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TMI BlogEXPLANATORY NOTES TO THE PROVISIONS OF THE FINANCE (No.2) ACT, 2014X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to a Manufacturing Company, 11.1 - 11.4. 35AD Deduction in respect of capital expenditure on specified business, 12.1 - 12.10. 37 Corporate Social Responsibility (CSR), 13.1 - 13.4. 40 Disallowance of expenditure for non- deduction of tax at source, 14.1 - 14.8. 43 Speculative transaction in respect of commodity derivatives, 15.1 - 15.3. 44AE Business of Plying, Hiring or Leasing Goods Carriages, 16.1 - 16.2. 45 Capital gains arising from transfer of an asset by way of compulsory acquisition, 17.1 -17.4. 47 Transfer of Government Security by one non-resident to another non-resident, 18.1 - 18.3. 48 Cost Inflation Index, 19.1 - 19.3. 54 Capital gains exemption in case of investment in a residential house property, 20.1 - 20.5. 54EC Capital gains exemption on investment in Specified Bonds, 21.1 - 21.4. 56 Taxability of advance for transfer of a capital asset, 22.1 - 22.6. 73 Losses in Speculation Business, 23.1 - 23.3. 80C Raising the limit of deduction under section 80C, 24.1- 24.4. 80CCD Extension of tax benefits under section 80CCD to private sector employees, 25.1 - 25.3. 80-IA Extension of the sunset date under section 80-IA for the power sector ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments, 54.1-54.3. 281B Provisional attachment under section 281B, 55.1-55.3. 285BA Obligation to furnish statement of Information, 56.1- 56.7. Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 13 Extension of income-tax exemption to Specified Undertaking of Unit Trust of India (SUUTI), 57.1 - 57.3. 1. Introduction 1.1 The Finance (No.2) Act, 2014 (hereafter referred to as 'the Act') as passed by the Parliament, received the assent of the President on the 6th day of August, 2014 and has been enacted as Act No. 25 of 2014. This circular explains the substance of the provisions of the Act relating to direct taxes. 2. Changes made by the Act 2.1 The Act has - (i) specified the rates of income-tax for the assessment year 2014-15 and the rates of income-tax on the basis of which tax has to be deducted at source and advance tax has to be paid during financial year 2014-15. (ii) amended sections 2,10, 10AA, 11, 12A, 12AA, 24, 32AC, 35AD, 37, 40, 43, 44AE, 45, 47, 48, 49, 51, 54, 54EC, 54F, 56, 73, 80C, 80CCD, 80CCE, 80-IA, 92B, 92C, 92CC, 111A, 112, 115A, 115BBC, 115BBD, 115JC, 115JEE, 115-O, 115R, 115TA, 116, 119, 133A, 139, 140, 145 153, 153B, 153C, 194A, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate of ten percent. of such income-tax in case of a person having a total income exceeding one crore rupees. However, marginal relief shall be available so the total amount payable as income-tax and surcharge on total income exceeding one crore rupees shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees. The Education Cess on income-tax shall continue to be levied at the rate of two per cent on the amount of tax computed inclusive of surcharge. In addition, the amount of tax computed shall be further increased by an additional surcharge called Secondary and Higher Education Cess on income-tax at the rate of one per cent of such income-tax inclusive of surcharge. No marginal relief shall be available in respect of Education Cess and Secondary and Higher Education Cess. For instance, if the income of an individual is ₹ 1,01,00,000 and income-tax computed is ₹ 28,60,000. Surcharge on the income-tax at the rate of 10% of such tax is ₹ 2,86,000. Thus the total income-tax inclusive of surcharge is ₹ 31,46,000 without providing marginal relief. On providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax in case of a firm having a total income exceeding one crore rupees. However, marginal relief shall be available so that the total amount payable as income-tax and surcharge on total income exceeding one crore rupees shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees. The Education Cess on income-tax shall continue to be levied at the rate of two per cent on the amount of tax computed inclusive of surcharge. In addition, the amount of tax computed shall be further increased by an additional surcharge called Secondary and Higher Education Cess on income-tax at the rate of one per cent of such income-tax inclusive of surcharge. No marginal relief shall be available in respect of Education Cess and Secondary and Higher Education Cess. 3.1.5 Local Authorities -In the case of every local authority, the rate of income-tax has been specified at thirty per cent in Paragraph D of Part I of the First Schedule to the Act. The amount of income-tax so computed shall be increased by a surcharge at the rate of ten percent. of such income-tax in case of a local authority having a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees, (ii) the total amount payable as income-tax and surcharge on total income exceeding ten crore rupees shall not exceed the total amount payable as income-tax and surcharge on a total income of ten crore rupees, by more than the amount of income that exceeds ten crore rupees. Education Cess on income-tax shall continue to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge in the case of every company. Also, such amount of tax and surcharge shall be further increased by an additional surcharge called Secondary and Higher Education Cess on income-tax at the rate of one per cent of the amount of tax computed, inclusive of surcharge. No marginal relief shall be available in respect of Education Cess and Secondary and Higher Education Cess. 3.2 Rates for deduction of income-tax at source from certain incomes during the financial year 2014-15. 3.2.1 In every case in which tax is to be deducted at the rates in force under the provisions of sections 193, 194, 194A, 194B, 194BB, 194D and 195 of the Income-tax Act, the rates for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted at the rate of one percent on ₹ 1,22,40,000 which works out to be ₹ 1,22,400. The total cess in this case will, therefore, amount to ₹ 3,67,200 (i.e., ₹ 2,44,800 + ₹ 1,22,400). 3.3 Rates for deduction of income-tax at source from "Salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 2014-15. 3.3.1 The rates for deducting income-tax at source from 'Salaries' and computing advance tax during the financial year 2014-15 have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 2014-15 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, assessment of bodies formed for short duration, etc. The rates are as follows:- 3.3.2 Individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person - Parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in Paragraph B of Part III of the First Schedule to the Act. The rates are as follows- Income chargeable to tax Rate Up to ₹ 10,000 10% ₹ 10,001- ₹ 20,000 20% Exceeding ₹ 20,000 30% The amount of income-tax so computed shall be increased by a surcharge at the rate of ten percent. of such income-tax in case of a co-operative society having a total income exceeding one crore rupees. However, marginal relief shall be available. Accordingly, the total amount payable as income-tax and surcharge on total income exceeding one crore rupees shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees. Education Cess on income-tax and Secondary and Higher Education Cess on income-tax shall be levied at the rate of two per cent and one per cent respectively of the amount of income-tax computed inclusive of surcharge. No marginal relief shall be available in respect of Education Cess and Secondary and Higher Education Cess. 3.3.4 Firms - In the case of every firm, the rate of income-tax of thirty per cent has been specified in Paragraph C of Part III of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceeding ten crore rupees. Surcharge at the rate of ten per cent shall be levied if the total income of the company exceeds ten crore rupees. In the case of a company other than a domestic company, royalties received from Government or an Indian concern under an approved agreement made after 31-3- 1961 but before 1-4-1976, shall be taxed at fifty per cent. Similarly, fees for technical services received by such company from Government or Indian concern under an approved agreement made after 29-2-1964 but before 1-4-1976, shall be taxed at fifty per cent. On the balance of the total income of such company, the tax rate shall be forty per cent. The tax computed shall be enhanced by a surcharge of two per cent where such company has total income exceeding one crore rupees but not exceeding ten crore rupees. Surcharge at the rate of five per cent shall be levied if the total income of the company other than domestic company exceeds ten crore rupees. However, marginal relief shall be allowed in the case of every company to ensure that (i) the total amount payable as income-tax and surcharge on total income exceeding one crore rupees shall not exceed the total amount payable as income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot;Foreign Portfolio investors (FPIs) have invested more than ₹ 8 lakh crore (about 130 billion US$) in India. One of their concerns is uncertainty in taxation on account of characterization of their income. Moreover, the fund managers of these foreign investors remain outside India under the apprehension that their presence in India may have adverse tax consequences. With a view to put an end ro this uncertainty and to encourage these fund managers to shift to India, I propose to provide that income arising to foreign portfolio investors from transaction in securities will be treated as capital gains." 4.2 Accordingly, clause (14) has been amended to provide that any security held by foreign institutional investor which has invested in such security in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 shall be a capital asset and not a current asset. Therefore, any income arising from transfer of such security by a foreign institutional investor would be in the nature of "capital gains". 4.3 Applicability: - This amendment takes effect from 1st April, 2015 and will, accordingly, apply in relation to the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or purposes of profit and which are wholly or substantially financed by the Government. 6.2 Absence of a definition of the phrase "substantially financed by the Government" had led to litigation and varying decisions of judicial authorities who had, for this purpose, relied upon various other provisions of the Income-tax Act and other Acts. Thus, there has been lack of certainty in this regard. 6.3 Therefore, clause (23C) of section 10 has been amended by inserting an Explanation below sub-clause (iiiac) of the said clause. It provides that if the Government grant to a university or other educational institution, hospital or other institution referred to in section 10(23C)(iiiab) or 10(23C)(iiiac) during any previous year exceeds a prescribed percentage of the total receipts (including any voluntary contributions), of such university or other educational institution, hospital or other institution, as the case may be, then such university or other educational institution, hospital or other institution shall be considered as being substantially financed by the Government for that previous year. Vide notification No. 79 /2014 dated 12.12.2014, Rule 2BBB has been inserted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding the interplay of the general provision of exemptions which are contained in section 10 of the Income-tax Act vis-a-vis the specific and special exemption regime provided in sections 11 to 13 of the said Act. As indicated above, the primary objective of providing exemption in case of charitable institution is that income derived from the property held under trust should be applied and utilised for the object or purpose for which the institution or trust has been established. In many cases it had been noted that trusts or institutions which are registered and have been availing benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. In such circumstances, when the income becomes taxable, a claim of exemption under general provisions of section 10 in respect of such income is preferred and tax on such income is avoided. This defeats the very objective and purpose of placing the conditions of application of income etc. in respect of income derived from property held under trust in the first place. 7.4.1 Sections 11, 12 and 13 of the Income-tax Act are special provisions governing institutions which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome for the purposes of its application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year. 7.6 Applicability:- These amendments take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years. 8. Applicability of the registration granted to a trust or institution to earlier years 8.1 The provisions of section 12A of the Income-tax Act, before amendment by the Act, provided that a trust or an institution can claim exemption under sections 11 and 12 only after registration under section 12AA of the said Act has been granted. In case of trusts or institutions which apply for registration after 1st June, 2007, the registration shall be effective only prospectively. 8.2 Non-application of registration for the period prior to the year of registration caused genuine hardship to charitable organisations. Due to absence of registration, tax liability is fastened even though they may otherwise be eligible for exemption and fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed to be exempt under other provisions of the Income-tax Act though they deliberately violated the provisions of section 13 of the said Act by investing in modes other that specified modes, etc. Similarly, there have been cases where the income is not properly applied for charitable purposes or is diverted for the benefit of certain interested persons. However, due to restrictive interpretation of the powers of the Commissioner under the said section 12AA, registration of such trusts or institutions continued to be in force and these institutions continued to enjoy the beneficial regime of exemption. 9.3 Whereas under section 10(23C) of the Income-tax Act, which also allows similar benefits of exemption to a fund, Institution, University etc, the power of withdrawal of approval is vested with the prescribed authority if such authority is satisfied that such entity has not applied income or made investment in accordance with provisions of said section 10(23C) or the activities of such entity are not genuine or are not being carried out in accordance with all or any of the conditions subject to which it was approved. 9.4 Therefore, in order to rationalise the provisions relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manufacturing Company 11.1 In order to encourage the companies engaged in the business of manufacture or production of an article or thing to invest substantial amount in acquisition and installation of new plant and machinery, Finance Act, 2013 inserted section 32AC in the Income-tax Act to provide that where an assessee, being a company, is engaged in the business of manufacture of an article or thing and invests a sum of more than ₹ 100 crore in new assets (plant and machinery) during the period beginning from 1st April, 2013 and ending on 31st March, 2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015- 16. 11.2.1 As growth of the manufacturing sector is crucial for employment generation and development of an economy, section 32AC of the Income-tax Act has been amended to extend the deduction available under the said section for investment made in plant and machinery up to 31.03.2017. 11.2.2 Further, in order to simplify the existing provisions of section 32AC of the Income-tax Act and also to make medium size investments in plant and machinery eligible for deduction, section 32AC has been amended to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified businesses" are eligible for availing the investment-linked deduction under section 35AD as enumerated in clause (c) of sub-section (8) of the said section:- (i) setting up and operating a cold chain facility; (ii) setting up and operating a warehousing facility for storage of agricultural produce; (iii) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network; (iv) building and operating, anywhere in India, a hotel of two-star or above category as classified by the Central Government; (v) building and operating, anywhere in India, a hospital with at least one hundred beds for patients; (vi) developing and building a housing project under a scheme for slum redevelopment or rehabilitation, framed by the Central Government or a State Government, as the case may be, and notified by the Board in accordance with the prescribed guidelines; (vii) developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head "Profits and gains of business or profession" of the previous year in which the asset is so used. Example: Deduction claimed under section 35AD on a capital asset ₹ 100 Depreciation eligible on such asset under section 32 ₹ 15 Profit chargeable to tax in accordance with the provisions of sub-section (7B) of section 35AD ₹ 85 12.7 It has also been provided that the provisions contained in sub-section (7B) of the said section would, however, not apply to a company which has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 within the time period specified in subsection (7A) of section 35AD. 12.8 The provisions of sub-section (3) of the aforesaid section, before amendment by the Act, provided that where any assessee has claimed a deduction under this section, no deduction shall be allowed under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidizing of around one-third of such expenses by the Government by way of tax expenditure. 13.3 The provisions of section 37(1) of the Income-tax Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Income-tax Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, said section 37 has been amended to clarify that for the purposes of sub-section (1) of section 37 any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under said section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Income-tax Act shall be allowed as deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cially in case of payment made to a resident in whose case the withholding of tax is only a mode of collection of tax and does not result into final discharge of tax liability. 14.4 Accordingly, section 40(a)(ia) of the Income-tax Act has been amended to provide that in case of non-deduction of tax at source or non-payment of tax so deducted on payments made to residents as specified in section 40(a)(ia) of the Income-tax Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed. 14.5 Further, the first proviso to section 40(a)(ia) of the Income-tax Act, prior to its amendment by the Act, provided that sum, which was disallowed due to non-deduction of tax at source or non-payment of tax so deducted, shall be allowed deduction in the previous year in which such tax deducted at source has been paid. As the disallowance under the amended section 40(a)(ia) of the Income-tax Act has been restricted to 30% of the amount of expenditure, the first proviso to the said section 40(a)(ia) has also been amended to provide that deduction of 30% of the amount of expenditure shall be allowed in the previous year in which the tax so deducted has been paid. In this rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al commodities. As a consequence to the levy of commodities transaction tax, clause (e) was inserted in the proviso to clause (5) of section 43 of the Income-tax Act to provide that eligible transaction in respect of trading in commodity derivatives carried out in a recognised association shall not be considered as speculative transaction. Vide Circular No. 3 dated 24-01-2014 explaining the provisions of the Finance Act, 2013, it was clarified that the eligible transaction shall include only those transactions in commodity derivatives which are liable to commodities transaction tax. 15.2 Accordingly, clause (e) of the proviso to the said clause (5) of section 43 of the Income-tax Act has been amended to provide that eligible transaction in respect of trading in commodity derivatives carried out in a recognised association and chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 shall not be considered to be a speculative transaction. 15.3 Applicability:- This amendment takes effect from 1st April, 2014 and will accordingly apply, in relation to the assessment year 2014-15 and subsequent assessment years. 16. Business of Plying, Hiring or Leasing G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the court is to be charged to tax, due to court orders. 17.3 Therefore, sub-section (5) of section 45 of the Income-tax Act, has been amended to provide that the amount of compensation received in pursuance of an interim order of the court, Tribunal or other authority shall be deemed to be the income chargeable under the head 'Capital gains' in the previous year in which the final order of such court, Tribunal or other authority is made. 17.4 Applicability:-This amendment takes effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years. 18. Transfer of Government Security by one non-resident to another non-resident 18.1 The provisions contained in section 47 of the Income-tax Act provide that certain transactions shall not be considered as transfer for the purpose of charging of capital gains. 18.2 With a view to facilitate listing and trading of Government securities outside India, clause (viib) has been inserted in section 47 of the Income-tax Act so as to provide that any transfer of a capital asset, being a Government Security carrying a periodic payment of interest, made outside India through an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore its amendment by the Act, inter-alia, provided that where capital gains arises from transfer of a long-term capital asset, not being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house, then, the portion of capital gains in the ratio of cost of new asset to the net consideration received on transfer is not chargeable to tax. 20.3 Certain courts had interpreted that the exemption is also available if investment is made in more than one residential house. The benefit was intended for investment in one residential house within India. Accordingly, sub-section (1) of section 54 of the Income-tax Act has been amended to provide that the rollover relief under the said section is available if the investment is made in one residential house situated in India. 20.4 Similarly, sub-section (1) of section 54F of the Income-tax Act has been amended to provide that the exemption is available if the investment is made in one residential house situated in India. 20.5 Applicability: - These amendments take effect from 1st April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t;Income from other sources". 22.3 A new clause (ix) has been inserted in said sub-section (2) of section 56 to provide for the taxability of any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset. Such sum shall be chargeable to income-tax under the head 'income from other sources' if such sum is forfeited and the negotiations do not result in transfer of such capital asset. 22.4 A consequential amendment in clause (24) of section (2) of the Income-tax Act has also been made to include such sum in the definition of the term 'income'. 22.5 The provisions of section 51 of the Income-tax Act, before amendment by the Act, provided that any advance retained or received shall be reduced from the cost of acquisition of the asset or the written down value or the fair market value of the asset. In order to avoid double taxation of the advance received and retained, said section 51 has been amended to provide that where any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset , has been included in the total income of the assessee for any previous year, in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24.2 The investments eligible for deduction, specified under sub-section (2) of section 80C, include life insurance premia, contributions to provident fund, schemes for deferred annuities etc. The assessee had the freedom to invest in any one or more of the eligible instruments within the overall ceiling of ₹ 1 lakh. 24.3 The limit of above investments eligible for deduction under section 80C was fixed vide Finance Act, 2005. In order to encourage household savings, the limit of deduction allowed under section 80C has been raised from the existing ₹ 1 lakh to ₹ 1.5 lakh. In view of the same, consequential amendment has been carried out in section 80CCE of the Act. The limit of employer's contribution to a notified pension scheme is, however, retained at ₹ 1 lakh u/s 80CCD. 24.4 Applicability:-These amendments take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years. 25. Extension of tax benefits under section 80CCD of the Income-tax Act to private sector employees 25.1 Under the provisions contained in sub-section (1) of section 80CCD of the Income-tax Act, before amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years. 27. Rationalisation of the definition of International Transaction 27.1 The provisions of section 92B of the Income-tax Act, before its amendment by the Act, defined 'International transaction' as a transaction in the nature of purchase, sale, lease, provision of services, etc. between two or more associated enterprises, either or both of whom are non-residents. 27.2 Sub-section (2) of the said section extended the scope of the definition of international transaction by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between the other person and the associated enterprise. The wordings of sub-section (2) of section 92B, prior to its amendment, had led to a doubt whether for the transaction to be treated as an international transaction, the unrelated person should als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the assessment year 2015-16 and subsequent assessment years. 29. Roll back provision in Advance Pricing Agreement Scheme 29.1 Section 92CC of the Income-tax Act provides for Advance Pricing Agreement (APA). It empowers the Central Board of Direct Taxes, with the approval of the Central Government, to enter into an APA with any person for determining the Arm's Length Price (ALP) or specifying the manner in which ALP is to be determined in relation to an international transaction which is to be entered into by that person. The agreement entered into is valid for a period, not exceeding five previous years, as may be specified in the agreement. Once the agreement is entered into, the ALP of the international transaction, which is subject matter of the APA, would be determined in accordance with such an APA. 29.2 In many countries the APA scheme provides for "roll back" mechanism for dealing with ALP issues relating to transactions entered into during the period prior to APA. The "roll back" provisions refer to the applicability of the methodology of determination of ALP, or the ALP, to be applied to the international transactions which had already been ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en, such excess shall be ignored for the purpose of computing the tax payable by the assessee. 30.3 Applicability: - This amendment takes effect from 1st April, 2015 and will accordingly apply, in relation to the assessment year 2015-16 and subsequent assessment years. 31. Anonymous donations under section 115BBC of the Income-tax Act 31.1 The provisions of section 115BBC of the Income-tax Act, before amendment by the Act, provided for levy of tax at the rate of 30 per cent. in case of certain assessees, being university, hospital, charitable organisation, etc. on the amount of aggregate anonymous donations exceeding five per cent of the total donations received by the assessee or one lakh rupees, whichever is higher. 31.2 Due to the mechanism of aggregation of tax provided in section 115BBC, while tax at the rate of 30 per cent. was levied on the amount of anonymous donations exceeding the threshold, the remaining tax was chargeable on total income after reducing the full amount of anonymous donations. The proper way of computation is to reduce the income by the amount which has been taxed at the rate of 30 per cent. 31.3 Therefore, section 115BBC has been amended to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 Under the Income-tax Act, the investment linked deductions have been provided in place of profit linked deductions. These profit linked deductions are subject to alternate minimum tax (AMT). 33.3 Accordingly, with a view to include the investment linked deduction claimed under section 35AD in computing adjusted total income for the purpose of calculating alternate minimum tax, section 115JC has been amended to provide that total income shall be increased by the deduction claimed under section 35AD for the purpose of computation of adjusted total income. The amount of depreciation allowable under section 32 shall, however, be reduced in computing the adjusted total income. Example: Total income ₹ 60 Deduction claimed under Chapter VI-A ₹ 40 Deduction claimed under section 35AD on a capital asset ₹ 100 Computation of adjusted total income for the purposes of AMT Total income ₹ 60 ADDITIONS (i) deduction under Chapter VI-A (on non-specified business) ₹ 40 ii) deduction under section 35AD(on specified business) ₹ 100 LESS: depreciation under section 32 ₹ 15 ₹ 85 Adjusted total income under section 115JC Rs.185 33. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income distributed by the mutual fund to its investors at the rates specified in the said section. 35.3 Prior to introduction of dividend distribution tax (DDT), the dividends were taxable in the hands of the shareholder. The gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%. However, after the introduction of the DDT, a lower rate of 15% was applicable but this rate was being applied on the amount paid as dividend after reduction of distribution tax by the company. 35.4 Therefore, the tax was computed by the company with reference to the net amount. Similar was the case when income was distributed by mutual funds. Due to difference in the base of the income distributed or dividend on which the distribution tax is calculated, the effective tax rate was lower than the rate provided in the respective sections. 35.5 In order to ensure that tax is levied on proper base, the amount of distributable income, and the dividends which are actually received by the unit holder of the mutual fund or shareholders of the domestic company, as the case may be, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the trust by acquiring controlling or other specific interest in an Indian company (SPV) from the sponsor. 36.3 Accordingly, the Income-tax Act has been amended to put in place a specific taxation regime which provides for the way the income in the hands of such trusts is to be taxed and the taxability of the income distributed by such business trusts in the hands of the unit holders of such trusts. Such regime has the following main features:- (i) The listed units of a business trust, when traded on a recognised stock exchange, would be liable to securities transaction tax (STT), and the long term capital gains shall be exempt and the short term capital gains shall be taxable at the rate of 15%. (ii) In case of capital gains arising to the sponsor at the time of exchange of shares in SPVs with units of the business trust, the taxation of gains shall be deferred and tax on gains shall be levied at the time of disposal of units by the sponsor. However, the preferential capital gains regime (consequential to levy of STT) available in respect of units of business trust, will not be available to the sponsor in respect of these units at the time of transfer. Further, for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors of Income-tax or Commissioners of Income-tax etc. 37.2 In view of the creation of new income-tax authorities, section 116 of the Income-tax Act has been amended so as to include the newly created income-tax authorities. Further, clauses (34A), (34B), (34C) and (34D) in section 2 of the Income-tax Act have been inserted so as to define the terms "Principal Chief Commissioner of Income-tax", "Principal Commissioner of Income-tax", "Principal Director General of Income-tax" and "Principal Director of Income-tax" to mean a person appointed to be an income-tax authority under section 117 of the Income-tax Act. Consequential amendments in clauses (15A), (16) and (21) of section 2 and in other sections of the Income-tax Act have also been made. 37.3 Applicability:- These amendments take effect retrospectively from 1st June, 2013. 38. Enabling CBDT to relax provisions relating to levy of fee under section 234E of the Income-tax Act: 38.1 As per the existing provisions of the Income-tax Act, a deductor/collector is required to furnish periodical tax deducted at source (TDS)/tax collected at source (TCS) statements (quarterly) containing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a view to align the time period and the authority for approval for retention of books of account or other documents beyond the specified time period, section 133A has been amended to provide that the income-tax authority shall not retain in his custody any such books of account or other documents for a period exceeding fifteen days (exclusive of holidays) without obtaining the approval of the Principal Chief Commissioner or Director General or Commissioner or Director therefor, as the case may be. 39.3 Section 133A has further been amended to provide that an income-tax authority may, for the purpose of verifying that tax has been deducted or collected at source in accordance with the provisions of Chapter XVII-B or Chapter XVII-BB, as the case may be, enter any office, or a place where business or profession is carried on, within the limits of the area assigned to him, or any such place in respect of which he is authorised for the purposes of the said section by such income-tax authority who is assigned the area within which such place is situated where books of account or documents are kept. The income-tax authority may for this purpose enter an office, or a place where business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. Apart from the above, certain other entities, which are not chargeable to income-tax in accordance with the provisions of section 10 of the Income-tax Act, are required to file their return of income if their total income without giving effect to the provisions of said section 10, exceeds the maximum amount which is not chargeable to income-tax. 41.2 Clause (23D) of section 10 of the Income-tax Act exempts the income of a Mutual Fund, clause (23DA) of section 10 of the said Act exempts the income of a securitisation trust from the activity of securitisation and clause (23FB) of section 10 of the Income-tax Act exempts the income of a venture capital company (VCC) or venture capital fund (VCF) from investment in a venture capital undertaking. Before amendments made by the Act, the Mutual Fund or securitisation trust or VCC or VCF were not obligated to furnish their return of income under section 139 of the Income-tax Act. Instead they were required to furnish a statement giving details of the nature of the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the value of any investment, any bullion, jewellery or fair market value of any property. On receipt of the report of the Valuation Officer, the Assessing Officer may after giving the assessee an opportunity of being heard take into account such report for the purposes of assessment or reassessment. 43.2 Section 142A of the Income-tax Act does not envisage rejection of books of account as a pre-condition for reference to the Valuation Officer for estimation of the value of any investment or property. Further, the said section 142A does not provide for any time limit for furnishing of the report by the Valuation Officer. 43.3 Accordingly, section 142A has been substituted so as to provide that the Assessing Officer may, for the purposes of assessment or reassessment, require the assistance of a Valuation Officer to estimate the value, including fair market value, of any asset, property or investment and submit the report to him. The Assessing Officer may make a reference to the Valuation Officer whether or not he is satisfied about the correctness or completeness of the accounts of the assessee. The Valuation Officer, shall, for the purpose of estimating the value of the asset, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able only to the computation of taxable income and a taxpayer should not be required to maintain books of account on the basis of AS notified under the Income-tax Act. The Final Report of the Committee was placed in public domain for inviting comments from stakeholders and general public. After examining the comments/suggestions, the Committee, inter alia, recommended that the provisions of section 145 of the Income-tax Act may be suitably amended to clarify that the notified AS are not meant for maintenance of books of account but are to be followed for computation of income. 44.3 In order to clarify that the standards notified under subsection (2) of section 145 of the Income-tax Act are to be followed for computation of income and disclosure of information by any class of assessees or for any class of income, section 145(2) has been amended to provide that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. 44.3.1 Section 145(2) has been further amended to provide that the Assessing Officer may make an assessment in the manner provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to in sub-section (1) of section 153A of the Income-tax Act . 45.3 Applicability:-This amendment takes effect from 1st October, 2014. 46. Tax deduction at source from non-exempt payments under life insurance policy 46.1 The provisions of section 10(10D) of the Income-tax Act provide that any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is exempt subject to fulfillment of conditions specified under said section 10(10D). Therefore, the sum received under a life insurance policy which does not fulfill the conditions specified under section 10(10D) are taxable under the provisions of the Income-tax Act. 46.2 In order to have a mechanism for reporting of transactions and collection of tax in respect of sum paid under life insurance policies which are not exempt under section 10(10D) of the Income-tax Act, a new section 194DA has been inserted in the Income-tax Act to provide for deduction of tax at the rate of 2 per cent on sum paid under a life ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson deducting tax ('the deductor') is required to file a quarterly statement of tax deduction at source (TDS) containing the prescribed details of deduction of tax made during the quarter by the prescribed due date. 48.2 Currently, a deductor is allowed to file correction statement for rectification/ updation of the information furnished in the original TDS statement as per the Centralised Processing of Statements of Tax Deducted at Source Scheme, 2013 notified vide Notification No.03/2013 dated 15th January, 2013. However, there does not exist any express provision in the Income-tax Act for enabling a deductor to file correction statement. 48.3 In order to bring clarity in the matter relating to filing of correction statement, Section 200 of the Income-tax Act has been amended to allow the deductor to file correction statements. 48.3.1 Consequently, provisions of section 200A of the Income-tax Act have also amended to enable the processing of correction statement filed. 48.3.2 The provisions of section 201(1) of the Income-tax Act provide for passing of an order deeming a payer as assessee in default if he does not deduct or does not pay or after deduction fails to pay the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under section 148 of the Income-tax Act, , section 201 has been amended and accordingly the time limit provided under section 201(3)(ii) of the Income-tax Act for passing an order under section 201(1) of the income-tax Act has been extended by one more year. 48.3.4 The provisions of section 271H of the Income-tax Act provide for levy of penalty for failure to furnish TDS/TCS statements in certain cases or furnishing of incorrect information in TDS/TCS statements. However, section 271H of the Income-tax Act did not specify the authority which would be competent to levy the penalty under the said section. Therefore, provisions of section 271H have been amended to provide that the penalty under section 271H of the Income-tax Act shall be levied by the Assessing officer. 48.4 Applicability:- These amendments take effect from 1st October, 2014. 49. Interest payable by the assessee under section 220 of the Income-tax Act 49.1 The provisions contained in sub-section (1) of section 220 of the Income-tax Act, provide that any amount specified as payable in a notice of demand under section 156 of the Income-tax Act shall be paid within thirty days of the service of notice at the place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50.1 Clause (b) of section 245A provides the definition of 'case' which means any proceeding for assessment under the Income-tax Act, of any person in respect of any assessment year or assessment years which may be pending before an assessing officer. However, the proviso to the said clause,before its amendment by the Act, provided that proceedings for assessment or reassessment under section 147 or a proceeding for making fresh assessment in pursuance of an order under section 254 or section 263 or section 264 of the Income-tax Act, setting aside or cancelling an assessment shall not be a proceeding for assessment for the purpose of this clause. 50.2 In order to enlarge the scope of Settlement Commission, the proviso to clause (b) of section 245A of the Income-tax Act has been omitted to enable proceedings under section 147 and proceedings for making fresh assessment in pursuance of an order under section 254 or section 263 or section 264 of the Income-tax Act, setting aside or cancelling an assessment also be eligible for settlement before the Settlement Commission. Similar amendment has also been made in section 22A of the Wealth -tax Act. 50.3 Applicability:- These amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson shall take from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft, if the amount of such loan or deposit or aggregate of such loans or deposits is twenty thousand rupees or more. Similarly, the provisions of section 269T of the Income-tax Act, before amendment made by the Act, inter-alia, provided that no loan or deposit shall be repaid otherwise than by an account payee cheque or account payee bank draft, if the amount of such loan or deposit together with interest or the aggregate amount of such loans or deposits together with interest, if any payable thereon, is twenty thousand rupees or more. 52.2 In the present times many banking transactions take place by way of internet banking facilities or by use of payment gateways. Accordingly, the provisions of the said sections 269SS and 269T have been amended to provide that acceptance or repayment of any loan or deposit by use of electronic clearing system through a bank account shall not be prohibited under the said sections if the other conditions regarding the quantum etc. are satisfied. 52.3 Applicability:- These amendments take effect from 1st April, 2015 and will, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments as required in any notice issued under sub-section (1) of section 142 of the Income-tax Act or wilfully fails to comply with a direction issued to him under sub-section (2A) of said section 142, he shall be punishable with rigorous imprisonment for a term which may extend to one year and with fine. 54.3 Applicability:- This amendment takes effect from 1st October, 2014. 55. Provisional attachment under section 281B of the Income-tax Act 55.1 The provisions of sub-section (1) section 281B of the Income-tax Act provide that during the pendency of any proceeding for assessment or reassessment the Assessing Officer may, in order to protect the interests of revenue, with the previous approval of the Chief Commissioner or Commissioner, attach provisionally any property belonging to the assessee in the manner provided in the Second Schedule. Sub-section (2) of section 281B of the Income-tax Act, before its amendment by the Act, provided that the provisional attachment shall cease to have effect after the expiry of six months. However, the Chief Commissioner or Commissioner may extend the period up to a total period of two years. 55.2 It has been observed that in certain cases t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aintained by the persons referred to in (a) above; and (c) the due diligence to be carried out by the persons referred to in (a) for the purpose of identification of any reportable account referred to in sub-section (1) of section 285BA. 56.5 Further, the provisions of section 271FA of the Income-tax Act, before amendment by the Act, provided for penalty for failure to furnish an annual information return. The said section 271FA has been amended to provide for penalty for failure to furnish statement of information or reportable account. 56.6 A new section 271FAA has been inserted in the Income-tax Act to provide that if a person referred to in clause (k) of sub-section (1) of section 285BA of the said Act, who is required to furnish a statement of financial transaction or reportable account, provides inaccurate information in the statement and where, (a) the inaccuracy is due to a failure to comply with the due diligence requirement prescribed under sub-section (7) of said section 285BA or is deliberate on the part of the person; or (b) the person knows of the inaccuracy at the time of furnishing the statement of financial transaction or reportable account, but does not inform t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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