
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The Institute of Chartered Accountants of India
Sr.      Section               Issue/Justification                     Suggestion
No
30% or the slab rate applicable to
the assessee instead of 100% of
the amount of loan or deposit
taken or repaid in violation of
provisions u/s 269SS & 269T.
163.   Penalty     for   The Finance Act, 2012 had i. Sub-section (3) may be
failure      to   inserted the penalty provisions        amended to provide that
furnish           under section 271H providing for       penalty provisions under
TDS/TCS           penalty         ranging        between section 271H would not be
statements-       Rs.10,000 to Rs.1,00,000 for           attracted if the person
Section 271H      failure to furnish quarterly           proves that after paying tax
statements of TDS and TCS              deducted or collected along
within the time prescribed under       with the fee and interest, if
the Income-tax Rules, 1962.            any, to the credit of the
However, such penalty would not        Central Government, he has
be levied if the person has paid       delivered or caused to be
the taxes deducted or collected        delivered the statement
along with fee and interest to the     referred to in section 200(3)
credit of the Central Government       or the proviso to section
and has filed the statements           206C(3) before the expiry of
within a period of one year from       due date of filing of return
the respective due dates i.e.,         of income of the previous
namely, 15 July, 15 October,
th           th          year in which the tax was so
15 January and 15 May,
th                         th       deducted      or    collected,
respectively for the quarters          irrespective of the quarter to
ending 30 June, 30 September,
th           th             which the tax relates.
31st December and 31st March.        ii. Penalty may be prescribed
The TDS/TCS statements form              having regard to quantum of
the basis of preparation of annual       default and the period of
tax statement in Form 26AS. The          delay, and no discretion
deductee is required to confirm          may be given to the
the exact tax deducted/collected         Assessing Officer in this
at source and remitted to the            regard.      In any case, it
Government by verifying Form             should not exceed the tax
26AS online, and thereafter pay          deductible or collectible at
the remaining taxes by way of            source, in respect of which
self-assessment tax. However, if         the quarterly statement has
TDS/ TCS statements are                  not been filed.
permitted to be filed within one     (SUGGESTIONS                FOR
year of the due date prescribed      RATIONALIZATION OF THE
for each quarter on account of       PROVISIONS OF DIRECT TAX
non-levy of penalty, then the same   LAWS)
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The Institute of Chartered Accountants of India
Sr.       Section              Issue/Justification                   Suggestion
No
would extend beyond the due date
of filing return of income of that
assessment year in respect of the
second, third and fourth quarters.
It may cause genuine hardship to
the deductees as they would not
be able to verify the TDS/TCS
credited to their account, for
payment of self-assessment tax
before the due date of filing of
return of income.
Therefore, it is felt that penalty
provisions should be attracted if
such statements are not filed at
the latest before due date of filing
return of income.
Further, Section 271H provides for
the minimum and maximum
penalty, within which range,
penalty can be imposed. The
discretionary powers provided to
the Assessing Officer in levying a
penalty ranging from Rs.10,000 to
Rs.100000 may lead to hardship
to the assessee.
Discretion element in levying
penalty should be removed.
Penalty may be prescribed having
regard to quantum of default and
the period of delay. In any case,
it should not exceed the tax
deductible or collectible at source,
in respect of which the quarterly
statement has not been filed.
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CHAPTER XXIII-
MISCELLANEOUS
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DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                        Suggestion
No.
164.   Signing    of    Section 282A provides for issue        It is suggested that the
notices under    of any income tax notice or other      computerized notice / document
Section 282A     document without it being signed       should have a separate control
by the requisite authority.            like provision for a digital
Although, the said section has         signature because these are
been provided in the context of        legal / statutory documents and
computerized     generation    of      this aspect should specifically
notices and other documents, this      be incorporated in section
can result in widespread misuse        282A. The signed hard copy
of powers and harassment. The          should in any case be sent
assessees who are willing to           subsequently. In respect of
receive communications through         manual notices/documents the
email should be given notices or       section should also provide
any other document in this form.       that     signatures   will   be
In such case also, the signed          mandatory.
hard copy should be sent               (SUGGESTIONS TO REDUCE /
subsequently.                          MINIMIZE LITIGATIONS)
165.   Omission of      In order to improve the standards      Section 282B may be reinstated
section 282B-    of service and transparency in the     and the date of implementation
Document         functioning of the Income-tax          of DIN may be postponed till the
Identification   Department, a computer based           availability    of       requisite
Number           system of allotment and quoting of     infrastructure on all-India basis.
Document Identification Number         (SUGGESTIONS         FOR
(DIN) in each correspondence           RATIONALIZATION OF THE
sent or received by the Income-        PROVISIONS OF DIRECT TAX
tax Department was proposed to         LAWS)
be introduced with effect from 1st
October, 2010 to facilitate tracking
of documents and alleviate the
taxpayers grievances.
Accordingly, section 282B was
inserted by the Finance (No.2)
Act, 2009, to provide that every
income-tax authority shall allot a
computer generated Document
Identification Number in respect of
every notice, order, letter or any
correspondence issued by him to
any other income-tax authority or
Pre-Budget Memorandum­ 2014 (Direct Taxes)                                              Page 277  
The Institute of Chartered Accountants of India
assessee or any other person and
such number shall be quoted
thereon.
Further, it was provided that every
document,       letter   or     any
correspondence, received by an
income-tax authority or on behalf
of such authority, shall be
accepted only after allotting and
quoting of a computer generated
Document Identification Number.
Since it is essential to have the
necessary infrastructure to cover
the full range of services specified
in section 282B on pan-India
basis, the date for implementation
of the DIN was extended by the
Finance Act, 2010 to 1st July,
2011.
However, the Finance Act, 2011
omitted this section, on account of
the practical difficulties due to
non-availability    of     requisite
infrastructure on an all India
basis.
It is largely opined that
introduction of this provision
would increase the accountability
of the tax administration. For
proper          discharge          of
responsibilities, accountability is a
necessary       counter   balance.
Therefore, the provision for
implementation of DIN should be
reinstated.
166.   Section          Section 285BA may appropriatelyThe meaning of "specified
285BA(3)                                        financial transactions' under
be amended to require information
Information to                                  section 285BA(3) may be
regarding the following financial
be furnished                                    widened to include within its
transactions involving an amount
in the Annual    over and above specified sums: ambit       the       aforesaid
Information      (a)   Payment received by tour transactions.
Return                 operators exceeding a Further, in respect of the above
specified sum.           mentioned transactions, where
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(b)   Information       regarding     the PAN is not provided by the
Government tenders where        payer, the provisions like TCS
the value exceeds a             may be made applicable to the
specified amount. This          payee. Accordingly, the payee
information may be provided     should be allowed to collect tax
by       the     concerned      at an appropriate rate. Later, in
Government Department.          case the deductee provides
(c)   Sales and purchases of PAN within a specified period to
shares        exceeding       a the deductor, the deductee
specified              amount should be provided with a
respectively in the case of certificate like TCS certificate
day      traders.          This for claiming the same in the
information can be filed by return of income. In case the
the concerned brokers who deductee does not provide PAN
are dealing with the day with the specified period, the
traders.                        tax so collected would be added
to the revenue of the
(d)   Receipt of donations by
Government.
trusts       or    Institutions
exceeding a specified sum. (SUGGESTION TO IMPROVE
Such information may be TAX COLLECTION)
filed by the concerned trusts
or institutions.
(e)   Educational fees paid in
excess of a specified sum.
The concerned educational
institution should furnish the
relevant information to the
Department.
(f)   Compulsory PAN on air-
ticket bookings for foreign
overseas package tours
Information to form part of
annual information return
under                section
285BA.Persons       booking
international     air-tickets
should be required to give
their PAN while booking
tickets when such foreign
travel is organized as
foreign package tours. This
step will bring many high
value transactions into the
data system, which can be
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The Institute of Chartered Accountants of India
scrutinized for expanding
the tax base. Alternatively,
the person who is funding
the package tour may be
required to give his PAN.
Those persons who are not
having PAN can be asked to
give a suitable declaration.
To      begin   with,   this
requirement may be in
respect of those persons
who incur expenditure on air
travel above a prescribed
ceiling limit. Further, the
airline companies should be
required to forward such
declarations     to    their
respective        Assessing
Officers. This information
can be included as part of
the return under section
285BA.
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PART III
SUGGESTIONS RELATING TO THE PROVISIONS
OF WEALTH-TAX ACT, 1956
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DETAILED SUGGESTIONS
Sr.      Section              Issue/Justification                     Suggestion
No
167.   Taxable          The definition of "assets" was       The     amendment       in  the
Wealth - to      amended in the year 1992. The        definition of "assets" was made
exempt motor     the then Honble Finance Minister     by the Finance Act, 1992 with a
cars             in his Budget speech had             view to promote investment in
mentioned :                          productive assets. In line with
"67. The Wealth-tax Act, 1957 has    intention of the lawmakers,
far too many exemptions making       motor cars used for all
its administration enormously        commercial       purposes    i.e.
complicated. The valuation of        whether     in    business    or
certain assets such as shares        profession should be excluded
also presents problems, since        from the definition of "assets"
very high market values reflecting   since they are productive
speculative activity can lead to a   assets.
heavy burden on shareholders
who are long term investors.
There is also no distinction at
present between productive and
non-productive      assets.    The
Chelliah       Committee       has
suggested that, in order to
encourage the taxpayers to invest
in productive assets such as
shares, securities, bonds, bank
deposits, etc. and also to promote
investments      through    Mutual
Funds, these financial assets
should be exempted from wealth
tax. Wealth tax should be levied
on individuals, Hindu undivided
families and all companies only in
respect of non productive assets
such as residential houses
including farm houses and urban
land, jeweller, bullion, motor
cars,planes, boats and yatchs
which are not used for commercial
purposes. The Committee has
further suggested that such tax
should be at the rate of one
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Sr.       Section               Issue/Justification                       Suggestion
No
percent.,with a basic exemption of
Rs.15 Lakhs. I propose to accept
this recommendation and I hope
this change will encourage
investments in productive assets
and discourage investment in
ostentatious        non-productive
wealth."
Accordingly, the definition of
"assets" under section 2(ea) of the
Wealth-tax Act comprises inter
alia motor cars other than those
used by the assessee in the
business of running them on hire
or as stock-in-trade. As intended
by the abovementioned speech of
the then Finance Minister, motor
cars "used in the business of
running them on hire or as stock-
in-trade" were not treated as
assets as they were considered
as productive assets.
The motor cars comprised in
business assets are meant for
efficient and smooth operation of
the business. Since the motor
cars used in business or
profession directly or indirectly
contribute to the productivity of
the business or profession, they
should be exempted from the
definition of "assets" under
section 2(ea) of the Wealth tax
Act.
168.   Increment in      As there is tremendous rise in the       Cash in hand limit should be
Cash Limit        cost of living from last few years, it   increased from Rs. 50,000 to
is therefore needed to enhance           Rs. 2, 50,000.
the basic exemption limit of cash
in hand.
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Sr.      Section              Issue/Justification                    Suggestion
No
169.   Enhancement      The basic exemption limit under      The basic exemption limit,
of the Basic     the Wealth tax is Rs. 30,00,000.     beyond which wealth tax is
Exemption        There has been a tremendous rise     charged be enhanced to Rs. 1
limit            in the value of properties in last   Crore.
few years, it is therefore,
suggested    that    the     basic
exemption limit, beyond which
wealth tax is charged be
enhanced.
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ANNEXURE I
S.    Section                              Limit (A) (Rs.)            Year of introduction/       Suggestive
No.                                                                    last modification          limit as per
current CII (Rs)
2    Workmen comp-            500,000.00                             April,1976(notification     10,00,000
10(10B)                                                         no. 10969 dt. 25-6-
1999
3    Leave ench-              25,500.00                              Finance act ,1982 wref
10(10AA)                                                        1-4-1978
300,000.00                             May,2002                     5,00,000
4    VRS- 10(10C)             500,000.00                             April,2001(amended)         10,00,000
5    Entertainment            Exempt: i)5000 ii)20% BS               April,2002(Amended)           12,000
Allowance 16(ii)         iii)Actually Recd
6    Sec: 10(14) read with Rule 2BB
i) Hilly Area                                                                                 3,000
Compensatory all.
Rs.800 p.m
ii) Children education   Rs. 100 p.m                            April, 89 (Amended)            500
allowance
iii) Hostel allowance    Rs. 300 p.m                                                           1500
iv)Transport             Rs. 800 p.m                                                          3,000
allowance
7    Educational facility-    Rs. 1000 p.m                                                       3,000 pm
17(2)
8    Deduction u/s 24         i) Rs. 30,000 ii) Rs. 1,50,000         April, 2002                  3,00,000
(house prop)
10    Sec - 44 AA:             if income > 1,20,000, or gross         April,1976
Maintenance of A/c's     receipts > 10,00,000 in any of 3
years imm. Preceeding the PY.
11    Sec-44 AB Audit of       Turnover(business) exceeds 1           inserted by finance act
accounts                 crore,           Gross                 1984
receipts(profession) exceeds 25        April , 2013(amended)
lakhs
16    Sec-17                   Motor car (perquisite):                Circular 15/2001,         A)3,968/5,290
(A) Car owned by employee:             dated Dec 12,2001              B)(ii)
1,323/1,984
If car is partly used for official &
partly for private purpose:
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Actual                   expenditure
Less: Amount of office use (ie
1800pmif engine doesnot exceed
1.6 lt or rs. 2400 pm if exceeds 1.6
ltr and rs. 900 pm if chauffeur is
provided)
(B) Car owned or hired by
employer:
(i)If car is partly used for official
& partly for private purpose:
1800pm if engine doesnot exceed
1.6 lt or rs. 2400 pm if exceeds 1.6
ltr and rs. 900 pm if chauffeur is
provided.
(ii)If car is partly used for official
& partly for private purpose &
maintenence expenses (pvt use)
borne by employee: Rs.600 pm if
engine doesnot exceed 1.6 lt or rs.
900 pm if exceeds 1.6 ltr and rs.
900 pm if chauffeur is provided.
Lunch/refreshment (perk): Cost to         Circular 15/2001,     110
employer in excess of Rs.50 per           dated Dec 12,2001
meal Less: recovered from
employee
Interest free or concessional             Circular 15/2001,   50,000
loans:Small loans upto Rs. 20,000         dated Dec 12,2001
in the aggregate are exempt.
Loans for medical treatment
specified in rule 3A are also
exempt, provided the amount of
loan for medical reimbursement is
not reimbursed under any medical
insurance scheme.
Gift, voucher or token in lieu of gift:   Circular 15/2001,   11,021
Rs.5000                                   dated Dec 12,2001
17   Sec- 64(1A)           Income of minor: Rs. 1500                 April,1993           5,000
[Deduction u/s
10(32)]
18   Sec- 80C              100,000.00                                April,2006          1,50,000
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The Institute of Chartered Accountants of India
24   Sec- 80D          Rs. 15,000 : others                     April,2009                     20,000
Rs. 20,000 : in case of senior          (substituted)
citizen                                 Inserted by income tax
SC 40,000
(amendment)act,1986
25   Sec-80DD          Rs.1,00,000: if disability is 80%or     April,2004 (inserted       i)1,00,000
above Rs.50,000:other cases             by finance act 1990        ii)1,50,000
26   Sec- 80DDB        Rs.40,000 or actual expenditure}        April,2004 (inserted      i)1,00,000 ii)
w.e.l (others)                          by finance (no.2)act        1,50,000
Rs.60,000 or actual expenditure}        1996
whichever is lower (senior citizen)
27   Sec-80EE          100,000.00                              April,2014                     1,00,000
28   Sec-80GG          i)Rs.2000 pm ii)25% of total            April,1998(reintroduce     5,000 pm
income           iii)excess of actual   d)
rent paid over 10% of total income
whichever is lower
29   Sec- 80QQB        Rs.3,00,000 or whole of such            April,2004                     5,00,000
income } whichever is lower
30   Sec-80RRB         Rs.3,00,000 or whole of such            April,2004                     5,00,000
income } whichever is lower
31   Sec-80TTA         10,000.00                               April,2013                     15,000
All Deposits
32   Sec-80U           Rs.1,00,000(severe disability ie        April,2004                i)1,00,000 ii)
80% or above)                                                       1,50,000
Rs.50,000 (other cases)
58   Sec-80P           Interest Income -Rs.20,000              April,1968                i)     48,278 ii)
Profit-Rs.50,000/Rs.1,00,000            April,1999(Substituted)         3,00,000/1,
(Consumer cooperative)                                                    50,000
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ANNEXURE II
Contents
Introduction ........................................................................................................................................... 290
Definition of R&D for software products ................................................................................................ 290
Definition of R&D for software products ................................................................................................ 290
Qualification as R&D Costs .................................................................................................................. 292
Activities that cannot be classified as R&D ........................................................................................... 292
Capitalization of R&D costs .................................................................................................................. 292
Accounting for R&D costs ..................................................................................................................... 295
Conclusion ............................................................................................................................................ 297
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Introduction
The clear definition of software product R&D activities and accounting of costs associated is
unavailable in current scenario. The R&D recognition is of high value for the growing number of
software product startups as it acts as a channel into many government funding schemes.
Also, tax benefits which can be carried over even if the startup is at a loss or fails, which is very
high likely, the founders still have an option to be acquired by a bigger company for the technology
or the team. Hence, the company is incentivised to do the same because it would get the benefit of
the tax deduction from losses being carried forward. This will be a huge step in creating parity
between Indian product startups and the startups in US or Canada which have these advantages.
To nurture the potential of Indian Product startups it becomes highly critical to revise the policies to
compete globally. The first step towards influencing government bodies to revise the policies is to
articulate a concise definition of R&D for software products.
Definition of R&D for software products
(as defined by UK government)
R&D includes developments leading to:
New or improved products, new or improved solutions, efforts to changing customer
requirements, cost reduction
Development of new technologies, solutions, architectures, integration designs, protocols,
specialized components and packages
Noticeable and quantifiable improvements to existing systems/processes affecting
security, scalability and availability
Redesign of existing systems with fundamentally new technologies or re-architecture of
systems to enable use of new technologies (such as cloud)
New or improved data processing solutions, risk management solutions, scalable engines
to automate work flows, message-oriented middleware are some of the examples/
categories of new solutions developed under R&D umbrella
Definition of R&D for software products
(as defined in FASB Statement No. 2)
As general definitions from FAS 2 section 8, research is planned search or critical investigation
aimed at discovery of new knowledge. Development is the translation of research findings into a
plan or design for a new product or process. Development deals more with the initial application of
knowledge, often to determine technological feasibility
The translation of research findings or other knowledge into a plan or design for a new
product or process or for a significant improvement to an existing product or process
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whether intended for sale or use. It includes the conceptual formulation, design, and
testing of product alternatives, construction of prototypes, and operation of pilot plants
o   It does not include routine or periodic alterations to existing products, production
lines, manufacturing processes, and other ongoing operations even though those
alterations may represent improvements and it does not include market research
or market testing activities
For example, engineering activity required to advance the design of a product to the point
that it meets specific functional and economic requirements and is ready for manufacture
Efforts to develop a new or higher level of computer software capability intended for sale
(but not under a contractual arrangement) would be a research and development activity
Developing or significantly improving a product or process that is intended to be sold,
leased, or otherwise marketed to others is a research and development activity. Similarly,
developing or significantly improving a process whose output is a product that is intended
to be sold, leased, or otherwise marketed to others is a research and development activity
All costs of planning, designing, and establishing the technological feasibility of a
computer software product would be research and development costs
Research and development activities should be considered incomplete until technological
feasibility has been objectively established and that research and development activities
in the software product process include:
o   All planning and designing (both product design and detail program design
o   Any coding and testing necessary to establish technological feasibility
All software creation costs incurred prior to establishing technological feasibility are to be
charged to expense when incurred as research and development costs
The research and development classification of Statement 2 would apply only to the costs
of designing the product and determining the availability of proven technology for product
development
All software creation costs incurred subsequent to establishing technological feasibility
are capitalized and reported at the lower of cost or net realizable value
The technological feasibility of some products cannot be established with completion of
the detail program design because high-risk development issues remain. Resolution of all
uncertainties related to identified high-risk development issues is therefore included as a
requirement for establishing technological feasibility
Both establishing technological feasibility of the software component and completing
research and development activities for the hardware component are necessary for
beginning of capitalization of software costs
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Summary of FASB Statement No. 2: This Statement establishes standards of financial
accounting and reporting for research and development (R&D) costs. This Statement
requires that R&D costs be charged to expense when incurred. It also requires a
company to disclose in its financial statements the amount of R&D that it charges to
expense.
Qualification as R&D Costs
(As per UK government)
Salary costs of technical and other employees directly involved in R&D work, and of those
indirectly involved in eligible R&D projects
Costs of consumable items employed in the R&D process
65% of contract staff costs
Cost of software licences, power and fuel used in the R&D project
R&D subcontracted to individuals or universities can be claimed but not if sub contracted
to a corporate third party entity
o   Specifically for small and medium enterprises, R&D relief can be claimed for 65%
of the costs of subcontracting to third party
Activities that cannot be classified as R&D
Statement 2, with its mandatory expensing requirement, extends a range of routine
production activities to the classification of research and development because it assigns
the bulk of computer programming activities (detail program design, coding, and testing).
Certainly, much research and development type activity does take place in the computer
software industry. However, most detail program design and coding activities are not
discovery or design-oriented in the sense of Statement 2, they are just the meticulous
execution of a plan with skilled employees applying proven methods as in any production
process
Costs incurred to purchase computer software are not research and development costs
unless the software is for use in research and development activities
Capitalization of R&D costs
Increasing the capitalization rates reduce operating expenses and lead to better EPS
results in a tough quarter, while during strong quarters management teams recognize a
little bit more R&D expenses to balance things back out
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Companies that provide software as a service will capitalize R&D expenses associated
with the software that supports those SaaS efforts as they are developing software to be
used internally, and it is only the service that is being provided to the customer
Change in the ASC rules causes some software companies to have to capitalize a portion
R&D expenses
The old rule: ASC 985-20 guided majority of software companies
ASC 985-20. ASC 985-20 states that R&D costs must be expensed on the income
statement until "technological feasibility" is established. Technological feasibility is defined
as completion of all planning, designing, coding, and testing necessary foe the product to
be produced to meet its designed functions, features, and performance. Then the
company may capitalize the remaining costs until the product is released to market
By capitalizing these costs and amortizing them over a (subjective) time period,
companies are able to boost their EPS by spreading R&D costs incurred in a quarter over
a long period of time. The capitalization rate could periodically be changed, allowing
management to subjectively fluctuate the levels
In late 1990's, many software companies chose to move to a practice of expensing 100%
of R&D costs as the time between the establishment of technological feasibility and
commercial release of software was minimal. It resulted in insignificant or no capitalization
of internally developed software costs.
The new rule: ASC 350-40 impacts companies offering SaaS
However, as per the new rule, companies with SaaS model have the software developed
internally and is never available as a product to be acquired or purchased, it is delivered
as a service (Software-as-a-Service)
Majority of the new age companies capitalize some portion of the R&D budget. The
largest amounts of capitalization are observed from SaaS (or Infrastructure as- a-Service
(IaaS)) companies such as Akamai, RackSpace, Verisign, and Neustar
o    Since the software is used internally for the company to deliver that service, they
are covered by ASC 350-40
According to the new rule, ASC 985-20, the length of time you may amortize is the greater
of:
o    The ratio of revenue in the current period to the total estimated revenue of the
product over its entire life or
o    The estimated economic life of the product
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For example,
o   if a company decides that the revenue over the life of the product is expected to
be $50M but only $10M in revenue in the current period, they can amortize the
R&D costs over a 5-year period ($50M/$10M) at $2M per year ($10M in
capitalized costs/5-year period)
o   Holding the current revenue constant at $10M but raising the expected future
revenue to $60M or $75M means that they can amortize over a 6 and 7.5 year,
respectively
o   Similarly, extend the estimates of the useful life of the product, the amount
amortized in each period is reduced. By extending the estimated useful life of the
product from, 2 years to 3 years one can reduce the annual amortized R&D costs
of the product by 33% from $5M per year ($10M of capitalized costs/2 year
economic life) to $3.3M per year ($10M of capitalized costs/3 year economic life)
o   A company has some subjectivity in its estimations, and the effects have a direct
impact on how much the company realizes in expenses on its income statement
Example - EMC
o   Research and development ("R&D") costs are expensed as incurred
o   R&D costs include salaries and benefits, consultants, facilities related costs,
material costs, depreciation and travel
o   Software development costs incurred subsequent to establishing technological
feasibility through the general release of the software products are capitalized
o   Technological feasibility is demonstrated by the completion of a detailed program
design or working model, if no program design is completed
o   Capitalized costs are amortized over periods ranging from eighteen months to
two years which represents the products' estimated economic life
Example ­ Microsoft
o   It must expense all costs until it has completed the activities (planning, designing,
coding, and testing) necessary to establish that it can produce the product to
meet its design specifications
o   It should capitalize subsequently incurred costs and amortize them to current and
future periods
o   Software purchased for alternative future uses can be capitalized
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o   The rule applies to only the development of software that is to be sold, leased, or
otherwise marketed to third parties
ASC 350-40 defines three stages of internal use software development, which are
preliminary project, application development, and post-implementation/ operation
ASC 350-40 treatment of R&D cost
Preliminary          Application                    Post-
Stage
Project          Development            Implementation/Operation
Activities            Concept
Design path                     Training
within stage         formulation
Evaluation of
Coding                      Maintenance
alternatives
Final selection       Installation
Testing
Only capitalize costs
associated with upgrades
Treatment          Expense as
Capitalize             or enhancements,
of costs           incurred
otherwise expense as
incurred
An example following the new rule:
o   On page 7 of its 2012 10K, Akamai says, "In addition, for the years ended
December 31, 2012, 2011, and 2010, we capitalized $50.6 million, $40.4 million,
and $31.1 million, respectively, of external consulting and payroll and payroll-
related costs related to the development of internal-use software used by us to
deliver our services and operate our network." Akamai considers the software it
develops that is the Akamai network to be for internal use in order for the
company to deliver its content delivery network (CDN) and related services. That
is why it falls under the newer rule
Accounting for R&D costs
All costs incurred to establish the technological feasibility of a computer software product
to be sold, leased, or otherwise marketed are research and development costs. Those
costs shall be charged to expense when incurred as required by FASB Statement No. 2,
Accounting for Research and Development Costs
For purposes of this Statement, the technological feasibility of a computer software
product is established when the enterprise has completed all planning, designing, coding,
and testing activities that are necessary to establish that the product can be produced to
meet its design specifications including functions, features, and technical performance
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requirements. At a minimum, the enterprise shall have performed the activities in either
(a) or (b) below as evidence that technological feasibility has been established:
o   If the process of creating the computer software product includes a detail
program design:
The product design and the detail program design have been completed,
and the enterprise has established that the necessary skills, hardware,
and software technology are available to the enterprise to produce the
product
The completeness of the detail program design and its consistency with
the product design have been confirmed by documenting and tracing the
detail program design to product specifications
The detail program design has been reviewed for high-risk development
issues (for example, novel, unique, unproven functions and features or
technological innovations), and any uncertainties related to identified
high-risk development issues have been resolved through coding and
testing.
o   If the process of creating the computer software product does not include a detail
program design with the features identified in (a) above:
A product design and a working model of the software product have
been completed
The completeness of the working model and its consistency with the
product design have been confirmed by testing
Production Costs of Computer Software
Costs of producing product masters incurred subsequent to establishing technological
feasibility shall be capitalized. Those costs include coding and testing performed
subsequent to establishing technological feasibility. Software production costs for
computer software that is to be used as an integral part of a product or process shall not
be capitalized until both:
o   Technological feasibility has been established for the software and
o   All research and development activities for the other components of the product
or process have been complete
Capitalization of computer software costs shall cease when the product is available for
general release to customers. Costs of maintenance and customer support shall be
charged to expense when related revenue is recognized or when those costs are incurred,
whichever occurs first
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Amortization of Capitalized Software Costs
Capitalized software costs shall be amortized on a product-by-product basis. The annual
amortization shall be the greater of the amount computed using:
o   The ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or
o   The straight-line method over the remaining estimated economic life of the
product including the period being reported on. Amortization shall start when the
product is available for general release to customers
Disclosures
The disclosure requirements for research and development costs in Statement 2 apply to the
research and development costs incurred for a computer software product to be sold, leased, or
otherwise marketed
Conclusion
It is critical that the government works with the industry and facilitates the growth of the software
product startups in India. To realize the potential opportunities, startups need to be able to define
clear value and enhance their attractiveness in order to get funding and competitive valuations in
the global market.
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