TaxTMI 
TaxTMI 
TaxTMI 
Charitable Trust, Association & Societies – Analysis of Income-tax and GST Provisions
X X X X Extracts X X X X
X X X X Extracts X X X X
....haritable Trust, Association & Societies – Analysis of Income-tax and GST Provisions<br>By: - RameshKumar Patodia<br>Income Tax<br>Dated:- 10-6-2019<br><br>Charitable Trust * The provisions relating to charitable trust are contained in Section 11 to 13 of the Income-tax Act,1961. The basic provisions are hereinbelow:- Section 11 11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property; (b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property; (c) income derived from property held under trust- (i) created on or after the 1st day of April 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and (ii) for charitable or religious purposes, created before the 1st day of April 1952, to the extent to which such income is applied to such purposes outside India: Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income; (d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. Section 12 12. (1) Any voluntary contributions received by a trust created wholly for chari- table or religious purposes or by an institution established wholly for such purposes (n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly. (2) The value of any services, being medical or educational services, made available by any charitable or religious trust running a hospital or medical institution or an educational institution, to any person referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13, shall be deemed to be income of such trust or institution derived from property held under trust wholly for charitable or religious purposes during the previous year in which such services are so provided and shall be chargeable to income-tax notwithstanding the provisions of sub-section (1) of section 11. Explanation.-For the purposes of this sub-section, the expression "value" shall be the value of any benefit or facility granted or provided free of cost or at concessional rate to any person ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3) of section 13. (3) Notwithstanding anything contained in section 11, any amount of donation received by the trust or institution in terms of clause (d) of sub-section (2) of section 80G in respect of which accounts of income and expenditure have not been rendered to the authority prescribed under clause (v) of sub-section (5C) of that section, in the manner specified in that clause, or which has been utilised for purposes other than providing relief to the victims of earthquake in Gujarat or which remains unutilised in terms of sub-section (5C) of section 80G and not transferred to the Prime Minister's National Relief Fund on or before the 31st day of March, 2004 shall be deemed to be the income of the previous year and shall accordingly be charged to tax. Section 12A 12A. (1) The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely:- (a) the person in receipt of the income has made an applicati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on for registration of the trust or institution in the prescribed form and in the prescribed manner to the Principal Commissioner or Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under section 12AA : Provided that where an application for registration of the trust or institution is made after the expiry of the period aforesaid, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution,- (i) from the date of the creation of the trust or the establishment of the institution if the Principal Commissioner or Commissioner is, for reasons to be recorded in writing, satisfied that the person in receipt of the income was prevented from making the application before the expiry of the period aforesaid for sufficient reasons; (ii) from the 1st day of the financial year in which the application is made, if the Principal Commissioner or Commissioner is not so satisfied: Provided further that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... provisions of this clause shall not apply in relation to any application made on or after the 1st day of June 2007; (aa) the person in receipt of the income has made an application for registration of the trust or institution on or after the 1st day of June, 2007 in the prescribed form and manner to the Principal Commissioner or Commissioner and such trust or institution is registered under section 12AA; [(ab) the person in receipt of the income has made an application for registration of the trust or institution, in a case where a trust or an institution has been granted registration under section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)], and, subsequently, it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, in the prescribed form and manner , within a period of thirty days from the date of said adoption or modification, to the Principal Commissioner or Commissioner and such trust or institution is registered under section 12AA;] (b) where ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the total income of the trust or institution as computed under this Act without giving effect to [the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year], the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed;] [(ba) the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section.] (c) [***] [(2) Where an application has been made on or after the 1st day of June, 2007, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately followi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the financial year in which such application is made:] [Provided that where registration has been granted to the trust or institution under section 12AA, then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the Assessing Officer as on the date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year: Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust or institution for any assessment year preceding the aforesaid assessment year only for non-registration of such trust or institution for the said assessment year: Provided also that provisions contained in the first and second proviso shall not apply in case of any trust or institution which was refused registration or the registration granted to it was cancelled at any time under section 12AA.] Section 12AA 12AA. (1) The Principal Commis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sioner or Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) 27[or clause (ab)] of sub-section (1) of section 12A, shall- (a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and (b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he- (i) shall pass an order in writing registering the trust or institution; (ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant : Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard. (1A) All applications, pending before the Principal Chief Commissioner or Chief Commissioner on which no order has been passed under clause (b) of sub-section (1) before the 1st day of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....June, 1999, shall stand transferred on that day to the Principal Commissioner or Commissioner and the Principal Commissioner or Commissioner may proceed with such applications under that sub-section from the stage at which they were on that day. (2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) or clause (aa) 28[or clause (ab)] of sub-section (1) of section 12A. (3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996) and subsequently the Principal Commissioner or Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution: Provided that no order under this sub-section shall be passe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d unless such trust or institution has been given a reasonable opportunity of being heard. (4) Without prejudice to the provisions of sub-section (3), where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and subsequently it is noticed that the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub-section (1) of section 13, then, the Principal Commissioner or the Commissioner may by an order in writing cancel the registration of such trust or institution: Provided that the registration shall not be cancelled under this sub-section, if the trust or institution proves that there was a reasonable cause for the activities to be carried out in the said manner. Section 13 13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om the total income of the previous year of the person in receipt thereof- (a) any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public; (b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste; (bb) [***] (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) : Provided that in the case of a trust or institutio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970; (d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....us year- (i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or (ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or (iii) any shares in a company, other than- (A) shares in a public sector company ; (B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11, are held by the trust or institution after the 30th day of November 1983: Provided that nothing in this clause shall apply in relation to- (i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June 1973; (ia) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus shares allotted to the trust or institution; ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (ii) any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March 1983; (iia) any asset, not being an investment or deposit in any of the forms or modes specified in sub-section (5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1993, whichever is later; (iii) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year. Explanation.-Where the trust or institution has any other income in addition to profits and gains of business, the provisions of clause (iii) of this proviso shall not apply unless the trust or institution maintains separate books of account in respect of such business. Explanation.-For the purposes of sub-clause (ii) of clause (c), in determining whether any part of the incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1st day of July, 1972, no regard shall be had to the amendments made to this section by section 7 [other than sub-clause (ii) of clause (a) thereof] of the Finance Act, 1972. (2) Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),- (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3) for any period during the previous year without either adequate security or adequate interest or both; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any period during the previous year without charging adequate rent or other compensation; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services; (d) if the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation; (e) if any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in sub-section (3) during the previous year for consideration which is more than adequate; (f) if any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in sub-section (3) during the previous year for consideration which is less than adequate; (g) if any income or property of the trust or institution is diverted during the previous year in favour o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f any person referred to in sub-section (3): Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property, so diverted does not exceed one thousand rupees; (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971), in any concern in which any person referred to in sub-section (3) has a substantial interest. (3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :- (a) the author of the trust or the founder of the institution; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees; (c) where such author, founder or person is a Hindu undivided family, a member of the family; (cc) any trustee of the trust or manager (by whatever name called) of the institution; (d) any relative of any such author, founder....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., person, member, trustee or manager as aforesaid; (e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest. (4) Notwithstanding anything contained in clause (c) of sub-section (1) but without prejudice to the provisions contained in clause (d) of that sub-section, in a case where the aggregate of the funds of the trust or institution invested in a concern in which any person referred to in sub-section (3) has a substantial interest, does not exceed five per cent of the capital of that concern, the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment, by reason only that the funds of the trust or the institution have been invested in a concern in which such person has a substantial interest. (5) Notwithstanding anything contained in clause (d) of sub-section (1), where any assets (being debentures issued by, or on behalf of, any company or corporation) are acquired by the trust or institution after the 28th day of February, 1983 but before the 25th day of July, 1991, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such assets, by reason only that the funds of the trust or the institution have been invested in such assets if such funds do not continue to remain so invested in such assets after the 31st day of March, 1992. (6) Notwithstanding anything contained in sub-section (1) or sub-section (2), but without prejudice to the provisions contained in sub-section (2) of section 12, in the case of a charitable or religious trust running an educational institution or a medical institution or a hospital, the exemption under section 11 or section 12 shall not be denied in relation to any income, other than the income referred to in sub-section (2) of section 12, by reason only that such trust has provided educational or medical facilities to persons referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3). (7) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the person in receipt thereof, any anonymous donation referred to in section 115 BBC on which tax is payable in accordance with the provisions of that section. (8) Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of section 2 become applicable in the case of such person in the said previous year. (9) Nothing contained in sub-section (2) of section 11 shall operate so as to exclude any income from the total income of the previous year of a person in receipt thereof, if- (i) the statement referred to in clause (a) of the said sub-section in respect of such income is not furnished on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year; or (ii) the return of income for the previous year is not furnished by such person on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the said previous year.  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; [Anonymous donations to be taxed in certain cases. 115BBC. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of- [(i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of anonymous donations received in excess of the higher of the following, namely:- (A) five per cent of the total donations received by the assessee; or (B) one lakh rupees, 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 anonymous donations received in excess of the amount referred to in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sub-clause (A) or sub-clause (B) of clause (i), as the case may be.]] (2) The provisions of sub-section (1) shall not apply to any anonymous donation received by- (a) any trust or institution created or established wholly for religious purposes; (b) any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution. (3) For the purposes of this section, "anonymous donation" means any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.] [Charge of tax where share of beneficiaries unknown. 164(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, [or which is of the nature referr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed to in sub-clause (iia) of clause (24) of section 2,] [or which is of the nature referred to in sub-section (4A) of section 11,] tax shall be charged on so much of the relevant income as is not exempt under section 11[or section 12], as if the relevant income not so exempt were the income of an association of persons : [Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]] CHARITABLE OR RELIGIOUS TRUST - REGISTRATION OF - CONDONATION OF DELAY IN FILING OF FORM NO. 10B FOR YEARS PRIOR TO ASSESSMENT YEAR 2018-19 CIRCULAR NO. 10 [F.NO.197/55/2018-ITA-I], DATED 22-5-2019 Under the provisions of section 12A of Income-tax Act, 1961 (hereafter 'Act') where the total income of a trust or institution as computed under the Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to Income-tax in any previous year, the accounts of the trust or institution for that year have to be audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in receipt of the income is required to furnish along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed. 2. As per Rule 17B of the Income-tax Rules, 1962 (hereafter 'Rules') the audit report of the accounts of such a trust or institution is to be furnished in Form No. 10B. As per Rule 12(2) of the Rules, such audit report is to be furnished electronically. The failure to furnish such report in the prescribed form along with the return of income results in disentitlement of the trust from claiming exemption under sections 11 and 12 of the Act. 3. Representations have been received by the Board/field authorities stating that Form No. 10B could not be filed along with the return of income for AY 2016 17 and AY 2017-18. It has been requested that the delay in filing of Form No. 10B may be condo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned. Previously, vide instruction in F.No. 267/482/77-IT(part), dated 9-2-1978, the CBDT had authorized the ITO to accept a belated audit report after recording reasons in cases where some delay has occurred for reasons beyond the control of the assessee. 4. Accordingly, in supersession of earlier Circular/Instruction issued in this regard, and with a view to expedite the disposal of applications filed by such trusts or institutions for condoning the delay in filing Form No. 10B and in exercise of the powers conferred under section 119(2) of the Act, the Central Board of Direct Taxes hereby directs that; (i) The delay in filing of Form No. 10B for AY 2016 17 and AY 2017-18, in all such cases where the Audit Report for the previous year has been obtained before the filing of return of income and has been furnished subsequent to the filing of the return of income but before the date specified under section 139 of the Act is condoned. (ii) In all other cases of belated applications in filing Form No. 10B for years prior to AY 2018-19, the Commissioners of Income-tax are authorized to admit such applications for condonation of delay under secti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 119(2)(b) of the Act. The Commissioners will while entertaining such belated applications in filing Form No. 10B shall satisfy themselves that the assessee was prevented by reasonable cause from filing such application within the stipulated time. Further, all such applications shall be disposed off by 30-9-2019. The first and the foremost question which arises is as to which entity to be formed when one is trying to deal with a Charitable entity. A comparison chart of the various entities is given herein below:- COMPARISON- TRUST, SOCIETY AND SECTION 8 COMPANY Sl. No. Nature TRUST SOCIETY SECTION 8 COMPANY * Governing Act Indian Trust Act, 1882 Societies Registration Act, 1860 Indian Companies Act, 2013 * Registration Registration required via Trust Deed. Section 1 & 2 of the Societies Registration Act-Registration required via memorandum of association. Registration required via Memorandum & Article of Association. * Objects Section 4 of the Indian Trust Act- A trust may be created for any lawful purpose. The purpose of a trust is lawful unless it is (a) forbidden by law, or (b) is of such a nature that, if permitted, it....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... would defeat the provisions of any law, or (c) is fraudulent, or (d) involves or implies injury to the person or property of another, or (e) the court regards it as immoral or opposed to public policy. Section 1 of the Societies Registration Act- Objects can be literary, scientific, or charitable and also for the special purposes as stated in the Section 20 of the said Act. Section 8 of the Companies Act- promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; * Stamp Duty Trust Deed required to be executed on Non Judicial Stamp Paper. No stamp Duty. No stamp duty. * Registering Authority Sub-Registrar of Registration/charity commissioner. Registrar or Deputy Registrar of society of the concerned state/charity commissioner. Registrar of Company. * Members Minimum 2 members. Section 1 of the Societies Registration Act, 1860- Minimum seven members. Public Company- seven members Private Company- 2 members. * Who can become member or trustee Section 10 of Indian Trust Act, 1882-Every person capable of holding property m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ay be a trustee; but, where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract. Any person associated with the stated objects of the society. Section 8(3)of the Companies Act-A firm may also become the member of Section 8 Company. * Legal title of the properties In the name of the trustees. Section 6 of the Indian Trust Act, 1882-the trust-property, and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transferred the trust-property to the trustee. Section 5 of the Societies Registration Act, 1860-The property, movable and immovable belonging to a society registered under this Act, if not vested in trustees, shall be deemed to be vested, for the time being, in the governing body of such society, and in all proceedings civil and criminal, may be described as the property of the governing body of such society for their proper title. In the name of the company * Annual Compliance No annual return filing. Section 19 of the Indian trust act, 1882-A trustee is bound (a) to keep clear and accurate accounts of the trust-property, and (b) at all reasonable tim....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es, at the request of the beneficiary, to furnish him with full and accurate information as to the amount and state of the trust-property. Section 4 of the Societies Registration act, 1860-Societies must file annually, with the Registrar of Societies, a list of the names, addresses and occupations of their managing committee members. There is requirement of annual compliance by filing of annual accounts and return of company with the Registrar of Companies. * Revocation or Dissolution Section 78 of the Indian Trust Act, 1882- A trust created by will may be revoked at the pleasure of the testator. A trust otherwise created can be revoked only- (a) where all the beneficiaries are competent to contract-by their consent; (b) where the trust has been declared by a non-testamentary instrument or by word of mouth-in exercise of a power of revocation expressly reserved to the author of the trust; or (c) where the trust is for the payment of the debts of the author of the trust, and has not been communicated to the creditors at the pleasure of the author of the trust. Section 13 of the Societies Registration Act, 1860- Revocable- Approval required by at least three fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urth of the members. Revocable in accordance with the provisions of Companies Act, 2013. * Properties after dissolution or winding up Vest in the hand of the trustee. Section 14 of the Societies Registration Act-If upon the dissolution of any society registered under this Act there shall remain, after the satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members of the said society or any of them, but shall be given to some other society, to be determined by the votes of not less than three-fifths of the members present personally or by proxy at the time of the dissolution, or in default thereof, by such court as aforesaid. Clause not to apply to Joint-stock Companies:Provided, however, that this clause shall not apply to any society which has been founded or established by the contributions of share-holders in the nature of a Joint-stock Company. Section 8(9) of the Companies Act-If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to the Rehabilitation and Insolvency Fund formed under section 269. * Grant of subsidy by Government Less preferable Less preferable More preferable * Liability if the trust, society or company sued in the name of person or any officer The trustee holds legal title to the trust property, he or she owes fiduciary duties to the beneficiaries who hold equitable title. A trustee is personally liable for a breach of his or her fiduciary duties. The trustee's fiduciary duties include a duty of loyalty, a duty of prudence, and subsidiary duties. Section 8 of Societies Registration Act- If a judgment shall be recovered against the person or officer named on behalf of the society, such judgment shall not be put in force against the property, movable or immovable, or against the body of such person or officer, but against the property of the society. In case any liability rises, the members of the company are not personally affected; members are liable for unpaid shares held by them and not more than that. * ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Liability in the hand of the member or trustee * Section 29 of the Indian trust Act-When the beneficiary's interest is forfeited or awarded by legal adjudication to the government, the trustee is bound to hold the trust-property to the extent of such interest for the benefit of such person in such manner as the State Government may direct in this behalf. * Section 46- Trustee cannot renounce after acceptance of trust. * Section 47-Trustee cannot delegate his office and duties. Section 10 of the Societies Registration act- Any member who may be in arrear of a subscription which according to the rules of the society he is bound to pay, or who shall possess himself of or detain any property of the society in a manner or for a time contrary to such rules, or shall injure or destroy any property of the society, may be sued for such arrear or for the damage accruing from such detention, injury, or destruction of the property provided. * Liability of a member is limited up to the amount unpaid share capital. * No minimum numbers of directors required. * No Minimum Paid up Capital Required * Company Secretary is not mandatory. The decision as to whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h entity is to be followed is to be done on the basis of above parameters. Thereafter the question of Registration under the Income-tax Act,1961 has to be done by filing Application before the DIT(Exemptions) in Form No 10A. Practical issues relating to Public Charitable Trust Investment in shares -Whether can be done by a charitable Trust? As per the provisions of Section 11(5) of the Income-tax Act,1961 investments by a trust has to be made as per the prescribed mode of investments as contained therein. A question arises whether a trust can purchase equity shares of any company or can invest in Stock market? In this regard, the shares of public sector companies are eligible mode of investment as per Section 11(5)(vii) of the Income-tax Act,1961 and also those shares which prescribed as a mode of investment u/s 11(5)(xii) of the Income-tax Act,1961. With reference to the investment in other shares, the trust has to dispose of the same as per the provisions of Section 13(1)(d) of Income-tax Act,1961. The following issues are relevant here- * Bonus shares which are received are not to be counted for the purpose of calculation of limit as specified in Section 13(2)(h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....)- CIT Vs Narinder Mohan Foundation 2007 (10) TMI 288 - DELHI HIGH COURT. * Innocent deviation need not loose exemption-2001 (8) TMI 78 - DELHI HIGH COURT. Also see Export Promotion council for handicrafts Vs DGIT(Exemptions) 2010 (5) TMI 38 - DELHI HIGH COURT In this regard, another pertinent question which arises is whether in case of a trust which makes investment which are not as per the provisions of Section 11(5), what happens to the taxation of such a trust whether the entire income becomes taxable or only the income. It is only the income from such investment which are not made as per the provisions of Section 11(5) is liable for tax as per this clause and not the entire income of the Trust. Sale of Capital assets by a Charitable trust- Applicability of Section 50C Section 50C of the Income-tax Act,1961 deals with Special provision for full value of consideration in certain cases and as per this section, where the consideration received or accruing as a result of the transfer by assessee of a capital asset, being land & building or both is less than the value adopted or assessed or assessable by any authority or a State Government for the purpose of payment of stamp du....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty in respect of such transfer, the value so adopted or assessed or assessable shall for the purpose of Section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. A question arises whether in a case of a charitable trust which has sold any property during the year -whether the provisions of Section 50C are applicable. In this regard, it may be noted that Section 11(1A) of the Act specifically deals with the capital asset held by a charitable trust and thus the calculation has to be done as per the provisions of Section 11(1A) and Section 50C cannot be invoked. The following cases in this regard can be relied upon: - * DCIT Vs Saife Jubilee High School (Ahmedabad ITAT ITA No 2301/Ahd/2014) [2018 (11) TMI 540 - ITAT AHMEDABAD] * ACIT-1 Kanpur Vs Upper India Chamber of Commerce ITA 601/LKW/2011 [2014 (11) TMI 395 - ITAT LUCKNOW] * CIT Vs Thiruvendgadam Investments Pvt ltd 2009 (12) TMI 48 - MADRAS HIGH COURT It is also to be noted that Section 50C doesn't start with a non-obstante clause and therefore these provisions are not applicable in case there are specific provisions dealing with the computation as in case of chari....
X X X X Extracts X X X X
X X X X Extracts X X X X
....table trust. Claim of depreciation on asset already claimed as application of income Income of a Charitable trust has to be computed on Commercial basis and Claim of Additional depreciation by a Charitable Trust has to be allowed notwithstanding that the entire amount of the capital asset may have been claimed as an application of Income. It has time and again been held that the income of a Charitable trust has to be computed on commercial principles [ CIT Vs Institute of Banking (2003) 264 ITR 110(Bom) ]and therefore even if the entire cost of the asset has been allowed to be treated as an application of income, depreciation on such asset in subsequent years has to be allowed on commercial principles. See also DIT(Exemptions) Vs Framjee Cawasjee Institute (1993) 109 CTR 463(Bombay) and CIT Vs Munisuvrat Jain (1994) Tax LR 1084(Bom). Moreover, if an asset is not capable of being used and has to be discarded and the entire WDV is written off in the books of account, then the same has to be allowed as an additional depreciation notwithstanding that the nomenclature in the accounts may not have been used as Additional depreciation because nomenclature cannot decided the claim under....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Act. CIT(Exemptions) Vs Bhatia General Hospital (2018) 405 ITR 24(Bom). Also CIT Vs Sheth Manilal Ranchhoddas Vishram Bhavan Trust(1992) 192 ITR 598(Guj) and CIT Vs Ganga Charity Trust (1986) 162 ITR 612(Guj). Similar view has been taken in the case of CIT Vs Market Committee, Pipli (2011) 330 ITR 16(P&H), CIT Vs Raipur Pallottine Society(1989) 180 ITR 579(MP),CIT Vs Sheth Manilal Ranchooddas Vishram Bhavan Trust(1992) 198 ITR 598(Guj), CIT Vs Society of the Sisters' of St Anne(1984) 146 ITR 28(kar). In the case of 146 ITR, the Court dealt with the argument of the Revenue that Depreciation allowance being a notional expenditure cannot be allowed to be debited to the expenditure account of the trust. The depreciation is nothing but decrease in the value of the property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy etc. The balance sheet will not present a true and fair view unless depreciation was provided for. Decision against- Kerala High Court Lissie Medical Institutions (2012) 348 ITR 344(Ker) -this decisions brings views of CBDT also as well as the CBDT Circular No 5-P is reported in End notes. Allahabad H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....igh Court in the case of CIT(Exemptions) Vs Seth Anandram Jaipuria education society Cantonment(2017) 394 ITR 712(All) has not accepted the Kerala High Court view. Amendment made by Finance (No 2) Act 2014 in Section 11(6). Amendment considered in the case of CIT-III,Pune Vs Rajasthan & Gujrati Charitable Foundation Poona(2018) 402 ITR 441(SC) and it was noted that the amendment is prospective in nature Whether carry forward of excess expenditure can be claimed as application of income in subsequent years by a Charitable Trust? In the case of [ CIT Vs Institute of Banking (2003) 264 ITR 110(Bom) ] it was held that Income derived from trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in subsequent year in which adjustment has been made having regard to the benevolent provisions contained in Section 11 of the Act. See also CIT Vs Shri Plot Swetamber Murti Pujak Jain Mandal(1995) 211 ITR 293(Guj) and Circular No 100 dated January 24,1973, F No 195/1/72....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-I.T.(A.I) [(1973) 88 ITR (St) 66] Also CIT Vs Maharana of Mewar Charitable Foundation (1987) 164 ITR 439(Raj) CIT Vs Kristi Upaj Mandi Samiti(2017) 390 ITR 59(Raj).[SLP granted against this decision reported in (2017) 245 Taxman 270(SC)] The decision of Rajasthan High Court in the case of Shri Akhey Ram Ishwari Prasad Trust Vs CIT (2004) 266 ITR 281 (Raj) was considered here as having not laying down any law that in all cases where the expenditure are incurred by the assessee in excess of income earned during the previous year relevant to the assessment year, such income though applied for charitable purposes, shall not be entitled for exemption under Section 11(1)(a) of the Act. Whether a Charitable trust can switch from one method of accounting to another ? In the case of CIT Vs Ganga Charity Trust Fund(1986) 162 ITR 612(Guj) it was held that there is nothing in the Act which precludes the assessee, who bona fide desires to switch over to another system of accounting, from doing so. A bona fide assessee cannot be precluded from switching over to another system of accounting which he finds convenient and which would reflect his real income. Reliance was placed on the following....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... decisions:- * CIT Vs Rajasthan Investment Co (P) Ltd 1978 (1) TMI 62 - CALCUTTA HIGH COURT * Reform Flour Mills Pvt ltd Vs CIT 1978 (3) TMI 80 - CALCUTTA HIGH COURT * Snow White Food Products Co Ltd Vs CIT 1981 (11) TMI 27 - CALCUTTA HIGH COURT Whether payment of income-tax and wealth-tax has to be deducted from income for the purpose of arriving at income which is available for application ? In the case of CIT Vs Ganga Charity trust fund(1986) 162 ITR 612(Guj),it was held that for the purpose of actual application or accumulation or setting apart of income from trust property for the purposes of the trust, the trustees must have on hand income which could be so utilised and what are outgoings towards payment of income-tax must be deducted for working out such surplus income. Similar view was taken in the case of CIT Vs Trustees of HEH , the Nizam's Supplemental Religious Endowment Trust(1981) 127 ITR 378(AP) by holding that the payment of income-tax and wealth-tax made during the relevant year relating to the previous assessment years were incidental to the carrying out of the charitable purposes of the trust. Such payments were outgoings in that particular year and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....were, therefore, incidental to the carrying out of the objects of the trust and had, therefore to be excluded from the income of the trust. See Also CIT Vs Janaki Amal Ayya Nadar Trust (1985) 153 ITR 159(Mad) in which it was held that payment of tax is necessary to preserve the property of the trust when a demand is lawfully made. Even though the trust may not accept the demand and challenges the same on appeal, that is not relevant for considering the question whether payment has to be made to preserve the trust property .The expenditure incurred by way of payment of tax out of current year's income has to be considered as application for charitable purposes. This is because payment is made to preserve the corpus, the existence of which is absolutely necessary for the trust. The Court also relied on the CBDT Circular No 5 dated 19th June,1968 ( to check whether Circular No 5-P (LXX-6) of 1968 dated July, 19 1968) wherein the application of income is to be considered and Income means income after considering all outgoings. Income for the purpose of Section 11 need not be computed in accordance with the provisions of Section 14 applicable for computation of total income In th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e case of CIT Vs Calavala Cunnan Chetty Charities (1982) 135 ITR 485(Mad), a question came up before the Hon'ble Court that whether for the purpose of computing the accumulation in excess of 25 percent, as laid down in Section 11(1)(a) of the Income-Tax Act, 1961 income has to be computed under various heads as enumerated under the Income-tax Act? The Court considered that the provisions of Section 11 are contained in the Chapter III dealing "Income which do not form part of total income". Thus, Section 11 forms Part of receipts or income which would be excluded from computation of total income. The Court also considered that in the case of Lord Chetwode Vs IRC (1977) 1 All ER 638 it was observed that " it is notorious that there is not and never has been any definition of income in the UK Tax Code. The same position holds good in India also because what is chargeable to income-tax is left to be determined according to the statutory provisions of the Act in the light of the elastic concept of income. That is why Section 2(24) defines "income" as including particular category of receipts. The idea is more to bring in all the categories of income which are brought to tax by applying ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a legal fiction so that by their non-inclusion in the definition, such categories did not escape taxation. In the absence of any definition of income, the same has to be proceeded on the basis of income as understood in general parlance. Income would ordinarily exclude a receipt by way of capital. Mere gross receipt cannot also be taxed as income. It may be broadly stated that what is taxed is not also any gross receipt. The receipt must be revenue in nature and is to be taxed after excluding the necessary outgoings. The court also noted that where Parliament considered that the computation should be done in accordance with the provisions of the Act, it introduced the concept by using appropriate language "as computed in accordance with the other provisions of this Act". The computation under different categories of income arises only for the purposes of charge. Those provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purpose of exemption under Chapter III. Finally it was held that income from properties held under trust would have to be arrived at in the normal commercial manner wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thout reference to the provisions which are attracted by Section 14. This decision was followed in the case of CIT Vs Estate of V L Ethiraj (1982) 136 ITR 12(Mad). Whether Provisions for doubtful debts can be considered to be an application of income? The Bombay High court in the case of Bombay Stock Exchange Vs DDIT(Exemption) and others (No 1) (2014) 365 ITR 160(Bom) quashed the reopening of the assessment by holding that full details of the provision for doubtful debts was given at the time of assessment and as such it could not have been said that there was an omission or failure to disclose fully and truly all material facts relating to the assessment. Similar view was taken in the case of Bombay Stock Exchange Ltd Vs DDIT(No 2) (2014) 365 ITR 181(Bom). Whether Corpus donation can be spent for the objects of the trust? ften it is seen that the Assessing officers dispute the application of income on the pretext that the application has been made out of the corpus fund. In this regard, it is to be noted that there is no bar on spending any amount received for the purpose of Corpus of the trust and it can be spent for the specific purpose for which it is received or there is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....no specific purpose then towards the objects of the trust. Anonymous Donation Difference between anonymous and unaccounted donation. Provisions of Section 115BBC. See Vidyavardhini Vs Asstt CIT, Central Circle-2, Thane(2012) 20 taxmann.com 81(Mum). CBDT Circular No 5/2010 dated 3-6-2010 Delay in filing Form No 10 Where eighty five percent income of the trust is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year then the trust has an option to accumulate the said income for the purpose of application in the next five years. The said option has to be exercised by filing a statement in form 10 in the prescribed manner to the assessing officer stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years. Prior to the coming into the force of Finance Act, 2015 The Finance Act, 2015 amended section 11 and section 13 of the Act with effect from 01.04.2016(A.Y.2016-17).Consequently, Income-tax Rules, 1962 (hereafter 'Rules') were also amended vide the Income-tax (1st Ame....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndment) Rules, 2016. As per the amended provisions of the Act read with rule 17 of the Rules, while 15% of the income can be accumulated indefinitely by the trust or institution, 85% of income can only be accumulated for a period not exceeding 5 years subject to the conditions, inter alia, that such person submits the prescribed Form No. 10 electronically to the Assessing Officer within the due date specified under section 139(1) of the Act. Therefore from the assessment year 2016-17 and onwards Form 10 has to be filed within the time allowed u/s 139(1). Here it may be noted that prior to the finance act, 2015 requirement of filing the form 10 within the time allowed u/s 139(1) was prescribed in the Rules only however after the amendment carried out by Finance Act, 2015 the requirement of filing the form 10 within the time allowed u/s 139(1) has also been incorporated in section 11(2) of the Act. There are number of case laws on this issue that Belated form 10 can also be filed is there are bonafide reasons or reasons which are beyond the controls of the assessee. The Hon'ble Bombay High Court in case of CIT Vs Sakal Relief Fund reported under 2017 (4) TMI 772 held ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that Tribunal justified in holding that Form 10 prescribed in terms of Rule 17 of Income Tax Rules for the purpose of Section 11 of the Act would be valid even if filed during the Assessment Proceedings, consequent to a reopening notice under Section 148 of the Act, even if not filed with the return of income". The Hon'ble Gujrat High Court in case of CIT Vs Mayur Foundation reported under 274 ITR 562 (2005) also held that belated form 10 can be filed. Recently the Hon'ble Chennai ITAT in case of DDIC vs The Madras Seva Sadan in ITA No 974/Mds/2015 dated 27.04.2016 held that "We are of the opinion, considering the activities of the trust and genuineness of the objects and supporting affidavit in explaining the delay, the assessee should file before Assessing Officer revised form No.10B and form No. 10 further considering the principles of natural justice and provisions of Rule 46A, we set aside the entire disputed issue to the file of the Assessing Officer for limited purpose to verify the genuineness of evidence and pass the order afresh after providing adequate opportunity of being heard to the assessee". Further the CBDT vide circular no 273 (F.No 180....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../57/80-IT(A-I)}, dated 03.06.1980 authorised the Commissioner for condoning the delay in filing of Form10 and directed him to admit belated application u/s 11(2) read with rule 17 and to dispose of the same after satisfying itself. Delay in filing of Audit Report in Form No 10B Further in the similar manner there are number of judgments in which Hon'ble Court held that exemption u/s 11 cannot be denied merely for delay in filing the Audit Report in Form 10B which is procedural in nature The Hon'ble Calcutta High Court had occasion to deal with the similar issues in case of Commissioner of Income Tax vs Rai Bahadur Bissesswarlal Motilal Malwasie. Trust reported under 195 ITR 825 (Calcutta). In this case assessee had not filed the audit report in Form 10B along with its return of income but filed the same before the completion of assessment. The Hon'ble Calcutta High Court in the above case held that where the assessee has complied with the provisions of the Act in the course of the assessment proceedings by curing the defect in the return by filing an audit report, the ITO cannot ignore such audit report or the return in completing the assessment and decided....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the issue in favour of the assessee. The said decision also followed by the Hon'ble Calcutta High Court in case of Commissioner of Income Tax vs Hardeodas Agarwalla Trust reported under 198 ITR 511 (Calcutta) and held that " In our view, having regard to the object of section 12A, it cannot be said that the Legislature intended that, even where the trust has got its accounts audited and the certificate obtained in Form No. 10B before the completion, merely because such report could not be filed in the course of the assessment proceedings, it would deprive a trust of getting the exemption if it is otherwise entitled to it in law." Moreover Hon'ble Andhra Pradesh High Court in case of CIT vs Andhra Pradesh State Road Transport Corporation reported under 285 ITR 147 confirmed the view of the ITAT that the provisions contained in section 12A(b) are only directory in nature and not mandatory" Six years for carry over -change in the use -application It is often seen that after filing form. No 10 for a specified purpose, due to some reason that purpose is not capable of being fulfilled and needs to be changed. In this regard, the AO is permitted to entertain an App....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lication for change of the use as per Section 11(3A) and thereafter it can be spent for the purposes as specified in the change which is done. Can a foreigner be a trustee of a trust? In this regard, it may be noted that the Income-tax Act,1961 doesn't say anything regarding this and resort has to be made to other Acts. The Indian Trust Act,1882 can be roped in even though it has been stated in the Act itself that this Act is not applicable to charitable or religious trust. In this regard as per the provisions of Section 73 of the Indian Trust Act where a person appointed as a trustee is absent for a continuous period of six months, leaves India for a continuous period of six months, or leaves India for the purpose of residing abroad, a new trustee may be appointed in his place by a person nominated in the trust documentfor that purpose, if an and in absence of such person, by settlor of the trust, if alive and competent to contract or the surviving/continuing trustee, if any or the retiring trustee himself with the consent of the court. See Global Academy of Emergency Vs CIT[E] decided on 14thSeptember,2018 Delhi ITAT. Whether Section 8 Company liable for MAT? There are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....specific provisions in Section 115JB dealing with exemption related to income of an entity registered u/s 11 of the Income-tax Act,1961. Resort can also be had to the decision of Delhi Gymkhana Club Ltd Vs DCIT in ITA No 3585/Del/2006 dated 30th September 2009 Can a trust do charitable activities outside India? In this regard, it is to be noted that as per the provisions of Section 11 the application of the Income has to be made for objects in India. It is clear that if the application is made as such, then the exemption u/s 11 cannot be availed. However, in the case of CIT Vs State Bank of India (1988) 169 ITR 298(Bom) it was held that simply a clause in the trust deed which permitted application outside India without there being actual spending outside India would not violate Section 11(1) (c) of the Income-tax Act. Also, in the case of CIT Vs Trustees of Nizam's religious endowment trust (1977) 108 ITR 229(SC) it was held that in case of a trust having activities outside India, the exemption will be denied to the extent of income applied outside India. Capital gains in case of Charitable Trust The manner in which capital gains are to be dealt with in Section 11(1A) as r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eproduced hereinabove. In this regard, CBDT's Instruction No 883 [XXI/1/74] dated 24.09.1975 is to be noted. Thus, if a charitable trust simply puts funds in fixed deposit exceeding six months, no capital gains tax is payable. The following judgements in this regard are worth discussion:- Whether a charitable trust can accept donation in Cash? There is no bar on a charitable trust accepting donation in cash directly. However in this regard, provisions of Section 269ST has to kept in mind. Also as far as donor is concerned, Section 80G (5D) provides that no deduction shall be allowed under this Section in respect of donation of any sum exceeding Rs. 2000/- unless such sum is paid by any mode other than cash. Whether a Charitable Trust can make expenditure in cash? An explanation 3 was inserted in Section 11 by Finance Act 2018 to provide that for the purpose of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of Section 40 and sub-section (3) and (3A) of Section 40A, shall mutatis mutandis apply as they apply in computing the income chargeable under the head "profits and gains of business or profession". ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The expression "mutatis mutandis" has its usual meaning, that is , that only such verbal changes are to be made in the rules mentioned (in the rules where to be applied) as would make the principles embodied in these rules applicable to applications under (rules from where it is to be applied). In this regard, the memorandum explaining provisions are as follows:- At present, there are no restrictions on payments made in cash by charitable or religious trusts or institutions. There are also no checks on whether such trusts or institutions follow the provisions of deduction of tax at source under Chapter XVII-B of the Act. This has led to lack of an audit trail for verification of application of income. In order to encourage a less cash economy and to reduce the generation and circulation of black money, it is proposed to insert a new Explanation to the section 11 to provide that for the purposes of determining the application of income under the provisions of sub-section (1) of the said section, the provisions of sub-clause (ia) of clause (a) of section 40, and of sub-sections (3) and (3A) o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and gains of business or profession". When violation of Section 11(5) is made as per Section 13(1)(d) -which part of income is to be taxed at maximum marginal rate. In the case of CIT Vs Fr Mullers Charitable Institution(2014) 363 ITR 230(Kar) it was held that in a case where an amount of Rs. 80 lacs was given as advance in violation of Section 11(5) read with Section 13(1)(d) , following clear provisions as laid down in Section 164(2) of the Act it was only that portion which was liable to be taxed at the maximum margin rate and not the entire amount of income. DIT(Exemptions) Vs Sheth Mafatlal Gagalbhai Foundation Trust( 2001) 249 ITR 533(Bom) and DIT(Exemption) Vs Agrim Charan Foundation (2002) 253 ITR 593(Del) Followed Charitable Purpose The Apex Court in the case of Indian Chamber of Commerce Vs CIT(1975) 101 ITR 796(SC) quoted the following passage from the judgement of the Andhra Pradesh High Court in the case of A P State Road Transport corporation Vs CIT(1975) 100 ITR 392,397(AP) while considering the import of Section 2(15) of the Income-tax Act....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,1961 It is one of the fundamental principles in legislation and the drafting of statutes that the provisions contained therein should be clear and cogent and, more so, with regard to the fiscal statutes which impose a burden on the public. But, in this case, we find is that the amendment, instead of being clear and cogent is complicated and courts have taken different views in interpreting the same. The Court also noted that "We dare say that achieving greater simplicity and clarity in statute law will be taken up by the draftsmen of the legislative bills to avoid playing linguistic games in the Court and the promotion of interpretative litigation. Lawyers and legislators must stop confusing each other and start talking to their read audience-the people-so that communication problems may not lead to prolific forensic battles.We must confess to having been hard put to it to get at The controlling distinction between activities which fall on one side or the other of "Charitable purpose". The Court noted the history which compelled the definitional modification was the abuse to which the charitable disposition of the statute to charitable purposes was subjected by exploiting busi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nessmen. You create a charity, earn exemption from the taxing provision and run big industries virtually enjoying the profits with a seeming veneer of charity, a situation which exsuscitated Parliament and constrained it to engraft a clause deprivatory of the exemption if the institution fulfilling charitable purposes undertook activities for profit and thus sought to hoodwink the statute. The Finance Minister's speech in the House explicates the reason for the restrictive condition. He stated in the house: The definition of charitable purpose in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefit provided by them, namely, the newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such case, the Select committee felt that the words " Not involving the carrying on of any activity for profit" should be added to the definition. (Refer Lok Sabha debates Volume LVI, page 3073(August 18,1961) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The evil sought to be abolished is thus clear. The interpretation of the provision must naturally fall in line with the advancement of the object. Of course there are borderline cases where it becomes difficult to decide at first sight whether the undertaking which yields profit is a deceptive device or a bonafide adventure which results in nominal surplus although substantially intended only to advance the charitable object. The Apex Court also noted Chambers of commerce dot this country and by and large, they have the same complex of objects. They exist to promote the trading interests of the commercial community and after the Andhra Chamber of Commerce case (1965) 55 ITR 722(SC) have been regarded as pursuing charitable purposes. This expression, defined in Section 2(15) is a term of art and embraces objects of general public utility. But , under cover of charitable purposes, a crop of camouflaged organisations sprung up. The mask was charitable, but the heart was hunger for tax free profit. When Parliament found this dubious growth of charitable chameleons, the definition in Section 2(15) was altered to suppress the mischief by qualifying the broad object of "general public u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tility" with the additive "not involving the carrying on of any activity for profit". The Court noted as follows at Page 804 In our view, the ingredients essential to earn freedom from tax are discernible from the definition, if insightfully, actually read against the brooding presence of the evil to be suppressed and the beneficial object to be served. The policy of the statute is to give tax relief for charitable purpose, but what falls outside the pale of charitable purpose? The institution must confine itself to the carrying on of activities which are not for profit. It is not enough if the object be one of general public utility. The attainment of that object shall not involve activities for profit. What then is an activity for profit? An undertaking by a business organisation is ordinarily assumed to be for profit unless expressly or by necessary implication or by eloquent surrounding circumstances the making of profit stands loudly negatived. We will illustrate to illumine. If there is a restrictive provision in the bye-laws of the charitable organisation which insists that the charges levied for services of public utility rendered are to be on a "no profit" basis, it clea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rly earns the benefit of section 2(15). For instance, a funeral home, an S.P.C.A. or a co-operative may render services to the public but write a condition into its constitution that it shall not charge more than is actually needed for the rendering of the services,-may be it may not be an exact equivalent, such mathematical precision being impossible in the case of variables,-may be a little surplus is left over at the end of the year-the broad inhibition against making profit is a good guarantee that the carrying on of the activity is not for profit. As an antithesis, take a funeral home or an animal welfare organisation or a super-bazaar run for general public utility by an institution which charges large sums and makes huge profits. Indubitably they render services of general public utility. Their objects are charitable but their activities are for profit. Take the case of a blood bank which collects blood on payment and supplies blood for a higher price thereby making profit. Undoubtedly, the blood bank may be said to be a general public utility but if it advances its public utility by sale of blood as an activity for (making) profit, it is difficult to call its purpose charit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able. It is just blood business: The Court also noted the decision of Lok Shikshana Trust (1975) 101 ITR 234(SC) where Khanna J observed as follows:- "As a result of the addition of the words 'not involving the carrying on of any activity for profit' at the end of the definition in section 2(15) of the Act, even if the purpose of the trust is 'advancement of any other object of general public utility', it would not be considered to be 'charitable purpose' unless it is shown that the above purpose does not involve the carrying on of any activity for profit. The result thus of the change in the definition is that in order to bring a case within the fourth category of charitable purpose, it would be necessary to show that: (1) the purpose of the trust is the advancement of any other object of general public utility, and (2) the above purpose does not involve the carrying on of any activity for profit. Both the above conditions must be fulfilled before the purpose of the trust can be held to be charitable purpose...................... It is true that there are some business activities like mutual insurance and co-operative stores of which profit making is not....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... an essential ingredient, but that is so because of a self-imposed and innate restriction on making profit in the carrying on of that particular type of business. Ordinarily, profit motive is a normal incident of business activity and if the activity of a trust consists of carrying on of a business and there are no restrictions on its making profit, the court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit.................(emphasis * ours). By the use of the expression 'profit motive' it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity.................... We are not impressed by the submission of the learned counsel for the appellant that profit under section 2(15) of the Act means private profit. The word used in the definition given in the above provision is profit and not private profit and it would not b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e permissible to read in the above definition the word 'private' as qualifying profit even though such word is not there." The true test is to ask for answers to the following questions: (a ) Is the object of the assessee one of general public utility? (b) Does the advancement of the object involve activities bringing in moneys? (c) If so, are such activities undertaken, (i) for profit, or (ii) without profit? Even if (a) and (b ) are answered affirmatively, if clause (i) is answered affirmatively, the claim for exemption collapses. The solution to the problem of an activity being one for or irrespective of profit is gathered on a footing of facts. What is the real nature of the activity? One which is ordinarily carried on by ordinary people for gain? Is there a built-in prescription in the constitution against making a profit? Has there been in practice, profit from this venture?, although this last is a weak test. The mere fact that a service is rendered is no answer to chargeability because all income is often derived by rendering some service or other. Further, what is an activity for profit depends on the correct connotation of the preposition. "For" used with the ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tive participle of a verb means "for the purpose of" (See judgment of Westbury C, 1127). "For" has many shades of meaning. It connotes the end with reference to which anything is done It also bears the sense of "appropriate" or "adapted to": "suitable to purpose"-vide Black's Legal Dictionary. An activity which yields a profit or gain in the ordinary course must be presumed to have been done for profit or gain. Of course, an extreme case could be imagined where without intent or purpose an activity may yield profit. Even so, it may legitimately be said that the activity is "appropriate or adapted to such profit". Ultimately the Court noted in Page No 809 as follows:- * Was there any restriction by the Memorandum of Association which sets any limit on making large profit this way. * There was nothing to show that the chamber was doing this activity on no profit basis. On these facts it was held that the activities did not amount to charitable purposes. Relief to the Poor In the case of Thiagarajar Charities Vs Addl CIT (1997) 225 ITR 1010(SC), the Apex Court held that Rural reconstruction necessarily involves uplift of the rural masses and is directed for the welfare of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....such people.Majority of such persons belong to poor(or poorer) segments of the society. Similarly cottage industry is also associated with the idea of small, simple enterprise or industry in which employees, work in their own houses or in a small place gathered together for the purpose using their own equipment and is usually found in rural areas/places or so carried on, by the poor( or poorer) section of the society. In substance the above acitivity, specified in clause 1(g) is to afford "relief to the poor". Clause 1(g) in the trust deed in the said case was worded as follows:- To engage in , carry on, help, aid and assist and promote rural reconstruction work, cottage industry and all other matters incidental thereto in India. Other issues The following issues are worth noting:- * What happens if the certificate u/s 11 or Section 80G is lost? * What is the applicability of ICDS on Trust? * How to amend a trust deed? * How to get certificate of lower deduction of tax at source? * Clarification regarding filing of return within due date and penal provisions in default thereof? Charity & Mutuality * The principle of mutuality is based on the principle that an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... organization cannot derive income from itself, meaning that an organizations' income consists only of funds derived from external sources. Therefore when a number of persons(i.e., members of a club, association or organization) contribute to a common fund which is created and controlled by those persons for a common purpose, any surplus arising therefrom, for the common purpose, will not be deemed to be income. This is known as principle of mutuality as one cannot make an income from oneself. The mutual organizations are carried on the benefit of members collectively. Thus, the profits are distributed or utilized by the members collectively. The principle of mutuality was explained in simple terms by Madras High Court in the case of CIT Vs Madras Race Club(1976) 105 ITR 433(Mad) as follows:- In considering the case for exemption of the subscriptions collected from the members of the application on the principle of mutuality it is necessary to bear in mind two concepts. The first concept is that the principle of mutuality is based on the doctrine that no person can make a profit out of himself. To take a common instance, supposing a dozen persons' gather together and agree to pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....chase certain commodities in bulk and distribute them among themselves in accordance with their individual requirements, they may collect a certain amount provisionally based on the anticipated price of the commodities to be purchased. If it ultimately happens that the commodities are available at a cheaper price so that at the end of the distribution of the commodities among themselves, a part of the original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent savings and not income. The Income-tax Act seeks to tax income and not savings. If this principle is borne in mind, then it would be easier to understand the decisions rendered on this point. It may be seen that in the above instance there is no trading as such. The same legal position would apply even where the parties join together and meet their commercial requirements in a manner mutually beneficial to them. In such a case there may be a trade inter se ; but the trade is not one intended to bring in any profits. It is this aspect which is referred to by Lord Normand in English and Scottish Joint Co-operative Wholesale Society Ltd. v.&nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p;Commissioner of Agricultural Income-tax [1948] 16 ITR 270, 279 (PC): "the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves." On the same issue the following decisions are important:- * Styles Vs New York Life Insurance Company(1889) 2 TC 460(HL) * Jones Vs South West Lancashire Coal owners Association Ltd (1927) 11 TC 790(HL) * CIT Vs Royal Western India Turf Club Ltd (1953) 24 ITR 551(SC) * Charity & Mutuality -whether can exist together In case of a charitable organization, the primary condition is that the organization cannot distribute surplus amongst the members and the surplus is always for the benefit of public at large. In such a situation, it is always believed that charity and mutuality cannot go together. It is pertinent to refer to the decision of Australian Court decision in the case of Coleambally Irrigation Mutual Co-operative Ltd Vs FCT(2004) FCAFC 250 which ruled that the principle of mutuality did not apply because the organization's constitution prohibited the distribution of surplus fund to the members. However, even....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... though charitable organization exists for the benefit of public at large, even if they are rendering services to the members, the principle of mutuality has been applied in several cases as would appear from discussion later on. It has been time and again discussed in professional circles that charity and mutuality are contradictory and cannot go together. However, in a number of decisions where the organization has been enjoying the provisions of charity, Income has been exempted applying principles of mutuality . Infact the Central Board of Direct Taxes(CBDT) in its Circular NO 11/2008 dated 19-12-2008 has clarified as follows in Para 3.1 of the Circular:- 3.1 There are industry and trade associations who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under 'any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organisations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organisations have dealings with non-members, their claim to be charitable organisations would now be governed by the additional conditions stipulated in the proviso to section 2(15). In the case of CIT Vs Indian paper mills association (1994) 209 ITR 28(Cal) it was held that the right of members of the club regarding the disposal of the surplus at the time of dissolution of the club cannot nullify the principle of mutuality in as much as the participants themselves should decide how the surplus fund should be utilized. Moreover the court also noted that if at all this question can arise in the actual year of dissolution to see whether the surplus has been distributed in accordance w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith the objects or not. Thus in such a situation even in case of a charitable organizations ,the principle of mutuality becomes applicable. * Mutuality-Identity between classes The mutuality principle is dependent upon the existence of an identity between contributors to the fund and those who are entitled to participate in it. The identity required is not an identity between individuals, but an identity between classes , and all that is required is reasonable relationship between what a member contributes and the member's expected participation in the common fund. Sydney Water Board Employees Credit Union Vs Federal commissioner of taxation(1973) 129 CLR 446 * What is Mutuality Typically the following are the characteristics of a Mutuality organization:- They are carried on the for the benefit of members' collectively. They have members that share a common purpose. Those members are all entitled to participate in that common purpose. The main purpose for which the organization is established and is operated is the common purpose of the members and all the members contribute to a common fund that gives effect to the common purpose and all contributions are applied ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the collective benefit of the members. The members contribute not with an idea to trade, but with an idea of rendering mutual help. The receipt in their hands is not really the profit, as no man can make a profit out of himself, just as he cannot enter into a trade or business with himself. In this regard, the Apex court in the case of Commissioner of Income-tax Vs Royal Western India Turf Club(1953) 24 ITR 551(SC) held that The cardinal requirement is that all contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial". Styles' case has recently been examined and explained by the Judicial Committee in English & Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax, Assam' [1948] AC 405; 16 ITR 270 After referring to various passages from the speeches of the different Law Lords in Styles'&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp;case Lord Normand, who delivered the judgment of the Board, summarized the grounds of the decision in Styles' case as follows:- "From these quotations it appears that the exemption was based on (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves" * Types of Organizations * Clubs * Trade Associations * Housing Society * Mutual benefit society * Employees benefit society * Professional Associations * Kitty in modern day. * Chit fund * Association of persons for mutual help * Puja Pandals * Impact of mutuality on income-Broad principles The practical effect of the principle is that receipts derived from mutual dealings with an organization's members(mutual receipts) are excluded from the assessable income of the organization; expenses incurred to get mutua....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l receipts are not deductible; receipts derived from trading with non-members and income from sources outside of the organization are treated as assessable income and the expenses directly related to the assessable income can be claimed as expenses. * Participators need not take surplus themselves The participation envisaged in the principle of mutuality is not that the members should take the surplus to themselves. It is enough if they have the right of disposal over the same. (See CIT Vs West Godavari District Rice Millers Association 150 ITR 394(AP) . In the said decision, the Hon'ble Court relied upon the decision of the Madras High Court in the case of CIT Vs Madras Race Club(1976) 105 ITR 433(Mad) wherein it was held as follows:- "The memorandum and articles of association of a company represent the contract between the company and the members. It is only by virtue of their ownership of the surplus assets, if any, that the members had agreed to the clause that they would not take back the surplus, but allow it to be transferred to any similar entity. As they themselves are to deal with the surplus, if any, at the time of winding up, it cannot....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be said that they are not participators in the surplus. This clause is only a fetter in the manner of disposal. The participation envisaged in the principle of mutuality is not that the members should willy-nilly take the surplus to themselves. It is enough if they had a right of disposal over the surplus to show that they were the participators." (p. 434). Moreover, the Madras High court quoted the English case of IRC Vs Eccentric Club Ltd (1925) 12 TC 657(HL) wherein it was provided clause 6 of the Memorandum that no member of the club in his character as such member was entitled to receive, directly or indirectly, any dividend, bonus or other profit out of such income or property of the club. On the winding up of the Club, the surplus if any was not to be distributed to the members but was to be given or transferred as the committee of management may determine. With all these features, it was held that the doctrine of mutuality would apply and the amount was not liable to be taxed. Also in the aforesaid decisions it was held that it is well settled that the identity need not be necessarily of individuals because it is the identity of status or capacity which matters more. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... * Application of principle of mutuality is not destroyed on account of transaction with non-members One extreme contention advanced on behalf of the revenue was that where a club had taxable income from trading or business activities, then there was no scope for the application of any principle of mutuality, even assuming that the subscriptions could be brought within the ambit of this principle. In Carlisle and Silloth Golf Club v. Smith [1912] 6 TC 48, 54, 55 (KB). there was a club, which was a bona fide members' club, for the purpose of recreation and other purposes incidental thereto. It took on lease from a railway company an open land which was utilized as a golf club at a nominal rent on condition that the golf club was to be run there and that non-members would be allowed on payment of certain fixed amounts for the use of the golf course. There were enough visitors to avail themselves of this privilege. The revenue authorities sought to assess the entire profits or gains of the golf club consisting of receipts from members and non-members. The court held that in so far as the club engaged itself in granting facilities of playing golf to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....non-members, it was carrying on a trade or business, and the profit was liable to be assessed. As regards contributions from the members, the principle of mutuality was applied. With reference to the facilities afforded on receipt of "green fees" from non-members, Hamilton J. held as follows1: "Now it seems to me that that constitutes engaging in the carrying on of an enterprise which is in itself outside the scope of the club and is distinct from the ordinary objects and activities of the club;............. I think, therefore, that at the outset the club has, for considerations sufficient in its own view, annexed to its ordinary enterprise of a golf club the rendering of services systematically to strangers for the purpose of obtaining, among other advantages to itself the revenue that those strangers provide..........; it is a case it seems to me at the outset in which this aggregate of gentlemen, who may for practical purpose be treated as one person, annexed to their club for the purposes of recreation an enterprise which is separate from it and which results in pecuniary receipts to themselves." This case, in our opinion, shows that the application of the principle of mu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tuality is not destroyed by the presence of transactions with, or profits derived from non-members. The said principle could apply to transactions with members. The maintenance of a combined account for all the transactions does not also affect the claim, as the way in which the accounts are kept is not conclusive in matters of taxation. The two activities can in appropriate cases be separated and the profits, if any, from the members, can be taken on the basis of the actuals from the accounts or, at any rate, by an estimate if it should become necessary. We are, therefore, unable to accept this part of the contention of the revenue. We are not shut out from considering the question of mutuality by virtue of (a) transactions with non-members or (b) maintenance of common accounts. * All the participators must be contributors to common fund In the case of CIT Vs Kumbakonam Mutual Benefit Fund Ltd (1964) 53 ITR 241(SC), the Hon'ble Apex Court held that essence of mutuality lies in the return of what one has contributed to a common fund, and if profits are distributed as shareholders, the principle of mutuality is not satisfied. All the participators must be contributors to the com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mon fund, mere entitlement to contribute will not suffice. * Receipts for various facilities extended by club to its members Receipts for the various facilities extended by the clubs to its members, as part of usual privileges , advantages and conveniences, attached to the membership of the club, could not be said to be from " a trading activity" and the surplus-excess of receipts over expenditure- as a result of mutual arrangement could not be said to be "income" for the purposes of the Act. CIT Vs Bankipur Club Ltd 226 ITR 97(SC) * Annual value of club house -also exempt on mutuality principle In the case of Chelmsford Club Ltd Vs CIT 243 ITR 89(SC), it was held that in addition to the surplus arising from the activities of the business of the club that was excluded from the levy of income-tax , even the annual value of the club house, as computed in Section 22 of the income-tax Act would be outside the purview of the levy of income-tax on principles of mutuality. * Principle of mutuality applies to what type of income? Principle of mutuality applies to all non-commercial activities. As regards income from commercial ventures, the club or society would not be entitled....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to claim principles of mutuality in respect of adventures of commercial nature. * Sports Club of Gujarat Ltd Vs CIT 171 ITR 504(Guj) Receipts from interest on bank deposit can be treated as exempt on principles of mutuality * CIT Vs Apsara Co-operative Housing Society Ltd 204 ITR 662(Cal) Transfer fee realized from a newly inducted member in a co-operative housing society was eligible to be exempt on principles of mutuality. Transfer Charges, non-occupancy charges were held to be exempt on principles of mutuality in the case of 402 ITR 670(SC). In the case of CIT Vs Apsara Co-operative Housing Society Ltd (1993) 204 ITR 662(Cal) it was held that the transfer fees charged by a cooperative housing society was exempt on account of mutuality and the principles which governed clubs as far as mutuality are concerned will equally govern co-operative housing society as well. See also ITO Vs Venkatesh Premises Co-operative society ltd (2018) 402 ITR 670(SC). The apex court case dealt with non-occupancy charges, transfer charges and common amenity fund charges. * Advertisement collected from members- taxable -Automobile association of Bengal Vs CIT,Calcutta(1968) 69 ITR 878(cal)- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the principle of mutuality was held to be not applicable as the money was collected by the association from some of the members as advertisement charges but benefits came out of the same to the members not as advertisers but as members. Moreover, the advertisers got commercially benefitted. * Interest earned on surplus fund invested in fixed deposits- In the case of 350 ITR 509(SC), the question was whether or not interest earned by the assessee on the surplus funds invested in fixed deposit with the corporate member banks is exempt from levy of income-tax based on doctrine of mutuality? The apex Court held as follows:- Before we evaluate the rival stands, it would be necessary to appreciate the general understanding of doctrine of mutuality. The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax; only the income which comes within the definition of Section 2(24) of the Act is subject to tax (income from business involving the doctrine of mutuality is denied exemption only in special cases covered under clause (vii) of Section 2(24) of the Act). The concep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. Over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance organizations. Mutuality is not a form of organization, even if the participants are often called members. Any organization can have mutual activities. A common feature of mutual organizations in general and of licensed clubs in particular, is that participants usually do not have property rights to their share in the common fund, nor can they sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their membership. A further feature of licensed clubs is that there are both membership fees and, where prices charged for club services are greater than their cost, additional contributions. It is t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hese kinds of prices and/or additional contributions which constitute mutual income. The Apex Court in a detailed case held that the income was not exempt on the principles of mutuality. In the case of CIT Vs Common Effluent Treatment Plant(2010) 328 ITR 362(Bom), the issue of taxability or otherwise of interest on fixed deposit with banks was discussed threadbare and the court was not inclined to follow the decisions of Karnataka High Court in the case of Canara Bank Golden Jubilee Staff Welfare Fund Vs Dy CIT(2009) 308 ITR 202(SC).Later on the decision in the case of Common Effluent has been approved by the Apex Court in ITO Vs Venkatesh Premises Co-operative society ltd (2018) 402 ITR 670(SC). Interest on fixed deposit with bank was exible to tax and could not be made exempt on the principles of mutuality - Sports Club of Gujarat ltd vs CIT(1988) 171 ITR 504(Guj). See also (1995) 211 ITR 379(Gujarat) * Even though facilities were provided to members including general public-income was held as exempt -DIT(Exemptions) Vs Chembur Gymkhana(2013) 346 ITR 86(Bom) In the said case it was held that notwithstanding the fact that the facilities of the club were being provided to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... members including general public, the activities were covered as advancement of object of general public utility and hence the income was exempt u/s 2(15) of the Act. * Bombay Presidency Golf club Ltd Vs DIT(Exemptions) (2012) 23 taxmann.com 319(Mum). Where all the activities of the assessee club towards its objects of promotion of game and other ancillary activities carried were only incidental to said game only, registration already granted u/s 12AA cannot be cancelled. Even otherwise, principle of mutuality is applicable. CBDT Circular No 11/2008 followed. Also ITOEUR-1, Kolkata Vs Indian leather Products Association (2015) 64 taxmann.com 406(Kolkata-Tribunal) * Delhi Stock Exchange Association Ltd Vs CIT Delhi (1961) 41 ITR 495(SC) In this case the apex court held that the entrance fee received from trading members was not exempt on account of principle of mutuality as the body of trading members who had paid the entrance fees and the shareholders among whom the profits of the company were distributed were not identical and the element of mutuality was lacking. * In the case of The English and Scottish Joint Co-operative Wholesale Society Ltd Vs Commissioner of Agr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icultural Income-tax, Assam (1948) 16 ITR 270(PC), it was held that the principle of styles' case cannot be applied to an association, society or company which grows produce on its own land or manufactures goods in its own factories, using either its own capital or capital borrowed whether from its members or from others and sells its produce or goods to its members exclusively. No matter who the purchasers may be , if the society sells the tea grown and manufactured by it at a price which exceeds the cost of producing it and rendering it fit for sale, it has earned profits which are , subject to the provisions of taxing act, taxable profits. The reason for taking such a stand that the society was formed under the Industrial and Provident Societies Act, 1893 which contemplated that the society registered under the said act will be a profit-making concern. The Court noted that when the constitution, rules and business practices of the appellant society so closely conform to the pattern of an ordinary profit-making concern, how can it plausibly be maintained that no profits can result? Thus, a commercial venture in order to make profits cannot be treated as exempt on acco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unt of principles of mutuality. * In the famous case of CIT, Bombay City Vs The Royal Western India Turf Club Ltd (1953) 24 ITR 551(SC), the constitution bench of the Apex Court dealt with extensively the principles of mutuality. The Hon'ble court noted the following important points:- * The objects of the Company are inter alia, to carry on the business of a Race course company in all its branches and to carry on the business of hotel-keepers , tavern-keepers, licensed victualler and refreshment purveyors. The court noted that although this circumstance may not be decisive , it cannot at the same time be overlooked altogether. It has to be noted as one of the material facts. * There is no mutual dealing between the members inter se in the nature of mutual insurance as was in the styles case and the principles of mutuality cannot be applied to an incorporated company which carries on business of horse racing and realizes money from the members and from the non-members for the same consideration, by the giving of the same or similar facilities to all alike in the course of one and the same business carried on by it. * Lastly the Club was held not to be a trade or professiona....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l or similar association u/s 10(6) of the Income-tax Act,1922. * Specific services- Section 10(6) of 1922 Act and Section 28(iii) of 1961 Act- The mutuality principles were held to be not applicable in the case of Indian Tea Planters Association Vs CIT,WB (1971) 82 ITR 322(Cal) in view of specific services being performed which were taxable u/s 10(6) of the 1922 Act. Similarly in the case of CIT WB Vs Calcutta Stock Exchange Association Ltd (1959) 36 ITR 222(Cal) it was held that entrance fees and subscriptions paid by members for employing authorized assistants and fees paid by members for including new companies in the stock exchange list was specific services and taxable u/s 10(6). This case was followed in the case of Delhi Stock Exchange Association ltd Vs CIT Delhi (1961) 41 ITR 495(Del). * Types of Income Clubs/Association * Entrance fee * Monthly fees * Receipt from rent * Receipt from games and supply of food etc Housing Society * Monthly maintenance charges * Reimbursement of electricity charges * Reimbursement for common repairs * Transfer fees * Non occupancy charges * No objection fees * Interest on savings deposit * Interest on fixed de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....posit * Whether to claim mutuality or charity or both? A question arises as to if in the case of an organization the provisions of charity and mutuality both are applicable, then which provisions should be applied. It is always advisable to apply mutuality provisions since the income is totally exempt in such cases without any fetters whereas in case of charitable organizations, there are conditions regarding utilization of funds and other statutory obligations. * Provisions of Income-tax Act,1961 and how to claim in Income-tax return? The provisions of Income-tax Act,1961 do not deal with Mutuality directly and it is only to be inferred that since there is no income in case of mutuality , there is no need for any application of the provisions of income-tax Act,1961. The principles relating to mutuality have evolved in view of the decisions of the various Courts. It is only regarding mutual insurance that specific provision has been made in Section 2(24) to treat the same as income. Also Section 28(iii) deals with specific services performed by association for its members which are brought within the tax net . * Partnership -loans to Partners and other business-whether mu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tuality applicable In the case of Anupam enterprises Vs ITO (2010) 322 ITR 230(Kar) it was held that if a partnership is created not only for the purpose of advancing loans to partners but for other purposes also and for lending to third parties, in such a situation the mutuality is not applicable. See Also CIT Vs Natraj finance corporation (1989) 169 ITR 732(AP). * Chit fund-V Raj Kumar Vs CIT(2014) 363 ITR 21(Mad) The hon'ble Madras High court held that where chits are run as a business by a third party and assessee subscribes to that merely as a subscriber, the dividend income received over and above what has been subscribed by the assessee, has to be assessed as income and cannot be claimed as exempt on principles of mutuality. * Chit fund- Soda Silicate and Chemical works Vs CIT (1989) 179 ITR 588 (P&H) In the said case , the court observed that the dominant motive which prompts most people to join chit fund schemes is to avail themselves of the facility of bidding for the chits when they are in urgent need of finance so that they may receive the chit amount in a lump sum as a loan with the facility of repaying it in monthly installments. A chit fund does, no doub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t incidentally partake of the nature of saving scheme also. But unless the amounts are advanced to the prizing subscribers through a scheme of competitive bidding or by drawing lots, there will no income derived either by way of interest or by way of amounts forgone by the bidders at the auction. Thus, the chit fund is primarily intended to operate as a scheme for advancing loans from the common fund to the subscribers, their turns for getting such loans being determined either by auction or by drawing lots. It was held that the contributions made to chit fund cannot be treated as revenue expenditure nor the receipt of any amount therefrom can be treated as a business receipt. * Interest income of a society-whether mutuality applicable. Wankaner Jain Social Welfare society Vs CIT(2003) 260 ITR 241(Mad) Though a member was of necessity also a depositor he was not required to be a borrower. Thar was wholly optional. The income of the fund was by way of interest and such interest was received only from those who borrowed from it. The fact that the money that was lent came out of deposits made by the members who had borrowed as also the deposits made by the members who had n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot chosen to raise any loan would not make any difference so far as the need for establishing identity between the contributor and the participator vis-à-vis interest income. It is enough to show that a person had a right to be the contributor even though he did not contribute. Conclusion There are many more cases where mutuality can be claimed. However, an important point to be noted is that commercial motive must not be there in order to claim mutuality. The present note deals with the direct tax aspect of mutuality, though in indirect tax also the concept of mutuality is there. Analysis of GST provisions * There are no specific provisions relating to the Charitable trusts, association and societies in the GST Law except the provisions relating to the registration under the GST Law. The said provisions are contained in Section 22 and 24 of the CGST Act and the relevant State SGST Act. * In this regard it is important to note the definition of supply and business in Section 7 and 2(18) respectively and a question arises whether a charitable entity which is not engaged in any business as understood in general parlance can be said to be engaged in business and therefo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re liable to registration under the CGST Act since the definition of business is very wide under the Act. * In this regard, several notifications have been issued under the CGST Act which directly or indirectly effect the Charitable entities and they are as under:- Relevant Notifications and Circulars: * Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (as amended by Notifications stated at Sl. Nos. 2, 3 and 4 herein and other notifications not relevant here) * Notification No. 02/2018-Central Tax (Rate) dated 25.01.2018 * Notification No. 14/2018-Central Tax (Rate) dated 26.07.2018 * Notification No. 28/2018-Central Tax (Rate) dated 31.12.2018 * Notification No. 09/2017-Integrated Tax (Rate) dated 28.06.2017 * Circular No. 66/40/2018-GST, dated 26.09.2018 * Chapter 39 dealing with 'GST on charitable and religious trusts' of compilation of 51 GST Flyers updated as on 01.01.2018 available on CBIC website Relevant entries from Notification No. 12/2017-Central Tax (Rate) Entry Provision Comments 1 Services by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) by way of charitable activities. The expression 'charitable a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctivities' have been defined under section 2(r) of the aforesaid notification as under: (r) "charitable activities" means activities relating to - (i) public health by way of ,- (A) care or counselling of (I) terminally ill persons or persons with severe physical or mental disability; (II) persons afflicted with HIV or AIDS; (III) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or (B) public awareness of preventive health, family planning or prevention of HIV infection; (ii) advancement of religion , spirituality or yoga; (iii) advancement of educational programmes or skill development relating to,- (A) abandoned, orphaned or homeless children; (B) physically or mentally abused and traumatized persons; (C) prisoners; or (D) persons over the age of 65 years residing in a rural area; (iv) preservation of environment including watershed, forests and wildlife; 13 Services by a person by way of- (a) conduct of any religious ceremony; (b) renting of precincts of a religious place meant for general public, owned or managed by an entity registered as a charitable or religious trust under section 12AA of the Income-tax Act....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 1961 (hereinafter referred to as the Income-tax Act) or a trust or an institution registered under sub clause (v) of clause (23C) of section 10 of the Income-tax Act or a body or an authority covered under clause (23BBA) of section 10 of the said Income-tax Act: Provided that nothing contained in entry (b) of this exemption shall apply to,- (i) renting of rooms where charges are one thousand rupees or more per day; (ii) renting of premises, community halls, kalyanmandapam or open area, and the like where charges are ten thousand rupees or more per day; (iii) renting of shops or other spaces for business or commerce where charges are ten thousand rupees or more per month. The expression 'religious place' has been defined in section 2(zy) of the aforesaid notification as under: (zy) "religious place" means a place which is primarily meant for conduct of prayers or worship pertaining to a religion, meditation, or spirituality; 14 Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent. The expression....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 'declared tariff' has been defined under section 2(w) of the aforesaid notification as under: (w) "declared tariff" includes charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit; 50 Services of public libraries by way of lending of books, publications or any other knowledge-enhancing content or material. 60 Services by a specified organisation in respect of a religious pilgrimage facilitated by the Ministry of External Affairs, the Government of India, under bilateral arrangement. The expression 'specified organisation' has been defined in section 2(zzg) of the aforesaid notification as under: (zzg) "specified organisation" shall mean,- (i) Kumaon Mandal Vikas Nigam Limited, a Government of Uttarakhand Undertaking; or (ii) 'Committee' or 'State Committee' as defined in section 2 of the Haj Committee Act, 2002 (35 of 2002); The words 'ministry of external affairs' omitted by clause (m) of notification no. 02/2018-Central Tax (Rate) dated 25.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....01.2018 66 Services provided - (a) by an educational institution to its students, faculty and staff; (b) to an educational institution, by way of,- (i) transportation of students, faculty and staff; (ii) catering, including any mid-day meals scheme sponsored by the Central Government, State Government or Union territory; (iii) security or cleaning or house-keeping services performed in such educational institution; (iv) services relating to admission to, or conduct of examination by, such institution; upto higher secondary: Provided that nothing contained in entry (b) shall apply to an educational institution other than an institution providing services by way of pre-school education and education up to higher secondary school or equivalent. The expression 'educational institution' has been defined in section 2 (y) of the aforesaid notification as under: (y) "educational institution" means an institution providing services by way of,- (i) pre-school education and education up to higher secondary school or equivalent; (ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force; (iii) education as a part of an ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....proved vocational education course; Amendments brought vide clause (o) of Notification no. 02/2018-Central Tax (Rate) dated 25.01.2018; against serial number 66, in the entry in column (3),- (i) after item (a), the following item shall be inserted, namely:- "(aa) by an educational institution by way of conduct of entrance examination against consideration in the form of entrance fee;"; (ii) in item (b),- (A) in sub-item (iv), the words "upto higher secondary" shall be omitted; (B) after sub-item (iv), the following sub-item shall be inserted, namely:- "(v) supply of online educational journals or periodicals:"; (C) in the proviso, for the word, brackets and letter "entry (b)", the words, brackets and letters "sub-items (i), (ii) and (iii) of item (b)" shall be substituted; (D) after the proviso, the following proviso shall be inserted, namely:- "Provided further that nothing contained in sub-item (v) of item (b) shall apply to an institution providing services by way of,- (i) pre-school education and education up to higher secondary school or equivalent; or (ii) education as a part of an approved vocational education course."; 74 Services by way of- (a) health care....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... services by a clinical establishment, an authorised medical practitioner or para-medics; (b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above. The expression 'health care services' has been defined under section 2(zg) of the aforesaid notification as under: (zg) "health care services" means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma; 77 Service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution - (a) as a trade union; (b) for the provision of carrying out any activity which is exempt from the levy of Goods and service Tax; or (c) up to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex. Amendments brought vide clause (p) of Notification no. 02/2018-Central Tax (Rate) dated 25.01.2018; for the words "five thousand", the words "seven thousand five hundred" shall be substituted; 80 Services by way of training or coaching in recreational activities relating to- (a) arts or culture, or (b) sports by charitable entities registered under section 12AA of the Income-tax Act. Relevant entries from Notification No. 14/2018-Central Tax (Rate) Entry Provision Comments 9D Services by an old age home run by Central Government, State Government or by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) to its residents (aged 60 years or more) against consideration upto twenty-five thousand rupees per month per member, provided that the consideration charged is inclusive of charges for boarding, lodging and maintenance. 77A Services provided by an unincorporated body or a non-profit entity registered under any law for the time being in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....force, engaged in,- (i) activities relating to the welfare of industrial or agricultural labour or farmers; or (ii) promotion of trade, commerce, industry, agriculture, art, science, literature, culture, sports, education, social welfare, charitable activities and protection of environment, to its own members against consideration in the form of membership fee upto an amount of one thousand rupees (Rs. 1000/-) per member per year. Relevant entries from Notification No. 28/2018-Central Tax (Rate) Entry Provision Comments 74A Services provided by rehabilitation professionals recognised under the Rehabilitation Council of India Act, 1992 (34 of 1992) by way of rehabilitation, therapy or counselling and such other activity as covered by the said Act at medical establishments, educational institutions, rehabilitation centres established by Central Government, State Government or Union territory or an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961). Relevant entries from Notification No. 09/2017-Integrated Tax (Rate) (Besides the entries contained in Notification No. 12/2017 above [with respect to CGST], as amended from time to time....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the following entry seek relevance with respect to IGST) Entry Provision Comments 10 Services received from a provider of service located in a non- taxable territory by - (a) the Central Government, State Government, Union territory, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession; (b) an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities; or (c) a person located in a non-taxable territory: Provided that the exemption shall not apply to - (i) online information and database access or retrieval services received by persons specified in entry (a) or entry (b); or (ii) services by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India received by persons specified in the entry. Circular No. 66/40/2018-GST, dated 26.09.2018 GST on Residential programmes or camps meant for advancement of religion, spirituality or yoga by religious and charitable trusts "The services provided by entity registered under Section 12AA....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Income Tax Act, 1961 by way of advancement of religion, spirituality or yoga are exempt. Fee or consideration charged in any other form from the participants for participating in a religious, Yoga or meditation programme or camp meant for advancement of religion, spirituality or yoga shall be exempt. Residential programmes or camps where the fee charged includes cost of lodging and boarding shall also be exempt as long as the primary and predominant activity, objective and purpose of such residential programmes or camps is advancement of religion, spirituality or yoga. However, if charitable or religious trusts merely or primarily provide accommodation or serve food and drinks against consideration in any form including donation, such activities will be taxable. Similarly, activities such as holding of fitness camps or classes such as those in aerobics, dance, music etc. will be taxable". THANK YOU -By CA Ramesh Kumar Patodia ([email protected]) [Disclaimer: The analysis in this booklet is solely for information purposes. We are not offering it as a legal, accounting or other professional service advice. While best efforts have been made in this preparation....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., we assume no liabilities of any kind with respect to the accuracy or completeness of the contents, and specifically disclaim from any loss caused, is alleged to have been caused directly or indirectly by the information contained herein. Readers are advised to take expert opinion. ============= Document 1 CIRCULAR NO. 05/2010 F.No.142/13/2010-SO(TPL) Government of India Ministry of Finance Department of Revenue (Central Board of Direct Taxes) *** Dated, the 3rd June, 2010 EXPLANATORY NOTES TO THE PROVISIONS OF THE FINANCE (NO.2) ACT, 2009 Explanatory Circular for Finance (No.2) Act, 2009 CIRCULAR INCOME-TAX ACT Finance (No.2) Act, 2009 – Explanatory Notes to the Provisions of Finance (No.2) Act, 2009 CIRCULAR NO. /2010, DATED 3º JUNE, 2010 AMENDMENTS AT A GLANCE Section/Schedule | Particulars/Paragraph number First Schedule 2(15) 2(23), 140, 167C 2(29BA) 2(48), 36, 194A 10(10C), 89 10(23C) 10(23D) 10A, 10B 10AA 13B, 2(22AAA), 2(24) 32 35 Finance Act Rate structure, 3.1-3.3.12 Income-tax Act Amendment to include certain activities within the ambit of provisions relating to ‘charitable purpose' in the Income Tax Act, 4.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1-4.3 Taxation of Limited Liability Partnership (LLP), 5.1-5.7 Definition of the term “manufactureâ€, 6.1-6.2 Power to issue Zero Coupon Bonds, 7.1-7.4 Compensation received on voluntary retirement or termination of service under a scheme of voluntary separation, 8.1-8.5 Extension of time limit for filing applications for tax exemption under section 10(23C), 9.1-9.3 Amendment to section 10(23D) of the Income Tax Act, 1961- Incorporating "Other Public Sector Banks" under the expression "Public Sector Bankâ€, 10.1-10.4 Extension of sunset clause for units in free trade zone under section 10A and for export oriented undertakings under section 10B, 11.1-11.3 Clarification regarding computation of exempted profits in the case of units in Special Economic Zones (SEZs), 12.1-12.3 Special provisions relating to voluntary contributions received by electoral trust, 13.1-13.3 Aligning the definition of “block of assetâ€, 14.1-14.2 Weighted deduction for in-house research and development, 15.1-15.3 35AD, 28, 43, 50B, Investment-linked tax incentive for specified business, 16.1-16.6 73A 36(1) 40 40A 43 44AD, 44AA, 44AB, 44AE, Special deducti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on under section 36(1) (viii) to National Housing Bank (NHB), 17.1-174 Remuneration to partners in a firm, 18.1-18.3 Enhancement of limit for disallowance of expenditure made in the case of transporters, 19.1-19.4 Definition of written down value under section 43(6), 20.1-20.8 Special provision for computing profits and gains of business on presumptive basis, 21.1-21.3 1 of 62 Explanatory Circular for Finance (No.2) Act, 2009 44AF 44AE 50C 56, 57 80A 80CCD, 10(44), 197A, 115-0 80DD 80E 80G 80GGB, 80GGC 80-IA 80-IB(9) 80-IB(10) 80-IB(11A) 80U 90 92C 92CB 115BBC 115JA, 115JB 115JAA 115WE, 115WM, 17,49 132, 132A 143 144C, 131, 143, 246A, 253 145A Presumptive income for truck owners under section 44AE, 22.1-22.5 Provisions for deemed valuation in certain cases of transfer, 23.1–23.4 Taxation of certain transactions without consideration or for an inadequate consideration as income from other sources, 24.1-24.6 Amendment in Chapter VI-A to prevent abuse of tax incentives, 25.1- 25.8 Tax benefits for New Pension System, 26.1-26.5 Deduction for medical treatment of a dependant suffering from disability, 27.1-27.4 Deduction in respect ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Interest on loan taken for higher education, 28.1-28.4 Donations to Certain Funds, Charitable Institutions, etc., 29.1-29.7 Deduction in respect of contributions to political parties, 30.1-30.4 Extension of sunset clause for tax holiday under section 80-IA, 31.1- 31.6 Deduction in respect of profits and gains from undertakings engaged in commercial production of mineral oil and natural gas, 32.1-32.7 Rationalising the provisions of deduction, 33.1-33.6 Deduction in case of an undertaking deriving profit from the business of processing, preservation and packaging of meat and meat products or poultry or marine or dairy products, 34.1-34.4 Deduction in case of a person with disability, 35.1-35.3 Empowering Central Government to enter into agreement with specified non-sovereign territories, 36.1-36.4 Determination of arm's length price in cases of international transactions, 37.1-37.5 Power of Board to make Safe Harbour Rules, 38.1-38.3 Tax relief on anonymous donations in certain cases, 39.1-39.3 Clarification regarding add back of 'provision for diminution in the value of asset', while computing book profits, 40.1–40.4 Minimum Alternate Tax, 41.1-41.4 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Fringe Benefit Tax, 42.1-42.5 Clarificatory amendment in section 132, 43.1-43.9 Centralized Processing of Returns, 44.1-44.3 Provision for constitution of alternate dispute resolution mechanism, 45.1-45.4 Rationalizing the provisions for taxation of interest received on delayed compensation or on enhanced compensation, 46.1-46.4 2 of 62 147 194A 194C, 194-I 200, 203A, 206A, 206C, 272A, 139A 200A 201 206AA 208 271 281B 282 282B 293C 1st Schedule 4th Schedule 13th Schedule 3 44A Explanatory Circular for Finance (No.2) Act, 2009 Clarificatory amendment in respect of reassessment proceeding under section 147, 47.1-47.4 Interest other than “interest on securitiesâ€, 48.1-48.2 Rationalisation of provisions relating to Tax Deduction at Source (TDS), 49.1-49.4 Filing of TDS and TCS statements, 49.5 Processing of statements of tax deducted at source, 49.6 Providing time limits for passing of orders u/s 201(1) holding a person to be an assessee in default, 50.1-50.4 Improving compliance with provisions of quoting PAN through the TDS regime, 51.1-51.5 Enhancement of the limit for payment of advance tax, 52.1.-52.2 Rationalization of provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s relating to penalty for concealment of income, 53.1-53.3 Rationalization of provision relating to provisional attachment of asset, 54.1-54.3 Service of notice, 55.1-55.4 Introduction of Document Identification Number, 56.1-56.3 Power to withdraw approvals, 57.1-57.3 Taxation of investment income/loss of Non life insurance business, 58.1-58.4 Recognition to Provident funds - Extension of time limit for obtaining exemption from EPFO, 59.1-59.4 Amendment in Part B of the Thirteenth Schedule to the Income Tax Act, 1961, 60.1-60.4 Wealth-tax Act Enhancement of the limit for payment of wealth tax, 61.1-61.2 Empowering Central Government to enter into agreement with specified non-sovereign territories, 36.1-36.4 Finance Act, 2008 Chapter VII section Abolition of Commodity Transaction Tax, 62.1-62.5 104 13(1) Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 Extension of income-tax exemption to Special Undertaking of Unit Trust of India (SUUTI), 63.1-63.3 3 of 62 Explanatory Circular for Finance (No.2) Act, 2009 1. 1.1 Introduction The Finance (No.2) Act, 2009 (hereafter referred to as the Act) as passed by the Parliament, received the assen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of the President on the 19th day of August, 2009 and has been enacted as Act No. 33 of 2009. This circular explains the substance of the provisions of the Act relating to direct taxes. 2. Changes made by the Act 2.1 (i) (ii) The Act has, specified the rates of income-tax for the assessment year 2009-10 and the rates of income-ax on the basis of which tax has to be deducted at source and advance tax has to be paid during financial year 2009-10. amended sections 2, 10, 10A, 10AA, 10B, 13B, 17, 28, 32, 35, 35AD, 36, 40, 40A, 43, 44AA, 44AB, 44AD, 44AE, 44AF, 49, 50B, 50C, 56, 57, 73A, 80A, 80CCD, 80DD, 80E, 80G, 80GGB, 80GGC, 80-LA, 80-IB, 80U, 89, 90, 92C, 92CB, 115BBC, 115JA, 115JAA, 115JB, 115-0, 115WE, 115WM, 131, 132, 132A, 139A, 140, 143, 144C, 145A, 147, 167C, 194A, 194C, 194-I, 197A, 200, 200A, 201, 203A, 206A, 206AA, 206C, 208, 246A, 253, 271, 272A, 281B, 282, 282B and 293C of the Income-tax Act, 1961; (iii) inserted new sections 13B, 35AD, 73A, 92CB, 115WM, 144C, 167C, 200A, 206AA, 282B and 293C of the Income-tax Act, 1961; (iv) amended rules 5 of Part B of the First Schedule, rule 3 of Part A of the Fourth Schedule and Part B of Thirteenth Schedule of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Income-tax Act, 1961; (v) amended sections 3 and 44A of Wealth-tax Act, 1957; (vi) inserted new section 121A in Chapter VII of Finance Act, 2008; € € (vii) amended section 13(1) of Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002. 4 of 62 Explanatory Circular for Finance (No.2) Act, 2009 3. 3.1 Rate structure Rates of income-tax in respect of incomes liable to tax for the assessment year 2009-10 3.1-1 In respect of income of all categories of taxpayers liable to tax for the assessment year 2009-10, the rates of income-tax have been specified in Part I of the First Schedule to the Act. These rates are the same as those laid down in Part III of the First Schedule to the Finance Act, 2008 for the purposes of computation of advance tax, deduction of tax at source from Salaries and charging of tax payable in certain cases during the financial year 2008-09. The major features of the rates specified in the said Part 1 are as follows: 3.1-2 INDIVIDUAL, HINDU UNDIVIDED FAMILY, ASSOCIATION OF PERSONS, BODY OF INDIVIDUALS OR ARTIFICIAL JURIDICAL PERSON. - Paragraph A of Part I of the First Schedule specifies the rates of income-tax in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case of every individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person (other than a co-operative society, firm, local authority and company) as under :- Income Rate of income-tax chargeable to Individual (other than Individual tax Up to Rs. Individual senior citizen, resident in India, who is of the in India and below the age of sixty-five years age of sixty- five years or more individual woman resident in woman, India and senior citizen resident resident in India), HUF, association of persons, body of individuals and artificial juridical person Nil 1,50,000 Nil Rs. 1,50,001 - Nil Rs. 1,80,000 Rs. 1,80,001 10% - Rs. 2,25,000 10% Rs. 2,25,001 Rs. 3,00,000 10% 10% 10% Rs. 3,00,000- Rs.5,00,000 20% Rs.5,00,000 and above 30% 20% 20% 30% 30% 5 of 62 Explanatory Circular for Finance (No.2) Act, 2009 In the case of every individual, Hindu undivided family, association of persons or body of individuals, surcharge shall be levied only where the total income exceeds ten lakh rupees. The income-tax shall be enhanced by a surcharge for the purposes of the Union at the rate of ten ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....per cent of income-tax. Marginal relief shall 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 income-tax and surcharge on a total income of Rs. 10,20,000 calculated at the rates specified would have been Rs. 2,32,100 i.e., income-tax of Rs. 2,11,000 and surcharge of Rs. 21,100. The additional tax liability incurred thereon as compared to a person having a total income of Rs. 10, 00,000 is Rs. 27,100. However, additional income as compared to a person having a total income of Rs. 10,00,000 is only Rs. 20,000. Therefore, marginal relief to the extent of Rs. 7,100 will be available in this case as the additional tax liability cannot be more than the additional income. The total tax liability will, therefore, be Rs. 2, 25,000 instead of Rs. 2, 32,100. In the case of artificial juridical person, surcharge shall be levied at the rate of ten per cent of the income-tax payable on all levels of income. An additional surcharge called the Education Cess on income-tax shall continue to be levie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d at the rate of two per cent on the amount of tax computed, inclusive of surcharge, if any, in all cases. For instance, if the income-tax computed is Rs. 1,00,000 and the surcharge is Rs. 10,000, then the education cess of two per cent is to be computed on Rs. 1,10,000 which works out to Rs. 2,200. In addition, the amount of tax computed and surcharge shall also be increased by an additional surcharge called Secondary and Higher Education Cess on income-tax at the rate of one per cent of such income-tax and surcharge. No marginal relief shall be available in respect of Education Cess. 3.1-3 CO-OPERATIVE SOCIETIES - In the case of every co-operative society, the rates of income-tax have been specified in Paragraph B of Part I of the First Schedule to the Act. The rates are as follows- Income chargeable to tax Up to Rs. 10,000 Rs. 10,001 - Rs. 20,000 Exceeding Rs. 20,000 Rate 10% 20% 30% © No surcharge shall be levied. Education Cess on income-tax and Secondary and Higher Education Cess on income-tax shall be levied at the rate of two per cent and one per cent respectively of the amount of tax computed. No marginal relief shall be available in respect of Educ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation Cess. 3.1-4 FIRMS - In the case of every firm, the rate of income-tax of thirty per cent has been specified in Paragraph C of Part I of the First Schedule to the Act. Surcharge at the rate of ten per cent shall be levied only in cases where the firm has total income exceeding one crore rupees. However, marginal relief shall be allowed to ensure that the additional 6 of 62 Explanatory Circular for Finance (No.2) Act, 2009 amount of income-tax payable, including surcharge, on the excess of income over one crore rupees is limited to the amount by which the income is more than one crore rupees. In respect of fringe benefits chargeable to tax under section 115WA of the Income-tax Act, surcharge shall be levied at the rate of ten per cent of the amount of tax irrespective of the amount of fringe benefits. Additional surcharge called the Education Cess on Income-tax shall continue to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge, in all cases. In addition, such amount of tax and surcharge shall be further increased by an additional surcharge called Secondary and Higher Education Cess on income-tax computed at the rate of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....one per cent on the amount of tax, inclusive of surcharge, in all cases. No marginal relief shall be available in respect of Education Cess. 3.1-5 LOCAL AUTHORITIES - In the case of every local authority, the rate of income- tax has been specified at thirty per cent in Paragraph D of Part I of the First Schedule to the Act. No surcharge shall be levied. However, Education Cess on Income-tax and Secondary and Higher Education Cess on income-tax shall be levied at the rate of two per cent and one per cent respectively of the amount of tax computed. No marginal relief shall be available in respect of Education Cess. 3.1-6 COMPANIES - In the case of a company, the rate of income-tax has been specified in Paragraph E of Part I of the First Schedule to the Act. In case of a domestic company, the rate of income-tax is thirty per cent of the total income. The tax computed shall be enhanced by a surcharge of ten per cent only where such domestic company has total income exceeding one crore rupees. In the case of a company other than a domestic company, royalties received from Government or Indian concern under an approved agreement made after 31-3-1961, but before 1-4-1976 sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....all be taxed at fifty per cent. Similarly, in the case of fees for technical services received by such company from Government or Indian concern under an approved agreement made after 29-2-1964, but before 1-4-1976, shall be taxed at fifty per cent. On the balance of the total income of such company, the tax rate shall be forty per cent. The tax computed shall be enhanced by a surcharge of two and one-half per cent only where such company has total income exceeding one crore rupees. However, marginal relief shall be allowed in the case of every company to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over one crore rupees is limited to the amount by which the income is more than one crore rupees. Also, in the case of every company having total income chargeable to tax under section 115JB of the Income-tax Act and where such income exceeds one crore rupees, marginal relief shall be provided. In respect of fringe benefits, in the case of a domestic company, surcharge shall be levied at the rate of ten per cent of the amount of tax, irrespective of the amount of fringe benefits. In the case of a company other than a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... domestic company, in respect of fringe 7 of 62 Explanatory Circular for Finance (No.2) Act, 2009 benefits, surcharge shall be levied at the rate of two and one-half per cent of the amount of tax, irrespective of the amount of fringe benefits. Education Cess on income-tax shall continue to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge in the case of every company. Also, such amount of tax and surcharge shall be further increased by an additional surcharge called Secondary and Higher Education Cess on income-tax at the rate of one per cent of the amount of tax computed, inclusive of surcharge. 3.2 Rates for deduction of income-tax at source from certain incomes during the financial year 2008-09 3.2-1 In every case in which tax is to be deducted at the rates in force under the provisions of sections 193, 194, 194A, 194B, 194BB, 194D and 195 of the Income-tax Act, the rates for deduction of income-tax at source during the financial year 2009-10 have been specified in Part II of the First Schedule to the Act. The rates for deduction of income-tax at source during the financial year 2009-10 will continue to be the same as th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ose specified in Part II of the First Schedule to the Finance Act, 2008 except for the following changes:- In the case of a person resident in India, other than company, on any other income the rates have been changed to 10% from 20%. In the case of a domestic company on the income by way of interest other than interest on security, and on any other income the rates have been changed to 10% from 20%. 3.2-2 SURCHARGE - 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, no surcharge shall be levied. (ii) In the case of every artificial juridical person, no surcharge shall be levied. (iii) No surcharge shall be levied on the amount of income-tax deducted in the case of a co-operative society and local authority (iv) In the case of every firm and domestic company, no surcharge shall be levied. (v) The surcharge on TDS shall be levied only on payments made to foreign companies. The rate of surcharge in such cases is 2.5 per cent. - 3.2-3 EDUCATION CESS The additional surcharge, called the Education Ce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss on income-tax shall continue to be levied for the purposes of the Union at the rate of two per cent of income-tax and surcharge, if any, in the case of salary payments to residents and in the case of all payments to non-residents. For instance, if such tax is Rs. 1,00,000 and the surcharge is Rs. 10,000, then the education cess of two per cent is to be computed on Rs. 1,10,000 which works out to be Rs. 2,200. In addition, the amount of tax deducted and surcharge shall be further increased by an additional surcharge called Secondary and Higher Education Cess on income-tax at the 8 of 62 - Explanatory Circular for Finance (No.2) Act, 2009 rate of one per cent in all such cases. Thus in the earlier illustration, where the amount of tax deducted is Rs. 1,00,000, the surcharge is Rs. 10,000, the Education Cess of two per cent is Rs. 2,200, the said Secondary and Higher Education Cess will be computed on Rs. 1,10,000 which works out to be Rs. 1,100. The total cess in this case will amount to Rs. 3,300 (i.e., Rs. 2,200 + Rs. 1,100). 3.3 Rates for computation of advance tax, deduction of income-tax at source from Salaries and charging of income-tax in certain cases duri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the financial year 2009- 10. 3.3-1 The rates for deducting income-tax at source from Salaries and computing advance tax during the financial year 2009-10 have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 2009-10 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, assessment of bodies formed for short duration, etc. The rates are as follows:- 3.3-2 INDIVIDUAL, HINDU UNDIVIDED FAMILY, ASSOCIATION OF PERSONS, BODY OF INDIVIDUALS OR ARTIFICIAL JURIDICAL PERSON - Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of every individual. Hindu undivided family, association of persons, body of individuals or artificial juridical person (other than a co-operative society, firm, local authority and company). In the case of individuals, the basic exemption limit has been enhanced from Rs. 1,5....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0,000 to Rs. 1,60,000. The exemption limit for every woman resident in India and below the age of 65 years of age has been enhanced from Rs. 1,80,000 to Rs. 1,90,000. Further, the exemption limit for every individual resident in India and of the age of 65 years or more at any time during the previous year has been raised from Rs. 2,25,000 to Rs. 2,40,000. The rates of tax during the financial year 2009-10 in the case of persons mentioned above are as follows:- Income Rate of income-tax chargeable to Individual (other tax Up to Rs. 1,60,000 than individual woman resident in India and senior citizen resident in India), HUF, association of persons, body of individuals and artificial juridical person Nil Individual woman, Individual senior resident in India citizen, resident in and below the age India, who is of the of sixty-five years age of sixty- five years or more Nil Nil 9 of 62 Rs. 1,60,001 Explanatory Circular for Finance (No.2) Act, 2009 Rs. 1,90,000 10% Rs. 1,90,001 Rs. 2,40,000 Rs. 2,40,001 10% 10% Rs. 3,00,000 Rs. 3,00,001 - 20% 20% 20% Rs. 5,00,000 Exceeding 30% 30% 30% Rs. 5,00,000 No surcharge shall be levied in such case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. The Education Cess on income-tax shall continue to be levied at the rate of two per cent on the amount of tax computed. In addition, the amount of tax computed shall also be increased by an additional cess called Secondary and Higher Education Cess on income- tax at the rate of one per cent of such income-tax. No marginal relief shall be available in respect of Education Cess. 3.3-3 CO-OPERATIVE SOCIETIES - In the case of every co-operative society, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. The rates are as follows- Income chargeable to tax Up to Rs. 10,000 Rs. 10,001 - Rs. 20,000 Exceeding Rs. 20,000 Rate 10% 20% 30% No surcharge shall be levied. Education Cess on income-tax and Secondary and Higher Education Cess on income-tax shall be levied at the rate of two per cent and one per cent respectively of the amount of tax computed. No marginal relief shall be available in respect of Education Cess. 3.3-4 FIRMS - In the case of every firm, the rate of income-tax of thirty per cent has been specified in Paragraph C of Part III of the First Schedule to the Act. No Surcharge shall be levied. The Ed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ucation Cess on Income-tax shall continue to be levied at the rate of two per cent on the amount of tax computed. In addition, such amount of tax shall be further increased by an additional cess called Secondary and Higher Education Cess on income-tax computed at the rate of one per cent on the amount of tax, in all cases. No marginal relief shall be available in respect of Education Cess. 3.3-5 LOCAL AUTHORITIES - In the case of every local authority, the rate of income- tax has been specified at thirty per cent in Paragraph D of Part III of the First Schedule to the Act. No surcharge shall be levied. However, Education Cess on Income-tax and Secondary and Higher Education Cess on income-tax shall be levied at the rate of two per 10 of 62 Explanatory Circular for Finance (No.2) Act, 2009 cent and one per cent respectively of the amount of tax computed. No marginal relief shall be available in respect of Education Cess. 3.3-6 COMPANIES - In the case of a company, the rate of income-tax has been specified in Paragraph E of Part III of the First Schedule to the Act. In case of a domestic company, the rate of income-tax is thirty per cent of the total income. The tax c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omputed shall be enhanced by a surcharge of ten per cent only where such domestic company has total income exceeding one crore rupees. In the case of a company other than a domestic company, royalties received from Government or Indian concern under an approved agreement made after 31-3-1961, but before 1-4-1976 shall be taxed at fifty per cent. Similarly, in the case of fees for technical services received by such company from Government or Indian concern under an approved agreement made after 29-2-1964, but before 1-4-1976, shall be taxed at fifty per cent. On the balance of the total income of such company, the tax rate shall be forty per cent. The tax computed shall be enhanced by a surcharge of two and one-half per cent only where such company has total income exceeding one crore rupees. However, marginal relief shall be allowed in the case of every company to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over one crore rupees is limited to the amount by which the income is more than one crore rupees. Education Cess on income-tax shall continue to be levied at the rate of two per cent on the amount of tax co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mputed, inclusive of surcharge in the case of every company. Also, such amount of tax and surcharge shall be further increased by an additional surcharge called Secondary and Higher Education Cess on income-tax at the rate of one per cent of the amount of tax computed, inclusive of surcharge. 4. Amendment to include certain activities within the ambit of provisions relating to 'charitable purpose' in the Income Tax Act 4.1 For the purposes of the Income-tax Act, “charitable purpose†has been defined in section 2(15) of the Income-tax Act and it includes - (a) relief of the poor, (b) education, (c) medical relief and, (d) the advancement of any other object of general public utility. However, as per proviso to the section, the “advancement of any other object of general public utility†shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 11 of 62 Explanatory Circular for Finance (No.2) Act, 2009 4.2 Clause 15 of section 2 has been amended so as to provide that the preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest would be excluded from the applicability of the aforesaid proviso which is applicable to the “advancement of any other object of general public utilityâ€. 4.3 Applicability - These amendments have been made applicable with effect from 1st April, 2009 and will accordingly apply for assessment year 2009-10 and subsequent assessment years. 5. Taxation of Limited Liability Partnership (LLP) 5.1 The Limited Liability Partnership Act, 2008 has come into effect in 2009. LLP Rules (except some rules dealing with conversion) and forms have been notified w.e.f. 1st April, 2009. 5.2 The Income tax Act has been amended to incorporate the taxation scheme of LLPs in the Income Tax Act on the same lines as the taxation scheme currently prevalent for general partnerships, i.e. taxation in the hands of the entity and exemption from tax in the hands of its partners. A “limited liab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ility partnership" and a general partnership will be accorded the same tax treatment. 5.3 It is provided that the word 'partner' shall include within its meaning a partner of a limited liability partnership, the word 'firm' shall include within its meaning a limited liability partnership and the word 'partnership' shall include within its meaning a limited liability partnership as these terms have been defined in the Limited Liability Partnership Act, 2008. 5.4 The LLP Act provides for nomination of “designated partners†who have been given greater responsibility. It is provided that the designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return. 5.5 It is also provided that in case of liquidation of an LLP, every partner will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. 5.6 As an LLP and a general partnership is being treated as equivalent (except for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same 12 of 62 Explanatory Circular for Finance (No.2) Act, 2009 after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of section 45 shall apply. 5.7 Applicability - This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-2011 and subsequent assessment years. 6. Definition of the term “manufacture" 6.1 A number of tax concessions under the Income-tax Act are provided for encouraging manufacture of articles or things. However, the term "manufacture" was earlier not been defined in the statute. Therefore, it has been the subject matter of dispute and resultant judicial review in a number of cases. In order to remove any kind of ambiguity which may still persist in this regard, a new clause (29BA) has been inserted in section 2 so as to provide that ‘manufactureâ€, with all its grammatical variations, shall ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mean a change in a non-living physical object or article or thing,― 6.2 (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new object or article or thing with a different chemical composition or integral structure. Applicability - This amendment has been made applicable with retrospective effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent years. 7. 7.1 Power to issue Zero Coupon Bonds Under the existing provision of clause (48) of section 2, only infrastructure capital company or infrastructure capital fund or public sector company are empowered to issue zero coupon bonds when they are authorized to do so. 7.2 With a view to empower the scheduled banks including nationalized banks to issue zero coupon bonds to source their long term funds, the Act has been amended so as to include the scheduled banks as an eligible person to issue zero coupon bonds. 7.3 Further, consequential amendments also were made in Explanation to clause (iiia) of sub-section (1) of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....section 36 and in clause (x) of sub-section (3) of section 194A of the Income-tax Act. 7.4 Applicability - These amendments has been made applicable with retrospective effect from 1st April, 2009 and will accordingly apply in relation to the assessment year 2009-10 and subsequent assessment years. 13 of 62 8. Explanatory Circular for Finance (No.2) Act, 2009 Compensation received on voluntary retirement or termination of service under a scheme of voluntary separation 8.1 Very often, a person receives arrears or advance of salary due to him. Since arrears and advance salary is liable to tax, the total income (including such arrears and advance) is assessed at a rate higher than that at which it would otherwise have been assessed if the total income did not include arrears and advance of salary. In other words, arrears and advance salary result in bracket creeping and higher tax burden. With the view to mitigating this excess burden, the provisions of section 89 of the Income-tax Act provide for backward spread of the arrears and forward spread of the advance. Under the voluntary retirement scheme, the retiree employee receives lump-sum amount in respect of his ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lance period of service. Such amount is in the nature of advance salary. 8.2 Clause (10C) of section 10 provides for an exemption of Rs. 5 lakhs in respect of such amount. This exemption is provided to mitigate the hardship on account of bracket creeping as a result of the receipt of the amount in lump-sum upon voluntary retirement. However, some tax payers have claimed both the benefit under clause (10C) of section 10 and section 89. The courts have also upheld their claims. 8.3 With the view to preventing the claim of double benefit, a proviso to section 89 has been inserted to provide that no relief shall be granted in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in case of a public sector company referred to in sub-clause (i) of clause (10C) of section 10, a scheme of voluntary separation, if an exemption in respect of such voluntary retirement or termination of his service or voluntary separation has been claimed by the assessee under clause (10C) of section 10 in respect of such, or any other, assessment year. 8.4 Corresp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ondingly, a third proviso has also been inserted to clause (10C) of section 10 to provide that where any relief has been allowed to any assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under clause (10C) of section 10 shall be allowed to him in relation to such, or any other, assessment year. 8.5 Applicability - These amendments have been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years. 14 of 62 Explanatory Circular for Finance (No.2) Act, 2009 9. Extension of time limit for filing applications for tax exemption u/s 10(23C) 9.1 Clause (23C) of section 10 provides that income of institutions specified under the various sub-clauses of the section shall be exempt from income-tax. In certain cases, approvals are required to be taken from prescribed authorities, in the prescribed manner, to become eligible for claiming exemption. Under the previous provisions, any institution (having receipts of more than rupees one crore) had to make an applicat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion for seeking exemption at any time during the financial year for which the exemption is sought to be taken. 9.2 In practice, under the previous regime, an eligible institution has to anticipate its annual receipts to decide whether the application for exemption is required to be filed or not. This has often led to avoidable hardship. In order to mitigate this hardship the above clause has been amended and the time limit for filing such application has been fixed as the 30th September in the succeeding financial year. It may also be noted that this is the time limit to complete the audit of such institution as well. For example, where the gross receipts of a trust or institution exceeds rupees one crore in the financial year 2008-09, it can file the application for exemption till 30th September, 2009 in respect of income of financial year 2008-09. 9.3 Applicability - These amendme ts have been made applicable with effect from 1st April, 2009 and will accordingly apply for assessment year 2009-10 and subsequent assessment years. 10. Amendment to section 10(23D) of the Income Tax Act, 1961- Incorporating “Other Public Sector Banks†under the expression....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... “Public Sector Bank†10.1 Section 10(23D) of the Income-tax Act, 1961 provides exemption from taxation to income arising to certain categories of mutual funds registered under SEBI Act, 1992 or set up by a public sector bank/public finance institution . 10.2 The expression "public sector banks" has been defined in the explanation to section 10(23D). Reserve Bank of India has categorized a new sub-group called “other public sector banksâ€. The Central Government holds more than 51% shareholding in IDBI Bank Limited which has been categorized under "other public sector banks†by RBI. 10.3 Since “other public sector banksâ€, has not been included in the expression “public sector banks†as defined in the Explanation to section 10(23D) they were not eligible for the exemption available under section. In view of the above, section 10(23D) has been amended to include "other public sector banks" as categorized by Reserve Bank of India in the expression “public sector banksâ€. 15 of 62 Explanatory Circular for Finance (No.2) Act, 2009 10.4 Applicability - These amendments have been made applicable with effect fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om 1" April, 2010 and will accordingly apply for assessment year 2010-11 and subsequent assessment years. 11. Extension of sunset clause for units in free trade zone under section 10A and for export oriented undertakings under section 10B 11.1 Under the existing provisions, the deductions under section 10A and section 10B of the Income Tax Act were available only upto the assessment year 2010-11. 11.2 Sections 10A and 10B have been amended to extend the tax benefit under both these sections by one year i.e., the deduction will be available upto assessment year 2011- 12. 11.3 Applicability - These amendments have been made applicable with effect from 1st April, 2009 and will accordingly apply for assessment year 2009-10 and subsequent assessment years. 12. Clarification regarding computation of exempted profits in the case of units in Special Economic Zones (SEZs) 12.1 Under sub-section (7) of section 10AA of the Income-tax Act, the exempted profit of a SEZ unit is the profit derived from the export of articles or things or services and same is required to be calculated as under: "the profit derived from the export of articles or things or services (including comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uter software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the assessee.†" Simply stated, it means that the exempted profit of the SEZ unit is equal to: Profits of the business of the unit X Export turnover of the unit Total turnover of the business carried on by the assessee 12.2 This method of computation of the profits of business with reference to the total turnover of the assessee is perceived to be discriminatory in so far as those assesses are concerned who were having multiple units in both the SEZ and the domestic tariff area (DTA) vis-à -vis those assesses 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 16 of 62 Explanatory Circular for Finance (No.2) Act, 2009 Tax Act were amended so as to provide that the deduction under section 10AA shall be computed with reference to the total turnover of the undertaking. 12.3 Applicability - This amendment will take....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... effect from 1st April, 2010 and will accordingly apply to assessment year 2010-11 and subsequent assessment years. 13. Special provisions relating to voluntary contributions received by an electoral trust 13.1 With a view to reforming the system of funding of political parties, sections 80GGB and 80GGC of the Income-tax Act have been amended to provide that voluntary contributions to an electoral trust shall be allowed as a hundred percent deduction in the computation of the income of the donor. Further, "electoral trust" has been defined in the new clause (22AAA) of section 2 as a trust so approved by the Board in accordance with the scheme made in this regard by the Central Government. Also, sub-clause (iia) of clause (24) of section 2 of the Income-tax Act has been amended to provide that voluntary contributions received by an electoral trust shall be treated as income of the trusts. However, a new section 13B has been inserted to provide that voluntary contributions received by an electoral trust shall not be included in the total income of the previous year of such electoral trust, if:- (a) the electoral trust distributes to any political party, registered unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r section 29A of the Representation of the People Act, 1951, during previous year 95 percent of the aggregate donations received by it during the said previous year along with the surplus, if any, brought forward from any earlier previous years; and b) the electoral trust functions in accordance with the rules made in this regard by the Central Government. 13.2 Applicability - These amendments have taken effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years 14. Aligning the definition of “block of asset†14.1 The term "block of assets" has been defined in clause (11) of section 2 and in Explanation 3 to sub-section (1) of section 32 of the Income-tax Act. However, these definitions are not identical and therefore they are subject to misuse. Hence the word “block of assets†has been deleted from the Explanation 3 of sub-section (1) of Section 32 of the Income-tax Act so that the word "block of assets" will derive its meaning only from clause (11) of section 2. 17 of 67 Explanatory Circular for Finance (No.2) Act, 2009 14.2 Applicability - This amendment has been made applicable wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h effect from 1st April, 2010 and will accordingly apply in relation to the assessment year 2010-11 and subsequent assessment years. 15. Weighted deduction for in-house research and development 15.1 Under the existing provisions of the Income-tax Act, under sub-section (2AB) of section 35, weighted deduction of 150 per cent is allowed to a company engaged in the business of biotechnology or in the business of manufacture or production of drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article or thing notified by the Board and which has incurred expenditure (excepting on land and building) on in-house scientific research and development facility approved by the prescribed authority. 15.2 With a view to promoting research and development in all sectors of the economy, the Act has been amended to extend the benefit of weighted deduction to companies engaged in the business of manufacture or production of an article or thing except those specified in the Eleventh Schedule of the Income-tax Act. 15.3 Applicability - This amendment has been made applicable with effect from 1st April, 2010 and will accordingly....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... apply in relation to the assessment year 2010-11 and subsequent assessment years. 16. Investment-linked tax incentive for specified business 16.1 The Income-tax Act provides for a number of profit-linked exemptions/deductions. Such benefits are inefficient, inequitable, impose higher compliance and administrative burden, result in revenue loss, increase litigations and lead to competitive demand for similar tax benefits. Further, these benefits also encourage diversion of profits from the taxed sector to the exempt/untaxed sector. However, investment-linked incentives are relatively less distortionary in their impact. 16.2 With a view to creating rural infrastructure and environment friendly alternate means of transportation for bulk goods, provide investment-linked tax incentive has been provided by inserting a new section 35AD in the Income-tax Act for the following businesses:- - (a) setting up and operating cold chain facilities for specified products; (b) setting up and operating warehousing facilities for storage of agricultural produce; 18 of 62 Explanatory Circular for Finance (No.2) Act, 2009 (c) laying and operating a cross-country natural gas or crud....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. 16.3 The salient features of the new regime of investment-linked tax incentives are the following:- (i) Hundred per cent deduction would be allowed in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of the specified business carried on during the previous year in which such expenditure is incurred. (ii) Capital expenditure incurred prior to the commencement of operations of the specified business and capitalised in the books of account of the assessee on the date of commencement of operations is also eligible for the deduction. (iii) The expenditure of capital nature shall not include any expenditure incurred on acquisition of any land or goodwill or financial instrument. (iv) The benefit is available- (a) in a case where the business relates to laying and operating a cross country natural gas pipeline network for distribution, if such business commences its operations on or after 1st April, 2007; and (b) in any other case, if such business commences its operation on or after the 1st....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... April, 2009. (v) The assessee shall not be allowed any deduction in respect of the specified business under the provisions of Chapter VIA; (vi) No deduction in respect of the expenditure in respect of which deduction has been claimed shall be allowed to the assessee under any other provisions of the Income-tax Act. (vii) Any sum received or receivable on account of any capital asset, in respect of which deduction has been allowed under section 35AD, being demolished, destroyed, discarded or transferred shall be treated as income of the assessee and chargeable to income tax under the head "Profits and gains of business or profession". (viii) Any loss computed in respect of the specified business shall not be set off except against profits and gains, if any, of any other specified business. To the extent the loss is unabsorbed the same will be carried forward for set off against profits and gains from any specified business in the following assessment year and so on. 16.4 Further, profit-linked deduction provided under section 80-IA to the business of laying and operating a cross country natural gas distribution network will be discontinued. As a result, any person ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....availing of this incentive can avail of the benefit under the proposed section 35AD. All capital expenditure (other than on land, goodwill and financial instrument), to the extent capitalized in the books as on 1st April, 2009 will be fully allowed as a deduction in the computation of total income of the said business for 19 of 62 Explanatory Circular for Finance (No.2) Act, 2009 the previous year 2009-10. This is available in addition to any other capital expenditure (excluding land, goodwill and financial instrument) incurred during such previous year. 16.5 The provisions of section 28, section 43 and section 50B of the Income-tax Act have also been amended to make consequential changes. Thus, any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD, shall be treated as taxable under section 28. Further, the actual cost of any capital asset on which deduction has been allowed or is allowable to the assessee under section 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....5AD, shall be treated as ‘nil' under section 43 in the case of such assessee and in any other case if the capital asset is acquired or received - (i) by way of gift or will or an irrevocable trust; (ii) on any distribution on liquidation of the company; and (iii) by such mode of transfer as is referred to in clauses (i), (iv), (v), (vi), (vib), (xiii) and (xiv) of section 47. Also, while computing capital gains in case of slump sale under section 50B, the aggregate value of total assets for computing the net worth in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD shall be treated as nil. 16.6 A new section 73A has also been inserted to give effect to the consequential provisions introduced in section 35AD. Thus, any loss computed in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business. Further, where for any assessment year any loss computed in respect of the specified business has not been wholly set off against profits and gains of another specified business, so mu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch of the loss as is not so set off or the whole loss where the assessee has no income from any other specified business shall be carried forward to the following assessment year, subject to the other provisions of Chapter VI and - (i) it shall be set off against the profits and gains, if any, of any specified business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. 16.7 Applicability - These amendments will be effective from 1st April, 2010 and will accordingly apply in respect of assessment year 2010-11 and subsequent assessment years. 17. Special deduction under section 36(1) (viii) to National Housing Bank (NHB) 17.1 Clause (viii) of sub-section (1) of Section 36 [section 36(1)(viii)] provides special deduction to financial corporations and banking companies of an amount not exceeding 20% of the profits subject to creation of a reserve. 20 of 62 Explanatory Circ ar for Finance (No.2) Act, 2009 17.2 National Housing Bank (NHB) is wholly owned by Reserve Bank of India and is engaged in promotion and regul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation of housing finance institutions in the country. It provides re-financing support to housing finance institutions, banks, ARDBs, RRBs etc., for the development of housing in India. It also undertakes financing of slum projects, rural housing projects, housing projects for EWS and LIG categories etc. NHB is also a notified financial corporation under section 4A of the Companies Act. 17.3 A view has been expressed that NHB is not entitled to the benefits of section 36(1) (viii) on the ground that it is not engaged in the long-term financing for construction or purchase of houses in India for residential purpose. Hence the Act has been amended to provide that corporations engaged in providing long-term finance (including re- financing) for development of housing in India will be eligible for the benefit under section 36(1)(viii). 17.4 Applicability - These amendments will be effective from the 1st April, 2010 and will accordingly apply in respect of assessment year 2010-11 and subsequent assessment years. 18. Remuneration to partners in a firm 18.1 Under the existing provisions of the Income-tax Act, the payment of salary, bonus, commission or remuneration (herei....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nafter referred to as "remuneration") to a working partner of a partnership firm is allowed as deduction if it is authorised by the partnership deed and subject to the overall ceiling of monetary limits prescribed under sub-clause (v) of clause (b) of section 40. The existing limits are as under: (1) in case of a firm carrying on a profession— (a) on the first Rs. 1,00,000 of the book-profit or in case of a loss (b) on the next Rs. 1,00,000 of the book-profit (c) on the balance of the book-profit (2) in the case of any other firm- (a) on the first Rs. 75,000 of the book-profit, or in case of a loss (b) on the next Rs. 75,000 of the book-profit (c) on the balance of the book-profit Rs. 50,000 or at the rate of 90 per cent of the book-profit, whichever is more; at the rate of 60 per cent; at the rate of 40 per cent; Rs. 50,000 or at the rate of 90 per cent of the book-profit, whichever is more; at the rate of 60 per cent; at the rate of 40 per cent: 18.2 The Act has been amended to make upward revision of the existing limits of the remuneration and also to prescribe uniform limits for both professional and non professional firms for simplicity and admin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....istrative ease. The revised limits as under: 21 of 62 Explanatory Circular for Finance (No.2) Act, 2009 (a) on the first Rs. 3,00,000 of the book-profit or in case of a loss (b) on the balance of the book-profit Rs. 1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more; at the rate of 60 per cent; 18.3 Applicability - This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to the assessment year 2010-2011 and subsequent assessment years. 19. Enhancement of limit for disallowance of expenditure made in the case of transporters 19.1 Under the existing provisions of the Income-tax Act, where an assessee incurs any expenditure, in respect of which payment in excess of Rs 20,000 is made otherwise than by an account payee cheque or account payee bank draft, such expenditure is not allowed as a deduction. 19.2 Given the special circumstances of transport operators for incurring expenditure on long haul journeys, the Act has been amended to raise the limit of payment to such transport operators otherwise than by an account payee cheque or account payee bank draft to Rs 35,000/- from the ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isting limit of Rs 20,000/-. For this purpose a new proviso has been inserted after the proviso in sub-section (3A) of section 40A of the Income-tax Act. 19.3 The existing limit for other categories of payments will remain at Rs 20,000/- subject to the exceptions declared in Rule 6DD of the Income-tax Rules. 19.4 Applicability - This amendment has been made applicable with effect from 1st October, 2009 and will accordingly apply in relation to the assessment year 2010-11 and subsequent assessment years. 20. Definition of written down value under section 43(6) 20.1 Clause (ii) of sub-section (1) of section 32 provides that depreciation is to be allowed and computed at the prescribed percentage on the written down value (WDV) of any block of assets. Sub-clause (b) of clause (6) of section 43 provides that WDV in the case of assets acquired before the previous year shall be computed by taking the actual cost to the assessee less all depreciation “actually allowed" to him under the Income-tax Act. 20.2 Rules 7A, 7B and 8 of the Income tax Rules, 1962, deal with the computation of composite income where income is derived in part from agricultural operations and in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 22 of 62 Explanatory Circular for Finance (No.2) Act, 2009 part from business chargeable to tax under the Income tax Act, 1961 under the head "Profits & Gains of Business". These rules prescribe the method of computation in the case of manufacture of rubber, coffee and tea. In such cases, the income which is brought to tax as "business income" is a prescribed fixed percentage of the composite income. 20.3 The Hon'ble Supreme Court in the case of CIT Vs. Doom Dooma India Ltd (222 CTR 105) has held that in view of the language employed in sub-clause (b) of clause (6) of section 43 regarding depreciation "actually allowed", where any income is partially agricultural and partially chargeable to tax under the Income tax Act, 1961 under the head “Profits & Gains of Businessâ€, the depreciation deducted in arriving at the taxable income alone can be taken into account for computing the WDV in the subsequent year. 20.4 For instance, Rule 8 prescribes the taxability of income from the manufacture of tea. Under the said rule, income derived from the sale of tea grown and manufactured by seller shall be computed as if it were income derived from business, and 40% of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... such income shall be deemed to be income liable to tax. As a result of the Court decision on depreciation to be “actually allowed†for computing WDV, the resultant computation of depreciation is as per the following illustration: Sale proceeds of made tea Less: Expenses - Depreciation – (10% of Rs. 1,000) - Others expenses Composite income Income subject to charge under the I.T. Act, 1961 by application of Rule 8 (40% of 600) Income not chargeable to income-tax (60% of 600) Rs. 1,000 (100) (300) 600 240 360 20.5 According to the interpretation of the Court, the W.D.V. of the fixed asset for the immediately succeeding year is to be taken at Rs.960/- (Rs.1,000 minus Rs. 40 being depreciation allocated for business income) and not Rs.900/- (Rs.1,000 minus depreciation of Rs.100/- allowed for determining composite income). Thus the depreciation for which deduction is allowed to the assessee while computing 'its agricultural income is to be ignored for computing the W.D.V. of the asset according to the Court ruling. 20.6 The above interpretation is not in accordance with the legislative intent. WDV is required to be computed by deducting ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the full depreciation attributable to composite income. Hence in the above illustration, the WDV of the fixed asset for the immediately succeeding year is to be taken at Rs.900/- and not Rs. 960/- as held by the Supreme 23 of 62 Explanatory Circular for Finance (No.2) Act, 2009 Court. The ambiguity in this case has arisen on account of the interpretation of the meaning of the phrase “actually allowed†in sub-clause (b) of clause (6) of section 43. 20.7 Hence an explanation has been inserted in clause (6) of section 43 to provide that in the cases of 'composite income', notwithstanding that the assessee was not required to compute a part of his income for the purposes of Income-tax Act for any previous year, depreciation shall be computed as if the total composite income of the assessee is chargeable under the Income-tax Act and such depreciation shall be deemed to have been "actually allowed" to the assessee. 20.8 Applicability - These amendments has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years. 21. basis Special provision for computing profits an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d gains of business on presumptive 21.1 The existing provisions of the Income-tax Act provide for taxation of income on presumptive basis in the case of construction business, income from goods carriages and business of retail trade. Section 44AD prescribes a method of presumptive taxation for assessee engaged in the business of civil construction or supply of labour for civil construction in which a sum equal to eight percent of the gross receipts is deemed to be the profits and gains from business. Section 44AE provides presumptive provisions for the assessee engaged in the business of plying, hiring or leasing up to ten goods carriages in which a prescribed sum per vehicle is deemed to be the presumptive income of the assessee. Section 44AF prescribes a method of presumptive taxation for retail trade, under which the presumptive income is computed at the rate of a sum equal to five per cent of the total turnover. There has been a substantial increase in small businesses with the growth of transport and communication and general growth of the economy. A large number of businesses and service providers in rural and urban areas who earn substantial income are outside ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the tax-net. Introduction of presumptive tax provisions in respect of small businesses would help a number of small businesses to comply with the taxation provisions without consuming their time and resources. A presumptive income scheme for small taxpayers lowers the compliance cost for such taxpayers and also reduces the administrative burden on the tax machinery. In view of the above, to expand the scope of presumptive taxation to all businesses, the existing section 44AD has been substituted by a new section 44AD. 21.2 The salient features of the new presumptive taxation scheme are as under: (a) The scheme is applicable to individuals, HUFS and partnership firms excluding Limited liability partnership firms. It is also not be applicable to an assessee who is 24 of 62 ! Explanatory Circular for Finance (No.2) Act, 2009 availing deductions under sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C.-Deductions in respect of certain incomes" in the relevant assessment year. (b) The scheme is applicable for any business (excluding a business already covered under Sec. 44AE) which has a maximum gross turnover/gross....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... receipts of 40 lakhs. (c) The presumptive rate of income is prescribed at 8% of gross turnover /gross receipts. (d) An assessee opting for the above scheme is exempted from payment of advance tax related to such business under the current provisions of the Income-tax Act. (e) An assessee opting for the above scheme is exempted from maintenance of books of accounts related to such business as required under section 44AA of the Income-tax Act. (f) An assessee with turnover below Rs. 40 lakhs, who shows an income below the presumptive rate prescribed under these provisions, in case his total income exceeds the taxable limit, required to maintain books of accounts and also get them audited. (g) The existing section 44AF is to be made inoperative for the assessment year beginning on or after 1st April, 2011. - 21.3 Applicability – These amendments have been made applicable with effect from 1st April, 2011 and will accordingly apply in relation to assessment year 2011-12 and subsequent assessment years. 22. Presumptive income for truck owners under section 44AE 22.1 Under the existing provisions of section 44AE, a presumptive scheme is available to assessees enga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ged in business of plying, hiring or leasing goods carriages. The scheme applies to an assessee, who owns not more than 10 goods carriages at any time during the previous year. 22.2 Under this scheme, which is optional to the assessee, a fixed amount of income per vehicle is taken at the rate of Rs.3,500/- per month per vehicle for owners of heavy goods vehicle, and Rs.3,150/- per month per vehicle for the owners of light goods vehicles. An assessee opting for this scheme is exempted from maintaining books of account to substantiate the income. 22.3 The Act has been amended to take care of inflationary trend, hence the limit has been enhanced to presume income per vehicle for the owners of (i) heavy goods vehicle to Rs.5,000/- per month; and 25 of 62 Explanatory Circular for Finance (No.2) Act. 2009 (ii) other than heavy goods vehicles to Rs.4,500/- per month. 22.4 Further an anti-avoidance clause is provided to state that a prescribed fixed sum or a sum higher than the aforesaid sum claimed to have been earned by the assessee shall be deemed to be profits and gains of such business. 22.5 Applicability - These amendments have been made applicable with effect from 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st April, 2011 and will accordingly apply in relation to assessment year 2011-12 and subsequent assessment years. 23. Provisions for deemed valuation in certain cases of transfer 23.1 The existing provisions of section 50C provide that where the consideration received or accruing as a result of the transfer of a capital asset, being land or building or both, is less than the value adopted or assessed by an authority of a State Government (stamp valuation authority) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of consideration received or accruing as a result of such transfer for computing capital gain. However, the present scope of the provisions does not include transactions which are not registered with stamp duty valuation authority, and executed through agreement to sell or power of attorney. 23.2 With a view to preventing the leakage of revenue, section 50C is amended, so as to provide that where the consideration received or accruing as a result of transfer of a capital asset, being land or building or both is less than the value adopted or assessed or assessable by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an authority of state Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of consideration received or accruing as a result of such transfer for computing capital gain. 23.3 Further, Explanation 2 has been inserted in the subsection (2) of the section 50C, so as to clarify the meaning of the term "assessable". 23.4 Applicability- These amendments have been made applicable with effect from 1st October, 2009 and will accordingly apply in relation to transactions undertaken on or after such date. 24. Taxation of certain transactions without consideration or for an inadequate consideration as income from other sources 24.1 The previous provisions of sub clause (vi) of section 56 provided that any 'sum of money' (in excess of the prescribed limit of rupees fifty thousand) received without 26 of 62 Explanatory Circular for Finance (No.2) Act, 2009 consideration by an individual or HUF would be chargeable to income tax in the hands of the recipient under the head 'income from other sources'. However, receipts from relatives or on the occasion of marriage or und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er a will were outside the scope of the provisions of clause (vi) of sub-section (2) of section 56 of the Income-tax Act. Similarly, anything which is received in kind having ‘money's worth' i.e. property were also remained outside the purview of these provisions. 24.2 The above section being an anti-abuse measure, in view of the above, section 56 of the Income-tax Act, 1961 has been amended by inserting a new clause (vii) in sub-section (2) to provide that the value of any property received without consideration or for an inadequate consideration will also be included in the computation of total income of the recipient as income from other source. Such properties will include immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. 24.3 It has been provided that in a case where an immovable property is received without consideration and the stamp duty value of such property exceeds fifty thousand rupees, the whole of the stamp duty value of such property shall be taxed as the income of the recipient. If an immovable property is received for a consideratio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n which is less than the stamp duty value of the property and the difference between the two exceeds fifty thousand rupees (inadequate consideration), the difference between the stamp duty value of such property and such consideration shall be taxed as the income of the recipient. If the stamp duty value of immovable property is disputed by the assessee, the Assessing Officer may refer the valuation of such property to a Valuation Officer. In such cases, the provisions of existing section 50C and sub-section (15) of section 155 of the Income Tax Act shall, as far as may be, apply for determining the value of such property. 24.4 It has been provided that in a case where movable property is received without consideration and the aggregate fair market value of such property exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property shall be taxed as the income of the recipient. If a movable property is received for a consideration which is less than the aggregate fair market value of the property and the difference between the two exceeds fifty thousand rupees, the difference between the fair market value of such property and such consid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eration shall be taxed as the income of the recipient. 24.5 The method for the determination of fair market value of property other than immovable property has been provided in rules 11U and 11UA vide Notification No. 23/2010/F.No. 142/21/2009-SO(TPL) dated 8th April, 2010. 24.6 Consequential amendment has been made in section 2 by inserting sub-clause (xv) in clause (24) thus expanding the definition of income to include any sum of money or value of property referred to in clause (vii) of sub-section (2) of section 56. Further, 27 of 62 Explanatory Circular for Finance (NO.2) Act, 2009 section 49 has also been amended by way of inserting a new sub-section (4) providing that for the purposes of computing capital gains, if the transaction of receipt of the asset is subject to tax under clause (vii) of sub-section (2) of section 56, then the cost of acquisition of the asset shall be the stamp duty value (for immovable property) or fair market value (for asset being a movable property) as the case may be. 24.7 Applicability - These amendments have been made applicable with effect from 1st October, 2009 and will accordingly apply for transactions undertaken on or after s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uch date. 25. Amendment in Chapter VIA to prevent abuse of tax incentives 25.1 The profit linked deductions in Chapter VIA are prone to considerable misuse. Further, since the scope of the deductions under various provisions of Chapter VIA overlap, the taxpayers, at times, claim multiple deductions for the same profits. 25.2 With a view to preventing such misuse, the provisions of section 80A of the Income-tax Act have been amended to provide the following, namely:- (i) deduction in respect of profits and gains shall not be allowed under any provisions of section 10A or section 10AA or Section 10B or section 10BA or under any provisions of Chapter VIA under the heading "C.-Deductions in respect of certain incomes" in any assessment year, if a deduction in respect of same amount under any of the aforesaid has been allowed in the same assessment year; (ii) the aggregate of the deductions under the various provisions referred to in (i) above, shall not exceed the profits and gains of the undertaking or unit or enterprise or eligible business, as the case may be; (iii) no deductions under the various provisions referred to in (i) above, shall be allowed if the deduct....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion has not been claimed in the return of income; 25.3 Applicability - This amendment has taken effect retrospectively from 1st April, 2003, and will accordingly apply in relation to assessment year 2003-04 and subsequent years. 25.4 Further, section 80A has been amended to also to provide that the transfer price of goods and services between the undertaking or unit or enterprise or eligible business and any other undertaking or unit or enterprise or business of the assessee shall be determined at the market value of such goods or services as on the date of transfer. 25.5 Furthermore, the expression "market value" has been defined to mean,- 28 of 62 Explanatory Circular for Finance (No.2) Act, 2009 (a) in relation to any goods or services sold or supplied, means the price that such goods or services would fetch if these were sold by the undertaking or unit or enterprise or eligible business in the open market, subject to statutory or regulatory restrictions, if any; (b) in relation to any goods or services acquired, means the price that such goods or services would cost if these were acquired by the undertaking or unit or enterprise or eligible business from the op....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en market, subject to statutory or regulatory restrictions, if any. 25.6 Applicability - This amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply to all cases where the proceedings are pending before any authority on or after such date. 25.7 Further, with a view to preventing the misuse of the tax holiday under section 80- IA of the Income-tax Act, the Explanation to the said section has been amended to clarify that nothing contained in the said section shall apply in relation to a business referred to in sub-section (4) of the said section which is in the nature of a works contract awarded by any person (including the Central or State Government) and executed by an undertaking or enterprise referred to in sub-section (1) thereof. 25.8 Applicability -This amendment has been made applicable with retrospective effect from 1st April, 2000 and will accordingly apply in relation to assessment year 2000-01 and subsequent years. 26. Tax benefits for New Pension System 26.1 The New Pension System (NPS) has become operational since 1st January, 2004 and is mandatory for all new recruits to the Central Government service from 1st Ja....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nuary, 2004. Since then it has been opened up for employees of State Government, private sector and self employed (both organised and unorganised). NPS Trust has been set-up on 27th February, 2008 as per the provisions of the Indian Trust Act, 1882 to manage the assets and funds under the NPS in the interest of the beneficiaries. 26.2 With a view to ensure that tax treatment of savings under this system is in synchronised with the "exempt-exempt-taxed" (EET) method and that there is no incidence of taxation at the accumulation stage, it is proposed to make the NPS Trust a complete pass-through in so far as taxation is concerned. Therefore, the following modifications have been made in the Income-tax Act - (i) A new clause (44) has been inserted in section 10 of the Income-tax Act so as to provide that any income received by any person on behalf of the New 29 of 62 Explanatory Circular for Fintice (No.2) Act, 2009 Pension System Trust established on 27th day of February, 2008 under the provisions of the Indian Trust Act of 1882 shall be exempt from income tax; (ii) Section 115-O has been amended to provide that any dividend paid to the NPS Trust shall be exempt from....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Dividend Distribution Tax; (iii) Chapter VII of Finance (No.2) Act, 2004 has been amended to provide that all purchases and sales of equity and derivatives by the NPS Trust will also be exempt from the Securities Transaction Tax; and (iv) Section 197A has been amended to provide that the NPS Trust shall receive all income without any tax deducted at source. 26.3 The tax benefit under section 80CCD of the Income-tax Act, 1961 was hitherto available to "employees†only. However, the NPS now has been extended to “self- employed†also. Therefore, sub-section (1) of section 80CCD has been amended so as to extend the tax benefit thereunder also to “self-employed" individuals. The deduction to be allowed in the case of an employee should not exceed 10% of his salary in the previous year, and in any other case, the same should not exceed 10% of his gross total income in the previous year. 26.4 The Explanation to the said section has also been amended to provide that for the purposes of the said section the assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....revious year. 26.5 Applicability - These amendments has been made applicable with retrospective effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent years. 27. Deduction for medical treatment of a dependant suffering from disability 27.1 Section 80-DD of the Income Tax Act provides for a deduction to an individual or HUF, who is a resident in India, in respect of the following:- (a) Expenditure for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability; and (b) Amount paid to LIC or other insurance in respect of a scheme for the maintenance of a disabled dependant. 27.2 The existing limit for deduction was Rs.50,000 if the dependant is suffering from disability and Rs.75,000 if the dependant is suffering from severe disability. 30 of 62 Explanatory Circular for Finance (No.2) Act, 2009 27.3 The limit for severe disability has been amended to Rs.1 lakh. However, the limit for ordinary disability has been retained at the existing level of Rs.50,000. 27.4 Applicability- The above amendment has been made applicable with effect from 1st April, 2010 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d will accordingly apply in respect of assessment year 2010-11 and subsequent years. 28. Deduction in respect of interest on loan taken for higher education 28.1 Section 80E of the Income-tax Act provides for a deduction to an assessee, being an individual, on account of any amount paid by him in the previous year by way of interest on loan taken from any financial institution or any approved charitable institution for the purpose of pursuing higher education in specified fields of study. 28.2 Under the existing provisions, the deduction was available only for pursuing full time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics. 28.3 With the objective of fostering human capital formation in the country, the provisions of section 80E of the Income Tax Act have been amended by substituting clause (c) of sub-section (3) so as to extend its scope to cover all fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entral Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so. Further, clause (e) has also been substituted to widen the scope of the term "relative" so as to include a student for whom an individual assessee is the legal guardian. 28.4 Applicability- This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years. 29. Donations to Certain Funds, Charitable Institutions, etc. 29.1 Section 80G of the Income-tax Act, 1961 provides for a deduction in respect of donations to certain funds, charitable institutions, etc. subject to, inter alia, the condition that such institutions and trusts are establish for ‘charitable purpose'. Consequent to the amendment of sub-section (15) of section 2 by the Finance Act 2008 a number of organizations have ceased to be charitable for the purposes of the Income-tax Act. However, such institutions and trusts continued to collect donation during the financial 31 of 62 Explanatory Circular for Finance (No.2) Act, 2009 year 2008-200....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9 for funding relief work for floods in Bihar and other public purposes. The donors made these donations under a bonafide belief that they would be entitled to benefit under section 80G. 29.2 With a view to mitigate hardship to the donors, a one-time relaxation has been given and sub-section (5) of section 80G of the Income-tax Act has been amended so as to provide that where an institution or fund has been approved under clause (vi) of sub- section 5 of section 80G for the previous year beginning on 1st April, 2007 and ending on 31st March, 2008, such institution or fund shall, notwithstanding anything contained in the proviso to clause (15) of section 2, be deemed to have been,- (a) established for charitable purposes for the previous year beginning on 1st April, 2008 and ending on 31st March, 2009; (b) approved under the said clause (vi) for the previous year beginning on 1st April, 2008 and ending on 31st March, 2009. 29.3 Applicability - This amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 only. 29.4 Further, as per clause (vi) of sub-section (5) of section 80G of the Income-ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x Act, 1961, the institutions or funds to which the donations are made have to be approved by the Commissioner of Income-tax in accordance with the rules prescribed in rule 11AA of the Income-tax Rule, 1962. The proviso to this clause provides that any approval granted under this clause shall have effect for such assessment year or years, not exceeding five assessment years, as may be specified in the approval. Due to this limitation imposed on the validity of such approvals, the approved institutions or funds have to bear the hardship of getting their approvals renewed from time to time. This is unduly burdensome for the bonafide institutions or funds and also leads to wastage of time and resources of the tax administration in renewing such approvals in a routine manner. 29.5 Therefore, the proviso to clause (vi) of sub-section (5) of section 80G has been omitted to provide that the approval once granted shall continue to be valid in perpetuity. 29.6 Further, the Commissioner will also have the power of withdraw the approval if the Commissioner is satisfied that the activities of such institution or fund are not genuine or are not being carried out in accordance with....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the objects of the institution or fund. 29.7 Applicability - This amendment has been made applicable with effect from 1st October, 2009. Accordingly, existing approvals expiring on or after 1st October, 2009 will be deemed to have been extended in perpetuity unless specifically withdrawn. However, in case of approvals expiring before 1st October, 2009, these will have to be renewed and once renewed these shall continue to be valid in perpetuity, unless specifically withdrawn. . 32 of 62 Explanatory Circular for Finance (No.2) Act, 2009 30. Deduction in respect of contributions to political parties 30.1 Section 80GGB and section 80GGC of the Income-tax Act, 1961 provide for deduction in respect of contributions given to political parties by companies and any person respectively. 30.2 With a view to reforming the system of funding of political parties section 80GGB and section 80GGC of the Income-tax Act, 1961 has been amended to provide that donations to electoral trusts shall be allowed as a 100 percent deduction in the computation of the income of the donor. 30.3 Further, sub-clause (iia) of clause (24) of section 2 of the Income-tax Act has also been amended t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o provide that donations to such electoral trusts shall be treated as income of the trusts which will be specifically exempt as per the newly inserted section 13B and not included in the total income of the previous year if:- (a) the electoral trust distributes to any political party, registered under section 29A of the Representation of the People Act, 1951, during previous year 95 percent of the aggregate donations received by it during the said previous year along with the surplus, if any, brought forward from any earlier previous years; (b) the electoral trust functions in accordance with the rules made in this regard by the Central Government. 30.4 Further, “electoral trust" has been defined in the new clause (22AAA) of section 2 as a trust so approved by the Board in accordance with the scheme made in this regard by the Central Government. 30.5 Applicability - These amendments have been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years. 31. Extension of sunset clause for tax holiday under section 80-IA 31.1 Under the provisions of clause (iii) of section (4) of section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....80-IA, an undertaking which develops, develops and operates or maintains and operates an industrial park notified by the Central Government in accordance with the scheme framed and notified by that Government for the period beginning on 1st April, 1997 and ending on 31st March, 2006, was eligible for hundred per cent deduction from profits and gains for 10 assessment years. This terminal date was extended upto 31st March, 2009 by the Finance Act, 2007. 33 of 62 Explanatory Circular for Finance (No.2) Act, 2009 31.2 Clause (iii) of sub-section (4) of section 80-IA has now been amended to extend the terminal date for a further period of two years upto 31st March, 2011. 31.3 Applicability - This amendment has been made applicable with retrospective effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years. 31.4 Further, the existing provisions of clause (iv) of sub-section (4) of section 80-IA provide for a deduction of profits and gains of an undertaking,--- (a) which is set up for the generation and distribution of power if it begins to generate power at any time during the period beginning on 1.04.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1993 and ending on 31.03.2010; (b) which starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on 1.04.1999 and ending on 31.03.2010; (c) which undertakes substantial renovation and modernization of existing network of transmission or distribution lines at any time during the period beginning on 1.04.2004 and ending on 31.03.2010. 31.5 Clause (iv) of sub-section (4) of section 80-IA has been amended to extend the terminal date for a further period of one year upto 31.03.2011. 31.6 Applicability - This amendment has been made applicable with retrospective effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years. 31.7 Furthermore, clause (v) of sub-section (4) of section 80-IA provides that an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant is eligible for 10 year tax benefit if it fulfils the following conditions:- (i) such company is formed before 30.11.2005 with majority equity participation by public sector companies for enforcing the security interest ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the lenders to the company owning the power generating plant; (ii) such Indian company is notified by the Central Government before 31.12.2005; and (iii) the undertaking begins to generate or transmit or distribute power before 31.03.2008. 31.8 Sub-clause (b) of clause (v) of sub-section (4) of section 80-IA has been amended to extend the terminal date for commencing the activity of generation, transmission or distribution of power in case of such undertaking from 31.03.2008 to 31.03.2011. 34 of 62 Explanatory Circular for Finance (No.2) Act, 2009 31.9 Applicability - This amendment has been made applicable with retrospective effect from 1st April, 2008 and will accordingly apply in relation to assessment year 2008-09 and subsequent years. 32. Deduction in respect of profits and gains from undertakings engaged in commercial production of mineral oil and natural gas 32.1 Sub-section (9) of section 80-IB of the Income Tax Act, 1961 provides for deduction in respect of profits and gains derived from commercial production or refining of mineral oil. The deduction under this sub-section is available to an undertaking for a period of seven consecutive assessment ye....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ars including the initial assessment year- (i) in which the commercial production under production sharing contract has first started; or (ii) in which the refining of mineral oil has begun. 32.2 However, no deduction under this sub-section is available to an undertaking which begins refining of mineral oil on or after 1st April, 2009 unless such undertaking fulfils all the following conditions as provided in the third proviso to this subsection, namely:- the (i) It is wholly owned by a public sector company or any other company in which a public sector company or companies hold at least forty-nine percent of voting rights; (ii) It is notified by the Central Government in this behalf on or before 31st May, 2008; and (iii) It begins refining not later than 31st March, 2012. 32.3 Under the existing provisions, it was incumbent on refineries in the private sector to commence refining of mineral oil on or before 31st March, 2009. The notice given to private sector entrepreneurs to complete the execution of their refinery project was extremely short. As a result, entrepreneurs who had undertaken substantial investment in anticipation of the tax holiday suffered seriou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s financial setback. 32.4 Therefore, the provisions of sub-section (9) have been amended so as to allow them a further period of three years i.e. upto 31st March, 2012 to begin refining of mineral oil and avail of the tax benefit. The new terminal date will be the same for both the public and the private sector. 32.5 Further, the Income Tax Act has also been amended through the insertion of clause (iv) in the said provisions so as to extend the tax holiday under sub-section (9) of section 80-IB of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of mineral oil, also to natural gas from blocks which are licensed under the VIII Round of bidding for award of exploration contracts under the New Exploration Licencing Policy (NELP-VIII) announced by the 35 of 62 Explanatory Circular for Finance (No.2) Act, 2009 Government of India vide Resolution No.0-19018/22/95-ONG.DO.VL, dated 10th February, 1999 and begin commercial production of natural gas on or after 1st April, 2009. 32.6 Furthermore, a new clause (v) has been inserted to also include within the scope of the aforesaid tax holiday the undertak....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ings engaged in commercial production of natural gas in blocks licensed under the IV Round of bidding for award of exploration contracts for Coal Bed Methane blocks which begin commercial production of natural gas on or after 1st April, 2009. 32.7 The term "undertaking" in sub-section (9) was not defined earlier. Therefore, in the context of mineral oil, the meaning of the term "undertaking" has been the subject matter of considerable dispute. The tax payers have been holding the view that every well in a block licensed constitutes a single "undertaking" and accordingly the tax holiday is available separately for each such well. However, this view is against the legislative intent. Accordingly, sub-section (9) has been amended by inserting an Explanation so as to clarify that for the purposes of claiming deduction under sub-section (9), all blocks licensed under a single contract, which has been awarded under the New Exploration Licencing Policy announced by the Government of India vide Resolution No. O- 19018/22/95-ONG.DO.VL, dated 10th February, 1999 or has been awarded in pursuance of any law for the time being in force or has been awarded by Central or a State Go....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vernment in any other manner, shall be treated as a single "undertaking". This definition of "undertaking" is applicable both in relation to mineral oil and natural gas. 32.8 Applicability - This amendment has been made applicable with retrospective effect from 1 April, 2000 and will accordingly apply in relation to assessment year 2000-01 and subsequent years. 33. Rationalising the provisions of deduction u/s 80-IB(10) 33.1 Sub-section (10) of section 80-IB of the Income-tax Act, 1961 provides for hundred per cent deduction of the profits derived by an undertaking from developing and building housing projects. This benefit is available subject to the following conditions:- (a) The project is approved by a local authority before 31st March, 2007. (b) The project is constructed on a plot of land having a minimum area of one acre. (c) The built-up area of each residential unit should not exceed 1,000 sq.ft. in the cities of Delhi and Mumbai (including areas falling within 25 kms. of municipal limits of these cities) and 1,500 sq.ft. in other places. 36 of 62 Explanatory Circular for Finance (No.2! Act, 2009 (d) The built-up area of the shops and other commercial est....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ablishments 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. (e) The project has to be completed within 4 years from the end of the financial year in which the project is approved by the local authority. 33.2 The terminal date of approval of the project by a local authority has been extended by one year from 31st March, 2007 to 31st March, 2008. 33.3 Applicability - This amendment has been made applicable with retrospective effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years. 33.4 The objective of the aforesaid tax concession is to provide tax benefit to the person undertaking the investment risk i.e., the actual developer. However, any person undertaking pure contract risk is not entitled to the tax benefits. 33.5 With a view to clarify accordingly, an Explanation after sub-section (10) of section 80-IB has been inserted so as to provide that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any other person (in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cluding Central or State Government). 33.6 Applicability - This amendment has been made applicable with retrospective effect from 1st April, 2001 and will accordingly apply in relation to assessment year 2001-02 and subsequent assessment years. 33.7 Further, the objective of the tax benefit for housing projects is to build housing stock for low and middle income households. This has been ensured by limiting the size of the residential unit. However, this is being circumvented by some developers by entering into agreement to sell multiple adjacent units to a single buyer. Accordingly, new clauses have been inserted in the said sub-section to provide that the undertaking which develops and builds the housing project shall not be allowed to allot more than one residential unit in the housing project to the same person, not being an individual, and where the person is an individual, no other residential unit in such housing project is allotted to any of the following persons:- (i) the individual or spouse or minor children of such individual; (ii) the Hindu undivided family in which such individual is the karta; (iii) any person representing such individual, the spouse o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r minor children of such individual or the Hindu undivided family in which such individual is the karta. 37 of 62 Explanatory Circular for Finance (No.2) Act, 2009 33.8 Applicability - These amendments have been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years. The amendments relate to restrictions on specific transactions (i.e., allotment of residential units). Therefore, they would apply to transactions after a specified date during the year. Since the Finance (No.2) Act, 2009 became law on 19th August, 2009, the restrictions regarding allotment of residential units shall not apply in respect of allotments made before 19.08.2009. 34. Deduction in case of an undertaking deriving profit from the business of processing, preservation and packaging of meat and meat products or poultry or marine or dairy products 34.1 The existing provisions of sub-section (11A) of section 80-IB of the Act provide for hundred per cent tax holiday for five assessment years in respect of profits derived from the business of processing, preservation and packaging of fruits or vegetables and thereafter....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., a deduction of twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from the operation of such business in a manner that the total period of deduction does not exceed ten consecutive assessment years and subject to fulfilment of the condition that it begins to operate such business on or after 1st April, 2001. 34.2 With a view to promote the preservation of perishable food items like milk, poultry and meat, sub-section (11A) has been amended to provide tax holiday in respect of the business of processing, preservation and packaging of meat and meat products or poultry or marine or dairy products on the above lines. 34.3 Further, in order to make the inclusion of the aforesaid business applicable for new units only, an explanation has been inserted specifying that the provisions of the aforesaid section shall not apply to an undertaking engaged in the business of processing, preservation and packaging of meat or meat products or poultry or marine or dairy products if it begins to operate such business before 1st April, 2009. ' 34.4 Applicability- These amendments have been made applicable with effect from 1st Ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ril, 2010 and will accordingly apply in respect of assessment year 2010-11 and subsequent years. 35. Deduction in case of a person with disability 35.1 Section 80U of the Income Tax Act provides for a deduction to an individual, being a resident, who, at any time during the previous year, is certified by the medical authority to be a person with disability. The existing limit for deduction was Rs. 50,000 if 38 of 62 Explanatory Circular for Finance (No.2) Act, 2009 the person is suffering from disability and Rs. 75,000 if the dependant is suffering from severe disability. 35.2 The limit for severe disability has been amended to Rs.1 lakh. The limit for ordinary disability has been retained at the existing level of Rs. 50,000. 35.3 Applicability- The above amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in respect of assessment year 2010-11 and subsequent years. 36. Empowering Central Government to enter into agreement with specified non- sovereign territories 36.1 Section 90 of the Income-tax Act empowers the Central Government to enter into Double Taxation Avoidance Agreement (‘DTAA') with the Government of an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y other country outside India for granting double-taxation relief and facilitate exchange of information concerning avoidance or evasion of tax. 36.2 The scope of section 90 was restricted to ‘any other country outside India'. Need was felt to expand the scope of this cooperation by entering into a DTAA or TIEA (Tax Information Exchange Agreement) with non-sovereign jurisdictions as well. 36.3 In order to enable the government to enter into agreements with non-sovereign territories as well, section 90 of the Income tax act, 1961 has been amended. The corresponding provisions under section 44A of the Wealth Tax Act have also been amended so as to enable the government to notify such specified territories outside India. 36.4 Applicability- These amendments have been made applicable with effect from 1st October, 2009 and will accordingly apply for transactions undertaken on or after such date. 37. Determination of arm's length price in cases of international transactions 37.1 Section 92C of the Income-tax Act provides for adjustment in the transfer price of an international transaction with an associated enterprise if the transfer price is not equal to the arm's....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... length price. As a result, a large number of such transactions are being subjected to adjustment giving rise to considerable dispute. 37.2 The proviso to sub-section (2) of section 92C provides that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which ** of 62 Explanatory Circular for Finance (No.2) Act, 2009 may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. 37.3 The above provision has been subject to conflicting interpretation by the assessee and the Income Tax Department. The assessee's view is that the arithmetical mean should be adjusted by 5 per cent to arrive at the arm's length price. However, the department's contention is that if the variation between the transfer price and the arithmetical mean is more than 5 per cent of the arithmetical mean, no allowance in the arithmetical mean is required to be made. 37.4 With a view to resolving this controversy, it is proposed to amend the proviso to section 92C to provide that where more than one price is determin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such price. However, if the arithmetical mean, so determined, is within five per cent of the transfer price, then the transfer price shall be treated as the arm's length price and no adjustment is required to be made. 37.5 Applicability- The above amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years. 38. Power of Board to make Safe Harbour Rules 38.1 In India, Transfer pricing rules were introduced in 2007, since then the number of cases identified for audit and the transfer pricing adjustments locked up in disputes have increased. 38.2 In order to reduce the number of transfer pricing audits and prolonged disputes a new section 92CB has been inserted to provide that the determination of arm's length price under section 92C or section 92CA shall be subject to safe harbor rules. 38.3 Applicability - The above amendment has been made applicable with effect from 1st October, 2009 and will accordingly apply in respect of assessment year 2010-11 and subsequent years. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....39. Tax relief on anonymous donations in certain cases 39.1 Under the provisions of section 115BBC, wholly religious entities are outside the purview of taxation of anonymous donations. Partly religious and partly charitable entities had also been exempted from the taxation of anonymous donations, except where the anonymous donation is made to an educational or medical institution run by such 40 of 62 Explanatory Circular for Finance (No.2) Act, 2009 entity in which case such donations were taxed at the rate of 30 per cent. In the case of wholly charitable entities, all anonymous donations are taxed at the rate of 30 per cent. 39.2 It was observed that in the case of some such institutions, there are practical difficulties to maintain complete records of donation received. In order to mitigate the compliance burden, the above section was amended and some relief was provided to such organizations by exempting a part of the anonymous donations from being taxed. The amendment has resulted in the following scheme:- 1. Anonymous donations received by wholly religious institutions shall remain exempt from tax. 2. In the case of partly religious and partly charitable inst....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itutions, anonymous donations directed towards a medical or educational institutions run by such entities shall be taxable only to the extent such donations exceed 5 per cent of total donations received by such trust or institution or a sum of Rs. 1 lakh, whichever is more. Other donations to partly religious and partly charitable institutions shall remain exempt from taxation. 3. In the case of wholly charitable institutions, anonymous donations shall be taxable only to the extent such donations exceed 5 per cent of total donations received by such trust or institution or a sum of Rs. 1 lakh, whichever is more. 39.3 Applicability- These amendments have been made applicable with effect from 1st April, 2010 and will accordingly apply for assessment year 2010-11 and subsequent assessment years. 40. Clarification regarding add back of ‘provision for diminution in the value of asset', while computing book profits 40.1 Section 115JB of the Income-tax Act provides for levy of minimum alternate tax (MAT) on the basis of book profits of a company. As per Explanation 1 after sub-section (2), the expression “book profit†means net profit as shown in the prof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it and loss account prepared in accordance with the provisions of Part-II and Part-III of Schedule-VI to the Companies Act, 1956 as increased or reduced by certain adjustments, as specified in that section. 40.2 A new clause (i) in Explanation 1 after sub-section (2) of the said section has been inserted so as to provide that if any provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit as shown in the profit and loss account for the purpose of computation of book profit. 41 of 62 Explanatory Circular for Finance (No.2) Act, 2009 40.3 Similar amendment has also been made in section 115JA of the Income-tax Act by way insertion of a new clause (g) in the Explanation after sub-section (2) of the said section. 40.4 Applicability- The amendment to section 115JA has been made applicable with retrospective effect from 1st April, 1998 and will accordingly apply in relation to assessment year 1998-99 and subsequent years. The amendment to section 115JB has been made applicable with retrospective effect from 1 April, 2001 and will accordingly apply in relation to assessment year 2001-02 and subs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....equent years. 41. Minimum Alternate Tax 41.1 The Income-tax Act is riddled with a plethora of tax incentives which has the effect of considerable eroding the tax base. Since tax incentives are generally sticky in nature, their distortionary impact can be reduced / eliminated only by imposing a cap thereon. The Minimum Alternate Tax (MAT) is designed to achieve this objective. 41.2 Under the existing provisions of section 115JB of the Income Tax Act, a company was required to pay a minimum tax on its book profits, if the income-tax payable on the total income, as computed under the Act in respect of any previous year relevant to the assessment year commencing on or after 1st April, 2007, was less than such minimum. The rate of the minimum tax was ten per cent of the book profit. Sub-section (1) of section 115JB was amended to increase the MAT rate to fifteen per cent. from the existing level of ten per cent. 41.3 However, with a view to provide relief to the assessees, being companies, who pay Minimum Alternate Tax under section 115JB for any assessment year beginning on or after 1st April, 2006, the provisions of sub-section (3A) of section 115JAA were also amended ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....so as to provide that the amount of tax credit determined under sub-section (2A) of section 115JAA shall be allowed to be carried forward and set-off upto the tenth assessment year immediately succeeding the assessment year in which the tax credit becomes allowable under sub-section (1A) of the said section. 41.4 Applicability - These amendments has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years. 42. Fringe Benefit Tax 42.1 The Finance Act, 2005 introduced a new levy, namely, Fringe Benefit Tax (FBT) on the value of certain fringe benefits. The provisions relating to levy of this tax are contained in Chapter XII-H (sections 115W to 115WL) of the Income Tax Act, 1961. 42 of 62 Explanatory Circular for Finance (No.2) Act, 2009 42.2 A new section 115WM has been inserted in the Income-tax Act, 1961 to abolish the fringe benefit tax. Consequently, the taxation of the fringe benefits as perquisites in the hands of the employees has also been restored. Therefore, clause (2) of section 17 has also been amended,— (a) by substituting sub-clause (vi) so as to provide that per....
X X X X Extracts X X X X
X X X X Extracts X X X X
....quisite shall include the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee. For this purpose, the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares. The “fair market value†will mean the value determined in accordance with the method as may be prescribed by the Board. (b) by inserting sub-clause (vii) to provide that perquisite shall also include the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees. (c) by inserting sub-clause (viii) to provide that perquisite shall also include the value of any other fringe benefit or amenity as may be prescribed. 42.3 Applicability - These amendments have been made applicable with effect from 1st April, 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....10 and will accordingly apply to the assessment year 2010-11 and subsequent assessment years. 42.4 Consequently, section 49 has also been amended to provide that where the capital gain arises from the transfer of specified security or sweat equity shares referred to in sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause. 42.5 Applicability - This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply to assessment year 2010-11 and subsequent assessment years. 43. Clarificatory amendment in section 132 43.1 Under clause (B) of the subsection (1) of section 132 such Joint Director or Joint Commissioner may authorize any Assistant Director or Deputy Director, Assistant 43 of 62 Explanatory Circular for Finance (No.2) Act, 2009 Commissioner or Deputy Commissioner or Income-tax Officer to conduct search and seizure operation. 43.2 As per clauses (28C) and (28D) of section 2 the Joint Director or Joint Commissioner are understood to include Additional Director and Additional Commiss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ioner. Based on this understanding in the Department, Additional Directors and Additional Commissioners have issued warrant of authorization .However, the courts have held that the Joint Directors and Joint Commissioners referred to in section 132 of the Income Tax Act do not include "Additional Director or Additional Commissioner". 43.3 Therefore, to provide explicitly that Additional Director or Additional Commissioner always had the power to issue warrant of authorization, a clarificatory amendment has been made in clause (B) of subsection (1) of section 132, by inserting the words Additional Director or Additional Commissioner. The amendment clarifies that the Additional Commissioner or Additional Director always had the power to issue authorization. 43.4 Applicability - This amendment has been made applicable with retrospective effect from 1st June, 1994. 43.5 Sub-section (1) of section 132 provides that the Director General or Director or the Chief Commissioner or Commissioner, Additional Director or Additional Commissioner had the power to issue authorization. 43.6 A clarificatory amendment has been made in the subsection (1) of the section 132 to provide tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t Joint Director or Joint Commissioner always had the power to issue authorisation. 43.7 Applicability - This amendment has been made applicable with retrospective effect from 1st October, 1998, and will accordingly apply in relation to the assessment year 1999-2000 and subsequent assessment years. 43.8 Similarly, consequential amendment has been made in sub-section (1) of section 132A to include Additional Director or Additional Commissioner as an authorized officer. 43.9 Applicability - This amendment has been made applicable with retrospective effect from 1st June, 1994, and will accordingly apply in relation to the assessment year 1995-96 and subsequent assessment years. 44 of 62 Explanatory Circular for Finance (No.2) Act, 2009 44. Centralized Processing of Returns 44.1 In order to enable the Board to issue notification for implementing the centralized processing of return, section 143 was amended and sub-sections (1A), (1B) and (1C) were inserted vide Finance Act, 2008. Sub-section (1A) provides that for the purposes of processing of returns, the Board may make a scheme for centralized processing of returns with a view to expeditiously determining the tax p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ayable or refund due to the assessee. Sub-section (1B) provides that for the purpose of giving effect to the scheme made under sub-section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no notification shall be issued after 31st March, 2009. 44.2 The work of establishing the facility for centralized processing of returns was underway; therefore, sub-section (1B) has been amended to empower the Board to issue notification up to 31st March, 2010. 44.3 Applicability - This amendment has been made applicable with effect from 1st April, 2009, and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years. 45. Provision for constitution of alternate dispute resolution mechanism 45.1 The dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained after long drawn litigation till Supreme Court. In order to address the concern of the multi-nat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional companies and to provide mechanism for speedy disposal of their cases so as to attain finality, a new section 144C is inserted in the Income-tax Act to facilitate expeditious resolution of disputes. 45.2 The salient features of the alternate dispute resolution mechanism are as under:- (1) (2) The Assessing Officer shall, forward a draft of the proposed order of assessment (hereinafter referred to as the draft order) to the eligible assessee if he proposes to make on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,- (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with - (i) the Dispute Resolution Panel; and 45 of 62 (3) (4) (5) (6) (7) (8) (9) Explanatory Circular for Finance (No.2) Act, 2009 (ii) the Assessing Officer. The Assessing Officer shall complete the assessment on the basis of the draft order, if - (a) the assessee intimates to the Assessing Officer the accep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tance of the variation; or (b) no objections are received within the period specified in sub-section (2). The Assessing Officer shall, notwithstanding anything contained in section 153, pass the assessment order under sub-section (3) within one month from the end of the month in which,- (a) the acceptance is received; or (b) the period of filing of objections under sub-section (2) expires. The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. The Dispute Resolution Panel shall issue the directions referred to in sub- section (5), after considering the, - (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by it. The Dispute Resolution Panel may, before issuing any directions r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eferred to in sub-section (5), - (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income tax authority and report the result of the same to it. The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members. (10) Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. (21) No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to their interest. 46 of 62 Explanatory Circular for Finance (No.2) Act, 2009 (12) No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee. (13) Upon receipt of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete the assessment without giving any further opportunity of being heard, within one month from the end of the month in which the direction is received notwithstanding anything to the contrary contained in section 153. (14) The Board may make rules for the efficient functioning of the Dispute Resolution Panel with a view to expeditiously dispose of the objections filed, under sub-section(2), by the eligible assessee. (15) For the purposes of this section, - (a) “Dispute Resolution Panel" means a collegium comprising of three commissioners of Income-tax constituted by the Board for this purpose; (b) "eligible assessee" means,- (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and (ii) any foreign company. 45.3 Further, consequential amendments have been made -- (i) in sub-section (1) of section 131 so as to provide that the "Dispute Resolution Panel" shall have the same powers as are vested in a Court under the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Code of Civil Procedure, 1908 (5 of 1908); (ii) in clause (a) of sub-section (1) of section 246A so as to exclude the order of assessment passed under sub-section (3) of section 143 or under section 147 in pursuance of the directions of the "Dispute Resolution Panel" as an appealable order and in clause (c) of sub-section (1) of section 246 so as to exclude an order passed under section 154 of such order as an appealable order; (iii) in sub-section (1) of section 253 so as to include an order of assessment passed under sub-section (3) of section 143 or under section 147 in pursuance of the directions of the "Dispute Resolution Panel" as an appealable order. 45.4 It would be the choice of the assessee whether to file an objection against the draft assessment order before the Dispute Resolution Panel (DRP) or to pursue the normal channel of filing an appeal against the assessment order before the Commissioner of Income Tax (Appeals). In order to approach the DRP, the assessee must file an objection against the draft assessment order within the prescribed time limit. In case the assessee does not file an objection, the assessing officer shall pass the assessment order.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The 47 of 62 Explanatory Circular for Finance (No.2) Act, 2009 assessee can file an appeal against such assessment order before the CIT (Appeals). Once the option of filing an objection against the draft assessment order before the DRP has been exercised, the assessee cannot withdraw the objection and opt for the normal channel of filing appeal before CIT(Appeals). 45.5 Applicability - These amendments have been made applicable with effect from 1st October, 2009, and will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years. The Dispute Resolution Panel Rules have been notified by S.O. No. 2958(E) dated 20th November, 2009. 46. Rationalizing the provisions for taxation of interest received on delayed compensation or on enhanced compensation 46.1 The existing provisions of Income Tax Act provide that income chargeable under the head “Profits and gains of business or profession†or “Income from other sources", shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon'ble Supreme Court in the case of Rama Bai vs. CIT (181 ITR 400) has h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eld that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to the taxpayers. 46.2 With a view to mitigate the hardship, section 145A is amended to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it was received, irrespective of the method of accounting followed by the assessee. 46.3 Further, clause (viii) is inserted in the sub-section (2) of the section 56 so as to provide that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be assessed as "income from other sources" in the year in which it is received. 46.4 Applicability - This amendment has been made applicable with effect from 1st April, 2010, and will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years. 47. Clarificatory amendment in respect of reassessment proceeding u/s 147 47.1 The existing provisions of section 147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has esca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ped assessment for any assessment year, he may, subject to the provisions of section 148 to 153, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment. Further Assessing Officer may also assess or reassess such other income 48 of 6 Explanatory Circular for Finance (No.2) Act, 2009 which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section. Assessing Officer is required to record the reasons for reopening the assessment before issuing notice under section 148 with a view to reassess the income of assessee. 47.2 Some Courts have held that the Assessing Officer has to restrict the reassessment proceedings only to the reasons recorded for reopening of the assessment and he is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent. 47.3 Therefore, to articulate the legislative intention clearly Explanation 3- has been inserted in section 147 to provide that the assessing officer may examine, assess or reassess any issue relevant to income which comes to his notice subse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....quently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-section (2) of section 148. 47.4 Applicability - This amendment has been made applicable with retrospective effect from 1st April, 1989 and will apply accordingly in relation to assessment year 1989-90 and subsequent years. 48. Interest other than “interest on securities" 48.1 It is a consequential amendment of section 36(1), to empower the scheduled banks including nationalized banks to issue zero coupon bonds to source their long term funds, the section 194A of the Income-tax Act has been amended. This will enable the scheduled banks as an eligible person to enjoy the benefit under TDS provisions. 48.2 Applicability - This amendment has been made applicable with retrospective effect from 1st April, 2009 and will accordingly apply in relation to the assessment year 2009- 10 and subsequent assessment years. 49. Rationalization of provisions relating to Tax Deduction at Source (TDS) 49.1 Tax deduction at source is a method of collecting taxes on behalf of the Government at the time of payment or credit....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The Income-tax Act casts a legal responsibility on the deductor to deduct tax on the correct amount, at the correct rate and deposit it to the Government account. The TDS rates are specified partly in the Finance Act and partly in the provisions of the Income tax Act. Deductors are also required to compute surcharge and cess over and above some of the prescribed rates of TDS. If the deductor fails to deduct the tax or fails to deposit the tax after deduction, interest, penalty and prosecution provisions may get attracted. Further, under the provisions of sub-clause (ia) of clause (a) of section 40, if the deductor fails to deduct tax on a prescribed payment 49 of 62 Explanatory Circular for Finance (No.2) Act, 2009 or fails to deposit the tax deducted in time, the entire expenditure is disallowed while computing his total income. To assist deductors in complying with their TDS obligations and reduce their compliance burden, the provisions of TDS are rationalized as under: 49.2 Rationalization of TDS rates: A) Under the existing provisions of section 194-1 of the Income-tax Act, TDS on rental payments is prescribed at the rate of- (a) 10% for the use of any machin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ery or plant or equipment, (b) 15% for the use of any land or building or furniture or fittings, if the payee is an individual or HUF and (c) 20% if the payee is other than an individual or HUF. The current rates needed downward revision as they were leading to blocking of working capital funds in many cases. The rates prescribed by section 194-1 is, therefore, rationalized and reduced as under: (a) 2% for the use of any machinery or plant or equipment, (b) 10% for the use of any land or building or furniture or fittings for all persons. Nature of Payment (194-I) Rent- - Existing rate New rate* (w.e.f.1-10-2009) a. rent of plant, machinery or equipment 10% 2% b. rent of land, building or furniture to an individual and Hindu undivided family 15% 10% c. rent of land, building or furniture to a person other than an individual or Hindu undivided family 20% 10% * The rate of TDS will be 20 per cent in all cases, if PAN is not quoted by the deductee w.e.f. 01.04.2010. B) Under the existing provisions of section 194C of the Income-tax Act, TDS at the rate of 2% is deducted on payment for a contract. However, in the case of a sub-contract, TDS is deducted at t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he rate of 1%. Further, in the case of payment for an advertising contract, TDS is required to be deducted at the rate of 1%. In order to reduce the scope for disputes regarding classification of contract as sub contract, The Act has been amended to specify the same rate of TDS for payments to both contractors as well as sub- 50 of 62 Explanatory Circular for Finance (No.2) Act, 2009 contractors. To rationalise the TDS rates and to remove multiple classifications, the Act has been amended to provide the same rate of TDS in the case of payment for advertising contracts. To avoid hardship to small contractors/sub-contractors most of whom are organized as individuals/HUFs, the following rates of TDS are prescribed: (a) 1% where payment for a contract are to individuals/HUF (b) 2% where payment for a contract are to any other entity. Nature of Payment (194C) Payment to a. Individual/HUF contractor Existing rate New rate** (w.e.f.1-10-2009) 2% 1% b. Other than individual/HUF contractor 2% 2% c. Individual/HUF sub-contractor 1% 1% d. Other than individual/HUF sub-contractor 1% 2% e. Individual/HUF contractor/sub-contractor for 1% 1% advertising f. Other ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....than individual/HUF contractor/ sub-contractor 1% for advertising 2% g. Sub-contractor in transport business 1% nil* h. Contractor in transport business 2% nil* * The nil rate will be applicable if the transporter quotes his PAN. If PAN is not quoted the rate will be 1% for an individual/ HUF transporter and 2% for other transporters up to 31.3.2010. ** The rate of TDS will be 20 per cent in all cases, if PAN is not quoted by the deductee w.e.f. 1.04.2010. C) Further, some of the rates of TDS specified for resident taxpayers have been reduced and converged to 10 per cent. D) In order to ease the computation of TDS, surcharge and cess on tax deducted on non-salary payments made to resident taxpayers has been removed. 49.3 Provisions for payments and tax deducted at source to transporters A) Under Section 194C, tax is required to be deducted on payments to transport contractors engaged in the business of plying, hiring or leasing goods carriages. However if they furnish a statement that they do not own more than two goods carriages, tax is not 51 of 62 Explanatory Circular for Finance (No.2) Act, 2009 to be deducted at source. Transport operators are reportin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g, problem in obtaining TDS certificates as these are not issued immediately by clients and they are not able to approach the client again as they may have to move across the country for their business. B) It is, therefore, the Act has been amended to exempt payments to transport operators (as defined in section 44AE) from the purview of TDS. However, this would only apply in cases where the operator furnishes his Permanent Account Number (PAN) to the deductor. Deductors who make payments to transporters without deducting TDS (as they have quoted PAN) will be required to intimate these PAN details to the Income Tax Department in the prescribed format. C) Applicability - This amendment has been made applicable with effect from 1st October, 2009 and will accordingly apply in relation to the assessment year 2010-2011 and subsequent assessment years. 49.4 Clarification regarding “work†under section 194C A) There is ongoing litigation as to whether TDS is deductible under section 194C on outsourcing contracts and whether outsourcing constitutes work or not. To bring clarity on this issue, it is provided that “work†shall not include manufacturing....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for 'sale'. This will however not apply to a contract which does not entail manufacture or supply of an article or thing (e.g. a construction contract). Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer is also included, within the definition of 'work'. It is further provided that in such a case TDS shall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value. B) Applicability - This amendment has been made applicable with effect from 1st October, 2009 and will accordingly apply in relation to assessment year 2010-2011 and subsequent assessment years. 49.5 Filing of TDS and TCS statements A) Sub-section (3) of section 200 of Income-tax Act provides that any person ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....deducting tax in accordance with the provisions of Chapter XVIIB has to furnish, within the prescribed time, quarterly statements for the period ending on the 30th June, 30th September, 31st December and 31st March in each financial year. Similarly, filing of quarterly returns for tax collection at source (TCS) have been provided in sub-section (3) 52 of 62 Explanatory Circular for Finance (No.2) Act, 2009 of section 206C of the Act. Further section 206A provides furnishing of quarterly return in respect of payment of interest to residents without deduction of tax. B) In order to provide administrative flexibility in deciding the periodicity of such TDS related statements, the Act has been amended and the existing provisions were modified so as to allow the Government to prescribe periodicity of such TDS statements besides prescribing their form and manner. C) Applicability - This amendment has been made applicable with effect from 1st October, 2009 and will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years. 49.6 Processing of statements of tax deducted at source A) Currently almost all statements of tax deducted at source are....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... filed in an electronic mode. The processing of these statements should, therefore, be done only in a computerized environment. The Income tax Act has been amended to provide for electronic processing of statement of TDS on the same lines as processing of Income-tax returns. This will ensure prompt calculation and intimation of liabilities on account of interest and other defaults in TDS payments. B) The following adjustments can be made during the computerized processing of statements of tax deducted at source: C) (i) any arithmetical error in the statement; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the statement, for example, in respect of rate of deduction of tax at source where such rate is not in accordance with the provisions of the Act. It is provided that after making adjustments, tax and interest [e.g. u/s 201(1A)] would be calculated and sum payable by the deductor or refund due to the deductor will be determined. An intimation will be sent to the deductor informing him of his tax liability or granting him the refund due within one year from the end of the financial year in which the statement is filed. It i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s also provided that these statements can be processed in centralized processing centre. D) - Applicability This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2011-12 and subsequent assessment years. 53 of 62 Explanatory Circular for Finance (No.2) Act, 2009 50. Providing time limits for passing of orders u/s 201(1) holding a person to be an assessee-in default 50.1 Currently, the Income Tax Act does not provide for any limitation of time for passing an order u/s 201(1) holding a person to be an assessee in default. In the absence of such a time limit, disputes arise when these proceedings are taken up or completed after substantial time has elapsed. In order to bring certainty on this issue, specific time limits is provided in the Act within which order u/s 201(1) will be passed. 50.2 It has been provided that an order u/s 201(1) for failure to deduct the whole or any part of the tax as required under this Act, if the deductee is a resident taxpayer, shall be passed within two years from the end of the financial year in which the statement of tax deduction at source is filed by the d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eductor. Where no such statement is filed, such order can be passed up till four years from the end of the financial year in which the payment is made or credit is given. To provide sufficient time for pending cases, it is provided that such proceedings for a financial year beginning from 1st April, 2007 and earlier years can be completed by the 31st March, 2011. 50.3 However, no time-limits have been prescribed for order under sub-section (1) of section 201 where:- (a) the deductor has deducted but not deposited the tax deducted at source, as this would be a case of defalcation of government dues, (b) the employer has failed to pay the tax wholly or partly, under sub-section (1A) of section 192, as the employee would not have paid tax on such perquisites, (c) the deductee is a non-resident as it may not be administratively possible to recover the tax from the non-resident. 50.4 Applicability - This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2011-12 and subsequent assessment years. 51. regime Improving compliance with provisions of quoting PAN through the TDS 51.1 Statutory provisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons mandating quoting of Permanent Account Number (PAN) of deductees in Tax Deduction at Source (TDS) statements exist since 2001 duly backed by penal provisions. The process of allotment of PAN has been streamlined so that over 75 lakh PANs are being allotted every year. Publicity campaigns for quoting of PAN are being run since the last three years. 51.2 The average time of allotment of PAN has come down to 10 calendar days. Therefore, non-availability of PAN has ceased to be an impediment. In a number of 54 of 62 Explanatory Circular for Finance (No.2) Act, 2009 cases, the non-quoting of PANs by deductees is creating problems in the processing of returns of income and in granting credit for tax at deducted at source, leading to delays in issue of refunds. In order to strengthen the PAN mechanism, a new section 206AA has been inserted in the Income Tax Act to provide that any person whose receipts are subject to deduction of tax at source i.e. the deductee, shall mandatorily furnish his PAN to the deductor failing which the deductor shall deduct tax at source at higher of the following rates: (i) the rate prescribed in the Act; (ii) at the rate in force i.e., the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... rate mentioned in the Finance Act; or (iii) at the rate of 20 per cent. 51.3 TDS would be deductible at the above-mentioned rates will also apply in cases where the taxpayer files a declaration in form 15G or 15H (under section 197A) but does not provide his PAN. Further, no certificate under section 197 will be granted by the Assessing Officer unless the application contains the PAN of the applicant. 51.4 These provisions will also apply to non-residents where TDS is deductible on payments or credits made to them. To ensure that the deductor knows about the correct PAN of the deductee, it is provided that both the deductor and deductee will mandatorily quote PAN of the deductee in all correspondence, bills and vouchers exchanged between them. 515 Applicability -This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2011-12 and subsequent assessment years. 52. Enhancement of the limit for payment of advance tax 52.1 Under the existing provisions of section 208 the Income-tax Act, liability for payment of advance tax during a financial year arises when the amount of such tax payable during....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that year is five thousand rupees or more. This limit was fixed in 1996. With a view to providing for inflation adjustment, the Income-tax Act has been amended to raise the threshold limit for payment of advance tax from the present five thousand rupees to ten thousand rupees. 52.2 Applicability - This amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years. 55 of 62 53. Explanatory Circular for Finance (No.2) Act, 2009 Rationalization of provisions relating to penalty for concealment of income 53.1 Under the existing provisions of section 271, Explanation 5A to sub-section (1) provides that where in the course of search initiated under section 132 on or after 1st June, 2007, the assessee is found to be owner of - (i) any money, bullion, jewellery or other valuable article or thing (hereinafter referred to as assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income for any previous year; or (ii) any income based on any entry in any books of account or other documents or transactions and he claim....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s that such assets or entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year; which has ended before the date of the search and the due date for filing the return of income for such year has expired and the assessee has not filed the return, then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income. 53.2 By substituting the Explanation 5A it has been clarified that the scope extends to the cases where the assessee has filed the return of income for any previous year and the income found during the course of search relates to such previous year and had not been disclosed in the said return, then such income shall represent deemed concealment of income and assessee shall be liable to pay penalty under section 271. 53.3 Applicability - This amendment has been made applicable with retrospective effect from 1st June, 2007 and will apply in cases where search under section 132 is initiated on or after 1st June, 2007.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 54. Rationalization of provision relating to provisional attachment of asset 54.1 The provisions of section 281B empower the Assessing Officer to make provisional attachment of the assets of the assessee during the pendency of any proceedings for the assessment or reassessment of any income. The sub-section (2) further provides that every attachment order shall cease to have effect after the expiry of a period of six months from the date of order made under sub-section (1). However, the period of validity of provisional attachment order can be further extended by two years. The second proviso to sub-section (2) further provides that where an application for settlement under section 245C is made, the period commencing from the date on which such application is made and ending with the date on which order under sub-section (1) of section 245D is made shall be excluded from the period specified in this sub-section. 54.2 In many cases, the assessees have filed writ petition in High Court or Supreme Court and have obtained stay of the assessment proceedings. Often such stay remains in force for many years during which the validity of provisional attachment order expires. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 56 of 62 Explanatory Circular for Finance (No.2) Act, 2009 In order to rationalize the provisions, a third proviso has be inserted in sub-section (2) of section 281B to provide that the period during which the proceeding for assessment or reassessment are stayed by an order or injunction of any Court shall be excluded from the period specified in first proviso. 54.3 Applicability - This amendment has been made applicable with retrospective effect from 1 April, 1988 and will accordingly apply in relation to assessment year 1988-89 and subsequent assessment years. 55. Service of notice 55.1 The existing provisions of Income --tax Act provide for service of notice either by post or as if it were a summon issued under the Code of Civil Procedure, 1908. The addressee of the notice is specified, in the case of different persons, in the Act. 55.2 With the work in the department exceeding exponentially, it is imperative that the mechanism of service of notice is modernized to enhance the efficiency of tax administration. 55.3 In order to enable the department to enter into an era of paperless communication with the taxpayers section 282 has been substituted which provide....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s that the service of notice or summon or requisition or order or any other communication may be made by delivering or transmitting a copy thereof by post or courier service or in such manner as provided in Code of Civil Procedure, 1908 or in the form of any electronic record as provided in Chapter IV of the Information Technology Act 2000; or by any other means of transmission as may be provided by rules made by Board in this behalf. 55.4 Applicability - The above amendment has been made applicable with effect from 1st October, 2009 and will accordingly apply in respect of assessment year 2010-11 and subsequent years. 56. Introduction of Document Identification Number 56.1 A tax administration designed to foster voluntarily compliance yields higher revenue then a sound tax policy administered by an inefficient tax administration. It has always been the endeavor of the Income-tax Department to improve the standards of its service and transparency in the functioning of the tax administration. A further step in this direction is to introduce a computer based system of allotment and quoting of Document Identification Number (DIN). Therefore, a new section 282B has been ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... inserted in Chapter XXIII of the income Tax Act so as to provide that every income tax authority shall allot a computer generated Document Identification Number in respect of every notice, order, letter or any correspondence issued by him to any other income-tax 57 of 62 Explanatory Circular for Finance (No.2) Act, 2009 authority or assessee or any other person and such number shall be quoted thereon. Where the notice, order, letter or any correspondence issued by any income-tax authority, does not bear a Document Identification Number, such notice, order, letter or any correspondence shall be treated as invalid and shall be deemed never to have been issued. 56.2 It is also provided that every document, letter or any correspondence, received by an income-tax authority or on behalf of such authority, shall be accepted only after allotting and quoting of a computer generated Document Identification Number .Where the document, letter or any correspondence received by any income-tax authority or on behalf of such authority does not bear Document Identification Number, such document, letter or any correspondence shall be treated as invalid and shall be deemed never to hav....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e been received. 56.3 Applicability - This amendment has been made applicable with effect from 1st October, 2010, and will accordingly apply in relation to the assessment year 2011-12 and subsequent years. 57. Power to withdraw approvals 57.1 Under the existing provisions of Income-tax Act, an approval is required to be granted by income-tax authority for availing of various incentives by the assesses. While some provisions of Income-tax Act specifically contain provisions for withdrawal of approval but in many cases there is no such specific provisions containing power of withdrawal. 57.2 In order to provide such explicit provisions for power to withdraw approval, a new section 293C has been inserted to provide that the Central Government or the Board or an income-tax authority, who has authority to grant approval, shall also have the power to withdraw the approval at any time. However, such withdrawal can be made only after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned assessee. 57.3 Applicability - This amendment has been made applicable with effect from 1st October, 2009, and will accordingly apply in relatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n to assessment year 2010-11 and subsequent assessment years. 58. Taxation of investment income/loss of Non life insurance business 58.1 The profits and gains of non-life insurance business is computed under section 44 read with Rule 5 of the First Schedule. As per Rule 5, profits and gains of non-life insurance business is taken to be profits disclosed in the annual account, copies of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller 58 of 62 Explanatory Circular for Finance (No.2) Act, 2009 of Insurance, subject to adjustments for unexpired risk and disallowances under section 30 to Section 43B. 58.2 The Insurance Act, 1938 was amended in 1999 and the Insurance Regulatory Development Authority (IRDA) was created. In the financial year 2001-02, IRDA introduced "IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2002". The regulations mandated new guidelines and formats for preparation of accounts by General Insurers. According to these changed norms, a non-life insurance company has to include profit or loss on realization/sale of investment in the profit and loss accoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t or revenue account. This is also consistent with international best practice on taxation of investment income of non-life insurance companies. 58.3 In view of the above, the Act has been amended to provide any increase in respect of any amount taken credit for in the accounts on account of appreciation of or gains on realisation of investments in accordance with the regulations prescribed by IRDA shall be treated as income and included in the computation of the total income. Similarly, deduction shall be allowed in respect of any amount either written off or provided in the accounts to meet diminution in or loss on realisation of investments in accordance with the regulations prescribed by IRDA. 58.4 Applicability - This amendment has been made applicable with effect from 1st April, 2011, and will accordingly apply in relation to assessment year 2011-12 and subsequent assessment years. - 59. Recognition to Provident funds Extension of time limit for obtaining exemption from EPFO 59.1 Rule 4 of Part A of the Fourth Schedule to the Income-tax Act provides for conditions which are required to be satisfied by a Provident Fund for receiving or retaining recognition u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder the Income-tax Act. Rule 3 of Part A of the Fourth Schedule provides that the chief Commissioner or the Commissioner of Income-tax may accord recognition to any provident fund which satisfies the conditions prescribed in rule 4 and the rules made by the Board in this behalf. 59.2 The proviso to sub-rule (1) of the said rule 3, inter alia, specifies that in a case where recognition has been accorded to any provident fund on or before 31st March, 2006, and such provident fund does not satisfy the conditions set out in clause (ea) of rule 4 on or before 31st March, 2009, the recognition to such fund shall be withdrawn. One of the requirements of this clause (ea) of rule 4 is that the establishment shall obtain exemption under section 17 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (EPF & MP Act). 59 of 62 Explanatory Circular for Finance (No.3) Act, 2009 59.3 With a view to provide further time to Employees' Provident Fund Organization (EPFO) to decide on the pending applications seeking exemption under section 17 of the EPF & MP Act, it is proposed to amend the said proviso so as to extend the time limit from 31st March, 2009 to 31st D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecember, 2010. 59.4 Applicability - This amendment has been made applicable with retrospective effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent years. 60. 1961 Amendment in Part B of the Thirteenth Schedule to the Income Tax Act, 60.1 Part-B of the Thirteenth Schedule to the Income-tax Act, 1961 provides for a list of activities or articles or things, the production or manufacture of which is not permissible if an undertaking wishes to avail a deduction under section 80-IC in respect of undertakings located in the states of Himachal Pradesh and Uttaranchal. 60.2 The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry has issued a notification F.No.3(1)/2003-SPS dated 27.6.2008 expanding the list of items in respect of the paper industry for which tax holiday cannot be availed by new units located in Himachal Pradesh and Uttaranchal. 60.3 In order to align the provisions of the Income-tax Act, 1961 with the overall industrial policy of DIPP in respect of these two States, Part B of the Thirteenth Schedule to the Income-tax Act has been amended and Sl.No.19 of Part B of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Thirteenth Schedule has been substituted pertaining to the paper industry with the list as per the notification dated 27.6.2008 of the DIPP. - 60.4 Applicability This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years. 61. Enhancement of the limit for payment of wealth tax 61.1 Under the existing provisions of section 3 of the Wealth-tax Act, wealth tax is charged every year in respect of net wealth, on the valuation date, of every individual, Hindu undivided family and company at the rate of one per cent. of the amount by which the net wealth exceeds fifteen lakh rupees. This limit was fixed in 1992. With a view to providing for inflation-adjustment, the Wealth tax Act has been amended to raise the threshold limit for the payment of wealth tax from fifteen lakh rupees to thirty lakh rupees. 60 of 6? Explanatory Circular for Finance (No.2) Act, 2009 61.2 Applicability - This amendment has been made applicable with effect from 1st April, 2010 and will accordingly apply in relation to assessment year 2010-11 and subsequent years. 62. Abolition of Commodity Tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansaction Tax 62.1 The provisions for levy of Commodity Transaction Tax were introduced by Chapter VII of Finance Act, 2008. The commodity transaction tax to be levied on 'taxable commodities transactions' entered in a recognized association. The 'taxable commodities transactions' has been defined to mean a transaction of purchase or sale of option of goods or option in commodity derivative or any other commodity derivative. Section 104 of Finance Act, 2008 provides the rate at which commodity transaction tax shall be levied on taxable commodities transaction undertaken by seller or purchaser as the case may be. 62.2 It has been decided to do away with the power to levy Commodity Transaction Tax. Therefore, a new section 121A is inserted in Chapter VII of Finance Act, 2008 to provide that nothing contained in that Chapter shall apply to, or in relation to, the taxable commodities transactions entered on or after 1st April, 2009. 62.3 The clause (xvi) of sub-section (1) of section 36 provided that an amount equal to commodity transaction tax paid by the assessee in respect of taxable commodities transactions entered into in the course of business during the previous y....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ear, shall be allowed as deduction in computing the income under the head "Profits and gains of business or profession". 62.4 Therefore a consequential amendment has been made in the sub-section (1) of section 36 so as to provide that the clause (xvi) shall not be applicable from 1st April 2009. 62.5 Applicability - This amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent years. 63. Extension of income-tax exemption to Special Undertaking of Unit Trust of India (SUUTI) 63.1 The Special Undertaking of Unit Trust of India (SUUTI) was created vide The Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002. SUUTI is the successor of UTI. The mandate of SUUTI is to liquidate government liabilities on account of the erstwhile UTI. Vide section 13(1)of the said Repeal Act, SUUTI is exempt 61 of 62 Explanatory Circular for Finance (No.2) Act, 2009 from income-tax or any other tax or any income, profits or gains derived, or any amount received in relation to the specified undertaking for a period of five years, computed from the appointed day, i.e., 1st February, 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....003. This exemption was to come to an end on 31st January, 2008 and then exemption was further extended up to 31st March, 2009. 63.2 Since some of the schemes of SUUTI are still pending closure, section 13(1) of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 has been amended so as to extend the exemption for a further period of five years that is up to 31st March, 2014. 63.3 Applicability - These amendments have been made applicable with effect from 1st April, 2009 and shall accordingly apply for assessment year 2009-10 and subsequent assessment years. M. (M. Rajan) Under Secretary to the Government of India Dated 03.06.2010 [F.No.142/13/2010-SO(TPL)] 03/06/10 The Chairman, Members and all other officers in CBDT of the rank of Under Secretary and above. - All Chief Commissioners/Director General of Income-tax with a request to circulate amongst all officers in their regions/charges. Copy to: 1. PS to FM/OSD to FM/OSD to MoS(R). 2. PS to Secretary (Revenue)/OSD to Advisor to FM. 3. 4. 562 5. 6. 7. 8. 9. 10. 11. All Chambers of Commerce as per usual mailing list. DGIT(Systems)/DGIT(Vigilance)/DGIT(Admn.)/DG(NADT)/DGIT(L&R). ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Media Co-ordinator and Official spokesperson of CBDT. DIT(IT)/DIT(RSP&PR)/DIT(Audit)/DIT(Vig.)/DIT(Systems)/DIT(O&MS)/ DIT(Spl. Inv.). The Comptroller and Auditor General of India (30 copies). Joint Secretary and Legal Advisor, Ministry of Law and Justice, New Delhi. The Institute of Chartered Accountants of India, IP Estate, New Delhi. /03/06/10 M. Rajan) Under Secretary to the Government of India ***** 62 of 62<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....