DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME – CHANGES IN FINANCIAL BILL, 2016

[Mr. M. GOVINDARAJAN]

Chapter VI of the Income Tax Act, 1961 (‘Act’ for short) provides for deductions to be made in computing total income.  The Finance Bill, 2016 has brought many amendments for this Chapter which may be discussed in this article in detail.

Section 80 CCD

Section 80 CCD of the Act provides for deduction in respect of contribution to pension scheme of Central Government.  Section 80CCD (3) of the Act provides that where any amount standing to the credit of the assessee in his account referred to in sub-section (1) or sub-section (1B), in respect of which a deduction has been allowed under those subsections or sub-section (2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year,-

1. on account of closure or his opting out of the pension scheme referred to in sub-section (1) or sub-section (1B); or
2. as pension received from the annuity plan purchased or taken on such closure or opting out,

the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year.

Clause 36 of the Bill inserted the proviso to this section which provides that the amount received by the nominee on the death of the assessee, under the circumstances referred to in clause (a) shall not be deemed to be the income of the nominee.

Section 80EE

Section 80EE provides for the deduction in respect of interest on loan taken for residential house property.  Clause 37 of the Bill seeks tin substitute this section with effect from 01.04.2017.  The newly inserted Section 80EE (1) provides that in computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this Section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential property.  Section 80EE (2) provides that the deduction shall not exceed ₹ 50,000/- and shall be allowed in computing the total income of the individual for the assessment year beginning on 01.04.2016 and subsequent assessment years.  Section 80EE(3) provides that the said deduction shall be subject to the following:

• the loan has been sanctioned by the Financial institution during the period beginning on 01.04.2016 and ending on 31.03.2017;
• the amount of loan sanctioned for acquisition of the residential house property does not exceed ₹ 35 lakhs;
• the value of residential house property does not exceed ₹ 50 lakh;
• the assessee does not own any residential house property on the date of sanction of laon.

Section 80EE (4) provides that where a deduction under this section is allowed for any interest the same deduction shall not be allowed in respect of such interest under any other provision of this Act for the same or any other assessment year.

Section 80GG

Section 80GG of the Act provides deductions in respect of rents paid.  Section 80 GG provides that In computing the total income of an assessee, not being an assessee having any income falling within clause (13A) of section 10, there shall be deducted any expenditure incurred by him in excess of ten per cent of his total income towards payment of rent (by whatever name called) in respect of any furnished or unfurnished accommodation occupied by him for the purposes of his own residence, to the extent to which such excess expenditure does not exceed two thousand rupees per month or twenty-five per cent of his total income for the year, whichever is less, and subject to such other conditions or limitations as may be prescribed, having regard to the area or place in which such accommodation is situated and other relevant considerations.

Clause 38 of the Bill seeks the  substitute the words ‘five thousand rupees’ for the words ‘two thousand rupees’.  This amendment will be effective from 01.04.2017.

Section 80-IA

Section 80 IA of the Act provides for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure etc.,   Clause 39 of the Bill proposes to insert a proviso to Section 80-IA (4)(i) and before the Explanation.  The proviso to be inserted provides that nothing contained in this section shall apply to any enterprise which starts the development or operation and maintenance of the infrastructure on or after 01.04.2017.

Section 80-IAB

Section 80-IAB of the Act provides for deduction in respect of profits and gains by undertaking or enterprise engaged in development of Special Economic Zone.   Section 80-IAB(1) provides that where the gross total income of an assessee, being a Developer, includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone, notified on or after the 1st day of April, 2005 under the Special Economic Zones Act, 2005, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.

Clause 40 of the Bill seeks to insert a new proviso to Section 80-IAB (1) from 01.04.2017.   The new proviso provides that the provisions of this section shall not apply to the assessee, being a developer, where the development of Special Economic Zone beings on or after 01.04.2017.

Section 80-IAC

Clause 41 of the Bill seeks to insert a new Section 80-IAC after section 80-IAB with effect from 01.04.2017.  The newly inserted Section 80-IAC (1) provides that where the gross total income of an assessee, being an eligible start-up includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100% of the profits and gains derived from such business for three consecutive assessment years.  Sub –clause (2) provides that such deduction at the option of the assessee may be claimed by him for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.

The said deduction is subject to the following conditions:

• It is not formed by splitting up or the reconstruction of a business already in existence.   This condition shall not apply in respect of a startup which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to in Section 33B, in the circumstances and within the period specified in that section;
• It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Sub-clause (3) provides that this deduction shall not apply to any undertaking which executes the housing project as a works contract awarded by any person, including the Central Government or the State Government.  Sub-clause (4) provides that where the housing project is not completed within the period and in respect of which a deduction has been claimed and allowed under this section, the total amount of deduction so claimed and allowed in one or more previous years, shall be deemed to be the income of the assessee chargeable under the head ‘profits and gains of business or profession’ of the previous year in which the period of completion so expires.

Sub-clause (5) provides that where any amount of profits and gains derived from the business of developing and building housing projects under any scheme for the housing is claimed and allowed for any assessment year, deduction to the extent of such profit and gains shall not be allowed under any other provisions of this Act.

Section 80-IB

Clause 42 of the Bill seeks to amend Section 80-IB of the Act relating to deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.  Sub-section (9) provides deduction at the rate of 100% of the profits of an undertaking located in specified areas subject to fulfillment of certain conditions.   It is proposed to amend clauses (ii), (iv) and (v) of the said  sub-section so as to provide that such clauses of the said section shall not apply to any enterprise which commences the business activity on or after 01.04.2017.

Section 80-IBA

Clause 43 seeks to insert a new Section 80-IBA after Section 80-IB with effect from 01.04.2017.  Section 80-IBA(1) provides that where the gross total income of an assessee includes any profits and gains derived from the business of developing and building housing projects, there shall be allowed a deduction of an amount equal to 100% of the profits and gains derived from such business.  The said deductions shall be subject to the following conditions:

• The project is approved by the competent authority after 01.06.2016 but on before 31.03.2019 in accordance with such guidelines as may be prescribed;
• The project is completed within a period of 3 years from the date of approval by the competent authority.  Where the approval is obtained more than once the project shall be deemed to have been approved on the date on which the project was first approved by the competent authority.   The project shall be deemed to have been completed when a certificate of completion of project as a whole is obtained in writing from the competent authority;
• The built up area of the shops and other commercial establishments included in the housing project does not exceed 3% of the aggregate built up area;
• The project is on a plot of land measuring not less than 1000 square meters where such project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the area of 25 kilometers from the municipal limits of these cities or 2000 square meters within the jurisdiction of any other municipality or cantonment board;
• The residential units does not exceed 30 square meters where such project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the area of 25 kilometers from the municipal limits of these cities or 60 square meters where such project is located within the jurisdiction of any other municipality or cantonment board;
• Where a residential unit in the housing project is allotted to an individual, no other residential unit in the housing project shall be allotted to the individual or the spouse or the minor children of such individual;
• The project utilizes not less than 90% of the floor area ratio permissible in respect of the plot of land to be made by the Central Government or State Government or the local authority, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the area of 25 kilometers from the municipal limits of these cities or not less than 80% of such floor area ratio where the project is located in any  area other than the areas of Chennai, Delhi, Kolkata or Mumbai;
• The assessee maintains separate books of account in respect of housing project.

This shall not apply to any undertaking which executes the housing project as a works contract awarded by any person including Central Government or State Government.  If the housing project is not completed with the specified period the deduction so claimed and allowed shall be deemed to be the income of the assessee chargeable under the head ‘profits and gains of business or profession’ of the previous year in which the period for completion so expires.

Where any amount of profits and gains derived from the business of developing and building housing projects under any scheme for the housing is claimed and allowed under this section for any assessment year, deduction to the extent of such profit and gains shall not be allowed under any other provisions of this Act.

Section 80JJAA

Section 80JJAA of the Act provides for deduction in respect of employment of new workmen with effect from 01.04.2017.  Clause 44 of the Bill seeks to substitute a new section for this section.   The newly substituted Section 80JJAA(1) provides that where the gross total income of an assessee to whom section 44AB applies, includes any profit and gains derived from business, there shall, subject to the conditions specified in sub section (2) be allowed a deduction of an amount equal to 30% of additional employee cost incurred in the course of such business sin the previous year, for three assessment years including the assessment year relevant to the previous in which such employment is provided.  Section 80JJAA (2) provides that no deduction under Section 80JJAA (1) shall be allowed:

• If the business sis formed by splitting up, or the reconstruction, of an existing business.  This condition shall not apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival of the assessee of the business in the circumstances and within the period specified in Section 33B;
• If the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganization;
• Unless the assessee furnishes along with the return of income the report of the accountant giving such particulars in the report as may be prescribed. 

The deduction under this proposed provisions will be available in respect of cost incurred whose total emoluments are less than or equal to ₹ 25000/- per month.   No deduction shall be allowed in respect of cost incurred on those employees for whom the entire contribution is paid by the Government under the Employees’ Pension Scheme notified in accordance with the Employees’ Provident Funds and