Definition of approved modes of payment and receipts is desirable for simplicity of provisions including proposed amendments.

[CA DEV KUMAR KOTHARI]

Budget 2019

Observations of author:

There was a time when there were few provisions relating to mode of payments and receipts otherwise than cash were prescribed and required to make payments in prescribed modes.

Modes for payment and receipts were also fewer- crossed cheque, a/c payee cheque or bank draft etc.

In due course of time provision for regulating payment and receipts, otherwise than cash have increased and modes of payment and receipts have also increased due to development of electronic modes of payments and receipts. There can be more such modes on further development and on new agencies facilitating payments, receipts, transfer of funds by electronic and other advanced modes. At present we have many apps by which payments can be made and received through electronic modes involving bank or other approved organisation for such activities.

Therefore, for simplification of provisions it would be better to insert a definition of approved modes of payments and receipts. The definition can include presently recognised methods and also other new methods as may be prescribed/ notified.

For example the definition can be on the following lines:

Approved mode of payment and receipt other than cash, includes payment and receipts by way of (a) A/c payee cheques (b) A/c payee bank draft, (c) e-cheques (d) ECS (e) NEFT (g) RTGS (h) credit and debit cards (i) payment apps like Bhim, Rupay, paytm, … (j) on line transfer from branch to branch and bank to bank (k) …. Any other mode as may be notified in which person making payment and person receiving payment both are identified at least by his account number, account name, PAN or AADHAR no and address which are duly recorded with the agency facilitating transfer of funds.

After inserting a suitable definition, related provisions could be amended suitably like payment exceeding Rs…. otherwise than approved method of payment and receipt.

Budget proposal:

In the budget proposals we find several proposal for prescribed new type of electronic modes for payment and receipts. In all such proposals it is mentioned that “Or through such other electronic mode as may be prescribed” We find some of such proposals vide clauses 8,9,11,12,14,16, 18, 21 & 27. There may be some more such proposals and this list may not be exhaustive.

In the memorandum explaining the proposals we find following mention:

Prescription of electronic mode of payments

There are various provisions in the Act which prohibit cash transactions and allow/encourage payment or receipt only through account payee cheque, account payee draft or electronic clearing system through a bank account.

Section 13A of the Act requires a political party to receive donation exceeding rupees two thousand only through an account payee cheque or an account payee bank draft or using the electronic clearing system through a bank account, for the purpose of exemption of such donation.

Section 35AD of the Act provides that the term ‘any expenditure of capital nature’ shall not include any expenditure in respect of which the assessee makes payment (or an aggregate of payments) exceeding rupees ten thousand to a person in a day through any mode other than an account payee cheque or an account payee bank draft or using the electronic clearing system through a bank account.

Section 40A of the Act provides for disallowance of any expenditure for which the assessee makes payment (or an aggregate of payments) exceeding rupees ten thousand through any mode other than an account payee cheque or an account payee bank draft or using the electronic clearing system through a bank account.

Sub-section (1) to section 43 of the Act provides the definition of the term “actual cost”. The second proviso to the said section specifies that where the assessee incurs any expenditure for the acquisition of an asset or part thereof, and in respect of such acquisition, he makes a payment or aggregate of payments exceeding rupees ten thousand in a day to a person in any mode other than an account payee cheque or an account payee bank draft or using the electronic clearing system through a bank account, then such expenditure shall not be included in the determination of the actual cost.

Section 43CA of the Act provides that where the date of agreement fixing the value of consideration for the transfer of the asset and the date of registration of such transfer of asset are different, then the full value of consideration for transfer of such asset shall be the stamp duty value on the date of the agreement provided the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account on or before the date of agreement for transfer of the asset. Similar provision is made in the second proviso to sub-section (1) of section 50C and the second proviso to sub-clause (b) of clause (x) of sub-section (2) of section 56.

Section 44AD of the Act relates to presumptive taxation scheme for eligible businesses and provides that in case of an assessee engaged in an eligible business shall be eligible to avail the benefit of the presumptive taxation scheme if the profit from such business is declared at at the rate of eight per cent. or higher of the total turnover or gross receipts in the previous year from such business. The proviso to sub-section (1) of the said section provides that the eligible assessee can opt for the presumptive taxation scheme if he declares profit at the rate of six per cent. or higher of turnover received through an account payee cheque or an account payee bank draft or the use of electronic clearing system through a bank account.

Section 80JJAA of the Act provides for the deduction of an amount equal to at the rate of thirty per cent. of additional employee cost incurred by an assessee in the previous year in the course of a business covered under section 44AB, for three years including the year in which such additional employment is provided. Sub-clause (b) of clause (i) of the Explanation to this section specifies that the additional employee cost in case of an existing business shall be nil if the emoluments are paid otherwise than by an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account.

In order to encourage other electronic modes of payment, it is proposed to amend the above section so as to include such other electronic mode as may be prescribed, in addition to the already existing permissible modes of payment in the form of an account payee cheque or an account payee bank draft or the electronic clearing system through a bank account.

These amendments will take effect from 1st April, 2020 and will, accordingly apply in relation to assessment year 2020-2021 and subsequent assessment years. [Clauses 8,9,11,12,14,16, 18, 21 & 27]

Proposals and notes thereon reads as follows:

Statutory Provisions

FINANCE (No. 2) BILL, 2019

Amendment of section 13A.

8. In section 13A of the Income-tax Act, in the first proviso, in clause (d), for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020.

Notes:

Clause 8 of the Bill seeks to amend section 13A of the Income tax Act relating to special provision relating to the incomes of political parties.

The said section provides that any income of a political party which is chargeable under the head “Income from house property” or “Income from other sources” or “Capital Gains” or income from voluntary contributions shall not be included in the total income of the previous year of such political party.

The first proviso to the said section lays down conditions to be satisfied by a political party in order for the provisions of this section to be applicable.

It is proposed to amend clause (d) of the said proviso so as to empower the Board to make rules to prescribe any other electronic mode through which a political party may also receive donations exceeding two thousand rupees.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Amendment of section 35AD.

9. In section 35AD of the Income-tax Act, in sub-section (8), in clause (f), for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020.

Notes:

Clause 9 of the Bill seeks to amend section 35AD of the Income-tax Act relating to deduction in respect of expenditure on specified business.

The said section provides for deduction to an assessee of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him.

Clause (f) of sub-section (8) of the said section provides that the term 'any expenditure of capital nature' shall not include any expenditure in respect of which the assessee makes payment or an aggregate of payments exceeding ten thousand rupees to a person in a day through any mode other than an account payee cheque or an account payee bank draft or using the electronic clearing system through a bank account.

It is proposed to amend the said clause (f) so as to empower the Board to make rules to provide that payment made through such other electronic mode as may be prescribed shall also be allowed as deduction.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Amendment of section 40A.

11. In section 40A of the Income-tax Act, with effect from the 1st day of April, 2020,––

(i) for the words “bank account” wherever they occur, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted;

(ii) in sub-section (4), after the words “such cheque or draft or electronic clearing system”, the words “or such other electronic mode as may be prescribed” shall be inserted.

Notes:

Clause 11 of the Bill seeks to amend section 40A of the Income-tax Act relating to expenses or payments not deductible in certain circumstances.

Sub-sections (3), (3A) and (4) of the said section provide for disallowance of any expenditure for which the assessee makes payment (or an aggregate of payments) exceeding ten thousand rupees through any mode other than through an account payee cheque or an account payee bank draft or using the electronic clearing system through a bank account.

It is proposed to amend the said sub-sections so as to empower the Board to make rules to provide that payment made through such other electronic mode as may be prescribed shall also be allowed as deduction.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020- 2021 and subsequent assessment years.

Amendment of section 43.

12. In section 43 of the Income-tax Act, in clause (1), in the second proviso, for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020.

Notes:

Clause 12 of the Bill seeks to amend section 43 of the Income-tax Act relating to definitions of certain terms relevant to income from profits and gains of business or profession.

Sub-section (1) of the said section defines the term “actual cost” to mean the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.

The second proviso to sub-section (1) of the said section provides that where the assessee incurs any expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost.

It is proposed to amend the said second proviso so as to empower the Board to make rules to provide that payment made through such electronic mode as may be prescribed shall not be ignored for the purposes of determination of actual cost.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Amendment of section 43CA.

14. In section 43CA of the Income-tax Act, in sub-section (4), for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020.

Notes:

Clause 14 of the Bill seeks to amend section 43CA of the Income-tax Act relating to special provision for value of consideration for transfer of assets other than capital assets in certain cases.

Sub-section (3) of the said section provides that where the date of agreement fixing the value of consideration for the transfer of the asset and the date of registration of such transfer of asset are not the same, then the full value of consideration for transfer of such asset shall be the stamp duty value on the date of the agreement.

Sub-section (4) of the said section provides that the provisions of sub-section (3) shall apply only in those cases where the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account on or before the date of agreement for transfer of the asset.

It is proposed to amend the said sub-section (4) so as to empower the Board to make rules to provide that the provisions of sub-section (3) shall also apply in respect of those cases where the amount of consideration or a part thereof has been received by way of any other electronic mode as may be prescribed.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Amendment of section 44AD.

16. In section 44AD of the Income-tax Act, in sub-section (1), in the proviso, for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020.

Notes:

Clause 16 of the Bill seeks to amend section 44AD of the Income-tax Act relating to special provision for computing profits and gains of business on presumptive basis.

Sub-section (1) of the said section provides that notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent. of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

The proviso to the said sub-section (1) provides that in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year, a sum equal to six per cent. or higher shall be deemed to be the profits and gains of business and profession.

It is proposed to amend the said proviso so as to empower the Board to make rules to provide that an eligible assessee can opt for presumptive taxation scheme if he declares profit at the rate of six per cent. or higher of the turnover, received through any other electronic mode as may be prescribed.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Amendment of section 50C.

18. In section 50C of the Income-tax Act, in sub-section (1), in the second proviso, for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020.

Notes:

Clause 18 of the Bill seeks to amend section 50C of the Income-tax Act relating to special provision for full value of consideration in certain cases.

The second proviso to sub-section (1) specifies that the first proviso shall apply only in a case where the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account on or before the date of agreement for transfer of the asset.

It is proposed to amend the said second proviso so as to empower the Board to make rules to provide that the first proviso shall also apply in respect of those cases where the amount of consideration or a part thereof has been received by way of any other electronic mode as may be prescribed.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Amendment of section 56.

21. In section 56 of the Income-tax Act, in sub-section (2),––

(i) in clause (viib), with effect from the 1st day of April, 2020,-

(a) in the proviso, in clause (i), for the words “venture capital fund”, the words “venture capital fund or a specified fund” shall be substituted;

(b) after the proviso, the following proviso shall be inserted, namely:-

“Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place.”;

(c) in the Explanation, after clause (a), the following clauses shall be inserted, namely:-

‘(aa) “specified fund” means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992(15 of 1992);

(ab) “trust” means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;’;

(ii) in clause (viii), for the words, brackets, letters and figures “clause (b) of section 145A”, the words, brackets, figures and letter “sub-section (1) of section 145B” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2017;

(iii) in clause (x),––

(A) in sub-clause (b), in the second proviso, for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020;

(B) in the proviso, after clause (X), the following clause shall be inserted with effect from the 1st day of April, 2020, namely:-

“(XI) from such class of persons and subject to such conditions, as may be prescribed.”.

Notes:

Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources.

Clause (viib) of sub-section (2) of the said section provides that where a company, not being a company in which the public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall not be charged to tax, if the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

It is proposed to amend the said clause so as to provide that where a company, not being a company in which the public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall not be charged to tax, if the consideration for issue of shares is received by a venture capital undertaking from a specified fund.

It is further proposed to define the expression “specified fund”.

It is also proposed to insert a second proviso to the said clause so as to provide that where the provisions of the said clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and the company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such shares shall be deemed to be the income of the company chargeable to income-tax for the previous year in which such failure has taken place.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020- 2021 and subsequent assessment years.

Clause (viii) of sub-section (2) of the said section provides that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be chargeable to tax.

It is proposed to amend the said clause so as to substitute the reference of clause (b) of section 145A with the reference of subsection (1) of section 145B therein.

This amendment will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent assessment years.

The second proviso to the sub-clause (b) of clause (x) of subsection (2) of the said section specifies that the first proviso shall apply only in a case where the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account on or before the date of agreement for transfer of the asset.

It is proposed to amend the said second proviso so as to empower the Board to make rules to provide that the first proviso shall also apply in respect of those cases where the amount of consideration or part thereof has been received by way of any other electronic mode as may be prescribed.

The proviso to the said clause (x) provides that where any person receives, in any previous year, from any person or persons any property without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property or consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, then the aggregate fair market value of such property as exceeds such consideration shall be the income of the person receiving such property.

It is proposed to insert a new clause (XI) in the proviso to the said clause (x) so as to provide that any sum of money or any property received from such class of persons and subject to such conditions, as may be provided by rules shall not be the income of such persons.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020- 2021 and subsequent assessment years.

Amendment of section 80JJAA.

27. In section 80JJAA of the Income-tax Act, in the Explanation, in clause (i), in the first proviso, in clause (b), for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020.

Notes:

Clause 27 of the Bill seeks to amend section 80JJAA of the Income-tax Act relating to deduction in respect of employment of new employees.

Clause (b) of the first proviso to clause (i) of the said Explanation specifies that the additional employee cost in case of an existing business shall be nil if the emoluments are paid otherwise than by an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account.

It is proposed to amend the said clause (b) so as to empower the Board to make rules to provide that deduction of an amount equal to thirty per cent. of additional employee cost in the case of an existing business shall be allowed if the emolument of such additional employees are paid through any other electronic mode as may be prescribed.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Observation of author:

If a definition is provided as suggested earlier all amendments and amended provisions would become very easy and certain at least as per present position about approved methods of fund transfers.