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TMI BlogFinance (No. 2) Act, 2004 - Explanatory Notes on provisions relating to Direct TaxesX X X X Extracts X X X X X X X X Extracts X X X X ..... 1961; (iii) substituted new sections 203A, 285BA of the Income-tax Act, 1961; (iv) amended section 35HA of the Wealth-tax Act, 1957; (v) introduced a new Chapter VII to levy Securities Transaction Tax. 3. Provisions in brief 3.1 The provisions of the Act in the sphere of direct taxes relate to the following matters: (i) Prescribing the rates of income-tax on income liable to tax for the assessment year 2004-05; the rates at which the tax will be deductible at source in the financial year 2004-05 from interest (including interest on securities), winnings from lotteries or cross-word puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act, rates for computing advance tax, deduction of income-tax from Salaries and charging of income-tax on current income in certain cases for the financial year 2004-05. (ii) Amendment of the Income-tax Act, 1961, with a view to : - modifying the definition of income to include any sum of money exceeding Rs. 25,000 received without any consideration by an individual or HUF. - providing a sunset provision to section 10( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research and development. - extending the time-limit for obtaining approval of housing projects for the purpose of tax holiday under section 80-IB, and allowing deduction for redevelopment or reconstruction of existing buildings in slum areas. - providing tax holiday for agro-processing industry. - giving incentive to an undertaking building, operating and maintaining a hospital in a rural area. - providing for deduction in respect of a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities. - giving rebate for repayment of housing loans taken from an authority established by a Central or State Act. - introducing a new provision for allowing deduction from tax payable for individuals having total income up to rupees one lakh. - amending section 90. - curbing tax avoidance via dividend and bonus stripping. - reducing the opportunity of arbitrage for the companies. - continuing exemption to open-ended equity oriented funds without any time-limit. - amending section 119 relating to instructions to subordinate authorities. - clarifying prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain cases during the financial year 2003-04. It has also been specified that in the case of individuals, Hindu undivided families, association of persons and body of individuals having total income exceeding Rs. 8,50,000, the tax so computed after rebate under Chapter VIII-A, shall be enhanced by a surcharge of ten per cent for purposes of the Union. In the case of every artificial juridical person, the tax computed shall be enhanced by a surcharge of ten per cent. In case of a firm, a local authority, a co-operative society and a company, the tax computed shall be enhanced by a surcharge of two and one-half per cent. Rates for deduction of income-tax at source during the financial year 2004-05 from income other than Salaries The rates for deduction of income-tax at source during the financial year 2004-05 from incomes other than Salaries have been specified in Part II of the First Schedule to the Act. These rates apply to income by way of interest on securities, interest other than interest on securities, insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to an additional surcharge, i.e., education cess on the tax payable on the total income of the whole of the financial year. The salient features of the rates specified in the said Part III are indicated in the following paragraphs: A. Individuals, Hindu undivided families, etc. Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, body of individuals or every artificial juridical persons other than a co-operative society, firm, local authority and company. No change has been made in the rate structure. The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of 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. 8,50,000. No surcharge would be payable by persons having incomes of Rs. 8,50,000 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. 8,50,000 is limited to the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emains at 35 per cent. The tax payable by firms would be enhanced by a surcharge for the purposes of the Union 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. D. Local authorities In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act. The tax payable would be enhanced by a surcharge for the purposes of the Union 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. E. Companies In the case of companies, the rate of income-tax has been specified in Paragraph E of Part III of the First Schedule to the Act. There is no change in the existing rates of thirty-five per cent for domestic companies and forty per cent for foreign companies. The tax payable by all companies would be enhanced by a surcharge at the rate of two and one-half per cent of the tax payable. The additional surchar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the interest payable to the European Investment Bank on developmental loans granted by it, is taxable. With a view to honour the commitment given under a sovereign agreement, the interest payable to the European Investment Bank on loans granted in pursuance of the framework agreement for financial co-operation entered into by the Central Government with the said Bank on 25-11-1993 has been exempted from income-tax by insertion of a new sub-clause (iiic) of clause (15) of section 10. This amendment takes effect from 1st April, 2005. [Section 5(c)(A)] Sunset provision to section 10(15)(iv)(fa) relating to interest on Foreign Currency Deposits Under the existing provisions contained in section 10(15)(iv)(fa), the interest payable by a scheduled bank to a non-resident or to a person who is not ordinarily resident on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India shall not be included in computing his total income. The Finance (No. 2) Act, 2004 has amended clause (15)(iv)(fa) of section 10 to provide that this exemption will not be available in respect of such interest payable on or after the 1st d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (19) has been inserted in the said section so as to provide that where the death of a member of the armed forces (including para-military forces) of the Union has occurred in the course of operational duties, in such circumstances and subject to such conditions as may be prescribed, the family pension received by the widow or children or nominated heirs, as the case may be, shall be exempt from tax. Circumstances and conditions have been prescribed in rule 2BBA of the Income-tax Rules, 1962. The proposed amendment takes effect from the 1st April, 2005 and applies in relation to assessment year 2005-06 and subsequent years. [Section 5(e)] Modification of definition of venture capital undertaking Under the existing provisions contained in section 10(23FB), Venture Capital Undertaking (VCU) is defined to mean a domestic company whose shares are not listed in the recognized stock exchange in India and which is engaged in the business of providing services, production or manufacture of an article or thing but does not include such activities or sectors which are specified by the Securities and Exchange Board of India (SEBI) with the approval of Central Government by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of agricultural land [being capital asset within the meaning of clause (14) of section 2] by way of compulsory acquisition under any law or under a transfer of such land, the consideration for which is determined or approved by the Central Government or the Reserve Bank of India. Such exemption shall be available where the compensation/enhanced compensation/enhanced consideration or consideration has been received on or after 1st April, 2004, and such land, during the period of two years immediately preceding the date of transfer was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his. This amendment takes effect from 1st April, 2005 and applies in relation to the assessment year 2005-06 and subsequent years. [Section 5(h)] Power to the Commissioner for cancelling registration under section 12AA Section 12AA provides for the procedure for registration of a trust or institution by the Commissioner of Income-tax. Although the power of cancellation of registration flows from the power to register, there has been unnecessary litigation on this issue. This section has been amended so as to specifically provide that if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contribution made by the Central Government in the previous year to the non-withdrawable pension tier-I account of an employee participating in the New Pension Scheme, shall be deemed to be income received in the previous year and shall be chargeable to tax under the head salary. The proposed amendments take effect retrospectively from 1st April, 2004 and apply in relation to the assessment year 2004-05 and subsequent years. [Sections 4, 7 and 15] Relaxation of the conditions for allowing initial depreciation Under the existing provisions of clause (iia) of sub-section (1) of section 32 of the Income-tax Act, a further deduction at the rate of fifteen per cent of the actual cost of new plant and machinery other than ships and aircrafts acquired and installed on or after 1-4-2002 is allowed. This deduction is available to (i) a new industrial undertaking during any previous year in which it begins to manufacture produce any article or thing on or after 1-4-2002; (ii) an undertaking existing before 1-4-2002, in the previous year in which it achieves not less than 25% increase in installed capacity. Installed capacity has been defined to mean the capacity of prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It has also been provided that the notification of an eligible project or scheme may be withdrawn by the National Committee, after giving a reasonable opportunity of being heard in case a report in the prescribed form in respect of such project or scheme is not furnished within the prescribed time after the end of each financial year. It has also been provided that a copy of the order withdrawing the approval or notification through which the notification of eligible project or scheme is withdrawn shall be forwarded to the Assessing Officer having jurisdiction over the concerned association or institution or local autho-rity or public sector company. This power of withdrawal will be in addition to the existing power of withdrawal of approvals or notifications in case the project or scheme is not being carried out in accordance with all or any of the conditions subject to which the approval was granted or project/scheme notified. This amendment takes effect from 1st October, 2004. [Section 10] Certain amounts not to be allowed as deduction while computing income under the head Profits and gains of business or profession if tax not deducted at source Under the exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction in computing the income of the previous year in which the tax has been paid to the account of the Central Government. These amendments take effect from 1st April, 2005 and apply in relation to the assessment year 2005-06 and subsequent assessment years. [Section 11] No set-off of business loss against income from salary Under the existing provisions of sub-section (1) of section 71 of the Income-tax Act, loss computed in current year under the head Profits and gains of business or profession can be set off against salary income. In order to prevent abuse of the provisions of set-off of losses, the Act has amended section 71 by way of insertion of a new sub-section (2A) to provide that an assessee shall not be entitled to set off any loss under the head Profits and gains of business or profession against income under the head Salaries. This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years. [Section 14] Deduction in respect of maintenance including medical treatment of a dependent being a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable to a new undertaking and not to an undertaking formed by way of reconstruction or splitting up of a business already in existence. Further, the deduction is not available in the case of the transfer of old plant and machinery to the new business. Recognising the need to encourage investment in renovation and modernization of the transmission and distribution network, the tax benefit under the section has been extended to undertakings which undertake substantial renovation and modernization of the existing network of transmission or distribution lines during the period beginning on 1-4-2004 and ending on 31-3-2006. Substantial renovation and modernisation means 50 per cent increase in the book value of plant and machinery in the network of transmission or distribution lines, as on 1-4-2004. Further, in view of the on-going reforms of the State Electricity Boards, the restrictions imposed on the transfer of old plant and machinery and splitting up or reconstruction of an old business shall no longer be applicable in the case of splitting up or, reconstruction, or re-organisation of State Electricity Boards. However, this benefit shall be available only in such cases where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80-IA of the Income-tax Act. This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years. [Section 17(b)(A) and 17(c)(A)] 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 or operation of a cold storage plant and set up during the period 1-4-1993 to 31-3-2004 in the industrially backward States as listed in the VIII Schedule, including the State of Jammu and Kashmir, are eligible for a 100 per cent deduction of profits for a period of 5 years, followed by 25 per cent (30 per cent in the case of a company) for the next 5 years. The deduction is not available to industries set up after 31-3-2004. The terminal date for setting up of industrial undertakings in the State of Jammu and Kashmir has been extended by one more year, i.e., till 31-3-2005. The Thirteenth Schedule has also been amended to include a negative list of commodities which should not be manufactured or produced by such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Mumbai and one thousand and five hundred square feet at other places. This tax incentive was provided to increase the stock of houses for lower and middle income groups. Keeping in view the fact that there is still a huge shortage of houses, the time limit for obtaining approval from the local authority has been extended from 31-3-2005 to 31-3-2007. However, a time limit has been introduced for completion of the housing project, where development and construction has commenced or commences on or after 1-10-1998. Such housing project approved by the local authority before 1-4-2004 has to be completed on or before 31-3-2008 and the housing project approved on or after 1-4-2004 should be completed within four years from the end of the financial year in which the project is approved by the local authority. For this purpose the date of approval shall be the date on which the building plan is first approved by the local authority and the date of completion of the housing project, shall be the date on which the completion certificate is issued by such authority. It has also been provided that the built-up area of the shops and other commercial establishments included in the housing pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frastructure development undertakings, engaged in the business of building, owning and operating multiplex theatres or convention centres, developing and building housing projects, or which are engaged in the integrated business of handling, storage and transportation of foodgrains or the production or refining of mineral oil. With a view to increase the penetration of medical services in the rural areas, a new sub-section (11B) in the said section has been inserted so as to provide that the profits derived by an undertaking or an enterprise from the business of operating and maintaining a hospital in a rural area shall be eligible for a deduction of hundred per cent of such profits and gains. The deduction shall be available for a period of five assessment years beginning from the assessment year in which the undertaking or enterprise begins to provide medical services. The undertaking or enterprise shall be eligible for the deduction if such hospital is constructed during the period beginning on the 1-10-2004 and ending on the 31-3-2008, in accordance with the local regulations in force, and has at least one hundred beds for patients. Further, for claiming the deduction, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of a residential house property, up to a limit of Rs. 20,000 in one year within the overall investment ceiling of Rs. 70,000. Repayment of the amount borrowed, however, has to be to the Central Government, or any State Government, or any bank including a Co-operative Bank, or the Life Insurance Corporation, or the National Housing Bank, or any public company engaged in the business of housing finance, or from an employer who is a public company, or a public sector company, or a university, or a local authority or a co-operative society. However, employees of a number of autonomous bodies established under the State or Central Acts were not eligible for rebate under section 88 of the Income-tax Act on account of repayment of housing loan from their employers. With a view to rationalize the provision, the sub-clause (c) of clause (xv) of sub-section (2) of section 88 has been amended so as to include within the purview to tax rebate under section 88, any sum paid on account of repayment of the amount borrowed by the assessee for the purchase or construction of a residential house property, from an authority or a board or a corporation or any other body established or constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss, if any, arising from such purchase and sale shall be ignored to the extent such loss does not exceed the amount of such dividend or income for the purposes of computing the income chargeable to tax of such person. It was felt that for units, the holding period of three months prior to sale as specified in the said sub-section did not provide sufficient deterrence to tax avoidance. The Finance (No. 2) Act, 2004, has amended sub-section (7) of section 94 so as to increase the holding period in respect of units from three months to nine months after the record date. With a view to curb tax avoidance via bonus stripping, Finance (No. 2) Act, 2004 has inserted a new sub-section (8) in section 94 so as to provide that where a person buys or acquires any units within a period of three months prior to the record date and he is allotted additional units on the basis of such units without making any payment, and thereafter he sells or transfers within a period of nine months after such date all or any of such units while continuing to hold all or any of the additional units, then, the loss, if any, arising to him on account of such purchase and sale of units shall be ignored for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view to empower the Board to issue orders of waiver of interest in cases of distribution tax where a company or a mutual fund may become liable to interest under section 115P or 115S, as the case may be, the Act has amended clause (a) of sub-section (2) of section 119 so as to enable the Central Board of Direct Taxes to issue such directions as the Board deems fit for relaxation of the provisions of sections 115P and 115S. This amendment takes effect from 1st October, 2004. [Section 31] Clarificatory amendments regarding estimates by Valuation Officer in certain cases The existing provisions of section 131 provide that the Assessing Officer shall have the same powers as are vested in a Court under the Code of Civil Procedure, 1908, when trying a suit. One such power which has been provided in clause (d) of sub-section (1) of section 131, is the power to issue commissions. Section 75 of CPC and order XXVI of the Schedule thereto lays down the power of issuing commission, which inter alia, empowers the Court to make a local investigation and also to hold a scientific, technical and expert investigation. Using this power, the Assessing Officer has been making a reference t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons contained in sections 245Q and 245R provide that the Authority for Advance Rulings shall on receipt of an application for advance ruling, forward the same to the Commissioner and if necessary call for the relevant records. The authority may either reject the application or pronounce its advance ruling after examining the application and the records. The existing provisions of section 245RR provide that no income-tax authority or the Appellate Tribunal shall proceed to decide any issue in respect of which an application has been made by a resident to the Authority for Advance Rulings. Finance (No. 2) Act, 2004 has inserted clause (vi) in Explanation 1 to section 153 so as to provide that the period commencing on the date on which application has been filed to the Authority for Advance Rulings and ending on the date on which the order rejecting the application is received by the Commissioner shall be excluded for computing the period of limitation under this section. Finance (No. 2) Act, 2004 has inserted clause (vii) in Explanation 1 to section 153 so as to provide that the period commencing on the date on which application has been filed to the Authority for Advance Rulings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also been provided that no deduction of tax shall be made where the immovable property is agricultural land, whether situated within municipal limits or not, and where the amount of compensation or enhanced compensation paid is less than one hundred thousand rupees. Section 197 of the Income-tax Act relating to certificate for deduction of tax at lower rates or no deduction of tax from the Assessing Officer has also been amended to include a reference to the newly inserted section 194LA. Consequential amendments have also been made in sections 198, 199, 200, 202, 203, 204 and 205 of the Income-tax Act. These amendments take effect from 1-10-2004. [Sections 38, 39, 40, 41(a), 42(1), 43, 44(a), 47 and 48] Common identification number in cases of tax deduction at source and tax collection at source Under the existing provisions of section 203A of the Income-tax Act, every person responsible for deduction of tax under the provisions of Chapter XVII-B is required to apply to the Assessing Officer for the allotment of a tax deduction account number if he has not been allotted such number. Similarly, every person responsible for collection of tax in accordance with the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of TDS returns on computer media under the said scheme is mandatory in the case of a company. The Act has amended sub-section (1) of section 206 to provide for filing of return of tax deducted at source with an authority or agency as may be prescribed. It has also been provided that the Board may, if it considers necessary or expedient so to do, frame a scheme for the purposes of filing of return with such other authority or agency referred to in sub-section (1). A scheme for furnishing paper returns of Tax Deducted at Source was notified vide Notification No. 179/2005, dated 30-6-2005. These amendments take effect from the 1-10-2004. The Act has also amended sub-section (2) of section 206 to provide that the prescribed person in the case of every office of Government shall also be required to deliver or cause to be delivered within the prescribed time (rule 37) after the end of each financial year, TDS returns on computer media under the scheme notified by the Board. A scheme for electronic filing of returns of Tax Deducted at Source was notified vide Notification No. 205/2003, dated 26-8-2003. This amendment takes effect from 1-4-2005. [Section 49] Collection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rns of tax collected at source may be filed on computer readable media such as floppies, diskettes, magnetic cartridge tapes, etc. as may be specified by the Board and that the information in such returns shall be admitted in evidence in any proceeding under the Income-tax Act. Sub-section (5C) of the said section provides for the requirement of checking and authenticating of the return by the Assessing Officer and due care by him for preservation of the return in the computer media by duplicating, transferring, mastering or storage without loss of data. With a view to bring the provisions relating to filing of TCS returns at par with those relating to filing of TDS returns, the Act has amended sub-section (5A) of section 206C to provide for filing of returns of tax collected at source within the time, as may be prescribed. With this amendment, the requirement of filing the half-yearly return of TCS has been dispensed with and an annual return is to be filed. It has also been provided that return of tax collected at source can be filed with any authority or agency as may be specified and that the Board may, if it considers necessary or expedient so to do, frame a scheme for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of this Act shall apply as if such person had failed to deliver the return. These amendments take effect from 1-4-2005. [Section 50] Special provisions relating to income of shipping companies A new chapter XII-G has been inserted in the Income-tax Act containing sections 115V to 115VZC. This Chapter has special provisions for taxation of the income of shipping companies. The Chapter has seven parts and thirty sections from sections 115V to 115VZC. Section 115V defines certain expressions used in the Chapter. Section 115VA provides that a company, may at its option, compute the income from the business of operating qualifying ships in accordance with the provisions of Chapter XII-G and the income thus computed shall be deemed to be the income chargeable to tax under the head Profits and gains of business or profession. Section 115VB stipulates when a company is to be considered as operating a ship. A company is regarded as operating a ship if it operates a ship, whether owned or chartered by it, and includes a case where even a part of the ship has been chartered in by it in an arrangement for slot charter, space charter or joint charter. A company is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing ships giving rise to relevant shipping income [referred to in sub-section (1) of section 115V-I] is to be considered as a separate business distinct from all other activities or business carried on by the company. It has also been provided that the profits referred to in sub-section (1) are to be computed separately from the profits and gains from any other business. A tonnage tax company engaged in the business of operating qualifying ships is required to compute the profits from the business of operating qualifying ships under the tonnage tax scheme and such profits are required to be computed separately from the profit and gains from any other business. The scheme is to apply only if an option is made in accordance with the provisions of section 115VP. The profits and gains of a company engaged in the business of qualifying ships but not covered under the tonnage tax scheme or, which has not made an option, shall be computed in accordance with the other provisions of the Income-tax Act. Section 115VF stipulates that the tonnage income shall be computed in accordance with the provisions of section 115VG and the income so computed shall be deemed to be the income of a tonnag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Daily profit: (Rs.) For the first 1,000 tons 460 For 1,001 to 10,000 tons 3,150 For remaining 15,000 tons 4,200 Total 7,810 Notional annual profit: Rs. 7810 365 days Rs. 28,50,650 Tonnage tax: Rs. 28,50,650 35/100= Rs. 9,97,727 The section also provides for rounding off of the tonnage. It has also been provided that notwithstanding anything contained in any other provisions of the Income-tax Act, no deduction or set off is to be allowed in computing the tonnage income under this Chapter. Section 115VH provides for computation in case of joint operation. The said section provides that where a qualifying ship is operated by two or more companies by way of joint interest in the ship or by way of an agreement for the use of the ship and their respective shares and definite and ascertainable, the tonnage income of each such company shall be an amount equal to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business carried on by such tonnage tax company are transferred to the tonnage tax business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the tonnage tax business does not correspond to the market value of such goods or services as on the date of the transfer, the relevant shipping income under this section shall be computed as if the transfer, in either case had been made at the market value of such goods or services as on that date. Where, in the opinion of the Assessing Officer, the computation of the relevant shipping income in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such income on such reasonable basis as he may deem fit. It has also been provided that where it appears to the Assessing Officer that, owing to the close connection between the tonnage tax company and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the tonnage tax company more than the ordinary profits which might be expected to arise in the tonnage tax business, the Assessing Officer shall, in computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the last day of immediately preceding previous year) be allocated to each of the new blocks in ratio of their respective book WDVs. To illustrate the above process, the following example may be taken: (i) The WDV of the existing block is Rs. 70 crores. This comprises three qualifying assets (Q) and two non-qualifying assets (NQ). The book WDV of each of the qualifying and the non-qualifying assets is identified as under as the first step: Assets Book WDV Q1 30 Q2 20 Q3 30 80 NQ1 15 NQ2 5 20 (ii) Book WDV of all the existing qualifying assets is Rs. 80 crores and that for the non-qualifying is Rs. 20 crores. (iii) Thus, the ratio of book WDV of qualified assets to that of non-qualifying assets is 4:1. (iv) In the final step, the existing WDV of the common block, which is Rs. 70 crores, is to be allocated in this ratio of qualifying block and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or set off against any income other than relevant shipping income in any previous year beginning on or after the company exercises its option under section 115VP. It has also been provided that any apportionment necessary to determine the losses referred to in sub-section (1) shall be made on a reasonable basis. Section 115VN relates to chargeable gains from transfer of tonnage tax assets. The said section provides that profits or gains arising from the transfer of a capital asset being an asset forming part of the block of qualifying assets shall be chargeable to income-tax in accordance with the provisions of section 45, read with section 50, and the capital gains so arising shall be computed in accordance with the provisions of sections 45 to 51. Section 115V-O provides for exclusion of book profits or loss derived from the activities of a tonnage tax company referred to in sub-section (1) of section 115V-I from section 115JB. Section 115VP relates to method and time of opting for tonnage tax scheme. A qualifying company may opt for the tonnage tax scheme by making an application to the Joint Commissioner having jurisdiction over the company in the Form No. 65 and manner p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the other provisions of the Income-tax Act. Section 115VR relates to renewal of tonnage tax scheme and it provides that an option for the tonnage tax scheme which has been approved under sub-section (3) of section 115VP may be renewed within one year from the end of the previous year in which the option ceases to have effect. It has also been provided that the provisions relating to method and time of opting for tonnage tax scheme (section 115VP) and the period for which tonnage tax option to remain in force (section 115VQ) shall apply in relation to a renewal of the option as they apply in relation to the approval of option for the tonnage tax scheme. Section 115VS provides that a qualifying company, if it leaves the scheme at any time, whether voluntary or through expulsion, will not be eligible to opt for the tonnage tax scheme for a period of ten years from the date of opting out or default or expulsion, as the case may be. The reasons for the prohibition are (i) default in complying with the provisions relating to creation of reserves; (ii) being excluded from the scheme on grounds of abuse of the tonnage tax scheme; (iii) default in complying with the trainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which it was acquired. Sub-section (5) of the said section provides for taxing of a proportion of the relevant shipping income in case of shortfall of credit to the reserve account. Sub-section (6) of the said section provides that if the reserve required to be created under sub-section (1) is not created for any two consecutive previous years of a tonnage tax company, the companys option for tonnage tax scheme shall cease to have effect from the start of the previous year following the second consecutive previous year in which the failure to create the reserve under sub-section (1) occurred and the company will be prohibited from exercising the option for tonnage tax scheme for a period of ten years in accordance with the provisions of section 115VS. Explanation to section 115VT defines the expression new ship. Section 115VU relates to minimum training requirement for tonnage tax companies. The said section provides that a tonnage tax company, after its option has been approved under sub-section (3) of section 115VP, shall be required to comply with the minimum training requirement in respect of trainee officers in accordance with the guidelines framed by the Director General ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d audit of accounts. The section provides that an option for tonnage tax scheme by a tonnage tax company shall not have effect in relation to a previous year unless such company maintains separate books of account in respect of the business of operating qualifying ships and furnishes, along with the return of income for that previous year, the report of an accountant, in Form No. 66 (Rule 11T) duly signed and verified by such accountant. Section 115VX relates to determination of tonnage. The said section provides that tonnage of a ship shall be determined in accordance with the valid certificate indicating its net tonnage. Clause (b) of the section specifies the certificates for the said purpose in respect of the both, i.e., in the case of ships registered in India and those registered outside India. Section 115VY relates to amalgamation. The said section provides that in case of amalgamation, the provisions relating to the tonnage tax scheme shall, as far as may be, apply to the amalgamated company, if it is a qualifying company. It has also been provided that where the amalgamated company is not a tonnage tax company, it shall exercise an option for tonnage tax scheme under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Explanation to the said sub-section defines the expression tax advantage. Section 115VZC relates to exclusion from tonnage tax scheme. Sub-section (1) of the said section provides that where a tonnage tax company is a party to any transaction or arrangement referred to in sub-section (1) of section 115VZA, the Assessing Officer shall, by an order in writing, exclude such company from the tonnage tax scheme after giving an opportunity of being heard to such company. It has also been provided that no order under this sub-section shall be passed without the previous approval of the Chief Commissioner. Sub-section (2) of the said section provides that the section shall not apply where the company shows to the satisfaction of the Assessing Officer that the transaction or arrangement were bona fide commercial transaction and had not been entered into for the purpose of obtaining tax advantage under this Chapter. Sub-section (3) of the said section provides that where an order has been passed under sub-section (1) by the Assessing Officer excluding the tonnage tax company from the tonnage tax scheme the option for tonnage tax scheme shall cease to be in force from the 1st day of April ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not accompanied by a TDS certificate in respect of tax claimed to have been deducted at source on or after 1st April, 2005. Section 200 relating to duty of person deducting tax has also been amended by way of insertion of a new sub-section (3) to provide that any person deducting any sum on or after 1st April, 2005 or any person being an employer referred to in sub-section (1A) of section 192 shall be required to prepare quarterly statements for the period ending on the 30th June, the 30th September, the 31st December and the 31st March in each financial year and deliver or cause to be delivered such statement in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed to the prescribed income-tax authority or the person authorized by such authority (Rule 31A). In respect of cases of tax collection at source, similar amendments have been made in sub-section (3) of section 206C. Further, sub-section (2) of section 272A relating to penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspection, etc. has also been amended by way of insertion of a new clause (k) to prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h that tax has been evaded by the other person. Provisions of section 278 do not provide adequate deterrence against making false entries in books of account or documents by a person enabling another person to evade tax, when in fact there is no underlying transaction. Many a times, even the confession made by a person that he has made false entries in books of account or documents to enable the other person to evade tax is not held to be sufficient evidence to substantiate tax evasion by such other person. Finance (No. 2) Act, 2004 has inserted a new section 277A providing that a person who wilfully and with intent to enable any other person to evade any tax or interest or penalty chargeable or imposable under the Income-tax Act, 1961, makes or causes to be made any entry or statement which is false and which the other person either knows to be false, or does not believe to be true, in any books of account or other document then such person shall be punished with rigorous imprisonment for a term not less than three months but which may extend to three years and with fine. It has been clarified in the Explanation to the said section that to establish charge under this section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is difficult to impose punishment of fine in lieu of imprisonment on a company, the prosecution against the company cannot be sustained. In order to plug the loopholes pointed out by the Honble Supreme Court in the case of ACIT v. Velliappa Textiles Ltd. (supra), a new sub-section (3) has been inserted in section 278B by the Finance (No. 2) Act, 2004, so as to provide that if an offence under the Act has been committed by a person being the company, and the punishment for such offence is imprisonment and fine, then, such company shall be punished with fine and any other person who was in-charge and was responsible for the conduct of business of the company, or any director, manager, secretary or other officer of the company shall be liable for punishment of imprisonment and fine, wherever so provided. (It may be relevant to mention here that the Honble Supreme Court in the case of Standard Chartered Bank v. Directorate of Enforcement and Other Appeals and a Writ petition [275 ITR 81, 5th May, 2005] has overruled its decision in the case of ACIT v. Velliappa Textiles [supra]. Section 35HA of the Wealth-tax Act has also been similarly amended. This amendment takes effect fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch person a notice requiring him to furnish such return within a period not exceeding sixty days from the date of service of such notice. Vide Notification S.O. No. 1316(E), dated 1-12-2004, a new section 114E relating to furnishing of Annual Information Return has been prescribed. The form and manner in which the annual information return shall be furnished has been prescribed in the said rule. Further, it has also been prescribed in the said rule that every person mentioned in column (2) of the Table below shall furnish an Annual Information Return in respect of transactions specified in the corresponding entry of column (3) of the said table. Table Sl. No. Class of person Nature and value of transaction (1) (2) (3) 1. A Banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act). Cash deposits aggregating to ten lakh rupees or more in a year in any savings account of a person maintained in that bank. 2. A Banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. [Sections 55, 59, 63] New provisions for levy of Securities Transaction Tax Chapter VII of the Finance (No. 2) Act, 2004 contains provisions relating to Securities Transaction Tax. It provides, inter alia, that the provisions of the Chapter shall come into force on such date as may be notified by the Central Government in the Official Gazette. Accordingly, the Central Government has notified the 1st day of October, 2004 as the date of commencement, vide notification S.O. No. 1058(E) dated 28th September, 2004. This Chapter provides that Securities Transaction Tax shall be charged in respect of the following transactions at the rates as under: (i) @ 0.075% on the value of transactions of delivery-based purchase of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange, to be paid by the buyer, (ii) @ 0.075% on the value of transactions of delivery-based sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange, to be paid by the seller, (iii) @ 0.015% on the value of transactions of non-delivery based sale of an equity share in a company or a unit of an eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been provided in the rules that the return of taxable securities transaction shall be furnished by the recognised stock exchange in Form No. STTS-1 and by the mutual fund in Form No. STTS-2. The format of the Form No. STTS-1 and Form No. STTS-2 has also been prescribed. The return of taxable securities transaction entered into during a financial year shall be furnished on or before 30th June of the financial year immediately following the financial year in relation to which taxable securities transactions are to be reported. The following persons shall be required to sign the return (i) in case of a corporate recognized stock exchange, the managing director or a director, (ii) in case of any other recognized stock exchange, the principal officer thereof, (iii) in case of a mutual fund, the trustee or such other person managing the affairs of the mutual fund as may be duly authorised by the trustee. It has been provided that in cases where the return of taxable securities transaction has not been filed in time by any assessee, the Assessing Officer may issue a notice to such assessee requiring him to furnish the return within thirty days of date of service of notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Income-tax Act. (i) A new clause (38) has been inserted in section 10 providing for exemption for income from the long term capital gains arising out of transfer of an equity share in company, or unit of an equity oriented fund, where such transfer takes place on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force and such transaction is chargeable to Securities Transaction Tax under the said Chapter. (ii) A new section 111A has been inserted so as to provide that short term capital gains arising out of transfer of an equity share in a company, or unit of an equity oriented fund, where such transfer takes place on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force and such transaction is chargeable to Securities Transaction Tax under the said Chapter, shall be charged at the rate of 10%. (iii) Section 115AD of the Income-tax Act, 1961, relates to tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer. Section 115AD has been amended so as to provide that income by way of short term capital gains referred to in the newly inserted section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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