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INTERMEDIATE (IPC) COURSE/ ACCOUNTING TECHNICIAN COURSE

SUPPLEMENTARY STUDY PAPER - 2014

TAXATION

[A discussion on amendments made by the Finance (No.2) Act, 2014, Budget Notifications and other important Circulars/ Notifications issued between 1st May, 2013 and 30th April, 2014]

(Relevant for students appearing in May, 2015 and November, 2015 examinations)

BOARD OF STUDIES

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of the Institute of Chartered Accountants of India. Permission of the Council of the Institute is essential for reproduction of any portion of this paper. Views expressed herein are not necessarily the views of the Institute.

The Institute of Chartered Accountants of India

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This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of the Institute of Chartered Accountants of India with a view to assist the students in their education. While due care has been taken in preparing this Supplementary Study Paper, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not responsible in any way for the correctness or otherwise of the amendments published herein. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher.

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A WORD ABOUT SUPPLEMENTARY

Taxation is amongst the extremely dynamic subjects of the chartered accountancy course. The level of knowledge prescribed at the Intermediate (IPC) Level for the subject is working knowledge. For attaining such a level of knowledge, the students not only have to be thorough with the basic provisions of the income-tax and indirect taxes, but also need to constantly update their knowledge of statutory developments. The Board of Studies has been instrumental in imparting theoretical education to the students of Chartered Accountancy Course. The distinctive characteristic of the course i.e., distance education, emphasizes the need for bridging the gap between the students and the Institute and for this purpose, Board of Studies provides a variety of educational inputs for the students. One of the important inputs of the Board is the Supplementary Study Paper on Taxation for the Intermediate (IPC) Course students. The Supplementary Study Paper is an annual publication and contains a discussion on the amendments made by the Annual Finance Acts and Notifications/Circulars in income-tax and indirect taxes. They are very important to the students for updating their knowledge regarding the latest statutory developments in the respective areas mentioned above. A lot of emphasis is being placed on these latest amendments in the Intermediate (IPC) examinations. The amendments made by the Finance (No.2) Act, 2014, Budget Notifications and other important Notifications/Circulars issued between 1st May, 2013 and 30th April, 2014 have been incorporated in this Supplementary Study Paper - 2014, which is relevant for students appearing in May, 2015 and November, 2015 examinations. The Supplementary Study Paper 2014 has been divided into chapters to facilitate co-relation with the Study Material. The chapter reference given in the Supplementary Study Paper corresponds to the parallel chapter number of the Study Material. The related sections, however, have been grouped together and explained in the same chapter in the Supplementary Study Paper to facilitate interlinking and reading of interconnected provisions. Illustrations have been given, wherever possible, to aid better understanding of the amendments. The amendments made by way of notifications/circulars issued after 30th April, 2014 and which are relevant for May, 2015 and November, 2015 examinations will be given in the Revision Test Paper (RTP) for May, 2015 and November, 2015 examinations, respectively. In case you need any further clarification/guidance with regard to this publication, please send your queries relating to income-tax at [email protected] and queries relating to indirect taxes at [email protected].

Happy Reading and Best Wishes for the forthcoming examinations!


PART I INCOME TAX


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INCOME TAX

AMENDMENTS AT A GLANCE FINANCE (No.2) ACT, 2014

S.No. Particulars Section I Income-tax A. Basic Concepts

1. Rates of income-tax B. Incomes which do not form part of total income

2. Registered trusts and institutions which are eligible for exemption under sections 11 to 13 not allowed to claim exemption under any of the clauses of section 10, other than exemption available under clauses (1) and (23C) of section 10

11(7) & 10(23C)

3. Disallowance of depreciation on commercial lines in respect of a capital asset, cost of acquisition of which has been claimed as application of income

11 & 10(23C)

4. Meaning of Substantially financed by the Government for the

purpose of exemption under sub-clauses (iiiab) and (iiiac) of section 10(23C)

10(23C)

5. Power of Principal Commissioner/Commissioner to cancel registration of trust or institution expanded

12AA

6. Taxability of anonymous donations exempt from applicability of maximum marginal rate of tax

115BBC

7. Registration granted to trust or institution to also be applicable to earlier years in specific cases

12A

C. Income from house property 8. Increase in deduction for interest on loan borrowed for

acquisition or construction of self-occupied house property 24(b)

D. Profits and gains of business or profession 9. Manufacturing companies investing more than ` 25 crore in new

plant and machinery in any previous year during the period from 1.4.2014 to 31.3.2017 entitled to investment allowance@15%

32AC

10. Expansion of scope of specified business eligible for investment linked deduction

35AD

11. Capital asset in respect of which deduction under section 35AD has been claimed to be used for specified business for a period of eight years

35AD


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12. Assessees claiming investment linked deduction under section 35AD not eligible to claim exemption under section 10AA

35AD

13. Disallowance of CSR expenditure 37 14. Remittance of TDS on payments to non-residents permitted to

be made on or before the due date of filing of return of income for avoiding disallowance of related expenditure under section 40(a)(i) during the previous year

40(a)(i)

15. Expansion of scope of section 40(a)(ia) to cover all expenditure/payments on which tax is deductible under Chapter XVII-B and restriction of quantum of disallowance thereunder to 30% of sum paid

40(a)(ia)

16. Speculative transaction to exclude eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax (CTT)

43(5)

17. Uniform amount of presumptive income from each goods carriage, whether heavy goods vehicle or other than heavy goods vehicle

44AE

E. Capital Gains 18. Income arising from transfer of security by a foreign portfolio

investor (FPI) characterized as capital gains 2(14)

19. Period of holding of units of debt oriented mutual fund and unlisted securities, to qualify as a long-term capital asset, increased from more than 12 months to more than 36 months

2(42A)

20. Benefit of concessional rate of tax@10% on long-term capital gains (without indexation) not to be available in respect of units of debt-oriented fund and unlisted securities

112

21. Compensation received in pursuance of an interim order deemed as income chargeable to tax in the year of final order

45(5)

22. Transfer of Government security outside India by a non-resident to another non-resident not a transfer for charge of capital gains tax

47

23. Rise in Consumer Price Index (Urban) to be the basis for notification of Cost Inflation Index

48

24. Exemption under section 54 and 54F to be available for investment in one residential house situated in India

54 & 54F

25. Maximum investment in bonds of NHAI and RECL, out of capital gains arising from transfer of one or more capital assets during a financial year, restricted to ` 50 lakhs, irrespective of whether the investment is made in the same financial year or in the subsequent financial year or both

54EC


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F. Income from other sources 26. Advance forfeited due to failure of negotiations for transfer of a

capital asset to be taxable as Income from other sources 56(2), 2(24) &

51 G. Set-off and Carry Forward of Losses

27. Transaction in respect of trading in shares on a recognised stock exchange by a company, the principal business of which is the business of trading in shares, not a speculative transaction

73

H. Deductions from Gross Total Income 28. Increase in the limit of deduction under section 80C 80C & 80CCE 29. Benefit under section 80CCD extended to private sector

employees without condition regarding date of joining being on or after 1st January, 2004

80CCD

30. Extension of sunset clause for tax holiday under section 80-IA for power-sector undertakings

80-IA(4)

I. Provisions concerning advance tax and tax deducted at source

31. Tax to be deducted on non-exempt payments made under life insurance policy

194DA

32. Enabling provision for deductor to file correction statement and for processing of correction statement so filed

200 & 200A

33. Revision of time limit for passing an order under section 201(1) 201(3) 34. Non-applicability of higher rate of TDS under section 206AA in

respect of tax deductible under section 194LC on payment of interest on long-term bonds to non-corporate non-residents and foreign companies

206AA(7)

J. Provisions for filing return of income 35. Return of income of mutual funds, securitization trusts, venture

capital companies/funds to be filed mandatorily 139(4C)

36. Verification of return of income 140


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1 BASIC CONCEPTS

AMENDMENTS BY THE FINANCE (No.2) ACT, 2014

RATES OF TAX Section 2 of the Finance (No.2) Act, 2014 read with Part I of the First Schedule to the Finance (No.2) Act, 2014, seeks to specify the rates at which income-tax is to be levied on income chargeable to tax for the assessment year 2014-15. Part II lays down the rate at which tax is to be deducted at source during the financial year 2014-15 from income subject to such deduction under the Income-tax Act, 1961; Part III lays down the rates for charging income-tax in certain cases, rates for deducting income-tax from income chargeable under the head "salaries" and the rates for computing advance tax for the financial year 2014-15 i.e., A.Y.2015-16. Part III of the First Schedule to the Finance (No.2) Act, 2014 will become Part I of the First Schedule to the Finance Act, 2015 and so on. Rates for deduction of tax at source for the F.Y.2014-15 from certain income Part II of the First Schedule to the Act specifies the rates at which income-tax is to be deducted at source under sections 193, 194, 194A, 194B, 194BB, 194D and 195 during the financial year 2014-15. These rates of tax deduction at source are the same as were applicable for the F.Y.2013-14. Surcharge would be levied on income-tax deducted at source in case of non-corporate non-residents and foreign companies. If the recipient is a non-corporate non-resident, surcharge@10% would be levied on such income-tax if the income or aggregate of income paid or likely to be paid and subject to deduction exceeds ` 1 crore. If the recipient is a foreign company, surcharge@ (i) 2% would be levied on such income-tax, where the income or aggregate of such incomes

paid or likely to be paid and subject to deduction exceeds ` 1 crore but does not exceed ` 10 crore; and

(ii) 5% would be levied on such income-tax, where the income or aggregate of such incomes paid or likely to be paid and subject to deduction exceeds ` 10 crore.

Surcharge would not be levied on deductions in all other cases. Also, education cess and secondary and higher education cess would not be added to tax deducted or collected at source in the case of a domestic company or a resident non-corporate assessee. However, education cess @2% and secondary and higher education cess @1% on income-tax plus surcharge, wherever applicable, would be added to tax deducted at source in cases of non-corporate non-residents and foreign companies.


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Rates for deduction of tax at source from "salaries", computation of "advance tax" and charging of income-tax in certain cases during the financial year 2014-15 Part III of the First Schedule to the Act specifies the rate at which income-tax is to be deducted at source from "salaries" and also the rate at which "advance tax" is to be computed and income-tax is to be calculated or charged in certain cases for the financial year 2014-15 i.e., A.Y. 2015-16. It may be noted that education cess @2% and secondary and higher education cess @1% would continue to apply on tax deducted at source in respect of salary payments. The general basic exemption limit for individuals (men and women)/HUFs/AOPs/BOIs and artificial juridical persons has been increased from ` 2,00,000 to ` 2,50,000. The basic exemption limit of ` 2,50,000 for senior citizens, being resident individuals of the age of 60 years or more but less than 80 years has also been increased to ` 3,00,000. Resident individuals of the age of 80 years or more at any time during the previous year would continue to be eligible for the higher basic exemption limit of ` 5,00,000. The tax slabs are shown hereunder - (i) (a) Individual/ HUF/ AOP / BOI and every artificial juridical person

Level of total income Rate of income-tax Where the total income does not exceed ` 2,50,000

Nil

Where the total income exceeds ` 2,50,000 but does not exceed ` 5,00,000

10% of the amount by which the total income exceeds ` 2,50,000


` 25,000 plus 20% of the amount by which the total income exceeds ` 5,00,000

Where the total income exceeds ` 10,00,000

` 1,25,000 plus 30% of the amount by which the total income exceeds ` 10,00,000

(b) For resident individuals of the age of 60 years or more but less than 80 years at any time during the previous year


Nil




` 20,000 plus 20% of the amount by which the total income exceeds ` 5,00,000


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(c) For resident individuals of the age of 80 years or more at any time during the previous year


Nil





(ii) Co-operative society There is no change in the rate structure as compared to A.Y.2014-15.

Level of total income Rate of income-tax (1) Where the total income does not

exceed ` 10,000 10% of the total income

(2) Where the total income exceeds ` 10,000 but does not exceed ` 20,000

` 1,000 plus 20% of the amount by which the total income exceeds ` 10,000

(3) Where the total income exceeds ` 20,000

` 3,000 plus 30% of the amount by which the total income exceeds ` 20,000

(iii) Firm/Limited Liability Partnership (LLP) The rate of tax for a firm for A.Y.2015-16 is the same as that for A.Y.2014-15 i.e., 30% on the whole of the total income of the firm. This rate would apply to an LLP also.

(iv) Local authority The rate of tax for a local authority for A.Y.2015-16 is the same as that for A.Y.2014-15 i.e. 30% on the whole of the total income of the local authority.

(v) Company The rates of tax for A.Y.2015-16 are the same as that for A.Y.2014-15.

(1) In the case of a domestic company

30% of the total income

(2) In the case of a company 40% of the total income


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other than a domestic company

However, specified royalties and fees for rendering technical services (FTS) received from Government or an Indian concern in pursuance of an approved agreement made by the company with the Government or Indian concern between 1.4.1961 and 31.3.1976 (in case of royalties) and between 1.3.1964 and 31.3.1976 (in case of FTS) would be chargeable to tax @50%.

Surcharge The rates of surcharge applicable for A.Y.2015-16 are as follows - (i) Individual/HUF/AOP/BOI/Artificial juridical person/Co-operative societies/Local

Authorities/Firms/LLPs Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 10% of income-tax computed in accordance with the provisions of para (i)/(ii)/(iii)/(iv) above or section 111A or section 112. Marginal relief is available in case of such persons having a total income exceeding ` 1 crore i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore.

(ii) Domestic company (a) In case of a domestic company, whose total income is > ` 1 crore but ` 10

crore Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable at the rate of 5% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore. Example Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is ` 1,01,00,000 and the total income does not include any income in the nature of capital gains. Answer The tax payable on total income of ` 1,01,00,000 of X Ltd. computed@ 31.5% (including surcharge@5%) is ` 31,81,500. However, the tax cannot exceed ` 31,00,000 (i.e., the tax of ` 30,00,000 payable on total income of ` 1 crore plus ` 1,00,000, being the amount of total income exceeding ` 1 crore). Therefore, the tax payable on ` 1,01,00,000 would be ` 31,00,000. The marginal relief is ` 81,500 (i.e., ` 31,81,500 - ` 31,00,000).


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(b) In case of a domestic company, whose total income is > `10 crore Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 10% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 10 crore should not be more than the amount of income exceeding ` 10 crore. Example Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is ` 10,01,00,000 and the total income does not include any income in the nature of capital gains. Answer The tax payable on total income of ` 10,01,00,000 of X Ltd. computed@ 33% (including surcharge@10%) is ` 3,30,33,000. However, the tax cannot exceed ` 3,16,00,000 [i.e., the tax of ` 3,15,00,000 (31.5% of ` 10 crore) payable on total income of ` 10 crore plus ` 1,00,000, being the amount of total income exceeding ` 10 crore]. Therefore, the tax payable on ` 10,01,00,000 would be ` 3,16,00,000. The marginal relief is ` 14,33,000 (i.e., ` 3,30,33,000 - ` 3,16,00,000).

(iii) Foreign company (a) In case of a foreign company, whose total income is > ` 1 crore but `10

crore Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,

surcharge is payable at the rate of 2% of income-tax computed in accordance with the provisions of paragraph (v)(2) above or section 111A or section 112. Marginal relief is available in case of such companies i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore.

(b) In case of a foreign company, whose total income is > `10 crore Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 5%

of income-tax computed in accordance with the provisions of para (v)(2) above or section 111A or section 112.

Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over `10 crore should not be more than the amount of income exceeding ` 10 crore.

Note Marginal relief would also be available to those companies which are subject to minimum alternate tax under section 115JB, in cases where the book profit (i.e. deemed total income) exceeds ` 1 crore and ` 10 crore, respectively.


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Education cess / Secondary and higher education cess on income-tax The amount of income-tax as increased by the union surcharge, if applicable, should further be increased by an Education cess on income-tax, calculated at the rate of 2% of such income-tax plus surcharge, wherever applicable. Further, Secondary and higher education cess on income-tax (SHEC) @1% of income-tax and surcharge, wherever applicable, is leviable to fulfill the commitment of the Government to provide and finance secondary and higher education. Education cess, including SHEC, is leviable in the case of all assessees i.e., individuals, HUFs, AOP/BOIs, artificial juridical persons, co-operative societies, firms, LLPs, local authorities and companies. No marginal relief would be available in respect of such cess.


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3 INCOMES WHICH DO NOT FORM PART OF

TOTAL INCOME

AMENDMENTS BY THE FINANCE (No.2) ACT, 2014

CHARITABLE TRUSTS AND INSTITUTIONS

S. No.

Particulars

(a) Registered trusts and institutions which are eligible for exemption under sections 11 to 13 not allowed to claim exemption under any of the clauses of section 10, other than exemption available under clauses (1) and (23C) of section 10 Sections : 11(7) & 10(23C) Effective from : A.Y.2015-16

Issue Need for amendment Amendment In the case of charitable trusts and institutions, the rationale of providing exemption is to ensure that income derived from the property held under trust is applied and utilised for the object or purpose for which the institution or trust has been established. However, many registered trusts or institutions claiming benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. Consequently, when the income becomes taxable, the trusts and institutions resort to claiming exemption under general

Once an institution or trust voluntarily opts for the special dispensation under sections 11, 12 and 13, it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions. Allowing such flexibility has adverse effects on the objective for which these sections were enacted.

Section 11 has been amended to provide that where a trust or an institution has been granted registration for purposes of availing exemption thereunder, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than exemption of agricultural income under section 10(1) and exemption available under section 10(23C)].


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provisions of section 10 and thus, avoid tax on such income. As a result, the very purpose of requirement of application of income etc. in respect of income derived from property under trust is defeated. This issue also arises in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. Section 10(23C) also has similar conditions of accumulation and application of income, investment of funds in prescribed modes etc.

Likewise, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 [except exemption under section 10(1) in respect of agricultural income].

(b) Disallowance of depreciation on commercial lines in respect of a capital asset, cost of acquisition of which has been claimed as application of income Sections: 11 & 10(23C) Effective from: A.Y.2015-16

Issue Need for amendment

Amendment

Both section 11 as well as section 10(23C) provide exemption in respect of income applied to acquire a capital asset for promoting the objects of the trust. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed due to which only the net amount after deduction of depreciation is required to be applied for charitable purposes. In effect, the amount of depreciation is not required to be applied for charitable purposes. Resultantly, trusts and institutions resort to claiming dual benefit of the same expenditure (namely, expenditure on acquisition of capital asset) under the existing law.

The allowance of dual benefit is not in accord with the true intent of law.

Sections 11 and 10(23C) have been amended to provide that income for the purposes of application shall be determined without allowing any deduction for depreciation or otherwise in respect of any asset, the cost of acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.


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(c) Meaning of Substantially financed by the Government for the purpose of exemption under sub-clauses (iiiab) and (iiiac) of section 10(23C) Section: 10(23C) Effective from: A.Y.2015-16


Amendment

Income of certain educational institutions, universities and hospitals which exist solely for educational purposes or solely for philanthropic purposes, and not for purposes of profit and which are wholly or substantially financed by the Government are exempt under section 10(23C).

There is no definition of the phrase substantially financed by the Government under the Income-tax Act, 1961, which has led to litigation resulting in varying decisions of judicial authorities, based upon the other provisions of the Income-tax Act, 1961 and other Acts on which they have placed reliance.

An Explanation has, therefore, been inserted after section 10(23C)(iiiac) to clarify that if the government grant to a university or other educational institution, hospital or other institution during the relevant previous year exceeds a percentage (to be prescribed) 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.

(d) Power of Principal Commissioner/Commissioner to cancel registration of trust or institution expanded Section: 12AA Effective from: 1.10.2014


Amendment

Under section 12AA, the registration once granted to a trust or institution shall remain in force until it is cancelled by the Commissioner. Section 12AA(3) provides the

On account of the restrictive interpretation of the powers of the Commissioner under section 12AA, registration

In order to rationalise the provisions relating to cancellation of registration of a trust, sub-section (4) has been inserted in section 12AA. It provides that where a trust or an institution has been granted registration, and


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following two circumstances in which the Commissioner can cancel the registration of the trust: (a) the activities of the trust

or institution are not genuine; or

(b) the activities are not being carried out in accordance with the objects of the trust or institution.

The Commissioner is empowered to cancel the registration only if either or both the above conditions are met, and not otherwise. The powers of Commissioner to cancel registration are, therefore, highly curtailed.

of such trusts or institutions continues to be in force and these institutions continue to enjoy the beneficial regime of exemption, even if they have not properly applied their income for charitable purposes or diverted such income for benefit of certain interested persons or invested their funds in prohibited modes.

subsequently it is noticed that its activities are being carried out in such a manner that, (i) its income does not enure for

the benefit of general public; (ii) it is for benefit of any

particular religious community or caste;

(iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or

(iv) its funds are invested in prohibited modes,

then, the Principal Commissioner or the Commissioner may cancel the registration of such trust or institution. However, if the trust or institution proves that there was a reasonable cause for the activities to be carried out in the above manner, the registration shall not be cancelled.

(e) Taxability of anonymous donations exempt from applicability of maximum marginal rate of tax Section : 115BBC Effective from: A.Y.2015-16


Amendment

Section 115BBC provides for levy of tax at 30% in case of certain assessees, being university, hospital, etc. on the amount of aggregate anonymous donations exceeding 5% of the total donations received by the assessee or ` 1 lakh, whichever is higher.

The correct method of computation is to reduce the income by the amount of anonymous donations which has actually been taxed at the rate of 30%.

Section 115BBC has been amended to provide that the income-tax payable shall be the aggregate of (i) the amount of income-tax

calculated @30% on the aggregate of anonymous donations received in excess of 5% of the total donations received by the assessee or


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On account of the mechanism of aggregation of tax provided in section 115BBC, while income-tax@30% is levied on the amount of anonymous donations exceeding the threshold, the remaining tax is chargeable on total income after reducing the entire amount of anonymous donations.

one lakh rupees, whichever is higher; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of the anonymous donations received in excess of 5% of the total donations received by the assessee or ` 1 lakh, as the case may be.

Example Income from property held under trust is ` 6 lakh. The voluntary contributions received by a trust is ` 20 lakh, which includes anonymous donations of ` 4 lakh and corpus donations of ` 5 lakh. The trust has applied ` 10 lakh to purchase a building on 1.8.2014 for meeting its objective. Compute the tax liability of the trust for A.Y.2015-16.

Answer Particulars ` `

Income from property held under trust1 6,00,000 Voluntary contributions 20,00,000 Less: Corpus donations (not taxable) 5,00,000 15,00,000 Less: Anonymous donations (taxable@30% under

section 115BBC) [` 4,00,000 ` 1,00,000]

3,00,000

12,00,000 18,00,000 Less: 15% of income eligible for retention/

accumulation without conditions2

2,70,000 15,30,000

1 Depreciation on building is not allowable since cost of acquisition of building has been claimed as application of income. It is assumed that depreciation on building has not been charged while computing income from property held under trust. 2 A view is taken that 15% of ` 1 lakh, representing the amount of anonymous donations exempt from applicability of 30% tax, is also eligible for retention/accumulation without conditions in line with other voluntary contributions. A contrary view may also be possible due to the language used in section 13(7), that such anonymous donations chargable to tax at normal rates are not eligible for retention/accumulation. If this view is taken, ` 2,55,000, being 15% of ` 17,00,000 has to be set apart (instead of ` 2,70,000, being 15% of ` 18,00,000).


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Less: Purchase of building for the purpose of the trust 10,00,000 Total Income (excluding anonymous donations taxable@30%) 5,30,000

The tax payable by the trust would be the aggregate of (i) ` 90,000, being income-tax calculated@30% on ` 3 lakh (i.e., ` 4 lakh ` 1 lakh); and (ii) ` 31,000, being income-tax calculated at normal rates on ` 5.30 lakh (i.e., ` 5,30,000). The total tax payable would be ` 1,24,630 (` 1,21,000 plus cess@3%)

(f) Registration granted to trust or institution to also be applicable to earlier years in specific cases Section: 12A Effective Date: 1.10.2014


Amendment

Under section 12A, a trust or an institution can claim exemption under sections 11 and 12 only after registration under section 12AA has been granted. Also, in case of trusts or institutions which apply for registration after 1st June, 2007, the registration shall be effective only prospectively. Non-application of registration for the period prior to the year of registration causes genuine hardship to charitable organisations.

On account of non-registration, tax liability gets attracted in those years even though they may otherwise be eligible for exemption due to compliance with other substantive conditions. The present provisions of the Act also do not permit condonation of delay in seeking registration.

In order to remove the genuine hardship and provide relief to the trusts, section 12A has been amended. Circumstance when exemption would be granted for an earlier assessment year: In case where a trust or institution has been granted registration under section 12AA, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration. Condition for grant of such exemption: The objects and activities of such trust or institution in the relevant earlier assessment year should be the same as those on the basis of which such registration has been granted.


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Reassessment proceedings not to be initated for earlier years due to reason of non-registration: No action for reopening of an assessment under section 147 shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration under section 12AA for the said assessment year. Non-availability of above benefits to a trust or institution in certain cases: The above benefits would, however, not be available in case of any trust or institution which at any time had applied for registration and the same was denied or a registration granted to it was cancelled at any time under section 12AA.

SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Notification of foreign company for claiming exemption under section 10(48) [Notification No. 64/2013, dated 19.08.2013] Income received by a foreign company in India in Indian currency from sale of crude oil, any other goods or rendering of services, as may be notified by the Central Government in this behalf, to any person in India is exempt under section 10(48). For this purpose, the foreign company, as well as the arrangement or agreement, should be notified by the Central Government having regard to the national interest. The foreign company should not be engaged in any other activity in India, except receipt of income under such arrangement or agreement. Accordingly, vide this notification, the Central Government, having regard to the national interest, has notified for the purposes of the said clause, the National Iranian Oil Company, as the foreign company and the Memorandum of Understanding entered between the Government of India in the Ministry of Petroleum and Natural Gas and the Central Bank of Iran on the 20th January, 2013, as the agreement subject to the condition that the said foreign company shall not engage in any activity in India , other than the receipt of income under the agreement aforesaid. The Notification is deemed to be effective from 20th January, 2013.


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2. Taxability of Awards received by a Sportsman [Circular No. 2/2014 dated 20.01.2014]

The CBDT had issued Circular No.447 on 22nd January, 1986 clarifying that awards received by a sportsman, who is not a professional, will not be liable to tax in his hands as the award will be in the nature of a gift and/or personal testimonial. This Circular was applicable when the gift was not taxable in the hands of the recipient. Thereafter, in the year 2005, there was a fundamental change in the manner of treatment of gift through insertion of sub-clauses (xiii), (xiv) and (xv) of section 2(24). Corresponding amendments were also made in section 56(2) by insertion of clauses (v), (vi) and (vii), thereby making an amount of money or immovable property received without consideration taxable subject to provisions of these clauses. Consequently, the CBDT has, through this Circular, clarified that Circular No.447 had become inapplicable w.e.f. 1-4-2005, since the statutory provisions have overridden the same.

It may however be noted that, in terms of provisions of section 10(17A), Central Government approves awards instituted by Central Government, State Government or other bodies as also the purposes for rewards instituted by Central Government or State Government from time to time. Tax exemption can be sought by eligible persons in respect of awards or rewards covered by such approvals.

3. Clarification regarding disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year [Circular No. 5/2014, dated 11.2.2014] The Finance Act, 2001 had introduced section 14A, with retrospective effect from 1st April, 1962, to provide that no deduction shall be allowed in respect of expenditure incurred relating to income which does not form part of total income. A controversy has arisen as to whether disallowance can be made by invoking section 14A even in those cases where no income has been earned by an assessee, which has been claimed as exempt during the financial year. The CBDT has, through this Circular, clarified that the legislative intent is to allow only that expenditure which is relatable to earning of income. Therefore, it follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether such income has been earned during the financial year or not. The above position is clarified by the usage of the term includible in the heading to section 14A [Expenditure incurred in relation to income not includible in total income] and Rule 8D [Method for determining amount of expenditure in relation to income not includible in total income], which indicates that it is not necessary that exempt income should necessarily be included in a particular years income, for triggering disallowance. Also, the terminology used in section 14A is income under the Act and not income of the year, which again indicates that it is not material that the assessee should have earned such income during the financial year under consideration.


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In effect, section 14A read along with Rule 8D provides for disallowance of expenditure even where the taxpayer has not earned any exempt income in a particular year.

4. Taxability of partners share, where the income of the firm is exempt under Chapter III / deductible under Chapter VI-A [Circular No. 8/2014 dated 31.03.2014] Section 10(2A) provides that a partners share in the total income of a firm which is separately assessed as such shall not be included in computing the total income of the partner. In effect, a partners share of profits in such firm is exempt from tax in his hands. Sub-section (2A) was inserted in section 10 by the Finance Act, 1992 with effect from 1.4.1993 consequent to change in the scheme of taxation of partnership firms. Since A.Y.1993-94, a firm is assessed as such and is liable to pay tax on its total income. A partner is, therefore, not liable to tax once again on his share in the said total income. An issue has arisen as to the amount which would be exempt in the hands of the partners of a partnership firm, in cases where the firm has claimed exemption/deduction under Chapter III or Chapter VI-A. The CBDT has clarified that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Therefore, the entire profit credited to the partners accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes Nil in the hands of the firm on account of any exemption or deduction available under the provisions of the Act.


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4 UNIT 2: INCOME FROM HOUSE PROPERTY

AMENDMENT BY THE FINANCE (No.2) ACT, 2014

Increase in deduction for interest on loan borrowed for acquisition or construction of self-occupied house property [Section 24(b)] Effective from: A.Y.2015-16 (i) Section 24 provides for two deductions from Net Annual Value of house property, namely,

statutory deduction at 30% of NAV under clause (a) thereof and interest payable on capital borrowed for acquisition, construction, repair, renewal or reconstruction of house property under clause (b) thereof.

(ii) In case of self-occupied house property, the annual value is Nil and the only deduction available is in respect of interest on borrowed capital. Consequently, the interest deduction would represent the loss from such house property during the relevant previous year.

(iii) The second proviso to clause (b) of section 24 provides that such interest deduction shall be restricted to ` 1,50,000 in case of capital borrowed for acquisition and construction of self-occupied property.

(iv) Taking into consideration the appreciation in the value of house property and the increased cost of finance, the second proviso to clause (b) of section 24 has been amended to increase the maximum amount of deduction on account of interest on capital borrowed for acquisition and construction of self-occupied property to ` 2,00,000.

Example Mr. Rajesh purchased a residential house property for self-occupation at a cost of ` 30 lakh on 1.6.2013, in respect of which he took a housing loan of ` 24 lakh from Punjab National Bank@11% p.a. on the same date. Compute the eligible deduction in respect of interest on housing loan for A.Y.2014-15 and A.Y.2015-16 under the provisions of the Income-tax Act, 1961, assuming that the entire loan was outstanding as on 31.3.2015 and he does not own any other house property. Answer

Particulars ` For A.Y.2014-15 (i) Deduction under section 24(b) ` 2,20,000

[` 24,00,000 11% 10/12]


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Restricted to 1,50,000 (ii) Deduction under section 80EE (` 2,20,000 `1,50,000) 70,000 For A.Y.2015-16 (i) Deduction under section 24(b) ` 2,64,000 [` 24,00,000 11%] Restricted to 2,00,000 (ii) Deduction under section 80EE

(` 1,00,000 ` 70,000, allowed as deduction in P.Y.2013-14) 30,000

Note - In this case, Mr. Rajesh is entitled to deduction under section 80EE, in addition to deduction under section 24(b) since (1) the loan is sanctioned by Bank of India, being a financial institution, during the period

between 1.4.2013 and 31.3.2014; (2) the loan amount sanctioned is less than ` 25 lakh; (3) the value of the house property is less than ` 40 lakh; (4) he does not own any other residential house property.


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4 UNIT 3: PROFITS AND GAINS OF BUSINESS

OR PROFESSION

AMENDMENTS BY THE FINANCE (No.2) ACT, 2014 (a) Manufacturing companies investing more than ` 25 crore in new plant and

machinery in any previous year during the period from 1.4.2014 to 31.3.2017 entitled to investment allowance@15% [Section 32AC] Existing Provisions [Effective from A.Y.2014-15]: (i) Section 32AC was inserted by the Finance Act, 2013 w.e.f. A.Y.2014-15 to provide

a tax incentive by way of investment allowance to encourage huge investment in plant or machinery.

(ii) As per section 32AC(1), a manufacturing company is entitled to deduction@15% of aggregate investment in new plant and machinery if it is - (a) engaged in the business of manufacture of an article or thing; and (b) invests a sum of more than ` 100 crore in new plant or machinery during the

period beginning from 1st April, 2013 and ending on 31st March, 2015. (iii) For A.Y. 2014-15, a manufacturing company was entitled to deduction of 15% of

aggregate amount of actual cost of new assets acquired and installed during the financial year 2013-14, if the aggregate cost of such assets exceed ` 100 crore.

For A.Y.2015-16, a deduction of 15% of aggregate amount of actual cost of new assets, acquired and installed during the period beginning on 1st April, 2013 and ending on 31st March, 2015, as reduced by the deduction allowed, if any, for A.Y. 2014-15.

(iv) The investment allowance@15% under this section is in addition to the depreciation and additional depreciation allowable under section 32(1). Further, the investment allowance would not be reduced to arrive at the written down value of plant and machinery.

Additional benefit [As per amendment by Finance (No.2) Act, 2014 with effect from A.Y.2015-16] (v) This year, considering that growth of the manufacturing sector is critical for

employment generation and development of an economy, the deduction available


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under section 32AC has been extended for investment made in plant and machinery up to 31.03.2017.

Further, in order to rationalize the existing provisions of section 32AC and also to make medium size investments in plant and machinery eligible for deduction, new sub-section (1A) has been inserted to provide that deduction under section 32AC would be available if the company, on or after 1st April, 2014, invests more than ` 25 crore in plant and machinery in a previous year.

(vi) Companies which are eligible to claim deduction under the existing combined threshold limit of more than ` 100 crore for investment made in previous years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under section 32AC(1), even if its investment in the year 2014-15 is below the new threshold limit of investment of ` 25 crore.

(vii) New plant or machinery does not include (1) any plant or machinery which before its installation by the assessee was used

either within or outside India by any other person; (2) any plant or machinery installed in any office premises or any residential

accommodation, including accommodation in the nature of a guest house; (3) any office appliances including computers or computer software; (4) any vehicle; (5) ship or aircraft; or (6) any plant or machinery, the whole of the actual cost of which is allowed as

deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head Profits and gains of business or profession of any previous year.

Example Compute the admissible deduction under section 32AC for A.Y.2014-15 & A.Y.2015-16 in each of the following cases -

Manufacturing company Investment in new plant and machinery (` in crores) P.Y.2013-14 P.Y.2014-15

A Ltd. 80 22 B Ltd. 70 25 C Ltd. 60 30 D Ltd. 75 25 E Ltd. 105 15 F Ltd. 70 30 G Ltd. 70 40


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Answer

Manufacturing Company

Investment in new plant and machinery

Deduction under section 32AC (` in crores)

Under sub-

section P.Y.2013-14 P.Y.2014-15 A.Y.2014-15 A.Y.2015-16 A Ltd. 80 22 Nil 15.30 (1) B Ltd. 70 25 Nil Nil - C Ltd. 60 30 Nil 4.5 (1A) D Ltd. 75 25 Nil Nil - E Ltd. 105 15 15.75 2.25 (1) F Ltd. 70 30 Nil 4.5 (1A) G Ltd. 70 40 Nil 16.5 (1)

(b) Expansion of scope of specified business eligible for investment linked deduction under section 35AD Effective from: A.Y.2015-16 (i) Under section 35AD, a deduction in respect of the whole of any expenditure of capital

nature (other than expenditure on land, goodwill and financial instrument) incurred wholly and exclusively, for the purposes of the specified business during the previous year in which such expenditure is incurred is allowed.

(ii) At present, the following 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:- (1) setting up and operating a cold chain facility; (2) setting up and operating a warehousing facility for storage of agricultural

produce; (3) 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;

(4) building and operating, anywhere in India, a hotel of two-star or above category as classified by the Central Government;

(5) building and operating, anywhere in India, a hospital with at least one hundred beds for patients;

(6) 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;

(7) developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the


24

case may be, and notified by the Board in accordance with the prescribed guidelines;

(8) production of fertilizer in India; (9) setting up and operating an inland container depot or a container freight station

notified or approved under the Customs Act, 1962; (10) bee-keeping and production of honey and beeswax; and (11) setting up and operating a warehousing facility for storage of sugar;

(iii) The Finance (No.2) Act, 2014 has included two new businesses as specified business for the purposes of the investment-linked deduction under section 35AD so as to promote investment in these sectors. They are:- (a) laying and operating a slurry pipeline for the transportation of iron ore; (b) setting up and operating a semiconductor wafer fabrication

manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines.

(iv) The date of commencement of operations for availing investment linked deduction in respect of the two new specified businesses shall be on or after 1st April, 2014.

(c) Capital asset in respect of which deduction under section 35AD has been claimed to be used for specified business for a period of eight years Effective from: A.Y.2015-16 (i) Under section 35AD, the time period for which capital assets on which deduction

has been claimed and allowed, have to be used for the specified business, has not been specifically provided.

(ii) In order to ensure that the capital asset on which investment linked deduction has been claimed is used for the purposes of the specified business, sub-section (7A) has been inserted in section 35AD.

(iii) Section 35AD(7A) provides that any asset in respect of which a deduction is claimed and allowed under section 35AD shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.

(iv) If any asset on which a deduction under section 35AD has been claimed and allowed, is demolished, destroyed, discarded or transferred, the sum received or receivable for the same is chargeable to tax under clause (vii) of section 28. This does not take into account a case where asset on which deduction under section 35AD has been claimed is used for any purpose other than the specified business by way of a mode other than that specified above.

(v) Accordingly, sub-section (7B) has been inserted to provide that if such asset is used for any purpose other than the specified business, the total amount of deduction so


25

claimed and allowed 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.

(vi) However, the deeming provision under sub-section (7B) shall not be applicable to a company which has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, during the intervening period of eight years specified in sub-section (7A).

Example ABC Ltd. is a company having two units Unit A carries on specified business of setting up and operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of operating a warehousing facility for storage of edible oil. Unit A commenced operations on 1.4.2013 and it claimed deduction of ` 100 lacs incurred on purchase of two buildings for ` 50 lacs each (for operating a warehousing facility for storage of sugar) under section 35AD for A.Y.2014-15. However, in February, 2015, Unit A transferred one of its buildings to Unit B. Examine the tax implications of such transfer in the hands of ABC Ltd. Answer Since the capital asset, in respect of which deduction of ` 50 lacs was claimed under section 35AD, has been transferred by Unit A carrying on specified business to Unit B carrying on non-specified business in the P.Y.2014-15, the deeming provision under section 35AD(7B) is attracted during the A.Y.2015-16.

Particulars ` Deduction allowed under section 35AD for A.Y.2014-15 50,00,000 Less: Depreciation allowable u/s 32 for A.Y.2014-15 [10% of ` 50 lacs] 5,00,000 Deemed income under section 35AD(7B) 45,00,000

(d) Assessees claiming investment linked deduction under section 35AD not eligible to claim exemption under section 10AA Effective from: A.Y.2015-16 (i) As per section 35AD(3), where any assessee has claimed investment linked

deduction under section 35AD, it would not be eligible to claim profit linked deduction under Chapter VIA for the same or any other assessment year.

(ii) Section 10AA also provides for profit linked deduction in respect of units set-up in Special Economic Zones. However, so far, there was no bar restricting an assessee claiming investment linked deduction under section 35AD from claiming profit linked deduction under section 10AA.


26

(iii) Section 35AD has, therefore, been amended to provide that where investment linked deduction has been availed by an assessee on account of capital expenditure incurred for the purposes of specified business in any assessment year, no deduction under section 10AA shall be available to the assessee in the same or any other assessment year in respect of such specified business.

(e) Disallowance of CSR expenditure under section 37 Effective from: A.Y.2015-16 (i) Section 135 of the Companies Act, 2013 read with Schedule VII thereto and

Companies (Corporate Social Responsibility) Rules, 2014 are the special provisions under the new company law regime imposing mandatory CSR obligations.

Mandatory CSR obligations under section 135: Every company, listed or unlisted, private or public, having a - - net worth of ` 500 crores or more [Net worth criterion]; or - turnover of ` 1,000 crores or more [Turnover criterion]; or - a net profit of ` 5 crores or more [Net Profit criterion] during any financial year to constitute a CSR Committee of the Board; CSR Committee has to formulate CSR policy and the same has to be

approved by the Board; Such company to undertake CSR activities as per the CSR Policy; Such company to spend in every financial year, at least 2% of its average net

profits made in the immediately three preceding financial years, on the CSR activities specified in Schedule VII to the Companies Act, 2013.

(ii) As per Rule 4 of the Companies (CSR) Rules, 2014, the following expenditure are not considered as CSR activity for the purpose of section 135: Expenditure on activities undertaken in pursuance of normal course of

business; Expenditure on CSR activities undertaken outside India; Expenditure which is exclusively for the benefit of the employees of the company

or their families; and Contributions to political parties.

(iii) Under section 37(1) of the Income-tax Act, 1961, only expenditure, not covered under sections 30 to 36, and incurred wholly and exclusively for the purposes of the business is allowed as a deduction while computing taxable business income. The issue under consideration is whether CSR expenditure is allowable as deduction under section 37.

(iv) It has now been clarified that for the purposes of section 37(1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013


27

shall not be deemed to have been incurred for the purpose of business and hence, shall not be allowed as deduction under section 37.

(v) The rationale behind the disallowance is that CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business.

(vi) However, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that CSR expenditure, which is of the nature described in sections 30 to 36, shall be allowed as deduction under those sections subject to fulfillment of conditions, if any, specified therein.

(f) Remittance of TDS on payments to non-residents permitted to be made on or before the due date of filing of return of income for avoiding disallowance of related expenditure under section 40(a)(i) during the previous year Effective from: A.Y.2015-16 (i) Under section 40(a)(i), interest, royalty, fee for technical services or other sum

chargeable under the Act which is payable to a non-resident is not allowable as deduction while computing business income if tax on such payments has not been deducted during the previous year, or after deduction, was not paid within the time prescribed under section 200(1).

(ii) The parallel provision for disallowance of business expenditure in respect of certain payments made to the residents under 40(a)(ia) permits remittance of tax deducted at source on or before the due date for filing of return of income under section 139(1), for claim of deduction during the relevant previous year in which the sum is payable.

(iii) In order to provide similar extended time limit for remittance of tax deducted from payments made to non-residents, section 40(a)(i) has been amended to provide that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1).

(iv) Further, if tax has been deducted in the subsequent year in respect of such remittances to non-residents, or if tax has been deducted in the previous year but paid after the due date for filing return of income under section 139(1), deduction in respect of such remittances would be allowed in previous year in which such tax has been actually paid.

(g) Expansion of scope of section 40(a)(ia) to cover all expenditure/payments on which tax is deductible under Chapter XVII-B and restriction of quantum of disallowance thereunder to 30% of sum paid Effective from: A.Y.2015-16 (i) Under section 40(a)(ia), disallowance is attracted while computing business income

in respect of certain payments such as interest, commission, brokerage, rent, royalty, fee for technical services and contract payments made to a resident, if tax


28

on such payments was not deducted, or after deduction, was not paid within the due date of filing return specified under section 139(1).

(ii) Chapter XVII-B mandates deduction of tax from certain other payments such as salary, directors fee not specifically covered under section 40(a)(ia). In respect of these payments, non-deduction or non-remittance of tax within the prescribed time does not attract disallowance under section 40(a)(ia) while computing income under the head Profits and gains from business or profession.

(iii) In order to rectify this inconsistency and improve TDS compliance in respect of all payments to residents, disallowance under section 40(a)(ia) has been extended to all expenditure on which tax is deductible under Chapter XVII-B.

(iv) However, at the same time, in order to alleviate the undue hardship caused to assessees on account of disallowance of 100% of expenditure under section 40(a)(ia), an amendment has been made to restrict the disallowance for non-deduction of tax or non-remittance of TDS on payments made to residents on or before the specified due date to 30% of the sum payable to a resident.

Example

XYZ Ltd. made the following payments in the month of March 2015 to residents without deduction of tax at source. What would be the tax consequence for A.Y.2015-16, assuming that the resident payees in all the cases mentioned below, have not paid the tax, if any, which was required to be deducted by XYZ Ltd.?

Particulars Amount in ` (1) Salary to its employees 15,00,000

(2) Non-compete fees to Mr. X 70,000

(3) Directors remuneration 25,000

Would your answer change if XYZ Ltd. has deducted tax on the above in April, 2015 from subsequent payments made to these persons and remitted the same in July, 2015?

Answer

Non-deduction of tax at source on any payment on which tax is deductible as per the provisions of Chapter XVII-B would attract disallowance under section 40(a)(ia). Therefore, non-deduction of tax at source on salary payment on which tax is deductible under section 192 and non-compete fees and directors remuneration on which tax is deductible under section 194J, would attract disallowance@30% of sum paid under section 40(a)(ia). Therefore, the amount to be disallowed under section 40(a)(ia) while computing business income for A.Y.2015-16 is as follows


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Particulars

Amount paid in `

Disallowance u/s 40(a)(ia) @

30% of sum paid (1) Salary

[tax is deductible under section 192] 15,00,000 4,50,000

(2) Non-compete fees to Mr. X [tax is deductible under section 194J]

70,000 21,000

(3) Directors remuneration [tax is deductible under section 194J without any threshold limit]

25,000 7,500

Disallowance under section 40(a)(ia) 4,78,500

If the tax is deducted and paid in the next year i.e., P.Y.2015-16, the amount of ` 4,78,500 would be allowed as deduction while computing the business income of A.Y.2016-17.

(h) Speculative transaction to exclude eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax (CTT) [Section 43(5)] Effective from: A.Y.2014-15 (i) The Finance Act, 2013 had introduced a new tax called Commodities Transaction Tax

(CTT) to be levied on taxable commodities transactions entered into in a recognised association, vide Chapter VII of the Finance Act, 2013.

(ii) For this purpose, a taxable commodities transaction was defined to mean a transaction of sale of commodity derivatives in respect of commodities, other than agricultural commodities, traded in recognised associations.

(iii) Section 43(5) defines a speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

(iv) The proviso to section 43(5) specifies the contracts and transactions which shall not be deemed to be a speculative transaction.

(v) Consequent to introduction of CTT, the Finance Act, 2013 had inserted clause (e) in the proviso to section 43(5) to exclude an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association from the definition of speculative transaction.

(vi) Thereafter, CBDT issued Circular No. 3 dated 24-01-2014 explaining the provisions of the Finance Act, 2013, which clarified that the eligible transaction shall include only those transactions in commodity derivatives which are liable to commodities transaction tax.

(vii) Accordingly, clause (e) of the proviso to section 43(5) has been amended to provide that an eligible transaction in respect of trading in commodity derivatives, carried


30

out in a recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 shall not be deemed as a speculative transaction.

(i) Uniform amount of presumptive income from each goods carriage, whether heavy goods carriage or other than heavy goods carriage [Section 44AE]

Effective from: A.Y.2015-16 (i) Section 44AE provides for a presumptive taxation scheme in the case of an assessee

engaged in the business of plying, hiring or leasing goods carriages and not owning more than ten goods carriages at any time during the previous year.

(ii) Upto A.Y.2014-15, the amount of presumptive income (per month or part of a month during which the goods carriage was owned by the taxpayer) was as follows:

Heavy Goods Vehicle (HGV) ` 5,000 Other than HGV ` 4,500

(iii) The Finance Act, 2014 has amended this provision due to the following two reasons - (1) The last revision was made 5 years back by the Finance (No.2) Act, 2009 and

there has been an erosion in the real values of the amount of specified presumptive income due to inflation over the years; and

(2) To simplify the presumptive taxation scheme by providing for a uniform amount of presumptive income per month (or part of a month) for all types of goods carriage without any distinction between HGV and vehicle other than HGV.

(iv) Therefore, with effect from A.Y.2015-16, a uniform amount of ` 7,500 per month (or part of a month) would be deemed as the income from each goods carriage, whether HGV or other than HGV, under section 44AE. However, the assessee can claim a higher amount as actually earned from the vehicle(s) as income from the vehicle(s).

Example Mr. X commenced the business of operating goods vehicles on 1.4.2014. He purchased the following vehicles during the P.Y.2014-15. Compute his income under section 44AE for A.Y.2015-16.

Type of Vehicle Number Date of purchase

(1) Light Goods Vehicles 2 10.4.2014 1 15.3.2015 (2) Medium Goods Vehicles 3 16.7.2014 1 2.1.2015 (3) Heavy Goods Vehicles 2 29.8.2014 1 23.2.2015


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Would your answer change if the two light goods vehicles purchased in April, 2014 were put to use only in July, 2014?

Answer Since Mr. X does not own more than 10 vehicles at any time during the previous year 2014-15, he is eligible to opt for presumptive taxation scheme under section 44AE. ` 7,500 per month or part of month for which each goods carriage is owned by him would be deemed as his profits and gains from such goods carriage.

(1) (2) (3) (4) Number of Vehicles

Date of purchase

No. of months for which vehicle is

owned

No. of months No. of vehicles

[(1) (3)] 2 10.4.2014 12 24 1 15.3.2015 1 1 3 16.7.2014 9 27 1 2.1.2015 3 3 2 29.8.2014 8 16 1 23.2.2015 2 2

10 Total 73

Therefore, presumptive income of Mr. X under section 44AE for A.Y.2015-16 is ` 5,47,500, being 73 ` 7,500. The answer would remain the same even if the two vehicles purchased in April, 2014 were put to use only in July, 2014, since the presumptive income of ` 7,500 per month has to be calculated per month or part of the month for which the vehicle is owned by Mr. X.

SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Approval of Agricultural Extension Project under section 35CCC: Conditions and Guidelines [Notification No. 38/2013 dated 30.05.2013 (as amended by Notification No. 18/2014 dated 21.03.2014)] In order to incentivize the business entities to provide better and effective agriculture extensive services, section 35CCC was inserted to provide weighted deduction of a sum equal to 150% of expenditure incurred by an assessee on agricultural extension project in accordance with the prescribed guidelines. Accordingly, the CBDT in exercise of the powers conferred by section 295 read with section 35CCC(1) of the Income tax Act, 1961, vide Notification No. 38/2013 dated 30.05.2013, prescribed rule 6AAD and 6AAE that contains the guidelines and conditions, for approval of the agricultural extension project. Rule 6AAD has been substituted and Rule 6AAE has been amended by this notification.


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(a) Conditions to be fulfilled for approval of agricultural extension project under section 35CCC [Rule 6AAD]: The agricultural extension project shall be considered for notification if it fulfils all of the following conditions, namely: (i) the project shall be undertaken by an assessee for training, education and

guidance of farmers; (ii) the project shall have prior approval of the Ministry of Agriculture, Government

of India; and (iii) an expenditure (not being expenditure in the nature of cost of any land or

building) exceeding the amount of twenty-five lakh rupees is expected to be incurred for the project.

An assessee shall make an application in Form 3C-O to the Member (IT), CBDT for notification of such project under section 35CCC.

(b) Conditions to be fulfilled for claiming weighted deduction [Rule 6AAE]: (i) The assessee undertaking agricultural extension project shall maintain

separate books of account of such agricultural extension project and get such books of account audited by an Accountant.

(ii) The audit report shall include the comments of the auditor on the true and fair view of the books of account maintained for agricultural extension project, the genuineness of the activities of the agricultural extension project and fulfillment of the conditions specified in the relevant provisions of the Act or the rules.

(iii) The assessee shall not accept an amount exceeding the amount as approved in the notification from the beneficiary under the eligible agricultural extension project for training, education, guidance or any material distributed for the purposes of such training, education or guidance.

(iv) The assessee shall not get any direct or indirect benefit from the notified agricultural extension project except the deduction of the eligible expenditure in accordance with the provisions of section 35CCC of the Act and prescribed rules.

(v) All expenses (not being expenditure in the nature of cost of any land or building), as reduced by the amount received from beneficiary, if any, incurred wholly and exclusively for undertaking an eligible agricultural extension project shall be eligible for deduction under section 35CCC. However, expenditure incurred on the agricultural extension project which is reimbursed or reimbursable to the assessee by any person, whether directly or indirectly, shall not be eligible for deduction under section 35CCC.

(vi) The assessee shall, on or before the due date of furnishing the return of income under section 139(1), furnish the following to the Commissioner of Income-tax or the Director of Income-tax, as the case may be, namely:


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(a) the audited statement of accounts of the agricultural extension projects for the previous year along with the audit report and amount of deduction claimed under section 35CCC(1).

(b) a note on the agricultural extension project undertaken by it during the previous year and the programme of agricultural extension project to be undertaken during the current year and the financial allocation for such programme; and

(c) a certificate from the Ministry of Agriculture, Government of India, regarding the genuineness of the agricultural extension project undertaken by the assessee during the previous year.

2. Approval of skill development project under section 35CCD: Conditions and Guidelines [Notification No. 54/2013, dated 15.07.2013] In order to encourage companies to invest on skill development projects, section 35CCD was inserted, to provide for weighted deduction of a sum equal to 150% of the expenditure (not being expenditure in the nature of cost of any land or building) incurred on skill development project notified by the CBDT, in accordance with the prescribed guidelines. Accordingly, the CBDT has, in exercise of the powers conferred by section 295 read with section 35CCD(1) of the Income-tax Act, 1961, laid down the guidelines and conditions for approval of a skill development project under section 35CCD.

S. No.

Particulars

(1) Guidelines for approval of Skill Development Project under section 35CCD: A skill development project shall be considered for notification if it is undertaken by an eligible company and the project is undertaken in separate facilities in a training institute [Rule 6AAF(1)]

(i)

"Eligible company" means a company, which is - engaged in the business of manufacture or production of any article

or thing specified in the Eleventh Schedule; not being beer, wine and other alcoholic spirits and tobacco & tobacco preparations such as cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff or

engaged in providing the following services S. No. Particulars

1. Accounting services 2. Architect services 3. Automobile repair or maintenance


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4. Banking, insurance and financial services including ATM installation, maintenance and operations or banking correspondents or insurance agents

5. Beauty and cosmetology, including hair styling or manicurists or pedicurists

6. Cable operators or Direct To Home (DTH) services 7. Cargo Handling and stevedoring services 8. Construction including painting or woodwork or plumbing or

flooring or electrical wiring or installation or maintenance of lifts 9. Courier services

10. Design services including fashion or gems and jewellery or apparel or industrial designing

11. Event management 12. Facilities management, housekeeping, cleaning services 13. Fire and safety services 14. Food processing or preservation services, including post

harvesting and post farm gate skills 15. Health and Wellness services including spa or nutritionists or

weight management or health instructors or yoga or gym trainers

16. Home decor services, landscaping 17. Hospital and Healthcare services, such as Lab technicians,

nursing and other paramedical staff 18. Hospitality, including culinary skills or catering services 19. Logistics and Transportation by any mode, including by air,

sea, road, rail or pipelines, and related services such as driving or operation of heavy machinery equipment, forwarding agents, packers and movers

20. Market research services 21. Media or film or advertising 22. Mining and extraction of mineral resources, including

hydrocarbons 23. Packaging and Warehousing, including both ambient

temperature storage and cold storage, operation of Internal Container Depots and Container Freight Stations

24. Port and maritime services such as dredging, piloting, tug boat operations, shipbuilding, ship scrapping, bunkering

25. Power Sector Services, including those required for erection or installation or maintenance of equipment or towers, etc. in generation, transmission or distribution sector projects


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26. Private Security, including guards, supervisors, installation and maintenance of security equipment etc.

27. Refrigeration and air-conditioning 28. Repair and maintenance services, including Installation and

servicing of household goods or white goods 29. Retail marketing, including shop floor assistants or

merchandisers 30. Telecom services, including erection and maintenance of

towers 31. Travel and tourism, including guides or ticketing or sales or

cab drives

(ii)

Training Institute means a training institute set up by the Central or State Government or a local authority or a training institute affiliated to National Council for Vocational Training or State Council for Vocational Training. A skill development project in respect of existing employees of the company shall not be eligible for notification under section 35CCD(1), where the training of such employees commences after six months of their recruitment [Rule 6AAG(3)].

(2) Application for approval of project [Rule 6AAF(2)]: Such company, before undertaking any skill development project, shall : - make an application for notification of such project under section 35CCD(1),

in duplicate, in Form No. 3CQ, to the National Skill Development Agency(NSDA); and

- also send a copy of the application in Form No. 3CQ to the Commissioner of Income tax or the Director of the Income tax as the case may be, having jurisdiction over the case, accompanied by the acknowledgement receipt as evidence of having furnished the application form in duplicate to the NSDA.

(3) Conditions laid down under Rule 6AAG: (i) The Company which undertakes a skill development project shall maintain

separate books of account of the skill development project and get such books of account audited by an Accountant.

(ii) All expenses (not being expenditure in the nature of cost of any land or building), incurred wholly and exclusively for undertaking a notified skill development project shall be eligible for deduction under section 35CCD. However, the expenditure incurred on the skill development project which is reimbursed or reimbursable to the company by any person, whether directly or indirectly, shall not be eligible for deduction under section 35CCD.

(iii) The company shall, on or before the due date of furnishing the return of income under section 139(1), furnish the audited statement of accounts of the


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3. Disallowance of any sum paid to a resident at any time during the previous year without deduction of tax under section 40(a)(ia) [Circular No.10/2013, dated 16.12.2013] Section 40(a)(ia) provides for disallowance of 30% of the sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in section 139(1). There have been conflicting interpretations by judicial authorities regarding the applicability of provisions of section 40(a)(ia), with regard to the amount not deductible in computing the income chargeable under the head Profits and gains of business or profession. Some court rulings have held that the provisions of disallowance under section 40(a)(ia) apply only to the amount which remained payable at the end of the relevant financial year and would not be invoked to disallow the amount which had actually been paid during the previous year without deduction of tax at source. Departmental View: The CBDTs view is that the provisions of section 40(a)(ia) would cover not only the amounts which are payable as on 31st March of a previous year but also amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a)(ia), the term "payable" would include "amounts which are paid during the previous year". The Circular has further clarified that where any High Court decides an issue contrary to the above Departmental View, the Departmental View shall not be operative in the area falling in the jurisdiction of the relevant High Court.

4. Clarification regarding treatment of expenditure incurred for development of roads/highways in Build-Operate-Transfer (BOT) agreements under the Income-tax Act, 1961 [Circular No. 09/2014, dated 23.04.2014]

The CBDT has, vide this Circular, clarified the tax treatment of expenditure incurred on development and construction of infrastructural facilities like roads/highways on Build-Operate-Transfer (BOT) basis with right to collect toll - whether the same is entitled to depreciation under section 32(1)(ii) or can be amortized by treating it as an allowable business expenditure under the relevant provisions of the Income- tax Act, 1961.

Generally, the BOT basis projects are entered into between the developer and the government or the notified authority, on the following terms: (i) In such projects, the developer, in terms of concessionaire agreement with

Government or its agencies, is required to construct, develop and maintain the infrastructural facility of roads/highways which, inter alia, includes laying of road, bridges, highways, approach roads, culverts, public amenities etc. at its own cost and its utilization thereof for a specified period.

skill development project for the previous year along with the audit report and amount of deduction claimed under section 35CCD(1) to the Commissioner of Income-tax or the Director of Income-tax, as the case may be.


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(ii) The possession of land is handed over to the assessee (i.e., the developer) by the Government/ notified authority for the purpose of construction of the project without any actual transfer of ownership. The assessee, therefore, has only a right to develop and maintain such asset. It also enjoys the benefits arising from the use of asset through collection of toll for a specified period, without having actual ownership over such asset. Therefore, the rights in the land remain vested with the Government/notified agencies.

(iii) Since the assessee does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred, it cannot be treated as an owner of the property, either wholly or partly, for purposes of allowability of depreciation under section 32(1)(ii). Thus, claim of depreciation on tollways is not allowable due to non-fulfillment of ownership criteria in such cases.

(iv) Where the assessee incurs expenditure on a project for development of roads/highways, it is entitled to recover cost incurred towards development of such facility (comprising of construction cost and other pre-operative expenses) during construction period. Further, expenditure incurred by the assessee on such BOT projects brings to it an enduring benefit in the form of right to collect the toll during the period of agreement.

The Supreme Court, in Madras Industrial Investment Corporation Ltd. vs. CIT 225 ITR 802, allowed the spreading over of liability over a number of years on the ground that there was continuing benefit to the company over a period. Therefore, analogously, expenditure incurred on an infrastructure project for development of roads/highways under BOT agreement may be treated as having been made/incurred for the purposes of business or profession of the assessee and same shall be allowed to be spread during the tenure of concessionaire agreement. In view of the above, the CBDT, in exercise of the powers conferred under section 119, clarifies that the cost of construction on development of infrastructure facility, being roads/highways under BOT projects, may be amortized and claimed as allowable business expenditure under the Act in the following manner: (i) The amortization allowable may be computed at the rate which ensures that the

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