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TMI BlogEXPLANATORY NOTES ON THE PROVISIONS OF THE FINANCE ACT, 2005X X X X Extracts X X X X X X X X Extracts X X X X ..... new sections 72AA, 80C, 80CCE, 206A, 271FB and Chapter XII-H in the Income-tax Act, 1961; (iv) omitted sections 80L, 88B, 88C and 88D of the Income-tax Act, 1961; (v) substituted new section for section 80E of the Income-tax Act; (vi) amended section 98 of the Finance (No.2) Act, 2004; and (vii) introduced a new levy namely, Banking Cash Transaction Tax Provisions relating to Banking Cash Transaction Tax introduced through Chapter VII of the Act along with consequential amendments in the Income-tax Act, 1961 have been explained separately through Circular No. 03/2005 dated 3 rd June, 2005. Similarly, the provisions relating to Fringe Benefit Tax introduced through Chapters XII-H of the Income-tax Act, 1961 have been explained separately through Circular No.8/2005 dated 29 th August, 2005. This circular explains the substance of other provisions of the Act relating to Direct Taxes. 2. RATE STRUCTURE 2.1 Rates of income-tax in respect of incomes liable to tax for the assessment year 2005-2006. 2.1.1 In respect of incomes of all categories of tax payers (corporate as well as non-corporate) liable to tax for the assessment year 2005-2006, the rates of income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or an Indian concern on or after the 1 st day of June, 2005 has been reduced from twenty per cent. to ten per cent. 2.2.3 The tax deducted at source in each case shall be increased by a surcharge for purposes of the Union as follows: (i) in the case of every individual, Hindu undivided family, association of persons and body of individuals, at the rate of ten per cent. of such tax where the income or the aggregate of such incomes paid or likely to be paid and subject to deduction exceeds Rs.10,00,000/-; (ii) in the case of every firm, at the rate of ten per cent. of such tax; (iii) in the case of every artificial juridical person, at the rate of ten per cent. of such tax; (iv) in the case of every domestic company, at the rate of ten per cent. of such tax; and (v) in the case of every foreign company, at the rate of two and one-half per cent. of such tax. 2.2.4 No surcharge is to be levied on the amount of income tax deducted in the case of every co-operative society and local authority. 2.2.5 Education Cess - An additional surcharge called the Education Cess is to be levied at the rate of two per cent. on the amount of tax deducted, inclusive of sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ten per cent. of the tax payable (after allowing rebate under Chapter VIII-A) in cases of individuals, Hindu undivided families, association of persons, body of individuals having total income exceeding Rs.10,00,000/-. No surcharge would be payable by persons having incomes of Rs.10,00,000/- or below. Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs.10,00,000/- is limited to the amount by which the income is more than Rs.10,00,000/-. For instance, the amount of tax and surcharge on a total income of Rs. 10,20,000 calculated at the rates specified would have been Rs. 2,56,000 and Rs. 25,600 totaling to Rs. 2,81,600. The additional tax liability, as per this computation, incurred as compared to a person having a total income of Rs. 10,00,000 is Rs. 31,600. However, additional income as compared to a person having a total income of Rs. 10,00,000 is only Rs. 20,000. Therefore, a marginal relief is given to the extent of Rs. 11,600 in this case thereby providing that the additional tax liability cannot be more than the additional income. The total tax liability in this case will, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering technical services received from Government or an Indian concerned in pursuance of an agreement made by it with the Government or the Indian concerned after 29.02.1964 but before 01.04.1976 will also continue to be 50 per cent. There is also no change in the existing rate of forty per cent on all other income for foreign companies. The tax payable by domestic companies would be enhanced by a surcharge at the rate of ten per cent. of the tax payable and in the case of foreign companies tax payable would be enhanced by a surcharge at the rate of two and one-half per cent. of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge in case of all companies. [Section 2 and First Schedule] 3. AMENDMENTS TO SECTIONS OF THE INCOME TAX ACT 3.1 Revival of exemption of interest in Non-Resident (External) Account - Section 10(4) (ii) of the I. T. Act deals with exemption of any income by way of interest on moneys standing to the credit of an individual in a Non-Resident (External) Account in any bank in India. Finance (No. 2) Act, 2004 had amended the said section so as to provide that such interest income paid or credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements entered on or after 1 st October 2005. The Taxation Laws (Amendment) Act, 2005 has further amended clause (15A) of section 10 so as to provide the above-said exemption in respect of lease payments made in pursuance of agreements entered before the 1 st day of April, 2006. Applicability: From A.Y. 2006-07 onwards. [Section 4] 3.4 Filing of return mandatory for units in Special Economic Zones Under the existing provisions of sub-section (1A) of section 10A, an undertaking set up in a Special Economic Zone, which begins to manufacture or produce articles or things or computer software after 31.3.2002, is allowed a hundred per cent. deduction of export profits for a period of five years followed by fifty per cent. deduction of such profits for the next two years, and thereafter a fifty percent deduction of export profits credited to a special reserve account, for the next three years. In order to ensure timely submission of returns claiming deduction under section 10A, a proviso has been inserted to provide that no deduction shall be allowed with regard to profits of an undertaking set up in any Special Economic Zone and claiming deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are effective from Assessment Year 2006-07. Among other things, the rate of depreciation on plant and machinery has been reduced from 25 % to 15 %. Applicability: From A.Y. 2006-07 onwards. [Section 8] 3.7 Reserves to be added to profits and not the sale proceeds on sale of a ship The existing sub-section (4) of section 33AC contains provisions dealing with the sale or transfer of a ship after the expiry of three years lock-in period. Where a company sells or transfers the ship after three years lock-in period and the sale proceeds are not utilised for the purpose of acquiring a new ship within a period of one year from the end of the previous year in which such sale or transfer took place, the sale proceeds are deemed to be the profits of the assessment year immediately following the previous year in which the ship was sold or transferred. A new ship is acquired by a shipping company not only by utilising the reserves but also by resorting to loans and other finances. When a ship so acquired is sold or transferred, taxation of the whole of the sale proceeds would imply taxation of loans and other finances which has ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The Finance Act, 2005 has, therefore, amended the aforesaid sub-section (1) so as to allow the whole expenditure incurred by the assessee employer in making payment to the employee in connection with his voluntary retirement either in the year of retirement or in any subsequent year, as deduction. The amendment would facilitate deduction of each part payment in five equal instalments beginning from the year in which such part payment is made to the employee. The following numerical illustration depicts admissibility of deduction under section 35DDA (In this example, Rs. 30 lakhs is paid on voluntary retirement in three annual instalments starting from Financial Year 2004-05) Financial Year Deduction available to employer when he pays Rs. 10 lakhs in first year, Rs. 15 lakhs in the second and balance Rs. 5 lakhs in the third year (in Rs. lakhs) 2004-05 2 2005-06 2 3 2006-07 2 3 1 2007-08 2 3 1 2008-09 2 3 1 2009-10 3 1 2010-11 1 Applicability:With retrospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking institution for the previous year in which the scheme of amalgamation is brought into force. It has also been provided that all the provisions relating to set off and carry forward of loss and unabsorbed depreciation shall apply to the above. The terms accumulated loss, banking company, banking institution and unabsorbed depreciation have been defined in the section. A new clause (viaa) has been inserted in section 47 providing that any transfer of a capital asset by such a banking company to such a banking institution in such a scheme of amalgamation, shall not be regarded as a transfer for the purposes of capital gains. Sub-section (1) of section 49 has also been amended so as to provide that, where the capital asset became the property of the assessee (banking institution) under aforesaid scheme of amalgamation, the cost of acquisition of the asset shall be deemed to be the cost for which previous owner (amalgamating banking company) of the asset acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be. Applicability: With retrospective e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e section and the assessee is free to invest in any one or more of the eligible instruments within the overall ceiling specified. Further, a new section 80CCE has also been inserted to provide that the aggregate amount of deductions under section 80C, section 80CCC and section 80CCD shall not exceed one lakh rupees . In view of insertion of new section 80C, section 88 has been amended to provide that no deduction from income-tax under the said section shall be allowed to any assessee for assessment year 2006-07 and subsequent assessment years. In view of the move towards EET method of taxation of financial saving schemes, section 80L has been omitted from assessment year 2006-07. Consequential amendments have also been carried out in section 10, section 54EC, section 54ED, section 80CCC, section 80CCD, and section 295. Applicability: From A.Y. 2006-07 onwards. [Section 21, 4, 17, 18, 22, 23, 24, 28, 29 64 ] 3.14 Deduction for entire amount of interest paid on a loan taken for pursuing higher education. Under the existing provisions of section 80E, a deduction upto forty thousand rupees is allowed to an individual on account of any a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80-IA has been amended. As a result, an authority or a board or a corporation or any other body established or constituted under a Central or State Act, may take advantage of the benefits provided under the said section. Applicability: From A.Y. 2006-07 onwards. [Section 26] 3.16 Extension of time limit for setting up of industries in the State of Jammu and Kashmir for the purpose of tax holiday under section 80-IB Under the existing provisions contained in sub-section (4) of section 80-IB, industrial undertakings engaged in manufacture or production of an article or thing or in operation of a cold storage plant and set up during the period 1.4.1993 to 31.3.2005 in the State of Jammu and Kashmir, are eligible for a hundred per cent. deduction of profits for a period of five years, followed by twenty-five per cent. (thirty per cent. in the case of companies) for the next five years. However, such industrial undertakings engaged in manufacture or production of articles or things mentioned in part C of the Thirteenth Schedule are not eligible for the said deduction. The deduction is not available to industries in the State set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en withdrawn. Applicability: From A.Y. 2006-07 onwards. [Section 30 31] 3.19 Elimination of tax rebate under section 88D for persons with income below rupees one lakh. The provisions of section 88D provide for a rebate of the entire amount of income-tax payable in case of an individual resident in India, having total income up to rupees one lakh. It also provides marginal relief to ensure that the post tax income of any individual does not fall below rupees one lakh. In view of the increase in the general exemption limit to rupees one lakh, section 88D, having become infructuous, has been omitted. Applicability: From A.Y. 2006-07 onwards. [Section 32] 3.20 Rationalisation of taxation of income arising from zero coupon bonds The Finance Act, 2005 has inserted a new clause (48) in section 2, defining zero coupon bond to mean a bond (i) which is issued on or after 1.6.2005 by an infrastructure capital company or infrastructure capital fund or public sector company; (ii) in relation to which no benefit is received or receivable before maturity or redemption from the company or the fund; and (iii) which is specified by the Central Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head Profits and gains from business or profession. Thus, no income from a zero coupon bond shall be taxed on accrual basis during the period of its holding by a person. It is further clarified that Circular No. 2/2002 dated 15 th February, 2002 explaining the tax treatment in respect of Deep Discount Bonds shall not be applicable in respect of zero coupon bonds as defined in clause (48) of section 2. Applicability: From A.Y. 2006-07 onwards. [Sections 3, 12, 33 48] 3.21 Reduction in rate of tax on royalty and fees for technical services in the case of a non-resident from 20% to 10% The existing provisions of clause (b) of sub-section (1) of section 115A provide for the rate at which income-tax shall be payable where the total income of a non-resident (not being a company) or a foreign company includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DA received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after 31 st March, 1976, and where such agreement is with an Indian concern, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxes so paid for such assessment year shall be allowed on the difference of the tax paid under section 115JB and the amount of tax payable by the company on its total income computed in accordance with the other provisions of the Act. The amount of tax credit so determined shall be allowed to be carried forward and set off in a year when the tax becomes payable on the total income computed under the regular provisions. However, no carry forward shall be allowed beyond the fifth assessment year immediately succeeding the assessment year in which the tax credit becomes allowable. The set off in respect of the brought forward tax credit shall be allowed for any assessment year to the extent of the difference between the tax on the total income and the tax which would have been payable under section 115JB for that assessment year. A numerical illustration:- A.Y. Normal tax liability Tax liability u/s. 115JB Tax payable by the assessee [Higher of (2) and (3)] Additional tax liability (4) (2) Credit u/s. 115JAA utilised Credit available for carry forward (1) (2) (3) (4) (5) ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section also provide that persons other than a company shall be required to file their return of income if their total income exceeds the maximum amount which is not chargeable to tax. With a view to widen the tax base, this section has been amended so as to provide for compulsory filing of return by the persons other than companies and firms whose total income before giving effect to the provisions of Chapter VI-A and sections 10A, 10B or 10BA exceeds the maximum amount not chargeable to tax. The existing provisions of the said section also provide that every person other than a company whose total income does not exceed the maximum amount which is not chargeable to tax shall also furnish return of his income if he fulfils any of six expenditure criteria (this scheme is popularly known as one-by-six scheme). The scope of this scheme has been modified. Subscriber-ship to a cellular phone has been excluded from the ambit of the scheme. However, it has been provided that a person incurring an expenditure of more than Rs.50,000/- on electricity consumption during the previous year shall also be required to file his return of income under the said scheme. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e search under section 132 or requisition under section 132A was made, he shall hand over the same to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against such other person under section 153A. Second proviso to section 153A provides that any assessment or re-assessment, relating to any assessment year falling within the period of six assessment years referred to in the said section, pending on the date of initiation of search under section 132 or on the date of making of requisition under section 132A, shall abate. The existing section 153C has been renumbered as sub-section (1) of the said section. Further, a new proviso to sub-section (1) of section 153C has been inserted providing that in the case of such other person, the reference to the date of initiation of search under section 132 or making of requisition under section 132A in the second proviso to section 153A, shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having the jurisdiction over such other person. A new sub-section (2) has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall abate; (iii) For assessment year relevant to the previous year in which search is conducted or requisition is made, the assessment or reassessment shall be made under section 153A if following conditions are satisfied:- (a) seized or requisitioned books of account or documents or assets are received by the assessing officer having jurisdiction over such other person after the due date for furnishing return under sub- section (1) of section 139 in his case for such assessment year, and (b) before the date of receipt of seized or requisitioned books of account or documents or assets by the assessing officer having jurisdiction over such other person (i) no return of income has been furnished by such other person under sub-section (1) of section 139 and no notice under sub-section (1) of section 142 has been issued to him for such assessment year, or (ii) a return of income has been furnished by such other person but no notice under sub-section (2) of section 143 for such assessment year has been served and the limitation of serving such notice has expired, or (iii) assessment or reassessment, if any, for such assessment year has been made. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificate to collectee. 139(9) Deductee not required to enclose TDS certificate with the return consequently return will not be treated defective. Collectee not required to enclose TCS certificate with the return. 199(3) and the Proviso to 206C(4) Credit for TDS will be given on the basis of annual statement of taxes accessible to the Assessing Officer. Credit for TCS will be given on the basis of annual statement of taxes accessible to the Assessing Officer. Dematerialisation of TDS/TCS Certificates should exclusively operationalise only after the On-Line Tax Accounting System (OLTAS) becomes flawlessly functional. Since OLTAS is yet to stabilise, there is need for issuance of paper tax deduction and collection certificates in the transitional Financial Year 2005-06 during which paper certificates should be required to be issued to the deductee or collectee. The following relevant provisions have been amended in respect of taxes deducted or collected to provide for this arrangement:- (i) during the Financial Year 2005-06 (transitional year) and (ii) in respect of tax deducted or collected on or after 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts with a Cooperative Society and deposits with a Public Company where such interest does not exceed five thousand rupees. The Finance Act, 2005 has inserted a new section 206A whereby such banking companies, co-operative societies and public companies are required to furnish quarterly returns in respect of such interest not exceeding five thousand rupees. The quarterly returns are required to be prepared for the quarters ending on the 30 th June, the 30 th September, the 31 st December and the 31 st March of the financial year, delivered or cause to be delivered to the prescribed income-tax authority or the person authorised by such authority and verified in such manner and within such time as may be prescribed. The quarterly returns are to be furnished on a floppy, diskette, magnetic cartridge tape, CD-ROM or any other computer readable media giving therein the details of payment of such interest. The Form for the quarterly return, the income-tax authority to whom such return is to be furnished and the time and manner in which the quarterly return is to be furnished have been notified [i.e., Rule 31AC and Form No. 26QA of the Income-tax Rules, 1962] vide S. O. No. 896 (E) dat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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