TMI BlogMemorandum Part-I (Income-tax)X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010-11 from interest (including interest on securities), winnings from lotteries or crossword puzzles, winnings from horse races, card games and other categories of income liable to deduction or collection of tax at source under the Income-tax Act; rates for computation of "advance tax", deduction of income-tax from, or payment of tax on, 'Salaries' and charging of income-tax on current incomes in certain cases for the financial year 2010-11. 3. Subject to certain exceptions, which have been indicated while dealing with the relevant provisions, changes in the provisions of the tax laws are ordinarily proposed to be prospective in their operation. 4. The substance of the main provisions of the Bill relating to direct taxes is explained in the following paragraphs. INCOME-TAX Rates of Income-tax I. Rates of income-tax in respect of income liable to tax for the assessment year 2010-11 In respect of income of all categories of assessees liable to tax for the assessment year 2010-11, the rates of income-tax have been specified in Part I of the First Schedule to the Bill. These are the same as those laid down in Part III of the First Schedule to the Finance (No.2) Act, 2009, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creased by a surcharge at the rate of two and one-half per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees. No surcharge will be levied on deductions in other cases. (2) Education Cess— "Education Cess on income-tax" and "Secondary and Higher Education Cess on income-tax" shall continue to be levied at the rate of two per cent. and one per cent. respectively, of income tax including surcharge wherever applicable, in the cases of persons not resident in India including companies other than domestic company. III. Rates for deduction of income-tax at source from "Salaries", computation of "advance tax" and charging of incometax in special cases during the financial year 2010-11 The rates for deduction of income-tax at source from "Salaries" during the financial year 2010-11 and also for computation of "advance tax" payable during the said year in the case of all categories of assessees have been specified in Part III of the First Schedule to the Bill. These rates are also applicable for charging income-tax during the financial year 2010-11 on current incomes in cases where ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2010-11. No surcharge will be levied. C. Firms In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Bill. This rate will continue to be the same as that specified for assessment year 2010-11. No surcharge shall be levied. D. Local authorities The rate of income-tax in the case of every local authority is specified in Paragraph D of Part III of the First Schedule to the Bill. This rate will continue to be the same as that specified for the assessment year 2010-11. No surcharge will be levied. E. Companies The rates of income-tax in the case of companies are specified in Paragraph E of Part III of the First Schedule to the Bill. These rates are the same as those specified for the assessment year 2010-11. The existing surcharge of ten per cent. on a domestic company is proposed to be reduced to seven and one-half per cent. In case of companies other than domestic companies, the surcharge shall be levied at the same rate and subject to the same conditions as were applicable for the assessment year 2010-11. However, the total amount payable as income-tax and surcharge on total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sub-section (1) for income by way of interest, royalty or fees for technical services respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein. The intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India. This was the settled position of law till 2007. However, the Hon'ble Supreme Court, in the case of Ishikawajima-Harima Heavy Industries Ltd., Vs DIT (2007)[288 ITR 408], held that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Act, 2009, section 10AA(7) of the Income-tax Act, 1961 was amended and the words "by the undertaking" were substituted for "by the assessee" with effect from assessment year 2010-11 and subsequent assessment years. This was done as the existing formula was perceived to be discriminatory in so far as those assessees are concerned who have multiple units in both the SEZ and the domestic tariff area (DTA) vis-à-vis those assessees who were having units in only the SEZ. With a view to removing the anomaly, the provisions of sub-section (7) of section 10AA of the Income-tax Act were amended. In order to make the amendment effective for earlier years, it is proposed, by inserting a proviso to sub-section (7), to provide that the provision of sub-section (7), as amended by Finance (No. 2) Act 2009, will apply to the assessment year 2006-07 and subsequent assessment years. [Clause 6] Cancellation of registration obtained under section 12A Section 12AA provides the procedure relating to registration of a trust or institution engaged in charitable activities. Section 12AA(3) currently provides that if the activities of the trust or institution are found to be non-genuine or its activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the assessment year 2011-12 and subsequent years. [Clause 9] Weighted deduction on payments made to associations engaged in research in social science or statistical research and exemption in respect of the income of such associations Section 35 of the Income-tax Act provides for deduction in respect of expenditure on research and development. The existing provisions of section 35(1)(ii) provide for a weighted deduction from business income to the extent of 125 per cent of any sum paid to an approved and notified scientific research association or to a university, college or other institution to be utilized for scientific research. Section 35(1)(iii) provides similar deduction if the sum is paid to an approved and notified university, college or other institution to be used to carry on research in social science or statistical research. Section 80GGA allows deductions for donations made to such association, universities, etc. Under section 10(21), exemption is granted in respect of the income of a scientific research association which is approved and notified under section 35(1)(ii). The university, college or other institutions which are approved either under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk. It is now proposed to include the business of building and operating a new hotel of two-star or above category, anywhere in India, which starts functioning after 1.4.2010 within the purview of "specified business". It is also proposed to substitute sub-section (3) of section 35AD so as to provide that where a deduction under this section is claimed and allowed in respect of the specified business for any assessment year, no deduction shall be allowed under the provisions of Chapter VI-A under the heading "C.-Deductions in respect of certain incomes" in relation to such specified business for the same or any other assessment year. A similar amendment is proposed in section 80A. These amendments are proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. One of the conditions for availing the benefit under section 35AD in the case of 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, is that the specified business 'has made not less than one-third of its total pipeline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross receipts for the purpose of audit of accounts and for presumptive taxation A. Under the existing provisions of section 44AB, every person carrying on business is required to get his accounts audited if the total sales, turnover or gross receipts in business exceed forty lakh rupees in the previous year. Similarly, a person carrying on a profession is required to get his accounts audited if the gross receipts in profession exceed ten lakh rupees in the previous year. In order to reduce compliance burden of small businesses and professionals, it is proposed to increase the aforesaid threshold limit from forty lakh rupees to sixty lakh rupees in the case of persons carrying on business and from ten lakh rupees to fifteen lakh rupees in the case of persons carrying on profession. B. In view of the amendment proposed above, it is also proposed to increase the maximum penalty, leviable under section 271B for failure to get accounts audited under section 44AB or to furnish a report of such audit, from one lakh rupees to one lakh fifty thousand rupees. C. It is also proposed that for the purpose of presumptive taxation under section 44AD, the threshold limit of total turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for technical services, it is proposed to amend the proviso to section 44BB so as to exclude the applicability of section 44BB to the income which is covered under section 44DA. Similarly, section 44DA is also proposed to be amended to provide that provisions of section 44BB shall not apply to the income covered under section 44DA. These amendments are proposed to take effect from 1st April 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. [Clauses 16, 17] Conversion of a private company or an unlisted public company into a limited liability partnership (LLP) The Finance (No. 2) Act, 2009 provided for the taxation of LLPs in the Income-tax Act on the same lines as applicable to partnership firms. Section 56 and section 57 of the Limited Liability Partnership Act, 2008 allow conversion of a private company or an unlisted public company (hereafter referred as company) into an LLP. Under the existing provisions of Income-tax Act, conversion of a company into an LLP has definite tax implications. Transfer of assets on conversion attracts levy of capital gains tax. Similarly, carry forward of losses and of unabsorbed depreciation is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 115JAA. It is proposed to clarify that the tax credit under section 115JAA shall not be allowed to the successor LLP. These amendments are proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. [Clauses 8, 11, 13, 18, 19, 20, 22, 29] Taxation of certain transactions without consideration or for inadequate consideration Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 50,000/-) by an individual or an HUF is chargeable to income tax in the hands of recipient under the head 'income from other sources'. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision. The existing definition of property for the purposes of section 56(2)(vii) includes immovable property being land or building or both, shares and securities, jewellery, archeological collection, drawings, paintings, sculpture or any work of art. A. These are anti-abuse provisions which are currently applicable only if an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... booking of a property and the receipt of such property on registration, which results in a taxable differential. It is, therefore, proposed to amend clause (vii) of section 56(2) so as to provide that it would apply only if the immovable property is received without any consideration and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of immovable property. These amendments are proposed to take effect retrospectively from 1st October, 2009 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years. D. It is proposed to amend the definition of 'property' as provided under section 56 so as to include transactions in respect of 'bullion'. This amendment is proposed to take effect from 1st June, 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. E. It is proposed to amend section 142A(1) to allow the Assessing Officer to make a reference to the Valuation Officer for an estimate of the value of property for the purposes of section 56(2). This amendment is proposed to take effect from 1st July, 2010. [Clauses 3, 20, 21, 33] Deduction in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... local authority. (b) the built-up area of the shops and other commercial establishments included in the housing project should not exceed 5 per cent of the total built-up area of the housing project or 2,000 sq.ft. whichever is less. To allow for extraordinary conditions due to the global recession and the resultant slowdown in the housing sector, it is proposed to increase the period allowed for completion of a housing project in order to qualify for availing the tax benefit under the section, from the existing 4 years to 5 years from the end of the financial year in which the housing project is approved by the local authority. This extension will be available for housing projects approved on or after 1.4. 2005. Further, it is also proposed to enhance the current norms for built-up area of shops and other commercial establishments in housing projects in order to enable basic facilities for the residents. The built-up area of the shops and other commercial establishments included in the housing project is proposed to be three per cent of the aggregate built-up area of the housing project or 5000 sq. ft., whichever is higher. This benefit will be available to projects approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-12 and subsequent years. [Clause 30] Centralised Processing of Returns Under the existing provisions of section 143(1B), the Central Government may, for the purposes of giving effect to the scheme of centralised processing of returns under section 143(1A), issue a notification relating to such processing of returns. Such a notification can be issued up to 31st March, 2010. A Centralised Processing Centre has been set up where returns are being processed in batches. However, some more functionalities in the processing of returns may need to be added to make it a complete end-to-end process. Therefore, it is proposed to extend the time limit for issue of such notification under section 143 (1B) from 31st March, 2010 to 31st March 2011. Consequential amendments on similar lines are proposed to be made in section 115WE of the Income-tax Act. These amendments are proposed to take effect retrospectively from 1st April, 2010. [Clauses 31, 34] Rationalisation of provisions relating to Tax Deduction at Source (TDS) Under the scheme of deduction of tax at source as provided in the Income-tax Act, every person responsible for payment of any specified sum to any person is required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement Commission The conditions for filing of an application before the Settlement Commission and the time for disposal of an application by the Settlement Commission are proposed to be modified. The changes proposed are as under:- A. Under the existing provisions of section 245A(b), the term "case", in relation to which an application can be made is defined as any proceeding for assessment, of any person in respect of any assessment year or assessment years which may be pending before an Assessing Officer on the date on which an application is made to the Settlement Commission. However, it excludes, among others, proceedings for assessment or reassessment resulting from a search or as a result of requisition of books of account or other documents or any assets, initiated under the Act. It is now proposed to include proceedings for assessment or reassessment resulting from search or as a result of requisition of books of account or other documents or any assets, within the definition of a "case" which can be admitted by the Settlement Commission. It is also proposed to amend the Explanation to section 245A(b) to specify the date on which the proceedings for assessment or rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of appeals A. The existing provisions of section 260A(2) provide that an appeal against the order of Income-tax Appellate Tribunal can be filed before the High Court within a period of one hundred and twenty days from the date of the receipt of the order by the assessee or the Commissioner.Sub-section (7) of section 260A of the Income-tax Act provides that the provisions of Code of Civil Procedure, 1908 (5 of 1908) shall, as far as may be, apply in the case of an appeal filed under this section before the High Court. The Delhi High Court, while interpreting provisions of section 260A, has held that the High Court has the power to condone delay in filing of an appeal. However, Allahabad, Bombay, Kolkata, Guwahati and Chattisgarh High Courts have held otherwise. It is, therefore, proposed to retrospectively insert sub-section (2A) in section 260A of the Income-tax Act to specifically provide that the High Court may admit an appeal after the expiry of the period of one hundred and twenty days, if it is satisfied that there was sufficient cause for not filing the appeal within such period. Consequential amendments on similar lines are proposed to be made in section 27A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Rule 5 of the said Schedule, the income of non-life insurance business is taken as 'profit before tax and appropriations' as per the profit and loss account of the company, prepared in accordance with the regulations made by the Insurance Regulatory Development Authority (IRDA), subject to certain adjustments. The Finance (No. 2) Act, 2009 amended the First Schedule to provide that in case of non-life insurance business, appreciation of or gains on realisation of investments taken credit for in the accounts shall be treated as income and be included in the computation of the total income. The appreciation in the value of investments, being in the nature of unrealized gain is not taken into account for determining profit or loss of non-life insurance business as per the IRDA regulations. It is, therefore, proposed that the unrealized gains due to appreciation in the value of investments will not be included in the total income. Similarly, deduction will not be allowed for provision for losses due to diminution in the value of investments as this is not a realized loss. It has also been provided that any gain or loss on realisation of investments shall be added or deducted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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