Synopsis of Proposed amendments in Direct Tax in Budget 2014

Tax Benefits/ Exemptions to Individual/ HUF

·         Basic Exemption Limit for FY 2014-15 is increased to Rs. 250000/- for individuals (whether male or female) below 60 years of age. For persons of 60 years or above, the basic exemption limit is raised to Rs. 300000/-

·         Limit for Deduction u/s 80C has been increased to Rs. 150000/-. Simultaneously, investment in PPF per year is increased to Rs. 150000/- (Earlier Rs. 100000/-).

·         Deduction u/s 24(b) for interest payment towards loan taken for self occupied houses increased to Rs. 200000/- (Earlier Rs. 150000/-)

 Calculation of Dividend/Income Distribution Tax

·         Section 115-O/115R levy additional income tax on income/divided distributed by companies or mutual funds. Earlier, the tax was calculated @ 15% on the net income/ distributed. Now, the tax shall be paid on the gross income distributed. For eg. If a dividend of Rs. 100 is distributed, earlier it was 15% of dividend paid i.e. Rs. 15/-. But now the dividend has to be grossed up by dividing the dividend amount by (1-tax rate). Accordingly, the tax would be Rs. 17.65. Additional burden on the companies or we may say less income in the hands of shareholders.

 Classification of Unlisted Equity Shares and units of mutual fund (other than equity oriented fund)

·         Sec 2(42A) now provides that an unlisted security and a unit of mutual fund (other than an equity oriented mutual fund) shall be short term capital assets if it is held for not more than 36 months.

Long Term Capital Gain Tax on debt oriented mutual fund

·         LTCG on debt oriented fund shall be 20%. Earlier it was 20% after indexation and 10% without indexation.

Taxability of Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust (INVIT)

These trusts would raise capital by way of issue of units to be listed on a recognized stock exchange. The income bearing assets would be held by the trust by acquiring interest in an Indian Company (SPV) from the sponsor

·         Taxability on par with listed equity shares i.e. LTCG is exempt on the listed units of REIT/INVIT and STCG @ 15% on such units

·         In case of Capital gains arising to sponsor at the times of exchange of shares in SPVs with units of the business trusts, the taxation of gains shall be deferred and taxed at the time of disposal of units by the sponsor. However, preferential tax regime (as in case of listed equity shares) shall not be available to sponsor.

·         Interest received by business trust from SPV is not taxable in the hands of trust and no withholding tax at the level of SPV. However, in case of payment of income component of income distributed, trust shall effect withholding tax at rate of 5% for non-residents and 10% for residents unit holder

·         In case of ECB by trusts, withholding rate of 5% on interest to be paid

·         Dividend received by the trust from SPV shall be exempt in the hands of trust and such dividend distributed to unit holders shall also be exempt. However, SPV shall pay DDT on dividend paid to trusts.

·         Capital gain is taxable in the hands of trust, but on distribution, such capital gain shall be exempt in the hands of unit holders.

Investment allowance to a Manufacturing Company

·         Deduction of 15% u/s 32AC for investment in new plant & machinery if the amount exceeds Rs. 25 Crore.

100% Deduction of Capital Expenditure on Specified Business

·         100% Deduction is allowed of Capital Expenditure (excluding land, goodwill and financial instrument) u/s 35AD for investment in specified business. Two new businesses are included i.e.

o   Laying and operating a slurry pipeline for the transportation of iron ore

o   Setting up and operating a semiconductor wafer fabrication manufacturing unit

·         If such asset is not used for the purpose of such business for eight years, deduction claimed earlier shall be income after deducting depreciation.

·         As per Sec 115JC, total income of the company shall be increased by the deduction claimed u/s 35AD (and decreased by the depreciation allowable u/s 32) for the purpose of computing of Alternate Minimum Tax (AMT).

Taxability of advance for transfer of a Capital Asset

·         Advance received against transfer of capital asset and forfeited thereafter shall be taxable under the head “Income from other Sources” as per Section  56(2)

(Earlier, Sec 51 covered these situations and the amount forfeited was reduced from the cost of acquisition of Capital Asset. If the amount forfeited exceeds the cost of acquisition, the cost of acquisition was reduced to nil and excess amount was treated as capital receipt not taxable in light of Apex Court decision in Travancore Rubber & Tea Co.)

 

Taxation of Charitable Trusts and Institutions

·         Where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)] and vice versa.

·         Under section 11 and section 10(23C), income for the purposes of application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.

·         Term “Substantially Financed by the Government” used in Sec 23AC, explained.

·         Powers of Commissioner to cancel the registrations of such trusts/ institutions widened.

·         Exemption from income also granted for period before registration.

 

Transfer Pricing

·         Introduction of Roll-back mechanisms in Advance Pricing Agreements (APA). Arm’s Length Price (ALP) determined in APA is valid for previous 4 years also.

·         TPO is also empowered to levy penalty u/s 271G in addition to the AO and CIT(A)

·         Definition of international transaction rationalized

Tax Deduction at Source (TDS)

·         To claim the expenditure, TDS on payment made to non-residents can be deposited before filing of return [Sec 40(a)(i)]

·          In case of non-deduction or non-payment of TDS from certain payments made to residents, only 30% of the expenditure shall be disallowed. [Sec 40(a)(ia)]

·         Disallowance u/s 40(a)(ia) shall extend to all payments on which tax is deductible

·         Time limit for 2 years to treat payer as assessee in default has been dispensed with.

·         Time limit of 6 years for TDS Statements not filed, extended to 7 years.

·         An income tax authority may for the purpose of checking of compliance of TDS may survey any premises and enquire about books of accounts etc u/s 133A

 Income Computation and disclosure standards

·         Central Government to notify the income computation and disclosure standards to be followed by any class of persons or in respects of any class of income.

·         AO may make best judgement assessment u/s 144, if the income is not computed in accordance with the standards notified u/s 145(2) of the Act.

Other amendments

·         Extension of the sunset date under section 80-IA for the power sector to 31-03-2017

·         Withholding tax of 5% on interest paid towards foreign borrowings via long term bonds

·         Dividend income from foreign companies to continue to be taxed @ 15%

·         Income arising from transfer of securities by a Foreign Portfolio Investor (FII) would be in the nature of Capital Gain

·         TDS @ 2% from payments (Not covered u/s 10(10D)) made by the Insurance Companies under a life insurance policy if it exceeds Rs. 100000/- in a year.

·         Corporate Social Responsibility (CSR) expenditure not allowed as deduction u/s 37

·         Presumptive income u/s 44AE = Rs 7500 per month per vehicles, whether HGV or other than HGV (Heavy Goods Vehicle)

·         Transfer of Government Security (carrying a periodic payment of interest) by one non-resident to other non-resident shall be exempt from capital gains tax.

·         Transaction in respect of trading in Commodity derivatives carried out in recognized association and chargeable to CTT is not speculative transaction.

·         In case of Capital gains arising from transfer of an asset by way of compulsory acquisition, the amount received in pursuance of an interim order of the authority shall be income of the previous year in which final order is made.

·         Sec 54/54F exemption only when the investment is made in one residential house situated in India

·         Limit of Rs. 50 Lakh u/s 54EC explained. Total investment of Rs. 50 Lakhs only is to be allowed, even if covering two financial years.

·         New Section 133C inserted to empower the prescribed income tax authority to issue notice to person, whose information is in possession of such authority, requiring him to furnish information or documents.

·         Failure to produce books of accounts and documents as required in any notice issued u/s 142(1) or failure to comply with a direction issued u/s 142(2A) mandatorily requires rigorous imprisonment upto 1 year and fine.

·         Sec 285BA includes more transactions and reportable accounts to be furnished by specified persons to the income tax authority.

·         Assessment of income of a person other than the searched person u/s 153C only if the Assessing officer of such other person is satisfied that books etc seized or requisitioned have a bearing on the determination of the total income of such other person.

·         Credit of Alternate Minimum Tax u/s 115C shall be allowed.

 

Regards

Rahul Jain

rahuljain@rpmd.in

E Filing of Wealth Tax Return is mandatory

Vide Notification No. 32/2014 dated 23-06-2014, CBDT has made mandatory filing of Wealth Tax Return only by electronic means for certain persons including Company and an assessee being individual or HUF who is liable to audit u/s 44AB.

From Assessment Year 2014-2015 onwards, Company and an assessee being individual or HUF who is liable to audit u/s 44AB are required to furnish Form BB (Return of Net Wealth) electronically under digital signature. Some of the important points are:

1.       New wealth tax return form BB (E-Filing) shall be applicable from assessment year 2014-15 for Years Prior to this Form BA will continue to remain applicable.

2.       E filing of wealth tax return is mandatory for all type of persons for assessment year 2014-15 onwards except for  Individual / HUF to whom provision of section 44AB (tax audit) is not applicable in assessment year 2014-15.

3.       Individual / HUF to whom provision of section 44AB (tax audit) is not applicable in assessment year 2014-15 may file wealth tax return on paper form.

4.       Exemption to Individual / HUF from e-filing of form BB is granted only for AY 2014-15.so from next year (AY 2015-16) all person are required to e file wealth tax return with digital signature.

5.        Form BB shall not be accompanied by any document i.e.- statement of computation of tax payable, valuation report of registered valuer, proof of tax or interest deposit.​

 

 

FAQ on Wealth Tax

 

Q. What is Wealth tax and on whom and when it is applicable?

A. Wealth Tax is applicable on Individual, HUF and a company if the net wealth of such person exceeds Rs. 30 Lakh. Wealth tax is charged @ 1% on net wealth exceeding Rs. 30 Lakh.

 

Q. What is the meaning of net wealth?

A. Net wealth means assets minus debt incurred for such asset.

 

Q. What is the meaning of asset as per Wealth Tax Act?

A. Asset includes:

·         Motor Cars (Other than used by the assessee in the business of running them on hire or used by the assessee as stock in trade)

·         Yachts, boats and aircrafts (other than used by the assessee for commercial purposes)

·         Jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum or any other precious metal. (other than used by the assessee as stock in trade)

·         Any building or land (with some exceptions like):

o   One residential home is exempt from Wealth Tax or urban land measuring 500 sqm or less.

o   Any residential property which has been let out for a minimum period of 300 days in the previous year

o   Any house occupied by the assessee for the purpose of any business or profession carried on by him

o   Commercial establishments or complexes

·         Cash in excess of Rs. 50000 in case of individual or HUF

·         Deemed Assets i.e assets transferred without consideration to family etc.

·         Assets of minor child barring some exception

·         Value of assets in partnership firm to be clubbed with the assets of partner

 

Q. What is the last date of filing return?

A. Last date to file the return is:

·         31^st July for Individuals or HUF

·         30^th Sep for Company and individual or HUF whose accounts are required to be audited u/s 44AB

 

Q. what can happen if I do not pay the tax or file the return>

A. Penalties:

·         Belated or revised return can be filed within one year from the end of assessment year after paying 1% per month of tax as penalty for delay.

·         Penalty upto 100% of tax in case of non-payment of wealth tax

·         Penalty upto 500% of tax in case of concealment of wealth tax

·         In case of willful default, imprisonment upto 7 years can be imposed

Regards
Rahul Jain
rahuljain@rpmd.in

 

 

VCES Order is appealable

Case: Barnala Builders & Property Consultants Vs The Deputy Commissioner of Central Excise & Service Tax (P&H)

 

Facts:  The assessee submitted a declaration under VCES scheme which was rejected by the department. The department argued that Vide Circular no. 170/5/2013-ST dated 08-08-2013, the CBEC had clarified that the VCES scheme does not have a statutory provision for filing of appeal against the order for rejection of declaration under Sec 106(2) by the designated authority.

Held by the High Court in favour of assessee:

• The VCES scheme has been incorporated into the act and is thus part and parcel of the Finance Act.
• Thus all the provisions of Finance Act, unless specifically excluded, apply to proceedings under this scheme.

• Instructions issued by CBEC on 08-08-2013 that orders under VCES scheme are not appealable held to be invalid.
• Assessee is allowed to file an appeal and the appeal, if filed, shall be considered and decided within a fortnight.

VCES – Clarification dated 11-12-2013

CBEC, vide instructions dated 11-12-2013, has clarified following issues on VCES

S.No.	Issues	Clarifications
1	Whether an undertaking is required from the declarant stating that there is no unpaid tax dues for the remaining period of the scheme	No. A declaration of tax dues has to be made in Form VCES-1. No other undertaking or declaration required to be furnished.
2	Whether the tax declared can be paid in installments.	Yes. The only condition is that 50% of the tax dues shall be paid by 31-12-2013 and balance 50% by 30-06-2014. For ex. a declarant may pay the 50% amount that he is required to pay by 31-12-2013 in more than 1 installments.
3	Whether the designated authority may raise frivolous/ unnecessary queries regarding the manner of calculation of tax dues.	No. The designated authority may check arithmetical calculation of tax dues. The commissioner, if he has reason to believe and the reasons to be recorded in writing, that the declaration is substantially false, he may serve notice on declarant.

 

eBay India is a dependent agent of eBay International AG but not a “dependent agent PE” so business profits cannot be taxed in India.

Case: eBay International AG vs Dy DIT (Mumbai – Trib)

 

Facts:  The assessee, eBay International AG, was incorporated in Switzerland. It operated specific websites in India that provided an online platform for facilitating the purchase and sale of goods and services to users based in India.

 

The assessee had entered into marketing support agreements with eBay India and eBay motors, for availing of certain support services in connection with its business in India.

 

The AO concluded that the payments received by the assessee from operations of websites were mainly in the nature of FTS. Further, it also held that the assessee had a PE in India in the form of its entities namely, eBay India and eBay motor. On appeal by the assessee, the DRP upheld the order of AO. Aggrieved-assessee filed the instant appeal.

 

 

HELD by the Tribunal in favour of assessee:

 

·         Fees accruing to assessee on successful completion of the transactions between the buyer and seller could not be described as FTS, as the assessee had no role to play in effecting sales and these were in nature of business profits;

·         The existence of PE as per Article 5 of India-Singapore DTAA (‘treaty’) is a must for bringing to charge any business profits as per Article 7 of treaty. The eBay India and eBay motors were dependent agents of assessee, as they were assisting it in carrying on business in India and if any of the conditions given in para 5 of Article 5 of treaty was satisfied, then they would constitute dependent agent PE of the assessee in India

·         First condition: "has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise”. By performing the activities as narrated in the agreement, it was seen that eBay India had at no stage negotiated or entered into contract for or on behalf of the assessee

·         Second condition: “dependent agent habitually maintaining a stock of goods for or on behalf of the enterprise”. This condition was not satisfied as eBay India didn’t maintain any stock of goods for delivery for or on behalf of the assessee

·         Third condition: “dependent agent manufactures or processes the goods or merchandize in that State for the enterprise”. Obviously, this clause was also not applicable because eBay Motors was not required to manufacture or process the goods or merchandise on behalf of the assessee;

·         Thus, the eBay India and eBay motors were dependent agents of assessee but they did not constitute dependent agent PE and, thus, profits earned by assessee could not be taxed as per Article 7 of treaty

 

CA Rahul Jain

rahuljain@rpmd.in

Depreciation cannot be disallowed on ground that some areas in mall remained unutilized

Case: E-City Entertainment (India) Pvt Ltd Vs. ACIT (Mumbai – Trib)

Facts:  The assessee was the owner of a mall of which certain areas were unutilized. AO disallowed the depreciation claim on commercial complex, by holding that its certain areas couldn’t be used by assessee for business purposes.

 

On appeal before the CIT (A), the assessee contended that the entire commercial space was put to use but only a part of it was leased out and it would not mean that the unutilised area was used for non-business purposes or personal purposes. It further contends that it was owner of the entire building so the depreciation couldn’t be disallowed. The CIT (A) allowed the claim of the assessee. Aggrieved-revenue filed the instant appeal.

 

 

HELD by the Tribunal in favour of assessee:

 

·         For the purpose of allowing of depreciation, only the block of assets had to be considered;

·         It had to be seen whether the particular block of assets was owned by the assessee and used for the purpose of business. If block of assets was owned by the assessee and used for the purpose of business, depreciation had to be allowed

·         The observation of the AO, that the depreciation on complex would be allowed to the extent of the area which was used for business purpose, was devoid of any merit

·         Once it was proved that block of asset was used for the purposes of assessee’s business and there was no finding as to whether the block of assets was used for other business purposes, proportionate disallowances of depreciation was not warranted. Thus, the addition made by AO was to be deleted

 

CA Rahul Jain

rahuljain@rpmd.in

If assessee is not engaged in the business of shares dealing, loss from shares dealing cannot be deemed to be from speculation under Explanation to Sec 73 of Income Tax Act.

Case: CIT Vs Orient Instrument Pvt Ltd (Delhi High Court)

Facts:  The assessee was primarily engaged in the business of trading of crafts paper. The assessee also purchased and sold some shares for which he claimed a loss of Rs. 5.53 Lakhs.

AO held that under the Explanation to Sec 73, the said loss of shares was deemed to be arising from speculative transactions and thus cannot be allowed to be set off against business profits.

The CIT(A) and Tribunal allowed the assessee claim by holding that the assessee was not engaged in the “business” of purchase and sale of shares and therefore exp to sec 73 does not apply.

Department appealed before the High Court and argued that even a single transaction of sale or purchase of shares might amount to a “business”

 

HELD by the High Court in favour of assessee:

 

·         The assessee was engaged in the business of trading of crafts paper, installation, job work, consultancy and commission.

·         By all means, transaction whereby it purchased shares and incurred losses on account of the fall in value of share was a solitary one.

·         Findings of Tribunal that transaction did not constitute business carried on by company, cannot be termed as perverse or unreasonable.

·         In circumstances, the court is satisfied that no substantial question or law arises. Appeal was accordingly dismissed

 

CA Rahul Jain

rahuljain@rpmd.in