Memorandum

MEMORANDUM REGARDING DELEGATED LEGISLATION

Clause 6 of the Bill seeks to amend section 10 of the Income- tax Act relating to incomes not to be included in total income.

Item (A) of sub-clause (e) of the said clause seeks to amend sub-clause (iv) of clause (23C) of the said section so as to provide that any income received by any person on behalf of any other fund or institution established for charitable purposes which may be approved by the prescribed authority shall not be included in total income.

Item (B) of the said sub-clause (e) seeks to amend sub-clause (v) of the said clause (23C) so as to provide that any income received by any person on behalf of any trust or institution wholly for public religious purposes or wholly for public religious and charitable purposes which may be approved by the prescribed authority shall not be included in total income.

It is proposed to empower the Board to prescribe the authority for the purposes of the said sub-clauses.

Clause 13 of the Bill seeks to substitute sub-section (3) of section 40A of the Income-tax Act which relates to expenses or payments not deductible in certain circumstances.

The proviso to the new sub section (3) provides that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under this sub-section where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft in such cases and under such circumstances as may be prescribed.

It is proposed to empower the Board to prescribe by rules the cases and the circumstances under which disallowance may not be made or the payment may not be deemed to be the profits and gains of business or profession.

Clause 22 of the Bill seeks to amend section 80-IA of the Income-tax Act relating to deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.

Item (C) of sub-clause (iii) of clause 22 seeks to insert a new clause (vi) in sub-section (4) of section 80-IA so as to provide conditions to be fulfilled by an undertaking carrying on the business of laying and operating a cross-country natural gas distribution network for claiming deduction under the said section. Sub-clause (b) of the proposed clause (vi) lays down a condition that the undertaking approved by the Petroleum and Natural Gas Regulatory Board and notified by the Central Government is eligible for claiming such deductions.

Sub-clause (e) of the proposed clause (vi) provides that the undertaking should also fulfil any other condition that may be prescribed by the Board for claiming deductions under the said section.

It is proposed to empower the Board to provide by rules additional conditions to be fulfilled by the undertaking for the purposes of claiming deductions under the said section.

Clause 24 of the Bill seeks to insert a new section 80-ID in the Income-tax Act to provide for deduction in respect of profits and gains from business of hotels and convention centres in specified area.

Clause (iv) of sub-section (3) of the said section provides that the assessee shall furnish along with the return of income audit report in such form and containing such particulars as may be prescribed.

It is proposed to empower the Board to prescribe by rules the form and particulars of audit report for the purposes of the said section.

Clause 31 of the Bill seeks to amend section 115WC of the Income-tax Act which relates to valuation of fringe benefits. It is proposed to insert a new clause (ba) in sub-section (1) of the said section so as to provide that the valuation of the specified security or sweat equity shares is its fair market value as reduced by actual payment by or recovery from the employee. The explanation to the said clause defines the term "fair market value" to mean the value determined in accordance with the method as may be prescribed.

It is proposed to empower the Board to prescribe by rules the method for determining the fair market value.

Clause 36 of the Bill seeks to insert two new sections 139C and 139D in the Income-tax Act. Section 139C seeks to empower the Board to make rules for dispensing with furnishing of documents, etc., along with return. Section 139D seeks to empower the Board to make rules for the purposes of filing return in electronic form.

Clause 37 of the Bill seeks to amend section 142 of the Income-tax Act relating to inquiry before assessment.

Sub-clause (b) of clause 37 of the Bill seeks to insert a proviso in sub-section (2D) of the said section so as to provide that the expenses of any special audit directed by the Assessing Officer shall be determined by the Chief Commissioner or Commissioner in accordance with such guidelines as may be prescribed.

It is proposed to empower the Board to make rules to provide guidelines for the purposes of determining such expenses.

Clause 86 of the Bill seeks to substitute section 14 of the Customs Act relating to valuation of goods for purposes of assessment.

Sub-section (1) of the proposed section empowers the Central Government to determine by rules the transaction value of the imported goods and export goods. Sub-section (3) of proposed section also empowers the Central Government to determine by rules, the value of such goods where there is no sale of imported goods or export goods or where the transaction value of the goods is not determinable.

Clause 103 of the Bill seeks to substitute sub-section (1) of section 135 of the Customs Act relating to penalty for evasion of duty, etc.

The proposed sub-section (1), inter alia, empowers the Central Government to specify by notification categories of prohibited goods, offence relating to which shall be punishable.

Clause 125 of the Bill seeks to amend Chapter V of the Finance Act, 1994, relating to service tax.

Sub-clause (C) of the said clause seeks to amend sub-section (1) of section 70 of the said Act relating to furnishing of returns.

The proposed sub-section (1) of the said section additionally empowers the Central Government to prescribe amount of late fee not exceeding two thousand rupees, to be paid by an assessee, if there is a delay in furnishing return.

Sub-clause (G) of the said clause seeks to insert a new sub-section (1D) in section 95 of the said Act relating to removal of difficulties.

The proposed sub-section empowers the Central Government to issue order for removal of any difficulty which may arise in implementing, classifying or assessing the value of any taxable service incorporated by the proposed legislation. The proviso to the said sub-section seeks to provide that any such order shall not be made beyond a period of one year from the date of the assent to the Bill.

Clauses 8, 12, 92 and 111 also empower the Central Government to make rules for certain matters. Delegation of the powers has already been provided under the existing respective provisions proposed to be substituted with new provisions by the said clauses.

2. The matters in respect of which notifications may be issued or rules may be made in accordance with the aforesaid provisions of the Bill are matters of procedure and detail and it is not practicable to provide for the same in the Bill itself.

3. The delegation of legislative power is, therefore, of a normal character.

MEMORANDUM EXPLAINING THE PROVISIONS RELATING TO DIRECT TAXES

The provisions of the Finance Bill, 2007 in the area of direct taxes relate to the following matters:—

  (i)  Prescribing the rates of income-tax on income liable to tax for the assessment year 2007-08, the rates at which tax will be deductible at source during the financial year 2007-08 from interest (including interest on securities), winnings from lotteries or cross-word puzzles, winnings from horse races, card games and other categories of income liable to deduction or collection of tax at source under the Income-tax Act; rates for computation of "advance tax", deduction of income tax from or payment of tax on ‘Salaries’ and charging of income tax on current income in certain cases for the financial year 2007-08.

 (ii)  Amendment of income-tax, inter alia, with a view to provide incentives for infrastructure development, socio-economic development, widening of tax base, checking tax evasion and avoidance, rationalization of certain provisions and provide for a revised settlement scheme.

(iii)  Amendment of Wealth-tax Act, 1957, inter alia, to provide for a revised settlement scheme.

 (iv)  Amendment of Finance Act, 2005 to rationalize the provisions of Banking Cash Transaction Tax.

2. The substance of the main provisions in the Bill relating to direct taxes is explained in the following paragraphs:—

INCOME-TAX

Rates of income-tax

I. Rates of income-tax in respect of income liable to tax for the assessment year 2007-08

In respect of income of all categories of tax payers (corporate as well as non-corporate) liable to tax for the assessment year 2007-08, the rates of income-tax have been specified in Part I of the First Schedule to the Bill. These are the same as those laid down in Part III of the First Schedule to the Finance Act, 2006, for the purposes of computation of "advance tax", deduction of tax at source from "Salaries" and charging of tax payable in certain cases. It has also been specified that in the case of individuals, Hindu undivided families, association of persons and body of individuals having total income exceeding Rs. 10,00,000, the tax so computed after rebate under Chapter VIII-A shall be enhanced by a surcharge at the rate of ten per cent for purposes of the Union. Marginal relief shall be provided. In the case of every artificial juridical person, firm and domestic company, the tax so computed shall be enhanced by a surcharge of ten per cent. In the case of local authority and co-operative society, no surcharge is levied. In the case of every company, other than a domestic company, the tax so computed shall be enhanced by a surcharge of two and one-half per cent.

An additional surcharge, called the "Education Cess on income-tax" so as to fulfil the commitment of the Government to provide and finance universalised quality basic education, shall continue to be levied at the rate of two per cent on the amount of tax payable, inclusive of surcharge, in all cases.

II. Rates for deduction of income-tax at source during the financial year 2007-08 from certain incomes other than "Salaries"

The rates for deduction of income-tax at source during the financial year 2007-08 from certain incomes other than "Salaries" have been specified in Part II of the First Schedule to the Bill. The rates are the same as those specified in Part II of the First Schedule to the Finance Act, 2006, for the purposes of deduction of income-tax at source during the financial year 2006-07. The amount of tax so deducted shall be increased by a surcharge:—

  (i)  in the case of every individual, Hindu undivided family, association of persons and body of individuals, whether incorporated or not, at the rate of ten per cent of such tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds ten lakh rupees;

 (ii)  in case of every artificial juridical person referred to sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, at the rate of ten per cent of such tax;

(iii)  in the case of every firm and domestic company, at the rate of ten per cent of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees;

 (iv)  in the case of every company other than a domestic company at the rate of two and one-half per cent of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees.

No surcharge shall be levied in the case of any cooperative society or local authority.

The additional surcharge, called the "Education Cess on income-tax" for purposes of the Union, shall continue to be levied at the rate of two per cent of income-tax and surcharge in all cases so as to fulfil the commitment of the Government to provide and finance universalised quality basic education.

It is proposed to levy an additional surcharge, called the "Secondary and Higher Education Cess on income-tax", at the rate of one per cent of income-tax and surcharge (not including the "Education Cess on income-tax") in all cases so as to fulfil the commitment of the Government to provide and finance secondary and higher education.

III. Rates for deduction of income-tax at source from "Salaries", computation of "advance tax" and charging of income-tax in certain cases during the financial year 2007-08

The rates for deduction of income-tax at source from "Salaries" during the financial year 2007-08 and also for computation of "advance tax" payable during that year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Bill.

These rates are also applicable for charging income-tax during the financial year 2007-08 on current incomes in cases where accelerated assessments have to be made. These include provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during the financial year, assessment of persons who are likely to transfer property to avoid tax, assessment of bodies formed for a short duration etc.

The salient features of the rates specified in the said Part III are indicated in the following paragraphs—

A. Individual, Hindu undivided family, association of persons, body of individuals, artificial juridical persons

The rates of income-tax in the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act (not being a case to which any other Paragraph of Part III applies) have been specified in Paragraph A of Part III.

  (i)  The basic exemption limit for persons other than those specified in items II and III below, is proposed to be increased from Rs. 1,00,000 to Rs. 1,10,000. In such cases, the rates of income-tax on total income shall be as follows—

Upto Rs. 1,10,000	Nil
Rs. 1,10,001 to Rs. 1,50,000	10 per cent
Rs. 1,50,001 to Rs. 2,50,000	20 per cent
Above Rs. 2,50,000	30 per cent

 (ii)  In the case of every individual, being a woman resident in India, and below the age of sixty-five years at any time during the previous year, the exemption limit is proposed to be raised from Rs. 1,35,000 to Rs. 1,45,000. The rates of income-tax on total income in such cases shall be as follows—

		Upto Rs. 1,45,000	Nil
		Rs. 1,45,001 to Rs. 1,50,000	10 per cent
		Rs. 1,50,001 to Rs. 2,50,000	20 per cent
		Above Rs. 2,50,000	30 per cent

(iii)  In the case of every individual, being a resident in India, who is of the age of sixty-five years or more at any time during the previous year, the exemption limit is proposed to be raised from Rs. 1,85,000 to Rs. 1,95,000. The rates of income-tax on total income in such cases shall be as follows—

		Upto Rs. 1,95,000	Nil
		Rs. 1,95,001 to Rs. 2,50,000	20 per cent
		Above Rs. 2,50,000	30 per cent

The amount of income-tax computed shall, in the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, having total income exceeding ten lakh rupees, be reduced by the amount of rebate of income-tax calculated under Chapter VIII-A. The income-tax as so reduced shall be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax. However, marginal relief shall be available and the total amount payable as income-tax and surcharge on total income exceeding ten lakh rupees shall not exceed the total amount payable as income-tax on a total income of ten lakh rupees by more than the amount of income that exceeds ten lakh rupees.

In the case of every artificial juridical person referred to in sub-clause (vii) of clause ( 31) of section 2 of the Income-tax Act, the amount of income-tax computed shall be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax.

B. Co-operative Societies

In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Bill. These rates shall continue to be the same as those specified for assessment year 2007-08. No surcharge shall be levied.

C. Firms

In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Bill. This rate shall continue to be the same as that specified for assessment year 2007-08.

It is proposed to provide in Paragraph C that the amount of income-tax computed shall, in the case of every firm having total income exceeding one crore rupees, be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income tax. Marginal relief shall be available and the total amount payable as income-tax and surcharge on total income exceeding one crore rupees shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

No surcharge shall be levied in the case of firms having total income of one crore rupees or less.

Surcharge shall be levied at the existing rates on tax on fringe benefits, irrespective of the amount of fringe benefits.

D. Local authorities

The rate of income-tax in the case of every local authority is specified in Paragraph D of Part III of the First Schedule to the Bill. This rate shall continue to be the same as that specified for the assessment year 2007-08. No surcharge shall be levied.

E. Companies

The rates of income-tax in the case of companies are specified in Paragraph E of Part III of the First Schedule to the Bill. These rates are the same as those specified for the assessment year 2007-08.

The amount of income-tax computed in Paragraph E shall, in the case of every domestic company having total income exceeding one crore rupees, be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income tax.

The amount of income-tax computed in Paragraph E shall, in the case of every company, other than a domestic company, having total income exceeding one crore rupees, be increased by a surcharge for purposes of the Union calculated at the rate of two and one-half per cent of such income tax.

Marginal relief shall be available and, in such cases, the total amount payable as income-tax and surcharge on total income exceeding one crore rupees shall not exceed the total amount payable as income-tax on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

No surcharge shall be levied in the case of companies having total income of one crore rupees or less.

Surcharge shall be levied at the existing rates on tax on fringe benefits, irrespective of the amount of fringe benefits.

The additional surcharge, called the "Education Cess on income-tax" for the purposes of the Union, shall continue to be levied at the rate of two per cent of income-tax and surcharge in all cases so as to fulfil the commitment of the Government to provide and finance universalised quality basic education.

It is proposed to levy an additional surcharge, called the "Secondary and Higher Education Cess on income-tax", at the rate of one per cent of income-tax and surcharge (not including the "Education Cess on income-tax") in all cases so as to fulfil the commitment of the Government to provide and finance secondary and higher education.

[Clause 2]

WIDENING OF TAX BASE

Widening the scope of capital assets

Under the existing provisions of clause (14) of section (2), a capital asset means property of any kind held by an assessee, whether or not connected with his business or profession. Personal effects held for personal use by the assessee or any members of his family dependent on him are excluded from the ambit of definition of capital asset. Presently, the only asset which is in the nature of personal effects, but is included in the definition of capital assets is jewellery.

With a view to widen the scope of ‘capital assets’, it is proposed to amend the said clause, so as to also exclude from the meaning of personal effects-archaeological collections, drawings, paintings, sculptures, or any work of art. Transfer of such personal effects will attract capital gains tax.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

[Clause 3]

New definition of India

Under the existing provisions of clause (25A) of section 2 of the Income-tax Act, India is deemed to include the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry. The said definition is as respects any period for the purposes of section 6 and as respects any period included in the previous year, for the purposes of making any assessment for the assessment year commencing on the 1st day of April, 1963, or for any subsequent assessment year. A similar definition of India is provided in clause (ka) of section 2 of the Wealth-tax Act.

With a view to provide a comprehensive definition of India, it is proposed to amend the said clause (25A) of section 2 of the Income- tax Act to define "India" to mean the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and the air space above its territory and territorial waters.

It is also proposed to amend clause (ka) of section 2 of the Wealth-tax Act, so as to provide similar comprehensive definition of India for the purposes of the Wealth-tax Act.

These amendments will take effect retrospectively from 25th August, 1976.

[Clauses 3 and 74]

To vest the Central Government with power to notify a statutory corporation or a body corporate for the purposes of deduction under section 36(1)(xii)

Under the existing provisions of clause (xii) of sub-section (1) of section 36, any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act, for the objects and purposes authorised by the said Acts, is allowed as deduction in the computation of its income.

The objects and purposes as listed in the Act may authorise any kind of expenditure, the allowability of which cannot be questioned in terms of the existing provisions. There is, therefore, a need to vest the Central Government with the power to notify the statutory corporations or bodies after examination of objects and purposes enshrined in the Acts under which these statutory corporations or bodies are set up.

Accordingly, the amendment provides that the deduction shall be allowed if such corporation or body corporate is notified by the Central Government in the Official Gazette under the said clause, having regard to the objects and purposes of the corresponding Central, State or Provincial Act.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

[Clause 12]

Providing condition for investment in "long-term specified bonds" under section 54EC

Section 54EC of the Income-tax Act, 1961 provides tax exemption on capital gains arising from the transfer of a long-term capital asset to the extent such capital gains are invested in "long-term specified assets" within a period of six months from the date of such transfer. The Finance Act, 2006 amended the definition of long-term specified assets so as to mean any bond redeemable after three years and issued on or after the 1st day of April, 2006 by National Highways Authority of India and Rural Electrification Corporation Limited. Such bonds had to be notified by the Central Government in the Official Gazette.

It is proposed to amend the said section, by substituting the existing clause (b) of explanation to the said section, so as to provide that the Central Government, while notifying such bonds in the Official Gazette may lay down in the said notification such conditions, including the condition for providing a limit on the amount of investment by an assessee in such bonds, as it thinks fit.

This amendment will take effect retrospectively from the 1st of April, 2006.

It is further proposed to insert a proviso to the said clause (b ), so substituted, so as to provide that where any bond has been issued before the 1st day of April, 2007, under a notification subject to the conditions specified therein by the Central Government in the Official Gazette under the provisions of said clause (b), as they stood immediately before their amendment by the Finance Act, 2007, such bond will be deemed to be a bond notified under the provisions of new clause (b). Accordingly the Notification S.O. 2146(E), dated 22nd December, 2006, with the conditions specified therein, will be deemed to have been issued under the proviso to the said clause (b) so substituted.

The said proviso is to be inserted with effect from the 1st day of April, 2006.

It is also proposed to dispense with the requirement of notifying such bonds by the Central Government in the Official Gazette. It is proposed to insert a new clause (ba ) so as to define "long-term specified asset" to mean any bond redeemable after three years and issued on or after 1st day of April, 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation limited, a company formed and registered under the Companies Act, 1956.

This amendment will take effect from 1st April, 2007.

It is also proposed to amend the said section so as to provide for a ceiling on investment by an assessee in such long-term specified assets. Investments in such specified assets to avail exemption under section 54EC, on or after 1st day of April, 2007 will not exceed fifty lakh rupees in a financial year.

This amendment shall take effect from 1st April, 2007.

[Clause 15]

Widening the scope of Minimum Alternate Tax

Section 115JB provides that in case of a company, if the tax payable on the total income as computed under the Income-tax Act in respect of any previous year relevant to the assessment year commencing on or after the 1st April, 2007, is less than ten per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the relevant previous year shall be ten per cent of such book profit.

The Explanation occurring after sub-section (2) of section 115JB says that the expression "book profit" means the net profit as shown in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 as increased or reduced by certain adjustments, as specified in that Explanation. The aforesaid Explanation, inter alia, provides that the book profit shall be increased by the amount or amounts of expenditure relatable to any income referred to in section 10A or section 10B if such amount is debited to the profit and loss account and it shall be reduced by the amount of income referred to in sections 10A and 10B, if any such amount is credited to the profit and loss account.

The exemption from MAT of the income eligible for deduction under section 10A or section 10B is contrary to the basic principle for introduction of MAT, which provides that every corporate taxpayer participating in the economy must contribute to the exchequer. Accordingly, it is proposed to amend clause (f) of the Explanation occurring after sub-section (2) of section 115JB to provide that the book profit shall not be increased by the amount or amounts of expenditure relatable to any income to which section 10A or section 10B applies.

It is further proposed to amend clause (ii) of the said Explanation so as to provide that the amount of income to which any of the provisions of section 10A or section 10B apply, shall not be reduced from the book profit for the purposes of calculation of income tax payable under the aforesaid section.

These amendments will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

[Clause 26]

WELFARE MEASURES

Exemption for compensation received or receivable on account of any disaster

In the wake of several natural and man-made disasters that have occurred in recent times, compensation has been granted, from time to time, to the victims and their families by the Central Government, various State Governments and local authorities.

With a view to exempt any such compensation from income-tax, it is proposed to insert a new clause (10BC) in section 10 so as to provide exemption from income-tax to any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster. The exemption is not allowable in respect of amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under the Income-tax Act on account of any loss or damage caused by such disaster. It is also proposed to provide that for the purposes of the new clause, ‘disaster’ shall have the meaning as assigned to it under section 2(d) of the Disaster Management Act, 2005.

This amendment will take effect retrospectively from 1st April, 2005 and will, accordingly, apply in relation to the assessment year 2005-06 and subsequent years.

[Clause 6]

Extension of tax benefits under section 80CCD to employees of "other employers"

Under the existing provisions contained in section 80CCD, in the case of an individual, employed by the Central Government on or after 1st January, 2004, who has paid or deposited any amount in a previous year in his account under a pension scheme notified or as may be notified by the Central Government, a deduction of such amount not exceeding ten per cent of his salary is allowed. Similarly, the contribution made by the Central Government to the said account of the individual under the pension scheme is also allowed as deduction to the extent it does not exceed ten per cent of the salary of the individual in the previous year.

It is proposed to amend section 80CCD so as to extend the provisions of the said section also to an individual employed by any other employer on or after the 1st day of January, 2004 and who has paid or deposited the specified amount in his account under the pension scheme referred to in sub-section (1) of the said section.

As a consequence of this amendment, sections 7 and 17 are also proposed to be amended to give a reference to ‘any other employer’ in the context of section 80CCD so as to deem the contribution by any other employer as income received in the previous year and to include the contribution by any other employer in the definition of salary respectively.

These amendments will take effect retrospectively from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-05 and subsequent years.

[Clauses 4, 10 and 19]

Deduction for entire amount of interest paid on a loan taken for higher education of a ‘relative’

Section 80E of the Income-tax Act provides for a deduction, from the gross total income of an individual, of the amount paid by him by way of interest on loan taken from any financial institution or approved charitable institution for the purpose of pursuing higher education. The deduction is available for eight assessment years beginning from the assessment year in which the payment of interest on the loan begins.

The tax benefit was introduced with a view to sustain high quality human resources in the country and to encourage talented men and women to take up higher studies despite the constraints of resources. The relief is not allowed to the parents, but to the student himself when he starts repaying the amount.

It is proposed to amend section 80E so as to allow the deduction of interest on loan taken by an individual for higher education of his relative also.

It is also proposed to define the term "relative" for the purposes of section 80E so as to mean spouse and children of the individual. This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

[Clause 21]

RATIONALISATION AND SIMPLIFICATION MEASURES

Income deemed to accrue or arise in India

Section 9 provides for situations where income is deemed to accrue or arise in India.

Vide Finance Act, 1976, a source rule was provided in the said section through insertion of clauses (v), ( vi), and (vii) for income from interest, royalty or fees for technical services. It was provided, inter alia, that in case of payments of interest, royalty or fees for technical services received from a resident payer, income would be deemed to accrue or arise in India, except where the interest or royalty or fees for technical services are relatable to a business or profession carried on by the resident payer outside India or for making or earning any income from any source outside India. The intent of the amendments was elaborated in the Explanatory notes on provisions relating to direct taxes for the Finance Act, 1976 issued vide Circular No. 202, dated 5-7-1976. With respect to source rule for royalty income, it was stated as follows :

"In view of the aforesaid amendment, royalty income consisting of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawings or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, will ordinarily become chargeable to tax in India."

Thus the intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services by way of creating a legal fiction in section 9. Since the source rule for interest and fees for technical services is the same as that for royalty income, the principle as elaborated above is equally applicable to interest and fees for technical services. The source rule would mean that irrespective of the situs of the services, the situs of the payer and the situs of the utilisation of services will determine the tax jurisdiction. Further, section 5, which defines scope of total income, is subject to other provisions of the Act, which would include section 9, and the income deemed to accrue or arise in terms of section 9 gets covered under section 5. Income does not have to actually accrue or arise in India to be deemed to accrue or arise in India.

Recent judicial opinion has been that despite the deeming fiction in the said section, for any such deemed income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It has been held that where any sum is payable to a non-resident by a resident, the deeming sweep of the said section cannot bring to tax, any income of a non-resident received outside India from Indian concerns for services rendered outside India. In regard to fees for technical services, it has been specifically held that for the fees to be taxable in India, the services have not only to be utilised in a business in India, but also have to be rendered in India.

Legislative intent for introduction of clauses (v), (vi) and (vii ) was to give legal sanctity to the source rule. This source rule is also recognised in India’s Double Taxation Avoidance Agreements. For removal of doubts, an Explanation has now been inserted in section 9 to specifically reaffirm the source rule provided in that section, to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) or (vii ) of sub-section (1) of section 9, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India. In such cases, it is not necessary to establish the territorial nexus between the income deemed to accrue or arise to the non-resident under the said clauses and the territory of India.

This amendment will take effect retrospectively from 1st June, 1976.

[Clause 5]

Clarification regarding concession in the matter of rent

Section 15 of the Income-tax Act provides that any salary due or paid or allowed or any arrears of salary paid or allowed to the assessee in the previous year by an employer or a former employer is chargeable to tax under the head ‘salaries’. The term ‘salary’ has been defined in section 17 of the IT Act and it, inter alia, includes perquisites or profits in lieu of or in addition to any salary or wages. The term ‘perquisite’ as defined in sub-section (2) of section 17 of the Income-tax Act, 1961,inter alia, includes—

  (i)  the value of rent-free accommodation provided to the assessee by his employer;

 (ii)  the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer.

With a view to provide a clarification as to what constitutes concession in the matter of rent, it is proposed to insert an Explanation to sub-clause (ii) of clause (2) of the said section so as to provide that concession in the matter of rent shall be deemed to have been provided if in a case where an unfurnished accommodation is provided to the assessee by an employer (other than Central Government or any State Government) and it is owned by the employer, the value of accommodation determined at the rate of ten per cent of the salary in cities having population exceeding four lakhs as per 1991 census and seven and one-half per cent of salary in other cities, in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable by assessee.

It is further proposed to provide that concession in the matter of rent shall be deemed to have been provided if in a case where an unfurnished accommodation is provided to the assessee by an employer (other than Central Government or any State Government), which has been taken on lease or rent by the employer, the value of accommodation being the actual amount of lease rental paid or payable by the employer or ten per cent of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable by the assessee.

It is also proposed to provide that concession in the matter of rent shall be deemed to have been provided if in a case where a furnished accommodation is provided to the assessee by the Central Government or any State Government, the licence fee determined by the Central Government or any State Government in respect of the accommodation in accordance with the rules framed by such Government as increased by the value of furniture and fixtures in respect of the period during which the said accommodation was occupied by the assessee, exceeds the aggregate of the rent recoverable from or payable by the assessee, and any charges paid or payable for the furniture and fixtures by the assessee.

It is also proposed to provide that in a case where a furnished accommodation is provided by an employer other than Central Government or any State Government and accommodation is owned by the employer, the value of unfurnished accommodation as increased by the value of the furniture and fixtures in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from or payable by the assessee.

It is also proposed to provide that in a case where a furnished accommodation is provided by an employer other than Central Government or any State Government and accommodation is taken on lease or rent by the employer, the value of unfurnished accommodation as increased by the value of the furniture and fixtures in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from or payable by the assessee.

It is also proposed to provide that the value of furniture and fixture shall be ten per cent of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, air-conditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, be the actual hire charges payable for the same as reduced by any charges paid or payable for the same by the assessee during the previous year.

It is also proposed to provide that in a case where the accommodation is provided by an employer other than Central Government or any State Government in a hotel (except where the employee is provided such accommodation for a period not exceeding in aggregate fifteen days on his transfer from one place to another), the value of accommodation determined at the rate of twenty-four per cent of salary paid or payable for the previous year or the actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided, exceeds the rent recoverable from or payable by the assessee.

These amendments will take effect retrospectively from 1st April, 2002 and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years.

It is also proposed to substitute clause (a) of the Explanation 1 as so inserted so as to provide that concession in the matter of rent shall be deemed to have been provided if in a case where an unfurnished accommodation is provided by any employer other than Central Government or any State Government and the accommodation is owned by the employer, the value of the accommodation determined at the rate of twenty per cent of salary in cities having population exceeding four lakhs as per 2001 census and fifteen per cent of the salary in other cities, in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from or payable by the assessee.

It is also proposed to provide that concession in the matter of rent shall be deemed to have been provided if in a case where an unfurnished accommodation is provided by any employer other than Central Government or any State Government and the accommodation is taken on lease or rent by the employer, the value of the accommodation being the actual amount of lease rental paid or payable by the employer or twenty per cent of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from or payable by the assessee.

These amendments will take effect retrospectively from 1st April, 2006 and will, accordingly, apply in relation to the assessment year 2006-07 and subsequent years.

[Clause 10]

Deduction in respect of any provision for bad and doubtful debts to be allowed in the case of co-operative banks under section 36(1)(viia)

Under the existing provisions of clause (viia) of sub-section (1) of section 36, deduction of an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under the said clause and Chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of a scheduled bank or a non-scheduled bank computed in the prescribed manner is allowed as deduction in the computation of income of such banks. "Scheduled bank", as defined in the Explanation to clause (viia) of sub-section (1) of the section 36, does not include a co-operative bank.

The deduction earlier allowable under section 80P in the case of a co-operative society engaged in carrying on the business of banking (co-operative banks) has been withdrawn from assessment year 2007-08 barring in the case of a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Since profits of co-operative banks are now taxable after withdrawal of deduction available to a co-operative society engaged in carrying on the business of banking under section 80P, such co-operative society banks should be allowed deduction in respect of any provision for bad and doubtful debts as its profits have become taxable. The amendment proposes to allow this deduction to co-operative banks not being a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

The definition of scheduled bank in clause (ii) of Explanation to said clause (viia) is also proposed to be amended to include scheduled co-operative banks within the definition.

Under the existing provisions contained in the Explanation to item (fa) of sub-clause (iv) of clause (15) of section 10, the expression "scheduled bank" has been defined to have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36 which does not include co-operative banks. However, the definition of "scheduled bank" after the proposed amendment will include scheduled co-operative banks. The referral definition of "scheduled bank" presently occurring in the Explanation to the aforesaid item (fa) does not allow exemption of interest payable to a non-resident or a not ordinarily resident by a co-operative bank. In order to continue with this position, the definition of "scheduled bank" in its pre-amended form in clause (ii ) of Explanation to clause (viia) of sub-section (1) of section 36 is being substituted for the existing Explanation in the aforesaid item (fa) to ensure that the scope of the exemption allowed under the aforesaid item (fa) is not changed. The proposed substitution of the definition of "scheduled bank" in the said item (fa) meets with this objective.

The proposed amendment to the definition of "scheduled banks" as it appears in section 36 will also have the effect of making the provisions of section 43D applicable to scheduled co-operative banks.

These amendments will take effect, retrospectively, from 1st April, 2007 and will, accordingly apply in relation to the assessment year 2007-08 and subsequent years.

[Clauses 6 and 12]

Rationalisation of provisions relating to deduction in respect of creation and maintenance of special reserve under section 36(1)(viii)

The existing provisions of clause (viii) of sub-section (1) of section 36 of the Income-tax Act, 1961 provide for a deduction in respect of any special reserve created and maintained by,—

  (i)  a financial corporation engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India; or

 (ii)  a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes.

The deduction allowable under the aforesaid clause cannot exceed forty per cent of the profits derived from the business of providing long-term finance.

The provisions regarding this special deduction also existed in the Income-tax Act, 1922 and were retained in the Income-tax Act, 1961. The objective of this deduction originally was to stimulate industrial development of the country. The scope of the provisions of the said clause was later on widened by the Finance (No. 2) Bill, 1971 to include in its ambit the approved financial corporations engaged in providing long-term finance for agricultural development in India. The objective underlying the provisions of the said clause, as explained in the Memorandum explaining the provisions of the aforesaid Bill, has been to enable financial corporations to build up their internal resources at an accelerated pace and become independent of subventions from Government for financing their activities.

Since the introduction of this special deduction and subsequent widening of its scope, high tax incidence on companies has come down substantially. The benefit of this deduction was also intended to enable corporations to augment their initial low equity base on account of limited accessibility to capital market. In the wake of liberalisation, from the beginning of the nineties, there has been considerable expansion and deepening of the capital market. Accessibility to capital market has markedly improved.

The amendment, therefore, proposes to limit the deduction to twenty per cent of the profits derived from the business of providing long-term finance. Considering the provision for outer limit to the deduction, which is twice the amount of the paid-up share capital and of the general reserves, the proposed reduction in the level of deduction to twenty per cent will have the effect of elongating the time period during which the deduction can be claimed by the beneficiary "specified entities". Effectively, therefore, the specified entities are not adversely affected in the long term.

The provision has also been restructured to provide for different categories of entities (which now also includes co-operative banks) and their respective activities for eligibility of the deduction under the said clause. For claiming deduction under the said clause, (i ) a financial corporation specified in section 4A of the Companies Act or a financial corporation which is a public sector company or a banking company or a co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) has to be engaged in the business of providing long-term finance in India for industrial or agricultural development or development of infrastructure facility, (ii) a housing finance company has to be engaged in the business of providing long-term finance for the construction or purchase of houses in India for residential purposes and (iii) any other financial corporation including a public company, has to be engaged in the business of providing long-term finance for development of infrastructure facility in India. It may be clarified that a financial corporation specified in section 4A of the Companies Act shall include such corporations specified under sub-section (1) and under sub-section (2) of section 4A of the Companies Act.

The amendment also provides definitions of the expressions "banking company", "co-operative bank", "primary agricultural credit society", "primary co-operative agricultural and rural development bank", "housing finance company", "public company", "infrastructure facility" and "long-term finance".

These amendments will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

[Clause 12]

Withdrawal of deduction under section 36(1)(x) in respect of contribution by public financial institutions towards ERAF

Under the existing provisions of clause (x) of sub-section (1) of section 36, any sum paid by a public financial institution by way of contribution towards any Exchange Risk Administration Fund (ERAF) set up by public financial institutions, either jointly or separately, is allowed as deduction in the computation of income of the payer institution.

ERAFs were set up under a scheme known as Exchange Risk Administration Scheme (ERAS). The benefit of coverage of exchange risk under the Scheme was available to borrowers of foreign currency loans provided by institutions out of their external commercial borrowings.

An exemption under clause (23E) of section 10 in respect of any income of a notified ERAF set up by public financial institutions was earlier provided by the Finance Act, 1989. By virtue of clause (14A) of section 10, income in the nature of Exchange Risk Premium received by public financial institutions from the borrower and thereafter credited to the ERAF was also exempted from tax. The exemption to ERAFs under section 10(23E) was withdrawn by the Finance Act, 2002 from assessment year 2003-04 on the ground that the operations of these funds were on a commercial line whereby they were collecting an exchange risk premium from borrowers of foreign currency to meet the actual losses on account of exchange fluctuation. ERAFs had been in existence for a considerable time since 1989 and it was felt that tax exemption to them had outlived the utility. Exemption under clause (14A) of section 10 was also withdrawn simultaneously.

The foreign exchange scenario in India has undergone a sea change since the launching of ERAS. There are several options available in the market for borrowers to hedge their foreign exchange risk. Responding to changed market dynamics ERAFs have been discontinued by the Industrial and Development Bank of India (IDBI), Power Finance Corporation (PFC) and Indian Renewable Energy Development Agency (IREDA). This clause has, therefore, outlived its utility.

The amendment, accordingly, proposes to omit clause (x ) from the said sub-section.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

[Clause 12]

Giving retrospective effect to exception from taxation for certain monetary receipts and to include certain other monetary receipts in the definition of income

Under clause (v) of sub-section (2) of section 56, where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004, but before the 1st day of April, 2006, the whole of such sum shall be chargeable to income-tax under the head ‘income from other sources’. Exception has been provided in the proviso to the said clause in respect of any sum of money received from certain persons and under certain circumstances as specified therein. The Taxation Laws (Amendment) Act, 2006, which was enacted on the 13th day of July, 2006, inserted new clauses (e ), (f) and (g) in the said proviso so as to provide such exception in respect of any sum of money received from a local authority, or an entity referred to in section 10(23C) or a trust or institution registered under section 12AA with effect from 13th July, 2006.

It is proposed to give retrospective effect to the said clauses (e ), (f) and (g) from 1st April, 2005, which is the date from which clause (v) of sub-section (2) of section 56 became effective.

This amendment will apply in relation to the assessment years 2005-06 and 2006-07.

Through the Taxation Laws (Amendment) Act, 2006, a new clause (vi ) was inserted in sub-section (2) of section 56, whereby, subject to the exceptions specified in the proviso thereto, the whole of the aggregate value of any sum of money exceeding fifty thousand rupees, received without consideration by an individual or Hindu undivided family in any previous year from any person or persons on or after the 1st day of April, 2006, is chargeable to income-tax under the head ‘income from other sources’.

Clause (24) of section 2 defines ‘income’. It is proposed to insert a new sub-clause (xiv) in the said clause so as to provide that ‘income’ includes any sum referred to in clause (vi) of sub-section (2) of section 56.

This amendment will take effect retrospectively from 1st April, 2007 and will accordingly apply in relation to the assessment year 2007-08 and subsequent years.

[Clauses 3 and 16]

Rationalization of provisions related to deduction of health insurance premium

Section 80D of the Income-tax provides that in computing the total income of an assessee, being an individual or a Hindu undivided family, the sum paid by cheque to effect or to keep in force an insurance on the health of the assessee or on the health of any member of the family shall be allowed as a deduction. The maximum amount allowed as deduction is ten thousand rupees. In the case of senior citizens, the deduction allowed is fifteen thousand rupees.

Similarly, clause (ib) of sub-section (1) of section 36 provides for a deduction of the amount of any premium paid by cheque by the assessee, as an employer, to effect or to keep in force an insurance on the health of his employees under a scheme framed by the General Insurance Corporation formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 and approved by the Central Government or by any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999.

With a view to allow deduction for payments made through electronic mode, credit card, etc., it is proposed to amend the provisions of section 80D and clause (ib) of sub-section (1) of section 36 so as to provide that the payment of premium made by any mode other than cash, shall be eligible for deduction under these sections.

It is also proposed to increase the maximum amount allowable under section 80D, from rupees ten thousand to rupees fifteen thousand. In the case of senior citizens, it is proposed to increase the limit from rupees fifteen thousand to rupees twenty thousand. These amendments will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

[Clauses 12 and 20]

Clarification regarding developer with reference to infrastructure facility, industrial park, etc. for the purposes of section 80-IA

Section 80-IA, inter alia, provides for a ten-year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, Industrial Parks and Special Economic Zones.

The tax benefit was introduced for the reason that industrial modernization requires a massive expansion of, and qualitative improvement in, infrastructure (viz., expressways, highways, airports, ports and rapid urban rail transport systems) which was lacking in our country. The purpose of the tax benefit has all along been for encouraging private sector participation by way of investment in development of the infrastructure sector and not for the persons who merely execute the civil construction work or any other works contract.

Accordingly, it is proposed to clarify that the provisions of section 80-IA shall not apply to a person who executes a works contract entered into with the undertaking or enterprise referred to in the said section. Thus, in a case where a person makes the investment and himself executes the development work i.e., carries out the civil construction work, he will be eligible for tax benefit under section 80-IA. In contrast to this, a person who enters into a contract with another person [i.e., undertaking or enterprise referred to in section 80-IA] for executing works contract, will not be eligible for the tax benefit under section 80-IA.

This amendment will take retrospective effect from 1st April, 2000 and will, accordingly, apply in relation to the assessment year 2000-01 and subsequent years.

[Clause 22]

Tax benefit under section 80-IA not available to undertakings/enterprises of Indian companies undergoing amalgamation or demerger after 31-3-2007

The existing provisions of section 80-IA provide for 100 per cent deduction for ten years in respect of profits and gains of certain undertakings or enterprises engaged in the business of development, operation and maintenance of infrastructure facility, industrial parks and special economic zones or generation, distribution or transmission of power, laying and operating and similar benefit is proposed for laying and operating a cross-country natural gas distribution network, including gas pipelines and storage facilities being an integral part of the network, etc.

Sub-section (12) of the said section 80-IA, inter alia, provides that where any undertaking of an Indian company which is entitled to the deduction under the said section is transferred before the expiry of the period specified therein, to another Indian company in a scheme of amalgamation or demerger, the provisions of the said section 80-IA shall apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.

It is proposed to insert a new sub-section (12A) in section 80-IA so as to provide that the provisions of sub-section (12) shall not apply to any undertaking or enterprise which is transferred in a scheme of amalgamation or demerger after 31-3-2007.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 22]

Extension of time limit set out in Rule 3 for complying with the condition laid down in Clause (ea) of Rule 4 of Part A of the Fourth Schedule to the Income-tax Act

Rule 4 of Part A of the Fourth Schedule to the Income-tax Act provides for the conditions which are required to be satisfied by a provident fund for receiving or retaining recognition under the Income-tax Act. Clause (ea) of the said rule provides that the fund shall be of an establishment to which the provisions of sub-section (3) or sub-section (4) of section 1 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 are applicable and such establishment has been exempted under section 17 of the said Act from the operation of all or any of the provisions of any scheme referred to in that section.

With a view to set out the conditions given in clause (ea ) in unambiguous terms, it is proposed to substitute clause (ea) so as to provide that for receiving and retaining recognition under the Income-tax Act, the fund shall be a fund of an establishment to which the provisions of sub-section (3) of section 1 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 apply or of an establishment which has been notified by the Central Provident Fund Commissioner under sub-section (4) of section 1 of the said Act, and such establishment shall obtain exemption under section 17 of the said Act from the operation of all or any of the provisions of any scheme referred to in that section.

Rule 3 of Part A of the Fourth Schedule provides that the Chief Commissioner or the Commissioner of Income-tax may accord recognition to any provident fund which satisfies the conditions prescribed in rule 4 and the rules made by the Board in this behalf.

The proviso to sub-rule (1) of the said rule 3, inter alia, specifies that in a case where recognition has been accorded to any provident fund on or before 31st March, 2006, and such provident fund does not satisfy the conditions set out in clause (ea) of rule 4, the recognition to such fund shall be withdrawn, if such fund does not satisfy such conditions on or before 31st March, 2007. With a view to provide adequate time to the Employees’ Provident Funds Organization to decide on the applications seeking exemption under section 17 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, it is proposed to extend the time limit provided under rule 3 of the Fourth Schedule to the Income-tax Act for fulfilment of the condition specified in clause (ea) of rule 4 of Part A of the said Schedule, from 31-3-2007 to 31-3-2008.

It is also proposed to insert a proviso in sub-rule (1) of rule 3 so as to provide that the first proviso shall not apply to the provident fund of an establishment in respect of which a notification has been issued by the Central Government under sub-section (2) of section 16 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

This amendment will take effect retrospectively from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-2008 and subsequent years.

[Clause 73]

RATIONALISATION OF PROVISIONS OF TAX DEDUCTION AND COLLECTION AT SOURCE

Amendment of section 193 of the Income-tax Act, 1961 to provide for TDS on 8 per cent Savings (Taxable) Bonds, 2003

The provisions of the existing section 193 exclude, inter alia, any interest payable on any security of the Central Government or a State Government from the requirement of deduction of tax at source. Consequently, tax is not being deducted on interest payable on 8 per cent Savings (Taxable) Bonds, 2003.

The 8 per cent Savings (Taxable) Bonds, 2003 are Central Government securities. The notification issued by the Department of Economic Affairs dated 21st March, 2003 also clarifies that the interest paid on 8 per cent Savings (Taxable) Bonds, 2003 is taxable under the Income-tax Act. Non-deduction of tax on these bonds has been resulting in evasion of taxes.

The proposed amendment provides that the person responsible for paying to a resident any interest on 8 per cent Savings (Taxable) Bonds, 2003 shall deduct income-tax if interest payable on such Bonds exceeds ten thousand rupees during a financial year.

This amendment will take effect from 1st day of June, 2007.

[Clause 43]

Increasing the threshold limit in respect of interest payable by a banking Company or a co-operative society or a Post Office under section 194A

The existing clause (i) of sub-section (3) of section 194A provides that deduction of income-tax at source shall not be made in a case where the amount of income by way of interest other than "Interest on securities" does not exceed five thousand rupees.

The amendment proposes that the limit for deduction of tax at source under the aforesaid section shall be ten thousand rupees where the payer is a banking company or a co-operative society engaged in carrying on the business of banking or a Post Office in respect of notified schemes. In other cases, the threshold limit shall be retained at five thousand rupees.

Consequential amendment has also been proposed to the provisions of section 206A relating to furnishing of quarterly return in respect of payment of interest to residents without deduction of tax at source.

These amendments will take effect from 1st June, 2007.

[Clauses 44, 51]

Expansion of scope of the provisions of section 194C

The existing provisions of sub-section (1) of section 194C provide for deduction of income-tax at source from any sum credited or paid to the resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government, local authorities, statutory corporations, companies, co-operative societies, statutory authorities engaged in providing housing accommodation, etc., registered societies, trusts, universities and firms. The rate of TDS is 1 per cent in respect of advertising contracts and 2 per cent in other cases.

The existing provisions of sub-section (1) of section 194C do not provide for deduction of tax at source on payments made by an individual or a Hindu undivided family to a contractor.

Considering the rising number of contracts being awarded by individuals and HUFs carrying on business or profession and the increasing volume of such payments to contractors, there is need to require such persons to deduct tax at source from payments made by them to contractors.

There would be genuine difficulties if individuals or HUFs with small business turnovers or gross receipts of profession are required to deduct tax at source. An exception in such cases would be justified. Similarly the contracts awarded by an individual or a member of HUF exclusively for personal purposes merit exclusion.

Accordingly, the amendment proposes to include only such individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which sum is credited or paid to the account of the contractor.

The amendment also proposes that the provisions of the said sub-section (1) shall not apply in respect of payments made to a contractor by any individual or a member of a Hindu undivided family exclusively for their personal purposes.

This amendment will take effect from 1st day of June, 2007.

[Clause 45]

Increase in the rate of TDS under section 194H to 10 per cent and exemption from TDS thereunder from commission payable by Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited to their PCO franchisees

The existing provisions of section 194H require deduction of tax at source on payment of commission or brokerage, the rate for deduction of tax being five per cent.

Deduction of tax at source facilitates capturing of income for tax purposes at the earliest point of time. However, deduction of tax at source in cases of payees whose income remains below taxable limit merely results in unnecessary paper work. Public Call Office (PCO) franchisees of Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited represent this category as very small sums of commission are received by them and there would be very few such cases where income would be above the threshold exemption limit.

The proposed amendment, therefore, provides that tax shall not be deducted on payments of commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.

Many cases have come to notice where tax incidence in the case of recipient of commission or brokerage is much higher than the amount of tax collected at the rate of five per cent. This has been resulting in either deferment in collection of taxes or escapement of income in some cases. This problem is proposed to be addressed by enhancement of the existing rate of five per cent for deduction of tax at source to ten per cent.

These amendments will take effect from 1st June, 2007.

[Clause 46]

Reduction in the rate for deduction of tax at source on rent for the use of any machinery or plant or equipment under section 194-I

The existing provisions of section 194-I provide for deduction of tax at source by the person paying any income by way of rent to a resident. Individuals and HUFs having their turnover below the limits specified in clause (a) or clause (b) of section 44AB are not required to deduct tax under this section. The existing rate of deduction of tax is fifteen per cent if the payee is an individual or a Hindu undivided family and twenty per cent in the case of other payees. "Rent" for the purposes of this section is defined in the Explanation.

The existing definition of "Rent" as amended by the Taxation Laws (Amendment) Act, 2006 has come into force from 13th July, 2006 and in this definition rent on three new items, viz., machinery, plant and equipment have been inserted. Subsequent to the above amendment, representations have been received to the effect that the profit margin in the transactions involving lease or hire of machinery, plant or other equipment being quite low, TDS at the existing rates of 15 per cent and 20 per cent was resulting in higher amounts of collection of tax than the tax incidence in such cases.

Accordingly, this amendment proposes to separately specify the rate of deduction of tax at source at a lower rate of ten per cent in respect of any income payable by way of rent for the use of any machinery or plant or equipment.

This amendment will take effect from 1st day of June, 2007.

[Clause 47]

Enhancement of the rate of TDS under section 194J of the Income-tax Act

Under the existing provisions of sub-section (1) of section 194J, a specified person is required to deduct an amount equal to five per cent of any sum payable to a resident by way of fees for professional services or fees for technical services.

The data collected on tax deduction in various cases of professionals and technical experts, showed that the tax incidence in such cases was much higher than the amount of tax collected by way of deduction of tax at source at the existing rate of five per cent. Accordingly, the amendment proposes to specify a higher rate of ten per cent for TDS under section 194J. The increased rate for deduction of tax at source shall be applicable to payment of any sum by way of fees for professional services or fees for technical services or royalty or any sum referred to in clause (va) of section 28.

This amendment will take effect from 1st June, 2007.

[Clause 48]

Omission of reference to omitted section 88B from section 197A

The existing provisions of sub-section (1C) of section 197A contain reference to section 88B which was omitted with effect from 1st April, 2006.

The amendment seeks to delete the reference to the omitted section 88B from the said sub-section.

This amendment will take effect retrospectively from 1st April, 2006 and will, accordingly, apply in relation to the assessment year 2006-2007 and subsequent years.

[Clause 49]

Definition of the expression "mining and quarrying" under section 206C of the Income-tax Act, 1961

The existing provisions of section 206C provide for collection of tax at source, inter alia, from the licensee or lessee in respect of any licence, contract or lease relating to any ‘mining and quarrying’ specified in column (2) of the Table in sub-section (1C) of the said section. The rate for collection of tax at source is specified in column (3) of the Table.

The existing provisions of the said section do not provide for a definition of the expression "mining and quarrying". Representations have been received from a few quarters that this phrase, in the absence of its definition in the section, was being interpreted to include oil exploration and incidental services and tax was being collected from licensees engaged in such exploration. Since, oil exploration and incidental services are in the organized sector, the provisions of TCS are not intended to be made applicable.

The amendment accordingly proposes to insert Explanation 1 to provide that for the purposes of sub-section (1) of section 206C,

"mining and quarrying" shall not include mining and quarrying of mineral oil. Explanation 2 further clarifies that for the purposes of Explanation 1, "mineral oil" includes petroleum and natural gas.

This amendment will take effect from 1st June, 2007.

[Clause 52]

MEASURES TO PROMOTE SCIENTIFIC RESEARCH AND DEVELOPMENT

Weighted deduction under clause (1) of sub-section (2AB) of section 35 to be allowed for five more years

The existing provisions of clause (1) of sub-section (2AB) of section 35, allow in the case of a company, engaged in the business of biotechnology or in the business of manufacture or production of any drugs, pharmaceuticals, electronic equipment, computers, telecommunication equipment, chemicals or any other article or thing notified by the Board, a deduction of a sum equal to one and one-half times of the expenditure incurred on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority. This provision is not applicable in respect of any expenditure incurred by a company after 31st March, 2007 and no weighted deduction against expenditure incurred after that date is admissible.

There is a general realisation that research and development still needs some fiscal support for a few more years. The amendment to clause (5) of the said sub-section, therefore, allows weighted deduction referred to in clause (1) for a further period of five years, that is, in respect of the expenditure incurred up to 31st March, 2012.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to assessment year 2008-2009 and subsequent assessment years up to assessment year 2012-2013.

[Clause 11]

MEASURES TO PROMOTE SOCIO-ECONOMIC DEVELOPMENT

Exemption for interest on notified bonds issued by State Pooled Finance Entities

Under the existing provisions of clause (vii) of sub-section (15) of section 10, interest on bonds issued by a local authority and specified by the Central Government by notification in the Official Gazette, is exempt from income-tax.

State Pooled Finance Entities have been set up to issue debt securities on behalf of urban local bodies in terms of the guidelines for the Pooled Finance Development Scheme notified by the Ministry of Urban Development. It is proposed to amend clause (vii ) of sub-section (15) so as to provide that interest on bonds issued by a State Pooled Finance Entity and specified by the Central Government by notification in the Official Gazette, shall also be exempt from income-tax. For this purpose, "State Pooled Finance Entity" is proposed to be defined to mean such entity which is set up in accordance with the guidelines for the Pooled Finance Development Scheme notified by the Central Government in the Ministry of Urban Development.

This amendment will take effect from 1st April, 2008 and will accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 6]

Exemption for certain incomes of Investor Protection Fund set up by commodity exchanges

Under the existing provisions contained in clause (23EA) of section 10, any income, by way of contributions received from recognised stock exchanges and the members thereof, of notified Investor Protection Fund, set up by recognised stock exchanges in India, either jointly or separately, is exempt from income-tax.

With a view to extend similar exemption to Investor Protection Funds set up by commodity exchanges, it is proposed to insert a new clause (23EC) in section 10 so as to provide that any income, by way of contributions received from commodity exchanges and the members thereof, of such Investor Protection Fund set up by commodity exchanges in India, either jointly or separately, as the Central Government may, by notification in the Official Gazette, specify in this behalf, shall not be included in the total income. As is currently provided in the proviso to the said clause (23EA), it is also proposed to provide in the new clause (23EC) that where any amount standing to the credit of the Fund and not charged to income-tax during any previous year is shared, either wholly or in part, with a commodity exchange, the whole of the amount so shared shall be deemed to be the income of the previous year in which the amount is so shared and shall accordingly be chargeable to income-tax. For the purposes of the new clause, it is proposed to define a "commodity exchange" to mean a "registered association" as defined in clause (jj) of section 2 of the Forward Contracts (Regulation) Act, 1952.

This amendment will take effect from 1st April, 2008, and will, accordingly apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 6]

Exemption for certain incomes of a venture capital company or venture capital fund from specified businesses or industries

Under the existing provisions of clause (23FB) of section 10, any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking is exempt from tax. The existing definition of a "venture capital undertaking", as provided in clause (c) of Explanation 1 to clause (23FB), means a venture capital undertaking referred to in the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 made under the Securities and Exchange Board of India Act, 1992 and notified as such in the Official Gazette by the Board.

It is proposed to amend the said clause so as to provide that such exemption will now be available only in respect of income of a venture capital company or venture capital fund from investment in a venture capital undertaking engaged in certain specified businesses or industries. For this purpose, it is also proposed to amend the aforesaid definition of venture capital undertaking to mean such domestic company whose shares are not listed in a recognised stock exchange in India and which is engaged in the business of nanotechnology, information technology relating to hardware and software development, seed research and development, bio-technology, research and development of new chemical entities in the pharmaceutical sector, production of bio-fuels, or building and operating composite hotel-cum-convention centre with seating capacity of more than three thousand, or engaged in the dairy industry or poultry industry.

This amendment will take effect from 1st April, 2008 and will accordingly apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 6]

Expansion of the scope of ‘infrastructure facility’ for the purposes of tax benefit under section 80-IA

Section 80-IA, inter alia, provides for a ten-year tax benefit to an enterprise engaged in development, operation and maintenance of infrastructure facilities. Under the existing provisions of clause (i) of sub-section (4) of section 80-IA, an enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility is eligible for a hundred per cent deduction of profits for a period of ten years, if it fulfils certain conditions specified therein.

Explanation to clause ( i) of sub-section (4) of the said section defines the expression "infrastructure facility" to mean a road including toll road, a bridge, a rail system, a highway project including housing or other activities being an integral part of the highway project, a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system, a port, airport, inland waterway or inland port.

Considering the fact that navigational channels in the sea is a high risk project (involving huge capital investment) and also has long gestation period, it is proposed to expand the scope of the expression "infrastructure facility" so as to include a navigational channel in the sea within its ambit for the purposes of ten year tax benefit under section 80-IA.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 22]

Extension of time limit for generation or transmission or distribution of power by an undertaking of an Indian company set up for reconstruction or revival of a power generating plant

Section 80-IA of the Income-tax Act, 1961 provides for a ten-year tax benefit to an enterprise engaged in development of infrastructure facilities, Industrial Parks and Special Economic Zones, generation and distribution of power, etc.

Under the existing provisions contained in clause (v ) of sub-section (4) of section 80-IA, an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant is eligible for ten year tax benefit under the said section if it fulfils the following conditions:—

 (a)  such company is formed before 30-11-2005 with majority equity participation by public sector companies for enforcing the security interest of the lenders to the company owning the power generating plant;

 (b)  such Indian company is notified by the Central Government before 31-12-2005; and

  (c)  the undertaking begins to generate or transmit or distribute power before 31st March, 2007.

With a view to provide adequate time for revival of the power generating plant, it is proposed to extend the time limit by one year for generating or transmitting or distributing power i.e., before 31st March, 2008.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 22]

Deduction in the case of an undertaking laying and operating cross-country natural gas distribution network

The existing provisions of section 80-IA provide for 100 per cent deduction for ten years in respect of profits and gains of certain undertakings or enterprises engaged in the business of development, operation and maintenance of infrastructure facility, industrial parks and special economic zones or generation distribution or transmission of power, etc. Sub-section (4) of the said section 80-IA specifies the activities eligible for deduction.

Considering the fact that tax subsidy for gas pipelines will enable substitution of the existing subsidy on LPG, it is proposed to insert a new clause (vi) in the said sub-section (4) of section 80-IA so as to provide that any undertaking carrying on the business of laying and operating cross-country natural gas distribution network, including gas pipelines and storage facilities being an integral part of the network, shall be eligible for deduction under the said section if it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation established or constituted under any Central or State Act; it has been approved by the Petroleum and Natural Gas Regulatory Board established under sub-section (1) of section 3 of the Petroleum and Natural Gas Regulatory Board Act, 2006 and notified by the Central Government in the Official Gazette; one-third of its total pipeline capacity is available for use on common carrier basis by any person other than the assessee or an associated person; it starts functioning on or after 1st April, 2007; and it fulfils such other condition as may be prescribed.

It is further proposed to define the expression "associated person" for the purposes of the proposed clause (vi).

It is also proposed to provide that the deduction shall be allowed for ten consecutive assessment years out of fifteen years beginning from the year in which an undertaking lays and begins to operate the cross-country natural gas distribution network.

It is also proposed to provide that any undertaking formed by way of reconstruction or splitting up or by transfer to a new business of old plant and machinery (subject to certain exceptions) shall not be eligible for the above deduction under section 80-IA.

These amendments will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 22]

Extension of time-limit for setting up of industrial undertakings in the State of Jammu and Kashmir for the purposes of tax benefit under section 80-IB(4)

Under the existing provisions contained in sub-section (4) of section 80-IB, industrial undertakings engaged in manufacture or production of articles or things or operation of a cold storage plant and set up during the period beginning on 1st April, 1993 and ending on 31st March, 2007 in the State of Jammu and Kashmir, are eligible for a hundred per cent deduction of profits for a period of five assessment years, followed by twenty-five per cent (thirty per cent in the case of a company) for the next five assessment years. The deduction is subject to a negative list of articles or things specified in Part-C of the Thirteenth Schedule to the Income-tax Act, which should not be manufactured or produced by such industrial undertakings.

With a view to promote the industrial development of the State of Jammu and Kashmir, it is proposed to extend the terminal date for setting up of industrial undertakings and commencement of eligible business in the State by five more years, i.e., from 31-3-2007 to 31-3-2012.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 23]

Tax holiday for hotels and convention centres in specified area

With a view to provide adequate number of hotel rooms to meet the requirement for accommodating the visitors to the Commonwealth Games which is to be hosted by the country in 2010 and also to boost the number of convention centres, it is proposed to insert a new section 80-ID to provide for deduction in respect of profits and gains from the business of hotels and convention centres in specified area.

It is proposed to provide that where the gross total income of an assessee includes any profits and gains derived by an undertaking from the business of hotel or from the business of building, owning and operating a convention centre, hundred per cent deduction of the profits and gains derived from such business shall be allowed for five consecutive assessment years beginning from the initial assessment year.

It is further proposed to provide that the said section applies to any undertaking engaged in the business of hotel located in the specified area, if such hotel is constructed and has started or starts functioning at any time during the period beginning on 1st April, 2007 and ending on 31st March, 2010 or engaged in the business of building, owning and operating a convention centre, located in the specified area, if such convention centre is constructed at any time during the period beginning on 1st April, 2007 and ending on 31st March, 2010.

It is also proposed to specify the conditions to be fulfilled by the undertaking for the purpose of deduction under the proposed new section.

It is also proposed to provide that in computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or in section 10AA, in relation to the profits and gains of the undertaking.

It is also proposed to provide that the provisions contained in sub-section (5) and sub-sections (8) to (11) of section 80-IA shall, so far as may be, apply to the eligible business under this section.

It is also proposed to define the expressions "convention centre", "hotel", "initial assessment year" and "specified area" for the purposes of the proposed new section. For the purposes of the proposed section hotel shall mean a hotel of two-star, three-star and four-star category as classified by the Central Government and specified area shall mean the National Capital Territory of Delhi and districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad.

It is also proposed to amend section 80AC so as to provide that no deduction under the proposed section 80-ID shall be admissible unless the assessee furnishes a return of his income for such assessment year on or before the due date specified under sub-section (1) of section 139 of the Income-tax Act.

These amendments will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clauses 18 and 24]

MEASURES FOR ADDITIONAL REVENUE MOBILISATION

Increase in the rates of Tax on distributed profits in certain cases

Under sub-section (1) of section 115-O, inter alia, any amount declared, distributed or paid by a domestic company by way of dividends on or after the 1st day of April, 2003, whether out of current or accumulated profits, shall be charged to additional income-tax (also called "tax on distributed profits") at the rate of twelve and one-half per cent.

It is proposed to increase the rate of such tax on distributed profits from twelve and one-half per cent to fifteen per cent.

This amendment will take effect from 1st April, 2007.

Under sub-section (2) of section 115R in Chapter XII-E, inter alia, any amount of income distributed by the specified company or a Mutual Fund to its unit holders shall be chargeable to tax and such specified company or Mutual fund shall be liable to pay additional income-tax on such distributed income at the rate of twelve and one-half per cent. on income distributed to any person, being an individual or a Hindu undivided family, and twenty per cent. on income distributed to any other person. No tax is payable on income distributed by an equity oriented mutual fund.

It is proposed to amend the said sub-section so as to provide that where the income is distributed by a money market mutual fund or a liquid fund, such fund shall be liable to pay additional income-tax on such distributed income at the rate of twenty-five per cent. For this purpose, it is proposed to provide definitions of "money market mutual fund" and "liquid fund" in the Explanation after section 115T. The existing rates of tax on income distributed by a fund other than a money market mutual fund or a liquid fund shall remain the same.

These amendments will take effect from 1st April, 2007.

[Clauses 27,28 and 29]

MEASURES TO PLUG REVENUE LEAKAGES

Tax benefit only for new units in special economic zones

Sections 10AA of the Income-tax Act provides that in computing the total income of an entrepreneur, from his unit in the special economic zone, the following deduction shall be allowed:—

  (i)  hundred per cent of profits and gains derived from the export made in eligible business for a period of five consecutive assessment years beginning from the year in which such business commences;

 (ii)  fifty per cent of such profits and gains for further five assessment years and thereafter;

(iii)  an amount not exceeding fifty per cent of the profit debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be created and utilized for the purposes of the business in the specified manner, for the next five consecutive assessment years.

Under the existing provisions contained in sub-section (4) of the said section, it is provided that section 10AA is applicable to any undertaking being the unit, which has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone. Considering the fact that the special economic zones are intended to promote new industry and new investment and not to facilitate migration of existing industries to avail of tax concessions, it is proposed to substitute sub-section (4) of section 10AA so as to provide that section 10AA is applicable to any undertaking, being the unit, which fulfils all the following conditions, namely:—

  (i)  it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;

 (ii)  it is not formed by the splitting up, or the reconstruction, of a business already in existence;

(iii)  it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

It is also proposed to provide that the conditions of clause (ii ) shall not apply in respect of any undertaking, being the unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section.

It is also proposed to provide that the provisions of Explanation 1 and Explanation 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii).

This amendment will take effect retrospectively from 10th February, 2006.

[Clause 7]

Strengthening the provisions of section 40A(3)

The existing provisions of sub-section (3) of section 40A provide for disallowance of twenty per cent of the expenditure incurred, payment in respect of which is made in a sum exceeding twenty thousand rupees, otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft.

The said sub-section was inserted by the Finance Act, 1968 providing for disallowance of hundred per cent of the expenditure, if payment was made in contravention of its provisions. Subsequently, the Finance Act, 1995 amended this sub-section with effect from 1st April, 1996 to restrict the disallowance to twenty per cent of the expenditure, payment against which is made in violation of its provisions.

The provisions of the said sub-section were to act as an anti-evasion measure. It has come to notice that substitution of the disallowance of hundred per cent by twenty per cent. has diluted the deterrence potential of the provisions. Therefore, to restrengthen the deterrence potential, it is proposed to amend sub-section (3) of section 40A to provide for hundred per cent disallowance of payments which are made in violation of its provisions.

There are occasions when deduction of expenditure is claimed in one year and the payment against such expenditure is made in any subsequent year in violation of the provisions of the said sub-section. In such cases, the existing first proviso to the said sub-section provides for re-computation of the total income of the previous year in which the liability to pay against the expenditure was incurred. Such re-computation is allowed to be made under the provisions in section 154 and the limitation of four years in respect of such re-computation is reckoned from the end of the assessment year next following the previous year in which the payment in contravention of provisions of sub-section (3) of section 40A was made. In many cases, violation is noticed after expiry of four years when no remedy is available. Rectification of past assessments involves inconvenience to the assessee and increases paper work for the Department. The amendment, therefore, proposes to substitute the present method of disallowance in an earlier year with a simplified method of contemporaneous disallowance by deeming the payments made in contravention of law in any subsequent year as profits and gains of business or profession of such year in which payment is made in violation of law. This method of deeming the income in the year of payment, will cast an obligation on the assessee to declare this deemed income in terms of the existing requirement under law to affirm that the amount of total income and other particulars in his return of income are truly stated.

It is further proposed to provide that no disallowance shall be made or no payment shall be deemed to be the profits or gains of business or profession if any payment exceeding twenty thousand rupees is made otherwise than by specified instruments, in such cases and under such circumstances as may be prescribed, having regard to - (i) the nature and extent of banking facilities available, (ii) business expediency considerations and (iii) other relevant factors.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent assessment years.

[Clause 13]

Rationalisation of provisions relating to penalty for concealment of or furnishing inaccurate particulars of income

Under the existing provisions of clause (b) of Explanation 4 to sub-section (1) of section 271, it has been provided that in a case to which Explanation 3 to the said sub-section (1) applies, the amount of tax sought to be evaded shall mean the tax on the total income assessed.

It has been proposed to amend said Explanation 4 so as to provide that in a case to which said Explanation 3 applies, the amount of tax sought to be evaded shall mean the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self assessment tax paid before the issue of notice under section 148.

This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to assessment year 2003-04 and subsequent years.

Under the existing provisions of Explanation 5 to sub-section (1) of section 271, it has been provided that where in the course of a search under section 132, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (referred to as assets in this Explanation) and the assessee claims that such assets have been acquired by him by utilising (wholly or in part) his income - (i) for any previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein; or (ii) for any previous year which is to end on after the date of the search, then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of section 271, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income. However, penalty shall not be levied if certain conditions prescribed therein are fulfilled.

It has been proposed to amend said Explanation 5 so as to provide that provisions of said Explanation shall be applicable only in a case where search under section 132 was initiated before 1st June, 2007.

This amendment will take effect from 1st June, 2007 and will be applicable to cases where search under section 132 is initiated on or after 1st June, 2007.

It has also been proposed to insert a new Explanation 5A to sub-section (1) of section 271 so as to provide that where in the course of a search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be the owner of - (i) any money, bullion, jewellery or other valuable article or thing (referred to as assets in the proposed new Explanation) or ( ii) any income based on any entry in any books of account or other documents or transactions and claims that such assets or entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year; which has ended before the date of the search and the due date for filing the return of income for such year has expired and the assessee has not filed the return, then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.

This amendment will take effect from 1st June, 2007 and will be applicable to cases where search under section 132 is initiated on or after 1st June, 2007.

It is also proposed to insert a new section 271AAA so as to provide that, in a case where search has been initiated under section 132 on or after 1st June, 2007, the assessee shall be liable to pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year. However, provisions of this section shall not be applicable if the assessee- (i ) in a statement under sub-section (4) of section 132 in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived; (ii ) substantiates the manner in which the undisclosed income was derived; and (iii) pays the tax, together with interest, if any, in respect of the undisclosed income. It is further proposed to provide that no penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be levied or imposed upon the assessee in respect of the undisclosed income referred to in proposed new section. It is also proposed to provide that the provisions of section 274 and section 275 shall, so far as may be, apply in relation to the penalty leviable under the proposed new section.

For the purposes of this section it has been proposed to define undisclosed income so as to mean—(i) any income of the specified previous years represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or which has otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of the search; or (ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.

For the purposes of this section, it has also been proposed to define specified previous year so as to mean the previous year—(i) which has ended before the date of search, but the date of filing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the said date; or (ii) in which search was conducted.

It is also proposed to provide an appeal to the Commissioner against levy of penalty under the proposed new section 271AAA.

This amendment will take effect from 1st April, 2007 and will accordingly apply in relation to assessment year 2007-2008 and subsequent years in cases where search under section 132 is initiated on or after 1st June, 2007.

[Clauses 62, 67 and 68]

RATIONALISATION AND SIMPLIFICATION OF ADMINISTRATIVE AND COMPLIANCE PROCEDURES

Clarificatory amendment to the definition of ‘Assessing Officer’ and definition of certain other Income-tax Authorities

Under the existing provisions of clause (7A) to section 2, the expression "Assessing Officer" has been defined to include Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act. The Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of section 120 can also exercise or perform all or any of the powers and functions conferred on or assigned to an Assessing Officer under this Act. The Income-tax authorities- "Additional Commissioner" and "Additional Director" were not specifically mentioned in the said definition as "Additional Commissioner" and "Additional Director" were included in the definition of Joint Commissioner and Joint Director under clauses (28C) and (28D) of the said section respectively.

With a view to clarify the meaning of the expression "Assessing Officer", it is proposed to amend said clause (7A) so as to include Additional Commissioner in the said clause. This amendment will take effect retrospectively from 1st June, 1994.

With a view to clarify the meaning of the expression "Assessing Officer", it is further proposed to amend the said clause (7A) so as to include Additional Director in the said clause. This amendment will take effect retrospectively from 1st October, 1996.

It is also proposed to insert clause (IC) in the said section so as to provide that "Additional Commissioner" means a person appointed to be an Additional Commissioner of lncome-tax under sub-section (1) of section 117. It is further proposed to insert clause (ID) in the said section so as to provide that "Additional Director" means a person appointed ‘to be an Additional Director of Income- tax under sub-section (1) of section 117. The said amendment is clarificatory in nature. This amendment will take effect retrospectively from 1st June, 1994.

It is also proposed to bring similar amendments in the Wealth-tax Act so as to provide that Assessing Officer shall include Additional Commissioner and Additional Director.

It is also proposed to insert clause (9B) in the said section so as to provide that "Assistant Director" means a person appointed to be an Assistant Director of Income-tax under sub-section (1) of section 117. This amendments will take effect retrospectively from 1st April, 1988.

[Clauses 3 and 74]

Substitution of the power of notification of certain charitable and religious entities by power of approval by the prescribed authority

Sub-clause (iv) of clause (23C) of section 10 provides that the income of any fund or institution established for charitable purposes which may be notified by the Central Government in the Official Gazette, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States, shall be exempt. Sub-clause (v) of clause (23C) of section 10 provides that the income of any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be notified by the Central Government in the Official Gazette, shall be exempt.

It is proposed to amend the said sub-clauses (iv) and (v) so as to provide that such exemption shall be available to the entities referred to therein, if they are approved by the prescribed authority.

Consequential amendments are proposed in the second proviso, ninth proviso and thirteenth proviso to clause (23C) of section 10, so as to include a reference to approval granted under sub-clause (iv) or sub-clause (v) of the said clause in addition to notification issued under the said sub-clauses. It is also proposed to insert a new proviso after the fifteenth proviso so as to provide that all pending applications in respect of which no notification has been issued under the said sub-clause (iv) or (v) before the 1st day of June, 2007, shall stand transferred on that day to the prescribed authority and the prescribed authority may proceed with such applications under those sub-clauses from the stage at which they were on that day.

Consequential amendment is also proposed in sub-clause (ii ) of the proviso to sub-section (3) of section 143. Consequential amendment is also proposed in section 296 so as to provide that notifications issued before the 1st day of June, 2007 under sub- clause (iv ) of clause (23C) of section 10 shall be placed before each House of Parliament within the specified period.

These amendments will take effect from 1st June, 2007.

[Clauses 6, 38 and 71]

Removal of the requirement for charitable or religious trusts or institutions to file for registration within one year of creation or establishment

Under the existing provisions of section 12A, in order to claim exemption under sections 11 and 12, a charitable or religious trust or institution is required to make an application for registration in the prescribed form and in the prescribed manner to the Commissioner within one year from the date of its creation or establishment and has to be registered under section 12AA. The section also provides that where such application is made after the aforesaid period, the Commissioner may condone such delay, if he is satisfied that the application was delayed for sufficient reasons. On such condonation of delay, the provisions of sections 11 and 12 shall apply in respect of the income of such trust or institution from the date of creation of the trust or establishment of the institution. However, where the Commissioner is not so satisfied, the provisions of sections 11 and 12 shall apply only from the 1st day of the financial year in which the application is made.

Amendment is proposed in section 12A to provide that the provisions of clause (a) shall not apply in relation to any application made on or after the 1st day of June, 2007.

It is also proposed to number section 12A as sub-section (1) of section 12A and to insert a new clause (aa) therein to provide that the provisions of sections 11 and 12 shall not apply in relation to the income of the trust or institution (where any application for registration has not been made under clause (a) before the first day of June, 2007), unless the person in receipt of the income has made an application for such registration on or after the 1st day of June, 2007 in the prescribed form and in the prescribed manner to the Commissioner and such trust or institution is registered under section 12AA.

It is also proposed to insert a new sub-section (2) in section 12A so as to provide that where an application has been made on or after the 1st day of June, 2007, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution for the assessment year immediately following the financial year in which such application is made.

Through the above amendments, a trust or institution will no longer be required to file an application for registration within one year from the date of its creation or establishment. Besides, the power of the Commissioner to grant registration for past years, by condoning the delay in filing such application, shall stand removed. Accordingly, in respect of applications filed on or after the 1st day of June, 2007, the provisions of sections 11 and 12 shall apply from the assessment year relevant to the financial year in which the application is made.

Consequential amendments are also proposed to be made in sub-sections (1) and (2) of section 12AA to include a reference to an application for registration of a trust or institution made under the newly inserted clause (aa) of sub-section (1) of section 12A.

These amendments will take effect from 1st June, 2007.

[Clauses 8 and 9]

Extension of Time limitation for making assessment where a reference is made to the Transfer Pricing Officer

Under the existing provisions of the Income-tax Act, there is no extra time available to the Assessing Officer for competing the assessment or reassessment in cases where a reference is made by him under sub-section 92CA to the Transfer Pricing Officer for determination of the Arm’s length price of an international transaction. Since, the time limit for selection of cases for scrutiny is one year from the end of the month in which the return was filed, references to Transfer Pricing Officers are made mostly after one year of filing of the return. Thus, Transfer Pricing Officers are not getting adequate time to make a meaningful audit of transfer price in cases referred to them.

With a view that the Transfer Pricing Officers as well as the Assessing Officers get sufficient time to make the audit of transfer price and the assessment in cases involving international transactions, it has been proposed to revise the time limits specified in sections 153 and 153B for making the assessment or reassessment in cases where a reference has been made to the Transfer Pricing Officer. The revised time limits in such cases shall be the time limits specified under the aforesaid sections, as increased by twelve months. It is further proposed to provide that the Transfer Pricing Officer shall determine the Arm’s length price at least two months before the expiry of new statutory time limit for making the assessment or reassessment.

Under the existing provisions of sub-section (4) of section 92CA, it has been provided that on receipt of the order under sub-section (3) of said section, the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the Arm’s length price determined under sub-section (3) by the Transfer Pricing Officer.

It has been proposed to amend said sub-section (4) of section 92CA so as to provide that, on receipt of the order under sub- section (3) of section 92CA, the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the Arm’s length price determined under sub-section (3) of section 92CA by the Transfer Pricing Officer.

These amendments will take effect from 1st June, 2007 and shall also be applicable in cases where a reference to the Transfer Pricing Officer was made prior to 1-7-2007 but the Transfer Pricing Officer did not pass the order under sub- section (3) of section 92CA before the said date.

[Clauses 25,39 and 40]

Rationalising provisions relating to the jurisdiction of Income-tax Authorities

Under the existing provisions of clause (b) of sub-section (4) of section 120, the Board may, by general or special order, and subject to such conditions, as specified therein, empower the Director General or Chief Commissioner or Commissioner to issue orders in writing that the powers and functions conferred on, or as the case may be, assigned to, the Assessing Officer by or under this Act in respect of any specified area or persons or classes of persons or incomes or classes of incomes or classes of cases, can be exercised or performed by a Joint Commissioner or Joint Director. Where any order is made under this clause, references in any other provisions of this Act, or to any rule made thereunder to the Assessing Officer shall be deemed to be references to such Joint Commissioner or Joint Director by whom the powers and functions are to be exercised or performed under such order, and any provision of this Act requiring approval or sanction of the Joint Commissioner shall not apply.

It is proposed to amend clause (b) of sub-section (4) of the said section so as to provide that the powers and functions conferred on or assigned to the Assessing Officer may also be exercised or performed by an Additional Commissioner.

This amendment will take effect retrospectively from 1st June, 1994.

It is further proposed to amend the said clause to provide that the powers and functions conferred on or assigned to the Assessing Officer may also be exercised or performed by the Additional Director.

This amendment will take effect retrospectively from 1st October, 1996.

[Clause 33]

Rules for facilitating annexure-less returns

Under the existing provisions contained in explanation to sub-section (9) of section 139, it is provided that a return of income shall be regarded as defective unless, the conditions specified in clauses (a) to (f) of the explanation to the said sub-section are fulfilled. The Finance Act, 2006, amended the said section by inserting a proviso to the said sub-section (9), conferring on the central Board of Direct Taxes, to dispense with any of the conditions specified in clauses (a) to (f) of the explanation. However, apart from the conditions specified in clauses (a) to (f) of the explanation to the said sub-section, documents, statements, receipts, certificate, audited reports or any other documents are also required to be annexed for claiming benefits or deductions under the Income-tax Act as specified under other sections.

It is proposed to insert a new section 139C so as to provide that the Board may make rules providing for a class or classes of persons who may not be required to furnish documents, statements, receipts, certificate, audited reports or any other documents, which are otherwise required to be furnished along with the return under any other provisions of this Act. However, on demand the said documents, statements, receipts, certificate, audited reports or any other documents are to be produced before the Assessing Officer.

It is also proposed to insert a new section 139D so as to provide that the Board may make rules providing for the class or classes of persons who shall be required to furnish the return of income in electronic form; the form and the manner in which the return of income in electronic form may be furnished; the documents, statements, receipts, certificates or audited reports which may not be furnished along with the return of income in electronic form but have to be produced before the Assessing Officer on demand; the computer resource or the electronic record to which the return of income in electronic form may be transmitted.

Consequentially, it is proposed to insert new clauses (eeba ) and (eebb) in sub-section (2) of section 295 which provides for rule making powers of the Board.

These amendments will take retrospective effect from the 1st of June, 2006.

As the provisions contained in the proviso to sub-section (9) of section 139 has been incorporated in the new sections 139C and 139D, it is proposed to omit the proviso to the explanation to sub-section (9) of section 139.

This amendment will take effect from 1st June, 2006.

[Clauses 35, 36 and 70]

Rationalisation of provision relating to special audit under section 142(2A)

Under the existing provisions of sub-section (2A) of section 142, at any stage of the proceedings before him, if the Assessing Officer having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288. The accountant is to be nominated by the Chief Commissioner or Commissioner in this behalf and he is to furnish a report of such audit in the prescribed form duly signed and verified by him and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require. Sub-section (2D) of section 142 provides that the expenses of, incidental to, any audit under sub-section (2A) (including the remuneration of the accountant) shall be determined by the Chief Commissioner or Commissioner (which determination shall be final) and paid by the assessee and in default of such payment, shall be recoverable from the assessee in the manner provided in Chapter XVII-D for the recovery of arrears of tax.

The provisions of sub-section (2A) of section 142 of Income-tax Act were reviewed by the Hon’ble Supreme Court in the case of Rajesh Kumar and Others v. Deputy Commissioner of Income-tax Others [287 ITR 91 (2006)]. The Hon’ble Supreme Court observed that the direction under sub- section (2A) of section 142 of Income-tax Act for special aduit of the accounts of the assessee is not administrative in nature and is a quasi-judicial order. Therefore, while arriving upon a decision to order special audit under the said provisions, the principles of natural justice are required to be applied, inter alia, to minimize arbitrariness. The Hon’ble Apex Court further observed that the expression "having regard to the nature and complexity of accounts" is significant, and if the assessee is put to a notice, he could show that the nature of the accounts is not such as would require appointment of a special auditor, and assessee could further show that what the Assessing Officer considers complex is, in fact not so. For these reasons, the Hon’ble Apex Court held that it is necessary to give an opportunity to the assessee before arriving upon a decision for ordering a special audit under sub-section (2A) of section 142. This issue again came up for consideration by the Hon’ble Supreme Court in the case of M/s. Sahara India. The Hon’ble Court observed that the decision in the case of Rajesh Kumar and others does not appear to be the correct position of law and accordingly referred the matter to a larger bench. The Court also directed that the order directing the Special Audit shall be operative and assessment proceedings, if any, shall continue subject to the outcome of the petition in this case. The decision of the Larger Bench is awaited.

There is no legislative intent to allow the assessee an opportunity of being heard before ordering a special audit under sub-section (2A) of section 142 of the Income-tax Act. Accordingly the Income Tax Department has over the years ordered a large number of special audit without giving any opportunity to the taxpayer of being heard. While it is not feasible to give effect to the ratio of the decision of the Hon’ble Supreme Court in the case of Rajesh Kumar and others in view of the large number of cases where such audit has been ordered in the past, respectfully following the decision of the Hon’ble Supreme Court in the said case, it is proposed to provide, prospectively, that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.

It is further proposed to insert a proviso to the said sub-section (2D) so as to provide that where any direction is issued under sub-section (2A) by the Assessing Officer to an assessee to get the accounts audited, the expenses of, and incidental to, such audit (including the remuneration of the Accountant) shall be determined by the Chief Commissioner or Commissioner in accordance with such guidelines as may be prescribed and the expenses so determined shall be paid by the Central Government.

These amendments will take effect from 1st June, 2007.

[Clause 37]

Assessment of search cases-Orders of assessment and reassessment to be approved by the Joint Commissioner

Under the existing provisions of making assessment and reassessment in cases where search has been conducted under section 132 or requisition is made under section 132A, no approval for assessment is required.

It is proposed to insert a new section 153D to provide that no order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner except with the previous approval of the Joint Commissioner. Such provision is proposed to be made applicable to orders of assessment or reassessment passed under clause (b) of section 153A in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A. It is further proposed to make the provision applicable to orders of assessment passed under clause (b) of section 153B in respect of the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A. The provisions of the said new section shall be applicable in case of a person referred to in section 153A and also in case of other person referred to in section 153C.

This amendment will take effect from 1st June, 2007.

[Clause 41]

Providing time limit for completion of assessments for returns filed under section 172

The provisions of section 172 relate to shipping business of non-residents which, inter alia, require preparation and furnishing of the return before departure of the ship, or within a maximum period of thirty days from the date of departure of the ship subject to certain conditions. The existing provisions of the said section, however, do not provide for a time limit for completion of assessment in respect of a return furnished under sub-section (3) thereof.

The amendment, therefore, proposes to insert a new sub-section (4A) providing that no order assessing the income and determining the sum of tax payable thereon shall be made under the said section after the expiry of nine months from the end of the financial year in which the return under sub-section (3) is furnished.

The amendment further proposes to insert a proviso to the proposed sub-section (4A) so as to provide that where a return under sub-section (3) is furnished before the 1st day of April, 2007, the order assessing the income and determining the sum of tax payable thereon may be made at any time on or before the 31st day of December, 2008. This will give a longer time limit of 21 months to complete all pending assessments under section 172.

These amendments will take effect retrospectively, from 1st day of April, 2007.

[Clause 42]

Change of method for calculation of interest from per annum basis to per month basis

Sub-section (1A) of section 201 provides that the person who has not deducted the whole or any part of the tax or after deduction has failed to pay the tax as required by or under the Act, shall be liable to pay simple interest at the rate of twelve per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.

On the other hand, under the other provisions of the Income-tax Act which relate to charge of interest from the assessee, namely, sections 220, 234A, 234B and 234D interest chargeable from the assessee is calculated for every month or part of a month comprised in the period for which interest is to be charged. Under section 234C(1)(a)( i), simple interest is charged at the rate of one per cent per month for the period specified in that section. Under section 244A also under which interest is paid on refunds to the assessee, interest is calculated for every month or part of a month.

The difference between calculation of interest on per annum basis and per month basis lies in the difference in procedure followed for calculation of interest under these two methods. When interest is calculated on per annum basis, any fraction of a month is ignored and when interest is calculated for every month or part of a month basis, any fraction of a month is deemed a full month and interest is calculated for the full month. This principle has been followed in framing rule 119A which provides for procedure for calculation of interest on annual or monthly basis.

Under the widely applicable provisions of sections 220(2), 234A, 234B, 234C, 234D and 244A, interest is chargeable on per month basis. Accordingly, the amendment proposes to change the method for calculation of interest to per month basis from the existing per annum basis under clause (a) of sub-section (4) of section 132B, sub-section (1A) of section 201, sub-section (6A) of section 245D, rule 60(1)(a) and rule 68A(3) of the Second Schedule to the Income-tax Act, and sub-section (6A) of section 22D of the Wealth- tax Act.

The proposed amendments regarding change of method of calculation of interest to monthly basis will be applicable in respect of interest chargeable or payable for the period commencing on or after 1st April, 2008. For any period ending on or before 31st March, 2008, interest shall continue to be charged or paid on per annum basis under the aforementioned sections and rules to the Second Schedule which are proposed to be amended. How will interest chargeable or payable be calculated in a case in which both the periods, that is, the period before 31st March, 2008 and the period thereafter are involved? The answer is that in respect of any period commencing on or before 31st March, 2008 and ending after that date, interest shall, in respect of so much of such period as falls after that date, be calculated on per month basis.

These amendments will take effect on 1st April, 2008.

[Clauses 34, 50 and 55]

Providing for the right to appeal against an order holding a person as an assessee in default under section 206C(6A)

The existing provisions of sub-section (6A) of section 206C deem a person responsible for collecting tax to be the assessee in default in respect of the whole or any part of the tax which he fails to collect or after collection fails to pay in accordance with the provisions of the Act. The Assessing Officer is required to pass an order deeming such person an assessee in default.

By virtue of the provisions of the aforesaid sub-section (6A), a liability is visited upon the person responsible for collecting tax and payment thereof as taxes become recoverable from him. Such person should, therefore, be entitled to file an appeal against the order of the Assessing Officer deeming him as an assessee in default. Provisions for appeal already exist against similar order passed by the Assessing Officer under sub-section (1) of section 201 whereby a person is deemed as an assessee in default if he fails to deduct or after deducting fails to pay the tax to the Government account.

The amendment, therefore, provides for insertion of a new clause ( hb) in sub-section (1) of section 246 to provide that a person deemed as an assessee in default may appeal before the Commissioner (Appeals).

The amendment also proposes to insert a new sub-section (1B) in section 246 to provide that an appeal filed by an assessee in default against an order made under sub-section (6A) of section 206C on or after 1st day of April, 2007 but before 1st day of June, 2007 shall be deemed to have been filed before the Commissioner (Appeals) under new clause (hb) of sub-section (1) of section 246.

These amendments will take effect from 1st June, 2007.

[Clause 62]

Provision of appeal by a person denying liability to deduct tax

Under the existing provisions of section 248, it is provided that where any person has deducted and paid tax in accordance with the provisions of sections 195 and 200 in respect of any sum chargeable under the Act, other than interest and who denies his liability to make such deductions, may make an appeal to the Commissioner (Appeals) to be declared not liable to make such deductions.

It is proposed to substitute section 248 so as to provide that where under an agreement or other arrangement, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income.

This amendment will take effect from 1st June, 2007.

[Clause 63]

Provision for Form of appeal and limitation: Consequential to the amendment made to section 248

Under the existing provisions of sub-section (2) of section 249, the different situations and the relevant dates from which thirty days for filing appeal shall be counted has been provided. The provisions of clause (a) of sub-section (2) provide that where the appeal relates to any tax deducted under sub-section (1) of section 195, thirty days for filling appeal shall be counted from the date of payment of the tax.

It is proposed to amend section 248 so as to provide for an appeal by a person, who has paid the tax deductible on income of the non-resident under ‘net of tax’ arrangement and who is denying that any tax was deductible. Consequentially, it is proposed to amend clause (a) of sub-section (2) of section 249 providing that where the appeal is under section 248, the prescribed time shall be counted from the date of payment of tax.

This amendment will take effect from 1st June, 2007.

[Clause 64]

Provision relating to approval of charitable institutions and funds

Under the existing provisions of section 80G, deductions in respect of donations to certain funds, charitable institutions is available from the taxable income of the donor. The said section provides for two categories of funds - one that are enumerated in sub-section (2) and the secondly, those funds which are approved by the Commissioner under clause (vi) of sub-section (5) of the said section.

Presently, under section 253, no appeal lies to the Appellate Tribunal against the order of rejection of approval by the Commissioner under section 80G(5)(vi). It is, therefore, proposed to amend section 253 so as to allow an appeal to be filed against such orders of the Commissioner before the Appellate Tribunal.

This amendment will take effect from 1st June, 2007.

[Clause 65]

Prescribing time-limit for grant of stay by the Appellate Tribunal

Under the existing provisions of section 254, the Appellate Tribunal may pass an order of stay in any proceeding relating to an appeal filed before it. In such cases, the Appellate Tribunal shall dispose of the appeal within a period of one hundred and eighty days from the date of such order. If the appeal is not decided within the period for which the stay was granted, the stay order shall be vacated after the expiry of the stay period.

It is proposed to amend section 254, so as to provide that the Appellate Tribunal, after considering the merits of the application made by the assessee, may pass an order of stay in any proceeding relating to an appeal filed under sub-section (1) of section 253, for a period not exceeding one hundred and eighty days from the date of such order. The Appellate Tribunal shall dispose of the appeal within the said period of stay specified in that order.

It is further proposed to provide that where such appeal is not disposed of within the aforesaid period of stay, the Appellate Tribunal may extend the period of stay or pass an order of stay for a further period or periods as it thinks fit. Such extension in the period of stay is to be granted on an application made in this behalf by the assessee and after the Appellate Tribunal is satisfied that the delay in disposing of the appeal is not attributable to the assessee. It has also proposed to provide that the aggregate of the period originally allowed and the period or periods so extended or allowed shall not in any case exceed three hundred and sixty five days. The Appellate Tribunal shall dispose of the appeal within the period or periods of stay so extended or allowed.

It is also proposed to provide that if the appeal is not disposed of within the period originally allowed or within the period or periods, subsequently extended, the order of stay shall stand vacated after the expiry of such period or periods.

This amendment will take effect from 1st June, 2007.

[Clause 66]

Clarification in respect of presumption as to seized books of account, money, bullion, jewellery or other valuable article or thing to other proceedings under the Income-tax Act

Under the existing provisions of sub-section (4A) of section 132, it is provided that the books of account, money, bullion, jewellery or other valuable article or thing found in the possession or control of any person in the course of a search under section 132 will be presumed to belong to the said person. It is further provided that it will be presumed that the contents of such books of account and other documents are true; and that the signature and every other part of such books of account and other documents which purport to be in handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person’s handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.

A new section 292C has been inserted so as to clarify that presumptions provided in sub-section (4A) of section 132 can be made in any proceedings under this Act.

It is also proposed to provide similar amendment in the Wealth-tax Act by insertion of a new section 42D.

This amendment will take effect retrospectively from the 1st day of October, 1975.

[Clauses 69 and 84]

REVISED SETTLEMENT SCHEME

Chapter XIX-A of the Income-tax Act contains provisions relating to settlement of cases by the Settlement Commission. With a view to avoid delay in determining the tax liability of an assessee which is caused because of factors like duplication of proceedings, absence of statutory time frame for settling the case, and also with a view to streamline the proceedings before the Settlement Commission, it is proposed to amend the provisions of said Chapter XIX-A of the Income-tax Act. The important changes proposed to be made are—

  (i)  Under the existing provisions, an assessee may make an application to the Commission at any stage of the proceedings in his case pending before any Income-tax Authorities. It is proposed to provide that after 31st May, 2007, an assessee can make an application to the Commission only during the pendency of the proceedings before the Assessing Officer. Further, an assessee shall not be allowed to make the application before the Commission during the pendency of following proceedings of assessment—

   (a)  Assessment/reassessment proceedings in response to a notice under section 148. These proceedings shall be deemed to have commenced on the date on which notice under section 148 was issued;

   (b)  assessment or reassessment proceedings under section 153A for each of six assessment years preceding the assessment year relevant to the previous year in which a search under section 132 was conducted or a requisition under section 132A was made; and also the assessment or reassessment proceedings in case of such persons for the assessment year relevant to the previous year in which the search under section 132 was conducted or the requisition under section 132A was made. These proceedings shall be deemed to have commenced on the date on which the search under section 132 was initiated or the requisition under section 132A was made;

    (c)  proceedings of making fresh assessment where original assessment was set aside under section 254 by the Appellate Tribunal or under section 263 or section 264 by the Commissioner. Such proceedings shall be deemed to have commenced from the date on which the order set asiding the original assessment was passed;

 (ii)  Under the existing provisions, an application can be made only if the additional amount of income-tax payable on the income disclosed in the application exceeds one lakh rupees. It is proposed to enhance this limit to three lakh rupees.

(iii)  Under the existing provisions, the income-tax payable on the income disclosed in the application has to be paid after the application is allowed to be proceeded with under sub-section (1) of section 245D. It is proposed to provide that such tax alongwith interest, if any, shall be paid on or before the date of making the application and proof of such payment shall be attached with the application. It is also proposed to provide that the applicant shall send a copy of the application to the Assessing Officer on the date of making the application before the Commission.

 (iv)  Under the existing provisions, the Commission, on receipt of an application, calls for a report from the Commissioner. After considering the material contained in such report and having regard to the nature and circumstances of the case or the complexity of the investigation involved, the Commission passes an order to reject the application or to allow the application to be further proceeded with. Under the existing provisions, there is no statutory time limit for passing the order for rejecting or allowing the application to be proceeded with. However, a suggestive time limit of one year from the end of the month in which such application was made has been provided. It is proposed to provide that the Settlement Commission, within 7 days of receipt of the application shall issue a notice to the applicant to explain as to why his application be admitted. Thereafter, within 14 days from the date of receipt of the application, the Settlement Commission shall pass an order for rejecting the application or allowing the application to be proceeded with. Complexity of the investigation involved in a case shall not be the criteria for admitting or rejecting the application. Further,where no order or rejection or admission of an application is passed within the aforesaid period, the application shall be deemed to have been allowed to be proceeded with. It has also been proposed to provide that—

   (a)  the applications which were made before 1st June, 2007 but pending on that date as to whether to be rejected or allowed to be proceeded with, shall be deemed to have been allowed to be proceeded with if the tax on the income disclosed in the application and the interest is paid on or before 31st July, 2007. In case, such tax and interest is not paid on or before the aforesaid date, the application shall be deemed to have been rejected;

   (b)  in respect of applications which were admitted before 1st June, 2007 but order of settlement was not passed before the said date, the tax on the income declared in the application and interest thereon shall have to be paid on or before 31st July, 2007. Tax and interest shall be paid by this date even in cases where the Commission has already granted any extension or instalment for payment of tax beyond the said date. If the tax and interest is not paid on or before 31st July, 2007, the application shall not be allowed to be further proceeded with and the proceedings before the Commission shall abate on 31st July, 2007.

  (v)  If an application made on or after 1st June, 2007 is allowed to be proceeded, the Settlement Commission shall issue a notice to the Commissioner within 30 days from the date on which the application was received. In case of applications referred to in (iv)(a ) above, if the tax and interest has been paid before 31st July, 2007, such notice shall be issued to the Commissioner on or before the 7th day of August, 2007. The Commissioner shall send his report within 30 days from the date on which the communication from the Settlement Commission is received by him;

 (vi)  On receipt of the report of the Commissioner, the Settlement Commission shall hear the applicant and the Commissioner within fifteen days from the date of receipt of the report. If it is found that the application was not a valid application, the Commission by passing an order may declare the application invalid. Copy of the order declaring an application invalid will have to be sent to the applicant and the Commissioner. In case an application is declared invalid the proceedings before the Commission shall abate. If the Commissioner does not send the report within the specified period, the Commission may proceed in the matter further without the report of the Commissioner.

(vii) In respect of applications made before 1-7-2007 and referred to in (iv)( a) or (iv )(b), above which are not declared invalid or as the case may be, allowed to be further proceeded with, the Settlement Commission, if, is of the opinion to do so, may direct the Commissioner to make or cause to be made such further inquiry or investigation as it deems fit. The Commissioner shall submit his report within 90 days from the date on which the communication from the Settlement Commission is received by him;

(viii)The Commission shall, after giving an opportunity to the Commissioner and to the applicant and considering the reports of the Commissioner and other material available with it, pass the settlement order. Under the existing provisions, there is no time limitation for making the order of settlement. It is proposed that the Commission shall pass such order within 9 months from the end of the month in which the application was received. In respect of applications referred to in (iv )(a) or (iv)(b ) above, the Settlement Commission shall pass the order on or before 31st March, 2008;

 (ix)  Under the existing provisions, it is provided that the Commission may grant immunity from prosecution under Indian Penal Code, Income-tax Act and any other Central Act. It is proposed that to provide that the Commission shall not grant immunity from prosecution under any law other than Income-tax Act and Wealth-tax Act. However, in respect of pending applications, the existing provisions shall continue.

  (x)  Under the existing provisions, it is provided that the Commission may, if. It is necessary or expedient to do so, reopen completed proceedings. It is proposed to provide that the Commission shall not have powers to reopen the completed proceedings in a case where an application under section 245C has been filed on or after 1st June, 2007.

 (xi)  It is also proposed that, if the application made on or after 1-7-2007 is rejected or such application or an application referred to in (iv)( a) above is declared invalid or an application referred to in (iv)( b) above is not allowed to be further proceeded with or the settlement order is not passed within the specified period, the proceedings before the Commission shall abate and the Assessing Officer or other income-tax Authority before whom the proceeding were pending at the time of making the application, as the case may be, shall resume and complete the proceeding. Credit shall be allowed for the tax and interest paid by the applicant by the Assessing Officer. The period from the date on which the application was made before the Commission and upto the date on which proceedings get abated shall be excluded from the time limitation for completing the proceedings by the Assessing Officer;

(xii) It is also proposed to provide that after 1-6-2007, an assessee can apply for settlement only once during his lifetime. For this purpose, an application which was not admitted shall not be deemed to be an application;

(xiii)It is also proposed to provide that the definition of "Vice-Chairman" shall include the senior Member among the Members of a Bench so that, if there is no Vice-Chairman at a Bench, it can be presided over by a Member who is senior amongst the Members of the Bench;

(xiv) Chapter V-A of the Wealth-tax Act also contains similar provisions for settling a Wealth-tax case by the Settlement Commission. It has been proposed to bring similar amendments in the Wealth-tax Act also.

(xv)  These amendments will take effect from 1st June, 2007.

[Clauses 53, 54, 55, 56, 57, 58, 59, 60, 61] and

[Clauses 75, 76, 77, 78, 79, 80, 81, 82, 83]

MISCELLANEOUS

Exemption for income of ASOSAI-SECRETARIAT

Clause (23BBD) of section 10 provides that any income of the Secretariat of the Asian Organisation of the Supreme Audit Institutions registered as "ASOSAI-SECRETARIAT" under the Societies Registration Act, 1860 for seven previous years relevant to the assessment years beginning on the 1st day of April, 2001 and ending on the 31st day of March, 2008, shall not be included in the total income. The Comptroller and Auditor General of India is the Secretary General of ASOSAI and its Secretariat functions from his office.

Since the term of the Comptroller and Auditor General of India as the Secretary General of ASOSAI has been extended by another three years, it is proposed to amend the said clause so as to extend the said exemption for a further period of three assessment years beginning on the 1st day of April, 2008 and ending on the 31st day of March, 2011.

This amendment will take effect from 1st April, 2008 and will apply in relation to the assessment years 2008-2009, 2009-2010 and 2010-2011.

[Clause 6]

Exemption for income of Central Electricity Regulatory Commission

It is proposed to insert a new clause (23BBG) in section 10 to provide exemption from income-tax to any income of Central Electricity Regulatory Commission constituted under sub-section (1) of Section 76 of the Electricity Act, 2003.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clause 6]

Amalgamation of Public Sector Companies engaged in the business of operation of aircraft

Under the existing provisions of section 72A, the accumulated losses and unabsorbed depreciation of the amalgamating companies or company shall be set-off against the profit of the amalgamated company. Presently, the benefit is available in case of amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company. Such benefits are also available in the case of amalgamation of a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 with a specified bank.

It is proposed to amend the said section so as to extend the benefits of carry-forward and set-off of accumulated losses and unabsorbed depreciation available under section 72A to amalgamation of one or more Public Sector Company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

[Clause 17]

FRINGE BENEFIT TAX

Rationalizing the provisions of Fringe Benefit Tax

Section 115WB defines fringe benefits and deemed fringe benefits. Under sub-section (1) of section 115WB the expression ‘fringe benefits’ has been defined, which, inter alia, means any privilege, service, facility or amenity, directly or indirectly, provided by an employer to his employees, any contribution by the employer to an approved superannuation fund for the employees, etc.

With a view to bring Employees’ Stock Option Plan within the purview of fringe benefit tax, it is proposed to insert a new clause (d) in sub-section (1) of section 115WB so as to include any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), within the ambit of "fringe benefits".

It is also proposed to define the expressions "specified security" and "sweat equity shares" for the purposes of the proposed clause (d).

Sub-section (2) of the said section 115WB provides that the fringe benefits shall be deemed to have been provided by the employer to his employees, if the employer has in the course of his business or profession, incurred any expense on or made any payment for the purposes of entertainment, hospitality, conference, sales promotion (including publicity), etc. Proviso to clause (D) of sub-section (2) of section 115WB excludes certain expenditure on advertisement from sales promotion including publicity. Clause (v) of the proviso refers to expenditure on advertisement by way of signs, art work, painting, banner, etc. Clause (vii) of the proviso refers to the expenditure on distribution of free samples of medicines or of medical equipment to doctors.

To expand the domain of such exceptions to provide relief to employers, it is proposed to amend clause (v) and to substitute clause (vii) of the proviso to clause (D) of sub-section (2) of section 115WB so as to provide that the expenditure on display of products and on distribution of samples of any item either free of cost or at concessional rate to any person including doctors, shall not be included in ‘sales promotion including publicity’ for valuation of fringe benefits.

Under the existing provisions contained in section 115WC, the method of computation of the value of fringe benefits referred to in section 115WB has been provided.

It is proposed to insert a new clause (ba) in sub-section (1) of the said section 115WC so as to provide that the fair market value of the specified security or sweat equity shares, on the date of exercise of the option by the employee as reduced by the amount actually paid by, or recovered from the employee in respect of such security or shares, shall be the value of fringe benefits referred to in the proposed clause (d) of sub-section (1) of section 115WB.

It is further proposed to define the expression "fair market value" to mean the value determined in accordance with the method as may be prescribed by the Board.

Consequent to the insertion of clause (d) in sub-section (1) of section 115WB, it is also proposed to omit proviso to sub-clause (iii) of clause (2) of section 17 which provides that the value of any benefit provided by the company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees’ Stock Option Plan or scheme of the company offered to such employees in accordance with the guidelines issued by the Central Government, is not a "perquisite" for the purposes of section 17.

Consequent to insertion of clause (ba) in sub-section (1) of section 115WC providing for the value of fringe benefits referred to in clause (d) of sub-section (1) of section 115WB, it is also proposed to insert a new sub-section (2AB) in section 49 so as to provide that for the purposes of said sub-section (2AB) of section 49, the cost of acquisition of specified security or sweat equity shares shall be the value under the proposed clause (ba ) of sub-section (1) of section 115WC if such value has been taken into account for the purposes of levy of fringe benefit tax.

These amendments will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

[Clauses 10, 14, 30 and 31]

Alignment of due date for payment of advance tax on fringe benefits with that of advance tax on income

Section 115WJ provides that every assessee who is liable to pay advance tax on his current fringe benefits shall pay the same on his own accord.

Sub-section (2) of section 115WJ provides that the advance tax payable in the financial year on the value of the fringe benefits referred to in section 115WC, shall be payable on or before the 15th day of the month following each quarter. However, the advance tax payable for the quarter ending on the 31st March of the financial year shall be payable on or before the 15th day of March of the said financial year.

Sub-section (3) of section 115WJ provides that where an assessee has failed to pay the advance tax for any quarter or where the advance tax paid by him is less than thirty per cent of the value of fringe benefits paid or payable in that quarter, he shall be liable to pay simple interest at the rate of one per cent on the amount by which the advance tax paid falls short of, thirty per cent of the value of fringe benefits for any quarter, for every month or part of the month for which the shortfall continues.

It is proposed to substitute sub-section (2) of the said section so as to provide that the amount of advance tax on the current fringe benefits shall be payable by all the companies, who are liable to pay the same, in four instalments during each financial year. The companies shall pay not less than fifteen per cent of such advance tax on or before 15th June; forty-five per cent as reduced by the amount paid in earlier instalment on or before 15th September; seventy-five per cent as reduced by the amount paid in earlier instalment(s) on or before 15th December; and the whole amount as reduced by any amount paid in earlier instalment(s) on or before 15th March of the financial year. All assessees (other than companies), who are liable to pay the advance tax on current fringe benefits shall pay the same in three instalments during each financial year. Such assessees shall pay not less than thirty per cent of such advance tax on or before 15th September; sixty per cent as reduced by the amount paid in earlier instalment on or before 15th December; and the whole amount as reduced by any amount paid in earlier instalment(s) on or before 15th March of the financial year.

It is further proposed to substitute sub-section (3) of section 115WJ so as to provide that where an assessee has failed to pay the advance tax payable by him on or before the due date for any instalment or where the advance tax paid by him is less than the amount payable by the due date, he shall be liable to pay simple interest at the rate of one per cent. of the amount by which the advance tax paid falls short of the amount payable by the due date for every month or part of the month for which the shortfall continues.

These amendments will take effect from 1st June, 2007.

[Clause 32]

BANKING CASH TRANSACTION TAX (BCTT)

Exclusion of office or establishment of the Central Government or the Government of a State and enhancement of exemption limit in the provisions of Banking Cash Transaction Tax (BCTT)

Under the existing provisions of Banking Cash Transaction Tax (BCTT), as contained in Chapter VII of the Finance Act, 2005, in section 94, tax is levied at the rate of 0.1 per cent (10 basis points) on taxable banking transactions. Such banking transactions include- (i) Withdrawals of cash (by whatever mode) exceeding Rs. 25,000 in the case of individuals and HUFs and Rs. 1,00,000 for other taxable entities on any single day from an account (other than a saving bank account) with any scheduled bank; and (ii) Receipt of cash exceeding a specified limit from any scheduled bank on any single day on encashment of one or more term deposits, whether on maturity or otherwise. The BCTT is also payable amongst others, by an office or establishment of the Central Government or the Government of a State.

It is proposed to amend the said section, so as to exclude the offices or establishments of the Central Government and Governments of the states from the purview of definition of "person".

It is also proposed to amend the said section so as to enhance the existing limit of taxable banking transactions from the present twenty-five thousand to fifty thousand rupees for individuals and Hindu undivided family.

This amendment will take effect from the 1st of June, 2007.

[Clause 134]

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