COMMITTEE OF GOVT OF INDIA GIVEN 10 SUGGESTIONS FOR TAX REFORM PANEL TO SIMPLIFY INCOME-TAX PROVISIONS.
COMMITTEE OF GOVT OF INDIA GIVEN 10 SUGGESTIONS FOR TAX REFORM PANEL TO SIMPLIFY INCOME-TAX PROVISIONS.
The Government has constituted a 10-member Committee (‘Tax Reform Panel’) on October 27, 2015 to simplify provisions of the Income-Tax Act. Justice R.V. Easwar, former Judge of the Delhi High Court is the Chairman of Tax Reform Panel.
The objective of Tax Reform Panelis to study and identify the provisions in the Income-Tax Act which are leading to litigations; to study and identify the provisions which are impacting the ease of doing business. Tax Reform Panel will recommend alternatives and modifications in the existing provisions to bring about predictability and certainty in tax laws without having substantial impact on the tax base and revenue collection.
‘Taxmann’ has taken first initiative to invite public suggestions for consideration of ‘Tax Reform Panel’. It received numerous suggestions from the public to simplify income-tax provisions. Following suggestions were sent to ‘Tax Reform Panel’.
- Payment made to a resident or a non-resident – Needed parity in the provisions.
Under the Indian tax laws, Section 40(a)(i) (payment to non-resident) and Section 40(a)(ia) (payment to resident), provide that where certain specified payments in the nature of interest royalty, etc., are made by the taxpayers, these shall not be allowed as deductions where the payer of such sum does not withhold requisite taxes thereon or after deduction of such taxes, does not pay the taxes to the Government within the prescribed time-limit.
Although both the disallowance provisions are same, yet an exemption has been provided to cases involving payments to residents. It has been provided that no disallowance shall be made where payment has been made to a resident without deduction of tax, if the recipient takes into account such receipt while computing its taxable income and files the income-tax return under section 139(1) in respect of such income.
However, in respect of payments made to non-residents under Section 40(a)(i), there is no corresponding exemption, which implies that even if the recipient of such payment takes into account such receipts in his computation of business income and files return under section 139(1) for same, the disallowance would still be made in the hands of the resident payer.
- Judicial precedent
In the case of Mitsubishi Corporation India (P.) Ltd. v. Dy. CIT [2014] 50 379 (Delhi – Trib.), the Hon’ble Delhi ITAT held that in view of the non-discrimination clause under the India-Japan tax treaty, no disallowance shall be made under Section 40(a)(i) for payments made to non-residents, if the non-resident recipient has considered such payments while filing his income-tax return and has paid taxes on such income. In effect, this judgment implied that any relaxation granted to a payer in respect of payments to residents, would constitute discrimination if same relaxation is not granted for similar payments made to non-residents.
It is recommended that an amendment should be made to remove this anomaly. As India is working hard to improve its image as a suitable investment destination, such an amendment would only work positively to reassure our commitment to be a favorable tax regime.
- Is investment in name of relatives valid for Sec. 54, 54B and 54F exemptions?
Sometimes the conditions provided under the Act to claim exemptions are not properly understood or appreciated by the assessees. Consequently, claims for such exemptions are rejected either at the assessment stage or at revision stage or at appellate stage.
Such situation is being witnessed while claiming exemptions under Sections 54, 54B and 54F of the Income-tax Act, when a new capital asset is purchased in the name of assessee’s relatives. Though such denial of exemption by the Assessing Officer or appellate authorities may be justified, the assessees should be made aware of such prohibition by means of an insertion of a proviso in respective section(s) at the initial stage itself. Assessees may be swayed by the broad proposition that all exemptions provisions have to be interpreted liberally but this any not be always so.
- Judicial precedents
The Bombay High Court in the case of Prakash v ITO [2008] 173 311 has held that in order to qualify for exemption under section 54F of the Act it is necessary and obligatory to make investment in residential house in name of assessee only and not in name of any other person.
The Hyderabad Bench of ITAT in the case of Girish Dharod v. Asstt. CIT [2013] 40 282 has held that liberal interpretation of statutory provisions taken by Courts to grant exemption available under section 54 of the Act, even in cases of investments in names of spouse and minor children of assessee cannot be extended beyond a point so to cover investments made in names of other blood relations or other relations.
The Andhra Pradesh High Court in the case of GantaVijaya Lakshmi v. ITO[2015] 54 301 has held that assessee is not entitled to relief under sections 54F and 54B of the Act in respect of properties acquired in name of her married daughters.
It is recommended that a proviso may be inserted suitably prohibiting the assessee from making a claim in respect of investments made in an altogether different name or in the name of a distant relative. Insertion of this proviso should also clarify that exemption would not be denied merely because the name of spouse and/or son /unmarried daughter/blood relative is added in the new investments as a precautionary measure and not otherwise.
- Age old threshold limits for maintenance of books should be raised.
As per Section 44AA of the Income-tax Act, every person carrying on specified profession shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income chargeable to tax.
However, every person carrying on business or any other than specified profession is required to maintain books of account if his income from business or profession exceeds Rs. 1,20,000 or his total sales, turnover or gross receipts, as the case may be, in business or profession exceedRs. 10,00,000 in any one of the three years immediately preceding the previous year.
These limits were last revised in 1999.
These age old-limits for maintenance of books needs to be revised so that compliance cost for small taxpayers would be reduced.
- Presumptive taxation scheme should be introduced for professionals.
Section 44AD of the Income-tax Act provides for presumption taxation scheme for the resident Individual, HUF and Partnership Firm (excluding LLP) engaged in eligible business.
“Eligible business” means –
- Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
- Whose total turnover or gross receipts in the previous year does not exceed an amount of one crore rupees.
Under the scheme, the assessee is exempted from maintaining books of account and obtaining tax audit report if he discloses at least 8% of his turnover or gross receipts, as the case may be, as his income and pays tax thereon. However, the persons engaged in specified profession like legal or accounting, etc., are not entitled to take benefit of this scheme.
A similar presumptive taxation scheme should be introduced for such specified professionals wherein they should be exempted from maintaining books and obtaining tax audit report on disclosure of fixed presumptive income. The presumptive income for such professionals may be set in the range of 25% to 35%.
- Separate provisions should be introduced to tax capital gains from JDAs.
Real estate developers often enter into Joint Development Agreements (‘JDA‘) with the land owners.As per the said JDA, real estate developers are required to develop land. Accordingly, the land owner hands over the vacant possession of the land to the developers and also assigns the development rights to them. In return of giving up rights in the land, the land owner receives an agreed share in the developed property.
The taxability of transactions resulting from JDA has been a contentious issue since a long time. Now one of the issues relate to year of taxability of capital gains, i.e., whether taxable in the year of entering into JDA or the year of allowing of actual possession or the year of receipt of developed property?
It is recommended that separate provisions should be introduced in the Income-tax Act for taxability of capital gains in JDAs. It will bring certainty in the tax law and will end sufferings of the taxpayers.
- Repayment or acceptance of loans/deposits by book entries.
The provisions of section 269SS of the Income-tax Act provide that no person shall take from any person any loan or deposit otherwise than by an account-payee cheque or account-payee bank draft or online transfer through a bank account, if the amount of such loan or deposit is twenty thousand rupees or more.
Similarly, Section 269T of the Income-tax Act provides that any loan or deposit shall not be repaid, otherwise than by an account-payee cheque or account-payee bank draft or online transfer through a bank account, if the amount of loan or deposit is twenty thousand rupees or more.
The issue is whether repayment or acceptance of loan or deposit of Rs. 20,000 or more through journal entries would amount to violation of provisions of section 269SS or 269T?
In this regard, the Bombay High Court in the case of CIT v. Triumph International Finance (I) Ltd. [2012] 22 138 (Bom.) held that repayment of loan/deposit by debiting the account through journal would amount to contravention of the provisions of section 269T of the Act. However, the High Court set aside the penalty imposed by the AO as assessee had shown the reasonable cause for such transaction.
However, the Delhi High Court has taken a different view in respect of the underlying issue in the case of CIT v. Noida Toll Bridge Co. Ltd. [2004] 139 Taxman 115 (Delhi). It was held that where associated enterprise of the assessee has made payment via account-payee cheque on behalf of assessee, and, consequently, debited the accounts of assessee in its books of account then such transaction could not be held to be in contravention of the provisions of section 269SS.
It should be clarified whether repayment or acceptance of any loans or depositsvia journal entry would be deemed as contravention of provisions of Section 269SS or Section 269T?
- Sale of ‘listed shares’ by NR to be taxed at 10% after giving effect to first proviso to Sec. 48
The first proviso to section 48 provides relief from exchange fluctuations to foreign companies and other non-residents purchasing shares of Indian companies in foreign exchange. Second proviso to section 48 provides for the benefit of indexation while computing long-term capital gain, thus providing relief against inflation. Indexation relief is not available to assessees covered by first proviso.
Tax on long-term capital gains is levied at 20% (plus applicable surcharge and education cess) for all assessees under the provisions of section 112. Proviso to section 112 provides for concessional rate of tax in case of transfer of listed securities. The profits, in that case, are liable to be taxed at 10% (plus applicable surcharge and education cess) on the amount of long-term capital gains before giving benefit of indexation under the second proviso to section 48. Thus, in case of transfer of listed securities the assessees have the option to pay tax on long-term capital gains at 20% with indexation or 10% without indexation benefit. The transfer should be otherwise than through the stock exchange [since the long-term capital gain on sale of shares through stock exchange is exempt from tax under section 10(38)].
Issues arise as to whether a foreign company (which sells listed shares of an Indian company otherwise than on stock exchange), entitled to the benefit of the first proviso to section 48, can also have the benefit of 10% tax rate on capital gains?.
- Judicial Precedents:
The Hon’ble Delhi High Court in case of Cairn UK Holdings Ltd v Director of Income Tax [2013] 38 179 (Delhi) has held that a foreign company (which is entitled to the benefit of the first proviso to section 48) is entitled to the benefit of lower rate of 10% on the sale of listed shares, where such sale takes place otherwise than on stock exchange.
Relying on the decision of Cairn UK Holdings the Authority of Advance Rulings (AAR) in Pan Asia Igate Solutions, Mauritius, In re[2014] 45 322(AAR – New Delhi) has made similar observations.
In case of Assistant Director of Income Tax v Abbott Capital India [2014] 46 33 (Mumbai – ITAT), the Mumbai ITAT has also held that the UK based foreign company was entitled to the benefit of lower rate of tax at 10% while computing long-term capital gain on the sale of shares of Abbott India Limited (a company listed on Bombay Stock Exchange) to another company. The ITAT relied on the decision in the case of Cairn UK Holdings for its findings.
Inspite of the above decisions the income-tax authorities have been taking a contradictory view on this issue. It is recommended that a specific amendment may be brought about to provide that foreign companies/non-residents who are covered by the first proviso to section 48 would be subject to tax at 10% in case of transfer of listed shares as provided by proviso to section 112.
- Employees contribution to PF/ESI is deductible if paid before due date of filing of return.
As per provisions of section 36(1)(va) deduction in respect of PF/ESI contribution received from employees shall be available only if such sum is credited to the employee’s account in the relevant fund or funds on or before the due date.
However, the due dates for repayment and applicability of Section 43B have always been a matter of dispute between taxpayers and Assessing Officers.
The Delhi High Court in case of CIT v. Aimil [2010] 188 265 (Delhi) held that the employees’ contribution towards PF/ESI would qualify for deduction even if paid after due date prescribed under Provident Fund Act/ESI Act but before due date of filing of return under Section 139(1). Similar views were taken by various High Courts.
However, Gujarat High Court in case of CIT v. Gujarat State Road Transport Corporation [2014] 41 100 (Gujarat) held that if assessee did not deposit employees’ contribution to PF/ESI in relevant fund before due date of relevant fund, no deduction would be admissible, even though he had deposited the same before due date of filing of return of income under Section 139(1).
It is recommended that provisions should be introduced in the Act to clarify the above issues.
Thus, it should be clarified that employees and employer’s contribution to PF/ESI shall be treated at par under provisions of Section 43B for claiming deduction.
- Deemed acceptance of rectification application if rectification is not carried out in 6 months’ time.
Section 154(8) provides that where an application for rectification is made to an Income-tax authority, the authority shall pass an order within a period of six months from the end of the month in which the application is received.
The aforesaid provision is being widely interpreted by the Assessing Officers in a manner, that if no action is taken within six months as referred to above, the application of the assessee is deemed to have lapsed and the same need not be entertained. It is most unfortunate that by adopting such an unfair interpretation, Assessing Officers are taking benefit of their own defaults.
It is recommended that where rectification is not carried out within a period of six months, such application should be deemed to have been allowed. Moreover, the erring officials must be held to be personally accountable for the lapse.
It is also requested that in cases of tax refunds due to the assessee, the time-limit of four years for rectification should be waived off, more particularly in cases where the assessee is not at fault for the delay in disposal of an application for rectification.
- Selection of cases for scrutiny assessment.
The issuance of clear guidelines by the CBDT for selection of scrutiny cases every year has indeed been a welcome measure, since it has introduced a high level of transparency and also helped in preventing mischievous practices which prevailed earlier.
In this regard, it is suggested that where any addition made in the case of a taxpayer in any earlier year is of a repetitive nature, scrutiny should not be initiated in a subsequent year on such a count alone.
Out of the cases selected for scrutiny, a majority of cases pertain to limited scrutiny or verification of specific points arising out of AIR/CIB/26AS Information. Presently, Assessing Officers do not share this vital information with taxpayers and quite oftenly send out stereotyped questionnaires even seeking a whole lot of irrelevant information. In all such cases, when the first notice for scrutiny is issued, the taxpayer must be clearly informed of the specific reasons for such scrutiny and irrelevant questions should be strictly avoided. This transparency will go a long way in creating greater trust, confidence and goodwill in the minds of the taxpayers for the Income-tax Department.
CBDT had issued Instruction No. 7/2014, dated 26-09-2014 directing that for the cases selected for Scrutiny under CASS on the basis of either AIR Data, CIB Information or for mismatch of Form 26AS Data, the scope of enquiry should be limited only to the verification of those particular aspects. Keeping in view the spirit and underlying objective of these instructions, they should be applied to all pending assessments, including A.Y. 2013-14. Several Officers are interpreting the above instruction as being applicable only to cases selected for scrutiny during A.Y. 2014-15. It needs to be immediately clarified that this narrow interpretation is clearly unjustified.
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