Direct Tax Amendment
CA Arun Setia Classes
UPDATE NO. 1
TAX RATE/ SURCHARGE / CESS/REBATE
TAX RATE/ SURCHARGE / CESS/ REBATE
I (A) In case of every individual other than the individual referred to in I(B) and I(C) or in case
of Hindu Undivided Family: (Resident as well as Non-resident)
Total Income
1. Where the total income does
not exceed Rs 2,50,000
2. Where the total income
exceeds Rs 2,50,000 but does
not exceed Rs 5,00,000
3. Where the total income
exceeds Rs 5,00,000 but does
not exceed Rs10,00,000
4. Where the total income
exceeds Rs 10,00,000
Rates of Income Tax
NIL
10% of the amount by which the total income
exceeds Rs 2,50,000
Rs 25,000 plus 20% of the amount by which
the total income exceeds Rs 5,00,000
Rs 1,25,000 plus 30% of the amount by which
the total income exceeds Rs 10,00,000
I (B) In case of every individual, being a resident in India, who is of the age of 60 years or
more but less than 80 years at any time during the previous year:
Total Income
1. Where the total income does
not exceed Rs 3,00,000
2. Where the total income
exceeds Rs 3,00,000 but does
not exceed Rs 5,00,000
3. Where the total income
exceeds Rs 5,00,000 but does
not exceed Rs 10,00,000
4. Where the total income
exceeds Rs 10,00,000
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Rates of Income Tax
NIL
10% of the amount by which the total income
exceeds Rs 3,00,000
Rs 20,000 plus 20% of the amount by which the
total income exceeds Rs 5,00,000
1,20,000 plus 30% of the amount by which the
total income exceeds Rs 10,00,000
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I (C) In case of every individual, being a resident n India, who is of the age of 80 years or more
at any time during the previous year:
Total Income
1. Where the total income does
not exceed Rs 5,00,000
2. Where the total income
exceeds Rs 5,00,000 but does
not exceed Rs 10,00,000
3. Where the total income
exceeds Rs 10,00,000
Rates of Income Tax
NIL
20% of the amount by which the total income
exceeds Rs 5,00,000
1,00,000 plus 30% of the amount by which the
total income exceeds Rs 10,00,000
POINTS TO BE NOTED:
1. The tax rates given in I(A) above are for residents as well as non-residents.
2. The tax rates given in I(B) and I(C) are for a resident individual. Therefore, in case of a
senior citizen or super senior citizen being a non-resident, the tax rates given in I (A)
shall apply.
3. Surcharge on Income-tax
The income tax so calculated or in section 111A or section 112 shall, in case of every
individual or HUF, be increased by a surcharge of 12% of such income tax, if the total
income exceeds Rs 1crore.
(ii)
In case of every LOCAL AUTHORITY, 30% of the total income. The income tax so
calculated or in section 111A or section 112 shall, in case of every local authority, be
increased by a surcharge of 12% of such income tax, if the total income exceeds Rs1
crore.
(iii)
In case of a FIRM, 30% of the total income. The income tax so calculated or in section
111A or section 112 shall, in case of every firm, be increased by a surcharge of 12% of
such income tax, if the total income exceeds Rs 1 crore
(iv)
In case of a DOMESTIC COMPANY, 30% of the total income. The income tax so
calculated or in section 111A or section 112 shall, in case of every domestic company, be
increased by a surcharge of 7% of such income tax, if the total income exceeds Rs 1
crore but does not exceed Rs10 crores. And where total income exceeds Rs 10 crores,
surcharge shall be levied at 12% of such income tax.
(v)
In case of a FOREIGN COMPANY, 40% of the total income. The income tax so calculated
or in section 111A or section 112 shall in case of every foreign company be increased by
a surcharge of 2% of such income tax, if the total income exceeds Rs 1 crore but does
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not exceed Rs 10 crores. And where total income exceeds Rs 10 crores, surcharge shall
be levied at 5% of such income tax.
MARGINAL RELIEF
A. In case I, II and III above i.e., in case of Individual, HUF, Local authority and Firm, where
the total income exceeds Rs 1 crore, then, the aggregate of income tax and surcharge
shall be restricted to:
(Tax on Rs 1 crore) + (Total Income - Rs1crore)
B. In case of domestic/ Foreign company, where the total income exceeds Rs 1 crore but
does not exceed Rs 10 crores, then the aggregate of income tax and surcharge shall be
restricted to:
(Tax on Rs1crore) + (Total Income - Rs1crore)
C. In case of domestic company, where the total income exceeds Rs10 crore, then the
aggregate of income tax and surcharge shall be restricted to:
(Tax on Rs10 crore with surcharge of 7%) + (Total Income - Rs10 crore)
D. In case of foreign company, where the total income exceeds Rs10 crore, then the
aggregate of income tax and surcharge shall be restricted to:
(Tax on Rs10 crore with surcharge of 2%) + (Total Income - Rs10 crore)
Illustration 1:
In case of a resident individual, age below 60 years, calculation of tax liability and marginal
relief shall be as under:
The aggregate of income tax and surcharge shall be restricted to:
(Tax on Rs1crore) + (Total Income - Rs1crore)
Total income
Rs1,00,00,000
Rs1,01,00,000
Rs1,02,00,000
Rs1,04,00,000
Rs1,04,00,000
Rs1,05,00,000
Rs1,07,00,000
Income Tax and surcharge
Rs 28,25,000
Rs 28,55,000 + Rs 3,42,600 = Rs 31,97,600 Restricted to Rs 29,25,000
Rs 28,85,000 + Rs 3,46,600 = Rs 32,31,200 Restricted to Rs 30,25,000
Rs 29,45,000 + Rs 3,53,400 = Rs 32,98,400 Restricted to Rs 32,25,000
Rs 29,51,000 + Rs 3,54,120 = Rs 33,05,120 Restricted to Rs 32,45,000
Rs 29,75,000 + Rs 3,57,000 = Rs 33,32,000 Restricted to Rs 33,25,000
Rs 30,35,000 + Rs 3,64,200 = Rs 33,99,200 no restricted
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Illustration 2:
In case of domestic company, where the total income exceeds Rs 1 crore but does not exceeds
no crores, then the aggregate of income tax and surcharge shall be restricted to:
(Tax on Rs1crore) + (Total Income - Rs1crore)
Total income
Rs1,00,00,000
Rs1,01,00,000
Rs1,02,00,000
Rs1,02,10,000
Rs1,03,00,000
Rs1,04,00,000
Income Tax and surcharge
Rs 30,00,000
Rs 30,30,000 + Rs 2,12,100 = Rs 32,42,100 Restricted to Rs 31,00,000
Rs 30,60,000 + Rs 2,14,200 = Rs 32,74,200 Restricted to Rs 32,00,000
Rs 30,63,000 + Rs 2,14,410 = Rs 32,77,410 Restricted to Rs 32,10,000
Rs 30,90,000 + Rs 2,16,300 = Rs 33,06,300 Restricted to Rs 33,00,000
Rs 31,20,000 + Rs 2,18,400 = Rs 33,38,400 no restricted
Illustration 3:
In case of domestic company, where the total income exceeds Rs10 crore, then the aggregate
of income tax and surcharge shall be restricted to:
(Tax on Rs 10 crore with surcharge of 7%) + (Total Income - Rs10 crore)
Total income
Rs10,00,00,000
Rs10,01,00,000
Rs10,05,00,000
Rs10,10,00,000
Rs10,20,00,000
Rs10,25,00,000
Income Tax and surcharge
Rs 3,00,00,000 + Rs 21,00,000 = Rs 3,21,00,000
Rs 3,00,30,000 + Rs 36,03,600 = Rs 3,36,33,600 Restricted to Rs 3,22,00,000
Rs 3,01,50,000 + Rs 36,18,000 = Rs 3,37,68,000 Restricted to Rs 3,26,00,000
Rs 3,03,00,000 + Rs 36,36,000 = Rs 3,39,36,000 Restricted to Rs 3,31,00,000
Rs 3,06,00,000 + Rs 36,72,000 = Rs 3,42,72,000 Restricted to Rs 3,41,00,000
Rs 3,07,50,000 + Rs 36,90,000 = Rs 3,44,40,400 no restricted
SECTION 87A: REBATE OF INCOME-TAX IN CASE OF CERTAIN INDIVIDUALS
 An assessee, being an individual resident in India,
 whose total income does not exceed Rs5,00,000, shall be entitled to a deduction,
 from the amount of income-tax on his total income with which he is chargeable for any
assessment year,
 of an amount equal to 100% of such income-tax or
 an amount of Rs 2,000,
 Whichever is less.
Illustration:
Mr. A, aged 50 years, earned a total income of ~2,75,OOO.Compute his tax liability.
Tax on Rs 2,75,000
Rs2,500
Less: Relief under section 87A Rs2,000
Rs500
Add: Education cess @ 3%
Rs 15
Net tax payable
Rs 515
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EDUCATION CESS
In all the above cases the income tax computed above as increased by surcharge, If any, and
after allowing marginal relief shall be further increased by education cess of 3% for assessment
year 2016-17. (2% education cess and 1% secondary and higher education cess)
SECTION 288A: ROUNDING OFF OF INCOME
The taxable income shall be rounded off to the nearest multiple of Rs 10 and for this purpose
any part of a rupee consisting of paise shall be ignored and thereafter if such amount is not a
multiple of ten, then, if the last figure in that amount is five or more, the amount shall be
increased to the next higher amount which is a multiple of ten and if the last figure is less than
five, the amount shall be reduced to the next lower amount which is a multiple of ten.
SECTION 2888: ROUNDING OFF OF TAX
Any amount payable, and the amount of refund due, under the provisions of this Act shall be
rounded off to the nearest multiple of Rs 10 and for this purpose any part of a rupee consisting
of paise shall be ignored and thereafter if such amount is not a multiple of ten, then, if the last
figure in that amount is five or more, the amount shall be increased to the next higher amount
which is a multiple of ten and if the last figure is less than five, the amount shall be reduced to
the next lower amount which is a multiple of ten.
UPDATE NO. 2
(DIVIDEND)
Section 115-O(1B): GROSSING UP OF DIVIDEND
For the purposes of determining the tax on distributed profit payable in accordance with this
section, any amount by way of dividends referred to in sub-section (1) as reduced by the
amount referred to in sub-section (1A) [hereafter referred to as net distributed profit], shall
be increased to such amount as would, after reduction of the tax on such increased amount
at the rate specified in sub-section (1), be equal to the net distributed profits.
(Inserted by FA, 2014)
ANALYSIS
Tax rate as per section 115-O (1) on dividends is 15%. As per Finance Act, 2015 this rate shall in
all cases be increased by surcharge of 12% and education cess of 3% regardless of what is the
total income/dividend distributed by the company.
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The effective tax rate for payment of DDT as per section 115O (1) shall be as under:
Let Dividend distributed = Rs 100
𝟏𝟎𝟎
Grossing UP of dividend = ( 𝟖𝟓 × 𝟏𝟎𝟎) = 𝟏𝟏𝟕. 𝟔𝟒𝟕𝟓
CDT @ 15% of Rs 117.6475
= 17.647
(+) Surcharge @ 12%
= 2.117
(+) Education cess @ 3%
=.593
= 20.357
UPDATE NO. 3
(Buy back)
ADDITIONAL INCOME-TAX ON DISTRIBUTED INCOME BY COMPANY FOR BUY BACK OF
UNLISTED SHARES[SEC. 115QA TO 115QC]
20% +12% +3% = 23.072
UPDATE NO. 4
(PGBP)
SEC – 32(1)(iia): ADDITIONAL DEPRECIATION
In the case of any new machinery or plant







other than ships and aircraft
which has been acquired and installed
by an assessee
engaged in the business of manufacture or
production of any article or thing
or in the business of generation or generation and distribution of power
additional depreciation @ 20% of actual cost shall be allowed as deduction.
Provided that no deduction shall be allowed in respect of–
a. any second hand machinery or plant whether Indian or imported or
b. any machinery or plant installed in any office premises or any residential
accommodation or guest house or
c. any other appliances or road transport vehicles or
d. any machinery or plant, the whole of the actual cost of which is allowed as deduction in
any one previous year by way of depreciation or under section 35(1)(iv).
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Note:
1. If the new plant and machinery is put to use for less than 180 days in the year in which it
is acquired, the additional depreciation would be restricted to 10% of cost of new plant
and machinery in the year it is acquired.
2. As per the amendment, if the asset is put to use for less than 180 days in the year of
acquisition, then additional depreciation would be 10% of the cost of acquisition in
the first year and the balance 10% would be available in the immediately succeeding
previous year. The amended provisions would be applicable from the AY 2015-16.
Illustration 1: Plant and machinery costing ₹ 50 lakh is acquired and installed by an assessee
engaged in manufacturing a product on 4th November, 2015. The assessee shall
be entitled to additional depreciation of 50% of 20% of 50 lakhs i.e., ₹5 lakh , in
the assessment year 2016-2017. He will be entitled to balance 50%
i.e.,₹ 5 lakh allowance in next assessment year 2017-2018. Under the amended
provision ,there will not be a loss of 50% of allowance i.e.₹ 5 lakh due to
acquiring the asset in the second half of Financial Year 2015-2016.
ADDITIONAL DEPRECIATION AT THE RATE OF 35% IN ANDHRA PRADESH, BIHAR, TELANGANA
OR WEST BENGAL



Investment in new plant and machinery in notified backward area in Andhra Pradesh,
Bihar, Telangana or West Bengal will be qualified for additional depreciation at the rate
of 35% (instead of 20%). If however, the new P&M is put to use for less than 180 days in
the year of acquisition, then additional depreciation will be limited to 17.5% of actual
cost in that year. The balance 17.5% will be allowed in the immediately succeeding
previous year.
The new P&M should be acquired and installed during the period beginning on 1-042015 and ending on 31-03-2020.
The new P&M should be acquired for the purpose of setting up an undertaking/
enterprise in the above noted backward area during the period beginning on April 1,
2015 and ending before April 1, 2020.
SEC – 32AC: INVESTMENT ALLOWANCE
Section 32AC has been inserted to provide for investment allowance in order to encourage
substantial investment in new plant and machinery.
ELIGIBLE ASSESSEE:

Deduction is available only to a Company (Indian as well Foreign) and
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
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Company must be engaged in the business or manufacture or production of any article
or thing.
CONDITIONS TO BE SATISFIED:
SECTION 32AC(1) i.e. 100 CRORES SCHEME


Assessee acquires and installs the new plant & machinery on or after 1st April 2013 but
on or before 31stMarch 2015 (both acquisition and installation should be completed
within the above mentioned period) and
Aggregate amount of actual cost of such new plant & machinery should exceed 100
crores.
SECTION 32AC(1A) i.e. 25 CRORES SCHEME



Assessee acquires and installs the new plant & machinery during the previous year 3103-2015 or previous year 31-03-2016 or previous year 31-03-2017
Both acquisition and installation should be in same previous year.
If the assessee acquires new plant & machinery of 30 crores in PY 31-03-2015 and
installs the same in PY 31-03-2016, then deductions shall not be available in PY 31-032015 as well as in PY 31-03-2016.
AMOUNT OF DEDUCTION:
SECTION 32AC(1)
SECTION 32AC(1A)
For AY 2014-15
15% of the actual cost of new plant & machinery
acquired and installed during previous year 2013-14,
if actual cost exceeds 100 crores.
For AY 2015-16
15% of the actual cost of new plant & machinery
acquired and installed during previous year 2013-14
and 2014-15, if actual cost exceeds 100 crores, as
reduced by deduction already allowed in AY 2014-15
For AY 2015-16
15% of the actual cost of plant & machinery acquired
and installed in previous year 31-03-2015, if its actual
cost exceeds 25 crores.
For AY 2016-17
15% of the actual cost of plant & machinery acquired
and installed in previous year 31-03-2016, if its actual
cost exceeds 25 crores.
For AY 2017-18
15% of the actual cost of plant & machinery acquired
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and installed in previous year 31-03-2017, if its actual
cost exceeds 25 crores.
No deduction shall be allowed u/s 32AC(1A) if deduction is available u/s 32AC(1).
LOCK-IN-PERIOD:



There shall be a lock-in-period of 5 years from the date of installation.
If new plant & machinery on which investment allowance deduction has been availed,
has been sold or transferred within 5 years from the date of installation, then deduction
allowed under section 32AC shall be deemed to be the income under the head PGBP of
the year in which plant & machinery is sold. This shall however not apply if plant and
machinery is transferred in a scheme of amalgamation or demerger.
However, the amalgamated company or the resulting company should not transfer the
new asset within 5 years (from its installation by amalgamating or demerged company).
PLANT & MACHINERY NOT ELIGIBLE FOR DEDUCTION
i.
ii.
iii.
iv.
v.
vi.
Ship or aircraft
Any plant or machinery which before its installation by the assessee was
used either within or outside India by any other person.
Any plant or machinery installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest house.
Any office appliances, including computers or computer software.
Any vehicle
Any plant or machinery, the whole of the actual cost of which is allowed as
deduction (whether by way of depreciation or otherwise) in computing the
income chargeable under the head “Profits and gains of business or
profession” of any previous year.
POINTS TO BE NOTED:





This deduction is in addition to the depreciation and additional depreciation.
Deduction u/s 32AC shall not be reduced from the WDV of block of asset.
To claim deduction u/s 32AC, there is no condition that plant and machinery should be
actually put to use.
This deduction is not available to power generating units.
The deduction will not be restricted to 50%, if plant and machinery purchased and
installed is used for less than 180 days during the previous year.
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SEC – 32AD: INVESTMENT ALLOWANCE IN NOTIFIED BACKWARD AREA
(APPLICABLE FROM AY 2016-17)


This deduction will be over and above the existing deduction available under section
32AC.
If an undertaking is set up in the notified backward areas in Andhra Pradesh, Bihar,
Telangana or West Bengal by a company, it shall be eligible to claim deduction under
the existing provisions of section 32AC as well as under the newly inserted section 32AD
if it fulfills the conditions specified in the said section 32AC and 32AD.
CONDITIONS FOR CLAIMING DEDUCTION UNDER SECTION 32AD
The assessee may be a company or any other person
2. Undertaking/ enterprise for manufacture or production of any article or thing is set up
on or after 1st April 2015.
3. It acquires and installs a “new asset”. “New Asset” for this purpose is a plant or
machinery. But it does not include the following–
1.
a) Ship or aircraft
b) Any plant or machinery which before its installation by the assessee was used either
within or outside India by any other person.
c) Any plant or machinery installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest house.
d) Any office appliances, including computers or computer software.
e) Any vehicle
f) Any plant or machinery, the whole of the actual cost of which is allowed as
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head “Profits and gains of business or profession” of any
previous year.

The new asset should be acquired and installed after March 31, 2015 but before April 1,
2020. Both acquisition and installation of the new asset are required to be made after
March 31, 2015 but before April 1, 2020.
QUANTUM OF INVESTMENT ALLOWANCE
If the above conditions are satisfied, investment allowance will be 15% of actual cost of “new
asset”. It will be available in the year in which the new asset is installed.
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WITHDRAWAL OF INVESTMENT ALLOWANCE –
The new asset should not be sold or otherwise within transferred within a period of 5 years
from the date of its installation .If the new assets is sold within a period of 5 years from the
date of its installation .If the new assets is sold or transferred within 5 years from its
installation,the amount of investment allowance allowed to the assessee shall be deemed to be
the income of assessee of the previous year in which such asset is sold or otherwise
transferred. Such deemed income will be taxable under the head “ Profits and gains of business
or profession ‘’Such deemed income shall be taxable in addition to taxability of capital gain
which arises under section 45, read with section 50.
ABOVE RESTRICTION NOT TO APPLY IN CASE OF AMALGAMATION /DEMERGER/BUISNESS REORGANISATION
The above restriction will not apply in a case of amalgamation or demerger or business reorganisation (i.e., conversion of firm /sole proprietary concern in to company or conversion of a
private company /unlisted public company in to LLP). In other words, if the under-taking of the
assessee –company is amalgamated or demerged or converted (as given above ) within 5 years
from the date of installation of new assets investment allowance allowed to the amalgamating
company or demerged or to the predecessor will not be taken back .However, the
amalgamated company or resulting company or the successor should not transfer the new
asset within 5 years (From its installation by the amalgamating company or demerged company
or predecessor). If it is sold or otherwise transferred within 5 years by the amalgamated
company/ resulting company or successor, the notional income stated above will be taxable in
the hands of amalgamated company or resulting company or successor.
COMPARATIVE ANALYSIS OF SECTION 32AC AND SECTION AD
Available to
Condition of setting up new
undertaking or enterprise
Location
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Section 32AC
Assessee being a company
Section 32AD
Any assessee i.e., company
and non-corporate
No such condition.
Assessee should set up an
Undertaking or enterprise for undertaking or enterprise for
manufacture or production of manufacture or production of
article or thing could be set up any article or thing on or after
at any time
1-4- 2015
Business of manufacture or
Undertaking or enterprise
production of article or thing
should be set up in any
can be anywhere in India
notified backward area in the
state of Andhra Pradesh,
Bihar, Telengana or west
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Assessment year in which
deduction is available
Actual cost of asset on which
deduction is available
Conditions for deduction
Assessment year 2015-16 to
Assessment year 2017-18
Actual cost of new assets
acquired and installed during
the Previous year should
exceed Rs 25 crore
Deduction is available if asset
is acquired and installed
during the same Previous
year.
Acquisition and installation
should be in Previous year 313-2015 and/or Previous year
31-3-2016 and/or Previous
Year 31-3-2017.
CA Arun Setia Classes
Bengal
Assessment year 2016-17 to
Assessment year 2020-21
No such condition Actual cost
of new asset may be of any
amount.
Deduction is available in the
year in which asset is
installed. If asset is acquired
in Previous Year 31-3-2016
and installed in Previous Year
31-3-2017, then deduction is
available in previous year 313-2017.
New asset should be acquired
and installed during the
period 1-4-2015 to 31-3-2020.
Deduction will be allowed in
the year of installation
SEC – 36(1)(iii): INTEREST ON BORROWED CAPITAL




Interest paid
in respect of capital borrowed
for the purposes of business and profession
is allowed as deduction (Subject to section 43B)
However, any amount of the interest paid in respect of capital borrowed for acquisition of an
asset for extension of existing business or profession (deleted) (Whether capitalized in the
books of accounts or not) for any period beginning from the date on which the capital was
borrowed for acquisition of the asset till the date on which such asset was first put to use, shall
not be allowed as deduction.
As per Finance Act, 2015 the words “for extension of existing business or profession” have
been omitted. After the amendment, the said proviso will be applicable even in the case of a
new business or in the case of an existing business when there is no extension.
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SEC – 36(1)(vii): BAD DEBTS
A bad debt shall be allowed as deduction if the following conditions are satisfied:
(i) The bad debt should be written off as irrecoverable in the books of account of the
assessee for the previous year in which deduction is claimed.
(ii) The debt should have been taken into account in computing the income of the previous
year in which deduction is claimed or any earlier previous year OR the debt represents
the money lend in the ordinary course of business of money lending or banking carried
on by the assessee.
Notes:
1. Deduction shall not be allowed if “Bad debts written off Account” is debited and
“Provision for bad & doubtful debts Account” is credited. To claim deduction the debtor
must be written off by name.
2. There is no need to establish/ prove that the debt has become bad/ irrecoverable.
As per Finance Act, 2015 If a debt becomes irrecoverable on the basis of Income computation
and Disclosure Standards (ICDS) without recording the same in the accounts, it shall be
allowed as deduction in the previous year in which such debt becomes irrecoverable and it
shall be deemed that such debt has been written off as irrecoverable in the accounts for the
purposes of Section 36(1)(iii) (applicable from the AY 2016-17)
SEC – 36(1)(xvii): EXPENDITURE BY CO-OPERATIVE SOCIETY FOR PURCHASE OF
SUGARCANE (Applicable from AY 2016-17)
Under this clause, deduction is allowed in respect of expenditure by a Co-Operative Society
(engaged in the business of manufacture of sugar) for purchase of Sugarcane at a price which is
equal to (or less than) the price fixed or approved by the Government.
SEC – 40(a)(i): NON-COMPLIANCE OF PROVISIONS OF TDS WHERE PAYMENT IS
MADE TO NON-RESIDENT
Disallowance under section 40(a)(i) shall be attracted if:
Condition 1:
The amount paid or payable is interest, royalty, fees for technical services or any other sum
(other than salary) chargeable under Income Tax Act. The aforesaid sums must be taxable in the
hands of the recipient under the I.T. Act.
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Condition 2:
The aforesaid sum is paid/ payable
(i) outside India to a non-resident or a foreign company
(ii) in India to a non-resident or a foreign company
Condition 3:
Tax is deductible at source on the aforesaid payments
Condition 4:
And any of the following defaults takes place
Default A:
Tax at source has not been deducted or
Default B:
Tax at source has been deducted but has not been paid on or before the due
date specified in section 139(1)
The proviso to section 40(a)(i) provides that where
i.
ii.
Tax has been deducted in the subsequent year or
Tax has been deducted in the previous year but paid after the due date specified in
section 139(1)
then such sum shall be allowed as deduction in the previous year in which such tax has been
paid.
UPDATE NO. 5
(Business Trust)
TAXATION OF BUSINESS TRUST AND UNIT HOLDERS
(INTRODUCED BY FINANCE ACT, 2014)
CIRCULAR EXPLAINING PROVISIONS OF FINANCE ACT, 2014
TAXATION REGIME FOR REAL ESTATE INVESTMENT TRUST (REIT) AND INFRASTRUCTURE
INVESTMENT TRUST (InVIT)
The Securities and Exchange Board of India (SEBI) has notified regulations relating to two new
categories of investment vehicles namely, the Real Estate Investment Trust (REIT) &
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Infrastructure Investment Trust (InVlT) on 26th September, 2014. These are SEBI (Real Estate
Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations,
2014.
The income-investment model of REITs and lnVlTs (referred to as business trusts) has the
following distinctive elements:
(i)
the trust would raise capital by way of issue of units (to be listed on a recognized
stock exchange) and can also raise debts directly both from resident as well as
nonresident investors;
(ii)
The income bearing assets would be held by the trust by acquiring controlling or
other specific interest in an Indian company (SpV) from the sponsor.
Accordingly, the Income-tax Act has been amended to put in place a specific taxation regime
which provides for the way the income in the hands of such trusts is to be taxed and the
taxability of the income distributed by such business trusts in the hands of the unit holders of
such trusts. Such regime has the following main features:(i)
The listed units of a business trust, when traded on a recognized stock exchange,
would be liable to securities transaction tax (STT), and the long term capital gains
shall be exempt and the short term capital gains shall be taxable at the rate of 15%.
(ii)
The capital gains arising to the sponsor at the time of exchange of shares in SPVs
with units of the business trust shall be exempt under section 47. The preferential
capital gains regime (consequential to levy of STT), in terms of section 10(38) and
section 111A, shall be available to the sponsor at the time of transfer of units of
business trust, acquired in exchange of shares of SPV. In order to provider parity, it is
provided that:
(a) STT shall be levied on sale of such units of business trust which are acquired in
lieu of shares of SPV, under an initial offer at the time of listing of units of
business trust on similar lines as in the case of sale of unlisted equity shares
under an IPO.
(b) The sponsor would get the same tax treatment on offloading of units under an
initial offer on listing of units as it would have been available had he offloaded
the underlying shareholding through an IPO.
(c) The benefit of concessional tax regime of tax @ 15% on STCG and exemption on
long term capital gains gains under section 10(38) of the Act shall be available to
the sponsor on sale of units received in lieu of shares of SPV subject to levy of
STT.
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(iii)
Further, for the purpose of computing capital gain, the cost of these units shall be
considered as cost of the shares to the sponsor. The holding period of shares shall
also be included in the holding period of such units.
(iv)
The income by way of interest received by the business trust from save is accorded
pass through treatment i.e., there is no taxation of such interest income in the hands
of the trust and no withholding tax at the level of SPV. However, withholding tax at
the rate of 5 per cent. In case of payment of interest component of income
distributed to nonresident unit holders, and at the rate of 10% in respect of payment
of interest component of distributed income to a resident unit holder shall be
effected by the trust.
(v)
In case of external commercial borrowings by the business trust, the benefit of
reduced rate of 5% on interest payments to non-resident lenders shall be available
on similar conditions, for such period as is provided in section 194LC of the Incometax Act.
(vi)
The dividend received by the trust shall be subject to dividend distribution tax at the
level of SpV but will be exempt in the hands of the trust, and the dividend
component of the income distributed by the trust to unit holders will also be exempt
in hands of unit holder.
(vii)
The income by way of capital gains on disposal of assets by the trust shall be taxable
in the hands of the trust at the applicable rate. However, if such capital gains are
distributed, then the component of distributed income attributable to capital gains
would be exempt in the hands of the unit holder. Any other income of the trust shall
be taxable at the maximum marginal rate and such other income distributed to unit
holder shall be exempt in hands of unit holder.
(viii)
Further, in case of a business trust, being REITs, the income is predominantly in the
nature of rental income. This rental income arises from the assets held directly by
REIT or held by it through an SPV. The rental income received at the level of SPV
gets passed through by way of interest or dividend to the REIT.
In order to provide pass through to the rental income arising to REIT from real estate
property directly held by it, it is proposed to provide that:
(a) any income of a business trust, being a real estate investment trust, by way
of renting or leasing or letting out any real estate asset owned directly by
such business trust shall be exempt;
(b) the distributed income or any part thereof, revived by a unit holder from the
REIT, which is in the nature of income by such REIT, shall be deemed to be
income of such unit holder and shall be charged to tax.
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(c) The REIT shall effect TDS on rental income allowed to be passed through. In
case of resident unit holder, tax shall deducted @ 10%, and in case of
distribution to non-resident unit holder, the tax shall be deducted at rate in
force as applicable for deduction of tax on payment to the non-resident.
(d) No deduction shall be made under section 194-I of the Act where the income
by way of rent is credited or paid to a business trust, being a real estate
investment trust, in respect of any real estate held directly by such REIT.
(ix)
The business trust is required to furnish its return of income.
(x)
The necessary forms to be filed and other reporting requirements to be met by the
trust shall be prescribed to implement the above scheme.
INTRODUCTION
1. Real Estate investment Trust (REITs) & Infrastructure Investment Trust (lnVlT) allow
small investors to access large income producing real estate assets and infrastructure
facilities much like how mutual funds provide access to stocks.
2. India's real estate sector has witnessed rapid growth in recent years underlined by
robust economic growth in the country. The growth scale of operations by corporate
sector has increased the demand for commercial buildings and space including modern
offices, warehouses, shopping centers, conference centers, etc., Globally, REITs invest
primarily in completed, revenue generating real estate assets and distribute major part
of the earnings among their investors. Typically, most of such investments are
incomplete properties which provide regular income to the investors of Relets, from the
rentals received from such properties. By the very nature of REIT's it is beneficial to both
investors and the industry in different ways. On one hand, REIT's provide the investors
with an investment avenue, which is comparatively less risky than investing in underconstruction properties and provide regular income. On the other hand, REITs provide
the developer of real estate properties avenues of exit thus providing liquidity and
enable them to invest in other projects. REITs are managed by professional managers
which usually have diverse skill bases in property development, re-development,
acquisitions, leasing and management etc. Listed REITs provide liquidity thus providing
easy exit to the investors.
3. The REIT/ lnVit may raise funds from any investor, resident or foreigner. The REIT/
InVitraises funds from investors by allotting them units and also making borrowings
from them including External Commercial Borrowings.
4. Investments conditions and dividend policy –
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(i)
In line with the nature of the REITs/ lnVit to invest primarily in completed
revenue generating properties, majority of the value of the REIT assets shall be
completed revenue generating properties and infrastructure facilities.
(ii)
In order to provide flexibility, it has been allowed to invest the some funds in
other assets as specified in the SEBI Regulations.
(iii)
To ensure regular income to the investors, it has been mandated to distribute
atleast 90% of the net distributable income after tax of the REIT/lnVlT to the
investors.
5. The income/investment model of such REITs and lnVlTS (referred to as business trusts)
has the following distinctive elements:
(i)
The business trust would raise capital by way of issue of units (to be listed on a
recognized stock exchange) and can also raise debts directly both from resident
as well as non- resident investors;
(ii)
The income bearing assets would be held by a business trust by acquiring
controlling interest in an Indian Company (SPV) from the shareholders/
promoters and by purchasing rent yielding properties.
(iii)
The business trust will provide loans to SPV and earn interest therefrom.
AMENDMENTS MADE BY FINANCE ACT, 2014 IN INCOME TAX ACT, 1961
SECTION2(13A): DEFINITION OF BUSINESS TRUST
"Business Trust” means a trust registered as, (i)
(ii)
an infrastructure investments Trust under the Securities and Exchange Board of
India (Infrastructure Investment Trust) Regulations, 2014: or
a Real Estate Investment Trust under the Securities and Exchange Board of india
(Real Estate Investment Trusts) Regulation, 2014 and
The units of which are required to be listed on recognised stock exchange in accordance
with the aforesaid regulations.
(Amended by Finance Act, 2015)
SECTION 10(23FC): EXEMPTION OF CERTAIN INCOME OF BUSINESS TRUST
Any income of a business trust by way of interest received or receivable from a special purpose
vehicle shall be exempt from tax.
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Explanation - For the purposes of this clause, the expression "special purpose vehicle" means
an Indian company in which the business trust holds controlling interest and any specific
percentage of shareholding or interest, as may be required by the regulations under which such
trust is granted registration.
SECTION 10(23FCA): EXEMPTION OF RENTAL INCOME OF REAL ESTATE INVESTMENT TRUST
Any income of a business trust, BEING a REAL ESTATE INVESTMENT TRUST, by way of renting
or leasing or letting out any real estate asset owned directly by such business trust shall be
exempt from tax.
Explanation. – For the purposes of this clause, the expression “real estate asset” shall have
the same meaning as assigned to it in clause (zj) of sub-regulation (1) of regulation 2 of the
Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014.
(Added by Finance Act, 2015)
Note : Rental income of infrastructure Investment Trust is not exempt.
SECTION 10(23FD): EXEMPTION OF CERTAIN INCOME OF BUSINESS TRUST
Any distributed income, referred to in section 115UA, received by a unit holder from the
business trust, not being that proportion of the income which is of the same nature as the
income referred to in section 10(23FC), shall be exempt from tax.
SECTION 47(XVII): EXEMPTION OF CAPITAL GAINS IN HANDS OF SHARE HOLDERS OF SPV
There will be no capital gains on any transfer of a capital asset, being share of a special purpose
vehicle to a business trust in exchange of units allotted by that trust to the transferor.
Explanation-For the purposes of this clause, the expression "special purpose vehicle" meansan
Indian company in which the business trust holds controlling interest and any specific
percentage of shareholding or interest, as may be required by the regulations under which such
trust is granted registration.
SECTION 49(2AC): COST OF ACQUISITION OF UNITS IN HANDS OF SHARE HOLDERS OF SPV
Where the capital asset, being a unit of a business trust, became the property of the assessee in
consideration of a transfer as referred to in clause (xvii) of section 47, the cost of acquisition of
the asset shall be deemed to be the cost of acquisition to him of the share referred to in the
said clause.
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SECTION 2(42A): PERIOD OF HOLDING
For computing the period of holding:
(hc) in the case of a capital asset, being a unit of a business trust, allotted pursuant to transfer
of share or shares as referred to in clause (xvii) of section 47, there shall be included the period
for which the share or shares were held by the assessee.
SECTION 111A : TAX ON SHORT- TERM CAPITAL GAINS IN CERTAIN CESS
Where the total income of an assessee includes any income chargeable under the head "Capital
gains" arising from the transfer of a short-term capital asset, being an equity share in a
company or a unit of an equity oriented fund or unit of a business trust and(a) the transaction of sale of such equity share or unit is entered into on or after
1.10.2004and
(b) such transaction is chargeable to securities transaction tax,
the tax payable by the assessee on the total income shall be the aggregate of –
(i)
the amount of income-tax calculated on such short-term capital gains at the rate of
fifteen per cent; and
(ii)
the amount of income-tax payable on the balance amount of the total income as if
such balance amount were the total income of the assessee;
Provided further that the provisions of this section shall not apply in respect of any
incomearising from transfer of units of a business trust which were acquired by the assessee
inconsideration of a transfer as referred to in clause (xvii) of section 47.
(Deleted by FA, 2015)
SECTION 10(38) : EXEMPTIONIN RESPECT OF LONG TERM CAPTTAL GAINS IN CASE OF
SPECIFIED SECURITIES
The following income shall be exempt from tax from Assessment Year 2005-06:
Any income arising from
-
the transfer of a long-term capital asset
being an equity share in a Company or
a unit of an equity oriented fund or a unit of a business trust where –
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(a) the transaction of sale of such equity share or unit is entered into on or after 1.10.2004 and
(b) Such transactionis chargeable to securities transaction tax.
Provided further that the provisions of this clause shall not apply in respect of any income
arising from transfer of units of a business trust which were acquired in consideration of
transfer referred to in clause (xvii) of section 47.
(Deleted by FA, 2015)
SECTION 115UA : TAX ON INCOME OF UNIT HOLDER AND BUSINESS TRUST
(1) Notwithstanding anything contained in any other provisions of this Act, any income
distributed by a business trust to its unit holders shall be deemed to be of the same nature
and in the same proportion in the hands of the unit holder as it had been received by, or
accrued to, the business trust.
(2) Subject to the provisions of section 111A and section 112, the total income of a business
trust shall be charged to tax at the maximum marginal rate
(3) lf in any previous year, the distributed income or any part thereof, received by a unit holder
from the business trust is of the nature as referred to in section 10(23FC), then, such
distributed income or part thereof shall be deemed to be income of such unit holder and
shall be charged to tax as income of the previous year'
(4) Any person responsible for making payment of the income distributed on behalf of business
trust to a unit holder shall furnish a statement to the unit holder and the prescribed
authority, within such time and in such form and manner as may be prescribed, giving the
details of the nature of the income paid during the previous year and such other details as
may be prescribed.
SECTION 139(4E) : RETURN OF INCOME BY BUSINESS TRUST
Every business trust, which is not required to furnish return of income or loss under any other
provisions of this section, shall furnish the return of its income in respect of its income or loss in
every previous year and all the provisions of this Act shall, so far as may be, apply if it were a
return required to be furnished under section 139(1).
SECTION 194A : TDS ON INTEREST
No TDS shall be deducted when SPV pays interest referred to in section 10(23FC) to business
trust.
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SECTION 194-I : TDS ON RENT
No deduction of tax at source shall be made under this section where the income by way of
rent is credited or paid to a business trust, being a real estate investment trust, in respect of
any real estate asset, referred to in section-10 (23FCA), owned directly by such business trust.
(Amended by Finance Act, 2015)
SECTION 194LBA : TAX DEDUCTION AT SOURCE
(1) Where any distributed income referred to in section 115UA, being of the nature referred to
in section 10(23FC) or section 10(23FCA), is payable by a business trust to its unit holder
being a resident, the person responsible for making the payment shall at the time of credit
of such payment to the account of the payee or at the time of payment thereof in cash or
by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct incometax throat the rate of 10%. (Such interest and rent shall be taxable in the hands of resident
at the normal tax rates applicable to him.)
(2) Where any distributed income referred to in section 115UA, being of the nature referred to
section 10(23FC), is payable by a business trust to its units holder, being a non-resident or a
foreign company, the person responsible for making the payment shall at the time of credit
of such payment to the account of the payee or at the time of payment thereof in cash or
by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct incometax thereon at the rate of 5%. (Such interest is taxable in the hands of non-resident or
foreign company @ 5% under section 115A.)
(3) Where any distributed income referred to in section 115UA, being of the nature referred
to in section 10(23FCA), is payable by a business trust to its unit holder, being a nonresident, or a foreign company, the person responsible for making the payment shall at
the time of credit of such payment to the account of the payee or at the time of payment
earlier, deduct income-tax thereon at the rates in force.
(Amended by Finance Act, 2015)
Note :Such rental income is taxable in hands of non-resident/foreign company at the
normal rates and TDS shall be deducted at normal tax rates as per section 195.
SECTION 115A : TAX ON INTEREST IN CASE OF NON-RESIDENTS & FOREIGN COMPANIES
1. Where a non-resident or foreign company being a unit holder of a business trust
receives distributed income referred to in section 115UA from a business trust and such
distributed income comprises of interest income referred to in section 10(23FC), then
the non-resident/foreign company shall be liable to pay tax @ 5% on such interest
income. [Corresponding TDS provisions are there in section 194LBA].
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2. Where a business trust borrows money in foreign currency from a non-resident or
foreign company:
 under a loan agreement at any time on or after 1-7-2012 but before 1-7-2017; or
 by issue of long term bonds including infrastructure bonds at any time during the
period 1-7-2012 but before 1-7-2017
as approved by Central Government.
then, the interest payable business trust to non-resident/foreign company shall be
taxable under section 115A @ 5% in the hands of non-resident/ foreign company.
Corresponding amendment is made in section 194LC where business trust shall deduct
TDS @ 5% on such interest.
UPDATE NO. 6
(MAT)
Manner of computation of book profit [Explanation 1] [Bold portion amended by Finance Act,
2015 w.e.f 01-04-2016 i.e. AY 2016-17]
Particulars
Net Profit as per Profit and Loss AI c
Rs
xxx
(a)
Add: If any of the following is debited to Profit and Loss AI c
the amount of income-tax paid or payable, and the provision therefor; [Refer
Explanation 2 below the table] or
xxx
(b)
the amounts carried to any reserves, by whatever name called; or
xxx
(c)
the amount or amounts set aside to provisions made for meeting liabilities, other
than ascertained liabilities; or
xxx
(d)
the amount by way of provision for losses of subsidiary companies; or
xxx
(e)
the amount or amounts of dividends paid or proposed; or
xxx
(f)
the amount or amounts of expenditure relatable to any income to which Section 10
[other than Section 10(38)] or Section 11 or Section 12 apply; or
xxx
(fa)
the amount or amounts of expenditure relatable to income, being share of the
assessee in the income of an association of persons or body of individuals, on
which no income-tax is payable in accordance with the provisions of section 86; or
xxx
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(fb)
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the amount or amounts of expenditure relatable to income accruing or arising to an
assessee, being a foreign company, from, -
xxx
(a) the capital gains arising on transactions in securities; or
(b) the interest, royalty or fees for technical services chargeable to tax at the rate
or rates specified in Chapter XII,
if the income-tax payable thereon in accordance with the provisions of this Act,
other than the provisions of this Chapter, is at a rate less than the rate specified in
under Section 115JB(1);or
(fc)
the amount representing -
xxx
(a) notional loss on transfer of a capital asset, being share of a special purpose
vehicle, to a business trust in exchange of units allotted by the trust referred to in
Section 47(xvii); or
(b) the amount representing notional loss resulting from any change in carrying
amount of said units; or
(c) the amount of loss on transfer of units referred to in Section 47(xvii); or
(g)
(h)
(i)
(k)
the amount of depreciation,
the amount of deferred tax and the provision therefor,
the amount or amounts set aside as provision for diminution in the value of any
asset,
Add: The amount standing in revaluation reserve relating to revalued asset on the
retirement or disposal of such asset, if not credited to P & L A/ c
xxx
xxx
xxx
Add: The amount of gain on transfer of units referred to in Section 47(xvii)
computed by taking @ into account the cost of the shares exchanged with units or
the carrying amount of the shares at the time of exchange where such shares are
carried at a value other than the cost through profit or loss account, as the case may
be;
xxx
xxx
xxx
xxx
Less:
(i)
the amount withdrawn from any reserve or provision if any such amount is credited
to the profit and loss account (See Note (a) & (b) below)
xxx
(ii)
the amount of income exempt uls 10 [other than section 10(38)]or uls 11 or uls 12
apply, if any such amount is credited to the profit and loss account; or
xxx
(iia)
the amount of depreciation debited to the profit and loss account (excluding the
depreciation on account of revaluation of assets) ; or
xxx
(iib)
the amount withdrawn from revaluation reserve and credited to the profit and loss
account, to the extent it does not exceed the amount of depreciation on account of
revaluation of assets; or
xxx
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(iic)
the amount of income, being the share of the assessee in the income of an
association of persons or body of individuals, on which no income-tax is payable in
accordance with the provisions of Section 86, if any, such amount is credited to
the profit and loss account; or
xxx
(iid)
the amount of income accruing or arising to an assessee, being a foreign company,
from, (a) the capital gains arising on transactions in securities; or
(b) the interest, royalty or fees for technical services chargeable to tax at the rate
or rates specified in Chapter XII,
if such income is credited to the profit and loss account and the income-tax
payable thereon in accordance with the provisions of this Act, other than the
provisions of this Chapter, is at a rate less than the rate specified in Section
115JB(1);or
xxx
(iie)
the amount representing, (a) notional gain on transfer of a capital asset, being share of a special purpose
vehicle to a business trust in exchange of units allotted by that trust referred to in
clause (xvii) of Section 47; or
(b) notional gain resulting from any change' in carrying amount of said units; or
(iif)
(c) gain on transfer of units referred to in clause (xvii) of Section 47,if any, credited
to the profit and loss account; or
the amount of loss on transfer of units referred to in Section 47(xvii) computed by
taking into account the cost of the shares exchanged with units referred to in the
said clause or the carrying amount of the shares at the time of exchange where
such shares are carried at a value other than the cost through profit or loss
account, as the case may be; or
xxx
(iii)
the amount of loss brought forward or unabsorbed depreciation, whichever is less
as per books of account.
Explanation: (a) the loss shall not include depreciation; (b) the above provisions
shall not apply if the amount of loss brought forward or unabsorbed depreciation, is
nil ; or
xxx
(iv)
the amount of profits of sick company for the assessment year commencing on and
from the assessment year relevant to the previous year in which the said company
has become a sick industrial company uls 17(1) of the SICA, 1985, and ending with
the assessment year during which the entire net worth of such company becomes
equal to or exceeds the accumulated losses.
xxx
(v)
the amount of deferred tax, if any such amount is credited to the profit and loss
account.
xxx
Book Profits of the Company under section 115-JB
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(Transfer pricing)
SECTION 92BA: MEANING OF SPECIFIED DOMESTIC TRANSACTION
(INTRODUCED BY FINANCE ACT, 2012)
For the purposes of this section and 92, 92C, 92D and 92E “specified domestic transaction” in
case of an assessee means any of the following transactions, not being on international
transaction, namely:(i)
(ii)
(iii)
(iv)
(v)
(vi)
Any expenditure in respect of which payment has been made or is to be made to a
person referred to in clause (b) of section 40A(2);
Any transaction referred to in section 80A;
Any transfer of goods or services referred to in sub-section (8) of section 80-IA;
Any business transacted between the assessee and other person as referred to in subsection (10) of section 80-IA;
Any transaction, referred to in any other section under Chapter IV-A or section 10AA, to
which provision of sub-section (8) or sub-section (10) of section 80-IA are applicable; or
Any other transaction as may be prescribed,
And where the aggregate of such transactions entered into by the assessee in the previous
year exceeds a sum of Rs 5 Crore. 20 Crore (w.e.f. FA 2015)
SECTION 92C: COMPUTATION OF ARM’S LENGTH PRICE
(1)
The arm’s length price in relation to an international transaction or specified domestic
transaction shall be determined by any of the following methods, being the most
appropriate method, having regard to the nature of transaction or class of transaction or
class of associated persons or functions performed by such persons or such other relevant
factors as the Board may prescribe, namely:a)
b)
c)
d)
e)
f)
Comparable uncontrolled price methods;
Resale price method;
Cost split method;
Profit split method;
Transitional net margin method;
Such other method as may be prescribed by the Board.
(Amended by Finance Act, 2012)
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(2)
CA Arun Setia Classes
The most appropriate method referred to in sub-section (1) shall be applied, for
determination of arm’s length price, in the manner as may be prescribed.
Provided 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.
Provided further that the first proviso shall not apply while analysing the comparability of an
uncontrolled transaction with an international transaction or a specified domestic transaction,
entered into on or after the 1st day of April, 2014.‖
RULE 1OCA: COMPUTATION OF ARM'S LENGTH PRICE IN CERTAIN CASES
(1) Where in respect of an international transaction or a specified domestic transaction, the
application of the most appropriate method referred to in sub-section (1) of section 92C
results in determination of more than one price, then the arm's length price in respect
of such international transaction or specified domestic transaction shall be computed in
accordance with the provisions of this rule.
(2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an
ascending order and the arm's length price shall be determined on the basis of the
dataset so constructed:
Provided that where the comparable uncontrolled transaction has been identified on the basis
of data relating to the current year of the unrelated enterprise undertaking the said
uncontrolled transaction, and the said unrelated enterprise, has in either or both of the two
financial years immediately preceding the current year undertaken the same or similar
comparable uncontrolled transaction then,(i)
the most appropriate method used to determine the price of the comparable
uncontrolled transactions undertaken in the aforesaid period and the price in
respect of such uncontrolled transactions shall be determined; and
(ii)
the weighted average of the prices, shall be computed by taking weighted average
of the current year price and prices of Last 2 financial years.
Provided that the weighted average of such prices shall be included in dataset constructed
above.
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(3) Where the dataset constructed in accordance with sub-rule (2) consists of six or more
entries, an arm's length range beginning from the thirty-fifth percentile of the dataset
and ending on the sixty-fifth percentile of the dataset shall be constructed and the
arm’s length price shall be computed in accordance with sub-rule (4) and sub-rule (5).
(4) If the price at which the international transaction or the specified domestic transaction
has actually been undertaken is within the range referred to in sub-rule (3), then, the
price at which such international transaction or the specified domestic transaction has
actually been undertaken shall be deemed to be the arm's length price.
(5) If the price at which the international transaction or the specified domestic transaction
has actually been undertaken is outside the arm's length range referred to in sub-rule
(3), the arm's length price shall be taken to be the median of the dataset.
(6) In a case where data set consists of less than six entries, the arm's length price shall be
the arithmetical mean of all the values included in the data set:
Provided that, if the variation between the arm's length price so determined and price at which
the international transaction or specified domestic transaction has actually been undertaken
does not exceed such percentage not exceeding three per cent of the latter, as may be notified
by the Central Government in the Official Gazette in this behalf, the price at which the
international transaction or specified domestic transaction has actually been undertaken shall
be deemed to be the arm's length price.
(7) For the purposes of this rule,(a) "the thirty-fifth percentile" of a dataset, having values arranged in an ascending
order, shall be:
Total entries in data set x 35/100
If this number is a fractional number, the next higher number which is a whole number shall be
taken and the value in the data set placed at this whole number shall be the thirty fifth
percentile.
If this number is a whole number, then the arithmetical average of value in data set at this
number and value in data set at next higher number shall be the thirty fifth percentile.
(b) "the sixty-fifth percentile" of a dataset, having values arranged in an ascending
order, shall be:
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Total entries in data set x 65/100
If this number is a fractional number, the next higher number which is a whole number shall be
taken and the value in the data set placed at this whole number shall be the sixty fifth
percentile.
If this number is a whole number, then the arithmetical average of value in data set at this
number and value in data set at next higher number shall be the sixty fifth percentile.
(c) "the median" of the dataset, having values arranged in an ascending order, shall be:
Total entries in data set x 50/100
If this number is a fractional number, the next higher number which is a whole number shall be
taken and the value in the data set placed at this whole number shall be the median.
If this number is a whole number, then the arithmetical average of value in data set at this
number and value in data set at next higher number shall be the median.
Illustration 1.- The data for the current year of the comparable uncontrolled transactions or the
entities undertaking such transactions is available at the time of furnishing return of income by
the assessee and based on the same, seven enter rises have been identified to have undertaken
the comparable uncontrolled transaction in the current year. All the identified comparable
enterprises have also undertaken comparable uncontrolled transactions in a period of two
years preceding the current year. The Profit level Indicator (PLI) used in applying the most
appropriate method is operating profit as compared to operating cost (OP/OC. The weighted
average shall be based upon the weight of OC as computed below:
S. No
Name
of Year 1
unrelated
enterprise
Year 2
Year 3
[current
year]
Aggregation of OC Weighted
and OP
Average
1
2
3
4
5
6
7
1
A
B
3
C
4
D
OC = 150
OP = 10
OC = 125
OP = 5
OC = 230
OP = 26
OC = 220
OP = 22
OC = 225
OP = 35
OC = 100
OP = 10
OC = 250
OP = 18
OC = 150
OP = 20
Total OC = 475
Total OP = 57
Total OC = 305
Total OP = 25
Total OC = 730
Total OP = 66
Total OC = 550
Total OP = 33
OP/OC = 12%
2
OC = 100
OP = 12
OC = 80
OP = 10
OC = 250
OP = 22
OC = 180
OP = (-)9
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OP/OC = 8.2%
OP/OC = 9%
OP/OC = 6%
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5
E
6
F
7
G
OC = 140
OP = 21
OC = 160
OP = 21
OC = 150
OP = 21
CA Arun Setia Classes
OC = 100
OP = (-)8
OC = 120
OP = 14
OC = 130
OP = 12
OC = 125
OP = (-)5
OC = 140
OP = 15
OC = 155
OP = 13
Total OC = 365
Total OP = 8
Total OC = 420
Total OP = 50
Total OC = 435
Total OP = 46
OP/OC =2.2%
OP/OC = 11.9%
OP/OC =
10.57%
From the above, the dataset will be constructed as follows:
S. No.
1
2
3
4
5
6
7
Values
2.2%
6%
8.2%
9%
10.57%
11.9%
12%
For construction of the arm's length range the data place of thirty-fifth and sixty-fifth percentile
shall be computed in the following manner, namely:
Total no. of data points in dataset 7 *(35/100) = 2.45
Total no. of data points in dataset 7 *(65/100) = 4.55
Thirty fifth percentile is next higher number to 2.45 which is a whole number i.e. 3.
Sixty fifth percentile is next higher number to 4.55 is a whole number i.e. 5.
The arm's length range will be beginning at 8.2% and ending at 10.57%.
Therefore, if the transaction price of the international transaction or the specified domestic
transaction has OP/OC percentage which is equal to or more than B.2% and less than or equal
to 10.57%, it is within the range. The transaction price in such cases will be deemed to be the
arm's length price and no adjustment shall be required. However, if the transaction price is
outside the arm's length range, say 6.2%, then for the purpose of determining the arm's length
price the median of the data set shall be first determined in the following manner:
The data place of median is calculated by first computing the total number of data point in the
dataset * (50/100). In this case it is 7*0.5=3.5.
Since this is not a whole number, the next higher data place, i.e. the value at the fourth place
will be the median.
The median is the value at fourth place, i.e., 9%. Therefore, the arm's length price shall be
considered as 9% and adjustment shall accordingly be made.
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Illustration 2 - The following prices have been determined as arm's length prices using
comparable uncontrolled transactions method:
1.90
5.102
9.112
13.118
17.124
2.98
6.104
10.114
14.119
18.126
3.100
7.107
11.116
15.12
19.128
4.101
8.110
12.117
16.122
20.130
Answer:
Since the above prices do not relate to unrelated enterprises, the prices of last two years shall
not be considered.
Total entries in data set = 20
Thirty fifth percentile = 20*35/100 = 7
Since this is a whole number, the arithmetical mean of value at 7 and B shall be the Thirty Fifth
percentile = 107+110/2 = 10B.50
Sixty Fifth percentile = 20*65/100 = 13
Since, this is a whole number, the arithmetical mean of value at 13 and 14 shall be the sixty fifth
percentile = 118+119/2 = 118.50
Median = 50/100*20 = 10
Since this is a whole number, the arithmetical mean of value at 10 and 11 shall be the median =
114+116/2 = 115
If the assessee exports goods to associated enterprise in the range of 10B.50 to 11B.50, then
the price at which goods are exported shall be the ALP. Let's say goods are exported to
associated enterprise at Rs. 109, then the actual transaction price is the ALP and no adjustment
is required.
However, if goods are exported to associate enterprise at say Rs. 100 (10 lakh goods), then ALP
shall be Rs 115 and income of the annexure shall be increased by 15*10 lakh goods = Rs. 150
lakh
Illustration 3 - If in the above illustration, the ALP on the basis of CUP method were determined
as under:
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Price 1:Rs. 100
Price 2: Rs. 102
CA Arun Setia Classes
Price 3:Rs. 90
Price 4:Rs. 110
Price 5: Rs. 115
Since entries in the data set are less than 6, to arithmetical mean of these prices shall be the
ALP
Thus, ALP shall be
100+102+90+110+115/5 = 517/5 = 103.40
In the above illustration, the addition on account of transfer price shall be 103.40 - 100 * 10
lakh goods = Rs. 341akhs
Illustration 4- In a given case the dataset of 20 prices arranged in ascending order is as under:
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S. No
Profits (in Rs. Thousand)
1
42.00
2
43.00
3
44.00
4
44.50
5
45.00
6
45.25
7
47.00
8
48.00
9
48.15
10
48.35
11
48.45
12
48.48
13
48.50
14
49.00
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15
49.10
16
49.35
17
49.50
18
49.75
19
50.00
20
50.51
Find out ALP?
NOTIFICATION NO. 86 /2015 DATED 29TH OCTOBER, 2015
In exercise of the powers conferred by the third proviso to sub-section (2) of section 92C of the
Income-tax Act, 1961 (43 of 1961) read with proviso to sub-rule (7) of rule 10CA of the Incometax Rules, 1962, the Central Government has notified that where the variation between the
arm‘s length price determined under section 92C and the price at which the international
transaction or specified domestic transaction has actually been undertaken does not exceed:
 one percent of the latter in respect of wholesale trading; and
 three percent of the latter in all other cases
The price at which the international transaction or specified domestic transaction has actually
been undertaken shall be deemed to be the arm‘s length price for Assessment Year 2015-2016.
UPDATE NO. 8
International Taxation
Sec 115A –Tax on Royalty and Technical service fee in case of Non- Residents &
Foreign Companies
Where the total income of a foreign company Applicable Rate of Tax
or a Non- Resident includes any income by
way of royalty or fees for technical services
Other than the income referred to in section
44DA
A. Received from the Government in 10% of such royalty or fee for technical
pursuance of an agreement made by services
the non-resident/ foreign company
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with the Government or
B. Received from the Indian concern in
pursuance of an agreement made by
the non-resident/ foreign company
with the Indian concern and the
agreement is approved by the Central
Government
However, if DTAA Provides for a rate lower
than 10%, then the provisions of DTAA or
section 115A, whichever are more beneficial
to the assessee shall apply i.e., the lower rate
of DTAA shall apply instead of 10%.
(Amended by Finance Act, 2015)
UPDATE NO. 9
Black Money ACT
THE BLACK MONEY (UNDISCLOSED FOREIGN INCOME AND ASSETS) AND
IMPOSITION OF TAX ACT, 2015
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 as
passed by the Parliament received the assent of the President on the 26th of May 2015. The Act
contains provisions to deal with the menace of black money stashed away abroad. It, inter alia:

Levies tax on undisclosed assets held abroad by a person who is a resident in India at the
rate of 30 percent of the value of such assets
 Provides for a penalty equal to 90 percent of the value of such asset
 Provides for rigorous imprisonment of three to ten years for willful attempt to evade tax
in relation to a undisclosed foreign income or asset.
Chapter VI of the Act, comprising sections 59 to 72, provides for a one-time compliance
opportunity for a limited period to persons who have any foreign assets which have hitherto
not been disclosed for the purposes of Income-tax. The provisions regarding compliance
window are:
A declaration under the aforesaid chapter can be made in respect of:
o undisclosed foreign assets of a person who is a resident other than not ordinarily
resident in India within the meaning of clause (6) of section 6 of the Income-tax Act.
o undisclosed asset located outside India and acquired from income chargeable to tax
under the Income-tax Act for any assessment year prior to the assessment year 201617 for which he had, either failed to furnish a return under section 139 of the Incometax Act, or failed to disclose such income in a return furnished before the date of
commencement of the Act, or such income had escaped assessment by reason of the
omission or failure on the part of such person to make a return under the Income-tax
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Act or to disclose fully and truly all material facts necessary for the assessment or
otherwise.
The person making a declaration under the provisions of the chapter would be liable to:
o Pay tax at the rate of 30 percent of the value of such undisclosed asset.
o in addition, also be liable to pay penalty at the rate of 100% of such tax (i.e., a further
30% of the value of the asset as on the date of commencement of the Act).
Therefore, the declarant would be liable to pay a total of 60 percent of the value of the
undisclosed asset declared by him. This special rate of tax and penalty specified in the
compliance provisions will override any rate or rates specified under the provisions of the
Income-tax Act or the Annual Finance Acts.
Time limits for declaration and making payment A declaration under the Act can be made in
Form 6 anytime on or after the date of commencement of the Act i.e. 1st July, 2015 but before
a date to be notified by the Central Government. The declaration is to be filed with the
Commissioner of Income-tax, Delhi. The declaration may also be filed online on the e-filing
website of the Income Tax Department using the digital signature of the declarant.
The Central Government has notified 30th September, 2015 as the last date for making the
declaration before the designated Principal Commissioner or Commissioner of Income Tax
(PCIT/CIT) and 31st December, 2015 as the last date by which the tax and penalty shall be paid.)
Declaration to be signed by:
Status of the declarant
Status of the declarant
Individual



Individual;
person authorized by the declarant, where he is absent from
India;
Guardian or other person competent to act on behalf of
individual, where the individual is mentally incapacitated
HUF


Karta;
Any other adult member of the HUF, where the karta is
absent from India or is mentally incapacitated from attending
to his affairs


Managing Director;
Any director. where for any unavoidable reason the managing
Company
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director is not able to sign or there is no managing director
Firm


Managing partner;
By any partner, not being a minor, where for any unavoidable
reason the managing partner is not able to sign the
declaration, or where there is no managing partner

Any member of the association or the principal officer

The person or by some other person competent to act on his
behalf
Any other association
Any other person
Declaration not eligible in certain cases
I. As per the provisions of section 71 read with section 59 of the Act, no declaration under
the compliance window can be made in respect of any undisclosed foreign asset
acquired from income chargeable to tax under the Income-tax Act for assessment year
2015-16 or any earlier assessment year by a person who has been served upon notice
under below mentioned provisions on or before 30th June 2015 (i.e. before the date of
commencement of this Act.) in respect of such assessment year and the proceeding is
pending before the Assessing Officer.





notice under section 142; or
notice under section 143(2); or
notice under section 148; or
notice under section 153A; or
notice under section 153C
II.
where a search has been conducted under section 132 or requisition has been made
under section 132A or a survey has been carried out under section 133A of the Incometax Act in a previous year and the time for issuance of a notice under section 143 (2) or
section 153A or section 153C for the relevant assessment year has not expired.
III.
where any information has been received by the competent authority on or before
30th June 2015 under an agreement entered into by the Central Government under
section 90 or section 90A of the Income-tax Act in respect of such undisclosed asset.
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IV.
CA Arun Setia Classes
A person in respect of whom proceedings for prosecution of any offence punishable
under Chapter IX (offences relating to public servants) or Chapter XVII (offences against
property) of the Indian Penal Code or under the Unlawful Activities (Prevention) Act or
the Prevention of Corruption Act are pending shall not be eligible to make declaration
under Chapter VI.
In the form of declaration (Form 6) the declarant shall verify:
 no such notice has been received by him on or before 30th June 2015.
 the facts stated above do not prevail in his case.
Circumstances where declaration shall be invalid
a) If the declarant fails to pay the entire amount of tax and penalty within the specified
date, i.e., 31.12.2015;
b) Where the declaration has been made by misrepresentation or suppression of facts or
information.
Effect of Void Declaration
 A declaration shall be deemed never to have been made
 All the provisions of the Act, including penalties and prosecutions, shall apply
accordingly
 Any tax or penalty paid in pursuance of the declaration shall, however, not be
refundable under any circumstances.
Effect of valid declaration
Where a valid declaration has been made, the following consequences will follow:
a) The amount of undisclosed investment in the asset declared shall not be included in the
total income of the declarant under the Income-tax Act for any assessment year;
b) The contents of the declaration shall not be admissible in evidence against the
declarant in any penalty or prosecution proceedings under the Income-tax Act, the
Wealth Tax Act, the Foreign Exchange Management Act, the Companies Act or the
Customs Act;
c) The value of asset declared in the declaration shall not be chargeable to Wealth Tax for
any assessment year or years.
d) Declaration of undisclosed foreign asset will not affect the finality of completed
assessments. The declarant will not be entitled to claim re-assessment of any earlier
year or revision of any order or any benefit or set off or relief in any appeal or
proceedings under the Act or under Income-tax Act in respect of declared undisclosed
asset located outside India or any tax paid thereon.
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Question:1
If firm has undisclosed foreign assets, can the partner file declaration in respect
of such asset?
Answer:
The declaration can be made by the firm which shall be signed by the person
specified in sub-section (2) of section 62 of the Act. The partner cannot make a
declaration in his name. However, the partner may file a declaration in respect of
an undisclosed asset held by him.
Question: 2
Where a company has undisclosed foreign assets, can it file a declaration under
Chapter VI of the Act? If yes, then whether immunity would be granted to
Directors of the company?
Answer:
Yes, the company can file a declaration under Chapter VI of the Act. The
Directors of the company shall not be liable for any offence under the Incometax Act, Wealth-tax Act, FEMA, Companies Act and the Customs Act in respect of
declaration made in the name of the company.
Question:3
Whether immunity in respect of declaration made under the scheme is
provided in respect of Acts other than those mentioned in section 67 of the
Act?
Answer:
Section 67 provides immunity from prosecution under the five Acts viz. the
Income-tax Act, Wealth-tax Act, FEMA, Companies Act and the Customs Act. It
does not provide immunity from prosecution under any other Act. For exampleif the undisclosed asset has been acquired out of the proceeds of sale of
protected animals the person will not be eligible for immunity under the Wildlife
(Protection) Act, 1972.
Question:4
Can a person against whom a search/ survey operation has been initiated file
voluntary declaration under Chapter VI of the Act?
The person is not eligible to make a declaration under Chapter VI if a search has
been initiated and the time for issuance of notice under section 153A has not
expired, even if such notice for the relevant assessment year has not been
issued. In this case, however, the person is eligible to file a declaration in respect
of an undisclosed foreign asset acquired in any previous year in relation to an
assessment year which is prior to assessment years relevant for the purpose of
notice under section 153A.
In case of survey operation the person is barred from making a declaration under
Chapter VI in respect of an undisclosed asset acquired in the previous year in
which the survey was conducted. The person is, however, eligible to make a
declaration in respect of an undisclosed asset acquired in any other previous
year.
Answer: (a)
(b)
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Question5:
Whether a person is barred from voluntary declaration under Chapter VI of the
Act if any information has been received by the Government under DTAA?
Answer:
As per section 71(d)(iii), the person cannot make a declaration of an undisclosed
foreign asset where the Central Government has received an information in
respect of such asset under the DTAA. The person is entitled for voluntary
declaration in respect of other undisclosed foreign assets for which no
information has been received.
Question:6
How would the person know that the Government has received information of
an undisclosed foreign asset held by him which will make the declaration
ineligible?
Answer:
The person may not know that the Government has information about
undisclosed foreign asset held by him if the same has not been communicated to
him in any enquiry/proceeding under the Income-tax Act. After the person has
filed a declaration, which is to be filed latest by 30th September, 2015, he will be
issued intimation by the Principal Commissioner/Commissioner by 31th October,
2015, whether any information has been received by the Government and
consequently whether he is eligible to make the payment on the declaration
made. If no information has been received up to 30th June, 2015 by the
Government in respect of such asset the person will be allowed a time upto 31st
December, 2015 for payment of tax and penalty in respect of the declared asset.
There may be a case where person makes declaration in respect of 5 assets
whereas the Government has information about only 1 asset. In such situation
the person will be eligible to declare the balance 4 assets under Chapter VI of the
Act. In such case the declarant, on receipt of intimation by the Principal
Commissioner/Commissioner, shall revise the declaration made within 15 days
of such receipt of intimation to exclude the asset which is not eligible for
declaration. Tax and penalty on the eligible assets under the Act shall be payable
in respect of the revised declaration by 31st of December, 2015. In respect of the
ineligible assets provisions of the Income-tax Act shall apply. (Please also see
answer to question no. 15)
Question: 7
A person is a non-resident. However, he was a resident of India earlier and had
acquired foreign assets out of income chargeable to tax in India which was not
declared in the return of income or no return was filed in respect of that
income. Can that person file a declaration under Chapter VI of the Act?
Answer:
Section 59 provides that a declaration may be made by any person of an
undisclosed foreign asset acquired from income chargeable to tax under the
Income-tax Act for any assessment year prior to assessment year 2016-17. Since
the person was a resident in the year in which he had acquired foreign assets
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(which were undisclosed) out of income chargeable to tax in India, he is eligible
to file a declaration under section 59 in respect of those assets under Chapter VI
of the Act.
Question: 8
A person is a resident now. However, he was a non-resident earlier when he
had acquired foreign assets (which he continues to hold now) out of income
which was not chargeable to tax in India. Does the person need to file a
declaration in respect of those assets under Chapter VI of the Act?
Answer:
Those assets do not fall under the definition of undisclosed assets under the Act.
Question:9
A person was employed in a foreign country where he acquired or made an
asset out of income earned in that country. Whether such asset is required to
be declared under Chapter VI of the Act?
Answer:
If the person, while he was a non-resident in India, acquired or made a foreign
asset out of income which is not chargeable to tax in India, such asset shall not
be an undisclosed asset under the Act. However, if income was accrued or
received in India while he was non-resident, such income is chargeable to tax in
India. If such income was not disclosed in the return of income and the foreign
asset was acquired from such income then the asset becomes undisclosed
foreign asset and the person may declare such asset under Chapter VI of the Act.
UPDATE NO. 10
(Vodafone Case)
VODAFONE CASE AND EFFECT OF
AMENDMENTS BY FINANCE ACT, 2012 &FINANCE ACT, 2015
The following is the decision of Bombay High Court in case of Vodafone International Holding:
VODAFONE INTERNATIONAL HOLDINGS B. V. VS. UNION OF INDIA (BOMBAY HIGH COURT)
Hutchison Essar limited (HEL) is an Indian Company which is the Joint venture of Hutchison
Group and Essar Group. HEL is carrying on the business of providing telecommunication
services in India.
Hutchison Telecommunication International limited (HTIL) is a foreign company, registered in
Hong Kong. This foreign company has a wholly owned subsidiary company CGP Investments
Ltd. (CGP) which is also a foreign company registered in Cayman Islands, Mauritius. The
Company CGP holds 51.95% shares in HEL and through its foreign subsidiary companies, CGP
also holds 15.05% shares in HEL. EssarGroup holds 33% shares in HEL.
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A company Vodafone International Holdings B.V. (Foreign Company registered in Netherland)
with a view to acquire the controlling interest in HEL purchased the 100% shares in CGP from
HTIL. The agreement of sale of shares of CGP took place outside India. Mainly two issues arise
on sale of CGP shares by HTIL to Vodafone. Firstly, whether HTIL by reason of instant
transaction, had earned income liable for capital gains tax in India as this income was earned
towards sale consideration of transfer of its business/ economic interests in India as a group in
favour of the Vodafone. Secondly, whether, on payment made by the Vodafone to HTIL on such
transaction, Vodafone was liable to deduct tax at source under section 195 from the sale
consideration paid to HTIL.
The Income tax department issued a show cause notice under section 201 to Vodafone as to
why it should not be treated as an assessee in default for not deducting TDS under section 195
on the payment made to HTIL which is taxable in India in hands of HTIL as capital gains.
Vodafone filed a writ petition in Bombay High Court challenging the legal validity of the show
cause notice.
The Bombay High Court held as under:
1. The transfer of shares of CGP by HTIL to Vodafone amounts to transfer of controlling
interest in Indian Company HEL to Vodafone. The dominant purpose of sale of shares of
CGP was to transfer the controlling interest of Indian Company.
2. Vodafone has acquired a source of income in India, HTIL by reason of this transaction
has earned capital gains taxable in India as the income was earned towards sale
consideration of transfer to Vodafone of its Indian business /economic interests as a
group.
3. In the instant case, the subject matter of transfer as contracted between the parties is
not actually the shares of a Cayman Island Company, but the assets situated in India.
4. Vodafone was therefore liable to deduct TDS on the payment made to HTIL and
therefore show cause notice under section 201 is a valid notice.
BOMBAY HIGH COURT DISMISSED THE WRIT PETITION of Vodafone and the court rejected the
argument of Vodafone that what was transferred was only shares of an Cayman Island
Company i.e., CGP, and therefore, the argument that no capital gains will arise on sale of
shares in CGP was rejected.
The very purpose of entering into agreements between the two foreign companies is to
acquire the controlling interest which one foreign company held in the Indian company. This
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being the dominant purpose of the transaction, the transaction would certainly be subject to
municipal laws of India, including the Indian Income Tax Act.
It was held that Income of HTIL was deemed to have accrued or arisen in India and therefore,
it squarely fell within the ambit of section 9 and hence, chargeable to Income tax under the
head capital gains.
Vodafone filed a review petition in Supreme Court and Supreme Court reversed the Bombay
High Court decision. Supreme Court held that Assessing Officer in India had no jurisdiction to
tax the transaction which took place outside India and what was transferred was the shares of a
foreign company namely CGPof Cayman's Island and not the Indian business.
The Supreme Court reversed the Bombay High Court judgment in the case of Vodafone
International Holdings B.V. and held that capital gains arising to Hutchison, Hong Kong, from
sale of shares of CGP located in Cayman's Island, is not taxable in India.
The Finance Act, 2012 has retrospectively amended the definition of:



Transfer under section 2(47)
Capital asset under section 2(14)
Deemed accrual of income under section 9
SECTION 2(14): AMENDMENT IN DEFINITION OF CAPITAL ASSET
Following Explanation has been added to section 2(14) i.e. the definition of capital asset by
Finance Act, 2012:
Explanation.- It is hereby clarified that:





property" includes
any rights in
or in relation to
an Indian company,
including rights of management or control or any other rights whatsoever.
Therefore, capital asset shall include the rights of Hutchison Hong Kong in Indian Company
including right of management and control, e.g., right to appoint directors, right to use Hutch
brand in India and non-compete agreement. Therefore, Hutchison Hong Kong has transferred
to Vodafone a capital asset in India, being rights in Indian Company including right of
management and control.
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SECTION 2(47): AMENDMENT IN DEFINITION OF TRANSFER
Following Explanation has been added to section 2(47) by Finance Act, 2012:
It is hereby clarified that:





transfer" includes
disposing of or parting with an asset or any interest therein, or
creating any interest in any asset in any manner whatsoever, directly or indirectly,
by way of an agreement whether entered into in India or outside India} or otherwise,
notwithstanding that such transfer of rights has been characterised as being effected or
dependent upon or flowing from
 the transfer of a share or shares of a company registered or incorporated outside India.
Therefore, as per the amendment, the Hutchsion Hong Kong has made a transfer to Vodafone
of the rights in Indian Company including rights of management and control since it has by
transferring the shares of CGP Mauritius:
 disposed of or parted with the rights in Indian company
 created interest of Vodafone in Indian Company by indirect means i.e. transfer of shares
of CGP
 by way of agreement
 and such transfer of rights take place by transfer of shares of a company incorporated in
Mauritius.
SECTION 9: AMENDMENT IN CONCEPT OF "INCOME DEEMED TO ACCRUE OR ARISE IN INDIA"
Section 9 provides that the following income shall be deemed to accrue or arise in India:
All income accruing or arising, whether directly or indirectly,




through or from any business connection in India, or
through or from any property in India, or
through or from any asset or source of income in India, or
through the transfer of a capital asset situate in India
Following two Explanations have been added by Finance Act, 2012:
Explanation 4.- For the removal of doubts, it is hereby clarified that the expression "through"
shall mean and include and shall be deemed to have always meant and included "by means
of', "in consequence of" or "by reason of".
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Explanation 5.- For the removal of doubts, it is hereby clarified that an asset or a capital asset
being any share or interest in a company or entity registered or incorporated outside India
shall be deemed to be and shall always be deemed to have been situated in India, if the share
or interest derives, directly or indirectly, its value substantially from the assets located in
India.
As per the Explanations added by Finance Act, 2012, the income shall be deemed to accrue or
arise in India in hands of Hutchison Hong Kong if such income arises directly or indirectly by
means of or by reasons of transfer of Capital asset situated in India i.e., transfer of rights in
Indian Company.
Explanation 5 provides that the shares of CGP Investment Mauritius being the share in a
company registered/ incorporated outside India shall be deemed to be situated in India as the
shares of CGP derives its value substantially from the business of Indian Company located in
India.
CLARIFICATION ON EXPLANATION 5 TO SECTION 9CIRCULAR NO. 4/2015
1. The Finance Act, 2012 inserted Explanation 5 to section 9. The said explanation reads
asunder:"Explanation 5.-For the removal of doubts, it is hereby clarified that an asset or a capital asset
being any share or interest in a company or entity registered or incorporated outside India shall
be deemed to be and shall always be deemed to have been situated in India, if the share or
interest derives, directly or indirectly, its value substantially from the assets located in India".
2. A number of representations have been received by the Board stating that the purpose of
introduction of Explanation 5 was to clarify the legislative intent regarding the taxation of
income accruing or arising through transfer of a capital asset situate in India. Apprehension
shave been expressed about the applicability of the Explanation to the transactions not
resulting in any transfer, directly or indirectly of assets situated in India. It has been pointed
out that such an extended application of the provisions of the Explanation may result in
taxation of dividend income declared by a foreign company outside India. This may cause
unintended double taxation and would be contrary to the generally accepted principles of
source rule as well as the object and purpose of the amendment made by the Finance Act,
2012.
3. It is clarified that Explanation 5 would be applicable in relation to deeming any in come
arising outside India from any transaction in respect of any share or interest in a foreign
company or entity, which has the effect of transferring, directly or indirectly, the underlying
assets located in India, as income accruing or arising in India.
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4. Declaration of dividend by such a foreign company outside India does not have the effect of
transfer of any underlying assets located in India. It is therefore, clarified that the dividends
declared and paid by a foreign company outside India in respect of shares which derive their
value substantially from assets situated in India would not be deemed to be income
accruing or arising in India by virtue of the provisions of Explanation 5 to section 9(1)(i)of
the Act.
Therefore, If CGP investment declares dividend of say Rs 100 crores on its shares and the said
dividend is received by Hutchison Hong Kong, then such dividend shall not be deemed to accrue
or arise in India in hands of Hutchison Hong Kong.
AMENDMENTS BY FINANCE ACT, 2015
REASONS FOR AMENDMENTS BY FINANCE ACT, 2015
The Finance Act, 2012 inserted certain clarificatory amendments in the provisions of section 9.
The amendments, inter alia, included insertion of Explanation 5 in section 9(l)(i). The
Explanation 5 clarified that an asset or capital asset, being any share or interest in a company or
entity registered or incorporated outside India shall be deemed to be situated in India if the
share or interest derives, directly or indirectly, its value substantially from the assets located in
India. The existing provisions related to indirect transfers are so widely worded that even if a
single share (constituting less than 1% of total shareholding) of a foreign company having
substantial assets in India is transferred outside India, then the gains arising on such a transfer
would be taxable in India. That would lead to undue hardship considering the fact that a single
shareholder may not be in the know of all the global assets of the company. In view of this, the
Expert Committee under the Chairmanship of Dr. Parthasarathi Shome had recommended that
transfer of small shareholdings in a foreign company should not be subject to undue hardship
as it does not result in the transfer of a controlling interest in the Indian assets. The
Committee recommended threshold exemption to give relief to small shareholders of foreign
company. The Committee had also recommended that the law must clarify as to when it can be
said that the share or interest derives its value substantially from the assets located in India. In
other words, law must define the word 'substantially' used in Explanation 5.
The existing provisions provide no tax exemption to indirect transfers taking place as part of
intra-group restructuring of foreign companies. The Shome Committee had recommended that
as the business reorganization within a group does not result in any real income, indirect
transfers as part of intra-group restructuring whether in India or outside should be tax
neutral. However, there should be sufficient safeguards by way of continuity of ownership to
prevent misuse of such exemption.
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THRESHOLD EXEMPTION TO SMALL SHAREHOLDERS OF FOREIGN COMPANY FROM INDIRECT
TRANSFER
Finance Act, 2015 has inserted Explanation 7 in section 9(1)with effect from Assessment
Year2016-17 Explanation 7 to section 9(1) provides that no income shall be deemed to accrue
or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company
or an entity, registered or incorporated outside India, referred to in the Explanation 5, if the
transferor whether individually or along with its associated enterprises,
a) neither holds the right of control or management,
b) nor holds voting power or share capital or interest exceeding five per cent of the total
voting power or total share capital,
at any time in 12 months preceeding the date of transfer, in the foreign company or entity
holding the Indian assets.
Clause (a) of Explanation 7 to section 9 provides as under:
 No income shall be deemed to accrue or arise to a non-resident,
 from transfer outside India, of any share of, or interest in, a company or an entity,
registered or incorporated outside India, referred to in the Explanation 5,
 if the transferor (whether individually or along with its associated enterprises),
 at any time in the twelve months preceding the date of transfer,
 neither holds the right of management or control in relation to such company or
entity,
 nor holds voting power or share capital or interest exceeding 5% of the total voting
power or total share capital or total interest,
 as the case may be, of such company or entity.
Continuing the above case, suppose the shares of CGP Mauritius are held by following
shareholders:
1. Hutchison Hong Kong 95%
2. Mr. A 3%
3. Mr. B 2%
If Mr. AI Mr. B transfers shares of CGP Mauritius to another non-resident on 1-1-2016 then no
capital gains shall arise in hands of Mr. AI Mr. B from transfer of shares of CGP although the
shares of CGP derives their value substantially from assets located in India. This is because
Mr. A/Mr. B:
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(i) do not have the right of control or management of CGP at any time from 1-1-2015 to 3112-2015
(ii) their voting power does not exceed 5% any time from 1-1-2015 to 31-12-2015.
PROPORTIONAL TAXATION OF GAINS FROM INDIRECT TRANSFERS
In a case where all the assets owned, by a company or, as the case may be, an entity referred to
in the Explanation 5, are not located in India, the income of the non-resident transferor, from
transfer outside India of a share of, or interest in, such company or entity, deemed to accrue or
arise in India under this clause, shall be only such part of the income as is reasonably
attributable to assets located in India and determined in such manner as may be prescribed.
(Method of calculation has not yet been prescribed)
Clause (b) of Explanation 7 to section 9 provides as under:
 In a case where all the assets owned, by a company or, as the case may be, an entity
referred to in the Explanation 5, are not located in India,
 the income of the non-resident transferor,
 from transfer outside India of a share of, or interest in, such company or entity,
 deemed to accrue or arise in India under this clause,
 shall be only such part of the income as is reasonably attributable to assets located in
India and determined in such manner as may be prescribed.
Suppose CGP Investments Balance Sheet is as under:
Liabilities
Amount
Assets
Share Capital
10,000
Investment in Indian Company
(Hutch India)
7,000
Investment in Dubai Company
3,000
Total
10,000
Amount
Total
10,000
Suppose Hutchison Hong Kong, holds the above shares of Rs. 10,000 crores acquired at face
value.
Now, Hutchison transfers these shares to Vodafone for Rs. 60,000 crores outside India.
Now Capital Gains arising to Hutchison Hong Kong in Rs. 60,000 crores - Rs. 10,000 crores =
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Rs.50, 000 crores
As per clause (b) of Explanation 7 to Section 9, the Capital Gains taxable in India shall be:
Rs. 50,000 crore X Rs. 7,000 crore/ Rs. 10,000 crores = Rs. 35,000 crores
MEANING OF "DERIVE ITS VALUE SUBSTANTIALLY"
Explanation 6.-For the purposes of this clause, it is hereby declared that(a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value
substantially from the assets (whether tangible or intangible) located in India, if, on the
specified date, the value of such assets(i)
(ii)
exceeds the amount of ten crore rupees; and
represents at least 50% of the value of all the assets owned by the company or
entity, as the case may be;
(b) the value of an asset shall be the fair market value as on the specified date, of such asset
without reduction of liabilities, if any, in respect of the asset, determined in such manner as
may be prescribed. (Rules not yet prescribed)
(c) "accounting period" means each period of twelve months ending with the 31st day of
March:
(d) "specified date" means the(i)
(ii)
date on which the accounting period of the company or, as the case may be, the
entity ends preceding the date of transfer of a share or an interest; or
date of transfer, if the book value of the assets of the company or, as the case
maybe, the entity on the date of transfer exceeds the book value of the assets as on
the date referred to in sub-clause (i), by fifteen per cent:
Provided that where a company or an entity, referred to in Explanation 5, regularly adopts a
period of twelve months ending on a day other than the 31st day of March for the purpose of(i)
(ii)
complying with the provisions of the tax laws of the territory, of which it is a
resident, for tax purposes; or
reporting to persons holding the share or interest,
then, the period of twelve months ending with the other day shall be the accounting period of
the company or, as the case may be, the entity:
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Provided further that the first accounting period of the company or, as the case may be, the
entity shall begin from the date of its registration or incorporation and end with the 31st day of
March or such other day, as the case may be, following the date of such registration or
incorporation, and the later accounting period shall be the successive periods of twelve
months:
Provided also that if the company or the entity ceases to exist before the end of accounting
period, as aforesaid, then, the accounting period shall end immediately before the company or,
as the case may be, the entity, ceases to exist.
Case -1
CGP Investments
Liabilities
Amount
Assets
Share Capital
10,000
Investment in Indian Company
(Hutch India)
1,000
Investment in Dubai Company
9,000
Total
10,000
Amount
Total
10,000
Case -2
CGP Investments
Liabilities
Amount
Assets
Share Capital
10,000
Investment in Indian Company
(Hutch India)
7,000
Investment in Dubai Company
9,000
Total
10,000
Amount
Total
10,000
In Case 1, the shares of CGP do not derive its value substantially from assets located in India
since:
(i)
Although the assets of CGP invested in Indian assets exceed Rs. 10 crores but
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50% of assets of CGP i.e., Rs. 5,000 crores are not invested in assets in India.
Therefore, no capital gains shall arise in India if shares of CGP are transferred outside India to
another non-resident.
In Case -2, the shares of CGP do derive their values substantially from assets located in India
since:
(i)
(ii)
Assets of CGP invested in Indian assets exceeds Rs. 10 crores; and
Investment in Indian assets i.e. Rs. 7,000 crores represents at least 50% of assets of
CGP i.e., Rs. 5000 crores.
Therefore, capital gain shall arise in India if share of CGP are transferred outside India to
another non-resident. However, proportional capital gains shall be taxable as per Explanation 7
to section 9.
EXEMPTION OF CAPITAL GAINS ON BUSINESS RESTRUCTURING I.E., AMALGAMATION AND
DEMERGER
Section 47 provides that following transactions shall not be regarded as transfer and hence no
capital gains shall arise:
Section 47(viab): any transfer, in a scheme of amalgamation, of a capital asset, being a share of
a foreign company, referred to in Explanation 5 to section 9, which derives, directly or
indirectly, its value substantially from the share or shares of an Indian company, held by the
amalgamating foreign company to the amalgamated foreign company, if(A) at least twenty-five per cent of the shareholders of the amalgamating foreign
company continue to remain shareholders of the amalgamated foreign company; and
(B) such transfer does not attract tax on capital gains in the country in which the
amalgamating company is incorporated.
Section 47(vicc): any transfer in a demerger, of a capital asset, being a share of a foreign
company, referred to in Explanation 5 to section 9, which derives, directly or indirectly, its
value substantially from the share or shares of an Indian company, held by the demerged
foreign company to the resulting foreign company, if,(a) the shareholders, holding not less than three-fourths in value of the shares of the
demerged foreign company, continue to remain shareholders of the resulting foreign
company; and
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(b) such transfer does not attract tax on capital gains in the country in which the
demerged foreign company is incorporated:
If Hutchison Hong Kong amalgamates with Hutchman Japan and in the scheme of
amalgamation, the shares of CGP Mauritius of Rs. 10,000 crores are transferred and in
amalgamation scheme the shares of CGP are transferred at Rs. 60,000 crores, then the capital
gains of Rs. 50,000 crores in hands of Hutchison Hong Kong are exempt if:
(i)
(ii)
25% shareholders of Hutchison Hong Kong continue to remain shareholders of
Hutchman Japan and
Such transfer does not attract tax on capital gain as per Income Tax Laws of
HongKong
If Hutchison Hong Kong demerges its telecom business to Hutchtimes, Australia and in the
demerger the shares of CGP Mauritius are transferred to Hutchtimes Australia at price of Rs.
60,000 crores then capital gain of Rs. 50,000 crores shall be exempt in hands of Hutchison Hong
Kong if:
(i)
(ii)
shareholders holding not less than 75% of value of shares of Hutchison Hong
Kongcontinue to remain shareholder of Hutchtimes Australia and
such transfer does not attract tax on capital gain as per Income Tax Law of
HongKong
REPORTING OBLIGATION ON INDIAN ENTITY
The Finance Act, 2015 has inserted a new section 285A, with effect from Assessment Year 201617, where under there shall be a reporting obligation on Indian concern through or in which the
Indian assets are held by the foreign company or the entity. The Indian entity shall be obligated
to furnish information relating to the off-shore transactions having the effect of directly or
indirectly modifying the ownership structure or control of the Indian company orentity. In case
of any failure on the part of Indian concern in this regard a penalty shall beleviable under new
section 271GA inserted by the Finance Act, 2015, with effect from assessment year Rs.016-17.
The penalty shall be(a) a sum equal to 2% of the value of the transaction in respect of which such failure has
taken place in case where such transaction had the effect of directly or indirectly
transferring the right of management or control in relation to the Indian concern; and
(b) a sum of Rs. 5,00,000 in any other case.
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SECTION 285A: FURNISHING OF INFORMATION OR DOCUMENTS BY AN INDIAN CONCERN IN
CERTAIN CASES
Where any share of, or interest in, a company or an entity registered or incorporated outside
India derives, directly or indirectly, its value substantially from the assets located in India, as
referred to in Explanation 5 to section 9, and such company or, as the case may be, entity,
holds, directly or indirectly, such assets in India through, or in, an Indian concern, then, such
Indian concern shall, for the purposes of determination of any income accruing or arising in
India under clause (i) of sub-section (1) of section 9, furnish within the prescribed period to the
prescribed income-tax authority the information or documents, in such manner, as may be
prescribed.
SECTION 271GA: PENALTY FOR FAILURE TO FURNISH INFORMATION OR DOCUMENT UNDER
SECTION 285A
If any Indian concern, which is required to furnish any information or document under section
285A, fails to do so, the income-tax authority, as may be prescribed under the said section, may
direct that such indian concern shall pay, by way of penalty,(i)
(ii)
a sum equal to 2% of the value of the transaction in respect of which such failurehas
taken place, if such transaction had the effect of directly or indirectlytransferring the
right of management or control in relation to the Indian concern;
a sum of Rs. 5,00,000 in any other case.
UPDATE NO. 11
Section
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Transaction not regarded as transfer
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47(viab)
CA Arun Setia Classes
Transfer of capital assets in a scheme of
amalgamation, being a share of a foreign
company, referred to in Explanation 5 to
section 9(1)(i), which derives, directly or
indirectly, its value substantially from the
share or shares of an Indian company,
held by the amalgamating foreign
company to the amalgamated foreign
company if:
(Applicable from AY 2016-17)
a. At least 25% of the shareholders of the
amalgamating foreign company continue
to remain shareholders of the
amalgamated foreign company and
b. Such transfer does not attract tax on
capital gains in the country, in which the
amalgamating company is incorporated.
Section
Transaction not regarded as
transfer
47(xvii)
Any transfer of a capital asset, being
share of a Special Purpose Vehicle
(Applicable (SPV) to a business trust in exchange
from AY
of units allotted by that trust to the
2015-16)
transferor.
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What is the
cost in the
hands of
transferee
If the transferee
subsequently
transfers the asset,
whether period of
holding by the
previous owner
should be included
The COA of
units of
Business Trust
in hands of
shareholder of
SPV shall be
cost at which
shares are
acquired by
them in SPV.
The period for which
shares were held by
shareholders in SPV
shall also be
considered.
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Section
CA Arun Setia Classes
Transaction not regarded as transfer
47(xviii)
Any transfer by a unit holder of a capital asset (units), held by him in the
consolidating scheme of mutual fund, made in consideration of the allotment to
(Applicable him of a capital asset (units), in the consolidating scheme of mutual fund.
from AY
2016-17)
NOTIFICATION NO. 60/ 2015 DATED 24TH JULY, 2015- COST INFLATION INDEX
FOR FINANCIAL YEAR 2015-16
In exercise of the powers conferred by clause (v) of the Explanation to section 48 of the
Income-tax Act, 1961 (43 of 1961), the Central Government has prescribed 1081 as the Cost
Inflation Index for the Financial year 2015-16
UPDATE NO. 12
Deduction
Explain briefly deduction in respect of health insurance premia under section 80D.
Ans: Deduction m respect of health insurance premia [Section 80D] [Bold portion amended
by Finance Act, 2015 tow.e.f01-04-2016 i.e. AY 2016-17]:
1) Eligible Assessee: An Individual or a Hindu Undivided Family (whether resident or nonresident).
2) Deduction in respect of individual assessee: Deduction is available in respect of –
(i) the amount paid to effect or to keep in force health insurance under a scheme made
by General Insurance Corporation of India (GIC) and approved by Central
Government or made by any other insurer and approved by Insurance Regulatory
and Development Authority.
(ii) the amount paid on account of preventive health check-up.
3) Condition to be complied with: For claiming such deduction under section 80D, the
payment can be made –
(i)
by any mode, including cash, in respect of any sum paid on account of preventive
health check-up;
(ii)
by any mode other than cash, in all other cases.
4) Amount of deduction in case of individual assessee: In case of individual assessee, the
deduction to be allowed shall be aggregate of the following –
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(A)
(B)
CA Arun Setia Classes
1)
Health insurance premia paid on the health of the assessee or his family or
any contribution made to the Central Government Health Scheme or such
other scheme as may be notified by the Central Government in this behalf :
(a) Total amount paid as above; or
(b) Rs. 25,000 Rs. (30,000 in case the insured is a senior citizen), whichever is
lower.
2)
The amount paid on account of medical expenditure incurred on the
health of the assessee or any member of his family, who is a very senior
citizen and no amount has been paid to effect or to keep in force an
insurance on the health of such person –
(a) Total amount paid as above; or
(b) Rs 30,000,
whichever is lower.
3)
The amount paid on account of preventive health check-up of the assessee
or his family (a) Total amount paid as above; or
(b) Rs. 5,000,
whichever is lower.
However, the said deduction of Rs. 5,000 is within the overall limit of Rs. 25,000 or
Rs. 30,000, as the case maybe.
1)
Health insurance premia paid on the health of the parent(s) of the
assessee(a) Total amount paid as above; or
(b) Rs. 25,000 Rs. (30,000 in case the insured is a senior citizen), whichever is
lower.
2)
The amount paid on account of medical expenditure incurred on the
health of the parents(s) ofthe assessee, who is a very senior citizen and no
amount has been paid to effect or to keep inforce an insurance on the
health of such person(a) Total amount paid as above; or
(b) Rs. 30,000,
whichever is lower.
3)
The amount paid on account of preventive health check-up of parent(s) of
the assessee–
(a) Total amount paid as above; or
(b) Rs. 5,000, whichever is lower.
However, the said deduction of Rs. 5,000 is within the overall limit of Rs. 25,000 or
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Rs. 30,000, as the casemaybe.
The total amount of deduction on account of preventive health checkup of the
assessee or his family or parents of the assessee cannot exceed Rs. 5,000.
Total amount of deduction (A + B)
xxx
5) Amount of deduction in case of HUF assessee:
(i) Deduction shall be lower of following (a) Health insurance premia paid in respect of health of any member of that HUF; or
(b)Rs. 25,000 Rs. (30,000 in case the insured is a senior citizen).
(ii) The amount paid on account of medical expenditure incurred on the health of any
member of the family, who is a very senior citizen and no amount has been paid to
effect or to keep in force an insurance on the health of such person –
(a) Total amount paid as above; or
(b) Rs. 30,000,
Whichever is lower.
Note:
(i)
(ii)
"Senior citizen" means an individual resident in India who is of the age of 60 years or
more at any time during the relevant previous year.
"Family" means the spouse and dependent children of the assessee)
Question
Write briefly about the provisions regarding deductions from gross total income in respect of
medical treatment of dependant disabled under section 80DD of the Income-tax Act, 1961.
Ans: Deduction in respect of maintenance including medical treatment of a dependant who is a
person with disability [Section 80DD] [Bold portion amended by Finance Act, 2015 to w.e.f. 0104-2016 i.e. AY 2016-17]:
1) Eligible Assessee: Resident individual or a resident Hindu undivided family.
2) Nature of payment: Deduction is available in respect of(i)
expenditure incurred for medical treatment (including nursing), training and
rehabilitation, of a dependant, being a person with disability; or
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(ii)
3)
4)
5)
6)
7)
amount paid or deposited under any scheme of Life Insurance Corporation or any
other insurer or administrator or specified company of Unit Trust of India, approved
by CBDT for maintenance, of a dependant, being a person with disability.
Amount of Deduction:
(i)
General: A fixed deduction of Rs. 75,000 irrespective of amount paid.
(ii)
Special: If the dependent is a person with severe disability, deduction is Rs. 1,25,000.
(Severe disability means 80% or more of disability)
Meaning of Dependant: Dependant means (i)
In case of individual: Spouse, children, parents, brothers and sisters of individual,
who is dependant wholly or mainly on such individual for his support and
maintenance, and has not claimed any deduction under section 80U;or
(ii)
In case of HUF : Any member of the HUF who is dependant wholly or mainly on such
HUF for his support and maintenance, and has not claimed any deduction under
section 80U.
Conditions of scheme:
(i)
The scheme must provide for payment of annuity or lumpsum amount for benefit of
such dependant, being person with disability, in the event of death of individual or
member of HUF in whose name subscription to the scheme has been made.
(ii)
The assessee must nominate either the dependant, being person with disability, or
any other person or a trust to receive the payment on his behalf, for the benefit of
such dependant.
Disability certificate to be furnished: The assessee claiming deduction under this section
shall furnish a copy of disability certificate issued by medical authority in prescribed form,
along with his return of income for assessment year for which the deduction is claimed.
Where condition of disability requires reassessment, deduction will be allowed only if a new
disability certificate is so obtained and furnished.
Taxability of amount received on death of dependant: If the dependant disabled
predeceases such individual or member of Hindu undivided family, the amount paid or
deposited under the scheme shall be deemed to be income of assessee of the previous year
in which it is received by the assessee and accordingly be chargeable to tax as the income of
that previous year.
Question
Write briefly about the provisions regarding deductions from gross total income in respect of
medical treatment of specified disease under section 80DDB of the Income-tax Act, 1961.
Ans: Deduction in respect of medical treatment, etc. [Section 80DDB][Amended by Finance Act,
2015 w.e.f. 1-4-2016 i.e. AY 2016-17]:
1) Eligible Assessee: Resident individual or a resident Hindu undivided family.
2) Conditions to be satisfied : Expenditure incurred on the medical treatment of prescribed
disease in respect of the following 9899259817, 9811059817
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(i)
In case of individual : himself or his spouse, children, parents, brothers and sisters
dependant mainly on such individual for his support and maintenance.,
(ii)
In case of HUF : any member of the HUF who is dependant wholly or mainly on such
HUF for his support and maintenance.
3) Amount of Deduction: Deduction to be allowed shall be lower of the following –
(i)
(ii)
sum actually paid; or
Rs.40,000.
Deduction for senior citizen :If such expenditure is incurred for a senior citizen, then the limit
of Rs.40,000 shall be substituted by Rs.60,000.
Deduction for very senior citizen: If such expenditure is incurred for a senior citizen, then the
limit of Rs. 40,000 shall be substituted by Rs. 80,000.
"Senior citizen" means an individual resident in India who is of the age of 60 years or more at
any time during the relevant previous year.
"Very senior citizen" means an individual resident in India who is of the age of 80 years or more
at any time during the relevant previous year.
Deduction to be reduced :Deduction will be reduced by the amount received from insurer, or
reimbursed by the employer of assessee for the medical treatment of the person(s) referred
above.
4) Medical Prescription to be obtained: No such deduction shall be allowed unless the
assessee obtains the prescription for such medical treatment from a neurologist, an
oncologist, a urologist, a haematologist, an immunologist or such other specialist, as may be
prescribed.
UPDATE NO. 13
(Salary)
Transport allowance : It is granted to meet the Rs 1,600 p.m. (Rs 3,200 p.m. in case of blind or
expenditure incurred on commuting between orthopedically
handicapped
employees)
residence and office
[Amended w.e.f. AY 2016-17]
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UPDATE NO. 14
CA Arun Setia Classes
(Miscellaneous)
(1)
Company [Section 6 (3)] Amended by finance Act, 2015 w.e.f. 01-04-2016 i.e AY
2016-17]: A company is said to be resident in India in any previous year, if
a. it is an Indian company ; or
b. its place of effective management, in that year is in India.
Place of effective management [Explanation]: “Place of effective management” means a place
where key management and commercial decisions that are necessary for the conduct of the
business of an entity as a whole, are in substance made.
(2)
Question
Discuss the special provisions made in the Income-tax Act, 1961for avoiding repetitive
appeals by the revenue.
Ans: Procedure for appeal by revenue when an identical question of law is pending before
Supreme Court [Section 158AA][Inserted by Finance Act, 2015 to W.e.f. 01-06-2015]:
1) Appeal not to be filed by the revenue in Appellate Tribunal when identical question of law is
pending in Supreme Court :Notwithstanding anything contained in the Act, where any
question of law arising in the case of an assessee for any assessment year is identical with a
question of law arising in his case for another assessment year which is pending before the
Supreme Court, in an appeal or in a special leave petition under Article 136 of the
Constitution filed by the revenue, against the order of the High Court in favour of the
assessee, the Commissioner or Principal Commissioner may, instead of directing the
Assessing Officer to appeal to the Appellate Tribunal under section 253(2) or section253(ii),
direct the Assessing Officer to make an application to the Appellate Tribunal in the
prescribed form within60 days from the date of receipt of order of the Commissioner
(Appeals) stating that an appeal on the question of law arising in the relevant case may be
filed when the decision on the question of law becomes final the earlier case.
2) Appeal not to be filed only when acceptance is received from assessee regarding pendency
of identical question: The Commissioner or Principal Commissioner shall direct the
Assessing Officer to make an application under section158AA(1),only if an acceptance is
received from the assessee to the effect that the question of law in the other case is
identical to that arising in the relevant case.
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However, in case no such acceptance is received, the Commissioner or Principal
Commissioner shall proceed in accordance with the provisions contained in section 253(2)
or section 2S3(2A). Accordingly, the Commissioner or Principal Commissioner may, if he
objects to the order passed by the Commissioner (Appeals), direct the Assessing Officer to
appeal to the Appellate Tribunal.
3) Appeal to be filed within 60 days of communication of the judgment of Supreme Court:
Where the order of the Commissioner (Appeals) is not in conformity with the final decision
on the question of law in the other case (if the Supreme Court decides the earlier case in
favour of the Department), the Commissioner or Principal Commissioner may direct the
Assessing Officer to appeal to the Appellate Tribunal against such order within 60 days from
the date on which the order of the Supreme Court is communicated to the Commissioner or
Principal Commissioner.
4) Other Provisions applicable: Unless otherwise provided in section 158AA, all other
provisions of Part B of Chapter XXII Appeals to Appellate Tribunal" shall apply accordingly.
(3)
NOTIFICATION NO. 95 DATED 30TH DECEMBER, 2015- INCOME–TAX (22ND AMENDMENT)
RULES, 2015
The Central Board of Direct Taxes has notified the Income–tax (22nd Amendment) Rules, 2015
to amend the Income-tax Rules by substituting existing rule 114B, 114C, 114D and 114E, with
the following rules respectively Rules 114B, 114C and 114D and shall come into force from the
1st day of January, 2016 and rule 114E shall come into force from the 1st day of April, 2016.
―114B. Transactions in relation to which permanent account number is to be quoted in all
documents for the purpose of clause (c) of sub-section (5) of section 139A
Every person shall quote his permanent account number in all documents pertaining to the
transactions specified in the Table below, namely:
Sr. No
Nature of transaction
Value of transaction
1.
Sale or purchase of a motor vehicle or
vehicle, other than two wheeled vehicles.
All such transactions.
2.
Opening an account other than a timedeposit
All such transactions.
3.
Making an application to any banking
company for issue of a credit or debit card
All such transactions.
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4.
Opening of a demat account with a
depository, participant, custodian of
securities
All such transactions.
5.
Payment to a hotel or restaurant against a
bill or bills at any one time.
Payment in cash of an amount exceeding
fifty thousand rupees.
6.
Payment in connection with travel to any
foreign country or payment for purchase of
any foreign currency at any one time.
Payment in cash of an amount exceeding
fifty thousand rupees.
7.
Payment to a Mutual Fund for purchase of
its units.
Amount exceeding fifty thousand rupees.
8.
Payment to a company or an institution for
acquiring debentures or bonds issued by it.
Amount exceeding fifty thousand rupees
9.
Payment to the Reserve Bank of India,
for acquiring bonds issued by it.
Amount exceeding fifty thousand rupees.
10.
Deposit with a banking company or a cooperative bank
Deposits in cash exceeding fifty thousand
rupees during any one day.
11.
Purchase of bank drafts or pay orders or
banker‘s cheques from a banking company
or a co-operative bank
Payment in cash for an amount
exceeding fifty thousand rupees during
any one day.
12.
13.
I.
a banking company or a co-operative
bank
II.
a Post Office;
III.
a Nidhi referred to in section 406
IV.
of the Companies Act, 2013
V.
a non-banking financial company
Payment as life insurance premium to an
insurer
9899259817, 9811059817
Amount exceeding fifty thousand rupees
or aggregating to more than five lakh
rupees during a financial year.
Amount aggregating to more than fifty
thousand rupees in a financial year.
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14.
A contract for sale or purchase of securities
(other than shares)
Amount exceeding one lakh rupees per
transaction
15.
Sale or purchase, by any person, of shares of
a company not listed in a recognised stock
exchange.
Amount exceeding one lakh rupees per
transaction.
16.
Sale or purchase of any immovable property.
Amount exceeding ten lakh rupees or
valued by stamp valuation authority
referred to in section 50C of the Act at an
amount exceeding ten lakh rupees.
17.
Sale or purchase, by any person, of goods or
services of any nature other than those
specified at Sl. No. 1 to 17 of this Table, if
any.
Amount exceeding two lakh rupees per
transaction:
Provided that where a person, entering into any transaction referred to in this rule, is a minor
and who does not have any income chargeable to income-tax, he shall quote the permanent
account number of his father or mother or guardian, as the case may be, in the document
pertaining to the said transaction:
Provided further that any person who does not have a permanent account number and who
enters into any transaction specified in this rule, he shall make a declaration in Form No.60
giving therein the particulars of such transaction:
Provided also that the provisions of this rule shall not apply to the following class or classes of
persons, namely:I.
II.
the Central Government, the State Governments
the non-residents, in respect of certain transactions
114E. FURNISHING OF STATEMENT OF FINANCIAL TRANSACTION
(1) The statement of financial transaction required to be furnished under sub-section (1) of
section 285BA of the Act shall be furnished in respect of a financial year in Form No. 61A and
shall be verified in the manner indicated therein.
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(2) The statement referred to in sub-rule (1) shall be furnished by every person and in respect
of all the transactions of the nature and value specified, which are registered or recorded by
him on or after the 1st day of April, 2016.
Question
Whether cost of production of a feature film which is abandoned since certificate of Board of
film censors is not received shall be allowed as deduction
Answer
As per circular no. 16/2015 date 6th Oct, 2015.
Rule 9A of income tax Rules, 1962 in the case of abandoned feature films, shall be nonapplicable. Thus expenditure incurred on such abandoned feature film is to be treated as
revenve expenditure and allowed as per provision of sector 37 of IT Act.
Question
Whether measurement of the distance for the purpose of agricultural land under section 2 (14)
of IT Act shall be done n aerial basis for period prior to AY 2014-15
Answer
As per circular No 17/2015 dated 6th Oct, 2015. For measurement of distance for the purpose of
agricultural land prior to AY 2014-15 shall not be on aerial basis rather it is to be measured
having regard it is to be measured having regard to shortest road distance.
Circular No. 18/2015 Dated 2nd Nov, 2015. Investment made by a banking concern are part of
business of banking. Therefore, income arising from such investment is attributable to business
of banking fall under the head ‘PGBP’
Revised Limits Henceforth, appeals/ SLPs shall not be filed in cases where the tax effect does not
exceed the monetary limits given hereunder: –
1. Before Appellate Tribunal - Rs. 10,00,000/2. Before High Court- Rs.20,00,000/3. Before Supreme Court- Rs. 25,00,000/It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the
monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the
case.
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Further, adverse judgments relating to the following issues should be contested on merits
notwithstanding that the tax effect entailed is less than the specified monetary limits or there is no
tax effect:
a) Where the Constitutional validity of the provisions of an Act or Rule are under challenge, or
b) Where Board‘s order, Notification, Instruction or Circular has been held to be illegal or ultra
vires, or
c) Where the addition relates to undisclosed foreign assets/ bank accounts.
Further, filing of appeal in cases of Income Tax, where the tax effect is not quantifiable or not
involved, such as the case of registration of trusts or institutions under section 12 A of the IT Act,
1961, shall not be governed by the limits specified above and decision to file appeal in such cases
may be taken on merits of a particular case.
Meaning and calculation of Tax Effect Tax effect means the difference between the tax on the total
income assessed and the tax that would have been chargeable had such total income been reduced
by the amount of income in respect of the issues against which appeal is intended to be filed
(hereinafter referred to as ―disputed issues‖).
In a case where appeal before a Tribunal or a Court is not filed only on account of the tax effect
being less than the specified monetary limit, the Commissioner of Income-tax shall specifically
record that ―even though the decision is not acceptable, appeal is not being filed only on the
consideration that the tax effect is less than the monetary limit specified in this instruction‖.
Further, in such cases, there will be no presumption that the Income-tax Department has accepted
in the decision on the disputed issues.
The Income-tax Department shall not be precluded from filing an appeal against the disputed issues
in the case of the same assessee for any other assessment year, or in the case of any other assessee
for the same or any other assessment year, if the tax effect exceeds the specified monetary limits.
Update 15
(Miscellaneous)
NOTIFICATION NO. 89/2015 DATED 2ND DECEMBER, 2015-INCOME-TAX (18TH AMENDMENT)
RULES, 2015
The Central Board of Direct Taxes has notified the Income-tax (18th Amendment) Rules, 2015
to insert rule 127 after rule 126 in the Income-tax Rules, 1962, which shall come into force on
the date of publication in the Official Gazette.
127 ―Service of notice, summons, requisition, order and other communication.
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1.
For the purposes of sub-section (1) of section 282, the addresses (including the address
for electronic mail or electronic mail message) to which a notice or summons or
requisition or order or any other communication under the Act (hereafter in this rule
referred to as ―communication‖) may be delivered or transmitted shall be as per subrule (2).
2.
The addresses referred to in sub-rule (1) shall be- (a) for communications delivered or
transmitted in the manner provided in clause (a) or clause (b) of sub-section(1) of
section 282; the address available in –
(i)
(ii)
(iii)
(iv)
the PAN database of the addressee; or
the income-tax return to which the communication relates; or
the last income-tax return furnished by the addressee; or
the website of Ministry of Corporate Affairs as address of the registered office in
the case of a company
Provided that the communication shall not be delivered or transmitted to the address
mentioned in item (i) to (iv) where the addressee furnishes in writing any other address for the
purposes of communication to the income-tax authority or any person authorised by such
authority issuing the communication;
(b) for communications delivered or transmitted electronically; email address(i) available in the income-tax return furnished by the addressee to which the
communication relates; or
(ii) available in the last income-tax return furnished by the addressee; or
(iii) available on the website of Ministry of Corporate Affairs, in the case of a company,
(iv) made available by the addressee to the income-tax authority or any person authorised
by such income-tax authority.
3.
The Principal Director General of Income-tax(Systems) or the Director General of
Income-tax(Systems) shall specify the procedure, formats and standards for ensuring
secure transmission of electronic communication and shall also be responsible for
formulating and implementing appropriate security, archival and retrieval policies in
relation to such communication.‖
Question 7
The business income of Raman Ltd., an Indian company computed as per the provisions of
Income Tax Act is Rs. 53,00,000. It has also received following dividend income during the
previous year 2015-16:
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Amount of Dividend
Received (Rs.)
Remuneration paid
for realizing Dividend
(Rs.)
From Geneva Inc, a Swiss company in
which it holds 23% of nominal value
of equity share capital
72,000
7,000
From shares held in Michigan Inc, a
US company in which it holds 51% of
nominal value of equity share capital
2,10,000
8,000
1,92,000
-
Rs. 58,000
6,000
Particulars
From shares held in Ontario Inc, a
Canadian company, in which it holds
23% of nominal value of equity share
capital
From shares held in Indian
Subsidiaries, on which dividend
distribution tax has been paid by such
subsidiaries
Compute the total income and tax liability of Raman Ltd. ignoring MAT.
Further, assuming that Raman Ltd. has distributed dividend of Rs. 3,80,000 in March, 2016
compute the additional income tax payable by it under section 115-O.
Answer
Computation of total income of Raman Ltd. for A.Y 2016-17
Particulars
Profits and gains of business or profession
Income from other sources (Note: 1)
Total Income
Amount (Rs.)
53,00,000
4,67,000
57,67,000
Computation of tax liability of Raman Ltd. for the A.Y 2016-17
Particulars
Tax @15% under section 115BBD on Rs. 2,10,000 (gross
dividend) (including surcharge @12%)
Tax @ 30% on balance income of Rs. 55,57,000
Tax before cess
Add: Education cess and SHEC @ 3%
Tax Liability
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Amount
(Rs.)
35,280
16,67,100
17,02,380
51,071.40
17,53,451.40
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Computation of additional income tax payable by Raman Ltd. under section 115-O
Particulars
Amount distributed by way of dividend
Amount
(Rs.)
Less : Dividend received from Indian subsidiaries, on
which DDT payable under section 115-O has been paid
58,000
Less : Dividend received from foreign subsidiary,
Michigan Inc, on which tax is payable under section 115
BBD
2,10,000
Add : increase for the purpose of grossing up of dividend
(15* 112000/85)
Gross Dividend
Additional income tax
Surcharge @12%
Education Cess & SHEC @ 3%
Total additional tax
Amount
(Rs.)
3,80,000
2,68,000)
19,765
1,31,765
19,765
2,372
664
22,801
(i) “Income from other sources”
Particulars
Rs.
From Geneva. Inc. a Swiss company-net dividend (i.e Rs. 72,000-Rs.7000)
taxable at normal rates
65,000
From Michigan Inc, a US company- gross dividend is taxable @ 15% under
section 115BBD (no deduction is allowable in respect of any expenditure
as per section 115 BBD(2))
2,10,000
From Ontario Inc, a Canadian Co. net dividend(i.e Rs. 192,000) is taxable at normal
rates
From shares in Indian subsidiaries Rs. 58000 - exempt under section
10(34)
1,92,000
NIL
Since DDT has been paid under section 115-O, as per section 14A no
deduction is allowable in respect of expenditure incurred to earn exempt
income.
Total Income from other Sources
4,67,000
(ii) W.e.f 1st October, 2014 the dividend paid is required to be to grossed up with
the income distributed for computing the tax liability on account of dividend
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distribution tax. With the grossing up, the effective tax rate on dividend
distribution has increased as under:
If surcharge and education cess is excluded then effective rate of dividend distribution tax
would be 20.357% {17.647% -(100 X15/85 )+ 12% surcharge and 3% education cess thereon}.
If surcharge and education cess is included then the rate would be 20.925%- (100X
17.304/82.696).
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