TaxTMI 
TaxTMI 
EXPLANATORY NOTES ON THE PROVISIONS OF THE FINANCE ACT, 2005
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....4A, 246A, 271, 272A, 273B, 276CC, 278 and 295 of the Income-tax Act, 1961; (iii) inserted new sections 72AA, 80C, 80CCE, 206A, 271FB and Chapter XII-H in the Income-tax Act, 1961; (iv) omitted sections 80L, 88B, 88C and 88D of the Income-tax Act, 1961; (v) substituted new section for section 80E of the Income-tax Act; (vi) amended section 98 of the Finance (No.2) Act, 2004; and (vii) introduced a new levy namely, Banking Cash Transaction Tax Provisions relating to Banking Cash Transaction Tax introduced through Chapter VII of the Act along with consequential amendments in the Income-tax Act, 1961 have been explained separately through Circular No. 03/2005 dated 3^rd June, 2005. Similarly, the provisions relating to Fringe Benefit Tax introduced through Chapters XII-H of the Income-tax Act, 1961 have been explained separately through Circular No.8/2005 dated 29^th August, 2005. This circular explains the substance of other provisions of the Act relating to Direct Taxes. 2. RATE STRUCTURE 2.1 Rates of income-tax in respect of incomes liable to tax for the assessment year 2005-2006. 2.1.1....
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....ecified in Part II of the First Schedule to the Finance (No.2) Act, 2004 except that the rate for deduction of tax at source on payment of royalty or fees for technical services to a foreign company in pursuance of an agreement made by such company with the Government or an Indian concern on or after the 1^st day of June, 2005 has been reduced from twenty per cent. to ten per cent. 2.2.3 The tax deducted at source in each case shall be increased by a surcharge for purposes of the Union as follows: (i) in the case of every individual, Hindu undivided family, association of persons and body of individuals, at the rate of ten per cent. of such tax where the income or the aggregate of such incomes paid or likely to be paid and subject to deduction exceeds Rs.10,00,000/-; (ii) in the case of every firm, at the rate of ten per cent. of such tax; (iii) in the case of every artificial juridical person, at the rate of ten per cent. of such tax; (iv) in the case of every domestic company, at the rate of ten per cent. of such tax; and (v) in the case of every foreign company, at the rat....
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....t in India and below the age of sixty-five years senior citizen, resident in India, who is of the age of 65 years or more Upto Rs. 1,00,000 Nil Nil Nil Rs. 1,00,001 Rs. 1,35,000 10% Rs. 1,35,001 Rs. 1,50,000 10% Rs. 1,50,001 Rs. 1,85,000 20% 20% Rs. 1,85,001 Rs. 2,50,000 20% Exceeding Rs. 2,50,000 30% 30% 30% 2.3.4 The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of ten per cent. of the tax payable (after allowing rebate under Chapter VIII-A) in cases of individuals, Hindu undivided families, association of persons, body of individuals having total income exceeding Rs.10,00,000/-. No surcharge would be payable by persons having incomes of Rs.10,00,000/- or below. Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs.10,00,000/- is limited to the amount by which the income is more than Rs.10,00,000/-. For instance, the amount of tax and surcharge on a total income of Rs. 10,20,000 calculated at the rates specified would have been Rs. 2,56,000 and Rs. 25,600 totaling to Rs. 2,81....
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....3.10 Companies - In the case of companies, the rate of income-tax has been specified in Paragraph E of Part III of the First Schedule to the Act. The rate in the case of domestic companies has been reduced to 30 per cent. In the case of foreign companies the rate of tax on royalties received from Government or an Indian concern in pursuance of an agreement made by it with the Government or Indian concerned after 31.03.1961 but before 01.04.1976 will continue to be 50 per cent. The rate of tax for foreign companies on fees for rendering technical services received from Government or an Indian concerned in pursuance of an agreement made by it with the Government or the Indian concerned after 29.02.1964 but before 01.04.1976 will also continue to be 50 per cent. There is also no change in the existing rate of forty per cent on all other income for foreign companies. The tax payable by domestic companies would be enhanced by a surcharge at the rate of ten per cent. of the tax payable and in the case of foreign companies tax payable would be enhanced by a surcharge at the rate of two and one-half per cent. of the tax payable. The additional surcharge called Education Cess is to....
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....on is available subject to the condition that the agreement for such lease is entered into prior to 1^st April, 2005. In other words, the tax exemption is not available in respect of lease rent payments received under an agreement entered into on or after 1^st April, 2005. Further, clause (6BB) of section 10 provides for exemption from tax on any tax paid by the Indian company on behalf of the government of a foreign state or a foreign enterprise in respect of such lease rent payments under an agreement entered into on or after 1^st April, 2005. The said clause (15A) was amended to provide that the exemption for lease payments shall continue with regard to agreements entered into on or before 30^th September, 2005. The benefit of exemption from tax under clause (6BB) of section 10 will be available in respect of lease payments made in pursuance of agreements entered on or after 1^st October 2005. The Taxation Laws (Amendment) Act, 2005 has further amended clause (15A) of section 10 so as to provide the above-said exemption in respect of lease payments made in pursuance of agreements entered before the 1^st day....
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....is allowed at the rate of fifteen per cent of the actual cost of the new machinery and plant (other than ships and aircraft) acquired and installed after the 31^st day of March, 2002. Additional depreciation is allowed in the case of a new industrial undertaking during any previous year in which it begins to manufacture or produce any article or thing on or after the 1^st day of April, 2002 or to any industrial undertaking existing before that date if it achieves substantial expansion during the previous year by way of increase in its installed capacity by not less than ten per cent. In order to encourage investment, the Finance Act, 2005 has amended section 32 to increase the rate of additional depreciation to twenty per cent on new machinery and plant other than ships and aircraft, acquired and installed after the 31^st day of March, 2005, and dispensed with the condition of additional depreciation to be allowed to a new industrial undertaking and the condition of expansion in installed capacity. Depreciation rates have been modified through ....
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....emicals, or any other article or thing notified by the Board incurring any expenditure on scientific research (excluding cost of land or building) on in-house research and development facility, is allowed a weighted deduction of a sum equal to one and one half times, i.e., hundred and fifty per cent. of the expenditure so incurred. However, no deduction with regard to such expenditure incurred after 31^st March, 2005 shall be allowed. With a view to encourage indigenous in-house scientific research and development, the time limit for availing the weighted deduction under the said sub-section has been extended by two more years i.e. from 31.3.2005 to 31.3.2007. Applicability: From A.Y. 2006-07 onwards. [Section 10] 3.9 Employer to be allowed entire expenses incurred on implementing VRS Under the existing provisions contained in sub-section (1) of section 35DDA, if any expenditure is incurred by an assessee in any previous year by way of payment of any sum to an employee at the time of his voluntary ret....
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....in transactions which are not deemed to be speculative transactions. Systemic and technological changes introduced by SEBI have resulted in sufficient transparency in the stock markets and have to a large extent curbed the scope for generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for audit trail. In the wake of these developments, the present distinction between speculative and non-speculative transactions, in respect of trading in derivatives of securities is losing relevance. The Finance Act, 2005 has, accordingly, amended section 43(5) to provide that an eligible transaction in respect of trading in derivatives of securities carried out on a recognised stock exchange shall not be deemed as speculative transaction. The notification prescribing the rules and the conditions to be fulfilled by a stock exchange to be recognized by the Central Government for the purposes of section 43(5) [i.e., Rules 6DDA and 6DDB of the Income-tax Rules, 1962] has been published in the Official Gazette on 1^st....
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.... 3.12 Speculation losses allowed to be carried forward for four years Under the existing provisions contained in sub-section (4) of section 73 no loss computed in respect of a speculation business is allowed to be carried forward for more than eight assessment years immediately succeeding the assessment year for which such loss was first computed. Finance Act, 2005 has amended the said sub-section (4) so as to reduce the period of loss to be carried forward from eight assessment years to four assessment years. Applicability: From A.Y. 2006-07 onwards. [Section 20] 3.13 Rationalisation of the tax treatment of savings. The existing method of taxing financial savings is distortionary resulting in economic inefficiency and inequity. With a view to removing such distortionary effects, there is a move towards shifting to the EET(Exempt Exempt Tax) method....
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....p; [Section 21, 4, 17, 18, 22, 23, 24, 28, 29 & 64 ] 3.14 Deduction for entire amount of interest paid on a loan taken for pursuing higher education. Under the existing provisions of section 80E, a deduction upto forty thousand rupees is allowed to an individual on account of any amount paid by him in the previous year by way of repayment of loan, or interest on such loan, taken from any financial institution or any approved charitable institution for the purpose of pursuing higher education. The deduction is available for eight assessment years beginning from the assessment year relevant to the previous year in which the repayment of loan or interest thereon begins. In order to encourage the pursuit of higher studies, section 80E has been substituted so as to provide that the entire amount of interest paid by an individual during the previous year on the loan taken from any financial institution or any approved charitable institution for the purposes of pursuing higher education, shall be allowed as a deduction from the total income. However, no deduction shall be allowed for repayment of the principal loan amount. The deduction shall ....
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....article or thing or in operation of a cold storage plant and set up during the period 1.4.1993 to 31.3.2005 in the State of Jammu and Kashmir, are eligible for a hundred per cent. deduction of profits for a period of five years, followed by twenty-five per cent. (thirty per cent. in the case of companies) for the next five years. However, such industrial undertakings engaged in manufacture or production of articles or things mentioned in part C of the Thirteenth Schedule are not eligible for the said deduction. The deduction is not available to industries in the State set up after 31.3.2005. With a view to promote industrial development of the State of Jammu and Kashmir, the terminal date for setting up of industrial undertakings and commencement of eligible business in the State has been extended by two more years, from 31.3.2005 to 31.3.2007. Applicability: From A.Y. 2006-07 onwards. [Section 27] 3.17 Extension of the time limit for the purpose of tax holiday under section 80-IB to any company carrying on scientific research and development. Under the existing provisions of sub-section (8A) ....
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....w rupees one lakh. In view of the increase in the general exemption limit to rupees one lakh, section 88D, having become infructuous, has been omitted. Applicability: From A.Y. 2006-07 onwards. [Section 32] 3.20 Rationalisation of taxation of income arising from zero coupon bonds The Finance Act, 2005 has inserted a new clause (48) in section 2, defining zero coupon bond to mean a bond (i) which is issued on or after 1.6.2005 by an infrastructure capital company or infrastructure capital fund or public sector company; (ii) in relation to which no benefit is received or receivable before maturity or redemption from the company or the fund; and (iii) which is specified by the Central Government in the Official Gazette in this behalf. Explanation to the newly inserted clause (48) provides that the expressions infrastructure capital company and infrastructure capital fund shall have the same meanings respectively assigned to them in clauses (a) and (b) of Explanation (1) to clause (23G) of section 10. &n....
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....l be taxed on accrual basis during the period of its holding by a person. It is further clarified that Circular No. 2/2002 dated 15^th February, 2002 explaining the tax treatment in respect of Deep Discount Bonds shall not be applicable in respect of zero coupon bonds as defined in clause (48) of section 2. Applicability: From A.Y. 2006-07 onwards. [Sections 3, 12, 33 & 48] 3.21 Reduction in rate of tax on royalty and fees for technical services in the case of a non-resident from 20% to 10% The existing provisions of clause (b) of sub-section (1) of section 115A provide for the rate at which income-tax shall be payable where the total income of a non-resident (not being a company) or a foreign company includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DA received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after 31^st March, 1976, and where such agreement is with an Indian concern, the agreement....
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....amended to provide that where any amount of tax is paid under sub-section (1) of section 115JB by a company for any assessment year beginning on or after the 1^st day of April,2006, credit in respect of the taxes so paid for such assessment year shall be allowed on the difference of the tax paid under section 115JB and the amount of tax payable by the company on its total income computed in accordance with the other provisions of the Act. The amount of tax credit so determined shall be allowed to be carried forward and set off in a year when the tax becomes payable on the total income computed under the regular provisions. However, no carry forward shall be allowed beyond the fifth assessment year immediately succeeding the assessment year in which the tax credit becomes allowable. The set off in respect of the brought forward tax credit shall be allowed for any assessment year to the extent of the difference between the tax on the total income and the tax which would have been payable under section 115JB for that assessment year. A numerical illustration:- A.Y. Normal tax liability Tax liability u/s. 11....
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....e Income-tax Act, 1961, relates to furnishing of return of income. The existing provisions of the said section provide for compulsory filing of return by every company. It has now been provided that every firm shall also compulsorily file a return of income in respect of its income or loss in every previous year. The existing provisions of the said section also provide that persons other than a company shall be required to file their return of income if their total income exceeds the maximum amount which is not chargeable to tax. With a view to widen the tax base, this section has been amended so as to provide for compulsory filing of return by the persons other than companies and firms whose total income before giving effect to the provisions of Chapter VI-A and sections 10A, 10B or 10BA exceeds the maximum amount not chargeable to tax. The existing provisions of the said section also provide that every person other than a company whose total income does not exceed the maxim....
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....that in the case of such other person the time limit for making assessment or re-assessment of total income of the assessment years referred to in clauses (a) and (b) of the said sub-section shall be two years from the end of the financial year in which the last of the authorizations for search under section 132 or for requisition under section 132A was executed or one year from the end of the financial year in which books of account or documents or assets seized or requisitioned are handed over to the Assessing Officer having jurisdiction over such other person, whichever is later. The existing provisions of section 153C provide that where the Assessing Officer is satisfied that books of account or documents or assets seized under section 132 or requisitioned under section 132A belong to a person other than a person in whose case search under section 132 or requisition under section 132A was made, he shall hand over the same to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against such other person under section 153A. Second proviso to section 153A prov....
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....ear in which search is conducted u/s 132 or requisition is made under section 132A. In other words, the amendments brought in section 153B and section 153C shall have the following effects in relation to assessment or reassessment in case of other persons referred to in section 153C:- (i) A period of one year from the end of financial year in which the books of account or documents or assets seized or requisitioned are handed over to the Assessing Officer having jurisdiction over such other person shall be available for the purposes of making assessment or reassessment under section 153A; (ii) Any assessment or reassessment for any assessment year falling within a period of six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made pending on the date on which books of account or documents or assets seized or requisitioned are received by the assessing officer having jurisdiction over such other person, shall abate; (iii) For assessment year relevant to the previous year in which search ....
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....ontractor (transporter) needs to furnish a declaration in the prescribed Form to the person paying or crediting. The person making payment to the sub-contractor without deduction of tax at source is also required to furnish to the income-tax authority the prescribed particulars in the prescribed Form within the prescribed time. The notification prescribing the rules and the Forms to be furnished by the sub-contractor and the contractor [i.e., Rule 29D and Form Nos. 15-I and 15J of the Income-tax Rules, 1962] was published in the Official Gazette on 17^th June, 2005 vide S. O. No. 855(E). This amendment is applicable from 1^st June, 2005. [Section 49] 3.28 Demat provisions of TDS / TCS - Tax deductor/collector not to issue TDS/TCS certificate and return of income not to be accompanied by TDS/TCS certificate for taxes deducted on or after 1^st April, 2006 Existing provisions in respect of taxes deducted or collected on or after 1^st April, 2005 provide for the following regarding issuance of TDS or TCS cert....
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....the TDS certificate with the return of income (from A.Y. 2007-08 onwards) and such return will not be treated as defective. Collectee is required to enclose the TCS certificate with the return of income for the taxes collected during the Financial Year 2005-06 (A.Y. 2006-07). However, for the taxes collected on or after 1^st April, 2006, the collectee is not required to enclose the TCS certificate with the return of income (from A.Y. 2007-08 onwards). 199(3) and the Proviso to 206C(4) For the taxes deducted during the Financial Year 2005-06, credit for TDS will be given on the basis of the TDS certificate accompanying the return. However, credit for the taxes deducted on or after 1^st April, 2006 will be given on the basis of annual statement of taxes accessible to the Assessing Officer. For the taxes collected during the Financial Year 2005-06, credit for TCS will be given on the basis of the TCS certificate accompanying the return. However, credit for the taxes collected on or after 1^st April, 2006 will be given on the basis of annual statement of taxes accessible to the Assessing Officer. [Sections 40, 50, 51 and 53] 3.29 F....