1.Clarification regarding treatment of cess and surcharge
Section 40 of the IT Act provides for non-deduction of certain amounts while computing the income chargeable to tax under the head “Profits and Gains of Business or Profession”. As per section 40(a)(ii) of the Income Tax Act, any sum paid as tax or rate levied on the profit and gains of any business or profession shall not be allowed as a deduction.
Finance bill now proposes to clarify that the term ‘tax’ includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.
This amendment shall be made effective from fiscal year 2004-05.
2. Updated Return u/s 139(8A)
A new sub-section (8A) in section 139 is proposed to be introduced to provide for furnishing of updated return under the new provisions
Any person, whether or not he has furnished a return may furnish an updated return of his income or the income of any other person in respect of which he is assessable under the Act, for the previous year
relevant to such assessment year, within twenty-four months from the end of the assessment year.
Updated Return cannot be filed in the following cases, if
- The updated return is a return of a loss.
- The updated return has the effect of decreasing the total tax Liability.
- The updated return results in refund or increases the refund due.
- Search has been initiated u/s 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of such person and Notice issued
- a survey has been conducted under section 133A, other than subsection (2A) of that section, in the case such person
3. Additional Tax Payable on filling Updated Return u/s 139(8A) -(Section 140B)
twenty-five per cent of aggregate of tax and interest payable if such return is furnished after expiry of the time available under sub-section (4) or sub-section (5) of section 139 and before completion of period of twelve months from the end of the relevant assessment year
fifty per cent of aggregate of tax and interest payable if such return is furnished after the expiry of twelve months from the end of the relevant assessment year but before completion of the period of twenty-four months from the end of the relevant assessment year.
- It is also clarified that for the purposes of computation of “additional income-tax”, tax shall include surcharge and cess, by whatever
name called, on such tax.
- These amendments will take effect from 1st April 2022.
4.Clarification in respect of disallowance under section 14A of the IT Act
Section 14A of the IT Act provides that no deduction shall be allowed in respect of expenditure incurred by the taxpayer in relation to an income that does not form part of the total income.
CBDT Circular No. 5/2014, dated 11 February 2014, which clarifies that Rule 8D of the IT Rules read with section 14A of the IT Act provides for disallowance of expenditure even in the event where no exempt income has been earned during the year. However, some Courts have held that where no exempt income has accrued, arisen or received by the taxpayer during a year, no disallowance under section 14A of the IT Act can be made.
The Finance Bill proposes to clarify that the provisions of section 14A of the IT Act shall and always have been deemed to apply and that the expenditure to be disallowed even if no exempt income has accrued or arisen or has been received during the year.
Further, the Finance Bill proposes to include a non-obstante clause to section 14A(1) of the IT Act for denying deductions of expenditure in relation to an exempt income.
These amendments shall be made effective from fiscal year 2021-22.
5. Exemption of amount received for medical treatment and on account of death due to COVID-19
it is proposed to amend clause (2) of section 17 and to insert a new sub-clause in the proviso to state that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in respect of any illness relating to COVID-19 subject to such conditions, as may be notified by the Central Government, shall not be forming part of “perquisite”.
Further, it is proposed to amend the proviso to Clause (x) of sub-section (2) of section 56 and insert two new clauses in the proviso so as to provide that-
fifty per cent of aggregate of tax and interest payable if such return is furnished after the expiry of twelve months from the end of the relevant assessment year but before completion of the period of twenty-four months from the end of the relevant assessment year.
- It is also clarified that for the purposes of computation of “additional income-tax”, tax shall include surcharge and cess, by whatever
name called, on such tax.
- These amendments will take effect from 1st April 2022.
4.Clarification in respect of disallowance under section 14A of the IT Act
Section 14A of the IT Act provides that no deduction shall be allowed in respect of expenditure incurred by the taxpayer in relation to an income that does not form part of the total income.
CBDT Circular No. 5/2014, dated 11 February 2014, which clarifies that Rule 8D of the IT Rules read with section 14A of the IT Act provides for disallowance of expenditure even in the event where no exempt income has been earned during the year. However, some Courts have held that where no exempt income has accrued, arisen or received by the taxpayer during a year, no disallowance under section 14A of the IT Act can be made.
The Finance Bill proposes to clarify that the provisions of section 14A of the IT Act shall and always have been deemed to apply and that the expenditure to be disallowed even if no exempt income has accrued or arisen or has been received during the year.
Further, the Finance Bill proposes to include a non-obstante clause to section 14A(1) of the IT Act for denying deductions of expenditure in relation to an exempt income.
These amendments shall be made effective from fiscal year 2021-22.
5. Exemption of amount received for medical treatment and on account of death due to COVID-19
it is proposed to amend clause (2) of section 17 and to insert a new sub-clause in the proviso to state that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in respect of any illness relating to COVID-19 subject to such conditions, as may be notified by the Central Government, shall not be forming part of “perquisite”.
Further, it is proposed to amend the proviso to Clause (x) of sub-section (2) of section 56 and insert two new clauses in the proviso so as to provide that-
Benefit of surcharge cap of 15% presently applicable to long-term capital gains (LTCG) on listed securities under section 112A of the IT Act has been proposed to be extended to LTCG on all assets (as against higher surcharge of 25%/37%) while LTCG tax rate of 20% remains unchanged on such assets.
9. Clarification on allowability of expenditure under section 37 of the IT Act
Section 37 of the IT Act provides for allowability of revenue expenditure which is incurred wholly and exclusively for the purpose of business or profession for computation of Income from Profit and Gains of Business or Profession. Further, Explanation 1 of section 37(1) of IT Act provides that expenditure incurred for any purpose which is an offence or which is prohibited by law, shall not be allowed as deduction from the Income from Profits and Gains from Business or Profession.
However, expenses incurred in providing various benefits in violation of the provisions of the Indian Medical Council Regulations, 2002 and expenses incurred for a purpose which is an offence under foreign law were claimed and allowed by Tax Tribunals/ Courts.
In order to make intentions of the legislation clear, the Finance Bill proposes to clarify that the expression ‘expenditure incurred by a taxpayer for any purpose which is an offence or which is prohibited by law’ shall include and shall be deemed to have always included the following:
Expenses incurred by a taxpayer for any purpose which is an offence under or is prohibited by any extant law of India or outside India; or
Expenses incurred to provide any benefit or perquisite to a person whether or not carrying on a business or profession, if acceptance of such benefit or perquisite by such person is violation of any extant law/ rules/ regulations/ guidelines governing the conduct of such person; or
Expenses incurred on compounding of offence under any extant law in India or outside India.
This amendment shall be made effective from fiscal year 2021-22.
10.Clarification regarding deduction on payment of interest only on actual payment Section 43B of the Act provides for certain deductions to be allowed only on actual payment. Explanation 3C, 3CA and 3D of this section provides that a deduction of any sum, being interest payable on loan or borrowing from specified financial institution /NBFC/scheduled bank or a co-operative bank under clause (d), clause (da),and clause (e) of this section respectively, shall be allowed if such interest has been actually paid and any interest referred to in these clauses which has
been converted into a loan or borrowing or advance shall not be deemed to have been actually paid.
However, certain taxpayers are claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a debenture on the ground that such conversion is a constructive discharge of interest liability and, therefore, amounted to actual payment which has been upheld by several Courts.
Such interpretation is against the intent of legislation. The section was introduced to curb the mischief of claiming deduction by the assessee, without paying interest to financial institutions /NBFC/scheduled bank or a co-operative bank. Section 43B makes a departure from other sections in the Act, as indicated by its non-obstante clause. Under the provisions of this section conversion of the outstanding interest liability into debentures is not an actual payment and cannot be claimed as deduction.
In other words, a mercantile system of accounting cannot be looked at when a deduction is claimed under this section, as actual payment would have to be made.
In view of the above, it is proposed to amend Explanation 3C, Explanation 3CA and Explanation 3D of section 43B to provide that conversion of interest payable under clause (d), clause (da), and clause (e) of section 43B, into debenture or any other
instrument by which liability to pay is deferred to a future date, shall also not be deemed to have been actually paid.
This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
11.Withdrawal of Concessional rate of tax on dividend from foreign company
The provisions of section 115BBD of the Income Tax Act provides concessional rate of tax on dividend income received by an Indian company from specified foreign company (wherein the Indian Company holds 26 % or more in nominal value of equity shares). The rate of tax applicable under this section is 15% which aligns with the rate of dividend distribution tax (levied on a domestic company distributing or declaring dividend) provided under section 115-O of the Income Tax Act.
The Finance Act, 2020 abolished dividend distribution tax under section 115-O of the Income Tax Act and now levies tax on dividend in the hands of shareholders at the applicable rate of tax. In order to provide parity in the tax treatment in case of dividends received from domestic companies and from foreign companies, the Finance Bill proposes to amend section 115BBD of the Income Tax Act to provide that this section shall not apply to any fiscal year beginning on or after 1 April 2022.
This amendment shall be made effective from fiscal year 2022-23.
12. Clarification on liability of Directors of Private Company
The provisions of section 179 of the IT Act currently provides that directors of a private company shall be jointly and severally liable for payment of “tax due” if the same could not be recovered from the private company. This section currently titled as “Liability of directors of private company in liquidation” makes no reference to a company being in liquidation.
The Finance Bill proposes to amend the title to “Liability of directors of private company”. Further, it proposes to include “fees” under the scope of “tax due” for clarificatory purposes and to avoid litigation.
These amendments shall be made effective from fiscal year 2021-22.
13.Books of account to be maintained by the trusts or institutions under both the regimes
In case of any trust or institution having total income without giving effect to the provisions of section 11 and section 12 of the Act, exceeds the maximum amount which is not chargeable to income-tax in any previous year, it is required to get its accounts audited. Similar provision exists for the trusts or institutions under the first regime in the tenth proviso to clause (23C) of section 10 of the Act.
However, there is no specific provision under the Act providing for the books of accounts to be maintained by such trusts or institutions. In order to ensure proper implementation of both the exemption
regimes, such trust or institution shall keep and maintain books of account and other documents in such form and manner and at such place, as may be prescribed.
These amendments will take effect from 1st April 2023 and will accordingly apply to the AY 2023-24 and subsequent assessment years.
14.TDS on benefit or perquisite of a business or profession
As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income. Accordingly, in order to widen and deepen the tax base, it is proposed to insert a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising of a profession by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such
benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite. For the purpose of this section, the expression ‘person responsible for providing’ has been proposed to mean a person providing such benefit or perquisite or in case of a company, the company itself including the principal officer thereof.
Further, in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit of perquisite shall, before releasing the benefit or perquisite, ensure that tax has been paid in respect of the benefit or perquisite.
No tax is to be deducted if the value or aggregate value of the benefit or perquisite paid or likely to be paid to a resident does not exceed twenty thousand rupees during the financial year.
Further, the provisions of the said section shall not apply to an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided.
This amendment will take effect from 1st July, 2022.
15. Widening the scope of reporting by producers of cinematograph films or persons engaged in specified activities
Under section 285B, the producer of cinematographic films is obliged to furnish within 30 days from the end of the financial year or from the date of completion of the film, whichever is earlier, a statement containing particulars of all payments over Rs.50,000/- in the aggregate made by him or due from him to each person engaged by him.