FINANCE (NO.2) BILL, 2009 PROVISIONS RELATING TO DIRECT TAXE

FINANCE (NO.2) BILL, 2009 PROVISIONS RELATING TO DIRECT TAXES

Introduction

 

The provisions of the Finance (No.2) Bill, 2009 relating to direct taxes seek to amend the Income-tax Act, inter alia, with a view to,—

 

(i) Lowering the burden on the individual taxpayers by increasing the basic exemption limit available to the taxpayers.

(ii) Introducing simplified presumptive tax scheme for small businesses.

(iii) Encouraging the growth of foreign investment in India by providing for a speedy dispute resolution mechanism.

(iv) Improving efficency of the tax system by providing for investment linked tax incentives for certain sectors.

(v) Focussing on tax administration by improving the standards of service delivery and transparency in the functioning.

(vi) Simplification and rationalization of provisions relating to TDS.

 

2. The Finance (No.2) Bill, 2009 seeks to prescribe the rates of income-tax on incomes liable to tax for the assessment

year 2009-10; the rates at which tax will be deductible at source during the financial year 2009-10 from interest (including interest

on securities), winnings from lotteries or crossword 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 incomes in certain cases for the financial

year 2009-10.

3. Subject to certain exceptions, which have been indicated while dealing with the relevant provisions, changes in the

provisions of the tax laws are ordinarily proposed to be prospective in their operation.

4. The substance of the main provisions of 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 2009-10

In respect of income of all categories of assessees liable to tax for the assessment year 2009-2010, the rates of incometax

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, 2008, for the purposes of computation of “advance tax”, deduction of tax at source from “Salaries”

and charging of tax payable in certain cases.

(1) Surcharge on income-tax—

It has also been specified therein 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 shall be enhanced by a surcharge at the rate

of ten per cent. for purposes of the Union.

In the case of artificial juridical person, the tax so computed shall be enhanced by a surcharge of ten per cent. on all levels

of income.

In the case of local authority and co-operative society, no surcharge is levied.

In the case of every firm and domestic company, surcharge at the rate of ten per cent. shall be levied only in cases where

the total income exceeds one crore rupees. In case of every company, other than a domestic company, surcharge at the rate

of two and one-half per cent. shall be levied only in cases where the total income exceeds one crore rupees. However, marginal

relief shall be allowed in all these cases to ensure that the additional amount of income-tax payable, including surcharge, on

the excess of income over one crore rupees is limited to the amount by which the income is more than one crore rupees.

Also, in the case of every company having total income chargeable to tax under section 115JB of the Income Tax Act and

where such income exceeds one crore rupees, marginal relief shall be provided.

(2) Surcharge on fringe benefit tax—

In respect of fringe benefits chargeable to tax under section 115WA of the Income Tax Act, for assessment year 2009-10,

surcharge shall be levied as follows-

(a) in the case of every association of persons and body of individuals, at the rate of ten per cent. of the amount of tax,

where the total fringe benefits exceed ten lakh rupees.

(b) in the case of every firm, artificial juridical person and domestic company, at the rate of ten per cent. of the amount of

tax, irrespective of the amount of fringe benefits.

(c) in the case of every company, other than a domestic company, at the rate of two and one-half per cent. of the amount

of tax, irrespective of the amount of fringe benefits.

(3) Education cess—

For assessment year 2009-10, additional surcharge called the “Education Cess on Income-tax” and “Secondary and Higher

Education Cess on income-tax” shall continue to be levied for the purposes of the Union at the rate of two per cent. and one per

cent. respectively, on the amount of tax computed, inclusive of surcharge, in all cases. No marginal relief shall be available in

respect of such Cess.

II. Rates for deduction of income-tax at source during the financial year 2009-10 from certain incomes other than

“Salaries”

The rates for deduction of income-tax at source during the financial year 2009-10 from certain incomes other than “Salaries”

have been specified in Part II of the First Schedule to the Bill. The rates for persons not resident in India, including companies

other than domestic companies, are the same as those specified in Part II of the First Schedule to the Finance Act, 2008, for the

purposes of deduction of income-tax at source during the financial year 2008-2009. For resident tax payers, some of the rates

have been reduced in order to converge most rates to 10 per cent.

(1) Surcharge—

The amount of tax so deducted in the case of every company other than a domestic company shall continue to be increased

by a surcharge 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.

Levy of surcharge has been withdrawn on deductions in all other cases.

(2) Education Cess—

“Education Cess on Income-tax” and “Secondary and Higher Education Cess on income-tax” shall continue to be levied

for the purposes of Union at the rate of two per cent. and one per cent. respectively of income-tax only in the cases of persons

not resident in India, including companies other than domestic companies and in the cases of deductions on payment of salary.

III. Rates for deduction of income-tax at source from “Salaries”, computation of “advance tax” and charging of incometax

in special cases during the financial year 2009-10

The rates for deduction of income-tax at source from “Salaries” during the financial year 2009-10 and also for computation

of “advance tax” payable during the said year in the case of all categories of assessees 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 2009-10 on current incomes in cases where

accelerated assessments have to be made, for instance, provisional assessments of shipping-profits arising in India to nonresidents,

assessments of persons leaving India for good during that financial year, assessments of persons who are likely

to transfer property to avoid tax, assessments 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 person

The rates of income-tax in the case of every individual or Hindu undivided family or every association of persons or body of

individuals, whether incorporated or not, or every 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 of the First Schedule.

The basic exemption is proposed to be increased from Rs. 1,50,000/- to Rs. 1,60,000/-. The new rates of income-tax on

total income in such cases shall be as under—

Upto Rs. 1,60,000/- Nil.

Rs. 1,60,001/- to Rs. 3,00,000/- 10 per cent.

Rs. 3,00,001/- to Rs. 5,00,000/- 20 per cent.

Above Rs. 5,00,000/- 30 per cent.

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. 1,80,000/- to Rs. 1,90,000/-. The new rates of income-tax

on total income in such cases will be as under—

Upto Rs. 1,90,000/- Nil.

Rs. 1,90,001/- to Rs. 3,00,000/- 10 per cent.

Rs. 3,00,001/- to Rs. 5,00,000/- 20 per cent.

Above Rs. 5,00,000/- 30 per cent.

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. 2,25,000/- to Rs. 2,40,000/-. The new rates of income-tax

on total income in such cases will be as under—

Upto Rs. 2,40,000/- Nil.

Rs. 2,40,001/- to Rs. 3,00,000/- 10 per cent.

Rs. 3,00,001/- to Rs.5,00,000/- 20 per cent.

Above Rs. 5,00,000/- 30 per cent.

No surcharge shall be levied in the cases of persons covered under Paragraph A of Part-III of the First Schedule.

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 will continue to be the same as those specified for assessment year 2009-10. No surcharge will 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 will continue to be the same as that specified for assessment year 2009-10.

However, now no surcharge shall be levied in the case of a firm.

D. Local authorities

The rate of income-tax in the case of every local authority is specified in Paragraph C of Part III of the First Schedule to the

Bill. This rate will continue to be the same as that specified for the assessment year 2009-10. No surcharge will 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 2009-10.

It has been provided that the amount of income-tax computed 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. 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.

However, 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.

For financial year 2009-10, additional surcharge called the “Education Cess on Income-tax” and “Secondary and Higher

Education Cess on income-tax” shall continue to be levied for the purposes of Union at the rate of two per cent. and one per cent.

respectively, on the amount of tax computed, inclusive of surcharge, in all cases. No marginal relief shall be available in respect

of such Cess. [Clause 2]

Deduction in respect of Interest on loan taken for higher education

Section 80E of the Income-tax Act provides for a deduction to an assessee, being an individual, on account of any amount

paid by him in the previous year by way of interest on loan taken from any financial institution or any approved charitable institution

for the purpose of pursuing higher education in specified fields of study.

Under the existing provisions, the deduction is available only for pursuing full time studies for any graduate or post-graduate

course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including

mathematics and statistics.

With the objective of fostering human capital formation in the country, it is proposed to amend the provisions of section 80E

of the Income Tax Act so as to extend its scope to cover all fields of studies (including vocational studies) pursued after passing

the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government

or State Government or local authority or by any other authority authorized by the Central Government or State Government or local

authority to do so.

This amendment will take effect from 1st day of April, 2010 and shall accordingly, apply in relation to assessment year 2010-

11 and subsequent years. [Clause 32]

Deduction for medical treatment of a dependent suffering from disability

Section 80-DD of the Income Tax Act provides for a deduction to an individual or HUF, who is a resident in India, in respect

of the following:—

(a) Expenditure for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person

with disability; and

(b) Amount paid to LIC or other insurance in respect of a scheme for the maintenance of a disabled dependant.

The present limit for deduction is Rs.50,000 if the dependant is suffering from disability and Rs.75,000 if the dependant is

suffering from severe disability.

It is proposed to increase the limit for severe disability to Rs.1 lakh. However, the limit for ordinary disability is proposed

to be retained at the existing level of Rs.50,000.

The above amendment shall be made effective from the 1st day of April, 2010 and will accordingly apply in respect of

assessment year 2010-11 and subsequent years. [Clause 31]

Enhancement of the limit for payment of advance tax

Under the existing provisions of section 208 the Income-tax Act, liability for payment of advance tax during a financial year

arises when the amount of such tax payable during that year is five thousand rupees or more. This limit was fixed in 1996.

With a view to providing for inflation adjustment, it is proposed to raise the threshold limit for payment of advance tax from

the present five thousand rupees to ten thousand rupees.

The proposed amendment will take effect from the 1st April, 2009. Accordingly, advance-tax for the financial year 2009-2010

would be payable only if the advance tax liability is Rs. 10,000/- or more. [Clause 70]

Enhancement of the limit for payment of wealth tax

Under the existing provisions of section 3 of the Wealth-tax Act, wealth tax is charged every year in respect of net wealth, on

the valuation date, of every individual, Hindu undivided family and company at the rate of one per cent. of the amount by which

the net wealth exceeds fifteen lakh rupees. This limit was fixed in 1992.

With a view to providing for inflation-adjustment, it is proposed to raise the threshold limit for payment of wealth tax from

fifteen lakh rupees to thirty lakh rupees.

The proposed amendment will apply for the valuation of net wealth as on 31st March, 2010 and will, accordingly, apply in

relation to assessment year 2010-11 and subsequent years. [Clause 82]

Enhancement of limit for disallowance of expenditure made in the case of transporters

Under the existing provisions of the Income-tax Act, where an assessee incurs any expenditure, in respect of which payment

in excess of Rs 20,000 is made otherwise than by an account payee cheque or account payee bank draft, such expenditure is

not allowed as a deduction.

Given the special circumstances of transport operators for incurring expenditure on long haul journeys, it is proposed to

raise the limit of payment to such transport operators otherwise than by an account payee cheque or account payee bank draft

to Rs 35,000/- from the existing limit of Rs 20,000/-. For this purpose a new proviso is proposed to be inserted after the proviso

in sub-section (3A) of section 40A of the Income-tax Act.

The existing limit for other categories of payments will remain at Rs 20,000/- subject to the exceptions declared in Rule 6DD

of the Income-tax Rules.

The proposed amendment will apply to transactions effected on or after the 1st October, 2009. [Clause 16]

Extension of time limit for filing applications for tax exemption under section 10(23C)

Clause (23C) of section 10 stipulates that income of institutions specified under its various sub-clauses shall be exempt

from income-tax. In certain cases, approvals are required to be taken from prescribed authorities, in the prescribed manner, to

become eligible for claiming exemption.

Under the existing provisions, any institution (having receipts of more than rupees one crore) has to make an application

for seeking exemption at any time during the financial year for which the exemption is sought.

In practice, an eligible institution has to anticipate its annual receipts to decide whether the application for exemption is

required to be filed or not. This has often led to avoidable hardship.

In order to mitigate this hardship it is proposed to extend the time limit for filing such application to the 30th day of September

in the succeeding financial year. It is proposed to provide this relaxation for the financial year 2008-2009 and subsequent years.

In other words, where the gross receipts of a trust or institution exceeds rupees one crore in the financial year 2008-2009, it can

file the application for exemption uptill 30th September, 2009. [Clause 4]

Amendment to include certain activities within the ambit of provisions relating to

‘charitable purpose’ in the Income Tax Act

For the purposes of the Income-tax Act, “charitable purpose” has been defined in section 2(15) of the Income–tax Act to include

(a) relief of the poor, (b) education, (c) medical relief and, (d) the advancement of any other object of general public utility. However,

the “advancement of any other object of general public utility” shall not be a charitable purpose, if it involves the carrying on of

any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce

or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income

from such activity.

It is now proposed to amend clause 15 of section 2 so as to separately list the preservation of environment (including

watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest so that they

would be excluded from the applicability of the aforesaid conditions which are applicable to the “advancement of any other object

of general public utility”.

The proposed amendment shall be applicable with retrospective effect from 1st April, 2009 and will accordingly apply in

respect of assessment year 2009-2010 and subsequent years. [Clause 3]

Tax relief on anonymous donations in certain cases

Under the current provisions of section 115BBC, wholly religious entities are outside the purview of taxation of anonymous

donations. Partly religious and partly charitable entities have also been exempted from the taxation of anonymous donations,

except where the anonymous donation is made to an educational or medical institution run by such entity in which case such

donations are taxed at the rate of 30 per cent. In the case of wholly charitable entities, all anonymous donations are taxed at the

rate of 30 per cent.

In order to mitigate the compliance burden, it is proposed to provide relief to such organizations by exempting a part of the

anonymous donations from being taxed. The proposed amendment will result in the following:—

1. Anonymous donations received by wholly religious institutions shall remain exempt from tax.

2. In the case of partly religious and partly charitable institutions, anonymous donations directed towards a medical

or educational institutions run by such entities shall be taxable only to the extent such donations exceed 5 per cent.

of total income of such trust or institution or a sum of Rs.1 lakh, whichever is more.

3. In the case of wholly charitable institutions, anonymous donations shall be taxable to the extent such donations

exceed 5 per cent. of total income of such trusts/institution or a sum of Rs.1 lakh, whichever is more.

The proposed amendments will be applicable with effect from the 1st day of April, 2010 and will accordingly apply in relation

to assessment year 2010-11 and subsequent years. [Clause 42]

Remuneration to partners in a firm

Under the existing provisions of the Income-tax Act, the payment of salary, bonus, commission or remuneration (hereinafter

referred to as “remuneration”) to a working partner of a partnership firm is allowed as deduction if it is authorised by the partnership

deed and subject to the overall ceiling of monetary limits prescribed under sub-clause (v) of clause (b) of section 40. The existing

limits are as under:

(1) in case of a firm carrying on a profession—

(a) on the first Rs. 1,00,000 of the book-profit or Rs. 50,000 or at the rate of 90 per cent of the

in case of a loss book-profit, whichever is more;

(b) on the next Rs. 1,00,000 of the book-profit at the rate of 60 per cent;

(c) on the balance of the book-profit at the rate of 40 per cent;

(2) in the case of any other firm—

(a) on the first Rs. 75,000 of the book-profit, or Rs. 50,000 or at the rate of 90 per cent of the

in case of a loss book-profit, whichever is more;

(b) on the next Rs. 75,000 of the book-profit at the rate of 60 per cent;

(c) on the balance of the book-profit at the rate of 40 per cent:

It is proposed to make upward revision of the existing limits of the remuneration. It is also proposed to prescribe uniform

limits for both professional and non professional firms for simplicity and administrative ease. The revised limits are proposed

to be as under:

(a) on the first Rs. 3,00,000 of the book-profit or Rs. 1,50,000 or at the rate of 90 per cent of the

in case of a loss book-profit, whichever is more;

(b) on the balance of the book-profit at the rate of 60 per cent;

The proposed amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to assessment year

2010-11 and subsequent years. [Clause 15]

Recognition to Provident funds – Extension of time limit for obtaining Exemption from EPFO

Rule 4 of Part A of the Fourth Schedule to the Income-tax Act provides for conditions which are required to be satisfied by

a Provident Fund for receiving or retaining recognition under the Income-tax Act.

Rule 3 of Part A of the Fourth Schedule provides that the chief Commissioner or the Commissioner of Income-tax may accord

recognition to any provident fund which satisfies the conditions prescribed in rule 4 and the rules made by the Board in this behalf.

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 the 31st day of March, 2006, and such provident fund does not satisfy the conditions set out in clause

(ea) of rule 4 on or before the 31st day of March, 2009, the recognition to such fund shall be withdrawn. One of the requirements

of this clause (ea) of rule 4 is that the establishment shall obtain exemption under section 17 of the Employees’ Provident Funds

and Miscellaneous Provisions Act, 1952 (EPF & MP Act).

With a view to provide further time to Employees’ Provident Fund Organization (EPFO) to decide on the pending applications

seeking exemption under section 17 of the EPF & MP Act, it is proposed to amend the said proviso so as to extend the time limit

from the 31st day of March, 2009 to the 31st day of December, 2010.

This amendment will take effect from 1st April, 2009. [Clause 80]

Weighted deduction for in-house research and development

Under the existing provisions of the Income-tax Act, under sub-section (2AB) of section 35, weighted deduction of 150

per cent. is allowed to a company engaged in the business of biotechnology or in the business of manufacture or production

of drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article

or thing notified by the Board and which has incurred expenditure (excepting on land and building) on in-house scientific research

and development facility approved by the prescribed authority.

With a view to promoting research and development in all sectors of the economy, it is proposed to extend the benefit of

weighted deduction to companies engaged in the business of manufacture or production of an article or thing except those

specified in the Eleventh Schedule of the Income-tax Act.

The proposed amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to assessment year

2010-11 and subsequent years. In other words, expenditure on research and development incurred by the company during the

financial year 2009-2010, will be eligible for aforesaid weighted deduction under section 35(2AB) of the Income-tax Act.

[Clause 12]

Donations to Certain Funds, Charitable Institutions, etc.

Section 80G of the Income-tax Act, 1961 provides for a deduction in respect of donations to certain funds, charitable

institutions, etc. subject to, inter alia, the condition that such intitutions and trusts are establish for ‘charitable purpose’.

Consequent to the amendment of sub-section (15) of section 2 by the Finance Act 2008 a number of organizations have

ceased to be charitable for the purposes of the Income-tax Act. However, such institutions and trusts continued to collect donation

during the financial year 2008-2009 for funding relief work for floods in Bihar and other public purposes. The donors made these

donations under a bonafide belief that they would be entitled to benefit under section 80-G. With a view to mitigate hardship to

the donors, it it is proposed to give a onetime relaxation and amend sub-section (5) of section 80G of the Income-tax Act so as

to provide that where an institution or fund has been approved under clause (vi) of sub-section 5 of section 80G for the previous

year beginning on the 1st day of April 2007 and ending on the 31st day of March, 2008, such institution or fund shall, notwithstanding

anything contained in the proviso to clause (15) of section 2, be deemed to have been,-

(a) established for charitable purposes for the previous year beginning on the 1st day of April, 2008 and ending on the

31st day of March, 2009;

(b) approved under the said clause (vi) for the previous year beginning on the 1st day of April, 2008 and ending on the 31st

day of March, 2009.

This amendment will take effect from 1st day of April, 2009 and shall accordingly, apply in relation to assessment year 2009-

10 only.

Further as per clause (vi) of sub-section (5) of section 80G of the Income-tax Act, 1961, the institutions or funds to which the

donations are made have to be approved by the Commissioner of Income-tax in accordance with the rules prescribed in rule

11AA of the Income-tax Rule, 1962. The proviso to this clause provides that any approval granted under this clause shall have

effect for such assessment year or years, not exceeding five assessment years, as may be specified in the approval.

Due to this limitation imposed on the validity of such approvals, the approved institutions or funds have to bear the hardship

of getting their approvals renewed from time to time. This is unduly burdensome for the bonafide institutions or funds and also

leads to wastage of time and resources of the tax administration in renewing such approvals in a routine manner.

Therefore, it is proposed to omit the proviso to clause (vi) of sub-section (5) of section 80G to provide that the approval once

granted shall continue to be valid in perpetuity. Further, the Commissioner will also have the power of withdraw the approval

if the Commissioner is satisfied that the activities of such institution or fund are not genuine or are not being carried out in

accordance with the objects of the institution or fund.

This amendment will take effect from 1st day of October, 2009. Accordingly, existing approvals expiring on or after 1st October,

2009 shall be deemed to have been extended in perpetuity unless specifically withdrawan. However, in case of approvals expiring

before 1st October, 2009, these will have to be renewed and once renewed these shall continue to be valid in perpetuity, unless

specifically withdrawan. [Clause 33]

Power to withdraw approvals

Under the existing provisions of Income-tax Act, an approval is required to be granted by income-tax authority for availing

of various incentives by the assessee. While some provisions of Income-tax Act specifically contain provisions for withdrawal

of approval but in many cases there is no such specific provisions containing power of withdrawal.

In order to provide explicit provisions for power to withdraw of approval, it is proposed to insert a new section 293C to provide

that an approval granting authority shall also have the powers to withdraw the apporval at any time. However, such withdrawal

can be made only after giving a reasonable opportunity of showing cause against be proposed withdrawal to the concerned

assessee.

This amendment will take effect from 1st October, 2009. [Clause 78]

Power to issue Zero Coupon Bonds

Under the existing provision of clause (48) of section 2, only infrastructure capital company or infrastructure capital fund or

public sector company are empowered to issue zero coupon bonds when they are authorized to do so.

With a view to empower the scheduled banks including nationalized banks to issue zero coupon bonds to source their long

term funds, it is proposed to amend the section so as to include the scheduled banks as an eligible person to issue zero coupon

bonds.

Further, it is proposed to make consequential amendments in Explanation to clause (iiia) of sub-section (1) of section 36

and in clause (x) of sub-section (3) of section 194A of the Income-tax Act.

These amendments will take effect from 1st April, 2009. [Clauses 3,14,59]

Amendment in Part B of the Thirteenth Schedule to the Income Tax Act, 1961

Part-B of the Thirteenth Schedule to the Income-tax Act, 1961 provides for a list of activities or articles or things, the production

or manufacture of which is not permissible if an undertaking wishes to avail a deduction under section 80-IC in respect of

undertakings located in the states of Himachal Pradesh and Uttaranchal.

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry has issued a notification

F.No.3(1)/2003-SPS dated 27.6.2008 expanding the list of items in respect of the paper industry for which tax holiday cannot be

availed by new units located in Himachal Pradesh and Uttaranchal.

In order to align the provisions of the Income-tax Act, 1961 with the overall industrial policy of DIPP in respect of these two

States, it is proposed to amend Part B of the Thirteenth Schedule to the Income-tax Act and substitute Sl.No.19 of Part B of the

Thirteenth Schedule pertaining to the paper industry with the list as per the notification dated 27.6.2008 of the DIPP.

This amendment will take effect from the 1st day of April, 2010 and shall accordingly, apply in relation to assessment year

2010-11 and subsequent years. [Clause 81]

Deduction in respect of contributions to political parties

Section 80GGB and section 80GGC of the Income-tax Act, 1961 provide for deduction in respect of contributions given to

political parties by companies and any person respectively.

With a view to reforming the system of funding of political parties it is proposed to amend section 80GGB and section 80GGC

of the Income-tax Act, 1961 to provide that donations to electoral trusts shall be allowed as a 100 percent deduction in the

computation of the income of the donor. It is also proposed to consequently amend sub-clause (iia) of clause (24) of section

2 of the Income-tax Act to provide that donations to such electoral trusts shall be treated as income of the trusts which will be

specifically exempt as per the newly inserted section 13B and not included in the total income of the previous year if:-

(a) the electoral trust distributes to any political party, registered under section 29A of the Representation of the People

Act, 1951, during previous year 95 percent of the aggregate donations received by it during the said previous year

along with the surplus, if any, brought forward from any earlier previous years

(b) the electoral trust functions in accordance with the rules made in this regard by the Central Government.

Further, “eletoral trust” has been defined in the new clause (22AAA) of section 2 as a trust so approved by the Board in

accordance with the scheme made in this regard by the Central Government.

These amendments will take effect from 1st day of April, 2010 and shall accordingly, apply in relation to assessment year

2010-11 and subsequent years. [Clauses 3,4,8,34,35]

Investment-linked tax incentive for specified business

The Income-tax Act provides for a number of profit-linked exemptions/deductions. Such benefits are inefficent, inequitable,

impose higher compliance and administrative burden, result in revenue loss, increase litigations and lead to competitive

demand for similar tax benefits. Further, these benefits also encourage diversion of proifits from the taxed sector to the exempt/

untaxed sector. However, investment-linked incentives are relatively less distortionary in their impact.

With a view to creating rural infrastructure and environment friendly alternate means of transportation for bulk goods, it is

proposed to provide investment-linked tax incentive by inserting a new section 35AD in the Income-tax Act for the following

businesses:—

(a) setting up and operating cold chain facilities for specified products;

(b) setting up and operating warehousing facilities for storage of agricultural produce;

(c) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including

storage facilities being an integral part of such network.

The salient features of the new regime of investment-linked tax incentives are the following:—

(i) 100 per cent. deduction would be allowed in respect of the whole of any expenditure of capital nature incurred, wholly

and exclusively, for the purposes of the specified business during the previous year in which such expenditure is

incurred.

(ii) The expenditure of capital nature shall not include any expenditure incurred on acquisition of any land or goodwill or

financial instrument.

(iii) The benefit will be available—

(a) in a case where the business relates to laying and operating a cross country natural gas pipeline network for

distribution, if such business commences its operations on or after the 1st day of April, 2007 and

(b) in any other case, if such business commences its operation on or after the 1st day of April, 2009.

(iv) The assessee shall not be allowed any deduction in respect of the specified business under the provisions of

Chapter VIA;

(v) No deduction in respect of the expenditure in respect of which deduction has been claimed shall be allowed to the

assessee under any other provisions of the Income-tax Act.

(vi) Any sum received or receivable on account of any capital asset, in respect of which deduction has been allowed under

section 35AD, being demolished, destroyed, discarded or transferred shall be treated as income of the assessee

and chargeable to income tax under the head “Profits and gains of business or profession”.

(vii) Any loss computed in respect of the specified business shall not be set off except against profits and gains, if any, of

any other specified business. To the extent the loss is unabsorbed the same will be carried forward for set off against

profits and gains from any specified business in the following assessment year and so on.

Further, profit-linked deduction provided under section 80-IA to the business of laying and operating a cross country natural

gas distribution network will be discontiuned. As a result, any person availaing of this incentive can avail of the benefit under the

proposed section 35AD. All capital expenditure (other than on land, goodwill and financial instrument), to the extent capitalized

in the books as on 1st April, 2009 will be fully allowed as a deduction in the computation of total income of the said business

for the previous year 2009-2010. This will be available in addition to any other capital expenditure (excluding land, goodwill and

financial instrucment) incurred during such previous year.

It is also proposed to amend the provisions of section 43 and section 50B of the Income-tax Act to make consequential

changes.

These amendments are proposed to be made effective from the 1st day of April, 2010 and will accordingly apply in respect

of assessment year 2010-11 and subsequent assessment years. [Clauses 10,13,17,24,28]

Extension of sunset clause for tax holiday under section 80-IA

Under the existing provisions of 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 10 year tax benefit if it fulfils the following

conditions:-

(i) such company is formed before 30.11.2005 with majority equity participation by public sector companies for enforcing

the security interest of the lenders to the company owning the power generating plant;

(ii) such Indian company is notified by the Central Government before 31.12.2005; and

(iii) the undertaking begins to generate or transmit or distribute power before 31st March, 2008.

It is proposed to amend sub-clause (b) of clause (v) of sub-section (4) of section 80-IA to extend the terminal date for

commencing the activity of generation, transmission or distribution of power in case of such undertaking from 31.3.2008 to

31.3.2011.

This amendment will take effect retrospectively from 1st day of April, 2008 and shall accordingly, apply in relation to

assessment year 2008-09 and subsequent years.

Further, under section 80-IA, the provisions of clause (iv) of sub-section (4) provides for a deduction of profits and gains of

an undertaking,—

(a) which is set up for the generation and distribution of power if it begins to generate power at any time during the period

beginning on 1-4-1993 and ending on 31-03-2010;

(b) which starts transmission or distribution by laying a network of new transmission or distribution lines at any time

during the period beginning on 1-4-1999 and ending on 31-03-2010;

(c) which undertakes substantial renovation and modernization of existing network of transmission or distribution lines

at any time during the period beginning on 1-4-2004 and ending on 31-03-2010.

It is proposed to amend clause (iv) of sub-section (4) of section 80-IA to extend the terminal date for a further period of one

year upto 31-03-2011.

This amendment will take effect retrospectively from 1st day of April, 2009 and shall accordingly apply in relation to

assessment year 2009-10 and subsequent assessment years. [Clause 36]

Amendment in Chapter VIA to prevent abuse of tax incentives

The profit linked deductions in Chapter VIA are prone to considerable misuse. Further, since the scope of the deductions

under various provisions of Chapter VIA overlap, the taxpayers, at times, claim multiple deductions for the same profits.

With a view to preventing such misuse, it is proposed to amend the provisions of section 80A of the Income-tax Act to provide

the following, namely:-

(i) deduction in respect of profits and gains shall not be allowed under any provisions of section 10A or section 10AA or

section 10B or section 10BA or under any provisions of Chapter VIA under the heading "C.-Deductions in respect of

certain incomes" in any assessment year, if a deduction in respect of same amount under any of the aforesaid has

been allowed in the same assessment year;

(ii) the aggregate of the deductions under the various provisions referred to in (i) above, shall not exceed the profits and

gains of the undertaking or unit or enterprise or eligible business, as the case may be;

(iii) no deductions under the various provisions referred to in (i) above, shall be allowed if the deduction has not been

claimed in the return of income;

These amendments will take effect retrospectively from the 1st April, 2003, and will accordingly apply in relation to

assessment year 2003-2004 and subsequent years.

Further it is also proposed to amend section 80A to provide that the transfer price of goods and services between the

undertaking or unit or enterprise or eligible business and any other undertaking or unit or enterprise or business of the

assessee shall be determined at the market value of such goods or services as on the date of transfer. Further, the expression

"market value" has been defined to mean,-

(a) in relation to any goods or services sold or supplied, means the price that such goods or services would fetch

if these were sold by the undertaking or unit or enterprise or eligible business in the open market, subject to

statutory or regulatory restrictions, if any;

(b) in relation to any goods or services acquired, means the price that such goods or services would cost if these

were acquired by the undertaking or unit or enterprise or eligible business from the open market, subject ot

statotory or regulatory restrictions, if any.

This amendment will take effect from 1st April, 2009 and will accordingly apply to all cases where the proceeding are

pending before any authority on or after such date.

Further, with a view to preventing the mususe of the tax holiday under section 80-IA of the Income-tax Act, it is proposed to

amend the Explanation to the said section to clarify that nothing contained in the said section shall apply in relation to a

business referred to in sub-section (4) of the said section which is in the nature of a works contract awarded by any person

(including the Central or State Government) and executed by an undertaking or enterprise referred to in sub-section (1) thereof.

This amendment will take effect retrospectively from 1st April, 2000 and will, accordingly, apply in relation to assessment

year 2000-2001 and subsequent years. [Clauses 29,36]

Deduction in respect of profits and gains from undertakings engaged in commercial

production of mineral oil and natural gas

Sub-section (9) of section 80-IB of the Income Tax Act, 1961 provides for deduction in respect of profits and gains derived

from commercial production or refining of mineral oil. The deduction under this sub-section is available to an undertaking for

a period of seven consecutive assessment years including the initial assessment year-

(i) in which the commercial production under production sharing contract has first started; or

(ii) in which the refining of mineral oil has begun.

However, no deduction under this sub-section is available to an undertaking which begins refining of mineral oil on or after

the 1st day of April, 2009 unless such undertaking fulfils all the following conditions as provided in the third proviso to this subsection,

namely:-

(i) It is wholly owned by a public sector company or any other company in which a public sector company or companies

hold at least forty-nine percent of the voting rights;

(ii) It is notified by the Central Government in this behalf on or before the 31 day of May, 2008; and

(iii) It begins refining not later than the 31st day of March, 2012.

Under the existing provisions, it is incumbent on refineries in the private sector to commence refining of mineral oil on or

before the 31st March, 2009. The notice given to private sector entrepreneurs to complete the execution of their refinery project

was extremely short. As a result, entrepreneurs who had undertaken substantial investment in anticipation of the tax holiday

suffered serious financial setback. Therefore, it is proposed to amend the provisions of sub-section (9) so as to allow them a

further period of three years i.e. upto the 31st March, 2012 to begin refining of mineral oil and avail of the tax benefit. The new

terminal date will be the same for both the public and the private sector.

Further, it is also proposed to amend the Income Tax Act so as to extend the tax holiday under sub-section(9) of section 80-

IB of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of

mineral oil, also to natural gas from blocks which are licensed under the VIII Round of bidding for award of exploration contracts

(hereafter referred to as "NELP-VIII") under the New Exploration Licencing Policy announced by the Government of India vide

Resolution No.O-19018/22/95-ONG.DO.VL, dated 10th February, 1999 and begin commercial production of natural gas on or

after the 1st day of April, 2009.

The term "undertaking" in sub-section (9) has not been defined. Therefore, in the context of mineral oil, the meaning of the

term "undertaking" has been the subject matter of considerable dispute. The tax payers have been holding the view that every

well in a block licensed constitutes a single "undertaking" and accordingly the tax holiday is available separetely for each such

well. However, this view is against the legislative intent. Accordingly, it is proposed to amend sub-section (9) by inserting an

Explanation so as to clarify that for the purposes of claiming deduction under sub-section (9), all blocks licensed under a single

contract, which has been awarded under the New Exploration Licencing Policy announced by the Government of India vide

Resolution No. O-19018/22/95-ONG.DO.VL, dated 10th February, 1999 or has been awarded in pursuance of any law for the

time being in force or has been awarded by Central or a State Government in any other manner, shall be treated as a single

"undertaking". This amendment is proposed to take retrospective effect from the 1st April, 2000 and will, accordingly, apply in

relation to assessment year 2000-2001 and subsequent years. This definition of "undertaking" will be applicable both in relation

to mineral oil and natural gas. [Clause 37]

Rationalising the provisions of deduction under sub-section (10) of section 80-IB

Sub-section (10) of section 80-IB of the Income-tax Act, 1961 provides for 100 per cent deduction of the profits derived by

an undertaking from developing and building housing projects. This benefit is available subject to the following conditions:—

(a) The project is approved by a local authority before the 31st day of March, 2007.

(b) The project is constructed on a plot of land having a minimum area of one acre.

(c) The built-up area of each residential unit should not exceed 1,000 sq.ft. in the cities of Delhi and Mumbai (including

areas falling within 25 kms. of municipal limits of these cities) and 1,500 sq.ft. in other places.

(d) The built-up area of the shops and other commercial establishments included in the housing project should not

exceed 5 per cent of the total built-up area of the housing project or 2,000 sq.ft. whichever is less.

(e) The project has to be completed within 4 years from the end of the financial year in which the project is approved by the

local authority.

The objective of this tax concession is to provide tax benefit to the person undertaking the investment risk i.e. the actual

developer. However, any person undertaking pure contract risk is not entitled to the tax benefits.

With a view to clarify accordingly, it is proposed to insert an Explanation after sub-section (10) of section 80-IB so as to provide

that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract

awarded by any other person (including Central or State Government).

This amendment will take effect retrospectively from the 1st day of April, 2001 and shall accordingly, apply in relation to

assessment year 2001-02 and subsequent assessment years.

Further, the objective of the tax benefit for housing projects is to build housing stock for low and middle income households.

This has been ensured by limiting the size of the residential unit. However, this is being circumvented by the developer by entering

into agreement to sell multiple adjacent units to a single buyer. Accordingly, it is proposed to insert new clauses in the said subsection

to provide that the undertaking which develops and builds the housing project shall not be allowed to allot more than

one residential unit in the housing project to the same person, not being an individual, and where the person is an individual,

no other residential unit in such housing project is allotted to any of the following person:-

(i) Spouse or minor children of such individual;

(ii) the Hindu undivided family in which such individual is the karta;

(iii) any person representing such individual, the spouse or minor children of such individual or the Hindu undivided

family in which such individual is the karta.

This amendment will take effect from the 1st day of April, 2010 and shall accordingly, apply in relation to assessment year

2010-11 and subsequent years. [Clause 37]

Extension of sunset clause for units in free trade zone under section 10A and for export oriented

undertakings under section 10B

Under the existing provisions, the deductions under section 10A and section 10B of the Income Tax Act are available only

upto the assessment year 2010-11.

It is proposed to amend sections 10A and 10B to extend the tax benefit under both these sections by one year i.e., the deduction

will be available upto assessment year 2011-12. [Clauses 5,7]

Amendment to section 10(23D) of the Income Tax Act, 1961- Incorporating “Other Public Sector Banks”

under the expression “Public Sector Bank”

The expression “public sector banks” has been defined in the explanation to section 10(23D). Reserve Bank of India has

categorized a new sub-group called “other public sector banks”. The Central Government holds more than 51% shareholding

in IDBI Bank Limited which has been categorized under “other public sector banks” by RBI.

Since “other public sector banks”, has not been included in the expression “public sector banks” as defined in the Explanation

to section 10(23D), it is proposed to amend the relevant provisions of the Income-tax Act, 1961 to do so.

This amendment will take effect from 1st April, 2010 and will, accordingly, apply in relation to assessment year 2010-2011

and subsequent assessment years. [Clause 4]

Definition of the term “manufacture”

A number of tax concessions under the Income-tax Act are provided for encouraging manufacture of articles or things.

However, the term “manufacture” has not been defined in the statute. Therefore, it has been the subject matter of dispute and

resultant judicial review in a number of cases. In order to remove any kind of ambiguity which may still persist in this regard, it

is proposed to insert a new clause (29BA) in section 2 so as to provide that ‘manufacture’, with all its grammatical variations,

shall mean a change in a non-living physical object or article or thing,—

(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a

different name, character and use; or

(b) bringing into existence of a new object or article or thing with a different chemical composition or integral structure.

This amendment will take retrospective effect from the 1st day of April, 2009 and will, accordingly, apply in relation to

assessment year 2009-2010 and subsequent years. [Clause 3]

Clarification regarding computation of exempted profits in the case of units in Special Economic Zones (SEZs)

Under sub-section (7) of section 10AA of the Income-tax Act, the exempted profit of a SEZ unit is the profit derived from the

export of articles or things or services and same is required to be calculated as under:

“the profit derived from the export of articles or things or services (including computer software) shall be the amount

which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export

turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the

assessee.”

Simply stated, it means that the exempted profit of the SEZ unit is equal to

Profits of the business of the unit × export turnover of the unit

Total turnover of the business carried on by the assessee

This method of computation of the profits of business with reference to the total turnover of the assessee is perceived to

be discriminatory in so far as those assessees are concerned who were having multiple units in both the SEZ and the domestic

tariff area (DTA) vis-a-vis those assessees who were having units in only the SEZ. With a view to removing the anomaly, it is

proposed to amend the provisions of sub-section (7) of section 10AA of the Income Tax Act so as to provide that the deduction

under section 10AA shall be computed with reference to the total turnover of the undertaking.

This amendment will take effect from the 1st day of April, 2010 and will accordingly, apply to assessment year 2010-11 and

subsequent assessment years. [Clause 6]

Clarificatory amendment in section 132

Sub-section (1) of section 132 of the Income-tax Act empowers income-tax authorities specified therein to authorise other

income-tax authorities to conduct search and seizure operations. The authorities empowered to issue authorization are:

(i) Director General or Chief Commissioner;

(ii) Director or Commissioner; and

(iii) such Joint Director or Joint Commissioner as are empowered by the Board to do so.

The Joint Director or Joint Commissioner are, in terms of the provisions of clause (28C) and clause (28D) of section 2 of

the Income-tax Act are understood to include Additional Director or Additional Commissioner. Based on this understanding in

the Department, Additional Directors and Additional Commissioners have issued warrant of authorisation since the institution

was created on 1st June, 1994. However, the Courts have held that Joint Directors or Joint Commissioners referred to in section

132 of the Income-tax Act does not include “Additional Director or Additional Commissioner” and, therefore, the warrants of

authorisation issued by the latter is illegal. Accordingly, all search and seizure operation have been declared to be illegal.

Therefore, it is proposed to make clarificatory amendment to section 132 to provide explicitly that Additional Director or

Additional Commissioner always had the power to issue warrant of authorisation under the said provisions.

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

Further, it is also proposed to clarify by amending the section 132 that Joint Commissioner or Joint Director always had the

power to issue authorization.

This amendment will take effect retrospectively from 1st October, 1998.

Similarly, it is proposed to make consequential amendments in section 132A to include Additional Director or Additional

Commissioner as an authorized Officer.

This amendment will take effect retrospectively from 1st June, 1994. [Clauses 50,51]

Clarificatory amendment in respect of reassessment proceeding under section 147

The existing provisions of section 147 provides, inter alia, that if the Assessing Officer has reason to believe that any income

chargeable to tax has escaped assessment for any assessment year, he may assess or reassess such income after recording

reasons for re-opening the assessment. Further, he may also assess or reassess such other income which has escaped

assessment and which comes to his notice subsequently in the course of proceedings under this section.

Some Courts have held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect

of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue

for which no reasons have been recorded. The above interpretation is contrary to the legislative intent.

With a view to further clarifying the legislative intent, it is proposed to insert an explanation in section 147 to provide that the

assessing officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course

of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded

under sub-section (2) of section 148.

This amendment will take effect retrospectively from 1st April, 1989 and will, accordingly, apply in relation to assessment

year 1989-1990 and subsequent years. [Clause 57]

Special deduction under section 36(1)(viii) to National Housing Bank (NHB)

Clause (viiii) of sub-section (1) of Section 36 [section 36(1)(viii)] provides special deduction to financial corporations and

banking companies of an amount not exceeding 20% of the profits subject to creation of a reserve.

National Housing Bank (NHB) is wholly owned by Reserve Bank of India and is engaged in promotion and regulation of

housing finance institutions in the country. It provides re-financing support to housing finance institutions, banks, ARDBs, RRBs

etc., for the develoment of housing in India. It also undertakes financing of slum projects, rural housing projects, housing projects

for EWS and LIG categories etc. NHB is also a notified financial corporation under section 4A of the Companies Act.

A view has been expressed that NHB is not entited to the benefits of section 36(1)(viii) on the ground that it is not engaged

in the long-term financing for consturction or purchase of houses in India for residential purpose. The proposed amendment

seeks to provide that corporations engaged in providing long-term finance (including re-financing) for development of housing

in India will be eligible for the benefit under section 36(1)(viii).

This amendment will take effect from the 1st April 2010 and will, accordingly, apply in relation to assessment year 2010-

11 and subsequent years. [Clause 14]

Definition of written down value under section 43(6)

Clause (ii) of sub-section (1) of section 32 provides that depreciation is to be allowed and computed at the prescribed

percentage on the written down value (WDV) of any block of assets. Sub-clause (b) of clause (6) of section 43 provides that WDV

in the case of assets acquired before the previous year shall be computed by taking the actual cost to the assessee less all

depreciation “actually allowed” to him under the Income-tax Act.

Rules 7A, 7B and 8 of the Income tax Rules, 1962, deal with the computation of composite income where income is derived

in part from agricultural operations and in part from business chargeable to tax under the Income tax Act, 1961 under the head

“Profits & Gains of Business”. These rules prescribe the method of computation in the case of manufacture of rubber, coffee

and tea. In such cases, the income which is brought to tax as “business income” is a prescribed fixed percentage of the composite

income.

The Hon’ble Supreme Court in the case of CIT Vs. Doom Dooma India Ltd (222 CTR 105) has held that in view of the language

employed in sub-clause (b) of clause (6) of section 43 regarding depreciation “actually allowed”, where any income is partially

agricultural and partially chargeable to tax under the Income tax Act, 1961 under the head “Profits & Gains of Business”, the

depreciation deducted in arriving at the taxable income alone can be taken into account for computing the WDV in the subsequent

year.

For instance, Rule 8 prescribes the taxability of income from the manufacture of tea. Under the said rule, income derived

from the sale of tea grown and manufactured by seller shall be computed as if it were income derived from business, and 40%

of such income shall be deemed to be income liable to tax. As a result of the Court decision on depreciation to be “actually allowed”

for computing WDV, the resultant computation of depreciation is as per the following illustration:

Rs.

Sale proceeds of made tea - 1,000

Less : Expenses –

Depreciation –(10% of Rs. 1,000) (100)

Others expenses- (300)

Composite income - 600

Income subject to charge under the I.T. Act,

1961 by application of Rule 8 (40% of 600) - 240

Income not chargeable to income-tax

(60% of 600) - 360

According to the interpretation of the Court, the W.D.V. of the fixed asset for the immediately succeeding year is to be taken

at Rs.960/- (Rs.1,000 minus Rs.40 being depreciation allocated for business income) and not Rs.900/- (Rs.1,000 minus

depreciation of Rs.100/- allowed for determining composite income). Thus the depreciation for which deduction is allowed to

the assessee while computing its agricultural income is to be ignored for computing the W.D.V. of the asset according to the

Court ruling.

The above interpretation is not in accordance with the legislative intent. WDV is required to be computed by deducting the

full depreciation attributable to composite income. Hence in the above illustration, the WDV of the fixed asset for the immediately

succeeding year is to be taken at Rs.900/- and not 960/- as held by the Supreme court. The ambiguity in this case has arisen

on account of the interpretation of the meaning of the phrase “actually allowed” in sub-clause (b) of clause (6) of section 43.

It is therefore proposed to provide that in the cases of ‘composite income’, notwithstanding that the assessee was not

required to compute a part of his income for the purposes of Income-tax Act for any previous year, depreciation shall be computed

as if the total composite income of the assessee is chargeable under the Income-tax Act and such depreciation shall be

deemed to have been “actually allowed” to the assessee.

This amendment will take effect from the 1st April, 2010 and will, accordingly, apply in relation to assessment year 2010-

11 and subsequent years. [Clause 17]

Extension of income-tax exemption to Special Undertaking of Unit Trust of India (SUUTI)

The Special Undertaking of Unit Trust of India (SUUTI) was created vide The Unit Trust of India (Transfer of Undertaking and

Repeal) Act, 2002. SUUTI is the successor of UTI. The mandate of SUUTI is to liquidate government liabilities on account of

the erstwhile UTI.

Vide section 13(1)of the said Repeal Act, SUUTI is exempt from income-tax or any other tax or any income, profits or gains

derived, or any amount received in relation to the specified undertaking for a period of five years, computed from the appointed

day, i.e. 1st day of February,2003. This exemption was to come to an end on 31st January, 2008 and the exemption was further

extended up to the 31st March, 2009.

Since some of the schemes of SUUTI are still pending closure, it is proposed to amend section 13(1) so as to extend the

exemption for a period of five years that is upto 31st March, 2014.

This amendment will take effect retrospectively from the 1st day of April, 2009. [Clause 113]

Fringe Benefit Tax

The Finance Act, 2005 introduced a new levy, namely, Fringe Benefit Tax (FBT) on the value of certain fringe benefits. The

provisions relating to levy of this tax are contained in Chapter XII-H (sections 115W to 115WL) of the Income Tax Act, 1961.

It is proposed to insert a new section 115WM to abolish the fringe benefit tax. Consequently, it is also proposed to restore

the taxation of the fringe benefits as perquisites in the hands of the employees. Therefore, it is also proposed to amend clause

(2) of section 17,—

(a) by substituting sub-clause (vi) so as to provide that perquisite shall include the value of any specified security or sweat

equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at

concessional rate to the assessee. For this purpose, the value of any specified security or sweat equity shares shall

be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the

option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in

respect of such security or shares. The “fair market value” will mean the value determined in accordance with the

method as may be prescribed by the Board.

(b) by inserting sub-clause (vii) to provide that perquisite shall also include the amount of any contribution to an approved

superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees.

(c) by inserting sub-clause (viii) to provide that perquisite shall also include the value of any other fringe benefit or amenity

as may be prescribed.

These amendments will take effect from 1st April, 2010 and will accordingly, apply to the assessment year 2010-11 and

subsequent assessment years.

Consequently, it is also proposed to amend section 49 to provide that Where the capital gain arises from the transfer of

specified security or sweat equity shares referred to in sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such

security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause.

This amendment will take effect from the 1st April, 2010 and will accordingly apply to assessment year 2010-11 and

subsequent assessment years. [Clauses 9,23,48]

Tax benefits for New Pension System

The New Pension System (NPS) has become operational since 1st January, 2004 and is mandatory for all new recruits

to the Central Government service from 1st January, 2004. Since then it has been opened up for employees of State Government,

private sector and self employed (both organised and unorganized). NPS Trust has been set-up on 27th February, 2008 as per

the provisions of the Indian Trust Act, 1882 to manage the assets and funds under the NPS in the interest of the beneficiaries.

With a view to ensure that tax treatment of savings under this system is in synchronised with the “exempt-exempt-taxed” (EET)

method and that there is no incidence of taxation at the accumulation stage, it is proposed to make the NPS Trust a complete

pass-through in so far as taxation is concerned. Therefore, it is proposed to,—

(i) insert a new clause (44) in section 10 of the Income-tax Act so as to provide that any income received by any person

on behalf of the New Pension System Trust established on 27th day of February, 2008 under the provisions of the

Indian Trust Act of 1882 shall be exempt from income tax;

(ii) amend section 115-O to provide that any dividend paid to the NPS Trust shall be exempt from Dividend Distribution

Tax;

(iii) amend Chapter VII of Finance (No.2) Act, 2004 to provide that all purchases and sales of equity and derivatives by the

NPS Trust will also be exempt from the Securities Transaction Tax; and

(iv) amend section 197A to provide that the NPS Trust shall receive all income without any tax deducted at source.

The tax benefit under section 80CCD of the Income-tax Act, 1961 was hitherto available to “employees” only. However, the

NPS now has been extended also to “self-employed”. Therefore, it is proposed to amend sub-section (1) of section 80CCD so

as to extend the tax benefit thereunder also to “self-employed” individuals.

It is also proposed to amend the Explanation to the said section to provide that for the purposes of the said section the

assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity

plan in the same previous year.

These amendments will take effect retrospectively from 1st April, 2009 and will, accordingly, apply in relation to assessment

year 2009-2010 and subsequent years. [Clauses 4,30,46,62,114]

Taxation of certain transactions without consideration or for an inadequate

consideration as income from other sources

Sub clause (vi) of section 56 provide that any ‘sum of money’ (in excess of the prescribed limit of Rupees fifty thousand)

received without consideration by an individual or HUF will be chargeable to income tax in the hands of the recipient under the

head ‘income from other sources’. However, receipts from relatives or on the occasion of marriage or under a will are outside

the scope of the provisions of clause (vi) of sub-section (2) of section 56 of the Income-tax Act. Similarly, anything which is received

in kind having ‘money’s worth’ i.e. property is also outside the purview of the existing provisions.

It is, therefore proposed to amend section 56 of the Income-tax Act to provide that the value of any property received without

consideration or for inadequte consideration will also be included in the computation of total income of the recipient. Such

properties will include immovable property being land or building or both, shares and securities, jewellery, archaeological

collections, drawings, paintings, sculptures or any work of art.

In a case where an immovable property is received without consideration and the stamp duty value of such property exceeds

fifty thousand rupees, the whole of the stamp duty value of such property shall be taxed as the income of the recipient. If an

immovable property is received for a consideration which is less than the stamp duty value of the property and the difference

between the two exceeds fifty thousand rupees (inadequate consideration), the difference between the stamp duty value of such

property and such consideration shall be taxed as the income of the recipient.

If the stamp duty value of immovable property is disputed by the assessee, the Assessing Officer may refer the valuation

of such property to a Valuation Officer. In such cases, the provisions of existing section 50C and sub-section (15) of section 155

of the Income Tax Act shall, as far as may be, apply for determining the value of such property.

In a case where movable property is received without consideration and the aggregate fair market value of such property

exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property shall be taxed as the income of the

recipient. If a movable property is received for a consideration which is less than the aggregate fair market value of the property

and the difference betweent the two exceeds fifty thousand rupees, the difference between the fair market value of such property

and such consideration shall be taxed as the income of the recipient.

It is also proposed to provide that,—

(i) the value of moveable property shall be the fair market value as on the date of receipt in accordance with the method

prescribed; and

(ii) in the case of immovable property, the value of the property shall be the ‘stamp duty value’ of the property.

This amendment will take effect from 1st October, 2009 and will accordingly apply for transactions undertaken on or after

such date. [Clause 26]

Minimum Alternate Tax

The Income-tax Act is riddled with a plethora of tax incentives which has the effect of considerable eroding the tax base. Since

tax incentives are generally sticky in nature, their distortionary impact can be reduced / eliminated only by imposing a cap thereon.

The Minimum Alternate Tax (MAT) is designed to achieve this objective.

Under the existing provisions of section 115JB of the Income Tax Act, a company is required to pay a minimum tax on its

book profits, if the income-tax payable on the total income, as computed under the Act in respect of any previous year relevant

to the assessment year commencing on or after the 1st day of April, 2007, is less than such minimum. The rate of the minimum

tax is ten per cent of the book profit. It is proposed to amend sub-section (1) of section 115JB to increase the MAT rate to fifteen

per cent. from the existing level of ten per cent.

However, with a view to provide relief to the assessees, being companies, who pay Minimum Alternate Tax under section

115JB for any assessment year beginning on or after the 1st day of April, 2006, it is also proposed to amend the provisions of

sub-section (3A) of section 115JAA so as to provide that the amount of tax credit determined under sub-section (2A) of section

115JAA shall be allowed to be carried forward and set off upto the tenth assessment year immediately succeeding the

assessment year in which the tax credit becomes allowable under sub-section (1A) of the said section.

These amendments will take effect from 1st day of April, 2010 and shall accordingly, apply in relation to assessment year

2010-11 and subsequent years. [Clauses 44,45]

Clarification regarding add back of ‘provision for diminution in the value of asset’, while computing book profits

Section 115JB of the Income-tax Act provides for levy of minimum alternate tax (MAT) on the basis of book profits of a company.

As per Explanation 1 after sub-section (2), the expression “book profit” means net profit as shown in the profit and loss account

prepared in accordance with the provisions of Part-II and Part-III of Schedule-VI to the Companies Act, 1956 as increased or

reduced by certain adjustments, as specified in that section.

It is proposed to insert a new clause (i) in Explanation 1 after sub-section (2) of the said section so as to provide that if any

provision for diminution in the value of any asset has been debited to the profit and loss account, it shall be added to the net profit

as shown in the profit and loss account for the purpose of computation of book profit.

Similar amendment is also proposed in section 115JA of the Income-tax Act by way insertion of a new clause (g) in the

Explanation after sub-section (2) of the said section.

The amendment to section 115JA is proposed to be made effective retrospectively from 1st day of April, 1998 and will,

accordingly, apply in relation to assessment year 1998-99 and subsequent years.

The amendment to section 115JB is proposed to be made effective retrospectively from 1st day of April, 2001 and will,

accordingly, apply in relation to assessment year 2001-02 and subsequent assessment years. [Clauses 43,45]

Taxation of investment income/loss of Non life insurance business

The profits and gains of non-life insurance business is computed under section 44 read with Rule 5 of the First Schedule.

As per Rule 5, profits and gains of non-life insurance business is taken to be profits disclosed in the annual account, copies

of which are required under the Insurance Act, 1938 (4 of 1938), to be furnished to the Controller of Insurance, subject to

adjustments for unexpired risk and disallowances under section 30 to Section 43B.

The Insurance Act, 1938 was amended in 1999 and the Insurance Regulatory Development Authority (IRDA) was created.

In the financial year 2001-02, IRDA introduced “IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance

Companies) Regulations, 2002". The regulations mandated new guidelines and formats for preparation of accounts by General

Insurers. According to these changed norms, a non-life insurance company has to include profit or loss on realization/sale of

investment in the profit and loss account or revenue account. This is also consistent with international best practice on taxation

of investment income of non-life insurance companies.

In view of the above, it is proposed to amend the provisions of the Income-tax Act to provide that any increase in respect of

any amount taken credit for in the accounts on account of appreciation of or gains on realisation of investments in accordance

with the regulations prescribed by IRDA shall be treated as income and included in the computation of the total income. Similarly,

deduction shall be allowed in respect of any amount either written off or provided in the accounts to meet diminution in or loss

on realisation of investments in accordance with the regulations prescribed by IRDA.

This amendment will be effective from the 1st day of April, 2011 and will accordingly apply in relation to assessment year

2011-12 and subsequent years. [Clause 79]

Provisions for deemed valuation in certain cases of Transfer

The existing provisions of section 50C provide that where the consideration received or accruing as a result of the transfer

of a capital asset, being land or building or both, is less than the value adopted or assessed by an authority of a State Government

( stamp valuation authority ) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed

shall be deemed to be the full value of the consideration received or accruing as a result of such transfer for computing capital

gain. However, the present scope of the provisions does not include transactions which are not registered with stamp duty

valuation authority, and executed through agreement to sell or power of attorney.

With a view to preventing the leakage of revenue, it is proposed to amend the section 50C so as to provide that where the

consideration received or accruing as a result of transfer of a capital asset, being land or building or both is less than the value

adopted or assessed or assessable by an authority of a State Government for the purpose of payment of stamp duty in respect

of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration

received or accruing as a result of such transfer for computing capital gain.

Further, it is proposed to insert a new explanation so as to clarify the meaning of the term ‘assessable’.

This amendment will take effect from 1st October, 2009 and shall accordingly apply in relation to transactions undertaken

on or after such date. [Clause 25]

Compensation received on voluntary retirement or termination of service under

a scheme of voluntary separation

Very often, a person receives arrears or advance of salary due to him. Since arrears and advance salary is liable to tax, the

total income (including such arrears and advance) is assessed at a rate higher than that at which it would otherwise have been

assessed if the total income did not include arrears and advance of salary. In other words, arrears and advance salary result

in bracket creeping and higher tax burden. With the view to mitigating this excess burden, the provisions of section 89 of the

Income-tax Act provide for backward spread of the arrears and forward spread of the advance.

Under the voluntary retirement scheme, the retiree employee receives lump-sum amount in respect of his balance period

of service. Such amount are in the nature of advance salary. Clause (10C) of section 10 provides for an exemption of Rs. 5 lakhs

in respect of such amount. This exemption is provided to mitigate the hardship on account of bracket creeping as a result of the

receipt of the amount in lump-sum upon voluntary retirement. However, some tax payers have claimed both the benefit under

clause (10C) of section 10 and section 89. The courts have also upheld their claims.

With the view to preventing the claim of double benefit, it is proposed to insert a proviso to section 89 to provide that no relief

shall be granted in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of

his service, in accordance with any scheme or schemes of voluntary retirement or in case of a public sector company referred

to in sub-clause (i) of clause (10C) of section 10, a scheme of voluntary separation, if an exemption in respect of such voluntary

retirement or termination of his service or voluntary separation has been claimed by the assessee under clause (10C) of section

10 in respect of such, or any other, assessment year.

Correspondingly, it is also proposed to insert a third proviso to clause (10C) of section 10 to provide that where any relief

has been allowed to any assessee under section 89 for any assessment year in respect of any amount received or receivable

on his voluntary retirement or termination of service or voluntary seperation, no exemption under cluase (10C) of section 10 shall

be allowed to him in relation to such, or any other, assessment year.

These amendments will take effect from 1st day of April, 2010 and will, accordingly, apply in relation to assessment year

2010-11 and subsequent years. [Clauses 4,38]

Rationalisation of provisions relating to penalty for concealment of income

Under the existing provisions of Explanation 5A to sub-section (1) of section 271, it has been provided that where, in the course

of search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be owner of – (i) any money,

bullion, jewellery or other valuable article or thing (hereinafter referred to as assets) and the assessee claims that such assets

have been acquired by him by utilizing (wholly or in part) his income for any previous year; or (ii) any income based on any entry

in any books of account or other documents or transactions and 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 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.

In order to clarify that the scope of Explanation 5A also extends to cases where the assessee has filed the return of income

for any previous year and the income found during the course of search relates to such previous year and is not disclosed in

the said return, then such income shall be deemed to be concealed income and assessee shall be liable to pay penalty under

section 271. Therefore, it is proposed to substitute the 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 (hereinafter referred to as assets) and the assessee

claims that such assets have been acquired by him by utilizing (wholly or in part) his income for any previous year; or

(ii) any income based on any entry in any books of account or other documents or transactions and he claims that such

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 search and,—

(a) where the return of income for such previous year has been furnished before the said date but such income has

not been declared therein; or

(b) the due date for filing the return of income for such previous year has expired but 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 retrospectively from 1st day of June, 2007 and apply in cases where search under section

132 is initiated on or after 1st June, 2007. [Clause 73]

Introduction of Document Identification Number and facility for electronic communication

It is now well accepted that “tax administration is tax policy”. A tax administration designed to foster voluntarily compliance

yields higher revenue than a sound tax policy administered by an inefficient tax administration. Therefore, it has always been

the endeavour of the Income-tax Department to improve the standards of its service and transparency in its functioning. Therefore,

it is proposed to introduce a computer based system of allotment and quoting of Document Identification Number (DIN) in each

correspondence sent or received by it so as to enable tracking of documents and minimize taxpayers grievances.

With a view to give effect to the aforesaid, it is proposed to insert a new section 282B so as to provide that every income tax

authority shall allot a computer generated Document Identification Number in respect of every notice, order, letter or any

correspondence issued by him to any other income-tax authority or assessee or any other person and such number shall be

quoted thereon.

It is further proposed that where the notice, order, letter or any correspondence issued by any income-tax authority does not

bear a Document Identification Number, such notice, order, letter or any correspondence shall be treated as invalid and shall

be deemed never to have been issued.

It is also proposed to provide that every document, letter or any correspondence, received by an income-tax authority or on

behalf of such authority, shall be accepted only after allotting and quoting of a computer generated Document Identification

Number. It is also proposed to provide that where the document, letter or any correspondence received by any income-tax authority

or on behalf of such authority does not bear Document Identification Number, such document, letter or any correspondence shall

be treated as invalid and shall be deemed never to have been received.

This amendment will take effect from 1st October, 2010.

Under the existing provisions of section 282 a notice or requisition under the Act may be served on the person therein named

either by post or as if it were a summons issued by a court.

It is proposed to amend the said provisions to provide that the service of notice or summon or requisition or order or any

other communication may be made by delivering or transmitting a copy thereof by post or courier service or in such manner as

provided in the Code of Civil Procedure, 1908 (5 of 1908) for the purposes of service of summons; or in the form of any electronic

record as provided in Chapter IV of the Information Technology Act, 2000; or by any other means of transmissions as may be

provided by rules made by the Board in this behalf.

It is also proposed that the Board may make rules providing for the addresses (including the address for electronic mail

or electronic mail message) to which such communication may be delivered.

This amendment will take effect from 1st October, 2009. [Clauses 76,77]

Rationalisation of provisions relating to provisional attachment of asset

The provisions of section 281B empower the Assessing Officer to make provisional attachment of the assets of the assessee

during the pendency of any proceedings for assessment or reassessment. The sub-section (2) further provides that every

attachment order shall cease to have effect after the expiry of a period of six months from the date of order made under sub-section

(1). However, the period of validity of provisional attachment order can be further extended by two years. The second proviso

to sub-section (2) further provides that where an application for settlement under section 245C is made, the period commencing

from the date on which such application is made and ending with the date on which the order under sub-section (1) of section

245D is made shall be excluded from the period specified in this sub-section.

In many cases, the assessees have filed writ petitions in High Courts and Supreme Court and have obtained stay of the

assessment proceedings. Often, such stay remains in force for many years during which the validity of provisional attachment

order expires. Therefore, it is proposed to amend sub-section (2) of section 281B to provide that the period, during which the

proceedings for assessment or reassessment are stayed by any Court, shall be excluded in calculating the period specified

therein.

This amendment will take effect retrospectively from 1st April, 1988 and will accordingly apply in relation to assessment

year 1988-89 and subsequent assessment years. [Clause 75]

Rationalization of provisions for taxation of interest received on

delayed compensation or enhanced compensation

The existing provisions of Income-tax Act provide that income chargeable under the head “Profits and gains of business

or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of

accounting regularly employed by the assessee. Further, the Hon’ble Supreme Court, in the case of Rama Bai Vs. CIT (181 ITR

400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This

has caused undue hardship to tax payers.

With a view to mitigating the hardship, it is proposed to amend section 145A to provide that the interest received by an

assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received,

irrespective of the method of accounting followed by the assessee.

Further, it is proposed to insert clause (viii) in sub-section (2) of section 56 to provide that income by way of interest received

on compensation or on enhanced compensation referred to in sub-section (2) of section 145A shall be assessed as “income

from other sources” in the year in which it is received.

This amendment will take effect from 1st April, 2010 and shall accordingly apply in relation to assessment year 1998-99

and subsequent assessment years. [Clauses 26,27,56]

Empowering Central Government to enter into agreement with specified

non-sovereign territories

Section 90 of the Income-tax Act empowers the Central Government to enter into Double Taxation Avoidance Agreement

(‘DTAA’) with the Government of any other country outside India for granting double-taxation relief and facilitate exchange of

information concerning avoidance or evasion of tax. The government now wishes to expand the scope of this cooperation by

entering into a DTAA or TIEA (Tax Information Exchange Agreement) with non-sovereign jurisdictions.

In order to enable the government to enter into agreements with non-sovereign territories, it is proposed to make suitable

amendments to section 90 of the Income Tax Act, 1961 and to the corresponding provisions under section 44A of the Wealth

Tax Act so as to enable the government to notify such specified territories outside India.

The proposed amendment will be effective from 1st October, 2009. [Clauses 39,83]

Determination of arm's length price in cases of international transactions

Section 92C of the Income-tax Act provides for adjustment in the transfer price of an international transaction with an

associated enterprise if the transfer price is not equal to the arm's length price. As a result, a large number of such transactions

are being subjected to adjustment giving rise to considerable dispute. Therefore, it is proposed to empower the Board to

formulate safe harbour rules i.e. to provide the circumstances in which the Income-tax authorities shall accept the transfer price

declared by the assessee.

This amendment will take effect from 1st April, 2009.

Further, the proviso to sub-section (2) of section 92C provides that where more than one price is determined by the most

appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices, or, at the option of the

assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.

The above provision has been subject to conflicting interpretation by the assessee and the Income Tax Department. The

assessee’s view is that the arithmetical mean should be adjusted by 5 per cent to arrive at the arm's length price. However, the

department’s contention is that if the variation between the transfer price and the arithmetical mean is more than 5 per cent of

the arithmetical mean, no allowance in the arithmetical mean is required to be made.

With a view to resolving this controversy, it is proposed to amend the proviso to section 92C to provide that where more than

one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of

such price. However, if the arithmetical mean, so determined, is within five per cent of the transfer price, then the transfer price

shall be treated as the arm's length price and no adjustment is required to be made.

This amendment will take effect from 1st October, 2009 and shall accordingly apply in relation to all cases in which

proceedings are pending before the Transfer Pricing Officer (TPO) on or after such date. [Clauses 40,41]

Provision for constitution of alternate dispute resolution mechanism

The dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained only

after a long drawn litigation till Supreme Court. Flow of foreign investment is extremely sensitive to prolonged uncertainity in tax

related matter. Therefore, it is proposed to amend the Income-tax Act to provide for an alternate dispute resolution mechanism

which will facilitate expeditious resolution of disputes in a fast track basis.

The salient features of the proposed alternate dispute resolution mechanism are as under:—

(1) The Assessing Officer shall, forward a draft of the proposed order of assessment (hereinafter in this section referred

to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any

variation in the income or loss returned which is prejudicial to the interest of such assessee.

(2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,-

(a) File his acceptance of the variations to the Assessing Officer; or

(b) File his objections, if any, to such variation with,—

(i) The Dispute Resolution Panel; and

(ii) The Assessing Officer.

(3) The Assessing Officer shall complete the assessment on the basis of the draft order, if —

(a) The assessee intimates to the Assessing Officer the acceptance of the variation; or

(b) No objections are received within the period specified in sub-section (2).

(4) The Assessing Officer shall, notwithstanding anything contained in section 153, pass the assessment order under

sub-section (3) within one month from the end of the month in which,—

(a) The acceptance is received; or

(b) The period of filing of objections under sub-section (2) expires.

(5) The Dispute Resolution Panel shall, in a case where any objections are received under sub-section (2), issue such

directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.

(6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following,

namely:—

(a) Draft order;

(b) Objections filed by the assessee;

(c) Evidence furnished by the assessee;

(d) Report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;

(e) Records relating to the draft order;

(f) Evidence collected by, or caused to be collected by, it; and

(g) Result of any enquiry made by, or caused to be made by it.

(7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5), -

(a) Make such further enquiry, as it thinks fit; or

(b) Cause any further enquiry to be made by any income tax authority and report the result of the same to it.

(8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however,

that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and

passing of the assessment order.

(9) If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to

the opinion of the majority of the members.

(10) Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer.

(11) No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and

the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the

revenue, respectively.

(12) No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order

is forwarded to the eligible assessee.

(13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the

directions, complete, notwithstanding anything to the contrary contained in section 153, the assessment without

providing any further opportunity of being heard to the assessee, within one month from the end of the month in which

the direction is received.

(14) The Board may make rules for the efficient functioning of the Dispute Resolution Panel and expeditious disposal of

the objections filed, under sub-section(2), by the eligible assessee.

(15) For the purposes of this section,—

(a) “Dispute Resolution Panel” means a collegium comprising of three commissioners of Income-tax constituted by

the Board for this purpose;

(b) “eligible assessee” means,-

(i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of

the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and

(ii) any foreign company.

Further, it is proposed to make consequential amendments—

(i) in sub-section (1) of section 131 so as to provide that “Dispute Resolution Panel” shall have the same powers as are

vested in a Court under the Code of Civil Procedure, 1908 (5 of 1908);

(ii) in clause (a) of sub-section (1) of section 246 so as to exclude the order of assessment passed under sub-section

(3) of section 143 in pursuance of directions of “Dispute Resolution Panel” as an appealable order and in clause (c)

of sub-section (1) of section 246 so as to exclude an order passed under section 154 of such order as an appealable

order;

(iii) in sub-section (1) of section 253 so as to include an order of assessment passed under sub-section (3) of section

143 in pursuance of directions of “Dispute Resolution Panel” as an appealable order.

These amendments will take effect from 1st October, 2009. [Clauses 49,55,71,72]

Special provision for computing profits and gains of business on presumptive basis

The existing provisions of the Income-tax Act, provide for taxation of income on presumptive basis in the case of construction

business, income from goods carriages and business of retail trade.

Section 44AD prescribes a method of presumptive taxation for assessees engaged in the business of civil construction

or supply of labour for civil construction in which a sum equal to eight percent of the gross receipts is deemed to be the profits

and gains from business. Section 44AE provides presumptive provisions for the assessees engaged in the business of plying,

hiring or leasing upto ten goods carriages in which a prescribed sum per vehicle is deemed to be the presumptive income of

the assessee. Section 44AF prescribes a method of presumptive taxation for retail trade, under which the presumptive income

is computed at the rate of a sum equal to five per cent of the total turnover.

There has been a substantial increase in small businesses with the growth of transport and communication and general

growth of the economy. A large number of businesses and service providers in rural and urban areas who earn substantial income

are outside the tax-net. Introduction of presumptive tax provisions in respect of small businesses would help a number of small

businesses to comply with the taxation provisions without consuming their time and resources. A presumptive income scheme

for small taxpayers lowers the compliance cost for such taxpayers and also reduces the administrative burden on the tax

machinery.

In view of the above, it is proposed to expand the scope of presumptive taxation to all businesses by substituting a new section

44AD. The salient features of the proposed presumptive taxation scheme are as under:

(a) The scheme shall be applicable to individuals, HUFs and partnership firms excluding Limited liability partnership

firms. It shall also not be applicable to an assessee who is availing deductions under sections 10A, 10AA, 10B, 10BA

or deduction under any provisions of Chapter VIA under the heading “C.—Deductions in respect of certain incomes” in

the relevant assessment year.

(b) The scheme is applicable for any business (excluding a business already covered under Sec. 44AE) which has a

maximum gross turnover /gross receipts of 40 lakhs.

(c) The presumptive rate of income is prescribed at 8% of gross turnover /gross receipts.

(d) An assessee opting for the above scheme shall be exempted from payment of advance tax related to such business

under the current provisions of the Income-tax Act.

(e) An assessee opting for the above scheme shall be exempted from maintenance of books of accounts related to such

business as required under section 44AA of the Income-tax Act.

(g) An assessee with turnover below Rs 40 lakhs, who shows an income below the presumptive rate prescribed under

these provisions, will, in case his total income exceeds the taxable limit, be required to maintain books of accounts

and also get them audited.

(h) The existing section 44AF is proposed to be made inoperative for the assessment year beginning on or after 1st day

of April, 2011.

The proposed amendment will take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year

2011-12 and subsequent years. [Clauses 18,19,20,21,22]

Presumptive income for truck owners under section 44AE

Under the existing provisions of section 44AE, a presumptive scheme is available to assessees engaged in business of

plying, hiring or leasing goods carriages. The scheme applies to an assessee, who owns not more than 10 goods carriages

at any time during the previous year.

Under this scheme, which is optional to the assessee, a fixed amount of income per vehicle is taken at the rate of Rs.3,500/

- per month per vehicle for owners of heavy goods vehicle, and Rs.3,150/- per month per vehicle for the owners of light goods

vehicles. An assessee opting for this scheme is exempted from maintaining books of account to substantiate the income.

It is proposed to enhance the presumed income per vehicle for the owners of–

(i) heavy goods vehicle to Rs.5,000/- per month; and

(ii) other than heavy goods vehicles to Rs.4,500/- per month.

It is further proposed to provide an anti-avoidance clause stating that a prescribed fixed sum or a sum higher than the

aforesaid sum claimed to have been earned by the assessee shall be deemed to be profits and gains of such business.

The proposed amendment will take effect from the 1st April, 2011 and will, accordingly, apply in relation to assessment year

2011-12 and subsequent years. [Clause 21]

Taxation of Limited Liability Partnership (LLP)

The Limited Liability Partnership Act, 2008 has come into effect in 2009. LLP Rules (except some rules dealing with

conversion) and forms have been notified w.e.f. 1st of April, 2009.

It is proposed to incorporate the taxation scheme of LLPs in the Income Tax Act on the same lines as the taxation scheme

currently prevalent for general partnerships, i.e. taxation in the hands of the entity and exemption from tax in the hands of its

partners. A “limited liability partnership” and a general partnership will be accorded the same tax treatment.

It is also proposed that the word ‘partner’ shall include within its meaning a partner of a limited liability partnership, the word

‘firm’ shall include within its meaning a limited liability partnership and the word ‘partnership’ shall include within its meaning

a limited liability partnership as these terms have been defined in the Limited Liability Partnership Act, 2008.

The LLP Act provides for nomination of “designated partners” who have been given greater responsibility. It is proposed

that the designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated

partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return.

It is proposed to provide that in case of liquidation of an LLP, every partner will be jointly and severally liable for payment of

tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part.

As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion

from a general parternship firm to an LLP will have no tax implications if the rights and obligations of the partners remain the

same after conversion and if there is no transfer of any asset or liability after conversion.If there is a violation of these conditions,

the provisions of section 45 shall apply.

It is further proposed to make the amendments effective from the 1st day of April 2010 i.e. assessment year 2010-11.

[Clause 3,53,58]

Rationalisation of provisions relating to tax deduction at source (TDS)

Tax deduction at source is a method of collecting taxes on behalf of the Government at the time of payment or credit. The

Income-tax Act casts a legal responsibility on the deductor to deduct tax on the correct amount, at the correct rate and deposit

it to the Government account. The TDS rates are specified partly in the Finance Act and partly in the provisions of the Incometax

Act. Deductors are also required to compute surcharge and cess over and above some of the prescribed rates of TDS. If the

deductor fails to deduct the tax or fails to deposit the tax after deduction, interest, penalty and prosecution provisions may get

attracted. Further, under the provisions of sub-clause (ia) of clause (a) of section 40, if the deductor fails to deduct tax on a

prescribed payment or fails to deposit the tax deducted in time, the entire expenditure is disallowed while computing his total

income. To assist deductors in complying with their TDS obligations and reduce their compliance burden, it is proposed to

rationalise the provisions of TDS as under:

a. Rationalisation of TDS rates:

A. Under the existing provisions of section 194-I of the Income-tax Act, TDS on rental payments is prescribed at the rate of–

(a) 10% for the use of any machinery or plant or equipment,

(b) 15% for the use of any land or building or furniture or fittings, if the payee is an individual or HUF and

(c) 20% if the payee is other than an individual or HUF.

The current rates need a downward revision as they are leading to blocking of working capital funds in many cases. It is

therefore proposed to rationalise and reduce the TDS rates on rental payments as under:

(a) 2% for the use of any machinery or plant or equipment,

(b) 10% for the use of any land or building or furniture or fittings for all persons.

Nature of Payment (194-I) Existing Proposed rate*

rate (w.e.f. 1-10-2009)

Rent —

a. rent of plant, machinery or equipment 10% 2%

b. rent of land, building or furniture to an individual and 15% 10%

Hindu undivided family

c. rent of land, building or furniture to a per son other than an 20% 10%

individual or Hindu undivided family

* The rate of TDS will be 20 per cent in all cases, if PAN is not quoted by the deductee w.e.f. 1.04.2010.

B. Under the existing provisions of section 194C of the Income-tax Act, TDS at the rate of 2% is deducted on payment for

a contract. However, in the case of a sub-contract, TDS is deducted at the rate of 1%. Further, in the case of payment for an

advertising contract, TDS is required to be deducted at the rate of 1%.

In order to reduce the scope for disputes regarding classificaton of contract as sub contract, it is proposed to specify the

same rate of TDS for payments to both contractors as well as sub-contractors. To rationalise the TDS rates and to remove multiple

classifications it is also proposed to provide same rate of TDS in the case of payment for advertising contracts. To avoid hardship

to small contractors/sub-contractors most of whom are organized as individuals/HUFs, it is proposed to prescribe following rates

of TDS:

(a) 1% where payment for a contract are to individuals/HUF

(b) 2% where payment for a contract are to any other entity.

Nature of Payment (194C) Existing Proposed rate**

rate (w.e.f. 1-10-2009)

Payment to —

a. Individual/HUF contractor 2% 1%

b. Other than individual/HUF contractor 2% 2%

c. Individual/HUF sub-contractor 1% 1%

d. Other than individual/HUF sub-contractor 1% 2%

e. Individual/HUF contractor/sub-contractor for advertising 1% 1%

f. Other than individual/HUF contractor/ sub-contractor for advertising 1% 2%

g. Sub-contractor in transport business 1% nil*

h. Contractor in transport business 2% nil*

* The nil rate will be applicable if the transporter quotes his PAN. If PAN is not quoted the rate will be 1% for an individual/

HUF transporter and 2% for other transporters upto 31.3.2010.

** The rate of TDS will be 20 per cent in all cases, if PAN is not quoted by the deductee w.e.f. 1.04.2010.

C. Further some of the rates of TDS specified for resident taxpayers have been reduced and converged to 10 per cent.

D. In order to ease the computation of TDS, it is proposed to remove surcharge and cess on tax deducted on non-salary

payments made to resident taxpayers.

b. Provisions for payments and tax deducted at source to transporters:

Under Section 194C, tax is required to be deducted on payments to transport contractors engaged in the business of plying,

hiring or leasing goods carriages. However if they furnish a statement that they do not own more than two goods carriages, tax

is not to be deducted at source. Transport operators report problem in obtaining TDS certificates as these are not issued

imediately by clients and they are not able to approach the client again as they may have to move across the country for their

business. It is, therefore, proposed to exempt payments to transport operators (as defined in section 44AE) from the purview

of TDS. However, this would only apply in cases where the operator furnishes his Permanent Account Number (PAN) to the

deductor. Deductors who make payments to transporters without deducting TDS (as they have quoted PAN) will be required to

intimate these PAN details to the Income Tax Department in the prescribed format.

Further under the existing provisions of sections 40A(3) the Income-tax Act, if an assessee incurs any expenditure in respect

of which payment in excess of Rs 20,000 is made otherwise than by an account payee cheque or account payee bank draft, such

expenditure is not allowed as a deduction. As a large number of small truck owners/drivers have little working capital and do

not have bank accounts outside their home cities, they insist on payment in cash for undertaking long haul journeys, as they need

cash for incurring en-route expenses on diesel, food and repairs etc and such expenses generally exceed Rs 20,000/-. This

causes operational problems to those who have to pay for their services.

To address this problem, it is proposed to raise the limit of cash payment to such transport operators to Rs 35,000/- from

the existing limit of Rs 20,000/-.

These amendments will take effect from the 1st day of October, 2009 and will accordingly apply to transaction on or after

such date.

c. Clarification regarding “work” under section 194C.

There is ongoing litigation as to whether TDS is deductible under section 194C on outsourcing contracts and whether

outsourcing constitutes work or not. To bring clarity on this issue, it is proposed to provide that “work” shall not include

manufacturing or supplying a product according to the requirement or specification of a customer by using raw material

purchased from a person other than such customer as such a contract is a contract for ‘sale’. This will however not apply to a

contract which does not entail manufacture or supply of an article or thing (e.g. a construction contract). It is also proposed to

include manufacturing or supplying a product according to the requirement or specification of a customer by using material

purchased from such customer, within the definition of ‘work’. It is further proposed to provide that in such a case TDS shall

be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned

separately in the invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted

on the whole of the invoice value.

It is further proposed to make the amendments effective from the 1st day of October, 2009. Accordingly, the proposed

amendments will apply to credits or payment effected on or after 1st October, 2009.

d. Improving compliance with provisions of quoting PAN through the TDS regime

Statutory provisions mandating quoting of Permanent Account Number (PAN) of deductees in Tax Deduction at Source (TDS)

statements exist since 2001 duly backed by penal provisions. The process of allotment of PAN has been streamlined so that

over 75 lakh PANs are being allotted every year. Publicity campaigns for quoting of PAN are being run since the last three years.

The average time of allotment of PAN has come down to 10 calendar days. Therefore, non-availability of PAN has ceased to

be an impediment. In a number of cases, the non-quoting of PANs by deductees is creating problems in the processing of

returns of income and in granting credit for tax at deducted at source, leading to delays in issue of refunds.

In order to strengthen the PAN mechanism, it is proposed to make amendments in the Income Tax Act to provide that any

person whose receipts are subject to deduction of tax at source i.e. the deductee, shall mandatorily furnish his PAN to the deductor

failing which the deductor shall deduct tax at source at higher of the following rates

(i) the rate prescribed in the Act;

(ii) at the rate in force i.e., the rate mentioned in the Finance Act; or

(iii) at the rate of 20 per cent.

TDS would be deductible at the above-mentioned rates will also apply in cases where the taxpayer files a declaration in form

15G or 15H (under section 197A) but does not provide his PAN. Further, no certificate under section 197 will be granted by the

Assessing Officer unless the application contains the PAN of the applicant.

These provisions will also apply to non-residents where TDS is deductible on payments or credits made to them. To ensure

that the deductor knows about the correct PAN of the deductee it is also proposed to provide for mandatory quoting of PAN of

the deductee by both the deductor and the deductee in all correspondence, bills and vouchers exchanged between them.

This amendment will take effect from 1st April, 2010. [Clauses 16,60,61]

e. Processing of statements of tax deducted at source

Currently almost all statements of tax deducted at source are filed in an electronic mode. The processing of these statements

should, therefore, be done only in a computerized environment. It is therefore proposed to provide for processing of statements

of tax deducted at source on computer so that liabilities on account of interest and other defaults in TDS payment are promptly

calculated and intimated to the deductor. In order to process TDS statements on computer, it is proposed to provide for electronic

processing on the same lines as processing of Income-tax returns.

It is proposed that the following adjustments can be made during the computerized processing of statements of tax deducted

at source:

(i) any arithmetical error in the statement; or

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the statement, for example, in respect of

rate of deduction of tax at source where such rate is not in accordance with the provisions of the Act.

It is proposed to provide that after making adjustments, tax and interest [e.g. u/s 201(1A)] would be calculated and sum

payable by the deductor or refund due to the deductor will be determined. An intimation will be sent to the deductor informing

him of his tax liability or granting him the refund due within one year from the end of the financial year in which the statement is

filed. It is also proposed that the processing of these statements can be undertaken in a centralized processing centre.

This amendment will take effect from 1st April, 2010 [Clauses 64,65]

f. Providing time limits for passing of orders u/s 201(1) holding a person to be an assessee in default

Currently, the Income Tax Act does not provide for any limitation of time for passing an order u/s 201(1) holding a person

to be an assessee in default. In the absence of such a time limit, disputes arise when these proceedings are taken up or

completed after substantial time has elapsed.

In order to bring certainty on this issue, it is proposed to provide for express time limits in the Act within which specified order

u/s 201(1) will be passed.

It is proposed that an order u/s 201(1) for failure to deduct the whole or any part of the tax as required under this Act, if the

deductee is a resident taxpayer shall be passed within two years from the end of the financial year in which the statement of tax

deduction at source is filed by the deductor. Where no such statement is filed, such order can be passed up till four years from

the end of the financial year in which the payment is made or credit is given. To provide sufficient time for pending cases, it is

proposed to provide that such proceedings for a financial year beginning from 1st April, 2007 and earlier years can be completed

by the 31st March, 2011.

However, no time-limits have been prescribed for order under sub-section(1) of section 201 where—

(a) the deductor has deducted but not deposited the tax deducted at source, as this would be a case of defalcation of

government dues,

(b) the employer has failed to pay the tax wholly or partly, under sub-section (1A) of section 192, as the employee would

not have paid tax on such perquisites,

(c) the deductee is a non-resident as it may not be administratively possible to recover the tax from the non-resident.

It is proposed to make these amendments effective from 1st April, 2010. Accordingly it will apply to such orders passed on

or after the 1st April, 2010. [Clause 65]

g. Filing of TDS and TCS statements

Sub-section (3) of section 200 of Income-tax Act provides that any person deducting tax in accordance with the provisions

of Chapter XVIIB has to furnish, within the prescribed time, quarterly statements for the period ending on the 30th June, 30th

September, 31st December and 31st March in each financial year. Similarly, filing of quarterly returns for tax collection at source

(TCS) have been provided in sub-section (3) of section 206C of the Act. Further section 206A provides furnishing of quarterly return

in respect of payment of interest to residents without deduction of tax.

In order to provide administrative flexibility in deciding the periodicity of such TDS related statements, it is proposed to modify

the existing provisions so as to allow the Government to prescribe periodicity of such TDS statements besides prescribing their

form and manner.

These provision will be applicable from 1st October, 2009. [Clauses 52,63,66,67,68,69,74]

Commodities Transaction Tax

The provisions for levy of Commodities Transaction Tax were introduced by Chapter VII of Finance Act, 2008. However the

levy has not yet been operationalised. In view of the recommendations of the Prime Minister's Economic Advisory Council, It is

proposed to insert a new section 121A in Chapter VII of Finance Act, 2008 to provide that the Chapter relating to levy of Commodities

Transanction Tax shall not apply on or after 1st April, 2009.

It is also proposed to make a consequential amendment in clause (xvi) in sub-section (1) of section 36 of the Income-tax

Act by omitting the said clause.

These amendments will take effect from 1st April, 2009. [Clause 115]

Aligning the definition of “block of asset”

The term "block of assets" has been defined in clause (11) of section 2 and in Explanation 3 to sub-section (1) of section

32 of the Income-tax Act. However, these definition are not identical and therefore they are subject to misuse. Accordingly, it is

proposed to amend Explanation 3 of sub-section (1) of Section 32 of the Income-tax Act so as to delete the definition of “block

of assets” provided therein. Consequently, “block of assets” will derive its meaning only from clause (11) of section 2.

It is proposed to make the amendments effective from the 1st day of April, 2010 and will, accordingly, apply in relation to

assessment year 2010-11 and subsequent years. [Clause 11]

Centralized Processing of Returns

The Income-tax department is in the process of setting up a Centralised Processing Centre (CPC) at Bengaluru for

centralised processing of Income-tax and Fringe benefits tax returns. For this purpose the Board had been empowered to relax,

modify or adapt any provision of law relating to processing of returns subject to the condition that the notification for such relaxation,

modification or adaptation is issued on or before the 31st March, 2009 and the said notification is laid on the table of the House.

Since the centre has still not been operationalised, it is necessary to allow the Board a further period of one year i.e. up to 31st

March, 2010 to relax, modify or adapt any provision of law relating to processing of returns.

These amendments will take effect from 1st April, 2009. [Clauses 47,54]