Significant Amendments by

Finance Act (2)2009CA. Divakar Vijayasarathy

40(b)(v) Partners Remuneration 40A (3A) Explanation 6 to 43(6) Sec 44AD Sec 50C/56(2)(vii)/49 New Pension Scheme Sec 56(2)(viii)145A Sec 194 C 115JA/JAA/JB

Presentation Schema

Misc:◦ 80E◦ 80G(5)◦ 80U◦ 194I◦ 44AE◦ Wealth Tax Act

Case Laws:◦ Capital Gains – 49(1)◦ TDS 194 j(hospitals)

Presentation Schema

Tax Rates Assessee / Income Slabs

(Rs in Lacs)

Resident

Women

below 65 yrs

Resident

Senior

citizen-

Any other

individual,

HUF, AOP&

BOI

Artificial

juridical

person

Co operative

society

Nil Upto Rs 1.90 Upto Rs 2.40 Upto Rs 1.60 Upto Rs 1.60 Nil

10% Rs 1.90 to

3.0

Rs 2.40 to

3.0

Rs 1.6 to 3.0 Rs 1.6 to 3.0 Upto Rs 0.10

20% Rs 3.0 to 5.0 Rs 3.0 to 5.0 Rs 3.0 to 5.0 Rs 3.0 to 5.0 Above Rs

0.10 to 0.20

30% Above Rs 5.0 Above Rs 5.0 Above Rs 5.0 Above Rs 5.0 Above Rs

0.20

Surcharge No Surcharge for all the above assesses irrespective of income levels

Note- The above rates are for total income excluding:

- Long term capital gains charged at 20%

- Short term capital gains u/s 111A charged @ 15%

- Income from lotteries, gambling, card games etc charged @ 30%

Rates of Taxation

Particulars Firms Domestic

Companies

Foreign

Companies

Local

Authority

Tax Rate 30% 30% 40% 30%

Surcharge Nil 10% if net

income

exceeds Rs 1

crore

2.5% if net

income

exceeds Rs 1

crore

Nil

Rates of Taxation

Sec 56(2)(vii) inserted wef 01-10-2009:◦ Aggregate sum of money exceeding Rs 50,000 or◦ Any receipt of a movable or immovable property

where the benefit exceeds Rs 50,000◦ Benefit could be without consideration or

inadequate consideration

Cost of acquisition of the asset received shall be FMV for the purpose of 56(2)(vii) s

Sec 49(4) & Sec 56(2)(vii)

An assessee is purchasing a property for Rs 50 lacs. The guideline value of the property is Rs 60 lacs. What would be tax implications in the hands of the buyer and the seller?

Case Study 1: Sec 49(4) & 56(2)(vii)

In the hands of Seller:◦ Guideline value of the property shall be regarded

as sale consideration for the purposes of capital gains

In the case of Buyer:◦ Rs 10 lacs (Rs 60lacs – Rs 50 lacs) shall be

regarded as Income from Other Sources – Sec 56(2)(vii)

◦ Cost of Acquisition of the property shall be Rs 60 lacs

Case Study 1: Sec 49(4) & 56(2)(vii)

An assessee received the following assets from his friends during the previous year. Discuss the tax implications:

Case Study 2: Sec 56(2)(vii)

Asset Consideration Remarks

Car Rs 50,000 FMV: Rs 95,000

House Rs 30,00,000 Guideline Value : Rs 40,00,000

Cash from A Rs 40,000 As birthday gift (from Non relative)

Cash from B Rs 30,000 As Wedding day gift (from Non relative)

Gold Rs 15,000 Rs 45,000

Asset Consideration

Remarks Benefit Taxable Amt

Remarks

Car Rs 50,000 FMV: Rs 95,000

Rs 45,000 Nil Less than Rs 50,000

House Rs 30,00,000 Guideline Value : Rs 40,00,000

Rs 10,00,000

Rs 10,00,000

Greater than Rs 50,000

Cash from A

Rs 40,000 Birthday gift

Rs 40,000 Rs 40,000

Aggregate exceeding Rs 50,000

Cash from B

Rs 30,000 Wedding day gift

Rs 30,000 Rs 30,000

Gold Rs 15,000 Rs 45,000 Rs 30,000 Nil Less than Rs 50,000

Total Rs 10,70,000

Case Study 2: Sec 56(2)(vii)

◦ Available for all individuals including self employed◦ Maximum investment restricted to

10% of salary earned or 10% of gross total income

◦ Contributions eligible for deduction (max Rs 1 lac) ◦ EET concept of taxation◦ If maturity amount is reinvested for annuity

purchase within the same previous year – no income shall accrue to the assessee.

◦ However the annuity received subsequently shall be liable to taxation in the year of receipt.

New Pension Scheme – Sec 80CCD

Income of the trust shall be exempt u/s 10(44)

Any dividends paid to the trust shall not be subject to dividend distribution tax u/s 115O

No securities transaction tax shall be levied on transactions made by the NPS – Sec 113A of Finance Act (2) 2004

The trust shall receive all its income without deduction of TDS- Sec 197A

Tax Concession for NPS Trust

An assessee is engaged in the business of growing and manufacturing Tea.

According to Rule 8- 40% of income from growing and manufacturing tea shall be regarded as business income.

The remaining 60% of income shall be regarded as agricultural income.

Explanation 6 to 43(6): WDV

The Honorable Supreme Court has held in CIT vs Doom Doma India Ltd (2009) 310 ITR 392:

◦ According to Explanation 6 to Sec 43(6)- depreciation actually allowed shall be reduced from the opening balance to arrive at WDV.

◦ Where an assessee is engaged in composite business (agri and non agri)- depreciation to the extent of non agri business shall be deemed to be allowed.

Explanation 6 to 43(6) : WDV

Where an assessee has both agri and non agri business

For computing the written down value of assets the total amount of depreciation shall be computed

As if the entire income is derived from the business (non agri)

The depreciation so computed shall be deemed to be the depreciation actually allowed under this Act.’.

Amendment : Explanation 7 to 43(6)

Particulars Pre Amendment Post Amendment

Sale 500 500

Operating and Non Expenses 200 200

Profit Before Depreciation 300 300

Depreciation 100 100

Net Profit 200 200

Business Income (40%) 80 80

Agricultural Income (60%) 120 120

Depreciation Actually Allowed 80 200

Remarks 40% of total depreciation 100% of total depreciation

Illustration : Pre and Post Amendment

Computation of Writted Down Value

Particulars Pre Amendment Post Amendment

Opening Balance of Fixed Assets 700 700

Depreciation Actually Allowed 80 200

Closing WDV 620 500

Illustration : Pre and Post Amendment

Particulars Pre Amendment Post Amendment

Assessee Any Person Resident individual, HUF or a partnership firm (other than LLP) who has:- Not claimed exemption u/s 10A, 10AA, 10B or 10BA- Not claimed deduction under Chapter VI A

Business Civil Construction or supply of labour

Any business other than plying, leasing and hiring of trucks.

Income Condition Gross Receipts not to exceed Rs 40 lacs

Estimated Income 8% of Gross receipts.Note: Assessee can declare income at a higher rate.

Note: The Amendment shall be effective from 01-04-2010. Sec 44AF shall cease to be operative effective 01-04-2010.

Presumptive Taxation – Sec 44AD

Particulars Pre Amendment Post Amendment

Assessee Any Person Any Person

Business Business of plying, leasing and hiring of trucks.

Condition Assessee does not own more than 10 carriages at any time during the previous year

Estimated Income Rs 3500 : Heavy VehiclesRs 3150: Other Vehicles

Rs 5000 : Heavy VehiclesRs 4500: Other Vehicles

Note: The Amendment shall be effective from 01-04-2010.

Presumptive Taxation – Sec 44AE

Pre Amendment Situation :

Partner’s Remuneration – Sec 40(b)(v)

Professional Firms Non Professional Firms Maximum Limit

First Rs.1,00,000 of book profit

First Rs.75,000 of book profit

Rs 50,000 or 90% of book profit whichever is high

Next Rs 1,00,000 of book profit

Next Rs 75,000 of book profit

60% of book profit

Balance of book profit Balance of book profit 40% of book profit

Post Amendment:

No distinction between professional and non professional firms

Partner’s Remuneration – Sec 40(b)(v)

Book Profit Slab Limit

First Rs 3,00,000 or loss Rs 1,50,000 or 90% of book

profit whichever is higher

Balance of book profit 60% of book profit

Net Profit as per Books : Rs 100 lacs

Adjustments:◦ Provision for bad and doubtful debts : Rs 10 lacs◦ Provision for reduction in investments : Rs 5 lacs◦ Provision for contingent liabilities : Rs 8

lacs◦ Provision for Income Tax : Rs 12 lacs

Compute book profit for the purpose of Sec 115JB

Sec 115 JB –Dimunition in the Value of Assets

Sec 115JB – Provisions

Particulars Rs in Lacs

Net Profit as per Books 100Add Provision for Income Tax 12Add Provision for Contingent Liabilities 8

Book Profit 120

Sec 115 JB –Dimunition in the Value of Assets

Provision for bad and doubtful debts and reduction in value of investments are “Provisions for Diminution in Value of Assets” hence not covered by Sec 115JB – The Honorable Supreme Court of India held in the case of CIT vs HCL Comnet Systems and Services Ltd (2008) 305 ITR 409 and Kolkatta Tribunal in Jt CIT vs Usha Martine Industries Ltd (2007) 104 ITD 249

Amendment – Finance Act (2)(2009)

Amendment is with Retrospective Effect – hence could affect pending assessments

Amended Section Effective Date Implication

Sec 115JA 01-04-1998 Any provision for diminution in the value of any

asset will also be included in the computation

of Book Profit

Sec 115JB 01-04-2001 Any provision for diminution in the value of any

asset will also be included in the computation

of Book Profit

Sec 115JB 01-04-2010 Rate of MAT is increased to 15% from 10%

Assessment year Rate of MAT

2001-02 to 2006-07 7.5%

2007-08 to 2009-10 10%

2010-11 on wards 15%

Summary MAT Rates

Sec 50C provides for Stamp Value taxation (as sale consideration) where the sale consideration is lower than Stamp Value

Tax planning instances of transfer using:◦ Power of Attorney ◦ Sale Agreement

Power of Attorney Transactions

The words “assessable” has been inserted in Sec 50C

“Assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty

Sec 50C : Amendment

Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty,

and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract,

and the transferee has performed or is willing to perform his part of the contract,

Sec 53A of Transfer of Property Act 1882

then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:

Sec 53A of Transfer of Property Act 1882

Power of attorney transactions would be regarded as transfer – Sec 2(47) read with Sec 53A of Transfer of Property Act 1882

Sale consideration or guideline value (whichever is higher) would be regarded as consideration – Sec 50C

Affect Segment:◦ Real Estate Brokers◦ Short term investors◦ Builders and Real Estate Promoters

Implications of the Amendment

Nature of Payment Till 30-09-

2009

On or after 01-10-

2009

Advertising contracts 1% 1% if the payee is an

individual or HUF

2% in any other case

Sub contract payments 1%

Other contract payments 2%

Contractors engaged in

plying, hiring and leasing

of goods carriage

2% Nil- if PAN is provided

to the payer.

- No distinction between contractors and subcontractors- No special rate of taxation for advertising contracts- Where a transporter fails to provide PAN- TDS @ 20% shall apply with effect from 01-04-2010- The scope of the term “work” has been expanded to include certain job work where the materials are supplied by the customer.

TDS on Contract Payments – Sec 194C

Nature of Payment Till 30-09-09 From 01-10-09

Rent for use of plant and machinery or

equipment

10% 2%

Rent for land and/or building, furniture

and fittings where payee is an individual

or HUF

15%10%

Rent for land and/or building, furniture

and fittings where payee is any other

person

20%

Where a payee fails to provide PAN- TDS @ 20% shall apply – with effect from

01-04-2010

TDS on Rental Payment – Sec 194 I

Any person entitled to receive any sum or income or amount, on which TDS is applicable shall furnish his PAN to the deductor.

Else TDS shall be deducted at the higher of the following rates: at the rate specified in the relevant provision of

this Act; or at the rate or rates in force; or at the rate of twenty per cent.

Mandatory PAN – Sec 206AA

The Section is effective from 01-04-2010

According to Sec 45(5) read with Sec 2(47):◦ Compulsory acquisition is regarded as transfer

◦ Initial compensation is taxable in the year in which whole or part of the compensation is received

◦ Enhanced compensation is taxable in the year of receipt

Interest on Enhanced Compensation

Interest on enhanced compensation is payable from the date of acquisition till the date of receipt

Such interest is received along with enhanced compensation or subsequently at a later stage

In which year is this interest taxable Relevance of Sec 145 need to be examined

Interest on Enhanced Compensation

Interest on enhanced compensation for land acquired under Land Acquisition Act, accrues from year to year and cannot be assessed in one lump sum in year in which it is awarded by the Court.

Supreme Court in Rama Bai vs. CIT [1990] 181 ITR 400

K.S. Krishna Rao vs. CIT [1990] 181 ITR 408).

CIT vs. T.N.K. Govindarajulu Chetty [1987] 165 ITR 231

Court Ruling on Interest received

Interest on enhanced compensation shall be taxable as Income from Other Sources – Sec 56(2)(viii)

Such interest shall be taxable only in the year of receipt – Sec 145 A

A flat deduction of 50% of such interest received shall be allowed as a deduction irrespective of the amount spent – Sec 57(iv)

Amendment – Finance Act

Miscellaneous Amendments

Recent Relevant Case Laws and Circulars

Indexation on 49(1) transactions

Circular 7/2009

Circular 8/2009

COMMISSIONER OF INCOME TAX, MADURAI

Vs M/s SRI MANGAYARKARASI MILLS (P)

LTD2009-TIOL-86-SC-IT

Assessee had made certain cash deposits in to the account of a District Cooperative Sugar Mill

The payments were made at the instance of the sugar mill

The value of the transactions exceeded Rs 20,000.

AO disallows the payment u/s 40A(3) Assessee claims payments made for

business expediency – Proviso to Sec 40A(3)

40A(3) Payments – Salem Case

The CIT (A) and the Tribunal pass an order in favour of the assessee

Madras High Court held that:◦ The payment was made to a quasi Government

organisation◦ Payment was made at the insistence of the

recipient ◦ Payment was made by cash owing to business

expediency ◦ Revenue’s appeal dismissed

40A(3) Payments – Salem Case

CIT Salem vs BG Subramaniam dtd August 18th 2009

An assessee (96 years old) sold a property to Indian Oil Corporation for Rs 99 lacs

The guideline value of the property was Rs 3.92 crores

The purchaser has not made a reference u/s 47A of the Indian Stamp Act for fair value determination

No appeal was made by the seller under the Stamp Act

The AO issues as order considering the sale consideration to be Rs 3.92 crores u/s 50C

Sec 50C : Hard Realities

The assessee filed a writ petition with Madras High Court

The AO’s argument:◦ No appeal for 47A valuation◦ Time limit for assessment u/s 143(3)◦ Sec 50C

Assessee’s argument:◦ Option u/s 50C(2) to refer to a Valuation Officer◦ Non appeal against 47A is not a ground for order

Sec 50C : Hard Realities

Madras High Court held:◦ Writ petition is allowed◦ Order is set aside◦ Valuation report to be obtained u/s 50C(2)◦ Assessment to be done based on the valuation

report.

Sec 50C : Hard Realities

N. Meenakshi vs ACIT Chennai – Madras High Court dated 11th September 2009

Mr Lalu Prasad Yadav – the ex Honorable Chief Minister of Bihar filed his income tax with the following details:

Assessment of Chief Minister’s Income

Income from other sources

Acc. Intt. on N.S.C 0.00  

Intt. on F.D. matured 2,16,060.00  

Intt. S/b A/c 2,439.00  

Pay and allowance as Chief Minister

72,802.40 2,91,301.40

Short-term capital gain 0.00 0.00

Long-term capital gain 0.00 0.00

Gross total income   2,91,301.40

Details of Pay/allowances as Chief Minister

Pay 23,539.85  

Allowance 35,209.70  

Sumptuary allowance 23,539.85  

TDS reimbursed for financial year 1995-96

82,289.40 8,497.00 90,786.40

Less: Incidental expenses Depreciation on car (on opening WDV 64922 at 20%) Insurance/expenses on car (estimated)

12,984.00 5,000.00

17,984.00

Net income   72,802.40

Assessment of Chief Minister’s Income

Intimation u/s 143(1)(a) stating:◦ Chief Minister’s pay should be assessed as

income from salaries. Hence only standard deduction should of Rs 15000 is allowed. The net addition to taxable income would be Rs 2,984.

◦ Accrued interest of Rs 6,000 should be assessed as income of the previous yearRemember – interest on NSC is regarded as reinvestment and was eligible for rebate u/s 88

Assessment of Chief Minister’s Income

The overall tax effect on the transaction was Rs 4305

The assessee referred the case to CIT(A) – who upheld the reclassification of income to salaries. However the addition of NSC interest was rejected citing method of accounting

Both the assessee and the revenue filed an appeal against CIT(A)’s order with the Tribunal

The case was ultimately settled by the Patna High Court in 11th of November 2008 after more than 10 years of deliberations.

Assessment of Chief Minister’s Income

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Divakar Vijayasarathy & Associates