Agricultural Income:Consider the following extract from the judgement delivered byChennai High Court in 2002 in the case of CIT v. Soundarya Nursery[2002] 123 Taxman 372:"All the products of the land, which have some utility either forconsumption or commerce, if they are based on land, would beagricultural products. In this case if the plants sold by theassessee in pots were grown by the assessee on the land on expendinghuman skill and labour thereon the income there from would be exemptfrom payment of tax. In the same manner seeds, flowers, vegetables,fruits, mud-pots etc. grown on the land is an exempted activity]A nursery grows plants for experimental study and also sells them tofarmers for transplantation. In the definition of agriculturalincome, the income of the nursery thus earned did not fit into theagricultural income, as it existed till A Y 2007-08. Upholding thereasoning given in Soundarya Nursery case, the government has (I amusing the present perfect tense to refer to amendments throughoutthis text, even though technically these "amendments" are stillproposals) added an Explanation 3 below Section 2(1A) to providethat any income earned by a nursery from saplings and seedlingswould be treated as agricultural and hence exempt from tax.Advancement of an object of general public utility:This has caused consternation in many circles across the country---from Kolkatta to Ludhiana.Under section 2(15), "charitable purpose" is defined toinclude "advancement of any other object of general public utility".It seems our government loves to cock a snook at the Supreme Courtverdicts. This time, it's the judgement in the case of CIT v.Gujarat Maritime Board (2007) 295 ITR 561 (SC); (2008) 166 Taxman 58(SC) that's been consigned to the dustbin. The Supreme Court hadallowed the assessee, the Gujarat Maritime Board, engaged in thedevelopment of minor ports within the state of Gujarat, the benefitof exemption u/s 11(1) in the light of the definition of charitablepurpose u/s 2(15). The Apex Court said that as long as the assesseeapplied the income from the property held under the trust to theadvancement of the object of general public utility, it would beentitled to exemption u/s 11, even if the income arose directly andsubstantially from business.Now, we have many Chambers of Commerce and other trade promotionorganizations—whether registered as Societies, Trusts or Section 25companies---that rent out their properties or earn income fromengaging in activities that are clearly commercial in nature. Theyclaim exemption on such income u/s 10(23C) or Section 11 of the Act.They were never really set up in the first place to make money thisway. This sort of business activity is incidental to their mainobject of advancement of the object of a general public utility. Andwhatever funds they thus generate remain in the treasury of theorganization and are ploughed back into pushing that object forward.Their raison d'etre remains "charitable".The proviso that would come to occupy its place beneath Section 2(15) w.e.f A Y 2009-10 mentions even the receipt of a cess or fee orany other consideration for services rendered in relation tobusiness or commerce as enough to disqualify the organization toclaim exemption.Now read what Section 11(4A) says (mark the capitalized words):[(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust oran institution, being profits and gains of business, UNLESS THEBUSINESS IS INCIDENTAL TO THE ATTAINMENT OF THE OBJECTIVES of thetrust or, as the case may be, institution, and separate books ofaccount are maintained by such trust or institution in respect ofsuch business.]Section 11(4A) has remained untouched. But I feel that if theintention was—and indeed it was, as the Explanatory Memorandumclearly states---to deny the exemption to such entities, thenwouldn't it have been in order to amend the above sub-section 4A aswell? Section 11(4A) clearly allows even business profits to beclaimed exempt if they are incidental to the attainment of the basicobjective of furtherance of general public utility, the onlycondition being the assessee should maintain separate books torecord those transactions.I think if Section 11(4A) is not dropped altogether or at leastsuitably amended to be brought in line with the proviso underneathSection 2(15), this issue is ripe for litigation.In love with a Sikkimese girl? Marry her before 31st March!The Republic of India annexed Sikkim in 1975. Since the Income TaxAct extends to the whole of India (without making an exception evenfor J & K), it ought to have extended to Sikkim as well, that statebeing a part of the Indian Union. But there was a state law inSikkim that said that no income tax was applicable in that state.The state legislature could do that by virtue of special privilegesgranted to it under Article 371F of the Indian Constitution.But this certainly was not in keeping with what the Income tax Act,1961 said. So now 33 years later, they've have woken up to theanomaly and inserted Section 10(26AAA) with retrospective effectfrom 1st April, 1990 that no income tax would be payable by anySikkimese. But what about a Sikkimese girl who marries a non-Sikkimese? The price of marrying a non-Sikkimese man she will haveto pay is the loss of exemption of income u/s 10(26AAA). But the cut-off date for marriage is 1st April 2008. So any youngsters readingthis and in love with a Sikkimese girl, marry her before the closeof this financial year—her income will be exempt for the rest of herlife.Reverse Mortgage inflows not taxable:Reverse mortgage scheme enables an elderly person, whose childrenhave turned their back on her, to have her property mortgaged to abank and receive monthly payments (or lump sum or an overdraft) fromthe bank while still living in her house. It turns your home into asort of moneymaking machine. The person can keep on receiving thestream of income until she passes away. After she's no more, thebank will sell off the property to recover its loan, which has piledup over the years. Unless she has disinherited them, the children ofthe deceased too can come forward and clear the debt and have aclear title to the property (incidentally, the amount the survivorspay to the bank will be added to their cost of acquisition as it ispaid to remove an encumbrance, as has been decided by the SC inRm.Arunachalam v. CIT (1997) 227 ITR 222 / 93 Taxman 423 (SC)].).Now the issue of whether these periodical payments or lump sumamount received by the mortgagee from the bank were assessable totax had been hanging hire since last year. It's been put to rest byadding sub-section 43 to the Exemption Section 10—any amountreceived by an individual as a loan, whether in instalments orlumpsum, would not form part of their income.A new clause (xvi) has also been added to Section 47—transactionsnot regarded as transfer—to provide that the transfer of a capitalasset under a reverse mortgage scheme won't be regarded as atransfer any more.Scientific Research Expenditure—Scope widened:Hitherto you could claim a weighted deduction of 125 per cent u/s 35if you made a payment to a scientific research association, or auniversity, college or other such institution. But w.e.f A Y 2009-10, you'd get to knock a similar inflated amount off your incomeeven if you make the payment to a company. This company has tofulfill certain criteria laid down in that section.This deduction will be allowed to you—individual, firm or company—even if the scientific research carried out by the donee company istotally unrelated to your business. A thing to be noted is thatthere is an Explanation below clause (iii) of Section 35(1). ThisExplanation states that the deduction under clause (i), (ii) or(iii) will not be denied merely on the ground that subsequent to thepayment by the assessee, the approval granted to the organization,university, etc has been withdrawn. Now it would have been better ifthis Explanation too have been amended, inserting clause (iia) after(ii) in there. But it hasn't been. Does that mean in respect ofpayments made under the new clause (iia), deduction will bedisallowed if the approval is withdrawn subsequently?Consider the following:Referring to the Supreme Court ruling in the case of State ofMaharashtra v. Suresh Trading Co. [1998] 109 STC 439 the Bombay HighCourt in the case of Ramdas Maneklal Gandhi v. Union of India heldthat the assessee is entitled to rely upon the certificate grantedby the prescribed authority to the institution or association towhich it had donated a sum of money for claiming deduction, whichwas valid and subsisting at the time the donation was made. TheCourt further held that the retrospective withdrawal and/orcancellation of the certificate would have no effect upon theassessee who had acted upon it when it was valid and operative. TheCourt thus quashed the notice issued under section 148 as beingwithout jurisdiction.So that the scientific research company approved u/s 35(1)(iia) doesnot get to claim a weighted deduction of 150 % on the amount that'salready been subjected to a 1.25 times deduction, clause (6) hasbeen added to Section 35(2AB) to provide that it won't be able toclaim a deduction on payments after 31st March 2008. It could ofcourse keep on claiming the normal 100% deduction on account ofscientific research u/s 35(1)(i).Amortisation of Preliminary Expenses:Section 35D as it stands today is biased against the ServicesSector, revenue generation from which constitutes nearly 60% ofIndia's GDP. Section 35D(1) has two limbs—dealing with expensesincurred before the commencement of the business and those incurredafter such commencement. While expenses incurred before commencementcan be claimed by any assessee, whether in the manufacturing or inthe service sector, amortisation of preliminary expenses—projectreport, market survey, etc---incurred after commencement of businesshas been restricted only to those assessees extending an INDUSTRIALundertaking or setting up a new INDUSTRIAL unit.What the amended Section 35D has done is drop the words "industrial"wherever it occurs in Section 35D. So now service companies too willget to amortise their preliminary expenses incurred by them inconnection with venturing into new lines of business.STT an expense, not Income Tax itself:So the Securities Transaction Tax has become an expense u/s 36(1)(xv) now rather than being a tax itself, which we could set offagainst our tax liability u/s 88E till A Y 2008-09. In other words,the FM has snatched away 66% (assuming income from ST was your onlyincome) of this benefit from you. This move it seems has beenprompted by a suspicion that unscrupulous assessees were misusingthis tax credit.Clause (ib) of Section 40a disallowing STT has been erased.Commodities Transaction Tax:We have a virtual alphabet soup in the IT law now: FBT, STT, DDT,BCTT (it's a while before we kiss it goodbye on 1st April 2009) andthe newest entrant: Master CTT.The Commodities Transaction Tax is meant to be levied on those whoengage in onscreen commodity or derivative trading. It varies from0.017 % to 0.125 % of the underlying transaction value and may bepayable either by seller or by the buyer depending upon thesituation. For details and a tabular example, refer to Chapter VIIof the FA 2008.This CDT will be an admissible expense u/s 36(1)(xvi).Cash Payments exceeding Rs 20000:Section 40A(3) provision as it stands today forbids a SINGLE paymentof Rs 20000 or more otherwise than through an account payee chequeor a bank draft if the assessee doesn't want to suffer theconsequences of disallowance. So supported by decided case laws likeCIT vs Aloo Supply Co (1980) 121 ITR 680 (Orissa) and CIT vsTriveniprasad Pannalal (1997) 228 ITR 680 (MP) and CIT vs KothariSanitation & Tiles (P) Ltd (2006) 282 ITR 117 (Mad.), many assesseesmade it a practice to split up the payment of a bill into parts,each part below Rs 20001.This splitting up within a single day won't be allowed any more. AndI think it makes good sense too. Is it sensible for some supplier—who you owe Rs 60000 on account of some purchase--to call on you 3times a day each time to collect Rs 20k each? It was apparent thatassessees were simply making multiple vouchers; payment was made ina lump sum of Rs 60000. The introduction of "a payment or aggregateof payments made to a person in a day" in Section 40A(3) will takecare that such hoodwinking tactics are put an end to.Of course, you can wait till the strike of midnight hour and stillsplit the payment. Liability for a 60000-rupee revenue expense canstill be discharged by making payment of Rs 20k each on threesuccessive days. Only payments made in a single day are to betotalled up.Explanation 6 to Section 43:It often happens that an assessee that had hitherto been enjoyingexemption from tax suddenly loses that exemption and has to pay tax.Since it has become liable to pay tax, it will also be entitled toclaim depreciation u/s 32 if it has income from business. Thequestion was: How do you compute the WDV of the assets on which toclaim the depreciation? Should we take the original cost or shouldwe just artificially calculate the WDV as if depreciation had beenclaimed and allowed from year to year, till the year the assesseelost the exemption?This issue is relevant from the point of view of withdrawal ofexemption u/s 2(15) to Chambers of Commerce, etc as discussed above.How would you arrive at the WDV of the assets on which they wouldclaim depreciation?An ITAT judgment had ruled that since there was no tax liabilityduring the exemption period, there was no occasion to compute theincome of that person under the Act. Mandatory depreciation u/s 32can be thrust upon the assessee only if it had Business Income thatwas assessable to tax. In the absence of taxable income, you can'twhittle down the WDV to reduce it down to a figure that we would'vehad, had the assessee's income been taxable all along.This ITAT ruling is being mutilated by adding Explanation 6 belowSection 43(6). The depreciation provided for in the books of accountduring the period the assessee was under exemption would be deemedto have been allowed to the assessee and the WDV for the currentprevious year will be computed accordingly.My commiserations to Chambers of commerce, trade promotionorganizations, etc---you've been inflicted a double whammy by FA2008.Section 80C expanded:Amounts deposited into Senior Citizen Savings Scheme Rules, 2004 orinto the 5-year time deposit under the Post Office Time DepositRules 1981 could now be used to bring down your total income.But make sure your client does not withdraw any amount, whetheraccrued interest or the principal, from these accounts before thelapse of 5 years. If she does, it will be taxable as income. Ofcourse, if the amount (other than interest not included inassessee's income earlier) is handed over to the legal heirs of theassessee in the event of her being no more, nothing would be taxablein their hands.It pays to take care of your parents:Insurance companies are not very keen on insuring the health of aperson above 65. But dutiful sons and daughters who care for theirparents have a definite monetary incentive to spare a penny or twofor the sake of their old folks.An additional write-off of Rs 15000—Rs 20k if the parent is above 65---will be allowed to you if you pay your Mummy's or Daddy's medicalinsurance premium, whether or not they are dependent on you. So ifsomeone pays Rs 15k towards medical insurance for himself, his wifeand the kids and also takes out insurance on the health of hisfather, the premium on account of which is Rs 30000. The son and thefather could claim the whole of this Rs 45000 together---the soncould pay Rs 15k for his family and Rs 20k for his father, and thefather could cough up (no pun!) the remaining Rs 10k.Make sure you do not pay health insurance premium in hard cash. ButI wish the government had done away with the requirement of thededuction being allowed u/s 80D only if the payment is made out ofthe assessee's income chargeable to tax. If 80C does not insist uponthis, why is it there in 80D?100-bed Hospitals in mofussil areas:A 5-year tax holiday to hospitals set up in suburban areas is on theanvil. {Section 80IB(11C)}2-, 3-, and 4-star Hotels:Hotels set up in cities having World heritage sites will be granteda tax leave for 5 years. The list of districts is given in thesection itself. Haridwar and Amritsar are conspicuous by theirabsence. I think they need to re-look at this list.Section 111-A---Nelson:From 10 per cent, it's gone up to 15%--the tax on capital gain onsale of short-term capital assets being shares. This perhaps isaimed at checking the volatility in the market. Besides if theinvestors have patience to cling on to the shares for more than ayear, the entire CG being long-term will be exempt.Section 115JB—DTL—Catch 22:So Deferred Tax liability will be added back to the Book Profit toarrive at your MAT liability. It would've been easier to swallow thegovernment's reasoning if the Deferred Tax Asset credited to the P &L account had also been proposed to be reduced from the book profit.The Explanatory Memorandum seeks to explain away this change withouthaving an understanding of the subtle nuances of accounting. Thememorandum uses the words "above the line" and "below the line" asif they're some sort of legal terms. This above/below the line thingis merely accounting slang and isn't used either in the ICAI'saccounting standards or in the Companies Act. AS-22 clearly saysthat tax expense is the aggregate of current tax and deferred taxcharged to the P & L account for the year. And since anothergovernment legislation viz the Companies Act has made adherence tothe ICAI accounting standards mandatory, shouldn't the Income taxlaw too interpret technical accounting terms in the manner they aredefined in AS-22?What about the judgements delivered by Tax courts? Some time back wehad a reason to rejoice when the Supreme Court in the case of J KIndustries Ltd vs Union of India [2007] 165 Taxman 323 upheld thevalidity of AS-22 and said that DTL was an accounting adjustmentwhich resulted in future cash outflows and wasn't thereforeinconsistent with the provisions of the Companies Act. DTL is anascertained liability; it's just a matter of time before the DTLgets crystallized after the Companies Act depreciation catches upwith Tax depreciation. So being a future tax, there does not seemany reason why it needs to be added back to the BP.The Kolkatta Tribunal's decision in ACIT vs Balrampur Chinni MillsLtd [2007] 14 SOT 372 (Kol.) clearly wasn't "sugar" to the palate ofour finance ministry mandarins.Horror of horrors, this amendment will take effect from 1st April2001! So do we have to issue fresh Form No 29B A Y 2001-02 onwards?Chidu Bhajji, please tell us.Section 115-O: DDT—some Commonsense:A subsidiary company pays dividend to its shareholder, the holdingcompany, and pays up Dividend Distribution Tax on it. The holdingcompany also intends to distributes its profits. Now part of thoseprofits are constituted of the dividend received from thesubsidiary. So if the holding company has to pay DDT on the whole ofits dividends, it clearly amounts to double taxation. So what thelaw has done is allow the holding company to reduce the amount ofdividend it got from its subsidiary from the dividend the holdingcompany itself wants to declare. The DDT will be payable on theremainder. A welcome move, reminiscent of Section 80M of yore.Section 115WB:On the FBT front, there is relief. Guesthouse maintenance expenseswon't be subject to FBT any more. Actually, most guest houses doubleup as training centers, and expenses on training centers beingoutside the purview of FBT, it made ample sense to drop clause (K)altogether.Also, now you can be less stingy whilst giving away those Diwaligifts—a little shuffling around of the alphabets has ensured that AY 2009-10 onwards, you'll have to pay FBT only on 20% of thoseexpenses, from the earlier 50%.Section 139--First Diwali with Kids!I wish Lord Rama hadn't chosen this time of the year to return toAyodhya from his 14-year exile. Diwali invariably happens to be fallaround end-October or early-November. In 2008 perhaps for the firsttime in a long while, practicing CAs (or may be those in service)will get to burst crackers with their kids. This probably was longoverdue. We can also spare ourselves the curses of the articledassistants for disturbing them in their studies.Some members are feeling uncomfortable reconciling this date—30thSeptember—with the date of AGM of a company assessee. There isnothing wrong technically—you can hold the AGM in the morning and e-file in the afternoon! Of course if you feel there are chances ofthe meeting being adjourned without the adoption of accounts, don'twait till the last day.Section 143--Scrutiny Assessment: Tardiness pays:So if you file your non-audit return of income for A Y 2008-09 onsay 15th April 2008, then you've got the sword of scrutinyassessment hanging over your head till 30th September 2009. Legallyyou can stretch this date as far as up to 31st March 2009. Now ifyou file your return for A Y 2007-08 (yes, this amendment takeseffect from 1st April 2008) on 31st March 2008, you have given thedepartment only 6 months' time i.e. only till 30th September 2008,to issue you the scrutiny notice. So perhaps it pays to be tardy,although you'll lose the right to revise the return if an error isdiscovered later.In the Summary assessment procedure, up until now the Taxwomen didnot have the right to amend the prima facie errors that cried out tobe corrected. Errors like a glaring arithmetical blunder; a clearinconsistency where figures in one part of the ITR did not matchwith the other; a deduction or something in claiming which theassessee had clearly overstepped what is allowable to her under theAct, and the like. Now to streamline the assessment procedure, theAOs have been empowered to themselves set right any such errordetected by the department's computer interface.Do not "co-operate" with IT Department:Notices for scrutiny assessments are supposed to be served latestbefore the expiry of 12 months from the end of the month (now sixmonths from the close of the financial year) in which the return wasfiled. There are inevitably cases where the notice though dulyposted under registered post by the ITO did not really get "served"because it was received by the assessees a day or two later. Thisdid not amount to "service" of notice when examined in the contextof Section 282, 283 and 284 of the General Clauses Act.What the assessees used to do was keep whining about the invalidityof the notice on account of its having arrived late, and at the sametime appear before the AO through their CAs/Advocates and fight outthe case. Now if you're contending that the notice itself isinvalid, why should the scrutiny assessment even begin? But sinceyou participated in it, the AO was more than happy to proceed withthe assessment.Later on, some higher authority admitting your plea about theinvalidity of the notice quashed the entire assessment proceedingsand the entire labour and time of both parties spent in framing andattending an assessment went down the drain.The government has gotten wise to this bizarreness and, in myopinion, rightly introduced a new Section 292BB in the I T Act. Nowwhat you will need to do is take up the matter of invalid noticeright in the very first hearing and seal your lips when it comes toproviding any information relating to assessment. Do not co-operatein any manner until the issue of whether or not the notice isinvalid is completely settled. If you end up answering the mostcasual of the AO's queries over a friendly cup of tea, your InvalidNotice defence goes out the window.Section 194C—Welcome AOPs and BOIs:The list of persons required to make tax at source u/s 194C did notinclude AOPs and BOIs. As a result, many business formations likethe Joint Ventures and Consortiums got off the hook, although theymade several payments to contractors. With effect from 1st June2008, they'll have to have a TAN and make TDS.Section 203/206C—Demat not in Sight:This has become a ritual now—every year the government extends thisdate, the date after which tax deductors/collectors are not requiredto issue TDS/TCS certificates in physical form. Now you'll have tokeep issuing Form 16, 16-A, etc at least until 31st March 2010.Section 254—ITAT--Stay of Proceedings:Section 254 as it stands today, empowers the ITAT to stay recoveryof tax, which is the subject matter of an appeal for a maximumperiod of 180 days. The Tribunal has to dispose off the appealwithin this period of stay. However if the appeal isn't disposed offwithin 180 days, the ITAT may grant a further stay beyond theinitial 180 days, subject to a maximum of 365 days' stay on bothoccasions. The grace period of stay is contingent upon the conditionthat the delay in getting over with the appeal shouldn't have beenattributable to the assessee.What the new Section 254 will do with effect from 1st October 2008is empower the ITAT to make an extension of maximum 365 days in therecovery of tax, irrespective of who is to blame for the appealbeing held up.That's all. I have left out certain amendments that I thought wereeither hyper-technical or not very relevant from the point of viewof majority of members.
Thanks,
CA Sanjeev Bedi
No comments:
Post a Comment