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DIRECT TAX LAWS

AMENDMENTS AT A GLANCE – FINANCE ACT, 2016


S.No. Particulars Section
Income-tax
A. Basic Concepts
1. Rates of income-tax
2. Government grant or subsidy, for the purpose of the corpus 2(24)
of a trust or institution established by the Central
Government or State Government not to be included in the
definition of income”
3. Set-off of losses not permissible against unexplained 115BBE
income, investments, money etc. chargeable under
sections 68/69/69A/69B/69C/69D
4. Increase in quantum of rebate 87A
B. Residential Status and Scope of Total Income
5. No income deemed to accrue or arise in India to a foreign 9(1)(i)
mining company through or from the activities which are [Explanation 1]
confined to display of uncut and unassorted diamonds in a
Special Notified Zone
6. Deferral of applicability of POEM based residence test and 6(3) & 115JH
incorporation of transition mechanism for a company
incorporated outside India, which has not earlier been
assessed to tax in India
7. Special Taxation Regime for offshore funds: Modification of 9A
certain conditions
C. Incomes which do not form part of total income
8. Exemption under section 10(34) not to apply to dividend 10(34) &
chargeable to tax in accordance with section 115BBDA 115BBDA
9. Exemption of income accruing or arising to a foreign company 10(48A)
on account of storage of crude oil in a facility in India and sale
of crude oil therefrom to any person resident in India
10. Exemption of interest on deposit certificates issued under 10(15)(vi) & 2(14)
the Gold Monetization Scheme, 2015
11. Payment from NPS Trust to an employee on closure of his 10(12A)
account or on his opting out of the pension scheme exempt
to the extent of 40% of such payment

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D. Income from house property
12. Extension of period for completion of construction from 3 24
years to 5 years, for claiming higher deduction of upto Rs.2
lakh in respect of interest on capital borrowed for
construction of self-occupied house property
13. Special provision for arrears of rent and unrealized rent 25A
received subsequently

E. Profits and gains of business or profession


14. Non-compete fee received/receivable for not carrying on a 28(va) & 55
profession chargeable under the head “Profits and gains of
business or profession”
15. Assessees engaged in the business of transmission of 32(1)(iia)
power eligible for additional depreciation
16. Deduction under section 32AC to be available in the year
of installation in respect of actual cost of new plant and
32AC
machinery acquired in the P.Y.2015-16 and P.Y.2016-17, if
the actual cost of such new plant and machinery acquired
in the relevant previous year exceeds Rs. 25 crores, even
if the new plant and machinery has not been installed in
the relevant previous year but has been installed on or
before 31.3.2017
17. Phasing out of incentives under the Income-tax Act, 1961 35/35AC/35AD/
35CCC/35CCD
18. Tax treatment for spectrum fee 35ABA
19. Scope of section 35AD expanded to include the business 35AD & 80-IA
of developing, maintaining and operating a new
infrastructure facility
20. NBFCs eligible for claim of deduction for provision for bad 36(1)(viia)
and doubtful debts
21. Sum payable to Indian Railways for use of railway assets 43B
allowable as deduction in the year in which the liability to
pay such sum is incurred, only if payment is made on or
before the due date of filing of return
22. Increase in threshold limit of gross receipts/turnover under 44AA, 44AB &
section 44AD of a business to be eligible for opting the 211
presumptive taxation scheme
23. Presumptive Taxation Scheme for assessees engaged in 44ADA & 44AB
eligible profession

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F. Capital Gains
24. Period of holding of unlisted shares to qualify as a long- 2(42A)
term capital asset to be reduced from “more than 36
months” to “more than 24 months”
25. Total value of assets of a private company or unlisted 47(xiiib)
company not to exceed Rs.5 crore in any of the three
preceding previous years for exemption of transfer of
capital asset or intangible asset on conversion of such
company into LLP
26. Transfer of units by unit holders on consolidation of plans 47(xix)
within a mutual fund scheme not to be regarded as transfer
27. Redemption by an individual of sovereign gold bonds 47(viic) & 48
issued by RBI not to constitute transfer for the purpose of
levy of capital gains tax
28. Cost of acquisition of asset, whose fair market value has 49(5)
been taken into account for the Income Declaration
Scheme, 2016
29. Stamp duty value on the date of agreement may be adopted 50C
as full value of consideration of immovable property, being
land or building or both, if whole or part of the consideration
has been paid by an account payee cheque or account
payee bank draft or use of electronic clearing system
through a bank account, on or before the date of the
agreement for the transfer of such immovable property
30. Exemption of long-term capital gains on investment in 54EE
notified units of specified fund
31. Exemption of long-term capital gains on sale of residential 54GB
property, where net consideration on sale is invested in
shares of an eligible start-up
32. Long-term capital gains on shares of private companies to be 112(1)(c)
subject to concessional rate of tax@10% in the hands of non-
corporate non-residents and foreign companies
G. Income from Other Sources
33. Shares received by an individual or HUF as a consequence of 56(2)(vii)
demerger or amalgamation of a company or a business
reorganisation of a co-operative bank not to be subject to tax
by virtue of section 56(2)(vii)
H. Set-off and Carry Forward and Set-off of losses
34. Filing of return of loss on or before the due date under 80 & 139(3)
section 139(1) mandatory for carry forward of loss from
specified business under section 73A

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I. Deductions from Gross Total Income
35. Additional deduction for interest on loan borrowed for 80EE
acquisition of self-occupied house property by an individual
36. Monetary limit for deduction under section 80GG increased 80GG
37. Tax incentives for new start-ups 80-IAC
38. Deductions in respect of profits and gains from housing 80-IBA
projects
39. Phasing out of profit-linked incentives 80-IA, 80-IAB,
80-IB, 35AD
40. Deduction in respect of employment of new employees 80JJAA
J. Assessment of various entities
41. Concessional Taxation Regime for royalty income in 115BBF & 115JB
respect of patent developed and registered in India
42. Non-applicability of MAT in respect of certain foreign 115JB
companies
43. Tax incentives to International Financial Services Centres 10(38), 111A,
115JB & 115-O
44. Dividend distributed by SPV to business trust exempt from 115-O, 10(23FC),
levy of DDT 10(23FD),
115UA& 194LBA
45. Rationalisation of the definitions of “buyback” and
“distributed income” for the purpose of levy of additional 115QA
income-tax on income distributed by a company on
buyback of unlisted shares from a shareholder
46. New Taxation Regime for Securitisation Trusts 115TCA, 115TA,
115TC & 10(35A)
47. Tax on accreted income of certain trusts and institutions 115TD
K. Transfer Pricing and Other Provisions to check avoidance
of tax
48. Extension of time limit available to TPO for making an order 92CA(3A)
49. Furnishing of report in respect of international group in line 286, 92D, 271AA,
with BEPS action plan - Country-By-Country Report and 271GB & 273B
Master file
L. Taxation of E-Commerce Transactions
50. Equalisation levy Chapter VIII of
Finance Act,
2016, 10(50),

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40(a)(ib)
M. Income-tax Authorities
51. Time limit for calling in question jurisdiction of Assessing 124(3)
Officer where notice is served under section 153A(1) or
153C(2)
N. Assessment Procedure
52. Rationalisation of provisions relating to filing of return of 139
income
53. Scope of permissible adjustments while processing a return 143(1)(a)
expanded
54. Mandatory processing of return of income before issuance 143(1D)
of assessment order
55. Time limits for completion of assessment, reassessment 153
and recomputation revised
56. Time limit for completion of assessment under section 153A 153B
57. Deemed escapement of income on the basis information 147 & 133C
obtained by the Income-tax authorities
O. Appeals and Revision
58. Removal of reference to “Senior Vice President” 252
59. Provision for filing of appeal by the Assessing Officer 253
against the order of DRP done away with
60. Reduction in time limit for rectification of mistake apparent 254(2)
from the record by the Appellate Tribunal
61. Raising the total income limit of the cases that may be 255(3)
decided by single member bench of Appellate Tribunal
P. Penalties
62. Penalty leviable for under-reporting of income and mis- 270A, 119, 253,
reporting of income 271, 271A,
271AA, 271AAB,
273A & 279
63. Immunity from imposition of penalty and prosecution 270AA & 249
64. Time limit for passing an order for waiver of interest and 220(2A), 273A &
penalty 273AA
65. Levy of penalty at a flat rate of 60% on undisclosed
income, in search cases where assessee does not admit 271AAB(1)(c)
such income in the course of search nor discloses the
same in the return of income for the specified previous year
filed on or before the specified date

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66. Penalty for failure to comply with notice under section 142(1) 272A & 288
or 143(2) of failure to comply with a direction u/s 142(2A)
Q. Miscellaneous Provisions
67. Provision for bank guarantee in lieu of provisional 281B
attachment of property for protecting interests of the
revenue
68. Provision of legal framework for automated processing and 282A, 143(2) &
paperless assessment 2(23C)
R. Deduction, Collection & Recovery of Tax
69. Deduction of tax at source under section 194LBB at ‘rates 194LBB, 2(37) &
in force’ on income distributed by an Investment Fund to its 197
non-resident unit-holders and enabling provision for
obtaining certificate of nil deduction or lower deduction of
tax at source under section 197
70. Increase in threshold limits and reduction of rates for 192A, 194BB,
deduction of tax at source in respect of certain payments 194C, 194D,
[Chapter XVII-B] 194DA, 194EE,
194G, 194H,
194LA
71. Advance tax payment scheme to be the same for 211 & 234C
companies and other assessees
72. Interest on refunds 244A
73. Expansion of scope of TCS 206C
74. Requirement to furnish PAN for avoiding higher tax
deduction not to apply to non-corporate non-residents and 206AA
foreign companies subject to certain conditions
Note - In addition, significant notifications and circulars issued between the period 1.5.2015 and
30.4.2016 have been included under the respective chapters.

Students may note that certain amendments included in this Supplementary Study Paper –
2016, which are effective from A.Y.2018-19 or any subsequent assessment year, are not
relevant for May, 2017 and November, 2017 examinations.

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1
BASIC CONCEPTS

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Rates of Tax


Section 2 of the Finance Act, 2016 read with Part I of the First Schedule to the Finance Act,
2016, seeks to specify the rates at which income-tax is to be levied on income chargeable
to tax for the assessment year 2016-17. Part II lays down the rate at which tax is to be
deducted at source during the financial year 2016-17 from income subject to such
deduction under the Income-tax Act, 1961; Part III lays down the rates for charging income-
tax in certain cases, rates for deducting income-tax from income chargeable under the
head "salaries" and the rates for computing advance tax for the financial year 2016-17 i.e.,
A.Y.2017-18. Part III of the First Schedule to the Finance Act, 2016 will become Part I of
the First Schedule to the Finance Act, 2017 and so on.
Rates for deduction of tax at source for the F.Y.2016-17 from certain income
Part II of the First Schedule to the Finance Act, 2016 specifies the rates at which income-tax
is to be deducted at source under sections 193, 194, 194A, 194B, 194BB, 194D, 194LBA and
195 during the financial year 2016-17. These rates of tax deduction at source are the same
as were applicable for the F.Y.2015-16. However, the rate of tax deduction at source has
been decreased from 10% to 5% in respect of income by way of insurance commission
payable to a resident non-corporate assessee. Further, the scope of Part II of the First
Schedule has been expanded to include the “rates in force” for the purpose of tax deduction
at source under section 194LBB from income distributed to a non-resident unit holder of an
investment fund and under section 194LBC from income distributed to a non-resident investor
of a securitization trust.
Surcharge would be levied on income-tax deducted at source in case of non-corporate
non-residents and foreign companies. If the recipient is a non-resident individual or HUF
or AOP or BOI, whether incorporated or not, or artificial juridical person, surcharge@15%
would be levied on such income-tax if the income or aggregate of income paid or likely to
be paid and subject to deduction exceeds ` 1 crore. If the recipient is co-operative
society or a firm, being a non-resident, surcharge@12% would be levied on such income-
tax if the income or aggregate of income paid or likely to be paid and subject to deduction
exceeds ` 1 crore.

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If the recipient is a foreign company, surcharge@ –
(i) 2% would be levied on such income-tax, where the income or aggregate of such
incomes paid or likely to be paid and subject to deduction exceeds ` 1 crore but
does not exceed ` 10 crore; and
(ii) 5% would be levied on such income-tax, where the income or aggregate of such
incomes paid or likely to be paid and subject to deduction exceeds ` 10 crore.
Surcharge would not be levied on deductions in all other cases. Also, education cess and
secondary and higher education cess would not be added to tax deducted or collected at
source in the case of a domestic company or a resident non-corporate assessee.
However, education cess @2% and secondary and higher education cess @1% on
income-tax plus surcharge, wherever applicable, would be added to tax deducted at
source in cases of non-corporate non-residents and foreign companies.
Rates for deduction of tax at source from "salaries", computation of "advance tax"
and charging of income-tax in certain cases during the financial year 2016-17
Part III of the First Schedule to the Finance Act, 2016 specifies the rate at which income-
tax is to be deducted at source from "salaries" and also the rate at which "advance tax" is
to be computed and income-tax is to be calculated or charged in certain cases for the
financial year 2016-17 i.e., A.Y. 2017-18.
It may be noted that education cess @2% and secondary and higher education cess
@1% would continue to apply on tax deducted at source in respect of salary payments.
The general basic exemption limit for individuals/HUFs/AOPs/BOIs and artificial juridical
persons remains unchanged (i.e., ` 2,50,000). The basic exemption limit of ` 3,00,000 for
senior citizens, being resident individuals of the age of 60 years or more but less than 80
years at any time during the previous year also remains the same. Resident individuals of the
age of 80 years or more at any time during the previous year would continue to be eligible for
the higher basic exemption limit of (i.e., ` 5,00,000). The tax slabs are shown hereunder -
(i) (a) Individual/ HUF/ AOP / BOI and every artificial juridical person
Level of total income Rate of income-tax
Where the total income does not exceed Nil
` 2,50,000
Where the total income exceeds 10% of the amount by which the
` 2,50,000 but does not exceed total income exceeds
` 5,00,000 ` 2,50,000
Where the total income exceeds ` 25,000 plus 20% of the
` 5,00,000 but does not exceed amount by which the total
` 10,00,000 income exceeds ` 5,00,000
Where the total income exceeds ` 1,25,000 plus 30% of the
` 10,00,000 amount by which the total
income exceeds ` 10,00,000

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(b) For resident individuals of the age of 60 years or more but less than 80
years at any time during the previous year
Level of total income Rate of income-tax
Where the total income does not Nil
exceed ` 3,00,000
Where the total income exceeds 10% of the amount by which the
` 3,00,000 but does not exceed total income exceeds ` 3,00,000
` 5,00,000
Where the total income exceeds ` 20,000 plus 20% of the amount
` 5,00,000 but does not exceed by which the total income
` 10,00,000 exceeds ` 5,00,000
Where the total income exceeds ` 1,20,000 plus 30% of the
` 10,00,000 amount by which the total income
exceeds ` 10,00,000
(c) For resident individuals of the age of 80 years or more at any time during
the previous year
Level of total income Rate of income-tax
Where the total income does not Nil
exceed ` 5,00,000
Where the total income exceeds 20% of the amount by which the
` 5,00,000 but does not exceed total income exceeds ` 5,00,000
` 10,00,000
Where the total income exceeds ` 1,00,000 plus 30% of the
` 10,00,000 amount by which the total income
exceeds ` 10,00,000
(ii) Co-operative society
There is no change in the rate structure as compared to A.Y.201 6-17.
Level of total income Rate of income-tax
(1) Where the total income does 10% of the total income
not exceed ` 10,000
(2) Where the total income ` 1,000 plus 20% of the amount by
exceeds ` 10,000 but does which the total income exceeds
not exceed ` 20,000 ` 10,000
(3) Where the total income ` 3,000 plus 30% of the amount by
exceeds ` 20,000 which the total income exceeds
` 20,000

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(iii) Firm/Limited Liability Partnership (LLP)
The rate of tax for a firm for A.Y.2017-18 is the same as that for A.Y.2016-17 i.e., 30%
on the whole of the total income of the firm. This rate would apply to an LLP also.
(iv) Local authority
The rate of tax for a local authority for A.Y.2017-18 is the same as that for
A.Y.2016-17 i.e., 30% on the whole of the total income of the local authority.
(v) Company
The rates of tax for A.Y.2017-18 are as follows:
(1) In the case of a domestic company
(i) Where the total turnover or gross receipt in the 29% of the total
previous year 2014-15 does not exceed ` 5 crore income
(ii) In case of other domestic companies 30% of the total
income
New section 115BA has been inserted to provide that the income-tax payable
in respect of the total income of a domestic company for any previous year
relevant to A.Y.2017-18 and thereafter, shall be computed @25%, at the
option of the company, if, -
(i) the company has been setup and registered on or after 1st March, 2016;
(ii) the company is not engaged in any business other than the business of
manufacture or production of any article or thing and research in relation to,
or distribution of, such article or thing manufactured or produced by it; and
(iii) the company while computing its total income has not claimed any benefit
under any of the provisions of the Act listed hereunder -
Section Incentive under the Income-tax Act, 1961
(1) 10AA Exemption of profits and gains derived from export
of articles or things or from services by a assessee,
being an entrepreneur from his Unit in SEZ.
(2) 32(1)(iia) Additional depreciation@20% of actual cost of new
plant and machinery acquired and installed by
manufacturing and power sector undertakings.
(3) 32AC Deduction@15% of actual cost of new plant and
machinery acquired and installed by manufacturing
companies, making substantial investment (i.e.,
exceeding ` 25 crores) in new plant and machinery
during the previous year.
(4) 32AD Deduction@15% of actual cost of new plant and
machinery acquired and installed by an assessee in
a manufacturing undertaking located in the notified
backward areas of specified States.

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(5) 33AB Deduction of 40% of profits and gains of business of
growing and manufacturing tea, coffee or rubber in
India, to the extent deposited with NABARD in
accordance with scheme approved by the
Tea/Coffee/Rubber Board.
(6) 33ABA Deduction of 20% of the profits of a business of
prospecting for, or extraction or production of,
petroleum or natural gas or both in India, to the
extent deposited with SBI in an approved scheme or
deposited in Site Restoration Account.
(7) 35(1)(ii)/ Weighted deduction for payment to any research
(iia)/(iii) association, company, university etc. for
undertaking scientific research or social science or
statistical research.
(8) 35(2AA) Weighted deduction for payment to a National
Laboratory or University or IIT for scientific research
(9) 35(2AB) Weighted deduction for in-house scientific research
expenditure incurred by a company engaged in the
business of bio-technology or in the business of
manufacture or production of an article or thing.
(10) 35AC Deduction of expenditure by way of payment to a
public sector company or local authority or to an
association or institution approved by the National
Committee for carrying out any eligible project or
scheme.
(11) 35AD Investment-linked tax deduction for specified
businesses.
(12) 35CCC Weighted deduction in respect of expenditure
incurred on notified agricultural extension project
(13) 35CCD Weighted deduction in respect of expenditure
incurred by a company on notified skill development
project.
(iv) the company has also not claimed benefit of any deduction in respect of
certain income under Part-C of Chapter-VI-A, other than the provisions of
section 80JJAA, while computing its total income;
(v) the company has also not claimed set-off of any loss carried forward
from any earlier assessment year, if such loss is attributable to the
deductions specified in (iii) and (iv) above [such loss shall be deemed to
have been already given full effect to and no further deduction for such
loss shall be allowed for any subsequent year];
(vi) normal depreciation under section 32 [i.e., depreciation other than

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additional depreciation under section 32(1)(iia)] is determined in the
prescribed manner;
(vii) the option is exercised in the prescribed manner on or before the due
date specified under section 139(1) for furnishing the first of the returns
of income which the person is required to furnish under the provisions of
the Income-tax Act, 1961. However, once the option has been
exercised for any previous year, it cannot be subsequently withdrawn for
the same or any other previous year.
(2) In the case of a 40% of the total income
company other than
However, specified royalties and fees for rendering
a domestic company
technical services (FTS) received from Government
or an Indian concern in pursuance of an approved
agreement made by the company with the
Government or Indian concern between 1.4.1961
and 31.3.1976 (in case of royalties) and between
1.3.1964 and 31.3.1976 (in case of FTS) would be
chargeable to tax @50%.
Surcharge
The rates of surcharge applicable for A.Y.2017-18 are as follows -
(i) Individual/HUF/AOP/BOI/Artificial juridical person
Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 15%
of income-tax computed in accordance with the provisions of para (i)(a)/(b)/(c)
above or section 111A or section 112.
Marginal relief is available in case of such persons having a total income exceeding ` 1
crore i.e., the additional amount of income-tax payable (together with surcharge) on the
excess of income over ` 1 crore should not be more than the amount of income
exceeding ` 1 crore.
(ii) Co-operative societies/Local Authorities/Firms/LLPs
Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 12%
of income-tax computed in accordance with the provisions of para (ii)/(iii)/(iv) above
or section 111A or section 112.
Marginal relief is available in case of such persons having a total income exceeding ` 1
crore i.e., the additional amount of income-tax payable (together with surcharge) on the
excess of income over ` 1 crore should not be more than the amount of income
exceeding ` 1 crore.
(iii) Domestic company
(a) In case of a domestic company, whose total income is > ` 1 crore but ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,
surcharge is payable at the rate of 7% of income-tax computed in accordance with

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the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is
available in case of such companies i.e. the additional amount of income-tax
payable (together with surcharge) on the excess of income over ` 1 crore should
not be more than the amount of income exceeding ` 1 crore.
Example
Compute the tax liability of X Ltd., a domestic company, assuming that the total
income of X Ltd. is ` 1,01,00,000 for A.Y.2017-18 and the total income does not
include any income in the nature of capital gains
[Note - The gross receipts of X Ltd. for the P.Y.2014-15 is ` 7,00,00,000]
Answer
The tax payable on total income of ` 1,01,00,000 of X Ltd. computed@ 32.1%
(including surcharge@7%) is ` 32,42,100. However, the tax cannot exceed
` 31,00,000 (i.e., the tax of ` 30,00,000 payable on total income of ` 1 crore
plus ` 1,00,000, being the amount of total income exceeding ` 1 crore).
Therefore, the tax payable on ` 1,01,00,000 would be ` 31,00,000. The marginal
relief is` 1,42,100 (i.e., ` 32,42,100 - ` 31,00,000).
(b) In case of a domestic company, whose total income is > ` 10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 12%
of income-tax computed in accordance with the provisions of para (v)(1) above or
section 111A or section 112.
Marginal relief is available in case of such companies i.e., the additional amount of
income-tax payable (together with surcharge) on the excess of income over ` 10
crore should not be more than the amount of income exceeding ` 10 crore.
Example
Compute the tax liability of Y Ltd., a domestic company, assuming that the total
income of Y Ltd. for A.Y.2017-18 is ` 10,01,00,000 and the total income does not
include any income in the nature of capital gains.
[Note - The gross receipts of Y Ltd. for the P.Y.2014-15 is ` 9,00,00,000]
Answer
The tax payable on total income of ` 10,01,00,000 of Y Ltd. computed@ 33.6%
(including surcharge@12%) is ` 3,36,33,600. However, the tax cannot exceed
` 3,22,00,000 [i.e., the tax of ` 3,21,00,000 (32.1% of ` 10 crore) payable on total
income of ` 10 crore plus ` 1,00,000, being the amount of total income exceeding
` 10 crore]. Therefore, the tax payable on ` 10,01,00,000 would be ` 3,22,00,000. The
marginal relief is ` 14,33,600 (i.e., ` 3,36,33,600 - ` 3,22,00,000).

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Rates of Surcharge
A.Y. 2017-18

Individual/HUF/AOP/ Co-operative Society/


BOI/AJP Local Authority/Firm/LLP Domestic Company Foreign Company

If TI ≤ If TI > If TI ≤ If TI > If TI ≤ If TI ≤ If TI >


`1 If TI > ` 1 If TI > If TI > ` 1
`1 `1 `1 `1 ` 10 `1 ` 10
crore crore crore but ≤ ` crore but ≤ `
crore crore crore crore crore crore
10 crore. 10 crore.

Nil 15% Nil 12% 5%


Nil 7% 12% Nil 2%

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(iv) Foreign company
(a) In case of a foreign company, whose total income is > ` 1 crore but ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,
surcharge is payable at the rate of 2% of income-tax computed in accordance with
the provisions of paragraph (v)(2) above or section 111A or section 112. Marginal
relief is available in case of such companies i.e., the additional amount of income -
tax payable (together with surcharge) on the excess of income over ` 1 crore
should not be more than the amount of income exceeding ` 1 crore.
(b) In case of a foreign company, whose total income is > ` 10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 5%
of income-tax computed in accordance with the provisions of para (v)(2) above or
section 111A or section 112.
Marginal relief is available in case of such companies i.e., the additional amount of
income-tax payable (together with surcharge) on the excess of income over ` 10
crore should not be more than the amount of income exceeding ` 10 crore.
Note – Marginal relief would also be available to those companies which are subject to
minimum alternate tax under section 115JB, in cases where the book profit (i.e. deemed
total income) exceeds ` 1 crore and ` 10 crore, respectively.
Education cess / Secondary and higher education cess on income-tax
The amount of income-tax as increased by the union surcharge, if applicable, should
further be increased by an “Education cess on income-tax”, calculated at the rate of 2%
of such income-tax plus surcharge, wherever applicable. Further, “Secondary and higher
education cess on income-tax” (SHEC) @1% of income-tax and surcharge, wherever
applicable, is leviable to fulfill the commitment of the Government to provide and finance
secondary and higher education. Education cess, including SHEC, is leviable in the case
of all assessees i.e., individuals, HUFs, AOP/BOIs, artificial juridical persons, co -
operative societies, firms, LLPs, local authorities and companies. No marginal reli ef
would be available in respect of such cess.
Applicability of surcharge and cess on distribution tax
Surcharge@12% would be leviable on distribution tax levied under sections 115-O, 115-
QA, 115R, 115TA and 115TD. Further, education cess@2% and secondary and higher
education cess@1% would be leviable on the distribution tax inclusive of surcharge.
(1) (2) (3) (4)
Section Particulars Rate Effective
of tax rate of tax
115-O Tax on distributed income of domestic companies by 15% 17.304%
way of dividend
115QA Tax on distributed income of domestic company for 20% 23.072%
buyback of shares

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115R Tax on distributed income of mutual funds
 Distribution by debt funds to individuals and 25% 28.84%
HUFs
 Distribution by debt funds to other persons 30% 34.608%
 Distribution by infrastructure debt funds to non- 5% 5.768%
corporate non-residents and foreign companies
115TA Tax on income distributed by securitization
trusts (upto 31.5.2016)
 Distribution to persons exempt from tax Nil Nil
 Distribution to individuals and HUFs 25% 28.84%
 Distribution to other persons 30% 34.608%
115TD Tax on accreted income of certain trusts and 30% 34.608%
institutions

Note – The dividend and income referred to in section 115-O and 115R, respectively,
have to be first grossed up by applying the rates of tax mentioned in column (3) above.
Thereafter, the effective rates of tax under section 115-O and 115R mentioned in column
(4) above have to be applied on gross dividend/income to compute the additional
income-tax payable by domestic companies and mutual funds, respectively, under
section 115-O and 115R.
(B) Government grant or subsidy, for the purpose of the corpus of a trust or institution
established by the Central Government or State Government not to be included in the
definition of income [Section 2(24)]
Effective from: A.Y.2017-18
(i) The Central Government had, vide Notification dated 31.3.2015, in exercise of the
powers conferred under section 145(2), notified ten income computation and
disclosure standards (ICDSs) to be followed by all assessees, following the
mercantile system of accounting, for the purposes of computation of income
chargeable to income-tax under the head “Profit and gains of business or
profession” or “Income from other sources”.
(ii) ICDS VII deals with the treatment of government grants. It recognizes that
government grants are sometimes called by other names such as subsidies, cash
incentives, duty drawbacks etc.
(1) This ICDS requires Government grants relatable to depreciable fixed assets to
be reduced from actual cost/WDV.
(2) Where the Government grant is not directly relatable to the asset acquired,
then, a pro-rata reduction of the amount of grant should be made in the same
proportion as such asset bears to all assets with reference to which the
Government grant is so received.

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(3) Grants relating to non-depreciable fixed assets have to be recognized as
income over the same period over which the cost of meeting such obligations
is charged to income.
(4) Government grants receivable as compensation for expenses or losses
incurred in a previous financial year or for the purpose of giving immediate
financial support to the person with no further related costs to be recognized
as income of the period in which it is receivable.
(5) All other Government Grants have to be recognized as income over the
periods necessary to match them with the related costs which they are
intended to compensate.
(iii) Thus, except in case of government grant relating to a depreciable fixed asset,
which has to be reduced from written down value or actual cost, all other grants ha d
to be recognized as upfront income or as income over the periods necessary to
match them with the related costs which they are intended to compensate.
(iv) Further, in line with the requirement in ICDS VII, the Finance Act, 2015 had included
sub-clause (xviii) in the definition of income under section 2(24). Accordingly,
assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver
or concession or reimbursement, by whatever name called, by the Central Government
or a State Government or any authority or body or agency in cash or kind to the
assessee is included in the definition of income. The only exclusion was the subsidy or
grant or reimbursement which has been taken into account for determination of the
actual cost of the asset in accordance with Explanation 10 to section 43(1).
(v) Consequently, grant or cash assistance or subsidy etc. provided by the Central
Government for budgetary support of a trust or any other entity formed specifically for
operationalizing certain government schemes would become taxable in the hands of
trust or any other entity.
(vi) In order to avoid genuine hardship in such cases, section 2(24) has been amended to
provide that subsidy or grant by the Central Government for the purpose of the corpus of
a trust or institution established by the Central Government or State Government shall
not be included in the definition of income.

Subsidy or Grant which are not included in the


definition of income u/s 2(24)
Subsidy or grant or reimbursement taken into account for
determination of actual cost of depreciable asset

Subsidy or grant by the Central Government for the purpose


of the corpus of a trust or institution established by a Central
Govt. or State Govt., as the case may be.

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(C) Set-off of losses not permissible against unexplained income, investments, money etc.
chargeable under sections 68/69/69A/69B/69C/69D [Section 115BBE]
Effective from: A.Y.2017-18
(i) Under section 115BBE, unexplained cash credits under section 68, unexplained
investments under section 69, unexplained money under section 69A, undisclosed
investments under section 69B, unexplained expenditure under section 69C and
amount borrowed or repaid on hundi under section 69D are taxable at the rate of 30%.
(ii) Further, no deduction in respect of any expenditure or allowance in relation to income
referred to in the said sections shall be allowable under any provision of the Income-tax
Act, 1961.
(iii) However, there is no specific provision prohibiting set-off of losses against income
referred in section 115BBE. This issue was, therefore, the subject matter of litigation,
and many Courts have taken a view that losses shall not be allowed to be set-off against
income referred to in section 115BBE.
(iv) In order to avoid further litigation and clarify the real intent of law, section 115BBE(2)
has been amended to expressly provide that no set off of any loss shall be allowable
against income brought to tax under sections 68 or section 69 or section 69A or section
69B or section 69C or section 69D.
(D) Increase in rebate under section 87A
Effective from: A.Y.2017-18
(i) Under section 87A, a rebate of an amount equal to 100% of income-tax or an amount
of ` 2,000, whichever is less, is allowed from the amount of income-tax payable by an
individual resident in India whose total income does not exceed ` 5 lakh.
(ii) In order to provide further relief to resident individuals in the lower income slab,
section 87A has been amended to increase the maximum amount of rebate
available under this provision from existing ` 2,000 to ` 5,000 from A.Y.2017-18.

Rebate under section 87A

` 5,000
(from
` 2,000 (upto A.Y.2017-18)
A.Y.2016-17)

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2
RESIDENCE AND SCOPE OF TOTAL INCOME

AMENDMENTS BY THE FINANCE ACT, 2016

(A) No income deemed to accrue or arise in India to a foreign mining company through or
from the activities which are confined to display of uncut and unassorted diamonds in
a Special Notified Zone [Explanation 1 to section 9(1)(i)]
Effective from: A.Y. 2016-17
(i) Scope of total income of a non-resident
The scope of total income of a non-resident is provided under section 5(2). It includes
all income which accrues or arises in India or which is deemed to accrue or arise in
India or is received or is deemed to be received in India.
(ii) Income accruing through business connection: Deemed to accrue or arise in
India
Section 9 provides circumstances under which income is deemed to accrue or arise in
India. As per section 9(1)(i), all income accruing, whether directly or indirectly, through
or from a business connection in India is deemed to accrue or arise in India.
(iii) Possible creation of business connection on account of display of rough
diamonds by foreign mining companies (FMCs) to India : A matter of concern for
FMCs
In order to ease shifting of operations by FMCs to India and to allow the trading of rough
diamonds in India by the leading diamond mining companies of the world, a “Special
Notified Zone” (SNZ) has been created. Since the activity of mere display of rough
diamonds even with no actual sale taking place in India may lead to creation of business
connection in India of the FMC, the probable tax consequence has been a matter of
concern for the mining companies contemplating to undertake these activities in India.
(iv) No income shall be deemed to accrue or arise in India from activities confined to
display of rough diamonds in SNZs: Insertion of new clause (e) in Explanation 1
to section 9(1)(i)
In order to facilitate the FMCs to undertake activity of display of uncut diamond (without
any sorting or sale) in the SNZ, clause (e) has been inserted in Explanation 1 to section
9(1)(i) to provide that in the case of a foreign company engaged in the business of

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mining of diamonds, no income shall be deemed to accrue or arise in India to it through
or from the activities which are confined to display of uncut and unassorted diamonds in
any special zone notified by the Central Government in the Official Gazette in this
behalf.
(B) Deferral of applicability of POEM based residence test and incorporation of transition
mechanism for a company incorporated outside India and which has not earlier been
assessed to tax in India [Section 6(3)]
Related amendment in section: 115JH
Effective from: A.Y. 2017-18
(i) Determination of residential status of a company, other than an Indian company:
Certain concerns:
(1) Under section 6(3), conditions to be satisfied by a company, to be a resident in
India for a previous year are provided.
(2) A company is said to be resident in India in any previous year, if-
(a) it is an Indian company; or
(b) during that year, the control and management of its affairs is situated wholly
in India.
(3) Since the condition for a company to be resident was that the whole of control and
management should be situated in India and that too for whole of the year, a
company could easily avoid becoming a resident by simply holding a board
meeting outside India. The existing provision gave scope for creation of shell
companies which were incorporated outside but controlled from India.
(ii) Place of effective management: Globally recognized concept for determination of
residence of a foreign company
(1) 'Place of effective management' (POEM) is a globally recognized concept for
determination of residence of a company incorporated in a foreign jurisdiction. The
concept of 'place of effective management' for determination of residence of a
company as a tie-breaker rule for avoidance of double taxation is recognised by
many of the tax treaties entered into by India. The Organisation of Economic
Cooperation and Development (OECD) also recognises the principle of POEM.
(2) The place of effective management has been defined in the OECD commentary on
model convention to mean a place where key management and commercial
decisions that are necessary for the conduct of the entity's business as a whole, are,
in substance, made.
(iii) Incorporation of concept of POEM in the Income-tax Act, 1961
(1) Incorporation of the concept of POEM in the Income-tax Act, 1961 to determine the
residence of a company would be in line with international standards. It would also

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help in aligning the provisions of the Act with the Double Taxation Avoidance
Agreements (DTAAs) entered into by India with other countries.
(2) This requirement would also discourage the creation of shell companies outside
India but being controlled and managed from India.
(3) Accordingly, section 6(3) was substituted by the Finance Act, 2015 with effect from
A.Y.2016-17 to provide that a company would be resident in India in any previous
year, if-
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India .
Explanation to section 6(3) defines “place of effective management” to mean a
place where key management and commercial decisions that are necessary for
the conduct of the business of an entity as a whole are, in substance made.
Determination of residential status of a company

Is the company an Whether POEM of The company is


No No
Indian company? the company is in a non-resident
India in the relevant for the relevant
P.Y P.Y.

Yes Yes

The company
is a resident in
India for the
relevant P.Y.

(iv) Implementation of concept of POEM for determining residential status of foreign


companies: Certain concerns
(1) In order to address the concerns regarding the applicability of provisions of the
Income-tax Act, 1961 to a company which is incorporated outside India and has
not earlier been assessed to tax in India, the applicability of POEM has been
deferred by one year i.e., from A.Y.2016-17 to A.Y.2017-18. Particularly, the
issues concerning the applicability of specific provisions of the Income-tax Act,
1961 on advance tax payment, TDS provisions, computation of total income, set
off of losses and manner of application of transfer pricing regime have to be
addressed, since they are in the nature of compliance requirements which would

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not have been undertaken by the company at the relevant point of time on account
of absence of any such requirement under tax laws of country of incorporation of
such company. Likewise, issues relating to depreciation computation also arise
when in earlier years it has not been subject to computation under the Income-tax
Act, 1961.
(2) It is also possible that a company may be claiming to be a foreign company not
resident in India. However, in the course of assessment, it may be held to be
resident based on POEM being in fact in India. This assessment would be well
after closure of the previous year and it may not be possible for company to
undertake many of procedural requirements.
(v) Deferral of applicability of POEM-based residence test by one year and putting in
place requisite transition mechanism
Therefore, so as to ensure clarity in respect of implementation of POEM based rule of
residence and to address concerns of the stakeholders, the Finance Act, 2016 has
provided the following : -
(1) Deferral of applicability of POEM-based residence test by one year [Section
6(3)]
The applicability of POEM based residence test has been deferred by one year
and the determination of residence based on POEM shall be applicable from
A.Y.2017-18.
(2) Transition Mechanism for a company incorporated outside India and has not
been assessed to tax earlier [New Chapter XII-BC – Section 115JH]
A transition mechanism for a company which is incorporated outside India and has
not earlier been assessed to tax in India has been provided by insertion of Chapter
XII-BC comprising of section 115JH.
(a) Accordingly, the Central Government is empowered to notify exception,
modification and adaptation subject to which, the provisions of the Act
relating to computation of income, treatment of unabsorbed depreciation, set-
off or carry forward and set off of losses, special provision relating to
avoidance of tax and the collection and recovery of taxes shall apply in a
case where a foreign company is said to be resident in India due to its POEM
being in India for the first time and the said company has never been resident
in India before.
(b) In a case where the determination regarding foreign company to be resident
in India has been made in the assessment proceedings relevant to any
previous year, then, these transition provisions would also cover any
subsequent previous year, if the foreign company is resident in India in that
previous year and the previous year ends on or before the date on which
such assessment proceeding is completed. In effect, the transition provisions
would also cover any subsequent amendment upto the date of determination

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of POEM in an assessment proceeding. However, once the transition is
complete, then, normal provisions of the Act would apply.
(c) In the notification issued by the Central Government, certain conditions
including procedural conditions subject to which these adaptations shall apply
can be provided for and in case of failure to comply with the conditions, the
benefit of such notification would not be available to the foreign company.
Accordingly, where in a previous year, any benefit, exemption or relief has
been claimed and granted to the foreign company in accordance with the
notification, and subsequently, there is failure to comply with any of the
conditions specified therein, then –
(i) the benefit, exemption or relief shall be deemed to have been wrongly
allowed;
(ii) the Assessing Officer may re-compute the total income of the assessee
for the said previous year and make the necessary amendment as if the
exceptions, modifications and adaptations as per the notification does
not apply; and
(iii) the provisions of section 154 shall, so far as may be, apply thereto and
the period of four years for rectification of mistake apparent from the
record has to be reckoned from the end of the previous year in which
the failure to comply with the condition stipulated in the notification
takes place.
(d) Every notification issued in exercise of this power by the Central Government
shall be laid before each house of the Parliament.
Example
ABC Inc., a Swedish company headquartered at Stockholm, not having a permanent
establishment in India, has set up a liaison office in Mumbai in April, 2016 in compliance with
RBI guidelines to look after its day to day business operations in India, spread awareness
about the company’s products and explore further opportunities. The liaison office takes
decisions relating to day to day routine operations and performs support functions that are
preparatory and auxiliary in nature. The significant management and commercial decisions
are, however, in substance made by the Board of Directors at Sweden. Determine the
residential status of ABC Inc. for A.Y.2017-18.
Answer
Section 6(3) has been substituted by the Finance Act, 2016 with effect from A.Y.2017-18
to provide that a company would be resident in India in any previous year, if-
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India .
In this case, ABC Inc. is a foreign company. Therefore, it would be resident in India for
P.Y.2016-17 only if its place of effective management, in that year, is in India.

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Explanation to section 6(3) defines “place of effective management” to mean a place
where key management and commercial decisions that are necessary for the conduct of
the business of an entity as a whole are, in substance made. In the case of ABC Inc., its
place of effective management for P.Y.2016-17 is not in India, since the significant
management and commercial decisions are, in substance, made by the Board of
Directors outside India in Sweden.
ABC Inc. has only a liaison office in India through which it looks after its routine day to
day business operations in India. The place where decisions relating to day to day
routine operations are taken and support functions that are prepara tory or auxiliary in
nature are performed are not relevant in determining the place of effective management.
Hence, ABC Inc., being a foreign company is a non-resident for A.Y.2017-18, since its
place of effective management is outside India in the P.Y.2016-17.
(C) Special Taxation Regime for offshore funds: Modification of certain conditions
[Section 9A]
Effective from: A.Y. 2017-18
(i) Under section 9A, a special regime has been provided in respect of offshore funds.
(ii) In the case of an eligible investment fund, the fund management activity carried out
through an eligible fund manager acting on behalf of such fund shall not constitute
business connection in India of the said fund.
(iii) Further, an eligible investment fund shall not be said to be resident in India merely
because the eligible fund manager undertaking fund management activities on its
behalf is located in India.
(iv) The benefit under section 9A is available subject to satisfaction of the conditions
provided in, inter-alia, section 9A(3), for the eligibility of the fund. These conditions
relate to residence of fund, corpus size, investor base, investment diversification
and payment of remuneration to fund manager at arm's length.
(v) However, there are instances where a fund may not qualify as a tax resident of a
country on account of domestic tax laws or legal framework of the country. The legal
and regulatory framework of the country of incorporation of funds forms the basis for
their global structure and the same cannot be modified in respect of any investment
made in a specific country. For example, large pension funds or mutual funds from
USA or SICAVs (open ended collective investment schemes) from Luxembourg. India
would still be able to collect information regarding fund under the applicable DTAA or
TIEA as under the agreements with many of the countries, information can be
exchanged in respect of persons who may not be resident of the country. Further, the
conditions relating to restriction on fund carrying on business or controlling fund
managing business in India or from India restricts the flexibility of operation for funds
and focus should be on nature of activities undertaken in India.
Accordingly, the following amendments have been made in section 9A by the Finance
Act, 2016:

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Condition Existing Provision Amendment by the
Finance Act, 2016
(1) Residence The Eligible Investment Fund The Eligible Investment
[Clause (b) has to be resident of a country Fund shall also mean a
of section or specified territory with fund established or
9A(3)] which India has entered into a incorporated or
Double Taxation Avoidance registered outside India
Agreement (DTAA) or Tax in a country or a
Information Exchange specified territory
Agreement (TIEA). notified by the Central
Government in this
behalf.
(2) Activities The fund shall not carry on or The condition of fund not
[Clause (k) control and manage, directly controlling and
of section or indirectly, any business in managing any business
9A(3)] India or from India. in India or from India
Note – Further, the Fund shall shall be restricted only in
neither engage in any activity the context of activities
which constitutes a business in India and will not
connection in India nor have apply in respect of
any person acting on its behalf activities from India.
whose activities constitute a Accordingly, clause (k)
business connection in India of section 9A(3) has
other than the activities been amended to
undertaken by the eligible fund provide that the fund
manager on its behalf. This is shall not carry on or
provided in clause (l) of section control and manage,
9A(3). directly or indirectly, any
business in India.

SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Basis for determining the period of stay in India for an Indian citizen, being a
member of the crew of a foreign bound ship leaving India [Notification No. 70/2015,
dated 17.8.2015]
Section 6(1) of the Income-tax Act, 1961 provides that an individual is said to be resident
in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to 182 days or more; or
(b) having within the four years preceding that year been in India for a period or periods
amounting in all to 365 days or more, is in India for a period or periods amounting in
all to 60 days or more in that year.

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However, where an Indian citizen leaves India as a member of crew of an Indian ship or
for the purpose of employment outside India, he will be resident only if he stayed in In dia
for 182 days during the previous year.
Thus, under section 6(1), the conditions to be satisfied by an individual to be a resident in
India are provided. The residential status is determined on the basis of the number of
days of his stay in India during a previous year.
However, in case of foreign bound ships where the destination of the voyage is
outside India, there is uncertainty regarding the manner and the basis of determining
the period of stay in India for an Indian citizen, being a crew member.
To remove this uncertainty, Explanation 2 has been inserted to section 6(1) to provide that
in the case of an individual, being a citizen of India and a member of the crew of a foreign
bound ship leaving India, the period or periods of stay in India shall, in respect of such
voyage, be determined in the prescribed manner and subject to the prescribed conditions.
Accordingly, the CBDT has, in exercise of the powers conferred by Explanation 2 to
section 6(1) read with section 295, vide this notification, with retrospective effect from 1st
April, 2015, inserted Rule 126 in the Income-tax Rules, 1962 to compute the period of
stay in such cases.
According to Rule 126, in case of an individual, being a citizen of India and a member of
the crew of a ship, the period or periods of stay in India shall, in respect of an eligible
voyage, not include the period commencing from the date entered into the Continuous
Discharge Certificate in respect of joining the ship by the said individual for the eligible
voyage and ending on the date entered into the Continuous Discharge Certificate in
respect of signing off by that individual from the ship in respect of such voyage.
The Explanation to this Rule defines the meaning of the following terms:
Terms Meaning
Continuous Discharge This term has the meaning assigned to it in the Merchant
Certificate Shipping (Continuous Discharge Certificate-cum-Seafarer's
Identity Document) Rules, 2001 made under the Merchant
Shipping Act, 1958.
Eligible voyage A voyage undertaken by a ship engaged in the carriage of
passengers or freight in international traffic where-
(i) for the voyage having originated from any port in India,
has as its destination any port outside India; and
(ii) for the voyage having originated from any port outside
India, has as its destination any port in India.
Example
Mr. Anand is an Indian citizen and a member of the crew of a Singapore bound Indian
ship engaged in carriage of passengers in international traffic departing from Chennai
port on 6 th June, 2016. From the following details for the P.Y.2016-17, determine the

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residential status of Mr. Anand for A.Y.2017-18, assuming that his stay in India in the last
4 previous years (preceding P.Y.2016-17) is 400 days and last seven previous years
(preceding P.Y.2016-17) is 750 days:
Particulars Date
Date entered into the Continuous Discharge Certificate in respect 6th June, 2016
of joining the ship by Mr. Anand
Date entered into the Continuous Discharge Certificate in respect 9th December,
of signing off the ship by Mr. Anand 2016

Answer
In this case, the voyage is undertaken by an Indian ship engaged in the carriage of
passengers in international traffic, originating from a port in India (i.e., the Chennai port)
and having its destination at a port outside India (i.e., the Singapore port). Hence, the
voyage is an eligible voyage for the purposes of section 6(1). Therefore, the period
beginning from 6 th June, 2016 and ending on 9 th December, 2016, being the dates
entered into the Continuous Discharge Certificate in respect of joining the ship and
signing off from the ship by Mr. Anand, an Indian citizen who is a member of the crew of
the ship, has to be excluded for computing the period of his stay in India. Accordingly,
187 days [25+31+31+30+31+30+9] have to be excluded from the period of his stay in
India. Consequently, Mr. Anand’s period of stay in India during the P.Y.2016 -17 would
be 178 days [i.e., 365 days – 187 days]. Since his period of stay in India during the
P.Y.2016-17 is less than 182 days, he is a non-resident for A.Y.2017-18.
Note - Since the residential status of Mr. Anand is “non-resident” for A.Y.2017-18
consequent to his number of days of stay in P.Y.2016-17 being less than 182 days, his
period of stay in the earlier previous years become irrelevant.

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3
INCOMES WHICH DO NOT FORM PART OF
TOTAL INCOME

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Exemption under section 10(34) not to apply to dividend chargeable to tax in
accordance with section 115BBDA
Effective from: A.Y.2017-18
(i) Section 10(34) exempts dividend received by a shareholder of a domestic company,
since the same is subject to dividend distribution tax (DDT) under section 115-O.
(ii) Under section 115-O, dividends distributed by a domestic company are subject to
tax@ 15% at the time of distribution in the hands of company declaring dividend.
This may result in vertical inequity amongst the tax payers since dividend distributed
to those shareholders (who receive high dividend) are subject to tax only at the rate
of 15% whereas had such income been taxable in their hands directly, the same
would have been subject to tax at the rate of 30%.
(iii) In order to remove this vertical inequity, section 115BBDA has been inserted to
provide that any income by way of aggregate dividend in excess of ` 10 lakh shall
be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a
firm who is resident in India, at the rate of 10%.
(iv) Further, the taxation of dividend income in excess ` 10 lakh shall be on gross basis
i.e., no deduction in respect of any expenditure or allowance or set -off of loss shall
be allowed to the assessee in computing the income by way of dividends.
(v) Accordingly, a proviso has been inserted in section 10(34) to provide that the
exemption available thereunder in respect of dividend received by a shareholder
from a domestic company would not apply to income by way of dividend chargeable
to tax under section 115BBDA.
Example
A Ltd., a domestic company, declared dividend of ` 170 lakh for the year F.Y.2015-16
and distributed the same on 10.7.2016. Mr. X, holding 10% shares in A Ltd., receives
dividend of ` 17 lakh in July, 2016. Mr. Y, holding 5% shares in A Ltd., receives dividend
of ` 8.50 lakh. Discuss the tax implications in the hands of A Ltd., Mr.X and Mr.Y,

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assuming that Mr.X and Mr.Y have not received dividend from any other domestic
company during the year.
Solution
(i) The dividend of ` 170 lakh declared and distributed in the P.Y.2016-17 is subject to
dividend distribution tax under section 115-O in the hands of A Ltd. First of all, the
dividend received has to be grossed up by applying the rate of 15%. The gross
dividend is ` 200 lakh [` 170 lakh × 100/85]. Dividend distribution tax @17.304% is
` 34.608 lakh.
(ii) In the hands of Mr. X, dividend received upto ` 10 lakh would be exempt under
section 10(34). ` 7 lakh, being dividend received in excess of ` 10 lakh, would be
taxable@10% as per section 115BBDA. Such dividend would not be exempt under
section 10(34). Therefore, tax payable by Mr. X on dividend of ` 7 lakh under
section 115BBDA would be ` 72,100 [i.e., 10% of ` 7 lakh + cess@3%].
(iii) In the hands of Mr. Y, the entire dividend of ` 8.50 lakh received would be exempt
under section 10(34), since only dividend received in excess of ` 10 lakh would be
taxable under section 115BBDA.
(B) Exemption of income accruing or arising to a foreign company on account of
storage of crude oil in a facility in India and sale of crude oil therefrom to any
person resident in India [Section 10(48A)]
Effective from: A.Y.2016-17
(i) As per section 5(2), the scope of total income of a non-resident includes only the
income which accrues or arises in India or is deemed to accrue or arise in India or is
received in India or is deemed to be received in India.
(ii) Section 9 lists the circumstances in which the income is deemed to accrue or arise
in India. Section 9(1)(i) provides that income would be deemed to accrue or arise in
India if any income accrues or arises, directly or indirectly, through or from a
business connection in India.
(iii) An underground storage facility is being set up by the Indian Strategic Petroleum
Reserves Limited for storage of crude oil as part of strategic reserves. It is in the
country’s national interest to maintain the strategic reserves. Further, it also
guarantees price stability for Indian oil companies. However, heavy financial burden
arises on account of the filling cost of such facility.
(iv) In order to address this concern, the Government is considering meeting a
significant portion of the financial burden through participation of private players
including foreign national oil companies (NOCs) and multinational companies
(MNCs). However, the activities of storage of crude oil by such foreign companies
and its sale in India would result in business connection and hence, such income
would be deemed to accrue or arise in India. Resultantly, these entities would be
subject to tax in India.
(v) For achieving tax neutrality to encourage the NOCs & MNCs to store their crude oil
in India and to build up strategic oil reserves, clause (48A) has been inserted in

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section 10 to exempt any income accruing or arising to a foreign company on
account of storage of crude oil in a facility in India and sale of crude oil therefrom to
any person resident in India, if, -
(1) such storage and sale by the foreign company is pursuant to an agreement or
an arrangement entered into by the Central Government or approved by the
Central Government; and
(2) having regard to the national interest, the foreign company and the agreement
or arrangement are notified by the Central Government in this behalf.
(C) Exemption of interest on deposit certificates issued under the Gold Monetization
Scheme, 2015 [Section 10(15)(vi)]
Related amendment in section: 2(14)
Effective from: A.Y.2016-17
(i) Sub-clause (vi) of section 10(15) exempts interest on Gold Deposit Bonds issued under
Gold Deposit Scheme, 1999 notified by the Central Government. These bonds are also
excluded from the definition of capital asset under section 2(14) and therefore, transfer
of such bonds is exempt from capital gains tax.
(ii) The Government of India has now introduced the Gold Monetization Scheme, 2015.
(iii) For the purpose of extending the tax benefits available under the Gold Deposit
Scheme, 1999 to this scheme –
(1) Section 10(15)(vi) has been amended to provide that the interest on Deposit
Certificates issued under the Scheme, shall be exempt from income-tax.
(2) Section 2(14) has been amended to specifically exclude Deposit Certificates
issued under Gold Monetisation Scheme, 2015 notified by the Central
Government from the definition of capital asset. Consequently, transfer of the
same would be exempt from capital gains tax.
(D) Payment from NPS Trust to an employee on closure of his account or on his opting out
of the pension scheme exempt to the extent of 40% of such payment [Section 10(12A)]
Effective from: A.Y.2017-18
(i) Currently, under the Income-tax Act, 1961, the tax treatment for the National Pension
System (NPS) referred to in section 80CCD is Exempt, Exempt and Tax (EET). This
implies that –
(1) the monthly/periodic contributions during the pension accumulation phase are
allowed as deduction from income for tax purposes;
(2) the returns generated on these contributions during the accumulation phase are
also exempt from tax;
(3) However, the terminal benefits on exit or superannuation, in the form of lump sum
withdrawals, are taxable in the hands of the individual subscriber or his nominee in
the year of receipt of such amounts.

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(ii) As per section 80CCD, any payment from National Pension System Trust to an employee
on account of closure or his opting out of the pension scheme is chargeable to tax.
(iii) New clause (12A) has been inserted in section 10 to provide that any payment from
National Pension System Trust to an employee on account of closure or his opting out
of the pension scheme referred to in section 80CCD, to the extent it does not exceed
40% of the total amount payable to him at the time of closure or his opting out of the
scheme, shall be exempt from tax.
(iv) However, the whole amount received by the nominee, on death of the assessee shall be
exempt from tax.
SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Investment in Stock Certificate as defined in the Sovereign Gold Bonds Scheme,


2015 notified as eligible form of investment by a charitable trust [Notification No.
21/2016, dated 23-03-2016]
Section 11(2)(b) provides that where 85% of the income is not applied, or is not deemed
to have been applied, to charitable or religious purposes in India during the previous year
but is accumulated or set apart, either in whole or in part, for application to such
purposes in India, such income so accumulated or set apart shall not be included in the
total income of the previous year of the person in receipt of the income, provided, inter
alia, the money so accumulated or set apart is invested or deposited in the forms or
modes as specified in section 11(5).
Rule 17C provides for the various forms or modes of investment or deposits by a
charitable or religious trust or institution. The CBDT has, vide this notification, amended
Rule 17C to insert clause (ix) to include Investment in “Stock Certificate” [as defined in
clause (c) of paragraph 2 of the Sovereign Gold Bonds Scheme, 2015, published in the
Official Gazette vide notification number G.S.R. 827(E), dated 30th October, 2015] as an
eligible form/mode of investment.
2. News agency notified for the purpose of section 10(22B) [Notification No. 72/2015,
dated 24.8.2015]
Section 10(22B) provides that any income of a news agency set up in India solely for
collection and distribution of news as the Central Government may notify shall be
exempt, subject to the condition that such news agency applies its income or
accumulates it for application solely for collection and distribution of news and does not
distribute its income in any manner to its members.
Accordingly, the Central Government has, through this notification, specified the Press
Trust of India Limited, New Delhi as a news agency set up in India solely for collection
and distribution of news, for the purpose of section 10(22B) for three assessment years
2016-17 to 2018-19. The income of such news agency will not be included in computing
the total income of a previous year of such agency for these three years, provided it
applies its income or accumulates it for application solely for collection and distribution of
news and does not distribute its income in any manner to its members.

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5
INCOME FROM HOUSE PROPERTY
AMENDMENTS BY THE FINANCE ACT, 2016

(A) Extension of period for completion of construction from 3 years to 5 years, for
claiming higher deduction of upto ` 2 lakh in respect of interest on capital borrowed
for construction of self-occupied house property
Effective from: A.Y.2017-18
(i) Section 24(b) provides that interest payable on capital borrowed for acquisition or
construction of a house property shall be deducted while computing income from
house property.
(ii) In case of self-occupied house property, the annual value is Nil as per section 23(2).
(iii) However, a deduction of an amount of upto ` 2 lakh is allowed under section 24 in
respect of interest on capital borrowed on or after 1 st April, 1999 for acquisition or
construction of a house property for the purpose of self-occupation, where such
acquisition or construction is completed within three years from the end of the
financial year in which capital was borrowed.
(iv) Since housing projects are taking a longer time for completion, a higher deduction
of upto ` 2 lakh on account of interest paid on capital borrowed for acquisition or
construction of a self-occupied house property shall be available if the acquisition or
construction is completed within five years from the end of the financial year in
which capital was borrowed.
Time period for completion of construction (from the end of the financial year
in which capital was borrowed)

5 years
(from A.Y.2017-18)

3 years
(upto A.Y.2016-17)

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(B) Special provision for arrears of rent and unrealized rent received subsequently
[New Section 25A]
Effective from: A.Y.2017-18
(i) At present, section 25AA contains the special provisions on taxation of unrealised
rent allowed as deduction when realised subsequently and section 25B contains the
tax treatment of arrears of rent received.
(ii) These two provisions are now merged in new section 25A, in order to ensure
uniformity in tax treatment of arrears of rent and unrealised rent. Thus, new section
25A substitutes erstwhile sections 25A, 25AA and 25B.
(iii) As per new section 25A(1), the amount of rent received in arrears from a tenant or
the amount of unrealised rent realised subsequently from a tenant by an assessee
shall be deemed to be income from house property in the financial year in which
such rent is received or realised, and shall be included in the total income of the
assessee under the head “Income from house property”, whether the assessee is
the owner of the property or not in that financial year.
(iv) Summary:
New section 25A(2) provides a deduction of 30% of arrears of rent or unrealised
rent realised subsequently by the assessee.
New Section 25A
Arrears of Rent / Unrealised Rent
(i) Taxable in the year of receipt/realisation
(ii) Deduction@30% of rent received/realised
(iii) Taxable even if assessee is not the owner of the property in the financial
year of receipt/realisation.

Example
Mr. Anand sold his residential house property in March, 2016.
In June, 2016, he recovered rent of ` 10,000 from Mr. Gaurav, to whom he had let out
his house for two years from April 2010 to March 2012. He could not realise two months
rent of ` 20,000 from him and to that extent his actual rent was reduced while computing
income from house property for A.Y.2012-13.
Further, he had let out his property from April, 2012 to February, 2016 to Mr. Satish. In
April, 2014, he had increased the rent from ` 12,000 to ` 15,000 per month and the
same was a subject matter of dispute. In September, 2016, the matter was finally settled
and Mr. Anand received ` 69,000 as arrears of rent for the period April 2014 to February,
2016.
Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr.
Anand, and if so in which year?

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Solution
Since the unrealised rent was recovered in the P.Y.2016-17, the same would be taxable
in the A.Y.2017-18 under section 25A, irrespective of the fact that Mr. Anand was not the
owner of the house in that year. Further, the arrears of rent was also received in the
P.Y.2016-17, and hence the same would be taxable in the A.Y.2017-18 under section
25A, even though Mr. Anand was not the owner of the house in that year. A deduction of
30% of unrealised rent recovered and arrears of rent would be allowed while computing
income from house property of Mr. Anand for A.Y.2017-18.
Computation of income from house property of Mr. Anand for A.Y.2017-18
Particulars `
(i) Unrealised rent recovered 10,000
(ii) Arrears of rent received 69,000
79,000
Less: Deduction@30% 23,700
Income from house property 55,300

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6
PROFITS AND GAINS OF BUSINESS OR
PROFESSION
AMENDMENTS BY THE FINANCE ACT, 2016

(A) Non-compete fee received/receivable for not carrying on a profession chargeable


under the head “Profits and gains of business or profession” [Section 28(va)]
Related amendment in section: 55
Effective from: A.Y.2017-18
(i) Section 28(va) brings to tax any sum received or receivable, in cash or in kind,
under an agreement for not carrying out any activity in relation to any business; or
not sharing any know-how, patent, copyright, trade mark, licence, franchise or any
other business or commercial right of similar nature or information or technique
likely to assist in the manufacture or processing of goods or provision for services
as business income.
(ii) The proviso to section 28(va) clarifies that receipts for transfer of right to
manufacture, produce or process any article or thing or right to carry on any
business, which are chargeable to tax under the head "Capital gains", would not be
taxable as profits and gains of business or profession.
(iii) However, so far, non-compete fee received/receivable for not carrying on a
profession was not covered under these provisions.
(iv) Clause (va) of section 28 has been amended to bring the non-compete fee
received/receivable (which are recurring in nature) in relation to not carrying out any
profession, within the scope of profits and gains of business or profession.
(v) Further, the proviso to section 28(va) has been amended to clarify that receipts for
transfer of right to carry on any profession, which are chargeable to tax under the
head "Capital gains", would not be taxable as profits and gains of business or
profession.
(vi) Any receipt arising out of transfer of any business or commercial rights is taxable
under the head "Capital gains". The amount of capital gains chargeable to tax is

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computed according to section 48. For this purpose, 'cost of acquisition' and 'cost of
improvement' are defined under section 55.
(vii) Section 55 has also been amended to provide that, for the purposes of sections 48
and 49, the cost of acquisition and cost of improvement in relation to a capital asset,
being right to carry on any profession, shall also be taken as Nil. However, in the
case of acquisition of such asset by the assessee by purchase from a previous
owner, the amount of purchase price would be the cost of acquisition for the
purpose of section 48 and 49.
(B) Assessees engaged in the business of transmission of power eligible for additional
depreciation [Section 32(1)(iia)]
Effective from: A.Y. 2017-18
(i) Section 32(1)(iia) allows additional depreciation@20% in respect of the cost of new
plant or machinery acquired and installed by certain assessees engaged in, inter
alia, the business of generation and distribution of power .
(ii) This additional depreciation available under section 32(1)(iia) is over and above the
deduction allowed for normal depreciation under section 32(1)(ii) at the rates
specified in new Appendix 1A read with Rule 5.
(iii) This incentive was so far not available in respect of new machinery or plant installed
by an assessee engaged in the business of transmission of power.
(iv) The benefit of additional depreciation@20% of actual cost of new machinery or
plant acquired and installed in a previous year under section 32(1)(iia) has now
been extended to an assessee engaged in the business of transmission of power
also.
Businesses eligible for claim of additional depreciation under section
32(1)(iia)

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Upto A.Y.2016-17 From A.Y.2017-18

Manufacture or
Manufacture or production of an article
production of an or thing
article or thing

Generation or Generation,
generation and transmission or
distribution of distribution of power
power
(C) Deduction under section 32AC to be available in the year of installation i n respect
of actual cost of new plant and machinery acquired in the P.Y.2015-16 and
P.Y.2016-17, if the actual cost of such new plant and machinery acquired in the
relevant previous year exceeds ` 25 crores, even if the new plant and machinery
has not been installed in the relevant previous year but has been installed on or
before 31.3.2017
Effective from: A.Y.2016-17
(i) Section 32AC(1A) provides for deduction@15% of actual cost of new plant and
machinery acquired and installed in a previous year by a company engaged in
manufacturing or production of any article or thing, if the actual cost exceeds ` 25
crore. However, for claim of deduction, the acquisition and installation had to be
done in the same previous year.
(ii) This tax benefit is available in respect of new plant and machinery acquired and
installed in the P.Y.2014-15, P.Y.2015-16 and P.Y.2016-17, provided the actual cost
of plant and machinery acquired and installed in the relevant previous year exceeds
` 25 crore.
(iii) The requirement of acquisition and installation in the year causes genuine hardship
in cases in which assets having been acquired could not be installed in same
previous year.
(iv) Therefore, section 32AC(1A) has been amended to provide that acquisition of the
plant and machinery, the actual cost of which exceeds ` 25 crore, has to be made
in the relevant previous year. However, installation may be made by 31.03.2017 in
order to avail the benefit of deduction of 15%.

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(v) Where the installation of the new asset is in a year other than the year of
acquisition, the deduction under this sub-section shall be allowed in the year in
which the new asset is installed, provided the installation is on or before 31.3.2017.
Example
Actual cost Previous Previous Assessment Deduction u/s
Company

of new year of Year of Year in which 32AC


plant and acquisition installation deduction u/s (` )
machinery 32AC can be
(` ) claimed
B Ltd. 40 crores P.Y.2015-16 P.Y.2016-17 A.Y.2017-18 6 crores
C Ltd. 50 crores P.Y.2016-17 P.Y.2016-17 A.Y.2017-18 7.50 crores
D Ltd. 60 crores P.Y.2016-17 P.Y.2017-18 - -

(D) Phasing out of incentives under the Income-tax Act, 1961


Effective from : A.Y. 2017-18
(i) The Finance Minister in his Budget Speech, 2015 has indicated that the rate of
corporate tax will be reduced from 30% to 25% over the next four years along with
corresponding phasing out of exemptions and deductions. The Government
proposed to implement this decision in a phased manner.
(ii) Accordingly, the following incentives under the Act are to be phased out in the
manner given hereunder:
Section Incentive under the Amendment by the Finance Act, 2016
Income-tax Act, 1961 restricting/phasing out the incentive
35 Expenditure on/Contribution for scientific research
35(1)(ii) 175% of sum paid to: Weighted deduction to be restricted to –
(i) an approved scientific Rate Period
research association
(i) 150% from P.Y.2017-18 to
which has the object
P.Y.2019-20
of undertaking
scientific research. (i.e., from A.Y.2018-19 to
A.Y.2020-21)
(ii) an approved univer-
sity, college or other (ii) 100% from P.Y.2020-21
institution, if such onwards
sum is used for (i.e., from A.Y.2021-22
scientific research. onwards)

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35(1)(iia) 125% of any sum paid Deduction to be restricted to 100% from
as contribution to an P.Y.2017-18 (i.e., A.Y.2018-19)
Indian company for
approved scientific
research

35(1)(iii) 125% of any sum paid Deduction to be restricted to 100% from


as contribution to an P.Y.2017-18 (i.e., A.Y.2018-19)
approved research
association or university
or college or other
institution to be used for
research in social
science or statistical
research

35(2AA) 200% of any sum paid to Weighted deduction to be restricted to –


a National Laboratory or Rate Period
a University or an IIT or
a specified person for (i) 150% from P.Y.2017-18 to
the purpose of approved P.Y.2019-20
scientific research (i.e., from A.Y.2018-19 to
programme. A.Y.2020-21)
(ii) 100% from P.Y.2020-21
onwards
(i.e., from A.Y.2021-22
onwards)
35(2AB) 200% of the expenditure Weighted deduction to be restricted to –
(not being expenditure in Rate Period
the nature of cost of any
land or building) on (i) 150% from P.Y.2017-18 to
scientific research on P.Y.2019-20
approved in-house (i.e., from A.Y.2018-19 to
research and A.Y.2020-21)
development facility (ii) 100% from P.Y.2020-21
incurred by a company, onwards
engaged in the business (i.e., from A.Y.2021-22
of bio-technology or in the onwards)
business of manufacture
or production of any
article or thing with the
exceptions of items

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specified in the Eleventh
Schedule.
35AC Expenditure on eligible projects or schemes
Deduction for expenditure No deduction under this section shall be
incurred by way of available from P.Y.2017-18 (i.e., from
payment of any sum to a A.Y.2018-19)
public sector company or
a local authority or to an
approved association or
institution, etc. on certain
eligible social
development project or a
scheme.
35AD Deduction in respect of specified business
In case of specified The deduction shall be restricted to 100%
business of setting up of capital expenditure from P.Y.2017-18
and operating a cold onwards (i.e., from A.Y.2018-19 onwards).
chain facility or This is effected by omission of sub-section
warehousing facility for (1A) providing for such weighted deduction.
storage of agricultural
produce or building and
operating a hospital with
atleast 100 beds for
patients or developing
and building an affordable
housing project or
production of fertiliser in
India, weighted
deduction@150% of
capital expenditure (other
than expenditure on land,
goodwill and financial
assets) is allowed, if the
operations are
commenced on or after
1.4.2012.
35CCC Expenditure on notified agricultural extension project
Weighted deduction of Deduction to be restricted to 100% from
150% of expenditure P.Y.2020-21 onwards (i.e., from A.Y.2021-
incurred on notified 22 onwards).
agricultural extension
project is allowed.

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35CCD Expenditure on skill development project
Weighted deduction of Deduction shall be restricted to 100% from
150% of any expenditure P.Y.2020-21 onwards (i.e., from A.Y.2021-
incurred (not being 22 onwards).
expenditure in the
nature of cost of any
land or building) by a
company on any notified
skill development project
is allowed.

(E) Tax treatment for spectrum fee [New section 35ABA]


Effective from: A.Y.2017-18
(i) Section 32 allows depreciation in respect of assets including certain intangible assets.
Section 35ABB provides for amortisation of licence fee in case of telecommunication
service.
(ii) The Government has newly introduced spectrum fee for auction of airwaves.
(iii) In order to resolve the uncertainty in tax treatment of payments in respect of spectrum
i.e., whether spectrum is an intangible asset and the spectrum fees paid is eligible for
depreciation under section 32 or whether it is in the nature of a 'license to operate
telecommunication business' and eligible for deduction under section 35ABB, new
section 35ABA has been inserted to provide for tax treatment of spectrum fee.
(iv) Tax treatment of spectrum fee [New section 35ABA]
Transaction Manner of deduction
(1) Acquisition of right to use spectrum
Any capital Appropriate fraction of the amount of such
expenditure incurred expenditure [1/total number of relevant previous
for acquisition of any years]
right to use spectrum
Meaning of relevant previous years:
for telecommunication
services either before Case Meaning
the commencement of
Where the spectrum The previous years beginning
the business or fee is actually paid with the P.Y. in which such
thereafter at any time before the business commenced and the
during any previous commencement of subsequent P.Y. or P.Y.s
year and for which business to operate during which the spectrum,
payment has actually telecommunication for which the fee is paid, shall
been made (actual services be in force.

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payment of In any other case The previous years beginning
expenditure or payable with the P.Y. in which the
in the prescribed spectrum fee is actually paid
manner) to obtain a and the subsequent P.Y. or
right to use spectrum. years during which the
spectrum, for which the fee is
paid, shall be in force.
(2) Transfer of the spectrum
Case 1: Where the The expenditure remaining unallowed as reduced by
proceeds of the the proceeds of transfer shall be allowed in the
transfer are less than previous year in which the spectrum has been
the expenditure transferred.
incurred remaining
unallowed
Case 2: Where the The excess amount shall be chargeable to tax as
proceeds of the profits and gains of business in the previous year in
transfer exceed the which the spectrum has been transferred. However,
amount of expenditure the excess should not exceed the difference
remaining unallowed between the expenditure incurred to obtain the
spectrum and the amount of expenditure remaining
unallowed.
If the spectrum is transferred in a previous year in
which the business is no longer in existence, the
taxability would arise in the above manner as
though the business is in existence in that previous
year.
Case 3: Where the No deduction for such expenditure shall be allowed
proceeds of the in the previous year in which spectrum is transferred
transfer are not less or in respect of any subsequent previous year or
than the amount of years.
expenditure incurred
remaining unallowed.
Case 4: Where a part Unallowed expenses would be amortised in the
of the spectrum is following manner –
transferred (and the
(i) subtracting the proceeds of transfer from the
case is not covered
expenditure remaining unallowed; and
under Case 2 above)
(ii) dividing the remainder by the number of relevant

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previous years which have not expired at the
beginning of the previous year during which the
licence is transferred.
(3) Transfer of spectrum in a scheme of amalgamation
If the amalgamating The provisions of section 35ABA will apply to
company sells or amalgamated company as they would have applied
transfers the spectrum to amalgamating company as if the latter has not
to the amalgamated transferred the spectrum.
company, being an
The tax treatment in cases 1,2 & 3 given in (2)
Indian company under
above will not apply to the amalgamating company.
the scheme of
amalgamation

(4) Transfer of spectrum in a scheme of demerger


If the demerged The provisions of section 35ABA will apply to
company sells or resulting company as they would have applied to
transfers the spectrum demerged company as if the latter has not
to the resulting transferred the spectrum.
company, being an
The tax treatment in cases 1,2 & 3 given in (2)
Indian company under
above will not apply to the demerged company.
the scheme of
demerger

(v) Consequences of failure to comply with the conditions after grant of deduction:
Where, in a previous year, any deduction has been claimed and granted to an
assessee and subsequently, there is failure to comply with any of the provisions of
this section, then –
(1) the deduction shall be deemed to have been wrongly allowed;
(2) the Assessing Officer may recompute the total income of the assessee for the
said previous year and make the necessary rectification. This is
notwithstanding anything contained in the Income-tax Act, 1961;
(3) the provisions under section 154 for rectification of mistake apparent from the
record would apply. The period of four years would be reckoned from the end
of the previous year in which the failure to comply with the prov isions of
section 154 takes place.
(F) Scope of section 35AD expanded to include the business of developing,
maintaining and operating a new infrastructure facility
Related amendment in section: 80-IA

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Effective from: A.Y.2018-19
(i) The Finance Minister in his Budget Speech, 2015 has indicated that the rate of
corporate tax will be reduced from 30% to 25% over the next four years along with
corresponding phasing out of exemptions and deductions. The Government
proposed to implement this decision in a phased manner.
(ii) The profit-linked deduction under section 80-IA(4)(i) available to any enterprise
which develops or operates and maintains a new infrastructure facility is also being
phased out. Accordingly, this deduction would not be available in respect of any
enterprise which starts the development or operation and maintenance of the
infrastructure facility on or after 1 st April, 2017.
(iii) However, such enterprise would be eligible for investment-linked tax deduction
under section 35AD –

Section Particulars Provision

(i) 35AD(8)(c) Definition of The business of developing or maintaining


“Specified and operating or developing, maintaining and
business” operating a new infrastructure facility has
been included in the definition of “specified
business”.

(ii) 35AD(8)(ba) Definition of (i) A road including toll road, a bridge or a


“infrastructure rail system.
facility”
(ii) A highway project including housing or
other activities being an integral part of
the highway project.

(iii) A water supply project, water treatment


system, irrigation project, sanitation
and sewerage system or solid waste
management system.

(iv) A port, airport, inland waterway, inland


port or navigational channel in the sea.

(iii) 35AD(5) Date of On or after 1.4.2017, where the specified


commencement business is in the nature of developing or
of such operating and maintaining or developing,
specified operating and maintaining, any infrastructure
business facility.

(iv) 35AD(2) Conditions to (i) The business should be owned by a

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be satisfied by company registered in India or by a
such specified consortium of such companies or by an
business authority or a board or corporation or any
other body established or constituted
under any Central or State Act.

(ii) The entity should have entered into an


agreement with the Central Government
or a State Government or a local
authority or any other statutory body for
developing or operating and maintaining
or developing, operating and
maintaining, a new infrastructure facility.

(G) NBFCs eligible for claim of deduction for provision for bad and doubtful debts
[Section 36(1)(viia)]
Effective from: A.Y.2017-18
(i) Under sub-clause (c) of section 36(1)(viia), in computing the profits of public
financial institutions, State financial corporations and State industrial investment
corporations, deduction of an amount not exceeding 5% of total income, computed
before making any deduction under section 36(1)(viia) and Chapter VI-A, is allowed
in respect of any provision for bad and doubtful debt.
(ii) Since Non-Banking Financial Companies (NBFCs) are also engaged in financial
lending to different sectors of society, sub-clause (d) has been inserted in section
36(1)(viia) to provide deduction on account of provision for bad and doubtful debts
of an amount not exceeding 5% of total income (before making any deduction under
section 36(1)(viia) and Chapter VI-A) in the case of NBFCs also.
(iii) Meaning of “Non-Banking Financial Company” [Section 45-I (f) of the Reserve
Bank of India Act, 1934]:
(i) a financial institution which is a company
(ii) a non-banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in
any other manner, or lending in any manner
(iii) such other non-banking institution or class of such institutions, as the Bank
may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.

(H) Sum payable to Indian Railways for use of railway assets allowable as deduction in
the year in which the liability to pay such sum is incurred, only if payment is made
on or before the due date of filing of return [Section 43B]

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Effective from: A.Y.2017-18
(i) Under section 43B, any sum payable by the assessee by way of tax, cess, duty or
fee, employer contribution to Provident Fund, etc., is allowable as deduction of the
previous year in which the liability to pay such sum was incurred (relevant previous
year) if the same is actually paid on or before the due date of furnishing of the
return of income irrespective of method of accounting followed by a person.
(ii) In effect, section 43B requires actual payment of tax, cess, duty or fee on or before
the due date of filing return of income for claim of deduction in the previous year in
which the liability to pay such sum was incurred.
(iii) In order to encourage timely payment of dues to Railways for use of the Railway
assets, clause (g) has been inserted in section 43B to expand its scope to include
any sum payable by the assessee to the Indian Railways for use of Railway assets,
within its ambit.
(I) Increase in threshold limit of gross receipts/turnover under section 44AD of a
business to be eligible for opting the presumptive taxation scheme
Related amendments in sections: 44AA, 44AB and 211
Effective from: A.Y.2017-18
(i) Section 44AD contains the presumptive taxation scheme for an eligible business.
(ii) As per this scheme, where in the case of an eligible assessee engaged in eligible
business having total turnover or gross receipts not exceeding rupees one crore, a sum
equal to 8% of the total turnover or gross receipts, or as the case may be, a sum higher
than the aforesaid sum shall be deemed to be profits and gains of such business
chargeable to tax under the head "Profits and gains of business or profession" [Section
44AD(1)]
(iii) Under the scheme, the assessee will be deemed to have been allowed the
deductions under sections 30 to 38.
(iv) Further, if an eligible assessee claims that the income earned by him is less than
the deemed income of 8% of the total turnover or gross receipts, he has to maintain
books of accounts as per section 44AA and get the same audited as per 44AB.
(v) Also, an eligible assessee, as far as eligible business is concerned, is not required
to pay advance tax. It would be sufficient compliance if they pay their tax while filing
their return of income before the due date.
(vi) For the purpose of reducing the compliance burden of the small tax payers and
facilitating the ease of doing business, the threshold limit specified in the definition
of "eligible business" has been increased from ` 1 crore to ` 2 crore.
(vii) Further, expenditure in the nature of salary, remuneration, interest etc. paid to th e
partner as per section 40(b) shall not be deductible while computing the income
under section 44AD since section 40 does not mandate for allowance of any

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expenditure; it merely places a restriction on deduction of amounts, otherwise
allowable under section 30 to 38. Therefore, the proviso to section 44AD(2) has
been omitted.
(viii) Where an eligible assessee declares profit for any previous year in accordance with
the provisions of this section and he declares profit for any of the five consecutive
assessment years relevant to the previous year succeeding such previous year not
in accordance with the provisions of sub-section (1), he shall not be eligible to claim
the benefit of the provisions of this section for five assessment years subsequent to
the assessment year relevant to the previous year in which the profit has not been
declared in accordance with the provisions of sub-section (1). This is provided in
new sub-section (4) of section 44AD.
(ix) An eligible assessee to whom the provisions of sub-section (4) are applicable and
whose total income exceeds the basic exemption limit has to maintain books of
account under section 44AA and get them audited and furnish a report of such audit
under section 44AB. This is provided in new sub-section (5) of section 44AD.
(x) Consequential amendments have been made in sections 44AA and 44AB to require
maintenance of books of account and audit of the same in the case of an eligible
assessee, where the provisions of section 44AD(4) are applicable and his income
exceeds the basic exemption limit.
(xi) Further, since the threshold limit of presumptive taxation scheme has been
enhanced to ` 2 crore, the eligible assessee is now required to pay advance tax by
15th March of the financial year.
(xii) Summary of amendments in section 44AD

Increase in treshold limit of eligible business from Rs.1


crore to Rs.2 crore

Salary, interest, remuneration paid to partner as per


section 40(b) not deductible

Advance tax to be paid on or before 15th March of the


financial year

In case of non-offering of income as per section 44AD for


five continuous years, eligible assessee cannot opt for
section 44AD for the next five AYs after the assessment
year of first non-option

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(xiii) Example:
Let us consider the following particulars relating to a resident individual, Mr. A,
being an eligible assessee whose gross receipts do not exceed ` 2 crore in any of
the assessment years between A.Y.2017-18 to A.Y.2019-20 -
Particulars A.Y.2017-18 A.Y.2018-19 A.Y.2019-20
Gross receipts (` ) 1,80,00,000 1,90,00,000 2,00,00,000
Income offered for taxation (` ) 14,40,000 15,20,000 12,00,000
% of gross receipts 8% 8% 6%
Offered income as per presumptive Yes Yes No
taxation scheme u/s 44AD
In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under
section 44AD for A.Y.2017-18 and A.Y.2018-19 and offers income of ` 14.40 lakh and
` 15.20 lakh on gross receipts of ` 1.80 crore and ` 1.90 crore, respectively.
However, for A.Y.2019-20, he offers income of only ` 12 lakh on turnover of ` 2
crore, which amounts to 6% of his gross receipts. He maintains books of account
under section 44AA and gets the same audited under section 44AB. S ince he has
not offered income in accordance with the provisions of section 44AD(1) for five
consecutive assessment years, after A.Y.2017-18, he will not be eligible to claim the
benefit of section 44AD for next five assessment years succeeding A.Y.2019-20 i.e.,
from A.Y.2020-21 to 2024-25.
Note – Section 44AB makes it obligatory for every person carrying on business to
get his accounts of any previous year audited if his total sales, turnover or gross
receipts exceed ` 1 crore. However, if an eligible person opts for presumptive
taxation scheme as per section 44AD(1), he shall not be required to get his
accounts audited if the total turnover or gross receipts of the relevant previous year
does not exceed ` 2 crore. The CBDT, has vide its Press Release dated 20th June,
2016, clarified that the higher threshold for non-audit of accounts has been given
only to assessees opting for presumptive taxation scheme under section 44AD.
(J) Presumptive Taxation Scheme for assessees engaged in eligible profession
[Section 44ADA]
Related amendment in section: 44AB
Effective from: A.Y. 2017-18
(i) Section 44AD provides for a presumptive taxation scheme for eligible persons
engaged in eligible business in order to reduce compliance burden of small tax
payers.
(ii) For reducing the compliance burden of small tax payers having income from
profession, the Finance Act, 2016 has introduced a presumptive taxation regime for
professionals.

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(iii) In this regard, new section 44ADA has been inserted in the Income-tax Act, 1961
providing a presumptive taxation scheme for estimating the income of an assessee:
 who is engaged in any profession referred to in section 44AA(1) such as legal,
medical, engineering or architectural profession or the profession of accountancy
or technical consultancy or interior decoration or any other profession as is notified
by the Board in the Official Gazette; and
 whose total gross receipts does not exceed fifty lakh rupees in a previous year,
at a sum equal to 50% of the total gross receipts, or, as the case may be , a sum
higher than the aforesaid sum claimed to have been earned by the assessee.

(iv) Meaning of Eligible Assessee:

Eligible Assessees

Resident assessee engaged in notified Total gross receipts ≤ `50


profession u/s 44AA(1) lakhs

(v) Under the scheme, the assessee will be deemed to have been allowed the
deductions under section 30 to 38. Accordingly, no further deduction under those
sections shall be allowed.
(vi) Further, the written down value of any asset used for the purpose of the profession
of the assessee will be deemed to have been calculated as if the assessee had
claimed and had actually been allowed the deduction in respect of depreciation for
the relevant assessment years.
(vii) The eligible assessee opting for presumptive taxation scheme will not be required to
keep and maintain books of account under section 44AA(1) and get the accounts
audited and furnish a report of such audit as required under section 44AB in respect
of such income unless the assessee claims that:
(a) the profits and gains from the aforesaid profession are lower than the profits
and gains deemed to be his income under section 44ADA(1); and
(b) his income exceeds the maximum amount which is not chargeable to income-tax.
(viii) Consequential amendment has been made in section 44AB requiring every person
carrying on profession to have his accounts audited by an accountant before the
specified date and furnish audit report by that date if such person has claimed lower
profits and gains than the deemed profits under section 44ADA and his income
exceeds the basic exemption limit.
SIGNIFICANT NOTIFICATIONS/CIRCULARS

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1. Certain districts of Bihar notified as backward areas under the first proviso to
section 32(1)(iia) and section 32AD(1) [Notification No. 71/2015, dated 17.8.2015]
In order to encourage the setting up of industrial undertakings in the backward areas of
the States of Andhra Pradesh, Bihar, Telangana and West Bengal, section 32AD(1)
provides for a deduction of an amount equal to 15% of the actual cost of new plant and
machinery acquired and installed in the assessment year relevant to the previous year in
which such plant and machinery is installed, if the following conditions are satisfied by
the assessee–
(a) the assessee sets up an undertaking or enterprise for manufacture or production of any
article or thing on or after 1st April, 2015 in any backward area notified by the Central
Government in the State of Andhra Pradesh or Bihar or Telangana or West Bengal; and
(b) the assessee acquires and installs new plant and machinery for the purposes of the
said undertaking or enterprise during the period between 1st April, 2015 and 31st
March, 2020 in the said backward areas.
Further, in order to encourage acquisition and installation of plant and machinery for
setting up of manufacturing units in the notified backward areas of the States of Andhra
Pradesh, Bihar, Telangana and West Bengal, first proviso has been inserted to section
32(1)(iia) to allow higher additional depreciation at the rate of 35% (instead of 20%) in
respect of the actual cost of new machinery or plant (other than a ship and aircraf t)
acquired and installed during the period between 1 st April, 2015 and 31 st March, 2020 by
a manufacturing undertaking or enterprise which is set up in the notified backward areas
of these specified States on or after 1 st April, 2015.
Accordingly, the Central Government has, vide this notification, notified the following 21
districts of the State of Bihar as backward areas under the first proviso to section
32(1)(iia) and section 32AD(1): -
S. No. District S. No. District
1. Patna 12. Samastipur
2. Nalanda 13. Darbhanga
3. Bhojpur 14. Madhubani
4. Rohtas 15. Purnea
5. Kaimur 16. Katihar
6. Gaya 17. Araria
7. Jehanabad 18. Jamui
8. Aurangabad 19. Lakhisarai
9. Nawada 20. Supaul
10. Vaishali 21. Muzaffarpur
11. Sheohar

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2. Oil wells included in New Appendix I under Mineral Oil concerns under “III. Plant
and Machinery” to be eligible for depreciation@15% [Notification No. 13/2016 dated
03-03-2016]
The CBDT has, vide this notification, included Oil wells as entry (c) under sub-item (xii)
“Mineral Oil concerns” under item (8) of sub-heading III “Plant and Machinery” in new
Appendix I.
The rate of depreciation for oil-wells included as entry (c) is 15%.
The amendment shall come into force on 1st April, 2016.
3. Deduction in respect of cost of production allowable under section 37 in the case
of Abandoned Feature Films [Circular No. 16, dated 6.10.2015]
The deduction in respect of the cost of production of a feature film certified for release by
the Board of Film Censors in a previous year is provided in Rule 9A.
In the case of abandoned films, however, since certificate of Board of Film Censors is not
received, in some cases no deduction was allowed by applying Rule 9A of the Rules or
by treating the expenditure as capital expenditure.
The CBDT has examined the matter in light of judicial decisions on this subject. The
order of the Hon’ble Bombay High Court dated 28.1.2015 in ITA 310 of 2013 in the case
of Venus Records and Tapes Pvt. Ltd. on this issue has been accepted and the aforesaid
disputed issue has not been further contested.
Consequently, it is clarified that Rule 9A does not apply to abandoned feature films and that
the expenditure incurred on such abandoned feature films is not to be treated as a capital
expenditure. The cost of production of an abandoned feature film is to be treated as revenue
expenditure and allowed as per the provisions of section 37 of the Income-tax Act, 1961.
4. Interest from non-SLR Securities of Banks: Whether chargeable under the head
“Profits and gains of business or profession” or “Income from other sources”?
[Circular No. 18, dated 2.11.2015]
The issue addressed by this circular is whether in the case of banks, expenses relatable
to investment in non-SLR securities need to be disallowed under section 57(i), by
considering interest on non-SLR securities as “Income from other sources."
Section 56(1)(id) provides that income by way of interest on securities shall be chargeable to
income-tax under the head "Income from Other Sources", if the income is not chargeable to
income-tax under the head "Profits and Gains of Business and Profession".
The CBDT has examined the matter in light of the judicial decisions on this issue. In the
case of CIT v. Nawanshahar Central Cooperative Bank Ltd. (2007) 160 Taxman 48
(SC), the Apex Court held that the investments made by a banking concern are part
of the business of banking. Therefore, the income arising from such investments is
attributable to the business of banking falling under the head "Profits and Gains of
Business and Profession".
5. Allowability of Employer's Contribution to funds for welfare of employees paid

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after the due date under the relevant Act but before the due date of filing of return
of income under section 139(1) [Circular No.22/2015 dated 17-12-2015]
Under section 43B of the Income-tax Act, 1961, certain deductions are admissible only
on payment basis. The CBDT has observed that some field officers disallow employer's
contributions to provident fund or superannuation fund or gratuity fund or any other fund
for the welfare of employees, by invoking the provisions of section 43B, if it has been
paid after the 'due dates' as per the relevant Acts.
The CBDT has examined the matter in light of the judicial decisions on this i ssue. In the
case of Commissioner vs. Alom Extrusions Ltd, [2009] 185 Taxman 416, the Apex Court
held that the deduction is allowable to the employer assessee if he deposits the
contributions to welfare funds on or before the 'due date' of filing of return of income.
Accordingly, the settled position is that if the assessee deposits any sum payable by it by
way of tax, duty, cess or fee, by whatever name called, under any law for the time being
in force, or any sum payable by the assessee as an employer by way of contribution to
any provident fund or superannuation fund or gratuity fund or any other fund for the
welfare of employees, on or before the 'due date' applicable in his case for furnishing the
return of income under section 139(1), no disallowance can be made under section 43B.
It is further clarified that this Circular does not apply to claim of deduction relating to
employee's contribution to welfare funds which are governed by section 36(1)(va) of the
Income-tax Act, 1961.

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7
CAPITAL GAINS
AMENDMENTS BY THE FINANCE ACT, 2016

(A) Period of holding of unlisted shares to qualify as a long-term capital asset to be


reduced from “more than 36 months” to “more than 24 months” [Section 2(42A)]
Effective from: A.Y.2017-18
(i) Section 2(42A) defines a short-term capital asset to mean a capital asset held by an
assessee for not more than 36 months immediately preceding the date of its transfer.
(ii) Section 2(29A) defines a long-term capital asset to mean a capital asset which is
not a short-term capital asset. Therefore, a capital asset held by an assessee for
more than 36 months immediately preceding the date of its transfer would be a
long-term capital asset.
(iii) Third proviso has been inserted in section 2(42A) with effect from A.Y.2017-18 to
provide that a share of a company (not being a share listed in a recognized stock
exchange in India) would be treated as a short-term capital asset if it was held by an
assessee for not more than 24 months immediately preceding the date of its transfer.
(iv) Thus, the period of holding of unlisted shares for being treated as a long-term
capital asset has been reduced from “more than 36 months” to “more than 24
months” from A.Y.2017-18.
(B) Total value of assets of a private company or unlisted company not to exceed ` 5 crore
in any of the three preceding previous years for exemption of transfer of capital asset
or intangible asset on conversion of such company into LLP [Section 47(xiiib)]
Effective from: A.Y.2017-18
(i) Under section 47(xiiib), any transfer of a capital asset or intangible asset on
conversion of a private company or unlisted public company to a Limited Liability
Partnership (LLP) shall not be regarded as transfer for levy of capital gains tax, on
fulfilment of certain conditions.
(ii) The proviso to section 47(xiiib) stipulates the various conditions to be fulfilled for the
transaction to not constitute a transfer for the purpose of capital gains. One of the
conditions is that the company's gross receipts, turnover or total sales in any of the
preceding three previous years should not exceed ` 60 lakh

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(iii) Clause (ea) has been inserted in the said proviso to stipulate an additional condition
for claim of exemption under section 47(xiiib). Accordingly, the total value of assets
as appearing in the books of account of the company in any of the three previous
years preceding the previous year in which the conversion takes place, should not
exceed ` 5 crore.
(C) Transfer of units by unit holders on consolidation of plans within a mutual fund
scheme not to be regarded as transfer [Section 47(xix)]
Effective from: A.Y. 2017-18
(i) Exemption for consolidation of mutual fund schemes:
Under section 47(xviii), any transfer by a unit holder of a capital asset, being a unit
or units, held by him in the consolidating scheme of a mutual fund, made in
consideration of the allotment to him of a capital asset, being a unit or units, in the
consolidated scheme of the mutual fund is not regarded as a transfer and is, hence,
not subject to capital gains tax.
(ii) Consolidation of mutual fund plans within a scheme: SEBI guidelines
SEBI has also issued guidelines for consolidation of mutual fund plans within a
scheme, on account of which, the tax exemption under section 47, available on
merger or consolidation of mutual fund schemes has been extended to the merger
or consolidation of different plans in a mutual fund scheme.
(iii) Exemption of transfer of units in the consolidation of Plans within a Mutual
Fund scheme: For the purpose of facilitating consolidation of mutual fund plans
within a scheme in the interest of the investors and to provide tax neutrality to unit
holders upon consolidation or merger of mutual fund plans within a scheme, new
clause (xix) has been inserted in section 47.
Accordingly, any transfer by a unit holder of a capital asset, being a unit or units,
held by him in the consolidating plan of a mutual fund scheme, made in
consideration of the allotment to him of a capital asset, being a unit or units, in the
consolidated plan of that scheme of the mutual fund shall not be considered transfer
for capital gain tax purposes.
(iv) Meaning of the following terms:
Term Meaning
Consolidating The plan within a scheme of a mutual fund which merges
Plan under the process of consolidation of the plans within a
scheme of mutual fund in accordance with the SEBI (Mutual
Funds) Regulations, 1996 made under SEBI Act, 1992.
Consolidated The plan with which the consolidating plan merges or which is
Plan formed as a result of such merger.
Mutual Fund A mutual fund specified under section 10(23D), i.e.,
(i) a Mutual Fund registered under the SEBI Act, 1992 or
regulations made thereunder;

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(ii) such other Mutual Fund set up by a public sector bank or
a public financial institution or authorised by the RBI and
subject to conditions notified by the Central Government.
(D) Redemption by an individual of sovereign gold bonds issued by RBI not to
constitute transfer for the purpose of levy of capital gains tax [Section 47(viic)]
Related amendment in section: 48
Effective from: A.Y.2017-18
(i) Sovereign Gold Bond Scheme, 2015
This scheme has been introduced by the Government of India to reduce the
demand for physical gold and consequently, reduce the foreign exchange outflow
due to import of gold. The two-fold benefit of this scheme are:
(1) The gold bond would serve as a substitute for physical gold; and
(2) The gold bond would provide security to the individual investor investing in gold
for meeting their social obligation.
(ii) Redemption by an individual of sovereign gold bonds (SGBs) not to constitute
transfer
Section 47 enlists transactions which are not considered as transfer for levy of
capital gains.
New clause (viic) has been inserted in section 47 with effect from A.Y.2017-18 to
provide that any transfer of sovereign gold bonds issued by RBI under Sovereign
Gold Bonds Scheme, 2015, by way of redemption, by an assessee being an
individual would not constitute a transfer for the purpose of levy of capital gains tax.
(iii) Benefit of indexation available on LTCG on transfer of SGBs [Third proviso to
section 48]
Further, benefit of indexation would be available in respect of long-term capital
gains arising from transfer of such sovereign gold bonds.
(iv) Rupee Denominated Bonds (RDBs)
Also, as a measure to enable Indian companies to raise funds from outside India,
the RBI has permitted them to issue rupee denominated bonds outside India.
(v) Rupee appreciation gains on redemption of RDBs not to be included in full
value of consideration [Fourth proviso to section 48]
Accordingly, in case of non-resident assessees, any gains arising on account of
rupee appreciation against foreign currency at the time of redemption of rupee
denominated bond of an Indian company subscribed by him shall not be included in
computation of full value of consideration. This would provide relief to the non-
resident investor who bears the risk of currency fluctuation.

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(E) Cost of acquisition of asset, whose fair market value has been taken into account
for the Income Declaration Scheme, 2016 [Section 49(5)]
Relevant from: A.Y.2017-18
(i) Income Declaration Scheme, 2016: Significant Features
(1) The Income Declaration Scheme, 2016 is contained in the Finance Act, 2016,
which received the assent of the President on 14th May 2016. The Scheme
provides an opportunity to persons who have paid not full taxes in the past to
come forward and declare the undisclosed income and pay tax, surcharge and
penalty totalling in all to 45% of such undisclosed income declared.
(2) A declaration under the aforesaid Scheme may be made in respect of any
income or income in the form of investment in any asset located in India and
acquired from income chargeable to tax under the Income-tax Act, 1961 for
any assessment year prior to the assessment year 2017-18 for which the
declarant had failed to furnish a return under section 139; or failed to disclose
such income in a return furnished before the date of commencement of the
Scheme or such income had escaped assessment by reason of the omission
or failure on the part of such person to make a return under the Income -tax Act
or to disclose fully and truly all material facts necessary for the assessment or
otherwise. Where the income chargeable to tax is declared in the form of
investment in any asset, the fair market value of such asset as on 1st June,
2016 computed in accordance with Rule 3 of the Income Declaration Scheme
Rules, 2016 shall be deemed to be the undisclosed income.
(3) The person making a declaration under the Scheme would be liable to pay tax
at the rate of 30% of the value of such undisclosed income as increased by
surcharge at the rate of 25% of such tax. In addition, he would also be liable to
pay penalty at the rate of 25% of such tax. Therefore, the declarant would be
liable to pay a total of 45% of the value of the undisclosed income declared by
him. This special rate of tax, surcharge and penalty specified in the Scheme
will override any rate or rates specified under the provisions of the Income-tax
Act or the annual Finance Acts.
(4) A declaration under the Scheme can be made anytime on or after 1st June,
2016 but before a date to be notified by the Central Government. The Central
Government has notified 30th September, 2016 as the last date for making
a declaration under the Scheme and 30th November, 2016 as the last date by
which the tax, surcharge and penalty mentioned above shall be paid .
(ii) Cost of acquisition of an asset declared under Income Declaration Scheme, 2016
(1) Section 49 of the Income-tax Act, 1961 provides for determination of cost with
reference to certain modes of acquisition.
(2) Sub-section (5) has been inserted with effect from A.Y.2017-18 to provide that
where capital gain arises from the transfer of asset declared under the Income
Declaration Scheme, 2016 and the tax, surcharge and penalty have been paid

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in accordance with the provisions of the Scheme on the fair market value of
the asset as on the date of commencement of the Scheme, the cost of
acquisition of the asset shall be deemed to be the fair market value of the
asset which has been taken into account for the purposes of the said scheme.
(F) Stamp duty value on the date of agreement may be adopted as full value of
consideration of immovable property, being land or building or both, if whole or
part of the consideration has been paid by an account payee cheque or account
payee bank draft or use of electronic clearing system through a bank account, on
or before the date of the agreement for the transfer of such immovable property
[Section 50C]
Effective from: A.Y.2017-18
(i) Adoption of stamp duty value on the date of transfer as full value of
consideration under section 50C
Under section 50C, in case of transfer of a capital asset being land or building o r
both, the value adopted or assessed by the stamp valuation authority for the
purpose of payment of stamp duty shall be taken as the full value of consideration
for the purposes of computation of capital gains, where the actual consideration is
less than such value.
The stamp duty value on the date of transfer has to be considered for the purpose
of section 50C.
(ii) Adoption of stamp duty value on the date of agreement as full value of
consideration under section 43CA
Section 43CA, which contains a similar provision in case of transfer of land or
building or both constituting stock-in-trade of the assessee, permits adoption of
stamp duty value on the date of agreement instead of the date of registration, if the
date of agreement and the date of registration are not the same and amount of
consideration or part thereof has been received by any mode other than cash on or
before the date of agreement for transfer of the asset.
(iii) Absence of provision in section 50C to adopt stamp duty value on the date of
agreement
The Income Tax Simplification Committee under the chairmanship of Justice
Easwar has, in its first report, pointed out that section 50C does not provide any
relief where the seller has entered into an agreement to sell the property much
before the actual date of transfer of the immovable property and the sale
consideration is fixed in such agreement in line with section 43CA.
(iv) Amendment in section 50C to ensure parity in tax treatment vis-a-vis section 43CA
Accordingly, in order to ensure parity in tax treatment, provisos have been inserted
in section 50C(1) so as to provide that where the date of the agreement fixing the
amount of consideration for the transfer of immovable property and the date of
registration are not the same, the stamp duty value on the date of the agreement
may be taken for the purposes of computing the full value of consideration.

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(v) Condition for adoption of stamp duty value on the date of agreement
However, the stamp duty value on the date of agreement can be adopted only in a
case where the amount of consideration, or a part thereof, has been paid by way of
an account payee cheque or account payee bank draft or use of electronic clearing
system through a bank account, on or before the date of the agreement for the
transfer of such immovable property.

Section 43CA Section 50C

Transfer of an asset, being land or


building or both, held as stock-in- Transfer of capital asset, being
trade land or building or both.

Stamp duty value on the date of


Stamp duty value on the date of
agreement may be adopted as
agreement may be adopted as
consideration
consideration

Whole or part of consideration should Whole or part of consideration


be paid by any mode other than should be paid by A/c payee
cash on or before the date of cheque/bank draft or ECS
agreement through a bank A/c on or before
the date of agreement

(G) Exemption of long-term capital gains on investment in notified units of specified


fund [New Section 54EE]
Effective from: A.Y.2017-18
(i) Objective:
For incentivising the start-up ecosystem in India, the 'start-up India Action Plan'
envisages establishment of a Fund of Funds which intends to raise ` 2,500 crores
annually for four years to finance the start-ups.
(ii) Exemption of LTCG invested in units of specified fund:
In order to achieve this objective, new section 54EE has been inserted to provide
exemption from capital gains tax if the long term capital gains proceeds are invested
by an assessee in units issued before 1 st April, 2019 of such fund, as may be

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notified by the Central Government in this behalf. The lower of the capital gains or
the amount so invested would be exempt under section 54EE.
(iii) Quantum of Exemption:
Case Amount exempted
If amount invested in notified units of specified fund Entire capital gains is exempt
≥ Capital gains
If amount invested in notified units of specified fund Capital gains to the extent of
< Capital gains cost of amount invested in
notified units is exempt
(iv) Time limit for investment:
The investment has to be made within 6 months after the date of transfer.
(v) Ceiling limit for investment in units of the specified fund:
The maximum investment in units of the specified fund in any financial year is ` 50
lakh. Further, the investment made by an assessee in the units of specified fund out
of capital gains arising from the transfer of one or more capital assets, cannot
exceed ` 50 lakh, whether the investment is made in the same financial year or
subsequent financial year or partly in the same financial year and partly in the
subsequent financial year.
(vi) Conditions for availing exemption:

Investment
of LTCG in
units of
specified
fund

Units should Investment


not be within 6
transferred Conditions months from
for a period the date of
of 3 years transfer

Maximum
investment is
` 50 lakhs

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(vii) Consequence of transfer of units before 3 years:
Where the units are transferred at any time within a period of three years from its
acquisition, the capital gains, to the extent exempt earlier, would be chargeable as
capital gains in the year of transfer.
(viii) Deemed transfer of notified units:
Further, if the assessee takes any loan or advance on the security of such units, he
shall be deemed to have transferred such units on the date on which such loan or
advance is taken.
(H) Exemption of long-term capital gains on sale of residential property, where net
consideration on sale is invested in shares of an eligible start-up [Section 54GB]
Effective from: A.Y.2017-18
(i) Exemption available under section 54GB so far
Under section 54GB, exemption is available from tax on long term capital gains
arising on account of transfer of a residential property, if such capital gains are
invested in subscription of shares of a company which qualifies to be a small or
medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 , and
such subscription is used in purchase of new plant and machinery, which excludes,
inter alia, office appliances including computer and computer software.
(ii) Scope of exemption under section 54GB expanded to cover LTCG on sale of
residential property invested in shares of eligible start-up company:
In order to encourage individuals/HUF to setup a start-up company by selling a
residential property and investing in the shares of such company, section 54GB has
been amended to provide that long term capital gains arising on account of transfer
of a residential property shall not be charged to tax, if:
(1) the net consideration is invested in subscription of equity shares of a company
which qualifies to be an eligible start-up on or before the due date of filing
return of income under section 139(1);
(2) the individual or HUF holds more than 50% shares of the company or 50%
voting rights after the subscription in shares by such individual or HUF; and
(3) such company utilises the amount invested in shares to purchase new plant
and machinery within one year from the date of subscription in equity shares.
(iii) Quantum of exemption:
If the cost of new plant and machinery ≥ Net sale consideration of residential
house, entire capital gains is exempt.
If the cost of new plant and machinery < Net sale consideration of residential house,
only proportionate capital gains is exempt i.e.
Cost of new plant and machinery
LTCG ×
Net sale consideration

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(iv) Purchase of computers or computer software out of amount invested in
shares of an technology driven start-up permitted
In case of an eligible start-up, being a technology driven start-up so certified by the
notified Inter-Ministerial Board of Certification (IMBC), the company can also utilise
the amount invested in shares to purchase computers or computer software. This is
because computers or computer software form the core asset base of such
technology driven start-ups.
(v) Meaning of eligible start-up:

Company engaged in
eligible business

Total turnover ≤ ` 25 crores Holds a certificate of eligible


Incorporated during the
in any P.Y. from P.Y.2016- business from the notified
period 1.4.2016-31.3.2019
17 to P.Y.2020-21 IMBC

(vi) Meaning of eligible business :


A business which involves -
innovation
development of new products,
driven by technology or
deployment processes or
intellectual property
services
commercialization

(i) Long-term capital gains on shares of private companies to be subject to concessional


rate of tax@10% in the hands of non-corporate non-residents and foreign companies
[Section 112(1)(c)]
Effective from: A.Y. 2017-18
(i) Section 112(1)(c) prescribes a concessional tax rate of 10% (without indexation
benefit) for long-term capital gain arising from transfer of unlisted securities in the
hands of non-corporate non-residents and foreign companies.
(ii) For the purposes of this provision, the expression "securities" has the same
meaning as in section 2(h) of the Securities Contracts (Regulations) Act, 1956.
(iii) Since some courts have opined that shares of a private company are not
"securities", section 112(1)(c) has been amended to provide that long-term capital
gains arising to a non-corporate non-resident or a foreign company from the transfer

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of a capital asset, being shares of a company not being a company in which the
public are substantially interested, shall also be chargeable to tax at the
concessional rate of 10%, without indexation benefit, in the hands of non-corporate
non-residents and foreign companies.
SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Notification of Cost Inflation Index for Financial Year 2016-17 [Notification No.
42/2016, dated 2.6.2016]
Clause (v) of Explanation to section 48 defines "Cost Inflation Index", in relation to a previous
year, to mean such Index as the Central Government may, by notification in the Official
Gazette, specify in this behalf, having regard to 75% of average rise in the Consumer Price
Index (Urban) for the immediately preceding previous year to such previous year.
Accordingly, the Central Government has, in exercise of the powers conferred by clause
(v) of Explanation to section 48, specified the Cost Inflation Index for the financial year
2016-17 as 1125.
S. Financial Cost Inflation S. No. Financial Cost
No. Year Index Year Inflation
Index
1. 1981-82 100 19. 1999-2000 389
2. 1982-83 109 20. 2000-01 406
3. 1983-84 116 21. 2001-02 426
4. 1984-85 125 22. 2002-03 447
5. 1985-86 133 23. 2003-04 463
6. 1986-87 140 24. 2004-05 480
7. 1987-88 150 25. 2005-06 497
8. 1988-89 161 26. 2006-07 519
9. 1989-90 172 27. 2007-08 551
10. 1990-91 182 28. 2008-09 582
11. 1991-92 199 29. 2009-10 632
12. 1992-93 223 30. 2010-11 711
13. 1993-94 244 31. 2011-12 785
14. 1994-95 259 32. 2012-13 852
15. 1995-96 281 33. 2013-14 939
16. 1996-97 305 34. 2014-15 1024
17. 1997-98 331 35. 2015-16 1081
18. 1998-99 351 36. 2016-17 1125

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2. Method of determination of period of holding of capital assets in certain cases
[Notification No. 18/2016, dated 17-03-2016]
Section 2(42A) provides for the meaning of the term "short-term capital asset" as a
capital asset held by an assessee for not more than thirty-six months immediately
preceding the date of its transfer. Clause (i) of Explanation 1 to section 2(42A) provides
for inclusion/ exclusion of certain periods in respect of specified transactions listed
thereunder for the purpose of determination of the period of holding of asset. Clause (ii)
of Explanation 1 to section 2(42A) provides that in respect of capital assets, other than
those mentioned in clause (i), the period for which the capital asset is held by the
assessee shall be determined subject to rules made in this behalf by the CBDT.
Accordingly, the CBDT has inserted new Rule 8AA in the Income-tax Rules, 1962 to
provide for method of determination of period of holding of capital assets, other than the
capital assets mentioned in clause (i) of the Explanation 1 to section 2(42A). Specifically,
in the case of a capital asset, being a share or debenture of a company, which becomes
the property of the assessee in the circumstances mentioned in section 47(x), there shall
be included the period for which the bond, debenture, debenture-stock or deposit
certificate, as the case may be, was held by the assessee prior to the conversion. The
said rule shall come into force with effect from 01-04-2016.
Note: Section 47(x) provides that any transfer by way of conversion of bonds or
debentures, debenture-stock or deposit certificates in any form, of a company into shares
or debentures of that company shall not be regarded as transfer for the purposes of levy
of capital gains tax.
3. Surplus on sale of shares and securities - whether taxable as capital gains or
business income? [Circular No. 06/2016, dated 29-2-2016]
Section 2(14) defines the term "capital asset" to include property of any kind held by an
assessee, whether or not connected with his business or profession, but does not include
any stock-in-trade or personal assets subject to certain exceptions. As regards shares
and other securities, the same can be held either as capital assets or stock -in-
trade/trading assets or both.
Determination of the character of a particular investment in shares or other securities,
whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-
specific determination and has led to a lot of uncertainty and litigation in the past.
Parameters laid down by CBDT and Courts to distinguish shares held as
investments and shares held as stock in trade
Over the years, the courts have laid down different parameters to distinguish the shares held
as investments from the shares held as stock-in-trade. The CBDT has also, through
Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007,
summarized the said principles for guidance of the field formations.
Principles to determine whether gains on sale of listed shares and other securities
would constitute capital gains or business income
Disputes, however, continue to exist on the application of these principles to the facts of

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an individual case since the taxpayers find it difficult to prove the intention in acquiring
such shares/securities. In this background, while recognizing that no universal principle
in absolute terms can be laid down to decide the character of income from sale of shares
and securities (i.e. whether the same is in the nature of capital gain or business income),
CBDT realizing that major part of shares/securities transactions takes place in respect of
the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial
modification to the aforesaid Circulars, further instructs the Assessing Officers to take
into account the following while deciding whether the surplus generated from sale of
listed shares or other securities would be treated as Capital Gain or Business Income —
a) Where assessee opts to treat such shares and securities as stock-in-trade: Where
the assessee itself, irrespective of the period of holding the listed shares and securities,
opts to treat them as stock-in-trade, the income arising from transfer of such
shares/securities would be treated as its business income,
b) Listed shares and securities held for a period of more than 12 months: In respect
of listed shares and securities held for a period of more than 12 months immediately
preceding the date of its transfer, if the assessee desires to treat the income arising
from the transfer thereof as Capital Gain, the same shall not be put to dispute by the
Assessing Officer. However, this stand, once taken by the assessee in a particular
Assessment Year, shall remain applicable in subsequent Assessment Years also and
the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in
subsequent years;
c) Other cases: In all other cases, the nature of transaction (i.e. whether the same is
in the nature of capital gain or business income) shall continue to be decided
keeping in view the aforesaid Circulars issued by the CBDT.
Principles listed above not to apply in case of sham transactions
It is, however, clarified that the above shall not apply in respect of such transactions in
shares/securities where the genuineness of the transaction itself is questionable, such as
bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham
transactions.
Objective of formulation of principles: Reducing litigation and ensuring
consistency
It is reiterated that the above principles have been formulated with the sole objective of
reducing litigation and maintaining consistency in approach on the issue of treatment of
income derived from transfer of shares and securities. All the relevant provisions of the
Act shall continue to apply on the transactions involving transfer of shares and securities.

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8
INCOME FROM OTHER SOURCES
AMENDMENT BY THE FINANCE ACT, 2016

(A) Shares received by an individual or HUF as a consequence of demerger or


amalgamation of a company or a business reorganisation of a co-operative bank
not to be subject to tax by virtue of section 56(2)(vii)
Effective from: A.Y.2017-18
(i) Under section 56(2)(vii), any money, immovable property or other property received
without consideration is chargeable to tax, if aggregate sum received by an
assessee, being an individual or an Hindu undivided family (HUF), is in excess of
` 50,000. Likewise, if immovable or other property is received by an individual or
HUF for inadequate consideration, and the difference between the stamp duty value
(in case of immovable property) or the fair market value (in case of other property)
exceeds ` 50,000, such difference is chargeable to tax under section 56(2)(vii).
(ii) Since the definition of “property” for the purpose of section 56(2)(vii) includes capital
asset being shares and securities, the taxability provisions thereunder are attracted
in a case where shares of a company are received as a consequence of demerger
or amalgamation of a company.
(iii) Such a transaction is not regarded as transfer where the recipient is a firm or a
company, not being a company in which public are substantially interested, on
account of a specific exemption provided in the proviso to section 56(2)(viia), where
shares are received as a consequence of demerger or amalgamation of a company.
(iv) In order to ensure uniformity in tax treatment, it is proposed to amend the second
proviso of section 56(2)(vii) which provides for cases where the taxability provisions
under the section would not be attracted.
(v) Accordingly, clause (h) has been inserted in the second proviso to section 56(2)(vii)
to provide that any shares received by an individual or HUF as a consequence of
demerger or amalgamation of a company or business reorganisation of a co-
operative bank shall not be subject to tax by virtue of the provisions contained in
section 56(2)(vii).

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10
SET-OFF AND CARRY FORWARD AND
SET-OFF OF LOSSES

AMENDMENT BY THE FINANCE ACT, 2016

(A) Filing of return of loss on or before the due date under section 139(1) mandatory
for carry forward of loss from specified business under section 73A [Section 80]
Related amendment in section: 139(3)
Effective from: A.Y.2016-17
(i) Under section 73A, any loss, computed in respect of any specified business referred
to in section 35AD shall not be set off except against profits and gains, if any, of any
other specified business. Such loss can, however, be carried forward indefinitely for
set-off against profits of the same or any another specified business.
(ii) Section 80 requires mandatory filing of return of loss under section 139(3) on or before
the due date specified under section 139(1) for carry forward of the following losses –
(1) Business loss under section 72(1)
(2) Speculation business loss under section 73(2)
(3) Loss under the head “Capital Gains” under section 74(1)
(4) Loss from the activity of owning and maintaining race horses under section
74A(3)
(iii) However, there was no such stipulation for carry forward of loss from specified
business under section 73A.
(iv) Accordingly, section 80 has been amended so as to provide that the loss
determined as per section 73A shall not be allowed to be carried forward and set off
if such loss has not been determined in pursuance of a return filed in accordance
with the provisions of section 139(3).
(v) Correspondingly, section 139(3) requiring filing of return of loss mandatorily within
the time allowed under section 139(1) for claiming carry forward of losses under
sections 72(1), 73(2), 74(1) and 74A(3) has been amended to include reference to
section 73A(2).

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11
DEDUCTIONS FROM GROSS TOTAL
INCOME
AMENDMENTS BY THE FINANCE ACT, 2016

(A) Additional deduction for interest on loan borrowed for acquisition of self-occupied
house property by an individual [Section 80EE]
Effective from: A.Y.2017-18
(i) Under section 80EE, a deduction of upto ` 1 lakh in respect of interest paid on loan
by an individual for acquisition of a residential house property was allowed for
A.Y.2014-15 and A.Y.2015-16.
(ii) As a step towards achieving the Government’s aim of providing ‘housing for all’,
first-home buyers availing home loans are encouraged, by providing additional
deduction under section 80EE from A.Y.2017-18 in respect of interest on loan taken
by an individual for acquisition of residential house property from any financial
institution. The maximum deduction allowable is ` 50,000.
(iii) The conditions to be satisfied for availing this deduction are as follows –

Value of
house ≤
` 50 lakhs

The assessee
should not own
any residential Loan should be
house on the Conditions sanctioned
during the
date of
P.Y.2016-17
sanction of
loan

Loan
sanctioned
≤ ` 35
lakhs

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(iv) The benefit of deduction under this section would be available till the repayment of
loan continues.
(v) The deduction of upto ` 50,000 under section 80EE is over and above the
deduction of upto ` 2,00,000 available under section 24 for interest paid in respect
of loan borrowed for acquisition of a self-occupied property.
(vi) Meaning of certain terms:
Term Meaning
(a) Financial institution  A banking company to which the Banking Regulation
Act, 1949 applies ; or
 Any bank or banking institution referred to in section
51 of the Banking Regulation Act, 1949; or
 A housing finance company.
(b) Housing finance A public company formed or registered in India with the
company main object of carrying on the business of providing
long-term finance for construction or purchase of
houses in India for residential purposes.

Example
Mr. A purchased a residential house property for self-occupation at a cost of ` 45 lakh on
1.6.2016, in respect of which he took a housing loan of ` 35 lakh from Bank of
India@11% p.a. on the same date. Compute the eligible deduction in respect of interest
on housing loan for A.Y.2017-18 under the provisions of the Income-tax Act, 1961,
assuming that the entire loan was outstanding as on 31.3.2017 and he does not own any
other house property.
Answer
Particulars `
Interest deduction for A.Y.2017-18
(i) Deduction allowable while computing income under the head
“Income from house property”
Deduction under section 24(b) ` 3,20,833
[` 35,00,000 × 11% × 10/12]
Restricted to 2,00,000

(ii) Deduction under Chapter VIA from Gross Total Income


Deduction under section 80EE ` 1,20,833
(` 3,20,833 – ` 2,00,000)
Restricted to 50,000

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(B) Monetary limit for maximum deduction under section 80GG increased
Effective from: A.Y 2017-18
(i) Under section 80GG, a deduction of any expenditure incurred by an individual (who
is not in receipt of house rent allowance from his employer) on payment of rent in
respect of any furnished or unfurnished accommodation occupied by him for the
purposes of his own residence is allowed, provided he or his spouse or minor child
or the HUF of which he is a member does not own a residential house at the place
where he ordinarily resides or performs his duties of office or carries on his
business or profession.
(ii) The deduction is allowable up to the least of the three limits –
(1) 25% of total income;
(2) Rent paid - 10% of total income;
(3) ` 2,000 per month.
(iii) With a view to provide relief to the individual tax payers who pay rent for the
purpose of their own residence, section 80GG has been amended to increase the
maximum limit of deduction [third limit given in (ii) above] from ` 2000 per month to
` 5000 per month.
Maximum limit of deduction u/s 80GG

` 5,000 p.m.
(from A.Y.2017-18)
` 2,000 p.m.
(upto A.Y.2016-17)

Example
Mr. Ganesh, a businessman, whose total income (before allowing deduction under
section 80GG) for A.Y.2017-18 is ` 4,60,000, paid house rent at ` 12,000 p.m. in
respect of residential accommodation occupied by him at Mumbai. Compute the
deduction allowable to him under section 80GG for A.Y.2017-18.
Solution
The deduction under section 80GG will be computed as follows:
(i) Actual rent paid less 10% of total income
(10 4,60,000)
1,44,000 (-) = ` 98,000 (A)
100

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(ii) 25% of total income
25 4,60,000
= ` 1,15,000 (B)
100
(iii) Amount calculated at ` 5,000 p.m.= ` 60,000 (C)
Deduction allowable (least of A, B and C) = ` 60,000

(C) Tax incentives for new start-ups [Section 80-IAC]


Effective from: A.Y.2017-18
(i) Objective:
In order to provide an incentive to start-ups and aid their growth in the early phase
of their business, new section 80-IAC has been inserted.
(ii) Quantum of deduction:
Accordingly, a deduction of 100% of the profits and gains derived by an eligible
start-up from an eligible business is allowed for any three consecutive assessment
years out of five years beginning from the year in which the eligible start up is
incorporated.
(iii) Meaning of eligible start-up:

Company or LLP engaged


in eligible business

Total turnover ≤ Rs.25 Holds a certificate of eligible


Incorporated during the business from the notified
crores in any P.Y. from
period 1.4.2016-31.3.2019 IMBC
P.Y.2016-17 to P.Y.2020-21

(iv) Meaning of eligible business :


A business which involves -
innovation
development of new products,
driven by technology or
deployment processes or
intellectual property
services
commercialization

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(v) Conditions to be fulfilled:
This incentive is available to an eligible start-up which fulfils the following
conditions:
(1) It is not formed by splitting up, or the reconstruction, of a business already in
existence.
However, this condition shall not apply in respect of a start-up which is formed
as a result of the re-establishment, reconstruction or revival by the assessee of
the business of any such undertaking as referred to in section 33B, in the
circumstances and within the period specified in that section;
(2) It is not formed by the transfer to a new business of machinery or plant
previously used for any purpose.
However, any machinery or plant which was used outside India by any person
other than the assessee shall not be regarded as machinery or plant previously
used for any purpose, if all the following conditions are fulfilled, namely: —
(a) such machinery or plant was not, at any time previous to the date of the
installation by the assessee, used in India;
(b) such machinery or plant is imported into India;
(c) no deduction on account of depreciation in respect of such machinery or
plant has been allowed or is allowable under the provisions of the
Income-tax Act, 1961 in computing the total income of any person for any
period prior to the date of the installation of the machinery or plant by the
assessee.
Further, where in the case of a start-up, any machinery or plant or any part
thereof previously used for any purpose is transferred to a new business and
the total value of the machinery or plant or part so transferred does not exceed
20% of the total value of the machinery or plant used in the business, then,
the condition specified that it should not be formed by transfer to a new
business of plant and machinery used for any purpose shall be deemed to
have been complied with.
(vi) Eligible business to be considered as the only source of income:
For the purpose of computing deduction under this section, the profits and gains of
the eligible business shall be computed as if such eligible business were the only
source of income of the assessee during the relevant previous years.
(vii) Audit of Accounts:
The deduction shall be allowed only if the accounts of the start-up for the relevant
previous year have been audited by a chartered accountant and the assessee
furnishes the audit report in the prescribed form, duly signed and verified by such
accountant along with his return of income.

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(viii) Transfer of goods/services between eligible business and other business of
the assessee:
Where any goods or services held for the purposes of the eligible business are
transferred to any other business carried on by the assessee, or vice versa, and if the
consideration for such transfer does not correspond with the market value of the goods
or services, then, the profits and gains of the eligible business shall be computed as if
the transfer was made at market value. However, if, in the opinion of the Assessing
Officer, such computation presents exceptional difficulties, the Assessing Officer may
compute the profits on such reasonable basis as he may deem fit.
(ix) Deduction not to exceed profits of eligible business:
The deduction claimed and allowed under this section shall not exceed the profits
and gains of the eligible business. Further, where deduction is claimed and allowed
under this section for any assessment year no deduction in respect of such profits
will be allowed under any other section under this chapter.
(x) Assessing Officer empowered to make adjustment in case any transaction
produces excessive profits to eligible business:
The Assessing Officer is empowered to make an adjustment while computing the
profit and gains of the eligible business on the basis of the reasonable profit that
can be derived from the transaction, in case the transaction between the assessee
carrying on the eligible business under section 80-IAC and any other person is so
arranged that the transaction produces excessive profits to the eligible business.
However, if the arrangement involves a specified domestic transaction referred to in
section 92BA, the amount of profits from such transaction shall be determined
having regard to the arm’s length price.
(xi) Central Government empowered to deny deduction to any class of start-up:
The section empowers the Central Government to declare any class of start-up as not
being entitled to deduction under this section. The denial of exemption shall be with
effect from such date as may be specified in the notification issued in Official Gazette.
Example
A Ltd. was incorporated on 1.4.2016 to carry on the business of innovation, development,
deployment and commercialization of new processes driven by technology. It holds a
certificate of eligible business from the notified IMBC 1.
Its total turnover and profits and gains from such business for the P.Y.2016 -17 to
P.Y.2020-21 are as follows:
P.Y.2016-17 P.Y.2017-18 P.Y.2018-19 P.Y.2019-20 P.Y.2020-21
Particulars
(Rupees in crores)
Total 15.42 18.36 20.21 22.72 24.95
turnover

1 Inter-Ministerial Board of Certification

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Profits/ (2.52) (1.37) 6.52 8.13 9.87
Losses
Is A Ltd. eligble for any tax benefit under the provisions of the Income-tax Act, 1961? If
yes, what is the benefit available?
Answer
A Ltd. is an eligible start-up, since –
(1) it is a company engaged in eligible business of innovation, development,
deployment and commercialization of new processes driven by technology. It holds
a certificate of eligible business from the notified IMBC.
(2) it is incorporated during the period 1.4.2016 to 31.3.2019.
(3) its total turnover does not exceed Rs.25 crores in any previous year from P.Y.2016-
17 to P.Y.2020-21.
(4) it holds a certificate of eligible business from the notified IMBC
Therefore, A Ltd., being an eligible start-up, is eligible for deduction under section
80-IAC of 100% of the profits and gains derived by it from an eligible business for any
three consecutive assessment years out of five years beginning from the year in which
the eligible start up is incorporated i.e. P.Y.2016-17.
In the first two years i.e., P.Y.2016-17 and P.Y.2017-18, A Ltd. has incurred a loss. In the
subsequent three years i.e., P.Y.2018-19, P.Y.2019-20 and P.Y.2020-21, A Ltd. has earned
profits from eligible business and can hence, claim 100% of its profits as deduction under
section 80-IAC from the P.Y.2018-19 to P.Y.2020-21. However, for P.Y.2018-19, the profits
eligible for deduction would be the profits after set-off of brought forward losses of P.Y.2016-
17 and P.Y.2017-18.
(D) Deductions in respect of profits and gains from housing projects [New Section 80-IBA]
Effective from: A.Y.2017-18
(i) Objective:
In order to provide impetus to affordable housing sector to achieve the larger
objective of 'Housing for All', new section 80-IBA has been inserted.
(ii) Quantum of deduction:
Where the gross total income of an assessee includes any profits and gains derived
from the business of developing and building housing projects, an amount equal to
100% of the profits and gains derived from such business is allowable as deduction
under new section 80-IBA, subject to fulfilment of certain conditions.
(iii) Conditions to be fulfilled for claim of deduction:
(a) the project is approved by the competent authority between 1st June, 2016
and 31st March, 2019;

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(b) the project is completed within a period of three years from the date of
approval by the competent authority:
However, in a case where the approval in respect of a housing project is obtained
more than once, the project shall be deemed to have been approved on the date
on which the building plant of such housing project was first approved by the
competent authority and the project shall be deemed to have been completed
when a certificate of completion of project as a whole is obtained in writing from
the competent authority.
(c) the built-up area of the shops and other commercial establishments included in
the housing project does not exceed 3% of the aggregate built-up area;
(d) where a residential unit in the housing project is allotted to an individual, no
other residential unit in the housing project shall be allotted to the individual or
the spouse or the minor children of such individual;
(e) Conditions relating to size of plot of land, residential units etc.
Location of Size onBuilt-up area Percentage of floor
the housing plot of of the area ratio to be
project land on residential utilised by the
which the unit project
comprised in
project is
located the housing
project
(1) (2) (3) (4) (5)
(i) Within the cities Not less Not more than Not less than 90%
of Chennai, than 1,000 30 sq.m. of the floor area
Delhi, Kolkata sq. m. ratio permissible in
or Mumbai or respect of the plot of
within the land under the rules
distance, to be made by the
measured Central Government
aerially, of 25 or the State
kms from the Government or the
municipal limits local authority, as
of these cities the case may be.
(ii) In any other Not less Not more than not less than 80% of
place than 2,000 60 sq.m. such floor area ratio
sq.m.
(f) The project is the only housing project on the plot of land [referred to in column (3)].
(g) the assessee maintains separate books of account in respect of the housing
project.

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(iv) No deduction for person executing the housing project as a works contract:
An assessee who merely executes the housing project as a works-contract awarded
by any person (including the Central Government or the State Government) would
not be eligible for deduction under this section.
(v) Consequence of non-completion of housing project within 3 years:
In a case where the housing project is not completed within the period of three
years from the date of approval by the competent authority and in respect of which a
deduction has been claimed and allowed under this section, the total amount of
deduction so claimed and allowed in one or more previous years, shall be deemed to be
the income of the assessee chargeable under the head “Profits and gains of business or
profession” of the previous year in which the period for completion so expires.
(vi) No deduction under any other provision of the Act in respect of such profits:
Where any amount of profits and gains derived from the business of developing and
building housing projects is claimed and allowed under this section for any
assessment year, deduction to the extent of such profit and gains shall not be
allowed under any other provision of this Act.
(vii) Meaning of certain terms:
Term Meaning
(a) Built-up area The inner measurements of the residential unit at the floor
level,
including –
 projections and balconies,
as increased by –
 the thickness of the walls,
However, built-up area does not include –
 the common areas shared with other residential units, and
 any open terrace so shared
(b) Competent The authority empowered by the Central Government to
authority approve the building plan by or under any law for the time
being in force.
(c) Floor area The quotient obtained by dividing the total covered area of
ratio plinth area on all the floors by the area of the plot of land
(d) Housing A project consisting predominantly of residential units with
project such other facilities and amenities as the competent authority
may approve subject to the provisions of this section
(e) Residential An independent housing unit with separate facilities for living,
unit cooking and sanitary requirements, distinctly separated from

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other residential units within the building, which is directly
accessible from an outer door or through an interior door in a
shared hallway and not by walking through the living space
of another household.

(E) Phasing out of profit-linked incentives [Sections 80-IA, 80-IAB, 80-IB]


Related amendment in section: 35AD
Effective from: A.Y. 2017-18
(i) The Finance Minister in his Budget Speech, 2015 has indicated that the rate of
corporate tax will be reduced from 30% to 25% over the next few years along with
corresponding phasing out of exemptions and deductions. The Government
proposes to implement this decision in a phased manner.
(ii) Accordingly, the following incentives under the Act are to be phased out in the
manner given hereunder:
Section Incentive under the Income-tax Amendment by the Finance
Act, 1961 Act, 2016 restricting/phasing
out the incentive
80-IA(4) Deduction of 100% of profits Any enterprise which starts
derived by an enterprise carrying the development or operation
on the business of developing or and maintenance of the
operating and maintaining or infrastructure facility on or
developing, operating and after 1.4.2017 will not be
maintaining any infrastructure allowed deduction under
facility which fulfils the conditions section 80-IA.
stated thereunder. Deduction Instead, they would be eligible
would be allowed for any ten for investment-linked tax
consecutive assessment years out deduction under section 35AD.
of fifteen years beginning from the
year in which the enterprise
develops and begins to operate
any infrastructure facility.
80-IAB Deduction of 100% of profits No deduction would be
derived by an undertaking or available to an assessee,
enterprise from any business of being a developer, where the
developing a SEZ which fulfils the development of SEZ begins on
conditions stated thereunder. or after 1st April, 2017.
Deduction would be allowed for
any ten consecutive assessment
years out of fifteen years
beginning from the year in which
the SEZ has been notified by the
Central Government.

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80-IB(9) Deduction of 100% of profits for a Sunset clause has been
period of seven consecutive inserted and commercial
assessment years, if the production of mineral oil and
undertaking fulfils the following natural gas in licensed blocks
conditions – should have commenced on or
before 31.3.2017, for availing
(i) it is located in any part of India
benefit of deduction under
and has begun or begins
section 80-IB. No deduction
commercial production of
would be available under
mineral oil on or after 1.4.1997;
section 80-IB where the
(ii) it is engaged in commercial commercial production of
production of natural gas in mineral oil and natural gas
licensed blocks [NELP-VIII] and commences on or after
begins commercial production 1.4.2017.
of natural gas on or after
1.4.2009;
(iii) it is engaged in commercial
production of natural gas in
licensed blocks [IV Round of
bidding] and begins
commercial production of
natural gas on or after
1.4.2009.

(F) Deduction in respect of employment of new employees [New Section 80JJAA]


Effective from: A.Y. 2017-18
(i) Existing incentive under section 80JJAA:
Under section 80JJAA, a deduction of 30% of additional wages paid to new regular
workmen in a factory is allowed. The section applies to an assessee, whose gross
total income includes any profits and gains derived from the manufacture of goods
in a factory. The deduction is allowable for three assessment years, including the
assessment year relevant to the previous year in which such employment is
provided. The 'workmen' should be employed for not less than 300 days in a
previous year. Further, in case of an existing factory, benefits are allowed only if
there is an increase of atleast 10% in the total number of workmen employed on the
last day of the preceding year.
(ii) Objective of substitution of new section:
In order to extend this employment generation incentive to all sectors, section
80JJAA has been substituted.

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(iii) Quantum of deduction:
Accordingly, where the gross total income of an assessee to whom section 44AB
applies, includes any profits and gains derived from business, a deduction of an
amount equal to 30% of additional employee cost incurred in the course of such
business in the previous year, would be allowed for three assessment years
including the assessment year relevant to the previous year in which such
employment is provided.
(iv) Conditions to be fulfilled:
The deduction would be allowed only subject to fulfilment of the following conditions:

The business should not be formed by splitting up, or the


reconstruction, of an existing business

The business is not acquired by the assessee by way of


transfer from any other person or as a result of any
business reorganisation

The report of the accountant, giving the prescribed


particulars, has to be furnished along with ROI

(v) Meaning of certain terms:


Term Meaning
(a) Additional employee Total emoluments paid or payable to additional
cost employees employed during the previous year.
In the case of The additional employee cost shall be
an existing Nil, if—
business
(a) there is no increase in the number
of employees from the total
number of employees employed
as on the last day of the preceding
year;
(b) emoluments are paid otherwise
than by an account payee cheque
or account payee bank draft or by
use of electronic clearing system
through a bank account

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In the first The emoluments paid or payable to
year of a new employees employed during that
business previous year shall be deemed to be
the additional employee cost.
(b) Additional employee An employee who has been employed during the
previous year and whose employment has the effect
of increasing the total number of employees employed
by the employer as on the last day of the preceding
year.
Exclusions from the definition:
(a) an employee whose total emoluments are more
than ` 25,000 per month; or
(b) an employee for whom the entire contribution is
paid by the Government under the Employees’
Pension Scheme notified in accordance with the
provisions of the Employees’ Provident Funds
and Miscellaneous Provisions Act, 1952; or
(c) an employee employed for a period of less than
240 days during the previous year; or
(d) an employee who does not participate in the
recognised provident fund.
(c) Emoluments any sum paid or payable to an employee in lieu of his
employment by whatever name called.
Exclusions from the definition:
(a) any contribution paid or payable by the employer
to any pension fund or provident fund or any
other fund for the benefit of the employee under
any law for the time being in force; and
(b) any lump-sum payment paid or payable to an
employee at the time of termination of his service
or superannuation or voluntary retirement, such
as gratuity, severance pay, leave encashment,
voluntary retrenchment benefits, commutation of
pension and the like.

(vi) The provisions of this section, as they stood immediately prior to their amendment by
the Finance Act, 2016, shall apply to an assessee eligible to claim any deduction for
A.Y.2016-17 or earlier assessment year.

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Example
Mr. A has commenced the business of of manufacture of computers on 1.4.2016. He
employed 350 new employees during the P.Y.2016-17, the details of whom are as follows -
No. of Date of Regular/ Total monthly emoluments
employees employment Casual per employee (`)
(i) 75 1.4.2016 Regular 24,000
(ii) 125 1.5.2016 Regular 26,000
(iii) 50 1.8.2016 Casual 17,000
(iv) 100 1.9.2016 Regular 24,000

The regular employees participate in recognized provident fund while the casual
employees do not. Further, out of 75, 50 and 100 regular employees employed on
1.4.2016, 1.5.2016 and 1.9.2016, only 40, 30 and 60 qualify as a “workman” under the
Industrial Disputes Act, 1947.
Compute the deduction, if any, available to Mr. A for A.Y.2017-18, if the profits and gains
derived from manufacture of computers that year is ` 75 lakhs and his total turnover is
2.16 crores.
Solution
Mr. A is eligible for deduction under section 80JJAA since he is subject to tax audit under
section 44AB for A.Y.2017-18, as his total turnover from business exceeds ` 1 crore and
he has employed “additional employees” during the P.Y.2016-17.
Additional employee cost = ` 24,000 × 12 × 75 [See Working Note below] =
` 2,16,00,000
Deduction under section 80JJAA = 30% of ` 2,16,00,000 = ` 64,80,000.
Working Note:
Number of additional employees
Particulars No. of workmen
Total number of employees employed during the year 350
Less: Casual employees employed on 1.8.2016 who do not 50
participate in recognized provident fund
Regular employees employed on 1.5.2016, since their total 125
monthly emoluments exceed Rs.25,000
Regular employees employed on 1.9.2016 since they have
been employed for less than 240 days in the P.Y.2016-17. _100 _275
Number of “additional employees” __75

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Note - Since casual employees do not participate in recognized provident fund, they do
not qualify as additional employees. Further, 125 regular employees employed on
1.5.2016 also do not qualify as additional employees since their monthly emoluments
exceed Rs.25,000. Also, 100 regular employees employed on 1.9.201 6 do not qualify as
additional employees for the P.Y.2016-17, since they are employed for less than 240
days in that year.
Therefore, only 75 employees employed on 1.4.2016 qualify as additional employees,
and the total emoluments paid or payable to them during the P.Y.2016-17 is deemed to
be the additional employee cost. From A.Y.2017-18, it is not necessary that the
employee should qualify as a “workman” under the Industrial Disputes Act, 1947 for the
employer to avail benefit under section 80JJAA.
SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. ‘Atal Pension Yojna’ notified under section 80CCD(1) [Notification No. 7/2016 dated
19-02-2016]
Section 80CCD(1) empowers the Central Government to notify a pension scheme,
contribution to which would qualify for deduction in the hands of an individual assessee.
Accordingly, in exercise of the powers conferred by section 80CCD(1), the Central
Government has notified the ‘Atal Pension Yojana (APY)’ as published in the Gazette of
India, Extraordinary, Part I, Section 1, vide number F. No. 16/1/2015-PR dated 16th
October, 2015 as a pension scheme, contribution to which would qualify for deduction
under section 80CCD in the hands of the individual.

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13
ASSESSMENT OF VARIOUS ENTITIES

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Concessional Taxation Regime for royalty income in respect of patent developed
and registered in India [Section 115BBF]
Related amendment in section: 115JB
Effective from: A.Y.2017-18
(i) The Finance Act, 2016 has introduced a concessional taxation regime for royalty
income from patents for the purpose of promoting indigenous research and
development and making India a global hub for research and development.
(ii) The purpose of the concessional taxation regime is for encouraging entities to retain
and commercialise existing patents and for developing new innovative patented
products.
(iii) Further, this beneficial taxation regime will incentivise entities to locate the high-value jobs
associated with the development, manufacture and exploitation of patents in India.
(iv) The nexus approach has been recommended by the OECD under Action Plan 5 in
Base Erosion and Profit Shifting (BEPS) project. This approach requires attribution
and taxation of income arising from exploitation of Intellectual property (IP) in the
jurisdiction where substantial research and development (R & D) activities are
undertaken instead of the jurisdiction of legal ownership.
(v) Accordingly, new section 115BBF has been inserted to provide that where the total
income of the eligible assessee includes any income by way of royalty in respect of a
patent developed and registered in India, then such royalty shall be taxable at the rate of
10% (plus applicable surcharge and cess). For this purpose, developed means atleast
75% of the expenditure should be incurred in India by the eligible assessee for any
invention in respect of which patent is granted under the Patents Act, 1970.
(vi) No deduction for any expenditure or allowance in respect of such royalty income
shall be allowed under the Act.
(vii) The eligible assessee has to exercise the option for taxation of income by way of
royalty in respect of a patent developed and registered in India in accordance with
the provisions of section 115BBF in the prescribed manner, on or before the due

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date specified under section 139(1) for furnishing the return of income for the
relevant previous year.
(viii) Where an eligible assessee opts for taxation of income by way of royalty in respect
of a patent developed and registered in India for any previous year in accordance
with section 115BBF, and the assessee offers the income for taxation for any of the
five assessment years relevant to the previous year succeeding the previous year
not in accordance with section 115BBF(1), then the assessee shall not be eligible
to claim the benefit of section 115BBF for five assessment years subsequent to the
assessment year relevant to the previous year in which such income has not been
offered to tax in accordance with section 115BBF(1).
(ix) Further, the amount of income by way of royalty in respect of patent chargeable to
tax under section 115BBF would not be subject to MAT under section 115JB . The
same would be reduced while arriving at the book profit. Consequently, the related
expenditure would be added back for arriving at the book profit.
(x) Meaning of eligible assessee:
Eligible assessee means:
 A person resident in India,
 who is the true and first inventor of the invention and
 whose name is entered on the patent register as the patentee in accordance with
Patents Act, 1970.
Eligible assessee includes:
 every such person, being the true and the first inventor of the invention, where
more than one person is registered as patentee under Patents Act, 1970 in respect
of that patent.
(xi) Meaning of royalty:
“Royalty”, in respect of a patent, means consideration (including any lump sum
consideration but excluding any consideration which would be the income of the
recipient chargeable under the head “Capital gains” or consideration for sale of
product manufactured with the use of patented process or the patented article for
commercial use) for the—
(1) transfer of all or any rights (including the granting of a licence) in respect of a
patent; or
(2) imparting of any information concerning the working of, or the use of, a patent; or
(3) use of any patent; or
(4) rendering of any services in connection with the activities referred to in (1) to (3)
above.
(xii) Meaning of lumpsum:
“Lump sum” includes an advance payment on account of such royalties which is not
returnable.

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(B) Non-applicability of MAT in respect of certain foreign companies [Section 115JB]
Effective retrospectively from: A.Y.2001-02
(i) Section 115JB(1) provides for levy of minimum alternate tax (MAT) in case of a
company, if the tax payable on the total income as computed under the Income-tax Act,
1961, is less than 18.5% of its book profit. In such a case, the book profit shall be
deemed to be the total income of the assessee-company and the tax payable by the
assessee-company for the relevant previous year shall be 18.5% of its book profit.
(ii) In order to address the issue relating to the applicability of section 115JB(1) to
Foreign Institutional Investors (FIIs) who do not have a permanent establishment
(PE) in India, the Finance Act, 2015 amended this section to provide that in case of
a foreign company, any income by way of capital gains on transactions in securities
or interest, royalty or fees for technical services chargeable to tax at the rates
specified in Chapter XII, is credited to profit and loss account and income-tax
payable thereon is at a rate lower than the rate specified in section 115JB, the same
shall be reduced from the book profits; and the corresponding expenditure will be
added back, if the same is debited to profit and loss account.
(iii) However, this amendment was prospective w.e.f. A.Y.2016-17. Therefore, the issue
related to applicability for assessment year prior to A.Y.2016-17 remained to be
addressed.
(iv) A Committee on Direct Tax matters headed by Justice A.P. Shah, s et up by the
Government to look into the matter, suggested that section 115JB be amended to
clarify the applicability of Minimum Alternate Tax (MAT) provisions to Foreign
Institutional Investors/ Foreign Portfolio Investors (FIIs/FPIs) in view of the fact that
FIIs and FPIs normally do not have a place of business in India.
(v) Keeping in mind the suggestions of the Committee and in order to ensure certainty
in taxation of foreign companies, Explanation 4 has been inserted in section 115JB
with retrospective effect from 01.04.2001 to provide for non-applicability of levy of
MAT under section 115JB in the following cases:
Existence of DTAA with the country Additional condition to be satisfied
of residence of the foreign company for non-applicability of MAT
(i) The foreign company is a resident of a It should not have a permanent
country or a specified territory with establishment in India in
which India has a DTAA under section accordance with the provisions of
90(1) or the Central Government has such Agreement
adopted any agreement between
specified associations for double
taxation relief under section 90A(1)
(ii) The foreign company is a resident of It is not required to seek
a country with which India does not registration under any law for the
have an agreement of the nature time being in force relating to
referred to in clause (i) above companies.

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(C) Tax incentives to International Financial Services Centres [Sections 10(38), 111A,
115JB & 115-O]
Effective from: A.Y.2017-18
In order to encourage the growth of International Financial Services Centres (IFSCs) into a
world class financial services hub, it is necessary to ensure a competitive tax regime to
International Financial Services Centre. Accordingly, the following incentives have been
provided to units set up in the IFSC under the Income-tax Act, 1961:
Section Exemption/Levy Incentive to IFSCs
(i) - Levy of STT and CTT Exemption from levy of STT and CTT
The provisions of Chapter Provisions of Chapter VII of the Finance
VII of the Finance (No.2) (No.2) Act, 2004 providing for levy of STT,
Act, 2004 provides for not to apply to taxable securities
levy of securities transactions entered into by any person on
transaction tax (STT) on a recognised stock exchange located in
transactions in taxable IFSC where the consideration for such
securities. transaction is paid or payable in foreign
currency, thereby exempting such
transactions from STT with effect from 1st
June, 2016.
The provisions of Chapter The provisions of Chapter VII of the
VII of the Finance Act, Finance Act, 2013 providing for levy of
2013 provides for levy of CTT, not to apply to taxable commodities
commodities transaction transactions entered into by any person on
tax (CTT) on transactions a recognised association located in unit of
in taxable commodities. IFSC where the consideration for such
transaction is paid or payable in foreign
currency, thereby exempting such
transaction from CTT with effect from 1st
June, 2016.
(ii) 10(38) Exemption of LTCG Exemption of LTCG even if STT not
only if STT is paid: paid:
Exemption of income by Second proviso has been inserted in
way of long term capital section 10(38) to exempt tax on long-term
gains arising from transfer capital gains in respect of income arising
of listed equity shares or from transaction undertaken in foreign
listed units of an equity currency on a recognised stock exchange
oriented fund or business located in an International Financial
trust provided securities Services Centre even when securities
transaction tax is paid. transaction tax is not paid in respect of
such transaction.

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(iii) 111A Levy of STCG@15% if Levy of STCG@15% even if STT is not
STT is paid paid
Short term capital gains Second proviso has been inserted in
arising from transfer of section 111A(1) to provide that short term
listed equity shares or capital gains arising from transaction
listed units of an equity undertaken in foreign currency on a
oriented fund or business recognised stock exchange located in an
trust is taxable at a International Financial Services Centre
concessional rate of 15% would be taxable at a concessional rate of
provided securities 15% even when securities transaction
transaction tax is paid. tax is not paid in respect of such
transaction.
(iv) 115JB MAT levy @18.5%: Concessional rate of MAT@9%:
In case of a company, if Sub-section (7) has been inserted in
the tax payable on the section 115JB to provide that in case of a
total income as computed company, being a unit located in
under the Income-tax Act, International Financial Services Centre
is less than 18.5% of its and deriving its income solely in
book profit, such book convertible foreign exchange, the minimum
profit shall be deemed to alternate tax shall be chargeable at the
be the total income of the rate of 9% instead of 18.5%.
company and the
Minimum Alternate Tax
(MAT) payable by the
company for the relevant
previous year shall be
18.5% of such book
profit.
(v) 115-O Levy of DDT@15%: Exemption from levy of DDT:
Additional income- Sub-section (8) has been inserted in
tax@15% is attracted on section 115-O to provide that no tax on
any amount declared, distributed profits shall be chargeable in
distributed or paid by a respect of the total income of a company
domestic company by being a unit located in International
way of dividends. Financial Services Centre, deriving income
solely in convertible foreign exchange, for
any assessment year on any amount
declared, distributed or paid by such
company, by way of dividends (whether
interim or otherwise) on or after 1st April,
2017 out of its current income, either in the
hands of the company or the person
receiving such dividend.

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(D) Dividend distributed by SPV to business trust exempt from levy of DDT [Section 115-O]
Related amendment in sections: 10(23FC), 10(23FD), 115UA& 194LBA
(i) The Finance (No.2) Act, 2014 had inserted Chapter XII-FA providing for a special
taxation regime in respect of business trusts, comprising of Real Estate Investment
Trust (REITs) and Infrastructure Investment Trust (Invits) regulated by SEBI.
(ii) Under the SEBI regulation, these business trusts can hold the income generating
asset either directly or through a Special Purpose Vehicle (SPV). SPV is defined to
mean any company in which REIT holds or proposes to hold controlling interest
which is not less than 50% of the shareholding. The other conditions are that the
SPV should hold at least 80% of the assets in properties and it should not invest in
other SPVs.
(iii) Under this regime, there is no multiple taxation, i.e., only the income in respect of
which the business trust enjoys a pass through status, is subject to tax in the hands
of the unit holder, namely, interest income from SPV and rental income arising to
REIT from real estate property directly held by it. An income which is subject to tax
in the hands of the business trust is not charged to tax once again in the hands of
the unit-holder, for example, capital gains on sale of developmental properti es.
(iv) In respect of assets held through an SPV, being an Indian company, the company
pays normal corporate tax and thereafter, when the income is distributed to the
REIT being a shareholder, it pays dividend distribution tax. Therefore, the income
distributed is exempt both in the hands of REIT [by virtue of section 10(34)] and also
its investors [by virtue of section 10(23FD)].
(v) There is a similar regime in case of Invits, with the only exception being that there is
no pass through for Invits holding income generating assets directly as normally,
such large infrastructure projects are not held directly in the trust but are held
through an SPV.
(vi) The levy of dividend distribution tax on the SPV at the time when its distributes
dividend to the business trust makes the business trust structure tax inefficient and
has an adverse impact on the rate of return for the unit-holder. This problem is
critical since as per SEBI regulations, both the SPV and business trust have to
distribute 90% of their operating income to the investors, whereas in case of normal
real estate company, there is no requirement of such annual distribution of
dividends. Consequent to the additional levy of DDT and associated tax inefficiency,
the REITs and Invits are yet to take off.
(vii) For addressing this concern, the taxation regime for business trusts (REITs and
Invits) and their investors has been further rationalised by providing for a special
dispensation and exemption from levy of dividend distribution tax.
(viii) The key amendments in the special taxation regime for business trusts are :
(a) Dividend distributed by SPV to the business trust would be exempt from levy of
DDT.

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(b) Such dividend received by the business trust and its investor shall not be
taxable in the hands of business trust or the unit holders;
(c) Exemption from levy of DDT would be applicable only in cases where the
business trust either holds 100% of the share capital of the SPV or holds all of
the share capital other than that which is required to be held by any other
entity as part of any direction of any Government or specific requirement of
any law to this effect or which is held by Government or Government bodies;
(d) Exemption from levy of DDT would be applicable only in respect of dividends
paid out of current income after the date when the business trust acquires the
shareholding referred in (c) above in the SPV. The dividends paid out of
accumulated and current profits upto this date shall be liable for levy of DDT as
and when any dividend out of these profits is distributed by the company either
to the business trust or any other shareholder.
(e) Summary of amendments:
Section Provision
(1) 115-O(7) Exemption from levy of DDT on distributions by a
(w.e.f. SPV to a business trust
1.6.2016)
Non-levy of DDT on distributed profits in respect of any
amount declared, distributed or paid by way of
dividends (whether interim or otherwise) out of its
current income –
(a) By a domestic company in which a business trust
has become a holder of the whole of the nominal
value of equity share capital of the company
(excluding the equity share capital required to be
held mandatorily by any other person in
accordance with any law for the time being in force
or any directions of Government or any regulatory
authority or equity share capital held by any
Government or Government body).
(b) On or after the date of acquisition of such holding
referred to in (a) above by the business trust.
However, this exemption would not be applicable in
respect of any amount declared, distributed or paid at
any time by the domestic company out of its
accumulated profits or current profits upto the date of
acquisition by the business trust of the specified
holding [as per (a) above] in the SPV.
(2) 10(23FC) Exemption of dividend referred to in section 115-O(7) in
(w.e.f. the hands of the business trust. This is provided for in
A.Y.2017-18) new sub-clause (b) of section 10(23FC).

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(3) 10(23FD) Exemption of dividend referred to in section 115-O(7) in
(w.e.f. the hands of the unit-holders.
A.Y.2017-18)
This section exempts any distributed income, referred to
in section 115UA, received by a unit holder from the
business trust, other than that proportion of the income
which is of the same nature as the income referred to in –
(i) Sub-clause (a) of Clause (23FC) i.e., income of a
business trust by way of interest received or
receivable from a SPV;
(ii) Clause (23FCA) i.e., rental income from real
estate asset directly owned by the REIT.
Consequently, dividend income, which is covered in
sub-clause (b) of clause (23FC), is exempt in the hands
of the unit holders.
(4) 115UA(3) This section provides for taxability of distributed income
(w.e.f. or any part thereof, which is in the nature of interest
A.Y.2017-18) income received by the business trust from the SPV
[referred to in sub-clause (a) of section 10(23FC)] or
rental income from real estate assets owned directly by
the REIT [referred to in section 10(23FCA)], in the
hands of the unit holders.
Consequently, dividend income referred to in sub-
clause (b) of section 10(23FC), which is exempt in the
hands of the business trust would not also be taxable in
the hands of the unit holders on distribution.
(5) 194LBA This section requires deduction of tax at source by the
(w.e.f. business trust on distribution to the unit holders, of income
1.6.2016) which is in the nature of interest income received by the
business trust from the SPV [referred to in sub-clause (a)
of section 10(23FC)] or rental income from real estate
assets owned directly by the REIT [referred to in section
10(23FCA)].
Consequently, no tax is required to be deducted at
source on distribution of income which is in the nature
of dividend referred to in sub-clause (b) of section
10(23FC), by the business trust to the unit-holders,
since the same is exempt in the hands of the unit
holders.
Example
A business trust, registered under SEBI (Real Estate Investment Trusts)
Regulations, 2014, gives particulars of its income for the P.Y.2016-17:

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(1) Interest income from Beta Ltd. – ` 4 crore;
(2) Dividend income from Beta Ltd. – ` 2 crore (received on 1st October, 2016);
(3) Short-term capital gains on sale of listed shares of Beta Ltd. – ` 1.5 crore;
(4) Short-term capital gains on sale of developmental properties – ` 1 crore
(5) Interest received from investments in unlisted debentures of real estate
companies – ` 10 lakh;
(6) Rental income from directly owned real estate assets – ` 2.50 crore
Beta Ltd. is an Indian company in which the business trust holds controlling interest.
The business trust holds 100% of the shareholding of Beta Ltd.
Discuss the tax consequences of the above income earned by the business trust in
the hands of the business trust and the unit holders, assuming that the business
trust has distributed ` 10 crore to the unit holders in the P.Y.2016-17.
Answer
Tax consequences in the hands of the business trust and its unit holders
(1) Interest income of ` 4 crore from Beta Ltd.: There would be no tax liability
in the hands of business trust due to pass-through status enjoyed by it under
sub-clause (a) of section 10(23FC) in respect of interest income from Beta
Ltd., being the special purpose vehicle. Therefore, Beta Ltd. is not required to
deduct tax at source on interest payment to the business trust.
However, the business trust has to deduct tax at source under section 194LBA –
 @ 10%, on interest component of income distributed to resident unit
holders; and
 @ 5%, on interest component of income distributed to non-corporate non-
resident unit holders and foreign companies.
Interest component of income distributed to unit holders is taxable in the hands
of the unit holders – @ 5%, in case of unit holders, being non-corporate non-
residents or foreign companies; and at normal rates of tax, in case of resident
unit holders.
The interest component of income received from the business trust in the
hands of each unit-holder would be determined in the proportion of 4/11.1, by
virtue of section 115UA(1).
(2) Dividend income of ` 2 crore from Beta Ltd.: The dividend distributed by
the SPV to the business trust is exempt by virtue of section 115-O(7), since the
SPV is a specified domestic company in which the business trust has become
the holder of whole of the nominal value of equity share capital of the
company. Further, there would be no tax liability in the hands of the business
trust, due to specific exemption provided under sub-clause (b) of section
10(23FC).

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Any distributed income referred to in section 115UA, to the extent it does not
comprise of interest [referred to in sub-clause (a) of section 10(23FC)] and
rental income from real estate assets owned directly by the business trust
[referred to in section 10(23FCA)] received by unit holders, is exempt in their
hands under section 10(23FD). Therefore, by virtue of section 10(23FD), there
would be no tax liability on the dividend component [referred to in sub-clause
(b) of section 10(23FC)] of income distributed to unit holders in their hands.
(3) Short-term capital gains of ` 1.50 crore on sale of listed shares of Beta
Ltd.: As per section 115UA(2), the business trust is liable to pay tax@15%
under section 111A in respect of short-term capital gains on sale of listed
shares of special purpose vehicle. There would, however, be no tax liability on
the capital gain component of income distributed to unit holders, by virtue of
the exemption contained in section 10(23FD).
(4) Short-term capital gains of ` 1 crore on sale of developmental properties:
It is taxable at maximum marginal rate of 35.535% in the hands of the business
trust as per section 115UA(2). There would be no tax liability in the hands of
the unit holders on the capital gain component of income distributed to them,
by virtue of the exemption contained in section 10(23FD).
(5) Interest of ` 10 lakh received in respect of investment in unlisted
debentures of real estate companies: Such interest is taxable@35.535%,
being the maximum marginal rate, in the hands of the business trust, as per
section 115UA(2). However, there would be no tax liability in the hands of the
unit holders on the interest component of income distributed to them, by virtue
of section 10(23FD).
(6) Rental income of ` 2.50 crore from directly owned real estate assets: Any
income of a business trust, being a REIT, by way of renting or leasing or letting
out any real estate asset owned directly by such business trust is exempt in
the hands of the trust as per section 10(23FCA).
Where the income by way of rent is credited or paid to a business trust, being
a REIT, in respect of any real estate asset held directly by such REIT, no tax is
deductible at source under section 194-I.
The distributed income or any part thereof, received by a unit holder from the
REIT, which is in the nature of income by way of renting or leasing or letting
out any real estate asset owned directly by such REIT is deemed income of
the unit holder as per section 115UA(3). The business trust has to deduct tax
at source@10% under section 194LBA in case of distribution to a resident unit
holder and at rates in force in case of distribution to a non-resident unit holder.
The rental income component received from the business trust in the hands of
each unit-holder would be determined in the proportion of 2.5/11.1, by virtue of
section 115UA(1).

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Notes:
(1) New Chapter XII-FA contains the special provisions relating to business trusts.
Section 115UA(1) provides that any income distributed by a business trust to its
unit holders shall be deemed to be of the same nature and in the same proportion
in the hands of the unit holder, as it had been received by, or accrued to the
business trust.
(2) Sub-clause (a) of section 10(23FC) exempts any income of a business trust by
way of interest received or receivable from a Special Purpose Vehicle (SPV).
Thus, the business trust enjoys a pass-through status in respect of interest
received or receivable from a SPV.
(3) Sub-clause (b) of section 10(23FC) exempts any income of a business trust by
way of dividend received from SPV, being a specified domestic company in which
a business trust has become the holder of the whole of the nominal value of equity
share capital of the company. Such dividend income is also exempt in the hands
of the unit-holder.
(4) SPV means an Indian company in which the business trust holds controlling
interest and any specific percentage of shareholding, as may be required by the
regulations under which such trust is granted registration [not less than 50% as per
the current SEBI (Real Estate Investment Trusts) Regulations, 2014].
Such company should hold not less than 80% of its assets directly in properties
and should not invest in other SPVs and should not be engaged in any activity
other than holding and developing property and any other activity incidental to
such holding or development.
Since Beta Ltd. is an Indian company in which the business trust holds controlling
interest and 100% of shareholding, it is a special purpose vehicle. It is presumed
that Beta Ltd. fulfills the other conditions specified in the regulations to qualify as
an SPV.
(5) The distributed income of the business trust, to the extent it comprises of interest
referred to in sub-clause (a) of section 10(23FC) and rental income referred to in
section 10(23FCA), is deemed to be the income of the unit holder in the previous
year of distribution and subject to tax in the hands of the unit holder in that year.
Accordingly, the business trust is required to deduct tax at source on the interest
component and rental component of income distributed to its unit holders.
(6) Any distributed income referred to in section 115UA, to the extent it does not
comprise of interest referred to in sub-clause (a) of section 10(23FC) and rental
income referred to in section 10(23FCA), received by unit holders is exempt in
their hands under section 10(23FD).
(7) Section 115UA(2) provides that subject to the provisions of sections 111A and
112, the total income of a business trust shall be chargeable to tax at the
maximum marginal rate.

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(E) Rationalisation of the definitions of “buyback” and “distributed income” for the
purpose of levy of additional income-tax on income distributed by a company on
buyback of unlisted shares from a shareholder[Section 115QA]
Effective from: 1 st June, 2016
(i) Section 115QA provides for the levy of additional income-tax@20% of the
distributed income on account of buy back of unlisted shares by a company.
(ii) Clause (i) of the Explanation to section 115QA defines “buyback” to mean the
purchase of a company of its own shares in accordance with the provisions of
section 77A of the Companies Act, 1956.
(iii) Clause (ii) of the Explanation to section 115QA defines “distributed income” to mean
the consideration paid by the company on buy back of shares as reduced by the
amount which was received by the company for issue of such shares.
(iv) Since the definition of buyback makes reference to section 77A of the C ompanies
Act, 1956, the effect of buybacks undertaken by the company under different
provisions of the Companies Act, 2013 and applicability of provisions of section
115QA to such transactions is an issue requiring clarification.
(v) Further, another issue relates to the lack of clarity in determination of consideration
received by the company at the time of issue of shares being bought back by the
company. There are situations where shares may have been issued by the company in
tranches, for different considerations, at different point of time or may have been issued
in lieu of existing shares of another company under amalgamation, merger or demerger.
(vi) For ensuring clarity and removing any ambiguity in relation to these issues, section
115QA has been amended to provide that the provisions of this section shall apply
to any buy back of unlisted share undertaken by the company in accordance with
the provisions of the law relating to the Companies and not necessarily restricted to
section 77A of the Companies Act, 1956.
(vii) Further, for the purpose of computing distributed income, the amount received by
the company for issue of shares being bought back shall be determined in the
prescribed manner. The Rules to be framed would provide for manner of
determination of the amount in various circumstances including shares being issued
under tax neutral reorganisations and in different tranches.
(viii) Definitions:
Term Upto 31.5.2016 With effect from 1.6.2016
Buy-back Purchase by a company of its Purchase by a company of its
own shares in accordance own shares in accordance with
with the provisions of any law for the time being in
section 77A of the force relating to companies.
Companies Act, 1956.
Distributed The consideration paid by the The consideration paid by the
income company on buy-back of company on buy-back of shares

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shares as reduced by the as reduced by the amount which
amount which was received was received by the company for
by the company for issue of issue of such shares,
such shares. determined in the manner as
may be prescribed.

(F) New Taxation Regime for Securitisation Trusts [Section 115TCA]


Related amendment in sections: 115TA, 115TC & 10(35A)
(i) Chapter-XII-EA of the Income-tax Act, 1961 comprising of sections 115TA, 115TB and
115TC provides for a special taxation regime in respect of income of the securitisation
trusts and the investors of such trusts.
(ii) As per the special taxation regime, the income distributed by the securitisation trust to
its investors would be subject to a levy of additional tax to be paid by the securitisation
trust within 14 days of distribution of income.
(iii) The rate of additional income-tax is 25%, if the distribution is made to an individual or a
Hindu undivided family (HUF) and @30%, if the distribution is to others. However, no
distribution tax is to be levied, if the distribution is made to an exempt entity.
Consequent to the levy of additional income-tax, the income of the investor, received
from the securitisation trust, is exempt under section 10(35A) and the income of
securitisation trust itself is exempt under section 10(23DA).
(iv) Under this special taxation regime, the trusts set up by reconstruction companies or the
securitisation companies were not covered although such trusts are also engaged in
securitisation activity. These companies are established for the purposes of the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (SARFAESI Act) and their activities are regulated by the RBI.
(v) Also, under this regime, the final levy in the form of distribution tax is tax inefficient for
the investors, specially the banks and financial institutions. Disallowance of expenditure
in respect of income received from securitisation trust increases the effective rate of
taxation for these investors. Further, the non-resident and resident investors could not
take benefits of their specific tax status.
(vi) In order to rationalise the tax regime for securitisation trust and its investors, and to
provide tax pass through treatment, a new taxation regime has been introduced by
insertion of section 115TCA with effect from A.Y.2017-18 and the earlier regime of
distribution tax under section 115TA shall cease to apply in case of distribution made by
securitisation trusts with effect from 1st June, 2016.
(vii) Salient Features of the New Taxation Regime for Securitisation Trust and its
investors [New Section 115TCA]:
(1) Applicability of New Taxation Regime [Clause (d) of Explanation below
section 115TCA]:
The new regime shall apply to a securitisation trust being:

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Form Regulation
(i) A special purpose SEBI (Public Offer and Listing of Securitised
distinct entity Debt Instrument) Regulations, 2008
(ii) A special purpose The guidelines on securitisation of standard
vehicle assets issued by RBI
(iii) A trust setup by a Securitisation and Reconstruction of
securitisation company Financial Assets and Enforcement of
or a reconstruction Security Interest Act, 2002 (SARFAESI Act)
company (or)
The RBI directions/guidelines.
(2) Exemption of income of securitisation trust from the activity of
securitisation:
The income of securitisation trust from the activity of securitisation shall continue to
be exempt under section 10(23DA).
(3) No exemption under section 10(35A) to investor:
However, exemption in respect of income of investor from securitisation trust
under section 10(35A) would not be available in respect of distributed income
received by them on or after 1.6.2016. Thereafter (i.e., on or after 1.6.2016), any
income received from securitisation trust would be taxable in the hands of
investors.
(4) Taxability of income from securitisation trust in the hands of the investor
[Section 115TCA(1)]:
New section 115TCA(1) provides that the income accruing or arising to, or
received by, a person, being an investor from the securitisation trust, out of
investments made in the securitisation trust, shall be taxable in the hands of
investor in the same manner and to the same extent as if the investor had made
investment directly in the underlying assets and not through the trust.
(5) Nature of income paid or credited by securitisation trust in the hands of the
investor [Section 115TCA(2)]:
The income paid or credited by the securitisation trust shall be deemed to be of the
same nature and in the same proportion in the hands of the investor of the
securitisation trust, as if it had been received by, or had accrued and arisen to, the
securitisation trust during the previous year.
(6) Deemed credit to investor [Section 115TCA(3)]:
If the income accruing or arising to, or received by, the securitisation trust, during a
previous year has not been paid or credited to the investor, the same shall be
deemed to have been credited to the account of the said person on the last day of

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the previous year in the same proportion in which such person would have been
entitled to receive the income had it been paid in the previous year.
(7) Statement specifying the details of nature of income to be furnished to
investor and prescribed income-tax authority [Section 115TCA(4)]:
The securitisation trust shall provide breakup regarding nature and proportion of its
income and such other relevant details to the investors and also to the prescribed
income-tax authority in the prescribed form and verified in the prescribed manner,
within the prescribed period.
(8) Income taxed in the year of accrual not taxable again in the year of payment
[Section 115TCA(5)]:
Where income has been included in the total income of the investor in a previous
year, on account of it having accrued or arisen in the said previous year, the same
shall not be included in the total income of such person in the previous year in
which such income is actually paid to him by the securitisation trust.
(9) Deduction of tax at source in respect of income payable to investor [New
Section 194LBC effective from 1.6.2016]:
Tax deduction at source under section 194LBC shall be effected by the
securitisation trust at the time of payment or credit of income to the account of the
investor, whichever is earlier.
Payee Rate of TDS
(i) Resident individuals and HUFs 25%
(ii) Resident payees, other than individuals and HUFs 30%
(iii) Non-corporate non-residents and foreign companies Rates in force

(10) The facility for the investors to obtain low or nil deduction of tax certificate would be
available; the investor can make an application to the Assessing Officer, and he
can, on an application made by the assessee in this behalf, issue a certificate
under section 197 in this behalf for no deduction of income-tax or deduction of
income-tax at a lower rate.
(G) Tax on accreted income of certain trusts and institutions [Chapter XII-EB]
Effective from: 1st June, 2016
(i) As per section 2(24), "income" includes any voluntary contribution received by a
charitable trust or institution or a fund.
(ii) Sections 11 and 12 provide exemption to trusts or institutions in respect of income
derived from property held under trust and voluntary contributions, subject to the
conditions stipulated thereunder.

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(iii) The exemption is subject to the condition that the income derived from property held
under trust should be applied for charitable purposes; and where such income cannot
be applied during the previous year, it has to be accumulated and invested in the modes
prescribed and applied for such purposes in accordance with specified conditions.
(iv) If the accumulated income is not applied in accordance with the conditions provided in
the said section within a specified time, then such income is deemed to be taxable
income of the trust or the institution. Section 12AA provides for registration of the trust or
institution which entitles them to be able to get the benefit of sections 11 and 12. It also
provides the circumstances under which the registration can be cancelled. Section 13 of
the Act provides for the circumstances under which exemption under section 11 or 12 in
respect of whole or part of income would not be available to a trust or institution.
(v) A society or a company or a trust or an institution carrying on charitable activity may –
(1) voluntarily wind up its activities and dissolve; or
(2) merge with any other charitable or non-charitable institution; or
(3) convert into a non-charitable organization.
There is, however, no specific provision in the income-tax law as to how the assets of
such a charitable institution should be dealt with.
(vi) Under section 11, certain amount of income of prior period can be brought to tax on
failure of certain conditions. However, there is no provision in the Income-tax Act, 1961,
which ensure that the corpus and asset base of the trust accreted over a period of time,
with promise of it being used for charitable purpose, continues to be utilised for
charitable purposes and is not used for any other purpose.
(vii) Consequently, it is always possible for charitable institutions to transfer assets to a non-
charitable institution.
(viii) In order to ensure that the benefit conferred over a period of time by way of exemption is
not misused and to plug the gap in law that allows the charitable trusts having built up
corpus/wealth through exemptions being converted into non-charitable organisation with
no tax consequences, new Chapter XII-EB has been inserted for imposing additional
income-tax in the nature of an exit tax when the organization is converted into a non-
charitable organization or gets merged with a non-charitable organization or does not
transfer the assets to another charitable organisation.
Salient Features:
Section Provision
(i) 115TD(1) Circumstances where levy of tax on accreted income is
attracted:
The accreted income of a trust or institution registered under
section 12AA shall be taxable at the maximum marginal rate
(@34.608%) on –
(1) conversion of the trust or institution into a form not eligible
for grant of registration under section 12AA; or

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(2) merger with an entity not having similar objects and
registered under section 12AA; or
(3) non-distribution of assets on dissolution to any charitable
institution registered under section 12AA or approved
under section 10(23C) within a period of 12 months from
the end of the month in which the dissolution takes place.
This levy of exit tax shall be in addition to income chargeable
in the hands of the entity.
(ii) 115TD(3) Deemed conversion into non-eligible form - Circumstances:
A trust or an institution shall be deemed to have been converted
into any form not eligible for registration under section 12AA in a
previous year, if,—
(i) the registration granted to it under section 12AA has been
cancelled; or
(ii) it has adopted or undertaken modification of its objects
which do not conform to the conditions of registration
and,—
(a) it has not applied for fresh registration under section
12AA in the said previous year; or
(b) it has filed application for fresh registration under
section 12AA but the said application has been
rejected.
(iii) 115TD(2) Meaning of Accreted Income :
Aggregate FMV of total assets as on the specified date
Less
Total liability computed in accordance with the prescribed
method of valuation
Notes –
(1) Accreted income attributable to any asset which is
established to have been directly acquired by the trust or
institution out of its agricultural income exempt under section
10(1) would be ignored. Liability, in relation to such asset, also
has to be ignored.
(2) Accreted income attributable to any asset acquired by the
trust or institution during the period beginning from the date of its
creation or establishment and ending on the date from which the
registration under section 12AA became effective2, if the trust or
institution has not been allowed any benefit of sections 11 and

2 Where the benefit under sections 11 and 12 have been allowed to the trust or institution in respect of
any previous year or years beginning prior to the date from which the registration under section 12AA
became effective, then, the registration shall be deemed to have become effective fr om the first day of
the earliest previous year. Thus, registration under section 12AA shall include any registration
obtained under section 12A as it stood before its amendment by the Finance (No.2) Act, 1996.

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12 during the said period, would be ignored. Liability, in relation
to such asset, also has to be ignored.
(3) The asset and the liability of the charitable organisation
which have been transferred on dissolution to another
charitable trust or institution registered under section 12AA or a
fund/institution/trust/ university/educational
institution/hospital/medical institution approved under section
10(23C) within specified time have to be ignored while
calculating accreted income.
Meaning of specified date [Explanation below section
115TD(7)]:
Case Specified Date
(i) conversion of the trust or institution The date of
registered u/s 12AA into a form not conversion
eligible for registration u/s 12AA
(ii) merger with an entity not having The date of
similar objects and registered u/s merger
12AA
(iii) non-distribution of assets on The date of
dissolution to any charitable dissolution
institution registered u/s 12AA or
approved u/s 10(23C) within a
period twelve months from
dissolution
Date of conversion [Explanation below section 115TD(7)]:
Case Specified Date
(i) Where the registration The date of the order
granted to it u/s 12AA has cancelling registration
been cancelled u/s 12AA
(ii) Where it has adopted or The date of adoption or
undertaken modification of modification of any
its objects which do not object.
conform to the conditions of
registration and has not
made an application for fresh
registration or the application
made has been rejected.
(iv) 115TD(4) Exit tax payable even if no income-tax is payable by the
Trust/Institution:
Even if no income-tax is payable by the trust or institution on
its total income, tax on accreted income shall be payable by
the trust or institution, like any other additional income-tax.

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(v) 115TD(5) Period within which tax on accreted income has to be paid
to the credit of the Central Government:
The principal officer or the trustee of the trust or the institution,
as the case may be, and the trust or the institution shall also be
liable to pay the tax on accreted income to the credit of the
Central Government within fourteen days from,—
Circumstance Relevant date
(1) Where the the date on which –
registration granted (a) the period for filing appeal
under section 12AA under section 253 against
has been cancelled the order rejecting the
application expires and no
appeal has been filed by the
trust or the institution; or
(b) the order in any appeal,
confirming the cancellation
of the application, is
received by the trust or the
institution

(2) Where the trust has the end of the previous year
modified its objects
and has not applied
for fresh registration
u/s 12AA
(3) Where the trust has the date on which –
modified its objects (a) the period for filing appeal
and has filed under section 253 against
application for fresh the order rejecting the
registration u/s 12AA, application expires an no
but the same was appeal has been filed by
rejected the trust or institution; or
(b) the order in any appeal,
confirming the cancellation
of the application, is
received by the trust or the
institution

(4) Where trust has the date of merger


merged with an entity
not having similar
objects and
registered u/s 12AA

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(5) Where the trust fails The date on which the period
to transfer upon of 12 months expires.
dissolution all its
assets to another
registered trust or
institution or
approved fund or
institution within 12
months from the end
of the month in which
the dissolution takes
place
(vi) 115TD(6) No credit available for tax paid on accreted income:
The tax on accreted income shall be final tax for which no credit
can be taken by the trust or institution or any other person.
(vii) 115TD(7) Non-availability of deduction under any other provision of
the Act:
No deduction is allowable under any other provision of the Act to
the trust or institution or any other person in respect of the
income which has been charged to tax or the tax thereon.
(viii) 115TE Interest for non-payment of tax within prescribed time:
In case of failure of payment of tax within the prescribed time, a
simple interest @ 1% per month or part of it shall be applicable
for the period of non-payment.
Period of non-payment:
Beginning from Ending with
The date immediately after The date on which the tax is
the last date on which such actually paid.
tax was payable
(ix) 115TF Circumstance when trust or institution is deemed to be
assessee-in-default:
The principal officer or the trustee and the trust or the institution
shall be deemed to be assessee-in-default for non-payment of
tax and all provisions related to the recovery of taxes shall apply.
Further, in the case of transfer of assets upon dissolution of the
trust or institution to a recipient, which is not a charitable
organisation, the recipient of assets of the trust shall also be
liable to be held as assessee-in-default in case of non-payment
of tax and interest. However, in such a case, the recipient's
liability shall be limited to the extent to which the assets received
by him is capable of meeting the liability.

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SIGNIFICANT NOTIFICATIONS/CIRCULARS
1. Does a consortium of contractors formed to implement large infra projects
necessarily constitute an AOP? [Circular No. 07/2016, dated 07-03-2016]
A consortium of contractors is often formed to implement large infrastructure projects,
particularly in Engineering Procurement and Construction ('EPC') contracts and Turnkey
Projects. The tax authorities, in many cases have taken a position that such a consortium
constitutes an Association of Persons ('AOP') i.e., a separate entity for charging tax. The
claim of taxpayers, on the other hand, is contrary to this view. This has led to tax disputes
particularly in those cases where each member of the consortium, although jointly and
severally liable to the contractee, has a clear distinction and role in scope of work,
responsibilities and liabilities of the consortium members.
Existence of AOP: Determined by facts and circumstances of a case and no
formula for universal application exists
The term AOP has not been specifically defined in the Income-tax Act, 1961. The issue as to
what would constitute an AOP was considered by the Apex Court in some cases. Although
certain guidelines were prescribed in this regard, the Court opined that there is no formula of
universal application so as to conclusively decide the existence of an AOP and it would rather
depend upon the particular facts and circumstances of a case. In the specific context of the
EPC contracts/Turnkey projects, there are several contrary ruling of various Courts on what
constitutes an AOP.
Consortium arrangement for executing EPC/Turnkey contracts – Necessary
attributes for not being treated as an AOP
With a view to avoid tax-disputes and to have consistency in approach while handling these cases,
the CBDT has decided that a consortium arrangement for executing EPC/Turnkey contracts which
has the following attributes may not be treated as an AOP:
(a) each member is independently responsible for executing its part of work through its
own resources and also bears the risk of its scope of work i.e., there is a clear
demarcation in the work and costs between the consortium members and each
member incurs expenditure only in its specified area of work;
(b) each member earns profit or incurs losses, based on performance of the contract
falling strictly within its scope of work. However, consortium members may share
contract price at gross level only to facilitate convenience in billing;
(c) the men and materials used for any area of work are under the risk and control of
respective consortium members;
(d) the control and management of the consortium it not unified and common
management is only for the inter-se co-ordination between the consortium members
for administrative convenience;
There may be other additional factors also which may justify that consortium is not an

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AOP and the same shall depend upon the specific facts and circumstances of a particular
case, which need to be taken into consideration while taking a view in the matter.
Non-applicability of Circular where consortium members are Associated Enterprises
This Circular shall not be applicable in cases where all or some of the members of the
consortium are Associated Enterprises within the meaning of section 92A of the Act. In
such cases, the Assessing Officer will decide whether an AOP is formed or not keeping in
view the relevant provisions of the Act and judicial jurisprudence on this issue.

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16
TRANSFER PRICING AND OTHER PROVISIONS
TO CHECK AVOIDANCE OF TAX

AMENDMENT BY THE FINANCE ACT, 2016

(1) Extension of time limit available to TPO for making an order [Section 92CA(3A)]
Effective from: 1st June, 2016
(i) As per section 92CA(3A), the Transfer Pricing Officer (TPO) has to pass his order
60 days prior to the date on which the limitation for making assessment expires.
(ii) In many cases, it becomes necessary to seek information from foreign jurisdictions
for the purpose of determining the arm's length price by the TPO. At times,
proceedings before the TPO may also be stayed by a court order.
(iii) Taking into consideration such cases, a proviso has been inserted in section
92CA(3A) to provide that where assessment proceedings are stayed by any court or
where a reference for exchange of information has been made by the competent
authority under an agreement referred to in section 90 or 90A, the time available to
the Transfer Pricing Officer for making an order after excluding the time for which
assessment proceedings were stayed or the time taken for receipt of information, as
the case may be, is less than 60 days, then such remaining period shall be
extended to 60 days.
(2) Furnishing of report in respect of international group in line with BEPS action plan
- Country-By-Country Report and Master file [New Section 286]
Related amendment in sections: 92D, 271AA, 271GB & 273B
Effective from: A.Y.2017-18
(i) Transfer Pricing provisions under the Income-tax Act, 1961:
Chapter X of the Income-tax Act, 1961 comprising sections 92 to 92F contain
provisions relating to transfer pricing regime.
Section 92D requires maintenance of prescribed information and document relating
to the international transaction and specified domestic transaction.

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(ii) Requirements as per OECD report on Action 13 of BEPS Action Plan:
The report provides for:
(1) revised standards for transfer pricing documentation; and
(2) a template for country-by-country reporting of income, earnings, taxes paid and
certain measure of economic activity.
(iii) Three-tier structure mandated by BEPS:
The BEPS report recommends that countries adopt a standardised approach to
transfer pricing documentation; it mandates the following three-tier structure:-
Document Information
(1) Master File Standardised information relevant for all multinational
enterprises (MNE) group members
(2) Local file Specific reference to material transactions of the local
taxpayer
(3) Country-by- Information relating to the global allocation of the MNE's
country report income and taxes paid; and
Indicators of the location of economic activity within the
MNE group.

(iv) Advantages of the three tier structure [as per BEPS Report]:
(1) Taxpayers will be required to articulate consistent transfer pricing positions;
(2) Tax administrations would get useful information to assess transfer pricing
risks;
(3) Tax administrations would be able to make determinations about where their
resources can most effectively be deployed, and, in the event audits are called
for, provide information to commence and target audit enquiries.
(v) Country-by-country Report : Reporting Requirements of MNEs
The Country-by-Country (CbC) report has to be submitted by parent entity of an
international group to the prescribed authority in its country of residence. This report
is to be based on consolidated financial statement of the group.
(1) MNEs have to report annually and for each tax jurisdiction in which they do
business:
(a) the amount of revenue;
(b) profit before income tax; and
(c) income tax paid and accrued.

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(2) MNEs have to report their total employment, capital, accumulated earnings
and tangible assets in each tax jurisdiction.
(3) MNEs have to identify each entity within the group doing business in a
particular tax jurisdiction and provide an indication of the business activities
each entity engages in.
(vi) Master File: Objective & Features
(1) The master file would provide an overview of the MNE groups business,
including:
(a) the nature of its global business operations,
(b) its overall transfer pricing policies, and
(c) its global allocation of income and economic activity
in order to assist tax administrations in evaluating the presence of significant
transfer pricing risk.
(2) The master file is intended to provide a high-level overview in order to place
the MNE group's transfer pricing practices in their global economic, legal,
financial and tax context.
(3) The master file shall contain information which may not be restricted to
transaction undertaken by a particular entity situated in particular country.
(4) Thus, information in master file would be more comprehensive than the
existing regular transfer pricing documentation.
(5) The master file shall be furnished by each entity to the tax authority of the
country in which it operates.
(vii) Implementation of international consensus in India :
India is one of the active members of BEPS initiative and part of international
consensus. For the purpose of implementing the international consensus, a specific
reporting regime in respect of CbC reporting and also the master file has been
incorporated in the Income-tax Act, 1961. The essential elements have been
incorporated in the Income-tax Act, 1961 while remaining aspects would be dealt
with in detail in the Income-tax Rules, 1962.
(viii) Elements relating to CbC reporting requirement and related matters which
have been incorporated in the Income-tax Act, 1961 [New Section 286]:—
(1) the reporting provision shall apply in respect of an international group for an
accounting year, if the total consolidated group revenue as reflected in the
consolidated financial statement (CFS) for the accounting year preceding such
accounting year is above a threshold to be prescribed [Sub-section (7)].

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(2) the parent entity of an international group or the alternate reporting entity, if it
is resident in India shall be required to furnish the report in respect of the
group to the prescribed authority for every reporting accounting year, on or
before the due date of furnishing of return of income under section 139(1) for
the relevant accounting year for which the report is being furnished, in the
prescribed form and manner [Sub-section (2)];
(3) the parent entity shall be an entity which is required to prepare consolidated
financial statement under the applicable laws or would have been required to
prepare such a statement, had equity share of any entity of the group been
listed on a recognized stock exchange in India;
(4) every constituent entity resident in India, of an international group having
parent entity that is not resident in India, shall notify the prescribed income-tax
authority on or before the prescribed date –
(i) whether it is the alternate reporting entity of the international group; or
(ii) the details of the parent entity or the alternate reporting entity, if any of
the international group, and the country of territory of which the said
entities are resident [Sub-section (1)].
(5) the report shall be furnished in prescribed manner and in the prescribed form .
(6) It should contain aggregate information in respect of:
(i) the amount of revenue,
(ii) profit and loss before income-tax,
(iii) amount of income-tax paid and accrued,
(iv) details of stated capital, accumulated earnings, number of employees,
tangible assets other than cash or cash equivalent in respect of each
country or territory along with details of each constituent's residential
status, nature and detail of main business activity and any other
information as may be prescribed.
This shall be based on the template provided in the OECD BEPS report on
Action Plan 13 [Sub-section (3)];
(7) A constituent entity of an international group resident in India, shall be required
to furnish CbC report to the prescribed authority if the parent entity of the
group is resident ;-
(a) in a country with which India does not have an arrangement for exchange
of the CbC report; or
(b) there has been a systemic failure of the country or territory i.e., such
country is not exchanging information with India even though there is an
agreement; and

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(c) this fact has been intimated to the entity by the prescribed authority [Sub-
section (4)].
(8) If there are more than one such constituent entity of the same group in India,
then the group can nominate (under intimation in writing on behalf of the group
to the prescribed authority), then, one constituent entity that shall furnish the
report on behalf of the group. This entity would then furnish the report
[Proviso to sub-section (4)];
(9) If an international group, having parent entity which is not resident in India, had
designated an alternate entity for filing its report with the tax jurisdiction in
which the alternate entity is resident, then the entities of such group operating
in India would not be obliged to furnish report if the report can be obtained
under the agreement of exchange of such reports by Indian tax authorities
[Sub-section (5)];
(10) The prescribed authority may call for such document and information from the
entity furnishing the report as it may specify in notice for the purpose of
verifying the accuracy. The entity shall be required to make submission within
thirty days of receipt of notice or further period if extended by the prescribed
authority, but extension shall not be beyond a further period of 30 days [Sub-
section (6)];
(ix) Penalty for non-furnishing of the report by any reporting entity which is
obligated to furnish such report [Section 271GB(1) & (3)]:-
Period of delay/default Penalty
(a) Not more than a month ` 5,000 per day
(b) beyond one month ` 15,000 per day for the period
exceeding one month
(c) Continuing default even after service of ` 50,000 per day of continuing
order levying penalty either under (a) failure beginning from the date
or under (b) of service of order
(x) Penalty for failure to produce information and documents within prescribed
time [Section 271GB(2) & (3)]:-
Default Penalty
(a) Failure to produce information ` 5,000 per day of continuing failure,
before prescribed authority from the day immediately following the
within the period allowed u/s day on which the period for furnishing
286(6) the information and document expires.
(b) Continuing default even after ` 50,000 per day for the period of
service of penalty order default beyond the date of service of
penalty order.

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(xi) Penalty for submission of inaccurate information in the CBC report [Section
271GB(4)]:
If the reporting entity has provided any inaccurate information in the report, the
penalty would be ` 5,00,000 if ,-
(a) the entity has knowledge of the inaccuracy at the time of furnishing the report
but does not inform the prescribed authority; or
(b) the entity discovers the inaccuracy after the report is furnished and fails to
inform the prescribed authority and furnish correct report within a period of
fifteen days of such discovery; or
(c) the entity furnishes inaccurate information or document in response to notice
of the prescribed authority under section 286(6).
(xii) Non-levy of penalty if reasonable cause for failure is proved [Section 273B]:
Section 273B provides for non-levy of penalty under various sections if the
assessee proves that there was reasonable cause for such failure. Section 271GB
has been included within the scope of section 273B. Therefore, t he entity can offer
reasonable cause defence for non-levy of penalties mentioned above.
(xiii) Maintenance and furnishing of Master file: Consequent amendments in the
Income-tax Act, 1961:
Section Provision
(1) Proviso to A person being constituent of an international group shall, in
section addition to the information related to the international
92D(1) transaction required under section 92D(1), also keep and
maintain such information and document in respect of the
international group to be prescribed by way of rules.
The rules shall, thereafter, prescribe the information and
document as mandated for master file under OECD BEPS
Action 13 report;
(2) 92D(4) The information and document shall also be furnished to the
prescribed authority u/s 286(1) within such period as may be
prescribed and the manner of furnishing may also be
provided for in the rules
(3) 271AA(2) For non-furnishing of the information and document to the
prescribed authority, a penalty of ` 5 lakh shall be leviable.
(4) 273B Reasonable cause defence against levy of penalty shall be
available to the entity.
(xiv) Threshold limit of consolidated group revenue for applicability of CbC
reporting requirement:
As indicated above, the CbC reporting requirement for a reporting year does not
apply unless the consolidated revenues of the preceding accounting year of the

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group, based on consolidated financial statement, exceeds a threshold to be
prescribed. The current international consensus is for a threshold of € 750 million
equivalent in local currency. This threshold in Indian currency would be equivalent
to ` 5395 crores (at current rates). Therefore, CbC reporting for an international
group having Indian parent, for the previous year 2016-17, shall apply only if the
consolidated revenue of the international group in previous year 2015 -16 exceeds
` 5395 crore (the equivalent would be determinable based on exchange rate as on
the last day of previous year 2015-16).
(xv) Meaning of certain terms [Section 286(9)]:
Term Meaning
(1) Accounting Case Accounting year
year
In a case where the A previous year
parent entity or
alternate reporting
entity is resident in
India; or
In any other case An annual accounting period, with
respect to which the parent entity of
the international group prepares its
financial statements under any law
for the time being in force or the
applicable accounting standards of
the country or territory of which
such entity is resident
(b) Agreement (i) an agreement referred to in section 90(1) or section
90A(1); or
(ii) any agreement as may be notified by the Central
Government in this behalf.
(c) Alternate Any constituent entity of the international group that has
reporting been designated by such group, in the place of the parent
entity entity, to furnish the CbC report in the country or territory in
which the said constituent entity is resident on behalf of such
group.
(d) Constituent (i) any separate entity of an international group that is
entity included in the consolidated financial statement of the
said group for financial reporting purposes, or may be
so included for the said purpose, if the equity share of
any entity of the international group were to be listed on
a stock exchange;

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(ii) any such entity that is excluded from the consolidated
financial statement of the international group solely on
the basis of size or materiality; or
(iii) any permanent establishment of any separate business
entity of the international group included in clause (i) or
clause (ii), if such business unit prepares a separate
financial statement for such permanent establishment
for financial reporting, regulatory, tax reporting or
internal management control purposes
(e) Group This includes a parent entity and all the entities in respect of
which, for the reason of ownership or control, a consolidated
financial statement for financial reporting purposes,—
(i) is required to be prepared under any law for the time
being in force or the accounting standards of the country
or territory of which the parent entity is resident; or
(ii) would have been required to be prepared had the equity
shares of any of the enterprises were listed on a stock
exchange in the country or territory of which the parent
entity is resident.
(f) Consolidated The financial statement of an international group in which the
financial assets, liabilities, income, expenses and cash flows of the
statement parent entity and the constituent entities are presented as
those of a single economic entity
(g) International Any group that includes,—
group
(i) two or more enterprises which are resident of different
countries or territories; or
(ii) an enterprise, being a resident of one country or
territory, which carries on any business through a
permanent establishment in other countries or
territories;
(h) Parent entity A constituent entity, of an international group holding, directly
or indirectly, an interest in one or more of the other
constituent entities of the international group, such that,—
(i) it is required to prepare a consolidated financial
statement under any law for the time being in force or
the accounting standards of the country or territory of
which the entity is resident; or
(ii) it would have been required to prepare a consolidated
financial statement had the equity shares of any of the

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enterprises were listed on a stock exchange,
and, there is no other constituent entity of such group which,
due to ownership of any interest, directly or indirectly, in the first
mentioned constituent entity, is required to prepare a
consolidated financial statement, under the circumstances
referred to in clause (i) or clause (ii), that includes the separate
financial statement of the first mentioned constituent entity.
(i) Permanent Meaning assigned to it in clause (iiia) of section 92F i.e.,
establishment includes a fixed place of business through which the
business of the enterprise is wholly or partly carried on.
(j) Reporting The accounting year in respect of which the financial and
accounting operational results are required to be reflected in the report
year to be furnished by the parent entity or the alternate reporting
entity in respect of the international group of which it is a
constituent, every year, on or before the due date specified
under section 139(1).
(k) Reporting The constituent entity including the parent entity or the
entity alternate reporting entity, that is required to furnish a report
in respect of the international group of which it is a
constituent, for every reporting accounting year on or before
the due date mentioned under section 139(1).
(l) Systemic Systemic failure, with respect to a country or territory, means
failure that the country or territory has an agreement with India
providing for exchange of report of the nature referred to in
section 286(2), but—
(i) in violation of the said agreement, it has suspended
automatic exchange; or
(ii) has persistently failed to automatically provide to India
the report in its possession in respect of any
international group having a constituent entity resident
in India

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SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Transfer Pricing Rules amended to incorporate “range concept” and “use of multi-
year data” [Notification No. 83/2015, dated 19.10.2015]
Section 92C(2) provides that the arm’s length price (ALP) in relation to an international
transaction or specified domestic transaction has to be determined by applying the most
appropriate method.
As per the first proviso to section 92C(2), where more than one price is determined by
applying the most appropriate method, the ALP shall be taken to be the arithmetical
mean of such prices.
However, if the variation between the ALP so determined and the price at w hich the
international transaction or specified domestic transaction has actually been undertaken
does not exceed such percentage, not exceeding 3%, as may be notified by the Central
Government, the price at which the transaction has actually been undertak en would be
deemed to be the ALP.
In the year 2014, the Finance Minister, in his budget speech, had proposed to introduce
the “range concept” for determination of ALP, for aligning Transfer Pricing Regulations in
India with the best practices.
Accordingly, a third proviso was inserted in section 92C(2) to provide that in case of an
international transaction or specified domestic transaction undertaken on or after
1.4.2014, where more than one price is determined by the most appropriate method, the
ALP shall be computed in the prescribed manner (based on “range concept” to be
specified by way of Rules) and the computation methodology given in the first and
second proviso, based on arithmetic mean, shall be ignored.
The CBDT has, in exercise of the powers conferred by section 92C read with section 295
prescribed the manner of computation of arm’s length price applicable for international
transactions and specified domestic transactions undertaken on or after 1.4.2014.
Incorporation of “Range Concept” in Transfer Pricing Rules
In case of an international transaction or specified domestic transaction undertaken on or
after 1.4.2014, where more than one price is determined by the most appropriate method, the
arm’s length price shall be computed in the prescribed manner specified in Rule 10CA.
Rule 10CA(1) provides that where in respect of an international transaction or a specified
domestic transaction, the application of the most appropriate method referred to in section
92C(1) results in determination of more than one price, then, the arm’s length price in
respect of such international transaction or specified domestic transaction has to be
computed on the basis of the dataset constructed by placing such prices in an
ascending order as provided in Rule 10CA(2).
However, where the most appropriate method is the resale price method or cost plus
method or transactional net margin method and the comparable uncontrolled transaction
has been identified on the basis of data relating to the current year and the enterprise
undertaking the said uncontrolled transaction, [not being the enterprise undertaking the

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international transaction or the specified domestic transaction referred to in sub -rule (1)],
has in either or both of the two financial years immediately preceding the current yea r
undertaken the same or similar comparable uncontrolled transaction then,-
(i) the most appropriate method used to determine the price of the comparable
uncontrolled transaction undertaken in the current year shall be applied in similar
manner to the comparable uncontrolled transaction or transactions undertaken in
the aforesaid period and the price in respect of such uncontrolled transactions shall
be determined; and
(ii) the weighted average of the prices, computed in accordance with the manner
provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in
the current year and in the aforesaid period preceding it shall be included in the
dataset instead of the price referred to in sub-rule (1).
Further, where the most appropriate method is the resale price method or cost plus
method or transactional net margin method where the comparable uncontrolled
transaction has been identified on the basis of the data relating to the financial year
immediately preceding the current year and the enterprise undertaking the said
uncontrolled transaction, [not being the enterprise undertaking the international
transaction or the specified domestic transaction referred to in sub-rule (1)], has in the
financial year immediately preceding the said financial year undertaken the same or
similar comparable uncontrolled transaction then, -
(i) the price in respect of such uncontrolled transaction shall be determined by applying
the most appropriate method in a similar manner as it was applied to determi ne the
price of the comparable uncontrolled transaction undertaken in the financial year
immediately preceding the current year; and
(ii) the weighted average of the prices, computed in accordance with the manner
provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in
the aforesaid period of two years shall be included in the dataset instead of the
price referred to in sub-rule (1).
Also, in such cases, where the use of data relating to the current year for determination
of ALP subsequently at the time of assessment establishes that,-
(i) the enterprise has not undertaken same or similar uncontrolled transaction during
the current year; or
(ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a
comparable uncontrolled transaction,
then, irrespective of the fact that such an enterprise had undertaken comparable
uncontrolled transaction in the financial year immediately preceding the current year or
the financial year immediately preceding such financial year, the price of comparable
uncontrolled transaction or the weighted average of the prices of the uncontrolled
transactions, as the case may be, undertaken by such enterprise shall not be included in
the dataset.
Rule 10CA(3) provides that where an enterprise has undertaken comparable uncontrolled

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transactions in more than one financial year, then for the purposes of sub-rule (2) the
weighted average of the prices of such transactions shall be computed in the following
manner, namely:-
Method used to Manner of computation of weighted average of
determine the prices the prices
(i) The resale price By assigning weights to the quantum of sales which has
method been considered for arriving at the respective prices
(ii) The cost plus method By assigning weights to the quantum of costs which has
been considered for arriving at the respective prices
(iii) The transactional net By assigning weights to the quantum of costs
margin method incurred or sales effected or assets employed or to
be employed, or as the case may be, any other base
which has been considered for arriving at the
respective prices.
Rule 10CA(4) provides that where the most appropriate method applied is –
(i) a method other than the profit split method or a method prescribed by the CBDT
under section 92C(1)(f); and
(ii) the dataset constructed in accordance with sub-rule (2) consists of six or more
entries,
an arm’s length range beginning from the thirty-fifth percentile of the dataset and ending
on the sixty-fifth percentile of the dataset shall be constructed.
If the price at which the international transaction or the specified domestic transaction
has actually been undertaken is within the said range, then, the price at which such
international transaction or the specified domestic transaction has actually been
undertaken shall be deemed to be the arm’s length price [Rule 10CA(5)].
If the price at which the international transaction or the specified domestic transaction
has actually been undertaken is outside the said arm's length range, the arm’s length
price shall be taken to be the median of the dataset [Rule 10CA(6)].
In a case where the provisions of Rule 10CA(4) are not applicable, the arm's length price
shall be the arithmetical mean of all the values included in the dataset. However, if the
variation between the arm's length price so determined and price at which the
international transaction or specified domestic transaction has ac tually been undertaken
does not exceed such percentage not exceeding three percent. of the latter, as may be
notified3 by the Central Government in the Official Gazette in this behalf, the price at

3 1% in respect of wholesale trading and 3% in respect of all other cases (for A.Y.2015-16) [Notification
No.86/2015 dated 29.10.2015]. Wholesale trading, for this purpose, means an international transaction or
specified domestic transaction of trading in goods, which fulfils the following conditions , namely:-
(i) purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities; and
(ii) average monthly closing inventory of such goods is 10% or less of sales pertaining to such trading activities.

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which the international transaction or specified domestic transaction has actually been
undertaken shall be deemed to be the arm's length price [Rule 10CA(7)].
Meaning of certain terms [Rule 10CA(8)]
Term Meaning
(a) the thirty-fifth percentile of a The lowest value in the dataset such that at
dataset (having values least 35% of the values included in the dataset
arranged in an ascending are equal to or less than such value.
order) However, if the number of values that are equal
to or less than the aforesaid value is a whole
number, then the thirty-fifth percentile shall be
the arithmetic mean of such value and the
value immediately succeeding it in the dataset.
(b) the sixth-fifth percentile of a The lowest value in the dataset such that at
dataset (having values least 65% of the values included in the dataset
arranged in an ascending are equal to or less than such value.
order) However, if the number of values that are equal
to or less than the aforesaid value is a whole
number, then, the sixty-fifth percentile shall be
the arithmetic mean of such value and the
value immediately succeeding it in the dataset.
(c) the median of the dataset The lowest value in the dataset such that at
(having values arranged in least 50% of the values included in the dataset
an ascending order) are equal to or less than such value.
However, if the number of values that are equal
to or less than the aforesaid value is a whole
number, then, the median shall be the
arithmetic mean of such value and the value
immediately succeeding it in the dataset.
Use of multiple year data:
Sub-rule (5) has been inserted in Rule 10B to provide that in case the most appropriate
method for determination of ALP of a transaction entered into on or after 1.4.2014 is the
resale price method or cost plus method or the transactional net margin method , then,
the data to be used for analyzing the comparability of an uncontrolled transaction with an
international transaction shall be –
(a) the data relating to the current year; or
(b) the data relating to the financial year immediately preceding the curr ent year, if the
data relating to the current year is not available at the time of furnishing the return
of income by the assessee, for the assessment year relevant to the current year.
However, where the data relating to the current year is subsequently available at the time
of determination of arm’s length price of an international transaction or a specified

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domestic transaction during the course of any assessment proceeding for the
assessment year relevant to the current year, then, such data shall be u sed for such
determination irrespective of the fact that the data was not available at the time of
furnishing the return of income of the relevant assessment year.
2. Co-operative Societies procuring and marketing milk eligible to opt for Safe
Harbour Rules [Notification No 90/2015, dated 8-12-2015]
Under section 92CB(2), the CBDT is empowered to make rules for safe harbour. Further,
section 92D empowers the CBDT to make rules regarding keeping and maintenance of
specified information and document for assessees entering into an international
transaction or specified domestic transaction as well as to prescribe the period for which
information and documents shall be kept and maintained. Accordingly, in exercise of the
powers conferred under such sections, the CBDT has amended Rules 10D, 10THA,
10THB, 10THC and 10THD.
(1) Eligible assessee to include a co-operative society engaged in the business of
procuring and marketing milk and milk products [Rule 10THA]: The scope of
eligible assessee under Rule 10THA has been extended and it now also includes a
person who has exercised a valid option for application of safe harbor rules in
accordance with the provisions of Rule 10THC and is a co-operative society
engaged in the business of procuring and marketing milk and milk products.
(2) Eligible specified domestic transaction to include purchase of milk or milk
products by a co-operative society from its members [Rule 10THB]:
Accordingly, Rule 10THB now includes purchase of milk or milk products by a co -
operative society from its members as an eligible specified domestic transaction.
(3) Specified circumstance in which transfer price declared by the co-operative
society can be accepted by the income-tax authorities [Rule 10THC]: In effect,
where a co-operative society engaged in the business of procuring and marketing
milk and milk products has entered into an eligible transaction of purchase of milk or
milk products from its members in any previous year relevant to an assessment
year and the option exercised by the co-operative society is treated to be validly
exercised under Rule 10THD, the transfer price declared by the co-operative society
will be accepted by the income-tax authorities, if it is in accordance with the
specified circumstance [as per Rule 10THC] given below:
The price of milk or milk products is determined at a rate which is fixed on the basis of
the quality of milk, namely, fat content and Solid Not Fat (SNF) content of milk; and -
(a) the said rate is irrespective of,-
(i) the quantity of milk procured;
(ii) the percentage of shares held by the members in the co-operative
society;
(iii) the voting power held by the members in the society; and

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(b) such prices are routinely declared by the co-operative society in a transparent
manner and are available in public domain.”
(4) Information and documents to be kept and maintained under section 92D in
case of an eligible assessee referred to in Rule 10THA [Rule 10D(2A)]:
Rule Eligible Assessee Information and documents to be kept and
maintained
10THA(i) A government (i) a description of the ownership structure
company engaged of the assessee enterprise with details of
in the business of shares or other ownership interest held
generation, supply, therein by other enterprises;
transmission or (ii) a broad description of the business of
distribution of the assessee and the industry in which
electricity the assessee operates, and of the
business of the associated enterprises
with whom the assessee has transacted;
(iii) the nature and terms (including prices) of
specified domestic transactions entered
into with each associated enterprise and
the quantum and value of each such
transaction or class of such transaction;
(iv) a record of proceedings, if any, before
the regulatory commission and orders of
such commission relating to the specified
domestic transaction;
(v) a record of the actual working carried out
for determining the transfer price of the
specified domestic transaction;
(vi) the assumptions, policies and price
negotiations, if any, which have critically
affected the determination of the transfer
price; and
(vii) any other information, data or document,
including information or data relating to
the associated enterprise, which may be
relevant for determination of the transfer
price.
10THA(ii) A co-operative (i) a description of the ownership structure
society engaged in of the assessee co-operative society with
the business of details of shares or other ownership
procuring and interest held therein by the members;
marketing milk and (ii) description of members including their

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milk products addresses and period of membership;
(iii) the nature and terms (including prices) of
specified domestic transactions entered
into with each member and the quantum
and value of each such transaction or
class of such transaction;
(iv) a record of the actual working carried out
for determining the transfer price of the
specified domestic transaction;
(v) the assumptions, policies and price
negotiations, if any, which have critically
affected the determination of the transfer
price;
(vi) the documentation regarding price being
routinely declared in transparent manner
and being available in public domain; and
(vii) any other information, data or document
which may be relevant for determination
of the transfer price.

3. Scope of Safe Harbour Rules expanded [Notification No.5/2016 dated 17-2-2016]


Under section 92CB(2), the CBDT is empowered to make rules for safe harbour.
Accordingly, in exercise of the powers conferred under the said section read with section
295, the CBDT has amended Rules 10THA, 10THB and 10THC:
Rule Particulars Existing Provision Amendment
10THA Meaning of A person who has The scope of eligible
“Eligible assessee” exercised a valid option assessee under Rule 10THA
for application of safe has been expanded to include
harbor rules and is a a person who has exercised a
Government company valid option for application of
engaged in the safe harbor rules in
business of generation, accordance with the
transmission or provisions of Rule 10THC and
distribution of is Government company
electricity. engaged in the business of
supply of electricity.
10THB Eligible specified A specified domestic Rule 10THB has been
domestic transaction undertaken amended to provide that an
transaction by an eligible assessee eligible specified domestic
and which comprises transaction would include a
of, inter alia, supply of specified domestic transaction

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electricity by a undertaken by an eligible
generating company. assessee and which
comprises of, inter alia, supply
of electricity. The
requirement that supply of
electricity should be by a
generating company has
been removed.

4. Clarifications on Rollback Provisions of Advance Pricing Agreement Scheme


[Circular No. 10/2015, dated 10-06-2015]
An Advance Pricing Agreement (APA) is an agreement between a taxpayer and a taxing
authority on an appropriate transfer pricing methodology for a set of transactions over a
fixed period of time in future. They offer better assurance on transfer pricing methods and
provide certainty and unanimity of approach.
Keeping in mind the benefits offered by the APAs, sections 92CC and section 92CD were
introduced in the transfer pricing regime by the Finance Act, 2012 to provide a framework
for formulation of APAs between the tax payer and the income-tax authorities.
Subsequently, the Advance Pricing Agreement Scheme was notified vide Notification No.
36/2012, dated 30/8/2012, thereby inserting Rules 10F to 10T and Rule 44GA in the
Income-tax Rules, 1962.
In order to reduce current pending as well as future litigation in respect of the transfer
pricing matters, the Finance (No. 2) Act, 2014 has inserted sub-section (9A) in section
92CC to provide for a roll back mechanism in the APA scheme.
Accordingly, the APA may, subject to such prescribed conditions, procedure and manner,
provide for determining the ALP or for specifying the manner in which ALP is to be
determined in relation to an international transaction entered into by a person during any
period not exceeding four previous years preceding the first of the previous years for
which the APA applies in respect of the international transaction to be undertaken.
The CBDT has, vide Notification No.23/2015 dated 14.3.2015, in exercise of the powers
conferred by section 92CC(9) and 92CC(9A) read with section 295, prescribed the
conditions, procedure and manner for determining the arm’s length price or for specifying
the manner in which arm’s length price is to be determined in relation to an international
transaction in which the roll back provisions have to be given effect to.
Subsequent to this notification of the rules, the CBDT has issued Circular No.10/2015
dated 10.6.2015 adopting a Question and Answer format to clarify certain issues arising
out of the said Rules. The questions raised and answers to such questions as per the
said Circular are given hereunder:

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Question 1
Under rule 10MA(2)(ii) there is a condition that the return of income for the relevant roll
back year has been or is furnished by the applicant before the due date specified in
Explanation 2 to section 139(1). It is not clear as to whether applicants who have filed
returns under section 139(4) or 139(5) of the Act would be eligible for roll back.
Answer
The return of income under section 139(5) can be filed only when a return under section
139(1) has already been filed. Therefore, the return of income filed under section 139(5)
of the Act, replaces the original return of income filed under section 139(1). Hence, if
there is a return which is filed under section 139(5) to revise the original return filed
before the due date specified in Explanation 2 to sub-section (1) of section 139, the
applicant would be entitled for rollback on this revised return of income.
However, rollback provisions will not be available in case of a return of income filed
under section 139(4) because it is a return which is not filed before the due date.
Question 2
Rule 10MA(2)(i) mandates that the rollback provision shall apply in respect of an
international transaction that is same as the international transaction to which the
agreement (other than the rollback provision) applies. It is not clear what is the meaning
of the word “same”. Further, it is not clear whether this restriction also applies to the
Functions, Assets, Risks (FAR) analysis.
Answer
The international transaction for which a rollback provision is to be allowed should be the
same as the one proposed to be undertaken in the future years and in respect of which
the agreement has been reached. There cannot be a situation where rollback is finalised
for a transaction which is not covered in the agreement for future years. The term same
international transaction implies that the transaction in the rollback year has to be of
same nature and undertaken with the same associated enterprise(s), as proposed to be
undertaken in the future years and in respect of which agreement has been reached. In the
context of FAR analysis, the restriction would operate to ensure that rollback provisions
would apply only if the FAR analysis of the rollback year does not differ materially from the
FAR validated for the purpose of reaching an agreement in respect of international
transactions to be undertaken in the future years for which the agreement applies.
The word “materially” is generally being defined in the Advance Pricing Agreements being
entered into by CBDT. According to this definition, the word “materially” will be interpreted
consistently with its ordinary definition and in a manner that a material change of facts and
circumstances would be understood as a change which could reasonably have resulted in
an agreement with significantly different terms and conditions.
Question 3
Rule 10MA(2)(iv) requires that the application for rollback provision, in respect of an
international transaction, has to be made by the applicant for all the rollback years in

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which the said international transaction has been undertaken by the applicant.
Clarification is required as to whether rollback has to be requested for all four years or
applicant can choose the years out of the block of four years.
Answer
The applicant does not have the option to choose the years for which it wants to apply for
rollback. The applicant has to either apply for all the four years or not apply at all.
However, if the covered international transaction(s) did not exist in a rollback year or
there is some disqualification in a rollback year, then the applicant can apply for rollback
for less than four years. Accordingly, if the covered international transaction(s) were not
in existence during any of the rollback years, the applicant can apply for rollback for the
remaining years. Similarly, if in any of the rollback years for the covered international
transaction(s), the applicant fails the test of the rollback conditions contained in various
provisions, then it would be denied the benefit of rollback for that rollback year. However,
for other rollback years, it can still apply for rollback.
Question 4
Rule 10MA(3) states that the rollback provision shall not be provided in respect of an
international transaction for a rollback year if the determination of arm’s length price of
the said international transaction for the said year has been the subject matter of an
appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order
disposing of such appeal at any time before signing of the agreement. Further, Rule 10
RA(4) provides that if any appeal filed by the applicant is pending before the
Commissioner (Appeals), Appellate Tribunal or the High Court for a rollback year, on the
issue which is subject matter of the rollback provision for that year, the said appeal to the
extent of the subject covered under the agreement shall be withdrawn by the applicant.
There is a need to clarify the phrase “Tribunal has passed an order disposing of such
appeal” and on the mismatch, if any, between Rule 10MA(3) and Rule 10RA(4).
Answer
The reason for not allowing rollback for the international transaction for which Appellate
Tribunal has passed an order disposing of an appeal is that the ITAT is the final fact
finding authority and hence, on factual issues, the matter has already reached finality in
that year. However, if the ITAT has not decided the matter and has only set aside the
order for fresh consideration of the matter by the lower authorities with full discretion at
their disposal, the matter shall not be treated as one having reached finality and hence,
benefit of rollback can still be given.
There is no mismatch between Rule 10MA(3) and Rule 10RA(4).
Question 5
Rule 10MA(3)(ii) provides that rollback provision shall not be provided in respect of an
international transaction for a rollback year if the application of rollback provision has the
effect of reducing the total income or increasing the loss, as the case may be, of the
applicant as declared in the return of income of the said year. It may be clarified whether

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the rollback provisions in such situations can be applied in a manner so as to ensure that
the returned income or loss is accepted as the final income or loss after applying the
rollback provisions.
Answer
It is clarified that in case the terms of rollback provisions contain specific agreement
between the Board and the applicant that the agreed determination of ALP or the agreed
manner of determination of ALP is subject to the condition that the ALP would get
modified to the extent that it does not result in reducing the total income or increasing the
total loss, as the case may be, of the applicant as declared in the return of income of the
said year, the rollback provisions could be applied. For example, if the declared income
is ` 100, the income as adjusted by the TPO is ` 120, and the application of the rollback
provisions results in reducing the income to ` 90, then the rollback for that year would be
determined in a manner that the declared income ` 100 would be treated as the final
income for that year.
Question 6
Rule 10RA(7) states that in case effect cannot be given to the rollback provision of an
agreement in accordance with this rule, for any rollback year to which it applies, on
account of failure on the part of applicant, the agreement shall be cancelled. It is to be
clarified as to whether the entire agreement is to be cancelled or only that year for which
roll back fails.
Answer
The procedure for giving effect to a rollback provision is laid down in Rule 10RA. Sub -
rules (2), (3), (4) and (6) of the Rule specify the actions to be taken by the applicant in
order that effect may be given to the rollback provision. If the applicant does not ca rry out
such actions for any of the rollback years, the entire agreement shall be cancelled.
This is because the rollback provision has been introduced for the benefit of the applicant
and is applicable at its option. Accordingly, if the rollback provision cannot be given effect
to for any of the rollback years on account of the applicant not taking the actions
specified in sub-rules (2), (3), (4) or (6), the entire agreement gets vitiated and will have
to be cancelled.
Question 7
If there is a Mutual Agreement Procedure (MAP) application already pending for a
rollback year, what would be the stand of the APA authorities? Further, what would be
the view of the APA Authorities, if MAP has already been concluded for a rollback year?
Answer
If MAP has been already concluded for any of the international transactions in any of the
rollback year under APA, rollback provisions would not be allowed for those international
transactions for that year but could be allowed for other years or for other international
transactions for that year, subject to fulfilment of specified conditions in Rules 10MA and
10RA. However, if MAP request is pending for any of the rollback year under APA, upon

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the option exercised by the applicant, either MAP or application for roll back sha ll be
proceeded with for such year.
Question 8
Rule 10MA(1) provides that the agreement may provide for determining ALP or manner
of determination of ALP. However, Rule 10MA(4) only specifies that the manner of
determination of ALP should be the same as in the APA term. Does that mean the ALP
could be different?
Answer
Yes, the ALP could be different for different years. However, the manner of determination of
ALP (including choice of Method, comparability analysis and Tested Party) would be same.
Question 9
Will there be compliance audit for roll back? Would critical assumptions have to be
validated during compliance audit?
Answer
Since rollback provisions are for past years, ALP for the rollback years would be agreed
after full examination of all the facts, including validation of critical assumptions. Hence,
compliance audit for the rollback years would primarily be to check if the agreed price or
methodology has been applied in the modified return.
Question 10
Whether applicant has an option to withdraw its rollback application? Can the applicant
accept the rollback results without accepting the APA for the future years?
Answer
The applicant has an option to withdraw its roll back application even while maintaining the
APA application for the future years. However, it is not possible to accept the rollback results
without accepting the APA for the future years. It may also be noted that the fee specified in
Rule 10MA(5) shall not be refunded even where a rollback application is withdrawn.
Question 11
For already concluded APAs, will new APAs be signed for rollback or earlier APAs could
be revised?
Answer
The second proviso to Rule 10MA(5) provides for revision of APAs already concluded to
include rollback provisions.
Question 12
For already concluded APAs, where the modified return has already been filed for the
first year of the APA term, how will the time-limit for filing modified return for rollback
years be determined?

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Answer
The time to file modified return for rollback years will start from the date of signing the
revised APA incorporating the rollback provisions.
Question 13
In case of merger of companies, where one or more of those companies are APA
applicants, how would the rollback provisions be allowed and to which company or
companies would it be allowed?
Answer
The agreement is between the Board and a person. The principle to be followed in case
of merger is that the person (company) who makes the APA application would only be
entitled to enter into the agreement and be entitled for the rollback provisions in respect
of international transactions undertaken by it in rollback years. Other persons
(companies) who have merged with this person (company) would not be eligible for the
rollback provisions.
To illustrate, if A, B and C merge to form C and C is the APA applicant, then the agreement
can only be entered into with C and only C would be eligible for the rollback provisions. A
and B would not be eligible for the rollback provisions. To illustrate further, if A and B
merge to form a new company C and C is the APA applicant, then nobody would be eligible
for rollback provisions.
Question 14
In case of a demerger of an APA applicant or signatory into two or more companies
(persons), who would be eligible for the rollback provisions?
Answer
The same principle as mentioned in the previous answer, i.e., the person (company) who
makes an APA application or enters into an APA would only be entitled for the rollback
provisions, would continue to apply. To illustrate, if A has applied for or entered into an
APA and, subsequently, demerges into A and B, then only A will be eligible for rollback
for international transactions covered under the APA. As B was not in existence in
rollback years, availing or grant of rollback to B does not arise.

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19
TAXATION OF E-COMMERCE TRANSACTIONS

(A) Equalisation levy [Chapter VIII of the Finance Act, 2016]


Related amendment in sections: 10 & 40(a)
(i) Growth of e-commerce and concerns emerging therefrom:
(1) The rapid growth of information and communication technology has resulted in
substantial expansion of the supply and procurement of digital goods and
services everywhere, including India. The digital economy is growing at 10%
per year, significantly faster than the global economy as a whole.
(2) At present, in the digital domain, business may be conducted without regard to
national boundaries and may dissolve the link between an income-producing
activity and a specific location. Hence, business in digital domain doesn’t
actually occur in any physical location but instead takes place in "cyberspace."
Persons carrying business in digital domain could be located anywhere in the
world. Entrepreneurs across the world have been quick to evolve their
business to take advantage of these changes. It has also made it possible for
the businesses to conduct themselves in ways that did not exist earlier, and
given rise to new business models that rely more on digital and
telecommunication network, do not require physical presence, and derives
substantial value from data collected and transmitted from such networks.
(ii) Taxation issues relating to e-commerce:
These new business models have created new tax challenges. The typical taxation
issues relating to e-commerce are:
(1) the difficulty in characterizing the nature of payment and establishing a nexus
or link between a taxable transaction, activity and a taxing jurisdiction,
(2) the difficulty of locating the transaction, activity and identifying the taxpayer for
income tax purposes.
The digital business, thus, challenges physical presence-based permanent
establishment rules. If permanent establishment (PE) principles are to remain
effective in the new economy, the fundamental PE components developed for the
old economy i.e. place of business, location, and permanency must be reconciled
with the new digital reality.

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(iii) OECD Recommendations under Action Plan 1 of the BEPS project:
The OECD has recommended several options to tackle the direct tax challenges
which include:
(1) Modifying the existing Permanent Establishment (PE) rule to provide that
whether an enterprise engaged in fully de-materialized digital activities would
constitute a PE, if it maintained a significant digital presence in another
country's economy.
(2) A virtual fixed place of business PE in the concept of PE i.e., creation of a PE
when the enterprise maintains a website on a server of another enterprise
located in a jurisdiction and carries on business through that website.
(3) Imposition of a final withholding tax on certain payments for digital goods or
services provided by a foreign e-commerce provider or imposition of a
equalisation levy on consideration for certain digital transactions received by a
non-resident from a resident or from a non-resident having permanent
establishment in other contracting state.
Taking into consideration the potential of new digital economy and the rapidly
evolving nature of business operations, it becomes necessary to address the
challenges in terms of taxation of such digital transactions.
(iv) Equalisation Levy - Insertion of Chapter VIII in the Finance Act, 2016:
In order to address these challenges, Chapter VIII of the Finance Act, 2016, titled
"Equalisation Levy", provides for an equalisation levy of 6% of the amount of
consideration for specified services received or receivable by a non-resident not having
permanent establishment in India, from a resident in India who carries out business or
profession, or from a non-resident having permanent establishment in India.
(v) Meaning of “Specified Service”:
(1) Online advertisement;
(2) Any provision for digital advertising space or any other facility or service for the
purpose of online advertisement;
Note - Specified Service also includes any other service as may be notified by the
Central Government.
(vi) Relief to small players in the digital domain:
Further, in order to reduce burden of small players in the digital domain, it is also
provided that no such levy shall be made if the aggregate amount of consideration
for specified services received or receivable by a non-resident from a person
resident in India or from a non-resident having a permanent establishment in India
does not exceed ` 1 lakh in any previous year.

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(vii) Provisions of new Chapter on Equalisation Levy:
To provide certainty and to avoid interpretational issues, certain terms and
expressions used therein have been defined. Further, the procedure to be adopted
for collection and recovery of equalisation levy has been provided.
In order to provide for the administrative mechanism of the equalisation levy, the
new Chapter provides for statutory authorities and also prescribes the duties and
powers of the authorities to administer the equalisation levy. In order to ensure
effective compliance, interest, penalty and prosecution in case of defaults have
been included with sufficient safeguards.
(viii) Central Government empowered to make rules:
Further, the Central Government is empowered to make rules for the purposes of
carrying out the provisions of this Chapter. Also, every Rule made under this
Chapter shall be laid before each House of Parliament.
Accordingly, vide Notification No.38/2016 dated 27.5.2016, Equalisation Levy Rules,
2016 were notified, which come into force on 1 st June, 2016.
(ix) Consequential amendments in the Income-tax Act, 1961:

Section Provision
(1) 10(50) In order to avoid double taxation, new clause (50) has been
inserted in section 10 to exempt any income arising from
providing any specified service on or after the date on which the
provisions of Chapter VIII of the Finance Act, 2016 comes into
force, and chargeable to equalisation levy under that Chapter.
(2) 40(a)(ib) In order to ensure compliance with the provisions this Chapter,
clause (ib) has been inserted in section 40(a) to provide that if
any consideration is paid or payable to a non-resident for a
specified service on which equalisation levy is deductible, and
such levy has not been deducted or after deduction, has not
been paid on or before the due date under section 139(1), then,
such expenses incurred by the assessee towards consideration
for specified service shall not be allowed as deduction.
However, where in respect of such consideration, if the
equalisation levy has been deducted in any subsequent year or
has been deducted during the previous year but paid after the
due date specified under section 139(1), such sum shall be
allowed as deduction in computing the income of the previous
year in which such levy has been paid.

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20
INCOME TAX AUTHORITIES

(A) Time limit for calling in question jurisdiction of Assessing Officer where notice is
served under section 153A(1) or 153C(2) [Section 124(3)]
Effective from: 1 st June, 2016
(i) Section 124(3)(a) provides that no person shall be entitled to call in question the
jurisdiction of an Assessing Officer in a case where return is filed under section 139(1),
after the expiry of one month from the date on which he was served with a notice issued
under section 142(1) or section 143(2) or after the completion of the assessment,
whichever is earlier.
(ii) This provision does not, however, specifically refer to notices issued under section 153A
or section 153C which relate to assessment in cases where a search and seizure action
has been taken or cases connected to such cases.
(iii) Consequently, at the appellate stages, the jurisdiction of an Assessing Officer in such
cases have been called into question, inspite of the fact that order passed under section
153A or 153C has to be read with section 143(3).
(iv) For the purpose of conveying the real intent of law in such cases, clause(c) has been
inserted in section 124(3) to specifically provide that in cases where search is initiated
under section 132 or books of accounts, other documents or any assets are
requisitioned under section 132A, no person shall be entitled to call into question the
jurisdiction of an Assessing Officer after the expiry of one month from the date on
which he was served with a notice under section 153A(1) or section 153C(2) or
after the completion of the assessment, whichever is earlier.

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21
ASSESSMENT PROCEDURE

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Rationalisation of provisions relating to filing of return of income [Section 139]


Effective from: A.Y.2017-18
For the purposes of rationalising the time allowed for filing of returns, completion of
proceedings, and realization of revenue without undue compliance burden on the
taxpayer, and to encourage due compliance, the following amendments have been
effected in section 139:
Section Provision Amendment by the Finance Act,
2016
(i) 139(1) Mandatory filing of return if Mandatory filing of return if total
[Sixth total income before giving income before giving effect to
proviso] effect to deductions under exemption u/s 10(38) in respect
Chapter VIA exceed basic of long-term capital gains exceed
exemption limit basic exemption limit
Every person, being an individual If such a person earns income by
or HUF or an AOP or a BOI, way of long-term capital gains in
whether incorporated or not or the previous year, which is exempt
any artificial juridical person, if his under section 10(38), and income
total income or the total income of such person without giving effect
of any other person in respect of to section 10(38) exceeds the basic
which he is assessable under this exemption limit, then also such
Act during the previous year, person shall be liable to
without giving effect to provisions mandatorily file return of income for
of Chapter VI-A, exceeds the the previous year on or before the
basic exemption limit shall be due date.
liable to furnish return on or
before the due date.
(ii) 139(4) Time limit for filing belated Reduction of time limit for filing
return: belated return:
A person who has not furnished a Any person who has not furnished
return within the time allowed to a return within the time allowed to
him under section 139(1), or him under section 139(1), may

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within the time allowed under a furnish the return for any previous
notice issued under section year at any time before the end of
section 142(1), may furnish the the relevant assessment year or
return for any previous year at any before the completion of the
time before the expiry of one year assessment, whichever is earlier.
from the end of the relevant Thus, belated return can be filed
assessment year or before the only in case a person has not
completion of the assessment, furnished his return within the
whichever is earlier. time allowed under section
139(1). Also, the belated return
cannot be furnished after the end
of the relevant assessment year.
(iii) 139(5) Belated return cannot be Belated return can be revised:
revised:
If any person, having furnished If any person, having furnished a
the return under section 139(1), return under section 139(1) or
or in pursuance of a notice belated return under section
issued under section 142(1), 139(4), discovers any omission or
discovers any omission or any any wrong statement therein, he
wrong statement therein, he may may furnish a revised return at any
furnish a revised return at any time before the expiry of one year
time before one year from the from the end of the relevant
end of the relevant assessment assessment year or before the
year or completion of completion of the assessment,
assessment, whichever is earlier. whichever is earlier.
An enabling provision for
revision of belated return has
been introduced. However, a
return furnished in pursuance of
a notice issued under section
142(1) cannot be revised.
(iv) Clause Return deemed to be defective Return not deemed to be
(aa) – if self-assessment tax is not defective if self-assessment tax
Expln paid before furnishing the is not paid before furnishing the
to return return
139(9) A return of income shall be A return which is otherwise valid
regarded as defective unless the would not be treated defective
self-assessment tax together with merely because self-assessment
interest, if any, payable in tax and interest payable in
accordance with the provisions of accordance with the provisions of
section 140A, has been paid on section 140A has not been paid on
or before the date of furnishing of or before the date of furnishing of
return. the return.

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(B) Scope of permissible adjustments while processing a return under section 143(1)(a)
expanded
Effective from: A.Y.2017-18
(i) As per section 143(1)(a), a return filed is to be processed and total income or loss is to
be computed after making the adjustments on account of any arithmetical error in the
return or on account of an incorrect claim, if such incorrect claim is apparent from any
information in the return.
(ii) For the purpose of facilitating removal of mismatch between the return of income and
the information available with the Department, the scope of adjustments that can be
made at the time of processing of returns under section 143(1) has been expanded.
(iii) Accordingly, with effect from 1st April, 2017, the following adjustments can also be made
at the time of processing of returns u/s 143(1):

Disallowance of loss claimed, if return is filed


beyond due date u/s 139(1)

Disallowance of expenditure indicated in the


audit report but not taken into account in
computing the total income in the return

Disallowance of deduction u/s 10AA, 80-IA,


80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if return
is filed beyond due date u/s 139(1)

addition of income appearing in Form 26AS or


Form 16A/16 which has not been included in
computing the total income in the return

(iv) Thus, adjustments can be made on the basis of data available with the Department in
the form of audit report filed by the assessee, returns of earlier years of the assessee,
Form 26AS, Form 16, and Form 16A.
(v) However, before making any such adjustments, in the interest of natural justice, an
intimation has to be given to the assessee requiring him to respond to such
adjustments. Such intimation may be in writing or through electronic mode. The
response received, if any, has to be duly considered before effecting any adjustment.
However, if no response is received within 30 days of issue of such intimation, the
processing shall be carried out incorporating the adjustments.

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(C) Mandatory processing of return of income before issuance of assessment order
[Section 143(1D)]
Effective from: A.Y.2017-18
(i) Section 143(1) requires processing of return of income filed under section 139(1) or
in response to a notice issued under section 142(1).
(ii) An intimation has to be prepared or generated and sent to the assessee specifying
the sum payable or the refund due, to the assessee.
(iii) No intimation can be sent after the expiry of one year from the end of the financial
year in which the return is made. This is provided in the second proviso to section
143(1).
(iv) Section 143(1D) provides that processing of a return is not necessary where a
notice has been issued to the assessee under section 143(2).
(v) Section 143(1D) has now been substituted to provide that the processing of a return
is not necessary before the expiry of the one year from the end of the financial year
in which the return is made, where notice has been issued to the assessee under
section 143(2).
(vi) However, the return has to be processed before the issuance of an order under
section 143(3).
(D) Time limits for completion of assessment, reassessment and recomp utation
[Section 153]
Effective from: 1 st June, 2016
(i) The time limit for completion of assessment proceedings is 2 years from the end of
the assessment year in which the income was first assessable. Further, no order of
assessment, reassessment or recomputation could be made under section 147 after
the expiry of one year from the end of the financial year in which notice under
section 148 was served.
Since digitisation of processes within the Department has enhanced its efficiency in
handling workload, the time limit has been accordingly reduced, so that the
assessment proceedings are finalised more expeditiously.
(ii) In order to simplify the provisions of section 153 by retaining only those provisions
that are relevant to the current provisions of the Act, section 153 has been
substituted with effect from 1 st June, 2016 to provide for the new time limits for
completion of assessment in the following cases:
Section Proceeding New Time limit for completion of
assessment or reassessment
153(1) Order of assessment u/s 143 21 months from the end of the
or 144 assessment year in which the
income was first assessable

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153(2) Order of assessment, 9 months from the end of the
reassessment or financial year in which the notice
recomputation u/s 147 u/s 148 was served
153(3) Fresh assessment u/s 9 months from the end of the
143/144/147 where the financial year in which the said
original assessment has order u/s 254 is received by the
been set aside, cancelled PCC/CC/PC/CIT4 or the order u/s
and referred back to the 263 or u/s 264 is passed by the
Assessing Officer by an order PC/CIT
u/s 254/263/264
153(4) Where a reference is made to An additional time period of 12
the TPO u/s 92CA(1) during months is available for completion
the course of proceeding for of assessment/reassessment in
assessment or such cases:
reassessment:
Completion of assessment 33 months from the end of the
u/s 143 or u/s 144. assessment year in which the
income was first assessable.
Completion of assessment/ 21 months from the end of the
reassessment/re-computation financial year in which notice u/s
u/s 147 148 is served.
Completion of fresh 21 months from the end of the
assessment in pursuance of financial year in which such order
an order u/s 254 (received by u/s 254 is received by the PCC or
the PCC or CC/PC or CIT) or CC/PC or CIT or such order u/s 263
an order passed by the PC or or 264 is passed by the PC or CIT,
CIT u/s 263 or u/s 264. as the case may be.
153(5) Effect to be given by the 3 months from the end of the month
Assessing Officer, to an order in which the order u/s
u/s 250/254/260/262/263/264, 250/254/260/262 is received by the
wholly or partly, otherwise PCC/CC/PC/CIT or the order u/s
than by making a fresh 263/264 is passed by the PC/CIT.
assessment or reassessment Note – Additional period of 6 months
may be allowed to the A.O. to give
effect to order if the PC/CIT is
satisfied, on an application from the
A.O., that the order could not be
given effect to within 3 months due to
reasons beyond the control of the

4 Principal Chief Commissioner (PCC) / Chief Commissioner (CC) / Principal Commissioner (PC) / Commissioner
of Income-tax (CIT).

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A.O.
However, in respect of cases
pending as on 1st June 2016, the
time limit for passing such order is
extended to 31.3.2017. This is
provided under section 153(7).
153(6)(i) Where the assessment, 12 months from the end of the
reassessment or month in which the order is received
recomputation is made on the or passed by the PC or CIT.
assessee or any person in Note – However, for cases pending
consequence of or to give as on 1.6.2016, the time limit for
effect to any finding or taking requisite action by the AO in
direction contained in an order respect of the assessee would be
u/s 250/254/260/262/263/264 31.3.2017. This is provided under
or in an order of any court in a section 153(7).
proceeding otherwise than by
way of appeal or reference.
153(6)(ii) Where, in the case of a firm, 12 months from the end of the
an assessment is made on a month in which the assessment
partner of the firm in order in the case of the firm is
consequence of an passed.
assessment made on the firm Note – However, for cases pending
under section 147 as on 1.6.2016, the time limit for
taking requisite action would be
31.3.2017. This is provided under
section 153(7).
153(8) The order of assessment or 1 year from the end of the month of
reassessment, relating to any such revival or within the period
assessment year, which specified in section 153 or section
stands revived under section 153B(1), whichever is later.
153A(2) Note - This is notwithstanding
anything contained in the foregoing
provisions of section 153, section
153A(2) or section 153B(1).
Note - The provisions of section 153, as they stood immediately before their amendment
by the Finance Act, 2016, shall apply to and in relation to any order of assessment,
reassessment or recomputation made before 1st June, 2016.
(iii) Exclusion of period [Explanation 1 to section 153] - In computing the period of
limitation for the purposes of section 153 the following time periods shall be excluded :

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Case Exclusion of Period
Commencing from Ending with
(1) Contravention of the date on which the date on which the copy of
the provisions of the A.O. intimates the order withdrawing the
section the Central approval or rescinding the
10(21)/(22B)/(23A)/ Government or the notification, as the case may be,
(23B)/(23C)(iv)/(v)/ prescribed authority, is received by the A.O.
(vi)/(via) the said
contravention as
required under
clause (i) of the
proviso to section
143(3)
(2) Direction to get the date on which the last date on which the
accounts audited the A.O. directs the assessee is required to furnish a
under section assessee to get his report of such audit
142(2A) accounts audited (or)
under section the date on which the order
142(2A) setting aside such direction is
received by the PC/CIT, if such
direction is challenged before a
Court.
(3) Reference to the the date on which the date on which the report of
Valuation Officer the Assessing the Valuation Officer is received
under section Officer makes a by the Assessing Officer.
142A(1) reference to the
Valuation Officer
(4) Where the the date on which the date on which the order
assessee furnishes the Assessing under section 158A(3) is made
declaration claiming Officer received the by him
that any question of declaration under Note – However, such period
law arising in his section 158A(1) cannot exceed 60 days.
case for an
assessment year
which is pending
before the A.O. or
any appellate
authority is identical
with a question of
law arising in his
case for another
A.Y. which is
pending before the

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High Court or
Supreme Court.
(5) Where an the date on which an the date on which the order u/s
application made application is made 245D(1) is received by the PC or
before the Income- before the CIT u/s 245D(2)
tax Settlement Settlement
Commission is Commission under
rejected by it or is section 245C
not allowed to be
proceeded with by it
(6) Where an the date on which an the date on which the order
application is made application is made rejecting the application is
before the AAR u/s before the AAR u/s received by the PC/CIT u/s
245Q(1) 245Q(1) 245R(3)
(or)
the date on which the advance
ruling pronounced by it is
received by the PC/CIT u/s
245R(7)
(7) Where reference(s) the date on which a the date on which the
for exchange of reference or first of information requested is last
information is the references for received by the PC/CIT
made by a exchange of (or)
competent information is made a period of one year,
authority by an authority
whichever is less
competent under an
agreement referred
to in section 90 or
section 90A
(8) the time taken in reopening the whole or any part of the proceeding or in giving
an opportunity to the assessee to be re-heard under the proviso to section
129; or
(9) the period during which the assessment proceeding is stayed by an order or
injunction of any court.
(iv) However, where immediately after the exclusion of the aforesaid period, the period of
limitation referred to in section 153(1)/(2)/(3)/(8) available to the Assessing Officer for
making an order of assessment, reassessment or recomputation, as the case may be, is
less than 60 days, such remaining period shall be extended to 60 days and the aforesaid
period of limitation shall be deemed to be extended accordingly.
(v) Further, where the period available to the Transfer Pricing Officer is extended to 60 days
in accordance with the proviso to section 92CA(3A) and the period of limitation available
to the Assessing Officer for making an order of assessment, reassessment or

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recomputation, as the case may be, is less than 60 days, such remaining period shall be
extended to 60 days and the aforesaid period of limitation shall be deemed to be
accordingly extended.
(vi) (a) Where a proceeding before the Settlement Commission abates under section
245HA, the period of limitation available under this section to the Assessing Officer
for making an order of assessment, reassessment or recomputation, as the case
may be, after the exclusion of the period under section 245HA(4), would be not less
than one year; and
(b) where such period of limitation is less than 1 year, it shall be deemed to have been
extended to 1 year;
(c) This would apply for the purposes of determining the period of limitation under
sections 149, 153B, 154, 155 and 158BE and for the purposes of payment of
interest under section 244A.
(vii) For the purposes of this section, ,—
Case Consequence
(a) Where, by an order referred to in An assessment of such income for
section 153(6)(i), any income is another assessment year shall, for
excluded from the total income of the the purposes of sections 150 and
assessee for an assessment year 153, be deemed to be one made in
consequence of or to give effect to
any finding or direction contained in
the said order
(b) Where, by an order referred to in An assessment of such income on
section 153(6)(i), any income is such other person shall, for the
excluded from the total income of one purposes of section 150 and section
person and held to be the income of 153, be deemed to be one made in
another person consequence of or to give effect to
any finding or direction contained in
the said order, provided such other
person was given an opportunity
of being heard before the said
order was passed.
(E) Time limit for completion of assessment under section 153A [New Section 153B]
Effective from: 1 st June, 2016
(i) The time limit for completion of assessments made under section 153A or section
153C cases have been amended to align the same with the new time limits provided
under new section 153. Further, in order to simplify the provisions of section 153B
by retaining only those provisions that are relevant to the current provisions of the
Act, section 153B has been substituted.

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(ii) The time limit for assessment or reassessment under section 153B with effect from 1st
June, 2016 is as follows -
Section Proceeding under section Time limit for completion of
assessment or reassessment
153B(1) 153A – for the assessment year 21 months from the end of the
relevant to the previous year in financial year in which the last of
which search is conducted u/s the authorizations for search
132 or requisition is made u/s under section 132 or for
132A and for each of the 6 requisition under section 132A
assessment years immediately was executed
preceding the assessment year
relevant to the previous year in
which search was conducted
153B(1) In case of a person assessed 21 months from the end of the
– First under section 153C – for the financial year in which last of the
Proviso assessment year relevant to the authorizations for search under
previous year in which search is section 132 or for requisition
conducted and for each of the 6 under section 132A was executed
assessment years immediately (or)
preceding the assessment year 9 months from the end of the
relevant to the previous year in financial year in which books of
which search was conducted account or documents or assets
seized or requisitioned are
handed over to the jurisdictional
Assessing Officer under section
153C,
whichever is later
153B(1) Completion of assessment in 33 months from the end of the
– cases where the last of the financial year in which the last of
Second authorizations for search under the authorizations for search
Proviso section 132 or for requisition under section 132 or requisition
under section 132A was under section 132A was executed.
executed and during the course
of assessment or reassessment
proceedings, reference u/s
92CA(1) is made.

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Completion of assessment/ 33 months from the end of the
reassessment in case of other financial year in which the last of
person referred to in section the authorizations for search
153C in cases where the last of under section 132 or for
the authorizations for search requisition under section 132A
under section 132 or for was executed
requisition under section 132A (or)
was executed and during the 21 months from the end of the
course of assessment or financial year in which the books
reassessment proceedings, of account or documents or
reference u/s 92CA(1) is made. assets seized or requisitioned are
handed over under section 153C
to the Assessing Officer having
jurisdiction over such other
person,
whichever is later.
(iii) Time of deemed execution of authorization in case of search and requisition :
Case Time when authorization is deemed to have been
executed
(a) Search u/s 132 On the conclusion of search as recorded in the last
panchnama drawn in relation to any person in whose
case the warrant of authorisation has been issued
(b) Requisition u/s On the actual receipt of books of account or other
132A documents or assets by the Authorised Officer.
(iv) The provisions of section 153B as they stood immediately before their amendment
by the Finance Act, 2016, shall apply to and in relation to any order of assessment,
reassessment or recomputation made before 1st June, 2016.
(v) Exclusion of period [Explanation to section 153B] - In computing the period of
limitation for the purposes of section 153B, the following time periods shall be excluded:
Exclusion of Period
Case
Commencing from Ending with
(1) Direction to get the date on which the the last date on
accounts audited under A.O. directs the which the
section 142(2A) assessee to get his assessee is
accounts audited under required to furnish
section 142(2A) a report of such
audit
(or)
the date on which

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the order setting
aside such
direction is
received by the
PC/CIT, if such
direction is
challenged before
a Court.
(2) Reference to the the date on which the the date on which
Valuation Officer under Assessing Officer makes the report of the
section 142A(1) a reference to the Valuation Officer
Valuation Officer is received by the
Assessing Officer
(3) Where an application the date on which an the date on which
made before the application is made the order u/s
Income-tax Settlement before the Settlement 245D(1) is
Commission is rejected Commission under received by the
by it or is not allowed to section 245C PC/CIT u/s
be proceeded with by it 245D(2)
(4) Where an application is the date on which an the date on which
made before the AAR application is made the order rejecting
u/s 245Q(1) before the AAR u/s the application is
245Q(1) received by the
PC/CIT u/s
245R(3)
(or)
the date on which
the advance ruling
pronounced by it is
received by the
PC/CIT u/s
245R(7),
as the case may
be.
(5) Where a proceeding or The date of annulment of The date of receipt
assessment order or the proceeding or of order setting
reassessment order assessment order or aside the order of
referred to in section reassessment order such annulment,
153A(2) is annulled by the PC/CIT.
(6) Where reference(s) for the date on which a the date on which
exchange of information reference or first of the the information
is made by a competent references for exchange requested is last
authority of information is made by received by the

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an authority competent PC/CIT
under an agreement (or)
referred to in section 90 a period of one
or section 90A year,
whichever is less
(7) the time taken in reopening the whole or any part of the proceeding or in
giving an opportunity to the assessee to be re-heard under the proviso to
section 129; or
(8) the period during which the assessment proceeding is stayed by an order
or injunction of any court.

(vi) However, where immediately after the exclusion of the aforesaid period, the period of
limitation referred to in section 153B(1)(a) and (b) available to the Assessing Officer
for making an order of assessment or reassessment, as the case may be, is less than
60 days, such remaining period shall be extended to 60 days. Consequently, the
aforesaid period of limitation shall be deemed to be extended accordingly.
(vii) Further, where the period available to the Transfer Pricing Officer is extended to 60
days in accordance with the proviso to section 92CA(3A) and the period of limitation
available to the Assessing Officer for making an order of assessment, reassessment
or recomputation, as the case may be, is less than 60 days, such remaining period
shall be extended to 60 days. Consequently, the aforesaid period of limitation shall
be deemed to be accordingly extended.
(F) Deemed escapement of income on the basis information obtained by the Income-tax
authorities [Section 147]
Related amendment is section: 133C
Effective from: 1st June, 2016
(i) Section 133C empowers the prescribed income-tax authority to issue notice calling for
information and documents for the purpose of verification of information in its
possession.
(ii) For the purpose of expediting verification and analysis of the information and documents
so received, sub-section (2) has been inserted in section 133C to provide that where
any information or document has been received in response to a notice issued under
section 133C(1), the prescribed income-tax authority may process such information or
document so obtained and make the outcome thereof available to the Assessing Officer,
for necessary action, if any.
(iii) Thus, this amendment provides sufficient legislative backing for processing of
information and documents so obtained and making the outcome thereof available to
the Assessing Officer for necessary action, if any.

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(iv) Explanation 2 to section 147 specifies certain cases where income chargeable to tax is
deemed to have escaped assessment. Clause (ca) has been inserted in Explanation 2
to provide the circumstances where income shall be deemed to have escaped
assessment in the cases mentioned in (1) and (2) hereunder:
Case Deemed escapement of income
(1) Where a return of On the basis of information or document received from
income has not the prescribed income-tax authority, under section
been furnished by 133C(2), it is noticed by the Assessing Officer that the
the assessee income of the assessee exceeds the basic
exemption limit
(2) Where a return of On the basis of information or document received from
income has been the prescribed income-tax authority, under section
furnished by the 133C(2), it is noticed by the Assessing Officer that the
assessee assessee has understated the income or has
claimed excessive loss, deduction, allowance or
relief in the return

Since income is deemed to have escaped assessment in such cases, the Assessing
Officer can reopen the assessment on the basis of the information so received.
SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Monetary limits of specified transactions which require quoting of PAN enhanced


with effect from 1stJanuary, 2016 [Notification No. 95/2015, dated 30-12-2015]
The Government is committed to curbing the circulation of black money and widening of
tax base. To collect information of certain types of transactions from third parties in a
non-intrusive manner, it is mandatory under Rule 114B of the Income-tax Rules, 1962 to
quote PAN where the transactions exceed a specified limit. To bring a balance between
burden of compliance on legitimate transactions and the need to capture information
relating to transactions of higher value, Rule 114B has been substituted to enhance the
monetary limits of certain transactions which require quoting of PAN.
S. Nature of transaction Value of transaction
No.
1. Sale or purchase of a motor vehicle or vehicle, as All such transactions
defined in the Motor Vehicles Act, 1988 which
requires registration by a registering authority
under that Act, other than two wheeled vehicles.
2. Opening an account [other than a time-deposit All such transactions
referred to at Sl. No.12 and a Basic Savings Bank
Deposit Account] with a banking company or a
co-operative bank to which the Banking

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Regulation Act, 1949 applies (including any bank
or banking institution referred to in section 51 of
that Act).
3. Making an application to any banking company or All such transactions
a co-operative bank to which the Banking
Regulation Act, 1949, applies (including any bank
or banking institution referred to in section 51 of
that Act) or to any other company or institution,
for issue of a credit or debit card.
4. Opening of a demat account with a depository, All such transactions
participant, custodian of securities or any other
person registered under section 12(1A) of the
Securities and Exchange Board of India Act,
1992.
5. Payment to a hotel or restaurant against a bill or Payment in cash of an
bills at any one time. amount exceeding
` 50,000.
6. Payment in connection with travel to any foreign Payment in cash of an
country or payment for purchase of any foreign amount exceeding
currency at any one time. ` 50,000.
7. Payment to a Mutual Fund for purchase of its Amount exceeding
units ` 50,000.
8. Payment to a company or an institution for Amount exceeding
acquiring debentures or bonds issued by it. ` 50,000.
9. Payment to the Reserve Bank of India for acquiring Amount exceeding
bonds issued by it. ` 50,000.
10. Deposit with a banking company or a co- Deposits in cash exceeding
operative bank to which the Banking Regulation ` 50,000 during any one
Act, 1949, applies (including any bank or banking day.
institution referred to in section 51 of that Act).
11. Purchase of bank drafts or pay orders or banker’s Payment in cash of an
cheques from a banking company or a co- amount exceeding
operative bank to which the Banking Regulation ` 50,000 during any one
Act, 1949 applies (including any bank or banking day.
institution referred to in section 51 of that Act).
12. A time deposit with, - Amount exceeding
(i) a banking company or a co-operative bank to ` 50,000 or aggregating to
which the Banking Regulation Act, 1949 applies more than ` 5 lakh during
(including any bank or banking institution referred to a financial year.
in section 51 of that Act);
(ii) a Post Office;
(iii) a Nidhi referred to in section 406 of the
Companies Act, 2013; or

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(iv) a non-banking financial company which
holds a certificate of registration under section
45-IA of the Reserve Bank of India Act, 1934, to
hold or accept deposit from public.
13. Payment for one or more pre-paid payment Payment in cash or by way
instruments, as defined in the policy guidelines of a bank draft or pay order
for issuance and operation of pre-paid payment or banker’s cheque of an
instruments issued by Reserve Bank of India amount aggregating to
under the Payment and Settlement Systems Act, more than ` 50,000 in a
2007, to a banking company or a co-operative financial year.
bank to which the Banking Regulation Act, 1949,
applies (including any bank or banking institution
referred to in section 51 of that Act) or to any
other company or institution.
14. Payment as life insurance premium to an insurer Amount aggregating to
as defined in the Insurance Act, 1938. more than ` 50,000 in a
financial year.
15. A contract for sale or purchase of securities Amount exceeding ` 1 lakh
(other than shares) as defined in section 2(h) of per transaction
the Securities Contracts (Regulation) Act, 1956.
16. Sale or purchase, by any person, of shares of a Amount exceeding ` 1 lakh
company not listed in a recognised stock exchange. per transaction.
17. Sale or purchase of any immovable property. Amount exceeding
` 10 lakh or valued by
stamp valuation authority
referred to in section 50C at
an amount exceeding ` 10
lakh
18. Sale or purchase, by any person, of goods or Amount exceeding ` 2 lakh
services of any nature other than those specified per transaction:
at Sl. No. 1 to 17 of this Table, if any.
Minor to quote PAN of parent or guardian
Where a person, entering into any transaction referred to in this rule, is a minor and who does
not have any income chargeable to income-tax, he shall quote the PAN of his father or
mother or guardian, as the case may be, in the document pertaining to the said transaction.
Declaration by a person not having PAN
Further, any person who does not have a PAN and who enters into any transaction
specified in this rule, shall make a declaration in Form No.60 giving therein the
particulars of such transaction.
Non-applicability of Rule 114B
Also, the provisions of this rule shall not apply to the following class or classes of

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persons, namely:-
(i) the Central Government, the State Governments and the Consular Offices;
(ii) the non-residents referred to in section 2(30) in respect of the transactions other
than a transaction referred to at Sl. No. 1 or 2 or 4 or 7 or 8 or 10 or 12 or 14 or 15
or 16 or 17 of the Table.
Meaning of certain phrases:
Phrase Inclusion
(1) Payment in Payment towards fare, or to a travel agent or a tour
connection with operator, or to an authorized person as defined in section
travel 2(c) of the Foreign Exchange Management Act, 1999
(2) Travel agent or A person who makes arrangements for air, surface or
tour operator maritime travel or provides services relating to
accommodation, tours, entertainment, passport, visa,
foreign exchange, travel related insurance or other travel
related services either severally or in package
(3) Time deposit Any deposit which is repayable on the expiry of a fixed
period.

2. Applicability of Supreme Court Guidelines on recording of satisfaction note under


section 158BD to apply to proceedings under section 153C for the purposes of
assessment of income of a person other than the person in respect of whom
search is initiated under section 132 or books of account are requisitioned under
section 132A [Circular No.24/2015, dated 31-12-2015]
The issue of recording of satisfaction for the purposes of section 158BD/153C has been
subject matter of litigation.
The Hon'ble Supreme Court in the case of M/s Calcutta Knitwears in its detailed
judgment in Civil Appeal No. 3958 of 2014 dated 12-3-2014 (available in NJRS at 2014-
LL-0312-51) has laid down that for the purpose of section 158BD of the Act, recording of
a satisfaction note is a pre-requisite and the satisfaction note must be prepared by the
Assessing Officer before he transmits the record to the other Assessing Officer who has
jurisdiction over such other person under section 158BD 5. The Supreme Court held that
"the satisfaction note could be prepared at any of the following stages:

5 Section 158BC lays down the procedure for block assessment dealt with in Chapter XIV -B of the Income-tax Act,
1961, which applies where search is initiated under section 132 or books of account are requisitioned under
section 132A on or before 31.5.2003. Section 158BD provides that where the Assessing Officer is satisfied that
any undisclosed income belongs to any person, other than the person wi th respect to whom search is made under
section 132 or books of account are requisitioned under section 132A, then, the books of account, other
documents seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such
other person and that Assessing Officer shall proceed under section 158BC against such other person and the
provisions of Chapter XIV-B shall apply accordingly.

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a. at the time of or along with the initiation of proceedings against the searched person
under section 158BC; or
b. in the course of the assessment proceedings under section 158BC; or
c. immediately after the assessment proceedings are completed under section 158BC
of the searched person.
Several High Courts have held that the provisions of section 153C are substantially
similar/ pari-materia to the provisions of section 158BD and therefore, the above
guidelines of the Supreme Court, apply to proceedings under section 153C, for the
purposes of assessment of income of other than the searched person. This view has
been accepted by CBDT.
It is further clarified that even if the Assessing Officer of the searched person and the
"other person" is one and the same, then also he is required to record his satisfaction as
has been held by the Courts.

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24
APPEALS & REVISION

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Removal of reference to “Senior Vice President”[Section 252]


Effective from: 1 st June, 2016
(i) Section 252(3)(b), 252(4A) and 252(5) provide for the appointment and powers of
Senior Vice-President of the Appellate Tribunal.
(ii) Considering the fact that there are no extra-judicial or administrative duties or
difference in the pay scale attached with the post of Senior Vice-President in the
Tribunal, the reference of "Senior Vice-President" in this section has been omitted.
(B) Provision for filing of appeal by the Assessing Officer against the order of DRP
done away with [Section 253]
Effective from: 1 st June, 2016
(i) Under section 253(2A), the Principal Commissioner or Commissioner may, if he
objects to any direction issued by the Dispute Resolution Panel (DRP) under section
144C(5) in pursuance of which the Assessing Officer has passed an order
completing the assessment or reassessment, direct the Assessing Officer to appeal
to the Appellate Tribunal against such order.
(ii) Further, section 253(3A) provides that every appeal under section 253(2A) shall be
filed within 60 days of the date on which the order sought to be appealed against is
passed by the Assessing Officer in pursuance of the directions of the DRP under
section 144C(5).
(iii) In order to minimise litigation, sub-sections (2A) and (3A) of section 253 have been
omitted. Thus, the provision for filing of appeal by the Assessing Officer against the
order of the DRP has been done away with.
(iv) In cases where Department is already in appeal against the directions of DRP un der
section 253(2A), no fee shall be payable. This amendment will take effect
retrospectively from 1st July, 2012.
(v) Further, the existing sub-section (4) has been substituted with new sub-section (4).
Accordingly, on receipt of notice that appeal against order of Commissioner
(Appeals) has been preferred by the Assessing Officer or the assessee, as the case
may be, the other party can file memorandum of cross objections within 30 days of

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receipt of notice against any part of the order of Commissioner (Appeals). The
Appellate Tribunal has to dispose of the memorandum of cross objections as if it
were an appeal filed within the given time limit.
(C) Reduction in time limit for rectification of mistake apparent from the record by the
Appellate Tribunal [Section 254(2)]
(i) Section 254(2) provides that the Appellate Tribunal may rectify any mistake
apparent from the record in its order at any time within four years from the date of
the order.
(ii) For bringing in certainty to the order of Appellate Tribunal, section 254(2) has been
amended to provide that the Appellate Tribunal may rectify any mistake apparent
from the record in its order at any time within six months from the end of the
month in which the order was passed.
(D) Raising the total income limit of the cases that may be decided by single member
bench of Appellate Tribunal [Section 255(3)]
Effective from: 1 st June, 2016
(i) Section 255(1) provides that the powers and functions of the Appellate Tribunal may
be exercised and discharged by Benches constituted by the President of the
Appellate Tribunal among the members thereof.
(ii) As per section 255(2), a Bench should normally consist of one judicial member and
one accountant member.
(iii) However, section 255(3) provides for constitution of a single member bench and a
Special Bench.
(iv) Section 255(3) provides that a single member bench may dispose of any case which
pertains to an assessee whose total income as computed by the Assessing Officer
in the said case does not exceed ` 15 lakh.
(v) The limit for a single member bench was revised last year from ` 5 lakh to ` 15 lakh.
(vi) In order to further expedite the process of dispute resolution at the appellate tribunal
level, section 255(3) has been amended to provide that a bench comprising of a
single member may dispose of a case where the total income as computed by the
Assessing Officer in the said case does not exceed ` 50 lakh.
SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Revision of monetary limits for filing of appeals by the Department before Income
Tax Appellate Tribunal and High Courts and SLP before Supreme Court – A
significant measure for reducing litigation [Circular No. 21/2015, dated 10‐12‐2015]
The CBDT has, through this circular, revised the monetary limits for filing of appeals by
the Department with the objective of reducing litigation as a part of its initiatives to
reduce grievances of the tax payers.

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Accordingly, henceforth, appeals/ SLPs shall not be filed in cases where the tax effect
does not exceed the monetary limits given hereunder -
S. No. Appeals in income-tax matters Monetary limit (` )
1. Before Appellate Tribunal 10,00,000
2. Before High Court 20,00,000
3. Before Supreme Court 25,00,000
It is also clarified that an appeal should not be filed merely because the tax effect in a
case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to
be decided on merits of the case.
Meaning of Tax Effect:
Case Tax effect
(i) In cases not covered The tax on the total income assessed
in (ii), (iii) and (iv) (-)
below The tax that would have been chargeable had such
total income been reduced by the amount of income
in respect of the issues against which appeal is
intended to be filed ("disputed issues").
Note - However, the tax will not include any interest
thereon, except where chargeability of interest itself is
in dispute.
(ii) In case the The amount of interest
chargeability of
interest is the issue
under dispute
(iii) In cases where The tax effect would include notional tax on disputed
returned loss is additions
reduced or assessed
as income
(iv) In case of penalty Quantum of penalty deleted or reduced in the order
orders to be appealed against
Manner of calculation of tax effect of different assessment years:
The Assessing Officer has to calculate the tax effect separately for every· assessment
year in respect of the disputed issues in the case of every assessee. If, in the case of an
assessee, the disputed issues arise in more than one assessment year, appeal can be
filed in respect of such assessment year or years in which the tax effect in respect of the
disputed issues exceeds the specified monetary limit. No appeal shall be filed in respect
of an assessment year or years in which the·tax effect is less than the monetary limit
specified. In other words, henceforth, appeals can be filed only with reference to the tax
effect in the relevant assessment year. However, in case of a composite order of an y

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High Court or appellate authority, which involves more than one assessment year and
common issues in more than one assessment year, appeal shall be filed in respect of all
such assessment years even if the 'tax effect' is less than the prescribed monetar y limits
in any of the year(s), if it is decided to file appeal in respect of the year(s) in which ‘tax
effect’ exceeds·the monetary limit· prescribed. In case where a composite order/judgement
involves more than one assessee, each assessee shall be dealt with separately.
Department not precluded from filing an appeal against disputed issues for
subsequent assessment years if the tax effect exceeds the specified monetary
limits in those years
In a case where appeal before a Tribunal or a Court is not filed only on account of the tax
effect being less than the monetary limit specified above, the Commissioner of Income -
tax shall specifically record that "even though the decision is not acceptable, appeal is
not being filed only on the consideration that the tax effect is less than the monetary limit
specified in this instruction". Further, in such cases, there will be no presumption that the
Income-tax Department has acquiesced in the decision on the disputed issues. The
Income-tax Department shall not be precluded from filing an appeal against the disputed
issues in the case of the same assessee for any other assessment year, or in the case of
any other assessee for the same or any other assessment year, if the tax effect exceeds
the specified monetary limits.
Cases in respect of which appeal is not filed due to tax effect being less than
specified monetary limit not to have any precedent value
In the past, a number of instances have come to the notice of the Board, whereby an
assessee has claimed relief from the Tribunal or the Court only on the ground that the
Department has implicitly accepted the decision of the Tribunal or Court in the case of
the assessee for any other assessment year or in the case of any other assessee for the
same or any other assessment year, by not filing an appeal on the same disputed issues.
The Departmental representatives/counsels must make every effort to bring to the notice
of the Tribunal or the Court that the appeal in such cases was not filed or not admitted
only for the reason of the tax effect being less than the specified monetary limit and,
therefore, no inference should be drawn that the decisions rendered therein were
acceptable to the Department. Accordingly, they should impress upon the Tribunal or the
Court that such cases do not have any precedent value. As the evidence of not filing
appeal due to this instruction may have to be produced in courts, the judicial folders in
the office of Cs IT must be maintained in a systemic manner for easy retrieval.
Circumstances when appeal can be filed even if tax effect is less than the specified
monetary limit
Adverse judgments relating to the following issues should be contested on merits
notwithstanding that the tax effect entailed is less than the specified monetary limits or
there is no tax effect:
(a) Where the Constitutional validity of the provisions of an Act or Rule are under challenge, or
(b) Where Board's order, Notification, Instruction or Circular has been held to be illegal or ultra
vires, or

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(c) Where Revenue Audit objection in the case has been accepted by the Department, or
(d) Where the addition relates to undisclosed foreign assets/bank accounts.
Specified monetary limit not to apply to writ matters and direct tax matters other
than income-tax
Filing of appeals in other direct tax matters shall continue to be governed by the relevant
provisions of statute and rules. Further, filing of appeal in cases of income-tax, where the
tax effect is not quantifiable or not involved, such as the case of registration of trusts or
institutions under section 12A, shall not be governed by the specified monetary limits and
decision to file appeal in such cases may be taken on merits of a particular case.
Clarification on applicability of Circular No 21/2015, dated 10-12-2105 [Letter F. No.
279/Misc./M-142/2007 - ITJ (Part), dated 08-03-2016]
The monetary limits for filing appeals before the Income Tax Appellate Tribunals and
High Courts were raised to ` 10 lakhs and ` 20 lakhs, respectively, by Circular 21/2015
dated 10.12.2015.
The issue under consideration is whether such circular would be applicable to cross
objections filed by the Department before the Income-tax Appellate Tribunal under
section 253(4) and to references to the High Court under sections 256(1) and 256(2) .
The CBDT has examined the matter and clarified that the monetary limit of ` 10 lakhs for
filing appeals before the ITAT would apply equally to cross objections under section
253(4). Cross objections below this monetary limit, already filed, should be pur sued for
dismissal as withdrawn/not pressed. Filing of cross objections below the monetary limit
may not be considered henceforth.
Similarly, references to High Courts below the monetary limit of ` 20 lakhs should be
pursued for dismissal as withdrawn/not pressed. References below this limit may not be
considered henceforth.

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25
PENALTIES

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Penalty leviable for under-reporting of income and mis-reporting of income [New
section 270A]
Related amendment in sections: 119, 253, 271, 271A, 271AA, 271AAB, 273A and 279
Effective from: A.Y.2017-18
(i) Section 271(1)(c) provides for penalty on account of concealment of particulars of
income or furnishing inaccurate particulars of income.
(ii) For the purpose of ensuring objectivity, certainty and clarity in the penalty
provisions, new section 270A has been inserted with effect from A.Y.2017-18
providing for levy of penalty in cases of under reporting and misreporting of income.
Consequently, the penal provisions under section 271 shall not apply in relation to
A.Y.2017-18 and onwards.
(iii) Section 270A(1) empowers the Assessing Officer, Commissioner (Appeals) or the
Principal Commissioner or Commissioner to direct levy of penalty, during the course
of proceedings under the Income-tax Act, 1961, if a person has under reported his
income. Such penalty shall be imposed by an order in writing by such authority.
(iv) Cases of under-reporting of income [Section 270A(2)]:
A person shall be considered to have under reported his income if, A>B in the cases
given hereunder – is greater than

Case (A) (B)


(1) Return of income Income assessed Income determined in the
has been filed return processed under
section 143(1)(a);
(2) No return of income Income assessed Basic exemption limit
has been filed
(3) Reassessment Income reassessed Income assessed or
reassessed immediately
before such re-assessment

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(4) Return of income The amount of The deemed total income
has been filed and deemed total income determined in the return
assessment/ assessed or processed u/s 143(1)(a)
reassessment is reassessed as per the
made on the basis provisions of section
of MAT/AMT 115JB or 115JC
provisions
(5) No return of income the amount of deemed The basic exemption limit,
is filed and total income assessed in case of an assessee
assessment/ as per the provisions being an individual, HUF,
reassessment is of section 115JB or AOP, BOI, in respect of
made on the basis 115JC whom the provisions of
of MAT/AMT AMT are applicable.
provisions
(6) Reassessment as The amount of The deemed total income
per the provisions deemed total income assessed or reassessed
of sections 115JB reassessed as per the immediately before such
or 115JC provisions of sections reassessment.
115JB or 115JC
Further, a person would be considered to have under-reported his income if the
income assessed or reassessed has the effect of reducing the loss or
converting such loss into income
(v) Calculation of under-reported income in different scenarios [Section 270A(3)]:
Case Manner of computation of under-reported income
(1) Where return is Assessed income
furnished and (-)
assessment is Income determined under section 143(1)(a)
made for the first
[in case of all persons]
time.
(2) Where no return Person Under-reported income
has been Company, firm or Assessed income
furnished and local authority
the assessment
Other persons Assessed income
is made for the
first time (-)
Basic exemption limit
(3) Where income is Income reassessed or recomputed
not assessed for (-)
the first time Income assessed or reassessed or recomputed in the
order immediately preceding the order during the
course of which penalty u/s 270A(1) has been initiated.

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(4) Where under (A - B) + (C - D)
reported income where,
arises out of A = Total income assessed as per the general
determination of provisions i.e., provisions other than the
deemed total provisions contained in section 115JB or section
income in 115JC;
accordance with
B = the total income that would have been chargeable
the provisions of
had the total income assessed as per the
section 115JB or
general provisions been reduced by the amount
section 115JC
of under reported income;
C = the total income assessed as per the provisions
contained in section 115JB or section 115JC;
D = the total income that would have been chargeable
had the total income assessed as per the
provisions contained in section 115JB or section
115JC been reduced by the amount of under
reported income.
However, where the amount of under reported income
on any issue is considered both under the provisions
contained in section 115JB or section 115JC and
under general provisions, such amount shall not be
reduced from total income assessed while
determining the amount under item D.
(5) Where an The loss claimed
assessment or (-)
reassessment The income or loss, as the case may be, assessed or
has the effect of reassessed.
reducing the loss
declared in the
return or
converting that
loss into income
(vi) Meaning of Under-reported income in a case where the source of any receipt,
deposit or investment is linked to an earlier year [Section 270A(4) & (5)] :
In a case where the source of any receipt, deposit or investment appearing in the
current assessment year is claimed to be an amount added to income or deducted
while computing loss, as the case may be, in the assessment of such person in any
earlier assessment year and no penalty was levied for such preceding year, under -
reported income shall include such amount as is sufficient to cover such receipt,
deposit or investment.
Note – Such amount shall be deemed to be the amount of income under-reported
for the preceding year in the following order –

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(i) The preceding year immediately before the year in which the receipt,
deposit or investment appears, being the first preceding year; and

(ii) Where the amount added or deducted in the first preceding year is not
sufficient to cover the receipt, deposit or investment, the year immediately
preceding the first preceding year and so on.

(vii) Cases not included within the scope of under-reported income under section
270A [Section 270A(6)]:
Case Condition
(1) The amount of income in The Assessing Officer/CIT/PC/
respect of which the assessee Commissioner (Appeals) is satisfied that
offers an explanation the explanation is bona fide and all the
material facts have been disclosed to
substantiate the explanation.
(2) The amount of under-reported If the accounts are correct and complete
income determined on the to the satisfaction of the income-tax
basis of an estimate authority but the method employed is
such that the income cannot properly be
deduced therefrom
(3) The amount of under-reported If the assessee has, on his own,
income determined on the estimated a lower amount of addition or
basis of an estimate disallowance on the same issue and
has included such amount in the
computation of his income and
disclosed all the facts material to the
addition or disallowance
(4) The amount of under-reported Where the assessee had maintained
income represented by any information and documents as
addition made in conformity prescribed under section 92D, declared
with the arm’s length price the international transaction under
determined by the Transfer Chapter X and disclosed all the material
Pricing Officer facts relating to the transaction
(5) The amount of undisclosed Where penalty is leviable under section
income on account of a search 271AAB in respect of such undisclosed
operation income.
(viii) Cases of misreporting of income [Section 270A(9)]:
(1) misrepresentation or suppression of facts;
(2) failure to record investments in books of account;
(3) claim of expenditure not substantiated by any evidence;

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(4) recording of any false entry in books of account;
(5) failure to record any receipt in books of account having a bearing on tot al
income; and
(6) failure to report any international transaction or deemed international
transaction or specified domestic transaction under Chapter X.
(ix) Quantum of penalty leviable

Section Case Penalty

(1) 270A(7) Under reporting of income 50% of tax payable on


under-reported income

(2) 270A(8) Where under reporting of income 200% of tax payable on


results from misreporting of such under-reported
income by any person. income

(x) Manner of computation of tax payable on under-reported income [Section


270A(10)]:

Case Manner of computation of tax payable on


under-reported income

(1) Where no return of The tax payable on under-reported income


income has been shall be the amount of tax calculated on the
furnished and the income under-reported income as increased by the
has been assessed for basic exemption limit as if it were the total
the first time income.

(2) Where the total income The tax payable in respect of the under-
determined u/s 143(1)(a) reported income shall be the amount of tax
or assessed or calculated on the under-reported income as
reassessed or if it were the total income.
recomputed in a
preceding order is a loss

(3) In any other case The amount of tax calculated on the under-
reported income as increased by the total
income determined under section 143(1)(a)
or total income assessed, reassessed or
recomputed in a preceding order as if it
were the total income
Minus
The amount of tax calculated on the total

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income determined under section 143(1)(a)
or total income assessed, reassessed or
recomputed in a preceding order.
(xi) No addition or disallowance of an amount shall form the basis for imposition of
penalty, if such addition or disallowance has formed the basis of imposition of
penalty in the case of the person for the same or any other assessment year
[Section 270A(11)].
(xii) Consequential amendments in other provisions:
Consequential amendments have been made in sections 119, 253, 271A, 271AA,
271AAB, 273A and 279 to provide reference to new section 270A.
Section Provision Amendment
(1) 119(2)(a) Power of CBDT to relax certain The CBDT has now been
provisions, by way of a general empowered to relax the
or special order, for the provisions for levy of penalty
purpose of proper and efficient section 270A also.
management of the work of
assessment and collection of
revenue.
(2) 253(1) Enlists the orders appealable The order passed by the
to the Appellate Tribunal. Commissioner (Appeals),
Principal Commissioner or
Commissioner under section
270A would also be
appealable to the Appellate
Tribunal.
(3) 271A Levy of penalty of ` 25,000 The penalty under this
for failure to keep, maintain section would be without
or retain books of account as prejudice to the provisions
required under section 44AA. of new section 270A.
(4) 271AA Levy of penalty of 2% of The penalty under this
value of international section would be without
transaction or specified prejudice to the provisions
domestic transaction, where of new section 270A.
the person fails to maintain
information and documents
required u/s 92D or report
such transaction or maintains
or furnishes an incorrect
information or document.

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(5) 271AAB Levy of penalty where search No penalty under section
is initiated under section 132 270A would be imposable in
on or after 1.7.2012. respect of undisclosed
income on which penalty
has been levied under
section 271AAB(1).
(6) 273A(1) Power of Principal Reduction or waiver of
Commissioner or penalty imposable on a
Commissioner to reduce or person u/s 270A, if prior to
waive penalty in certain detection by the Assessing
cases. Officer, the person has
voluntarily and in good faith
made full and true
disclosure of particulars of
income i.e., where the
excess of income assessed
over the income returned is
of such a nature as not to
attract the penal provisions
u/s 270A.
(7) 273A(2) Order reducing or waiving Previous approval of higher
penalty under section authorities also required if,
273A(1) to be made by the in a case falling u/s 270A,
PC/CIT only with the previous the amount of income in
approval of the respect of which the penalty
PCC/CC/PDG/DG, as the is imposed or imposable for
case may be. the relevant A.Y., or where
such disclosure relates to
more than one A.Y., the
aggregate amount of such
income for those years
exceed ` 5 lakh.
(8) 276C Prosecution to be instituted if Prosecution to also be
a person willfully attempts in instituted if a person under-
any manner to evade any tax, reports his income under the
penalty or interest chargeable Income-tax Act, 1961
or imposable under the
Income-tax Act, 1961.
Rigorous imprisonment for a Rigorous imprisonment for a
period of 6 months to 7 years period of 6 months to 7
and fine would be attracted in years and fine would also be
a case where the amount attracted in a case where

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sought to be evaded exceeds the tax on under-reported
` 25 lakhs. income exceeds ` 25 lakhs.
(9) 279(1A) Prosecution not to be Prosecution not to be
instituted against a person instituted against a person u/s
u/s 276C or 277 in relation to 276C or 277 in relation to the
the assessment for an assessment for an AY in
assessment year in respect respect of which penalty
of which penalty imposed or imposed or imposable u/s
imposable u/s 271(1)(iii) has 270A or u/s 271(1)(iii) has
been reduced or waived by been reduced or waived by
an order u/s 273A. an order u/s 273A.

(xiv) Examples:
(1) M/s. XYZ is a firm liable to tax@30%. The following are the particulars
furnished by the firm for A.Y.2017-18:
Particulars of total income `
(1) As per the return of income furnished u/s 139(1) 50,00,000
(2) Determined under section 143(1)(a) 60,00,000
(3) Assessed under section 143(3) 75,00,000
(4) Reassessed under section 147 95,00,000
Can penalty be levied under section 270A on M/s. XYZ? If the answer is in the
affirmative, compute the penalty leviable under section 270A.
Solution
M/s. XYZ is deemed to have under-reported its income since:
(1) its income assessed under 143(3) exceeds its income determined in a return
processed under section 143(1)(a); and
(2) the income reassessed under section 147 exceeds the income assessed
under section 143(3).
Therefore, penalty is leviable under section 270A for under-reporting of
income.
Computation of penalty leviable under section 270A
Particulars ` `
Assessment under section 143(3)
Under-reported income:
Total income assessed under section 143(3) 75,00,000
(-) Total income determined u/s 143(1)(a) 60,00,000
15,00,000

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Tax payable on under-reported income:
Tax on under-reported income of ` 15 lakhs plus
tax on total income of ` 60 lakhs determined u/s 23,17,500
143(1)(a) [30% of ` 75 lakh + EC &
SHEC@3%]
Less: Tax on total income determined u/s
18,54,000
143(1)(a) [30% of ` 60 lakh + EC &
SHEC@3%]
_4,63,500
Penalty leviable@50% of tax payable 2,31,750

Reassessment under section 147


Under-reported income:
Total income reassessed under section 147 95,00,000
(-) Total income assessed under section 75,00,000
143(3)
20,00,000
Tax payable on under-reported income:
Tax on under-reported income of ` 20 lakhs plus
tax on total income of ` 75 lakhs assessed u/s 29,35,500
143(3) [30% of ` 95 lakh + EC & SHEC@3%]
Less: Tax on total income assessed u/s
143(3) [30% of ` 75 lakh + EC & 23,17,500
SHEC@3%]
6,18,000
Penalty leviable@50% of tax payable 3,09,000
Note – The following assumptions have been made -
(1) None of the additions or disallowances made in assessment or
reassessment qualifies under section 270A(6); and
(2) The under-reported income is not on account of misreporting.
(2) Mr. Ram, a resident individual of the age of 55 years, has not furnished his return of
income for A.Y.2017-18. However, the total income assessed in respect of such
year under section 143(3) is ` 12 lakh. Is penalty under section 270A attracted in
this case, and if so, what is the quantum of penalty leviable?
Solution
Mr. Ram is deemed to have under-reported his income since he has not filed his
return of income and his assessed income exceeds the basic exemption limit of
` 2,50,000. Hence, penalty under section 270A is leviable in his case.

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Computation of penalty leviable under section 270A
Particulars ` `
Assessment under section 143(3)
Under-reported income:
Total income assessed under section 143(3) 12,00,000
(-) Basic exemption limit 2,50,000
9,50,000
Tax payable on under-reported income as increased by 1,85,000
the basic exemption limit [30% of ` 2 lakhs + ` 1,25,000]
Add: EC & SHEC@3% __5,550
1,90,550
Penalty leviable@50% of tax payable 95,275
Note – It is assumed that the under-reported income is not on account of
misreporting.
(3) ABC Ltd. is a domestic company liable to tax@30%. The following are the
particulars furnished by the company for A.Y.2017-18:
Particulars of total income `
(1) As per the return of income furnished u/s 139(1) (15,00,000)
(2) Determined under section 143(1)(a) (8,00,000)
(3) Assessed under section 143(3) (5,00,000)
(4) Reassessed under section 147 4,00,000
Is penalty leviable under section 270A on ABC Ltd., and if so, what is the quantum
of penalty?
Solution
ABC Ltd. is deemed to have under-reported its income since:
(1) the assessment under 143(3) has the effect of reducing the loss determined in a
return processed under section 143(1)(a); and
(2) the reassessment under section 147 has the effect of converting the loss assessed
under section 143(3) into income.
Therefore, penalty is leviable under section 270A for under-reporting of income.
Computation of penalty leviable under section 270A
Particulars ` `
Assessment under section 143(3)
Under-reported income:
Loss assessed u/s 143(3) (5,00,000)

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(-) Loss determined under section 143(1)(a) (8,00,000)
3,00,000
Tax payable on under-reported income@30% 90,000
Add: EC & SHEC@3% 2,700
92,700
Penalty leviable@50% of tax payable 46,350
Reassessment under section 147
Under-reported income:
Total income reassessed under section 147 4,00,000
(-) Loss assessed under section 143(3) (5,00,000)
9,00,000
Tax payable on under-reported income@30% 2,70,000
Add: EC & SHEC@3% 8,100
2,78,100
Penalty leviable@50% of tax payable 1,39,050
Note – The following assumptions have been made -
(1) None of the additions or disallowances made in assessment or reassessment
qualifies under section 270A(6); and
(2) The under-reported income is not on account of misreporting.
(B) Immunity from imposition of penalty and prosecution [New section 270AA]
Related amendment in section: 249
Effective from: A.Y.2017-18
(i) Application to be made by the assessee to Assessing Officer for grant of
immunity from penalty and prosecution [Section 270AA(1)]
An assessee may make an application to the Assessing Officer for grant of
immunity from imposition of penalty under section 270A and initiation of
proceedings under section 276C or section 276CC, if he -
(1) pays the tax and interest payable as per the order of assessment under
section 143(3) or reassessment under section 147, within the period specified
in such notice of demand; and
(2) does not prefer an appeal against such assessment/reassessment order.
(ii) Time limit for making application [Section 270AA(2)]
The assessee can make such application in the prescribed form and verified in the
prescribed manner within one month from the end of the month in which the order
of assessment or reassessment is received

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(iii) Circumstances in which the Assessing Officer cannot grant immunity from
penalty and prosecution [Section 270AA(3)]
The Assessing Officer shall grant immunity from initiation of penalty under section
270A and prosecution under section 276C or section 276CC, on fulfilment of the
conditions specified in (1) and (2) of (i) above, and after the expiry of period of filing
appeal as specified in section 249(2).
However, immunity shall be granted by the Assessing Officer only if the penalty
proceedings under section 270A have not been initiated on account of the following,
namely:—
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in books of account having a bearing on total
income; or
(f) failure to report any international transaction or any transaction deemed to be
an international transaction or any specified domestic transaction to which the
provisions of Chapter X apply.
(iv) Time limit for passing order accepting or rejecting application for immunity
from penalty and prosecution [Section 270AA(4)]
The Assessing Officer shall pass an order accepting or rejecting the application for
immunity from penalty under section 270A or prosecution under section 276C or
section 276CC within a period of one month from the end of the month in which
such application is received. However, in the interest of natural justice, no order
rejecting the application shall be passed by the Assessing Officer unless the
assessee has been given an opportunity of being heard.
(v) Finality of order passed by the Assessing Officer under section 270AA(4)
[Section 270AA(5)]
The order of the Assessing Officer passed under section 270AA(4) accepting or
rejecting the application made by the assessee for immunity from penalty under
section 270A or prosecution under section 276C or section 276CC shall be final.
(vi) Order of assessment/reassessment, in respect of which application for
immunity is accepted, is neither appealable before Commissioner (Appeals)
nor can the same be admitted by Commissioner for revision under section 264
[Section 270AA(6)]
No appeal under section 246A or an application for revision under section 264 shall
be admissible against the order of assessment or reassessment referred to in
section 270A(1)(a), in a case where an order under section 270AA(4) has been
made accepting the application.

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(vii) Exclusion of period when application for immunity is pending before
Assessing Officer from the time limit for filing of appeal before Commissioner
(Appeals), in a case where such application is rejected [Second Proviso to
section 249(2)(b)]
As per section 249(2)(b), an appeal before the Commissioner (Appeals) is to be
made within 30 days of the receipt of the notice of demand relating to an
assessment or penalty, where the appeal relates to such assessment or penalty.
In a case where the assessee makes an application under section 270AA seeking
immunity from penalty, then, the following period has to be excluded for calculation
of the aforesaid thirty days period –
Exclusion of period
beginning from ending with
the date on which application under the date on which the order rejecting
section 270AA for immunity from the application is served on the
penalty under section 270A is made assessee.

(C) Time limit for passing an order for waiver of interest and penalty [Sections 220(2A),
273A, 273AA]
Effective from: 1 st June, 2016
(i) No time limit has been provided within which orders under section 220 or sections
273A or 273AA have to be passed. Further, there is no requirement under these
provisions that the assessee be given an opportunity of being heard in case such
application is rejected by an authority.
(ii) Accordingly, the Finance Act, 2016 has amended these provisions to provide for a time
limit within which the order for waiver of interest and penalty have to be passed by the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner of Income-tax, as the case may be. Further, no order rejecting the
application of the assessee, either in full or in part, under section 220 or 273A, 273AA
shall be passed without giving the assessee an opportunity of being heard.
Section Powers of Principal Time limit
Commissioner/CIT
(1) 220(2A) To reduce or waive the amount of
interest paid or payable section An order accepting
220(2). or rejecting
Note – Section 220(1) requires application of an
payment of amount specified in the assessee in full or
notice of demand under section 156 part has to be
within 30 days of service of notice. passed within a

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In case of default, interest is leviable period of 12
@1% per month or part of the month months from the
under section 220(2) for the period end of the month
during which the default continues. in which such
(2) 273A(4A) To reduce or waive the amount of application is
any penalty payable by an assessee received by the
or stay or compound any proceeding PC or CIT.
for recovery of the penalty amount in In respect of
certain circumstances, on an applications
application made by the assessee in pending as on 1st
this behalf. June, 2016, the
(3) 273AA To grant immunity from penalty, if order under said
penalty proceedings have been sections has to be
initiated in case of a person who has passed on or
made application for settlement before 31 st May,
before the Settlement Commission 2017.
and the proceedings for settlement
had abated under the circumstances
contained in section 245HA.

(D) Levy of penalty at a flat rate of 60% on undisclosed income, in search cases where
assessee does not admit such income in the course of search nor discloses the
same in the return of income for the specified previous year filed on or before the
specified date [Section 271AAB(1)(c)]
Relevant from: A.Y.2017-18
(i) Section 271AAB(1)(c) provides for levy of penalty ranging between 30% to 90% of
the undisclosed income, in a case where search has been initiated under section
132 on or after 1st July, 2012, and the assessee neither admits, in a statement
under section 132(4), undisclosed income in the course of search nor declares
such income in the return of income furnished for the specified previous year and
pays tax and interest on such undisclosed income.
(ii) For the purpose of reducing discretionary powers in levy of penalty and rationalizing
the rate of penalty, section 271AAB(1)(c) has been amended to provide for levy of
penalty on such undisclosed income at a flat rate of 60% of such undisclosed income.

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Penalty u/s 271AAB(1)(c)

Upto A.Y.2016-17 From A.Y.2017-18

30% to 90% 60%


of of
undisclosed income undisclosed income

(e) Penalty for failure to comply with notice under section 142(1) or 143(2) of
failure to comply with a direction u/s 142(2A) [Section 272A]
Related amendment in section: 288
Effective from: A.Y.2017-18
(i) Under section 272A(1), penalty of ` 10,000 is leviable in each of the following
cases:
(a) for failure or default to answer the questions raised by an income-tax
authority under the Income-tax Act, 1961;
(b) for refusal to sign any statement legally required during the proceedings
under the Income-tax Act, 1961; or
(c) failure to attend to give evidence or produce books or documents as
required under section 131(1).
(ii) New clause (d) has been included in section 272A(1) to levy penalty of `
10,000 for each default or failure to comply with a notice issued under section
142(1) or section 143(2) or failure to comply with a direction issued under
section 142(2A).
(iii) Accordingly, section 272A(3) has been amended to provide that penalty in
case of failure referred to above shall be levied by the income tax authority
issuing such notice or direction.
(iv) Section 288(4) has been consequentially amended to provide that no person,
inter alia, on whom penalty has been imposed under this Act [other than
penalty imposed under section 272A(1)(d)] shall be qualified to represent an
assessee before any income-tax authority or the Appellate Tribunal in
connection with any proceeding under the Income-tax Act, 1961, for such time
as the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner may by order determine.

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In effect, a person on whom penalty has been imposed under section
272A(1)(d) is not disqualified from representing an assessee before any
income-tax authority or the Appellate Tribunal.
SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Commencement of limitation for penalty proceedings under sections 271D and


271E [Circular No.9/2016 dated 26.4.2016]
There are conflicting interpretations of various High Courts on the issue whether the
limitation for imposition of penalty under sections 271D and 271E commences at the
level of the Assessing Officer (below the rank of Joint Commissioner of lncome -tax) or at
level of the Range authority i.e., the Joint Commissioner of Income -tax/Additional
Commissioner of lncome-tax.
Some High Courts have held that the limitation commences at the level of the authority
competent to impose the penalty i.e., Range Head, while others have held that even
though the Assessing Officer is not competent to impose the penalty, the limitation
commences at the level of the Assessing Officer, where the Assessing Officer has issued
show cause notice or referred to the initiation of proceedings in assessment order.
The CBDT is of the view that for the sake of clarity and uniformity, the conflict needs to
be resolved by way of a "Departmental View".
The Kerala High Court, in Grihalaxmi Vision v. Addl. CIT, observed that the question to
be considered is whether proceedings for levy of penalty are initiated with the passing of
the order of assessment by the Assessing Officer or whether such proceedings have
commenced with the issuance of the notice by the Joint Commissioner. From the
statutory provisions, it is clear that the competent authority to levy penalty is the Joint
Commissioner. Therefore, only the Joint Commissioner can initiate proceedings for levy
of penalty. Such initiation of proceedings could not have been done by the Assessing
Officer. The statement in the assessment order that the proceedings under Section 271D
and 271E are initiated is inconsequential. On the other hand, if the assessment order is
taken as the initiation of penalty proceedings, such initiation is by an authority who is
incompetent and the proceedings thereafter would be proceedings without jurisdiction. If
that be so, the initiation of the penalty proceedings is only with the issuance of the notice
by the Joint Commissioner to the assessee to which he has filed his reply.
The CBDT Circular clarifies that the above judgement reflects the "Departmental View".
Accordingly, the Assessing Officers (below the rank of Joint Commissioner of income -
tax) have to make a reference to the Range Head, regarding any violation of the
provisions of section 269SS and section 269T, as the case may be, in the course of the
assessment proceedings (or any other proceedings under the Act). The Assessing
Officer (below the rank of Joint Commissioner of lncome-tax) shall not issue the notice in
this regard. The Range Head will issue the penalty notice and shall dispose/complete
the proceedings within the limitation prescribed under section 275(1)(c).

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The Circular further clarifies that where any High Court decides this issue contrary to the
"Departmental View", the "Departmental View" thereon shall not be operative in the area
falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should
immediately bring the judgment to the notice of the Central Technical Committee (CTC).
The CTC shall examine the said judgment on priority to decide as to whether filing of SLP
to the Supreme Court will be adequate response for the time being or some legislative
amendment is called for.
2. Limitation for penalty proceedings under section 271D and 271E – whether to be
determined u/s 275(1)(a) or u/s 275(1)(c) [Circular No.10/2016 dated 26.4.2016]
The issue whether the limitation for imposition of penalty under sections 271D and 271E,
is determined under section 275(1)(a) or section 275(1)(c), has given rise to considerable
litigation.
The Delhi High Court, in CIT v. Worldwide Township Projects Ltd., has considered this
issue and observed that is well settled that a penalty under this provisio n is independent
of the assessment. The action inviting imposition of penalty is granting of loans above
the prescribed limit otherwise than through banking channels and as such infringement of
section 269SS is not related to the income that may be assessed or finally adjudicated.
In this view, section 275(1)(a) would not be applicable and the provisions of section
275(1)(c) would be attracted. The judgment has been accepted by the CBDT.
In view of the above, it is a settled position that the period of lim itation of penalty
proceedings under section 271D and section 271E of the Act is governed by the
provisions of section 275(1)(c). Therefore, the limitation period for the imposition of
penalty under these provisions would be the expiry of the financial yea r in which the
proceedings, in the course of which action for the imposition of penalty has been
initiated, are completed, or six months from the end of the month in which action for
imposition of penalty is initiated, whichever period expires later. The limitation period is
not dependent on the pendency of appeal against the assessment or other order referred
to in section 275(1)(a).

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27
MISCELLANEOUS PROVISIONS

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Provision for bank guarantee under section 281B


Effective from: 1st June, 2016
(i) Assessing Officer’s power to provisionally attach property for protecting
interests of the revenue :
Under section 281B, the Assessing Officer is empowered to provisionally attach any
property of the assessee, by an order in writing, during the pendency of assessment
or reassessment proceedings, with the prior approval of the income-tax authorities
specified therein, if he is of the opinion that it is necessary to do so for the purpose of
protecting the interests of the revenue. Such provisional attachment has to be made in
the manner provided in the Second Schedule.
(ii) Validity of provisional attachment :
The provisional attachment shall be valid for a period of 6 months from the date of the
order. However, such attachment of property is extendable to a maximum period of
two years or sixty days after the date of order of assessment or reassessment,
whichever is later.
(iii) Recommendation of Income Tax Simplification Committee:
The Income Tax Simplification Committee under the chairmanship of Justice R.V.
Easwar (Retd.) has recommended that provisional attachment of property could be
substituted by a bank guarantee subject to fulfilment of certain conditions.
(iv) Furnishing bank guarantee in lieu of provisional attachment of property -
Enabling provisions inserted:
Accordingly, sub-sections (3) to (9) have been inserted in section 281B providing for
furnishing of bank guarantee in lieu of provisional attachment of property. Further
Explanation to section 281B(1), providing that proceedings under section 132(5)
would be deemed to be proceedings for the assessment of any income or for the
assessment or reassessment of any income which has escaped assessment, has
been consequently omitted.

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(v) Furnishing of bank guarantee in lieu of provisional attachment [Section 281B(3)]
The Assessing Officer shall, by an order in writing, revoke provisional attachment of
property made under section 281B(1) in a case where the assessee furnishes a
guarantee from a scheduled bank, for an amount not less than the fair market value of
such provisionally attached property or for an amount which is sufficient to protect the
interests of the revenue.
(vi) Reference to Valuation Officer [Section 281B(4)]
For enabling determination of the fair market value of the property provisionally
attached, the Assessing Officer may, make a reference to the Valuation Officer, who
is required to estimate of the fair market value of the property and submit the report of
such estimation to the Assessing Officer within a period of 30 days from the date of
receipt of such reference.
(vii) Time limit for passing order revoking the attachment of property [Section 281B(5)]
For ensuring revocation of attachment of property in lieu of bank guarantee in a time
bound manner, an order revoking the attachment has to be made by the Assessing
Officer within the following time period:
Case Time period for revoking attachment
(i) in a case where a reference is within 45 days from the date of receipt
made to the Valuation Officer of such guarantee
(ii) in any other case within 15 days from the date of receipt
of such guarantee
(viii) Assessing Officer empowered to invoke bank guarantee for failure to pay sum
specified in notice of demand [Section 281B(6)]
Where a notice of demand specifying a sum payable is served upon the assessee and
the assessee fails to pay such sum within the time specified in the notice of demand,
the Assessing Officer may invoke the bank guarantee, wholly or partly, to recover the
said amount.
(ix) Power to invoke bank guarantee on assessee’s failure to renew or furnish new
guarantee [Section 281B(7)]
In a case where the assessee fails to renew the bank guarantee or fails to furnish a
new guarantee from a scheduled bank for an equal amount fifteen days before the
expiry of such guarantee, the Assessing Officer shall, in the interests of the revenue,
invoke the bank guarantee.
(x) Manner of adjustment of amount realized by invoking bank guarantee [Section
281B(8)]
(1) The amount realised by invoking the bank guarantee shall be adjusted against
the existing demand which is payable by the assessee;
(2) The balance amount, if any, has to be deposited in the Personal Deposit
Account of the Principal Commissioner or Commissioner in the branch of

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Reserve Bank of India or the State Bank of India or of its subsidiaries or any
bank as may be appointed by the Reserve Bank of India as its agent at the place
where the office of the Principal Commissioner or Commissioner is situated.
(xi) Release of bank guarantee [Section 281B(9)]
In a case where the Assessing Officer is satisfied that the bank guarantee is not
required anymore to protect the interests of the revenue, he shall release that
guarantee forthwith.
(B) Provision of legal framework for automated processing and paperless assessment
[Section 282A]
Related amendment in sections: 143(2) & 2(23C)
Effective from: 1st June, 2016
Requirement Amendment Purpose of
amendment
282A(1) Where a notice or other Notices and documents In order to provide
document is required to required to be issued by adequate legal
be issued by any any income-tax authority framework for
income-tax authority under the Act shall be paperless
under the Act, such signed and issued by such assessment for
notice or document authority in paper form or improving efficiency
should be signed by communicated in and reducing the
that authority in electronic form in compliance burden
manuscript accordance with such
procedure as may be
prescribed.
143(2) Where an assessee Such notice may be Such notice has to be
has furnished his return served on the assessee served on the
u/s 139 or in response by the Assessing Officer assessee within 6
to a notice u/s 142(1) or the prescribed months from the end
and the Assessing income-tax authority, of the F.Y. in which
Officer considers it requiring the assessee to the return is
necessary and attend the office of the furnished. For the
expedient to ensure Assessing Officer on the purpose of ensuring
that the assessee has specified date or to timely service of such
not understated the produce, or cause to be notice to the
income or has not produced before the assessee, the
computed excessive Assessing Officer any prescribed income-tax
loss or has not under- evidence on which the authority has also
paid the tax in any assessee may rely in been empowered to
manner, he shall serve support of the return. serve such notice.
on the assessee a
notice requiring him to

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produce, or cause to be
produced on a specified
date, any evidence on
which the assessee
may rely in support of
the return.
2(23C) - The term “hearing” has New clause (23C) has
been defined to include been inserted in
communication of data section 2 to define the
and documents through term "hearing" to
electronic mode. clarify that the same
can be through
electronic mode also.

SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Nature of Business Relationship, for the purpose of clause (b)(viii) of Explanation


below section 288(2), prescribed [Notification No. 50/2015, dated 24.6.2015]
Explanation below section 288(2) defines an “accountant” to mean a “Chartered
Accountant” as defined in section 2(1)(b) of the Chartered Accountants Act, 1949,
holding a valid certificate of practice under section 6(1) of the said Act, but does not
include [except for appearing as an authorized representative under section 288(1)] in
case of a non-corporate assessee, inter alia a person who, whether directly or indirectly,
has business relationship with the assessee of such nature as may be prescribed.
Consequently, the CBDT has, in exercise of the powers conferred by section 295 read
with sub-clause (b) (viii) of Explanation below section 288(2), inserted Rule 51A
prescribing the nature of business relationship. Accordingly, the term "business
relationship" shall be construed as any transaction entered into for a commercial
purpose, other than,—
(i) commercial transactions which are in the nature of professional services
permitted to be rendered by an auditor or audit firm under the Act and the Chartered
Accountants Act, 1949 and the rules or the regulations made under those Acts;
(ii) commercial transactions which are in the ordinary course of business of the
entity at arm's length price - like sale of products or services to the auditor, as
customer, in the ordinary course of business, by entities engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses." 6

6Section 141(3) of the Companies Act, 2013 contains a similar disqualification in case of a company; for which purpose
“business relationship” has been defined in the like manner in Rule 10(4) of the Companies (Audit & Auditors) Rules,
2014. It may be noted that in case of a company, a person who is not eligible for appointment as an auditor of the
said company in accordance with section 141(3) of the Companies Act, 2013 is not included in the definition of
“accountant” [except for appearing as an authorised representative under section 288(1)]

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2. Furnishing of statement of financial transaction [Rule 114E] [Notification No.
95/2015, dated 30-12-2015]
The statement of financial transaction required to be furnished under section 285BA(1) of
the Income-tax Act, 1961 shall be furnished by every person mentioned in column (3) of
the Table below in respect of all the transactions of the nature and value specified in the
corresponding entry in column (2) of the said Table, which are registered and recorded
by him on or after 1 st April, 2016.
S. Nature and value of transaction Class of person (reporting
No. person)
1. (a) Payment made in cash for A banking company or a co-
purchase of bank drafts or pay operative bank to which the
orders or banker’s cheque of an Banking Regulation Act, 1949
amount aggregating to ` 10 lakh or applies (including any bank or
more in a financial year. banking institution referred to in
(b) Payments made in cash section 51 of that Act)
aggregating to ` 10 lakh or more
during the financial year for
purchase of pre-paid instruments
issued by Reserve Bank of India
under the Payment and Settlement
Systems Act, 2007.
(c) Cash deposits or cash withdrawals
(including through bearer’s cheque)
aggregating to ` 50 lakhs or more
in a financial year, in or from one or
more current account of a person.
2. Cash deposits aggregating to ` 10 lakhs (i) A banking company or a co-
or more in a financial year, in one or operative bank to which the
more accounts (other than a current Banking Regulation Act,
account and time deposit) of a person. 1949 applies (including any
bank or banking institution
referred to in section 51 of
that Act);
(ii) Post Master General as
referred to in the Indian Post
Office Act, 1898.
3. One or more time deposits (other than a (i) A banking company or a co-
time deposit made through renewal of operative bank to which the
another time deposit) of a person Banking Regulation Act,
aggregating to ` 10 lakhs or more in a 1949 applies (including any
financial year of a person. bank or banking institution
referred to in section 51 of

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that Act);
(ii) Post Master General as
referred to in the Indian Post
Office Act, 1898;
(iii) Nidhi referred to in section
406 of the Companies Act,
2013;
(iv) NBFC which holds a
certificate of registration
under section 45-IA of the
Reserve Bank of India Act,
1934, to hold or accept
deposit from public.
4. Payments made by any person of an A banking company or a co-
amount aggregating to- operative bank to which the
(i) ` 1 lakh or more in cash; or Banking Regulation Act, 1949
(ii) ` 10 lakh or more by any other applies (including any bank or
mode, banking institution referred to in
section 51 of that Act) or any other
against bills raised in respect of one or
company or institution issuing
more credit cards issued to that person,
credit card.
in a financial year.
5. Receipt from any person of an amount A company or institution issuing
aggregating to ` 10 lakh or more in a bonds or debentures.
financial year for acquiring bonds or
debentures issued by the company or
institution (other than the amount
received on account of renewal of the
bond or debenture issued by that
company).
6. Receipt from any person of an amount A company issuing shares
aggregating to ` 10 lakh or more in a
financial year for acquiring shares
(including share application money)
issued by the company.
7. Buy back of shares from any person A company listed on a recognised
(other than the shares bought in the stock exchange purchasing its
open market) for an amount or value own securities under section 68 of
aggregating to ` 10 lakh or more in a the Companies Act, 2013.
financial year.
8. Receipt from any person of an amount A trustee of a Mutual Fund or such
aggregating to ` 10 lakh or more in a other person managing the affairs
financial year for acquiring units of one of the Mutual Fund as may be duly

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or more schemes of a Mutual Fund authorised by the trustee in this
(other than the amount received on behalf.
account of transfer from one scheme to
another scheme of that Mutual Fund).
9. Receipt from any person for sale of Authorised person as referred to
foreign currency including any credit of in section 2(c) of the Foreign
such currency to foreign exchange card Exchange Management Act, 1999.
or expense in such currency through a
debit or credit card or through issue of
travellers cheque or draft or any other
instrument of an amount aggregating to
` 10 lakh or more during a financial year
10. Purchase or sale by any person of Inspector-General appointed
immovable property for an amount of under the Registration Act, 1908
` 30 lakhs or more or valued by the or Registrar or Sub-Registrar
stamp valuation authority referred to in appointed under that Act
section 50C at ` 30 lakhs or more
11. Receipt of cash payment exceeding Any person who is liable for audit
` 2 lakh for sale, by any person, of under section 44AB of the Act.
goods or services of any nature (other
than those specified at Sl. Nos. 1 to 10
of this rule, if any).
Manner of application of threshold limit: The reporting person mentioned in column
(3) of the Table under sub-rule (2) [other than the person at Sl.No.9] shall, while
aggregating the amounts for determining the threshold amount for reporting in respect of
any person as specified in column (2) of the said Table,-
(a) take into account all the accounts of the same nature as specified in column (2) of
the said Table maintained in respect of that person during the financial year;
(b) aggregate all the transactions of the same nature as specified in column (2) of the
said Table recorded in respect of that person during the financial year;
(c) attribute the entire value of the transaction or the aggregated value of all the
transactions to all the persons, in a case where the account is maintained or
transaction is recorded in the name of more than one person;
(d) apply the threshold limit separately to deposits and withdrawals in respect of
transaction specified in item (c) under column (2), against Sl. No. 1 of the said
Table.

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28
DEDUCTION, COLLECTION & RECOVERY OF TAX

AMENDMENTS BY THE FINANCE ACT, 2016

(A) Deduction of tax at source under section 194LBB at ‘rates in force’ on income
distributed by an Investment Fund to its non-resident unit-holders and enabling
provision for obtaining certificate of nil deduction or lower deduction of tax at
source under section 197
Related amendment in section: 2(37) & 197
Effective from: 1st June, 2016
(i) Special taxation regime for Investment Funds:
(1) A special taxation regime, contained in sections 10(23FBA), 10(23FBB),
115UB and 194LBB, was introduced by the Finance Act, 2015 for Category-I
and II Alternative Investment Funds registered with SEBI, in order to ensure
tax pass through status for these investment funds which are collective
investment vehicles.
(2) Under this regime, the income of the investment fund (other than business
income) is exempt in the hands of investment fund. Such income received by
the unit-holder from the investment fund (other than business income which is
taxed at the level of investment fund) is taxable in the hands of unit-holder.
(3) The taxation in the hands of unit-holders is in the same manner and in the
same proportion as it would have been, had the unit-holder received such
income directly and not through the investment fund.
(ii) Deduction of tax under section 194LBB@10% without facility for application of
relief under section 197 – Resultant hardship to non-resident investors
eligible for concessional rate of tax/exemption under the DTAA :
(1) Under section 194LBB, tax is deductible@10% in respect of any income
credited or paid by the investment fund to its unit-holder. Section 197 enables
an assessee to file an application to the Assessing Officer for issue of
certificate of deduction of tax at lower rate or no deduction of tax under certain
sections specified thereunder. If the Assessing Officer is satisfied that total
income of the recipient justifies issue of such certificate, he may give to him
such certificate for non-deduction of tax or deduction of tax at a lower rate.

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(2) However, section 194LBB is not included in the sections specified under
section 197, in respect of which an application can be filed for issue of
certificate for deduction of tax at a lower rate or for non-deduction of tax. This
has created genuine hardship for a non-resident unit-holder entitled to
exemption of such income under the relevant Double Taxation Avoidance
Agreement (DTAA). In such a case also, tax would be deducted at
source@10%under section 194LBB, since there is no provision under section
197 for such unit-holder to approach the Assessing Officer for seeking
certificate of tax deduction at a lower or Nil rate under section 194LBB.
(iii) Rationalisation of TDS Regime in respect of payments made by the investment
funds to its investors:
Section 194LBB has been amended by the Finance Act, 2016 to provide that the
person responsible for making the payment to the unit-holder shall deduct income-
tax under section 194LBB as given hereunder -
Category of Payee Rate of tax deduction at source
(1) Residents 10%
(2) Non-corporate non-residents or foreign Rates in force
companies

However, in case of a payee being a non-corporate non-resident or a foreign


company, no deduction of tax at source shall be made in respect of any income that
is not chargeable to tax under the provisions of the Income-tax Act, 1961.
(iv) Consequential amendments:
Section Amendment
(1) 197 Inclusion of section 194LBB in the list of sections u/s 197(1)
for which a certificate for deduction of tax at lower rate or no
deduction of tax can be obtained, if the Assessing Officer is
satisfied on an application made in this behalf that the total
income of the recipient justifies deduction of income-tax at
lower rates or no deduction of income-tax.
(2) 2(37A)(iii) ‘Rate or rates in force’, in relation to an assessment year or
financial year, means, for the purpose of, inter alia, tax deduction
under sections 194LBA, 194LBB, 194LBC or 195 –
(i) the rate or rates of income-tax specified in this behalf in
the Finance Act of the relevant year; or
(ii) the rate or rates of income-tax specified in an agreement –
(a) entered into by the Central Government u/s 90, or
(b) notified by the Central Government u/s 90A,
whichever is applicable by virtue of the provisions of
section 90, or section 90A, as the case may be.

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(B) Enabling provision for filing of self-declaration in Form 15G/15H by recipient of rental
income, for non-deduction of tax at source under section 194-I [Section 197A]
(i) Tax deductible under section 194-I on rental payments exceeding ` 1,80,000:
Under 194-I, tax is deductible at source for payments in the nature of rent
exceeding the specified threshold of ` 1,80,000 in a financial year.
In spite of the threshold for deduction tax under this section, there still may be
cases where the tax payable on recipient's total income, including rental payments,
will be nil.
(ii) Enabling provisions contained in the Act for furnishing self-declaration by
recipients of income referred to in section 192A/193/194/194A/194DA :
Section 197A provides for furnishing of self-declaration in writing in duplicate in the
prescribed form, declaring that the tax on his estimated total income of the relevant
previous year would be nil. The prescribed form is Form No.15G in case of a
person, other than a company or firm, and Form No. 15H, in case of a resident
individual of the age of 60 years or more at any time during the previous year. If
declaration is so furnished to the person responsible for paying tax, no deduction of
tax shall be made by such person.
However, there was no such enabling provision for furnishing self-declaration by the
recipient of rent, which is subject to tax deduction under section 194-I.
(iii) Enabling provision introduced for furnishing self-declaration by recipient of
rent for non-deduction of tax at source under section 194-I:
In order to reduce compliance burden in such cases, section 197A has been
amended for enabling persons, other than companies and firms, in receipt of rent,
on which tax is deductible under section 194-I, to file self-declaration in Form No.
15G for non-deduction of tax at source to the person responsible for paying rent.
Likewise, resident senior citizens in receipt of rent can file declaration in Form No.
15H for non-deduction of tax at source to the person responsible for paying rent.
(C) Increase in threshold limits and reduction of rates for deduction of tax at source in
respect of certain payments [Chapter XVII-B]
Effective from: 1 st June, 2016
(i) Requirement of deduction of tax at source under Chapter XVII-B if payments
exceed the specified threshold:
Every person responsible for payment of any specified sum on which tax is
deductible at source under Chapter XVII-B to any person is required to deduct tax at
source at the prescribed rate and remit the same to the Central Government within
specified time.
However, no deduction is required to be made if the payments do not exceed
prescribed threshold limit specified under the relevant section.

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(ii) In order to rationalise the rates and base for TDS provisions, the existing threshold
limits for deduction of tax at source and the rates of deduction of tax at source have
been revised with effect from 1 st June, 2016.
Revision in threshold limits for deduction of tax at source from certain payments:
Section Nature of payment Threshold limit (` )
Upto From
31.5.2016 1.6.2016
(1) 192A Payment of accumulated balance due
to an employee participating in 30,000 50,000
recognized provident fund
(2) 194BB Winnings from horse race 5,000 10,000
(3) 194C Payment to contractors (revision of 75,000 1,00,000
threshold of aggregate payment in a
year)
(4) 194D Insurance commission 20,000 15,0007
(5) 194G Commission on sale of lottery tickets 1,000 15,000
(6) 194H Commission or brokerage 5,000 15,000
(7) 194LA Payment of compensation or
enhanced compensation on 2,00,000 2,50,000
compulsory acquisition of immovable
property
Reduction in rate of tax to be deducted at source in respect of certain
payments:
Rate of TDS
Section Nature of payment
Upto From
31.5.2016 1.6.2016
(1) 194DA Payment in respect of life insurance policy 2% 1%
(2) 194EE Payments in respect of deposits under 20% 10%
National Savings Scheme
(3) 194G Commission on sale of lottery tickets 10% 5%
(4) 194H Commission or brokerage 10% 5%
In addition, the rate of TDS under section 194D in respect of insurance commission
has been reduced from 10% to 5% 8.

7 In this case, there is a decrease in threshold limit.


8 Refer Part II of the First Schedule to the Finance Act, 2016 providing for the rates in force

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(iii) Omission of non-operational provisions for TDS u/s 194K and 194L:
Further, the non-operational provisions for deduction of tax at source under section
194K in respect of income from units of a mutual fund or UTI (which ceased to be in
force since 1 st April, 2003) and section 194L in respect of payment of compensation
on compulsory acquisition of a capital asset (which ceased to be in force since 1 st
June, 2000) have been omitted with effect from 1 st June, 2016.
(D) Advance tax payment scheme to be the same for companies and other assessees
[Section 211]
Related amendment in section: 234C
Effective from: 1 st June, 2016
(i) Differential advance tax payment schedule for companies and other
assessees under section 211(1) [upto 31.5.2016]
Advance tax payment schedule for companies (4 installments):

Due date of installment Amount payable


On or before 15th June Not less than 15% of advance tax liability
On or before 15th Not less than 45% of advance tax liability, as
September reduced by the amount, if any, paid in the
earlier installment.
On or before 15th December Not less than 75% of advance tax liability, as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments.
On or before 15th March The whole amount of advance tax liability as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments.
Advance tax payment schedule for non-corporate assessees (3 installments) :

Due date of installment Amount payable


On or before 15th Not less than 30% of advance tax liability
September
On or before 15th December Not less than 60% of advance tax liability, as
reduced by the amount, if any, paid in the
earlier installment.
On or before 15th March The whole amount of advance tax liability as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments.

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(ii) Common advance tax payment schedule for both corporates and non-
corporates (other than an eligible assessee in respect of eligible business
referred to in section 44AD) from 1st June 2016:
Due date of installment Amount payable
On or before 15th June Not less than 15% of advance tax liability
On or before 15th Not less than 45% of advance tax liability, as
September reduced by the amount, if any, paid in the
earlier installment.
On or before 15th December Not less than 75% of advance tax liability, as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments.
On or before 15th March The whole amount of advance tax liability as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments.
Note - Any amount paid by way of advance tax on or before 31 st March shall also be
treated as advance tax paid during each financial year on or before 15 th March.
(iii) Eligible assessee computing profits on presumptive basis under section 44AD
to pay advance tax by 15th March
An eligible assessee, opting for computation of profits or gains of business on
presumptive basis in respect of eligible business referred to in section 44AD, shall
be required to pay advance tax of the whole amount in one instalment on or before
the 15th March of the financial year.
However, any amount paid by way of advance tax on or before 31st March shall also
be treated as advance tax paid during each financial year on or before 15 th March.
(iv) Consequential amendments in section 234C
(a) Manner of computation of interest under section 234C for deferment of
advance tax by corporate and non-corporate assessees:
In case an assessee, other than an eligible assessee in respect of the eligible
business referred to in section 44AD, who is liable to pay advance tax under
section 208 has failed to pay such tax or the advance tax paid by such assessee
on its current income on or before the dates specified in column (1) is less than
the specified percentage [given in column (2)] of tax due on returned income,
then simple interest@1% per month for the period specified in column (4) on the
amount of shortfall, as per column (3) is leviable under section 234C.
Specified Specified Shortfall in advance tax Period
date %
(1) (2) (3) (4)
15th June 15% 15% of tax due on returned income (-) 3 months
advance tax paid up to 15th June

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15th 45% 45% of tax due on returned income (-) 3 months
September advance tax paid up to 15th September
15th 75% 75% of tax due on returned income 3 months
December (-) advance tax paid up to 15 th
December
15th March 100% 100% of tax due on returned income 1 month
(-) advance tax paid up to 15th March
Note – However, if the advance tax paid by the assessee on the current
income, on or before 15th June or 15th September, is not less than 12% or, as
the case may be, 36% of the tax due on the returned income, then, the
assessee shall not be liable to pay any interest on the amount of the shortfall
on those dates.
(b) Computation of interest under section 234C in case of an eligible
assessee in respect of eligible business referred to in section 44AD:
In case an eligible assessee in respect of the eligible business referred to in
section 44AD, who is liable to pay advance tax under section 208 has failed to
pay such tax or the advance tax paid by the assessee on its current income on
or before 15th March is less than the tax due on the returned income, then, the
assessee shall be liable to pay simple interest at the rate of 1% on the amount
of the shortfall from the tax due on the returned income.
(c) Non-applicability of interest under section 234C in certain cases:
Interest under section 234C shall not be leviable in respect of any shortfall in
payment of tax due on returned income, where such shortfall is on account of
under-estimate or failure to estimate –
(i) the amount of capital gains;
(ii) income of nature referred to in section 2(24)(ix) i.e., winnings from
lotteries, crossword puzzles etc.;
(iii) income under the head “Profits and gains of business or profession” in
cases where the income accrues or arises under the said head for the
first time.
However, the assessee should have paid the whole of the amount of tax
payable in respect of such income referred to in (i), (ii) and (iii), as the case
may be, had such income been a part of the total income, as part of the
remaining instalments of advance tax which are due or where no such
instalments are due, by 31 st March of the financial year.
(e) Interest on refunds [Section 244A]
Effective from: 1 st June, 2016
(i) Period for which interest on refund is payable:
An assessee is entitled to interest on refund arising out of excess payment of
advance tax, tax deducted or collected at source, for the period beginning from

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1st April of the assessment year and ending on the date on which refund is
granted.
(ii) Differential period for interest on refund in cases where return is filed
beyond the due date under section 139(1)
For ensuring filing of return on or before the due date under section 139(1),
section 244A has been amended to provide for interest@0.5% for every month
or part of a month for the period specified in the following table for each of the
cases mentioned in column (2) hereunder –
Period for grant of interest
Case on refund
Beginning from Ending
with
(1) (2) (3) (4)
(a) Where the refund is out of TCS u/s
206C or paid by way of advance tax
or treated as paid u/s 199, during
the financial year immediately
preceding the assessment year:
(1) Where the return is filed on or 1st April of the Date of
before the due date u/s 139(1) assessment year grant
(2) Where the return is filed after the date of filing of of
the due date return refund

(b) Where the refund is out of self- Date of furnishing Date of


assessment tax paid u/s 140A return of income or grant of
payment of tax, refund
whichever is later
Note – However, if the amount of refund is less than 10% of tax
determined under section 143(1) or on regular assessment, no interest is
payable under either of the cases [(a) or (b)] mentioned above.
(iii) Additional interest on refund arising out of appeal effect being delayed
beyond the time prescribed under section 153(5):
Where a refund arises as a result of giving effect to an order under section
250/254/260/262/264, wholly or partly, otherwise than by making a fresh
assessment or reassessment, the assessee shall be entitled to receive, in
addition to the interest payable under section 244A(1), an additional interest on
such refund amount calculated at the rate of 3% p.a., for the period beginning
from the date following the date of expiry of the time allowed under section
153(5) to the date on which the refund is granted. Further, in cases where
extension is granted by the Principal Commissioner or Commissioner by

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invoking proviso to section 153(5), the period of additional interest, if any, shall
begin from the expiry of such extended period.

Circumstance Period9
Where a refund arises as a result From the expiry of 3 months from
of giving effect to an order under the end of the month in which the
section 250/254/260/262/264, order u/s 250/254/260/262 is
wholly or partly, otherwise than by received, or order u/s 263 or 264 is
making a fresh assessment or passed, by the PCC/CC/PC/CIT.
reassessment
Where extension is granted by the From the expiry of 9 months from
Principal Commissioner or the end of the month in which the
Commissioner by invoking proviso order u/s 250/254/260/262 is
to section 153(5) received, or order u/s 263 or 264 is
passed, by the PCC/CC/PC/CIT.
(f) Expansion of scope of TCS under section 206C
Effective from: 1 st June, 2016
(i) Expansion of scope of TCS under section 206C:
Section 206C(1D) requires collection of tax at source, at the time of receipt of
consideration, on cash sale of bullion or jewellery. Tax has to be
collected@1% of sale consideration, if such consideration exceeds ` 2 lakh for
bullion and ` 5 lakh for jewellery.
The scope of tax collection at source under section 206C has been expanded
to provide that every person, being the seller shall, at the time of receipt of
consideration, collect tax at the rate of 1% from the purchaser on sale of
goods or provision of services specified in column (2) exceeding the
corresponding value specified in column (3) :
(1) (2) (3)
Section Sale / Service Transaction Threshold limit
206C(1D) Sale in cash of any goods (other than ` 2 lakhs
bullion and jewellery), or providing of any
services (other than amounts on which tax
is deducted at source by the payer under
Chapter XVII-B), consideration for which is
received in cash.
206C(1F) Sale of motor vehicle ` 10 lakhs

9 Period for which assessee would be entitled to receive additional interest on refund

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(ii) Reasons for expansion of scope of section 206C:
(1) To reduce the quantum of cash transaction in sale of any goods and
services;
(2) To curb the flow of unaccounted money in the trading system; and
(3) To bring high value transactions within the tax net.
(iii) Requirement to collect tax at source under section 206C(1D) on sale of
goods (other than bullion and jewellery) and provision of services not to
apply to certain class of buyers fulfilling prescribed conditions:
New sub-section (1E) has been inserted in section 206C to provide that the
requirement to collect tax at source under section 206C(1D) in relation to sale
of any goods (other than bullion and jewellery) or provision of any service,
consideration for which is received in cash, shall not apply to certain class of
buyers who fulfil the prescribed conditions.
(iv) Definition of buyer with respect to sections 206C(1D) and 206C(1F):
Consequent to insertion of sub-section (1F) in section 206C, the definition of
buyer with respect to section 206C(1D) and 206C(1F) would mean a person
who obtains in any sale, good of the nature specified under thereunder.
(v) Definition of seller expanded:
Consequent to expansion of scope of TCS to include transaction of provision
of services, the definition of seller under clause (c) of Explanation to section
206C has been amended to include individuals/HUFs whose gross receipts
from business or profession exceed the monetary limits specified in section
44AB during the financial year immediately preceding the financial year in
which such services are provided.
Note - These amendments in section 206C have given rise to certain issues relating
to the scope and applicability of the provisions. Accordingly, the CBDT has, vide
Circular No. 22/2016 dated 8.6.2016 and Circular No.23/2016 dated 24.6.2016,
clarified the following issues in “Question & Answer (Q&A)” format.
Q.1 Whether TCS@1% is on sale of motor vehicle at retail level or also on
sale of motor vehicles by manufacturers to dealers/ distributors?
A. To bring high value transactions within the tax net, section 206C has been
amended to provide that the seller shall collect the tax @ 1% from the
purchaser on sale of motor vehicle of the value exceeding ` 10 lakhs. This is
brought to cover all transactions of retail sales and accordingly, it will not
apply on sale of motor vehicles by manufacturers to dealers/distributors.
Q.2 Whether TCS@1% on sale of motor vehicle is applicable only to luxury
cars?

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A. No, as per section 206C(1F), the seller shall collect tax@1% from the
purchaser on sale of any motor vehicle of the value exceeding ` 10 lakhs.
Q.3 Whether TCS@1% is applicable in the case of sale to Government
Departments, Embassies, Consulates and United Nation Institutions, of
motor vehicle or any other goods or provision of services?
A. Government, institutions notified under United Nations (Privileges and
Immunities) Act 1947, and Embassies, Consulates, High Commission,
Legation, Commission and trade representation of a foreign State shall not be
liable to levy of TCS@1% under sub-section (1D) and (IF) of section 206C.
Q.4 Whether TCS is applicable on each sale of motor vehicle or on aggregate
value of sale during the year?
A. Tax is to be collected at source@1% on sale consideration of a motor vehicle
exceeding ` 10 lakhs. It is applicable to each sale and not to aggregate value
of sale made during the year.
Q.5 Whether TCS@1% on sale of motor vehicle is applicable in case of an
individual?
A. The definition of "Seller" as given in clause (c) of the Explanation below sub-
section (11) of section 206C shall be applicable in the case of sale of motor
vehicles also.
Accordingly, an individual who is liable to audit as per the provisions of section
44AB during the financial year immediately preceding the financial year in
which the motor vehicle is sold shall be liable for collection of tax at source on
sale of motor vehicle by him.
Q.6 How would the provisions of TCS on sale of motor vehicle be applicable
in a case where part of the payment is made in cash and part is made by
cheque?
A. The provisions of TCS on sale of motor vehicle exceeding ` 10 lakhs is not
dependent on mode of payment. Any sale of motor vehicle exceeding ` 10
lakhs would attract TCS@1%.
Q.7 As per section 206C(1D), tax is to be collected at source@1% if sale
consideration received in cash exceeds ` 2 lakhs whereas as per section
206C(1F), tax is to be collected at source@1% of the sale consideration of
a motor vehicle exceeding 10 lakh rupees. Whether TCS will be made
under both sub-section (lD) and (IF) of section 206C@2%, where part of
the payment for purchase of motor vehicle exceeds ` 2 lakhs in cash?
A. Sub-section (1F) section 206C provides for TCS at the rate of 1% on sale of
motor vehicle of value exceeding ` 10 lakhs. This is irrespective of the mode
of payment. Thus, if the value of motor vehicle is ` 20 lakhs, out of which ` 5
lakhs has been paid in cash and balance amount by way of cheque, the tax

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shall be collected at source@1% on total sale consideration of ` 20 lakhs only
under sub-section (1F) of section 206C. However, if a vehicle is sold for ` 8
lakhs and the consideration is paid in cash, tax shall be collected at
source@1% on ` 8 lakhs as per sub-section (1D) of section 206C.
Q.8 Whether tax collection at source@1% under section 206C(1D) will apply
in cases where the sale consideration received is partly in cash and
partly by cheque and the cash receipt is less than ` 2 lakh?
A. No, TCS will not be levied if the cash receipt does not exceed ` 2 lakhs, even
if the sale consideration exceeds ` 2 lakhs.
Q.9 Whether tax collection at source under section 206C(1D) will apply only
to cash component or in respect of whole of sales consideration?
A. Under section 206C(1D), tax is required to be collected at source on the cash
component of the sale consideration and not on the whole of the sales
consideration.
(g) Requirement to furnish PAN for avoiding higher tax deduction not to apply to
non-corporate non-residents and foreign companies subject to certain
conditions [Section 206AA]
Effective from: 1 st June, 2016
(i) Higher rate of tax deduction in respect of persons who fail to furnish PAN
to the person responsible for deducting tax at source:
Under section 206AA, any person who is entitled to receive any sum or income
or amount on which tax is deductible under Chapter XVIIB shall furni sh his
Permanent Account Number (PAN) to the person responsible for deducting
such tax, failing which tax shall be deducted at –
(1) the rate mentioned in the relevant provisions of the Act or
(2) the rate or rates in force or
(3) the rate of 20%
whichever is higher.
(ii) Applicability of section 206AA to non-residents and consequent
compliance burden:
The provisions of section 206AA also apply to non-residents, on account of
which they have to obtain and furnish PAN. Otherwise, higher rate of tax
deduction is attracted even if tax on such income is payable at a lower rate on
account of applicability special provisions of the Act or the relevant double
taxation avoidance agreement.
The benefit of non-applicability of the provisions of section 206AA is currently
available only in respect of payment of interest on long-term bonds by an
Indian company or a business trust as referred to in section 194LC to non-
corporate non-residents or foreign companies.

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(iii) Non-applicability of section 206AA to non-residents subject to fulfilment
of certain conditions:
For the purpose of reducing the compliance burden, section 206AA has been
amended to provide for non-applicability of the requirements contained therein to a
non-corporate non-resident or to a foreign company, also in respect of any other
payment subject to such conditions as may be prescribed.
SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. No tax to be deducted in respect of the income specified under section 10(23FBA)


received by an Investment Fund [Notification No. 51/2015, dated 24.6.2015]
Section 197A(1F) provides that no deduction of tax shall be made from such specified
payment to such institution, association or body or class of institutions, associations or
bodies as may be notified by the Central Government.
Accordingly, the Central Government has, vide this notification, notified that no tax has to
be deducted in respect of payments of the nature specified in section 10(23FBA) [i.e.,
any income other than the income chargeable under the head “Profits and gains of
business or profession”] received by any investment fund.10
2. Simplification of format and procedure for self-declaration in Form No.15G & 15H
[Notification No. 76/2015, dated 29.09.2015]
Tax payers seeking non-deduction of tax from certain incomes are required to file a self-
declaration in Form No. 15G or Form No.15H as per section 197A. In order to reduce the
cost of compliance and ease the compliance burden for both the tax payer and the tax
deductor, the CBDT has simplified the format and procedure for self-declaration of Form
No.15G or 15H. The procedure for submission of the forms by the deductor has also
been simplified.
Under the simplified procedure contained in new Rule 29C, a payee can submit the self-
declaration either in paper form or electronically. The deductor will not deduct tax and will
allot a Unique Identification Number (UIN) to all self-declarations in accordance with the
procedure as specified by the Principal Director General of Income-tax (Systems) under
sub-rule (7) of new Rule 29C. The particulars of self-declarations will have to be
furnished by the deductor along with UIN in the quarterly TDS statements. The
requirement of submitting physical copy of Form 15G and 15H by the deductor to the
income-tax authorities has been dispensed with. The deductor will, however be required
to retain Form No.15G and 15H for seven years. The revised procedure shall be effective
from 1st October, 2015.

10 “Investment Fund” means any fund established or incorporated in India in the form of a trust or a company or a LLP or
a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative
Investment Fund and is regulated under the SEBI (AIF) Regulations, 2012, made under the SEBI Act, 1992.

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3. Furnishing of evidence of claims by employee for deduction of tax under
section 192 [Notification No.30/2016 dated 29.4.2016]
New Rule 26C has been inserted in the Income-tax Rules, 1962, with effect from
1st June, 2016, to require furnishing of evidence of the following claims by an
employee to the person responsible for making payment under section 192(1) in
Form No.12BB for the purpose of estimating his income or computing the tax
deduction of tax at source:
S.No. Nature of Claim Evidence or particulars
1. House Rent Allowance Name, address and PAN of the
landlord(s) where the aggregate
rent paid during the previous year
exceeds ` 1 lakh.
2. Leave Travel Concession or Evidence of expenditure
Assistance
3. Deduction of interest under the Name, address and PAN of the
head “Income from house lender
property”
4. Deduction under Chapter VI-A Evidence of investment or
expenditure.

4. Time and mode of payment of TDS and TCS to Government account – Amendments
in Rule 30, 31 & 37A [Notification No.30/2016 dated 29.4.2016]
(i) Increase in time limit for payment of TDS under section 194-IA to Government
Account [Rule 30(2A)]:
Rule 30(2A) has been amended to increase the time limit for payment of tax
deduction under section 194-IA to Government account from 7 days to 30 days
from the end of the month in which deduction is made.
(ii) Common due date for filing of statement of TDS under section 200(3) in case
of Government deductors and other deductors [Rule 31A(2)]:
Rule 31A requires every person responsible for deduction of tax under Chapter
XVII-B to deliver, or cause to be delivered, quarterly statements to the Director
General of Income-tax (Systems) or the person authorised by him within the due
date for each quarter specified in Rule 31A(2). Rule 31A(2) prescribed differential
due dates for Government deductors and other deductors. In order to ensure equity
and give more time for other deductors, common due dates are now prescribed
thereunder for Government deductors and other deductors. Accordingly, quarterly

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statements of TDS have to be furnished by the due dates specified in column (3)
against the corresponding quarter -
Sl.No. Date of ending of the Due date
quarter of the financial
year
1. 30th June 31st July of the financial year
2. 30th September 31st October of the financial year
3. 31st December 31st January of the financial year
4. 31st March 31st May of the financial year immediately
following the financial year in which the
deduction is made.

(iii) Mode of payment in the case of an office of the Government, where tax has
been paid to the credit of the Central Government without production of a
challan [Rules 30 & 37C]:
Rule 30(4) and 37CA(3) have been amended to remove the time limit of 10 days
specified thereunder for submission of Form No.24G in respect of tax
deducted/collected by deductors/collectors (in the case of an office of the
Government, where tax has been paid to the credit of the Central Government
without the production of a challan) and reported to the agency authorised by the
Director General of Income-tax (Systems). In effect, in the case of an office of the
Government, where tax has been paid to the credit of the Central Government,
without production of challan, Rule 30(4) and 37CA(3) now simply require
submission of statement in Form 24G to the agency authorised by the Principal
Director General of Income-tax (Systems) in respect of tax deducted/collected by
the deductors/collectors and reported to him
Time limit for submission of statement in Form 24G in such cases [New sub -
rule (4A) of Rule 30 & Sub-rule (3A) of Rule 37CA]:
Month to which the statement relates Time limit
(i) In a case where the statement relates to On or before 30 th April
the month of March
(ii) In any other case On or before 15 days from
the end of the relevant
month
Manner of submission of statement in Form 24G [New sub-rule (4B) of Rule 30
& sub-rule (3B) of Rule 37CA]:
(i) Electronically under digital signature; or
(ii) Electronically along with the verification of the statement in Form 27A or
verified though an electronic process

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in accordance with the procedures, formats and standards specified under Rule 30(5) .
Intimation of book identification number to deductors [New sub-rule (4C) of
Rule 30]:
The Pay and Accounts Officer or the Treasury Officer or the Cheque Drawing and
Disbursing Officer or any other person by whatever name called to whom the
deductor reports the tax so deducted has to intimate the book identification number
generated by the agency to each of the deductors in respect of whom the sum
deducted has been credited.
Specification of procedures, formats and standards for the purpose of
furnishing and verification of the statements [New sub-rule (5) of Rule 30 &
sub-rule (4) of Rule 37CA]:
The procedures, formats and standards shall be specified by the Principal Director
General of Income-tax (Systems) for the purposes of furnishing and verification of
the statements. He shall also be responsible for the day-to-day administration in
relation to the furnishing of the information and verification of the statements.
5. Tax not to be deducted from payments made to Corporations whose income is
exempt under section 10(26BBB) [Circular No. 7/2015, dated 23-04-2015]
The CBDT had earlier issued Circular No. 4/2002 dated 16.07.2002 which laid down that
there would be no requirement for tax deduction at source from payments made to such
entities, whose income is unconditionally exempt under section 10 and who are
statutorily not required to file return of income as per the section 139.
Section 10(26BBB), inserted by the Finance Act, 2003 w.e.f. 01.04.2004, exempts any
income of a corporation established by a Central, State or Provincial Act for the welfare
and economic up liftment of ex-service-men being the citizen of India. The corporations
covered under section 10(26BBB) are also statutorily not required to file return of income
as per the section 139.
Now, the CBDT has, vide this circular, clarified that since corporations covered under
section 10(26BBB) satisfy the two conditions of Circular No. 4/2002 i.e., unconditional
exemption of income under section 10 and no statutory liability to file return of income
under section 139, they would also be entitled for the benefit of the said circular.
6. Applicability of provisions for deduction of tax at source under section 194A on
interest on fixed deposit made in the name of the Registrar General of Court or the
depositor of the Fund on directions of Courts [Circular No.23/2015, dated 28-12-
2015]
Section 194A stipulates deduction of tax at source (TDS) on interest other than interest
on securities if the aggregate of amount of such interest credited or paid to the account
of the payee during the financial year exceeds the specified amount.
In the case of UCO Bank in Writ Petition No. 3563 of 2012 and CM No. 7517/2012 vide
judgment dated 11/11/2014, the Hon'ble Delhi High Court has held that the provisions of
section 194A do not apply to fixed deposits made in the name of Registrar General of

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the Court on the directions of the Court during the pendency of proceedings before the
Court. In such cases, till the Court passes the appropriate orders in the matter, it is not
known who the beneficiary of the fixed deposits will be. Amount and year of receipt is
also unascertainable. The Delhi High Court, thus, held that the person who is ultimately
granted the funds would be determined by orders that are passed subsequently. At that
stage, undisputedly, tax would be required to be deducted at source to the credit of the
recipient. The High Court has also quashed Circular No.8/2011.
The CBDT has accepted the aforesaid judgment. Accordingly, it is clarified that interest
on FDRs made in the name of Registrar General of the Court or the depositor of the fund
on the directions of the Court, will not be subject to TDS till the matter is decided by the
Court. However, once the Court decides the ownership of the money lying in the fix ed
deposit, the provisions of section 194A will apply to the recipient of the income.
7. Applicability of TDS provisions on payments by broadcasters or Television
Channels to production houses for production of content or programme for
telecasting [Circular No. 04/2016, dated 29-2-2016]
The issue of applicability of TDS provisions on payments made by broadcasters/ telecasters
to production houses for production of content or programme for broadcasting/telecasting has
been examined by CBDT.
The issue under consideration is whether payments made by the broadcaster/telecaster to
production houses for production of content/programme are payments under a ‘work contract’
liable for tax deduction at source under section 194C or a contract for ‘professional or
technical services’ liable for tax deduction at source under section 194J of the Income-tax
Act, 1961.
In this regard, the CBDT has clarified that while applying the relevant provisions of TDS
on a contract for content production, a distinction is required to be made between:
(i) a payment for production of content/programme as per the specifications of the
broadcaster/telecaster; and
(ii) a payment for acquisition of broadcasting/ telecasting rights of the content already
produced by the production house.
In the first situation where the content is produced as per the specifications provided by
the broadcaster/ telecaster and the copyright of the content/programme also gets
transferred to the telecaster/ broadcaster, such contract is covered by the definition of
the term `work’ in section 194C and, therefore, subject to TDS under that section. This
position clearly flows from the definition of `work’ given in clause (iv)(b) of the
Explanation to section 194C and the same has also been clarified vide Q. No. 3 of
Circular No. 715 dated 8.8.1995.
However, in a case where the telecaster/broadcaster acquires only the telecasting/
broadcasting rights of the content already produced by the production house, there is no
contract for ‘’carrying out any work”, as required in section 194C(1). Therefore, such
payments are not liable for TDS under section 194C. However, payments of this nature
may be liable for TDS under other sections of Chapter XVII-B of the Act.

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8. Applicability of TDS provisions on payments by television channels and publishing
houses to advertisement companies for procuring or canvassing for
advertisements [Circular No. 05/2016, dated 29-2-2016]
The issue of applicability of TDS provisions on payments made by television channels or
media houses publishing newspapers or magazines to advertising agencies for procuring
and canvassing for advertisements has been examined by the CBDT.
The CBDT noted that there are two types of payments involved in the advertising
business:
(i) Payment by client to the advertising agency, and
(ii) Payment by advertising agency to the television channel/newspaper company
The applicability of TDS on these payments has already been dealt with in Circular No.
715 dated 8-8-1995, where it has been clarified in Question Nos. 1 & 2 that while TDS
under section 194C (as work contract) will be applicable on the first type of payment,
there will be no TDS under section 194C on the second type of payment e.g. payment by
advertising agency to the media company.
However, another issue has been raised in various cases as to whether the fees/charges
taken or retained by advertising companies from media companies for canvasing/booking
advertisements (typically 15% of the billing) is 'commission' or 'discount'. It has been
argued by the assessees that since the relationship between the media company and the
advertising company is on a principal-to-principal basis, such payments are in the nature
of trade discount and not commission and, therefore, outside the purview of TDS under
section 194H. The Department, on the other hand, has taken a stand in some cases that
since the advertising agencies act on behalf of the media companies for procuring
advertisements, the margin retained by the former amounts to constructive payment of
commission and, accordingly, TDS under section 194H is attracted.
The issue has been examined by the Allahabad High Court in the case of Jagran
Prakashan Ltd. and Delhi High Court in the matter of Living Media Limited and it was
held in both the cases that the relationship between the media company and the
advertising agency is that of a 'principal-to-principal' and, therefore, not liable for TDS
under section 194H. The SLPs filed by the Department in the matter of Living Media Ltd.
and Jagran Prakashan Ltd. have been dismissed by the Supreme Court vide order dated
11-12-2009 and order dated 5-5-2014, respectively. Though these decisions are in
respect of print media, the ratio is also applicable to electronic media/television
advertising as the broad nature of the activities involved is similar.
In view of the above, the CBDT has clarified that no TDS is attracted on payments made by
television channels/newspaper companies to the advertising agency for booking or procuring
of or canvassing for advertisements. It is also further clarified that 'commission' referred to in
Question No.27 of the CBDT's Circular No. 715 dated 8-8-1995 does not refer to payments by
media companies to advertising companies for booking of advertisements but to payments for
engagement of models, artists, photographers, sportspersons, etc. and, therefore, is not
relevant to the issue of TDS referred to in this Circular.

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Example
Discuss the following issues in the context of the provisions of the Income -tax Act, 1961,
with specific reference to clarification given by the Central Board of Direct Taxes -
(i) Moon TV, a television channel, made payment of ` 50 lakhs to a production house
for production of programme for telecasting as per the specifications given by the
channel. The copyright of the programme is also transferred to Moon TV. Would
such payment be liable for tax deduction at source under section 194C? Discuss.
Also, examine whether the provisions of tax deduction at source under section 194C
would be attracted if the payment was made by Moon TV for acquisition of
telecasting rights of the content already produced by the production house.
(ii) Mudra Adco Ltd., an advertising company, has retained a sum of ` 15 lakhs,
towards charges for procuring and canvassing advertisements, from payment of
` 1 crore due to Cloud TV, a television channel, and remitted the balance amount of
` 85 lakhs to the television channel. Would the provisions of tax deduction at
source under section 194H be attracted on the sum of ` 15 lakhs retained by the
advertising company?
Answer
(i) In this case, since the programme is produced by the production house as per the
specifications given by Moon TV, a television channel, and the copyright is also
transferred to the television channel, the same falls within the scope of definition of
the term ‘work’ under section 194C. Therefore, the payment of ` 50 lakhs made by
Moon TV to the production house would be subject to tax deduction at source under
section 194C.
If, however, the payment was made by Moon TV for acquisition of telecasting rights
of the content already produced by the production house, there is no contract for
‘’carrying out any work”, as required in section 194C(1). Therefore, such payment
would not be liable for tax deduction at source under section 194C.
(ii) The issue of whether fees/charges taken or retained by advertising companies from
media companies for canvasing/booking advertisements (typically 15% of the
billing) is 'commission' or 'discount' to attract the provisions of tax deduction at
source has been clarified by the CBDT vide its Circular No.5/2016 dated 29.2.2016.
The Circular draws reference to the Allahabad High Court ruling in the case of
Jagran Prakashan Ltd. and the Delhi High Court ruling in the matter of Living Media
Limited. In both the cases, the Courts have held that the relationship between the
media company and the advertising agency is that of a 'principal -to-principal' and,
therefore, not liable for TDS under section 194H. Though these decisions are in
respect of print media, the ratio is also applicable to electronic media/television
advertising as the broad nature of the activities involved is similar.
In view of the above, the CBDT has clarified that no liability to deduct tax is
attracted on payments made by television channels to the advertising agency for
booking or procuring of or canvassing for advertisements.

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Accordingly, in view of the clarification given by CBDT, no tax is deductible at
source on the amount of ` 15 lakhs retained by Mudra Adco Ltd., the advertising
company, from payment due to Cloud TV, a television channel.
9. Payment of interest on refund under section 244A of excess TDS deposited under
section 195 [Circular No.11/2016 dated 26.4.2016]
The procedure for refund of tax deducted at source under section 195 to the person
deducting the tax is set out in CBDT Circular No.7 /2007 dated 23.10.2007. Circular
No.7/2007 states that no interest under section 244A is admissible on refunds to be
granted in accordance with the circular or on the refunds already granted in accordance
with Circular No.769 or Circular No.790 dated 20.4.2000.
The issue of eligibility for interest on refund of excess TDS to a tax deductor has been a
subject matter of controversy and litigation. The Supreme Court of I ndia, in Tata
Chemical Limited 1, Civil Appeal No. 6301 of 2011 vide order dated 26.02.2014, held that
refund due and payable to the assessee is debt-owed and payable by the Revenue.
Though there is no express statutory provision for payment of interest on the refund of
excess amount/tax collected by the Revenue, the Government cannot shrug off i ts
apparent obligation to reimburse the deductors lawful monies with the accrued interest
for the period of undue retention of such monies. The State having received the money
without right, and having retained and used it, is bound to make the party good, just as
an individual would be under like circumstances. The obligation to refund money received
and retained without right implies and carries with it the right to interest."
In view of the above judgment of the Apex Court, it is settled that if a reside nt deductor is
entitled for the refund of tax deposited under section 195, then it has to be refunded with
interest under section 244A from the date of payment of such tax.

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