Direct Taxdirect Tax

FINAL COURSE
SUPPLEMENTARY STUDY PAPER - 2012

DIRECT TAX LAWS AND INDIRECT TAX LAWS

[Covers amendments made by the Finance Act,
2012 and Important Circulars/Notifications issued
between 1
st
J uly 2011 and 30
th
J une, 2012]

(Relevant for students appearing for May, 2013 and
November, 2013 examinations)

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
This supplementary study paper has been prepared by the faculty of the Board of Studies of
the Institute of Chartered Accountants of India. Permission of the Council of the Institute is
essential for reproduction of any portion of this paper. Views expressed herein are not
necessarily the views of the Institute.
The Institute of Chartered Accountants of India
This Supplementary Study Paper has been prepared by the faculty of the Board of Studies of
the Institute of Chartered Accountants of India with a view to assist the students in their
education. While due care has been taken in preparing this Supplementary Study Paper, if
any errors or omissions are noticed, the same may be brought to the attention of the Director
of Studies. The Council of the Institute is not responsible in any way for the correctness or
otherwise of the amendments published herein.

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A WORD ABOUT SUPPLEMENTARY
Direct Tax Laws and Indirect Tax Laws are amongst the extremely dynamic subjects of the
chartered accountancy course. The level of knowledge prescribed at the final level for the
subjects is advanced knowledge. For attaining such a level of knowledge, the students have
not only to be thorough with the basic provisions of the relevant laws, but also have to
constantly update their knowledge regarding statutory developments.
The Board of Studies has been instrumental in imparting theoretical education for the students
of Chartered Accountancy Course. The distinctive characteristic of the course i.e., distance
education, has emphasized the need for bridging the gap between the students and the
Institute and for this purpose, the Board of Studies has been providing a variety of educational
inputs for the students.
One of the important inputs of the Board on taxation is the supplementary study paper in direct
and indirect tax laws to be used by the final students. The supplementary study papers are
annual publications and contain a discussion of the amendments made by the Annual Finance
Acts and Notifications/Circulars in income-tax, wealth-tax, excise, customs and service tax.
They are very important to the students for updating their knowledge regarding the latest
statutory developments in the respective areas mentioned above. A lot of emphasis is being
placed on these latest amendments in the final examinations.
The amendments made by the Finance Act, 2012 and important Notifications/Circulars issued
between 1
st
July, 2011 and 30
th
June, 2012 have been incorporated in this Supplementary
Study Paper 2012, which is relevant for students appearing for May 2013 and November
2013 examinations. The amendments made by way of notifications/circulars issued after
30
th
June, 2012 and which are relevant for May, 2013 and November, 2013 examinations will
be given in the Revision Test Paper (RTP) for May, 2013 and November, 2013 examinations,
respectively. In case you need any further clarification/guidance with regard to this publication,
please send your queries relating to direct tax laws at priya@icai.org and
agarwalnidhi@icai.org and queries relating to indirect tax laws at shefali.jain@icai.in &
swati.bos@icai.org.

Happy Reading and Best Wishes for the forthcoming examinations!

DIRECT TAX LAWS
AMENDMENTS AT A GLANCE FINANCE ACT, 2012
S.No. Particulars Section
Part I : Income-tax
1. A. Rates of tax
B. Basic Concepts
2. Unexplained share capital, share premium etc. credited in
the books of account of a closely held company to be
treated as income of such company
68
3. Unexplained money, investments etc. to attract maximum
marginal rate of tax @30%
115BBE
C. Residence and scope of total income
4. Gains from offshore transactions to be taxed if underlying
assets are located in India
9(1)(i), 2(14),
2(47) & 195(1)
5. Consideration for use or right to use of computer software
is royalty
9(1)(vi)
6. Specified class or classes of persons, making payment to
the non-resident, to mandatorily make application to
Assessing Officer to determine the appropriate proportion
of sum chargeable to tax
195(7)
7. Validation of demands etc. under Income-tax Act, 1961 in
certain cases
Section 119 of
the Finance Act,
2012
D. Incomes which do not formpart of total income
8. Exemption of income of Prasar Bharati (Broadcasting
Corporation of India)
10(23BBH)
9. Removal of sectoral restrictions on VCUs 10(23FB)
10. Exemption in respect of income received by certain foreign
companies in India in Indian currency from sale of crude oil
to any person in India
10(48)
11. Exemption to be denied to a charitable trust having its main
object as advancement of any other object of general
public utility if its trading receipts exceed the specified
threshold irrespective of withdrawal of approval or
cancellation of registration or rescindment of notification
10(23C), 13 &
143(3)
ii
E. Profits and gains of business or profession
12. Benefit of additional depreciation@20% extended to new
plant and machinery acquired and installed in power sector
undertakings
32(1)(iia)
13. Extension of sunset clause for claiming weighted
deduction@200% of expenditure on in-house scientific
research and development incurred by a company
35(2AB)
14. Expansion of scope of specified business for provision of
investment-linked tax deduction
35AD
15. Weighted investment-linked tax deduction for certain
specified businesses
35AD(1A)
16. Owner of a hotel eligible for investment-linked tax
deduction even if he transfers the operation of the hotel to
another person
35AD(6A)
17. Weighted deduction in respect of expenditure incurred on
notified agricultural extension project
35CCC
18. Weighted deduction in respect of expenditure incurred by
companies on notified skill development project
35CCD
19. Increase in threshold limits of total sales/ turnover/ gross
receipts for applicability of tax audit
44AB & 44AD
20. Presumptive taxation provisions not to apply to profession,
brokerage or commission income and agency business
44AD(6)
F. Capital Gains
21. Modification in the conditions to be satisfied in case of
amalgamation and demerger for not being regarded as
transfer
47(vii) & 2(19AA)
22. Cost of acquisition of the capital asset transferred by a sole
proprietorship or firm to a company on succession, to be
taken as cost to the previous owner i.e. the predecessor
proprietor or firm, where such succession is not regarded
as transfer under section 47
49
23. Fair market value of the capital asset on the date of
transfer to be taken as sale consideration, in cases where
the consideration is not determinable
50D
24. Extension of capital gain exemption under section 54B to a
Hindu Undivided Family
54B
25. Exemption of long-term capital gains on transfer of
residential property if the sale consideration is used for
54GB
iii
subscription in equity of a new start-up manufacturing SME
company to be used for purchase of new plant and
machinery
26. Assessing Officer enabled to make a reference to the
Valuation Officer in case the assessee has taken the fair
market value as the cost of acquisition of the asset in
accordance with the estimate made by the Registered
Valuer
55A
27. Non-residents and foreign companies to be subject to tax at
a concessional rate of 10% (without indexation benefit or
currency fluctuation) on long-term capital gains arising from
transfer of unlisted securities
112
G. Income fromother sources
28. Any sum of money or property received by a HUF without
consideration or for inadequate consideration from its
members exempt from tax
56(2)(vii)
29. Consideration received in excess of FMV of shares issued
by a closely held company to be treated as income of such
company, where shares are issued at a premium
56(2)(viib)
H. Deductions fromGross Total Income
30. Life insurance premium up to 10% of minimum capital sum
assured to qualify for deduction under section 80C, in
respect of insurance policies issued on or after 1.4.2012
80C & 10(10D)
31. One time deduction for investment by a resident individual
in listed equity shares as per notified scheme
80CCG
32. Eligible age for senior citizen reduced from 65 years to 60
years for availing increased deduction
80D & 80DDB
33. Deduction for expenditure on preventive health check-up 80D
34. No deduction in respect of cash donation exceeding of
` 10,000
80G & 80GGA
35. Extension of sunset clause for tax holiday for power-sector
undertakings
80-IA(4)(iv)
36. Deduction in respect of interest on deposits in savings
accounts
80TTA
I. Assessment of various entities
37. Concessional rate of tax on interest on borrowings in
foreign currency by Indian companies
115A, 194LC &
195
iv
38. Income received or receivable by a non-resident
entertainer, from performance in India included within the
scope of Section 115BBA and rate of tax thereunder
increased from 10% to 20%
115BBA & 194E
39. Dividends received by Indian companies from specified
foreign companies to be entitled to concessional rate of tax
for one more year
115BBD

40. Net profit as per profit and loss account prepared in
accordance with the respective Act governing insurance
companies, banking companies, electricity companies etc.
to form the basis for computation of book profit for levy of
MAT in case of such companies
115JB
41. Amount standing in the revaluation reserve relating to a
retired or disposed asset, to be subject to minimum
alternate tax, if the same is not credited to profit and loss
account
Explanation 1 to
section 115JB
42. Levy of Alternate Minimum Tax (AMT) extended to all
persons claiming profit-linked deductions, other than
companies [New Chapter XII-BA]
115JC to 115JF
Tax credit for AMT 115JD, 140A,
234A, 234B &
234C
43. Conversion of an Indian branch of foreign company into an
Indian subsidiary company [New Chapter XII-BB]
115JG
44. Removal of cascading effect of DDT in multi-tier corporate
structure
115-O
45. Taxability of income of VCCs/VCFs in the hands of the
investor on accrual basis
115U
46. Increase in presumptive rate of daily tonnage income 115VG
J. Double taxation relief
47. Meaning to be assigned to a term used in DTAA by way of
notification to be effective from the date such DTAA came
into existence
90 & 90A
48. Tax Residence Certificate (TRC) - a necessary but not
sufficient condition for claiming treaty benefits
90 & 90A
K. Transfer pricing and other provisions to check
avoidance of tax

49. Transfer Pricing Officer empowered to examine any 92CA(2B) &
v
international transaction not reported by the assessee 92CA(2C)
50. Penalty provisions made more stringent in cases where the
assessee fails to keep and maintain information and
document, etc in respect of an international transaction
271AA
51. Income from domestic transaction to be subject to transfer
pricing
92(2A) & 92(3)
52. Meaning of specified domestic transaction 92BA
53. Arms length price and income of a specified domestic
transaction to be computed in the same manner as
applicable to an international transaction
92 & 92C
54. Persons entering into specified domestic transaction to
maintain information, documents and furnish report of an
accountant
92D & 92E
55. Reference to Transfer Pricing Officer for computation of
arms length price of specified domestic transaction
92CA
56. Penalty provisions to apply to specified domestic
transactions as they apply to an international transaction
271, 271AA,
271BA & 271G
57. No adjustment to expenditure under section 40A(2) if the
transaction is carried out at arms length price
40A(2)
58. Market value to be the arms length price of goods or
services in a specified domestic transaction
80A & 80-IA(8)
59. Meaning of International transaction amplified 92B
60. Permissible variation between ALP and Transfer Price to
be notified by the Central Government not to exceed 3%
92C
61. Introduction of Advance Pricing Agreements 92CC, 92CD &
246A
62. Income shall be deemed to have escaped assessment in
case the assessee fails to furnish report under section 92E
in respect of any international transaction
Explanation 2 to
section 147
L. Income tax authorities
63. Director of Income-tax to be included in the definition of
Commissioner
2(16)
M. Assessment procedure
64. Assessment to be made individually in search cases even
where the authorization or requisition mentions the name of
more than one person
292CC
vi
65. Extension of due date for filing of return of income and tax
audit report in case of all assessees undertaking
international transaction
44AB & 139(1)
66. Mandatory filing of ROI by every resident having any asset
(including financial interest in any entity) located outside
India
139(1), 147 &
149
67.
Processing of return of income under section 143(1) not
necessary in a case where notice has been issued under
section 143(2) to the assessee for scrutiny of return
143(1D)
68.
Dispute Resolution Panel empowered to consider any
matter arising during the assessment proceeding even if
that matter is not raised by the eligible assessee
Explanation to
section 144C(8)
69. The time limit for completion of assessment in search
cases mentioned under section 144C to be notwithstanding
the time limit mentioned under section 153B
144C(4) &
144C(13)
70. Extension of time limit for issue of notice to a person
treated as an agent of non-resident under section 163, in a
case where income of the non-resident has escaped
assessment
149(3)
71. Time limit for completion of assessments and
reassessments extended by 3 months
153 & 153B
72. Time limit for completion of assessment or reassessment
to be extended in case information is sought by a
competent authority under an agreement referred to in
section 90 or section 90A
153 & 153B
73. The Central Government to notify class or classes of cases
of search, where compulsory issue of notice for assessing
or reassessing the total income of immediately preceding
six assessment years not required
153A, 153C &
296
N. Settlement commission
74. Substantial interest to be determined on the basis of
beneficial ownership of shares carrying not less than 20%
voting power/ beneficial entitlement to profits on the date
of search
Explanation to
Section 245C
O. Advance rulings
75.
Provision of advance ruling to determine the applicability of
GAAR introduced
245N & 254R
76.
Increase in fees for filing application before Authority for
Advance Rulings
245Q
vii
P. Appeals and revision
77. Appeal against the order of the Assessing Officer under
sections 153A/ 153C passed in pursuance of direction of
the DRP to lie to Income-tax Appellate Tribunal
246A & 253
78. Income-tax authorities authorized to file an appeal to
Income-tax Appellate Tribunal against the order passed in
pursuance of the directions of the Dispute Resolution Panel
253 & 254
Q. Penalties
79. Penal provisions on undisclosed income found during the
course of search made more stringent
271AAB
R. Offences &prosecution
80. Increased limits for applicability of rigorous punishment 276C, 276CC,
277, 277A & 278
81. Constitution of Special Courts & Offences triable by
Special Court
280A & 280B
82. Trial of offences as summons case 280C
83. Application of Code of Criminal Procedure, 1973 to
proceedings before Special Court
280D
S. Miscellaneous provisions
84. Relaxation of time limit for satisfying the conditions, the
non-compliance of which would result in withdrawal of
recognition of recognized provident fund
Rule 3 of Part A
of Fourth
Schedule to the
Income-tax Act,
1961
T. Provisions for deduction and collection of tax
85. Tax not to be deducted at source in case aggregate of
interest which is payable to an individual or Hindu
Undivided Family on debentures does not exceed ` 5,000
Proviso to
section 193
86. Tax to be deducted under section 194J on any
remuneration paid to a director, other than in the nature of
salary on which tax is deductible under section 192
194J
87. Threshold limit for non-deduction of tax at source on
payment of compensation on compulsory acquisition of
immovable property increased
194LA
88. Eligible age for senior citizen reduced from 65 years to 60
years for the purpose of section 197A(1C)

197A(1C)
viii
89. No tax to be deducted in case of payment made to notified
institutions, associations etc.
197A(1F)
90. Tax to be collected at source on sale of certain minerals to
be used for trading purposes
206C(1)
91. Cash sale of jewellery or bullion exceeding specified
threshold to attract TCS
206C(1D)
92. Payer not to be treated as an assessee-in-default for non-
deduction of tax at source, if such tax is paid by the
resident payee & due date of filing the return of the payee
would be deemed as the date of payment of taxes
40(a)(ia), 201 &
206C
93. Time limit for passing an order, declaring an assessee to
be assessee-in- default under section 201, extended in
certain cases
201
94. Drawing or Disbursing Officer to be the person
responsible for paying in case of payment by Central
Government or State Government
204
95. Senior Citizens, not having profit and gains of business or
profession, exempt from payment of advance tax
207
96. Stringent penal provisions for delay in furnishing of
TDS/TCS statements and/or for furnishing incorrect
information in TDS/TCS statements
234E, 271H,
272A & 273B
97. Provision for rectification and appeal in relation to
intimation under section 200A
154, 156, 246A &
220
98. No reduction of tax deductible but not deducted and tax
collectible but not collected, while computing advance tax
liability
209
U. Wealth tax
99. Residential house not to be charged to wealth-tax in case
the same is allotted to an employee etc, having gross annual
salary less than ` 10 lakh
2(ea)
100. Time limit for completion of assessments and
reassessments extended by 3 months
17A
101. Reserve Bank of India to be exempt from payment of
wealth-tax
45

DIRECT TAX LAWS
AMENDMENTS BY THE FINANCE ACT, 2012 IN THE INCOME-TAX ACT, 1961
1. RATES OF TAX
Section 2 of the Finance Act, 2012 read with Part I of the First Schedule to the Finance
Act, 2012, seeks to specify the rates at which income-tax is to be levied on income
chargeable to tax for the assessment year 2012-13. Part II lays down the rate at which
tax is to be deducted at source during the financial year 2012-13 i.e., A.Y. 2013-14 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 2012-13 i.e. A.Y.2013-14. Part III of the First Schedule to the Finance
Act, 2012 will become Part I of the First Schedule to the Finance Act, 2013 and so on.
Rates for deduction of tax at source for the F.Y.2012-13 fromincome other than
salaries
Part II of the First Schedule to the Act specifies the rates at which income-tax is to be
deducted at source during the financial year 2012-13 from income other than "salaries".
These rates of tax deduction at source are the same as were applicable for the F.Y.2011-
12. However, it has been clarified that the rate of tax deduction at source @ 20% on
income by way of interest payable by Government or an Indian concern on moneys
borrowed or debt incurred by Government or the Indian concern in foreign currency
would not be applicable in respect of interest payable by a notified infrastructure debt
fund to a non-resident/foreign company under section 194LB and interest payable by a
specified Indian company to a non-resident/foreign company under new section 194LC,
for which the rate of TDS would be 5%. Further, tax would be deductible@10% (instead
of 20%) on long-term capital gains arising from transfer of a capital asset, being unlisted
securities, arising to a person who is not resident in India.
No surcharge would be levied on income-tax deducted at source except in the case of
foreign companies. If the recipient is a foreign company, surcharge @ 2% 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. Levy of surcharge has been withdrawn 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% of income tax including surcharge, wherever
applicable, would be added to tax deducted or collected at source in cases of persons
not resident in India 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 2012-13
Part III of the First Schedule to the Act 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
2

computed and income-tax is to be calculated or charged in certain cases for the financial
year 2012-13 i.e. A.Y. 2013-14.
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 has been increased from ` 1,80,000 to ` 2,00,000. The basic exemption limit for
women residents has also been increased from ` 1,90,000 to ` 2,00,000. Hence, the basic
exemption limit for both resident men and women would be ` 2,00,000. There is no change
in the basic exemption limit of ` 2,50,000 for senior citizens, being resident individuals of
the age of 60 years or more but less than 80 years. Also, resident individuals of the age of
80 years or more at any time during the previous year would be eligible for a higher basic
exemption limit of ` 5,00,000. The revised 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 ` 2,00,000
Nil
Where the total income exceeds
` 2,00,000 but does not exceed
` 5,00,000
10% of the amount by which the
total income exceeds ` 2,00,000
` 10,00,000
` 30,000 plus 20% of the
amount by which the total
income exceeds ` 5,00,000
` 10,00,000
` 1,30,000 plus 30% of the
amount by which the total
(b) For resident individuals of the age of 60 years or more but less than 80
years at any time during the previous year
exceed ` 2,50,000
Nil
` 5,00,000
10% of the amount by which the
total income exceeds ` 2,50,000
` 10,00,000
` 25,000 plus 20% of the amount
by which the total income exceeds
` 5,00,000
` 10,00,000
` 1,25,000 plus 30% of the amount
` 10,00,000
3

(c) For resident individuals of the age of 80 years or more at any time during
the previous year
exceed ` 5,00,000
Nil
` 10,00,000
20% of the amount by which the total
` 10,00,000
` 1,00,000 plus 30% of the amount
` 10,00,000
(ii) Co-operative society
There is no change in the rate structure as compared to A.Y.2012-13.
(1) Where the total income does not
exceed ` 10,000
10% of the total income
(2) Where the total income exceeds
` 10,000 but does not exceed
` 20,000
` 1,000 plus 20% of the amount by
which the total income exceeds
` 10,000
(3) Where the total income exceeds
` 20,000
` 3,000 plus 30% of the amount by
which the total income exceeds
` 20,000
(iii) Firm/Limited Liability Partnership (LLP)
The rate of tax for a firm for A.Y.2013-14 is the same as that for A.Y.2012-13 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.2013-14 is the same as that for
A.Y.2012-13 i.e. 30% on the whole of the total income of the local authority.
(v) Company
The rates of tax for A.Y.2013-14 are the same as that for A.Y.2012-13.
(1) In the case of a domestic company 30% of the total income
(2) In the case of a company other
than a domestic company
40% on the total income
However, specified royalties and
fees for rendering technical
services (FTS) received from
4

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.2013-14 are as follows -
(i) Individual/HUF/AOP/BOI/Artificial juridical person
No surcharge would be leviable in case of such persons.
(ii) Co-operative societies/Local authorities
No surcharge would be leviable on co-operative societies and local authorities.
(iii) Firms/LLPs
No surcharge would be leviable on firms and LLPs.
(iv) Domestic company
Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 5% 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
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.
Example
Compute the tax liability of X Ltd., assuming that the total income of X Ltd. is
` 1,01,00,000 and the total income does not include any income in the nature of
capital gains.
The tax payable on total income of ` 1,01,00,000 of X Ltd. computed@ 31.5%
(including surcharge) is ` 31,81,500. However, the tax cannot exceed the tax of
` 30,00,000 payable on total income of ` 1 crore by more than the ` 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 (` 30,00,000 + ` 1,00,000). The marginal
relief is ` 81,500 (i.e., ` 31,81,500 - ` 31,00,000).
(v) Foreign company
Where the total income exceeds ` 1 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
5

companies 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.
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.
Education cess / Secondary and higher education cess on income-tax
The amount of income-tax as increased by the union surcharge, if applicable, should be
further increased by an Education cess on income-tax, calculated at the rate of 2% of
such income-tax and surcharge. Education cess is leviable in the case of all assessees
i.e. individuals, HUFs, AOP/BOIs, co-operative societies, firms, LLPs, local authorities
and companies. Further, Secondary and higher education cess on income-tax @1% of
income-tax and surcharge is leviable to fulfill the commitment of the Government to
provide and finance secondary and higher education. No marginal relief would be
available in respect of such cess.
2. BASIC CONCEPTS
(a) Unexplained share capital, share premiumetc. credited in the books of
account of a closely held company to be treated as income of such company
[Section 68]
(i) Section 68 brings to tax any sum found credited in the books of an assessee,
in respect of which the assessee does not offer any explanation about the
nature and source of money so credited or the explanation offered by the
assessee is not found to be satisfactory by the Assessing Officer.
(ii) In order to prevent the practice of conversion of unaccounted money as investment
in the share capital of a closely held company, additional onus is required to be
placed on such companies to prove the source of money in the hands of the
shareholder or persons making payment towards the issue of shares.
(iii) Accordingly, a proviso has been inserted in section 68 to provide that any
explanation offered by a closely held company in respect of any sum credited
as share application money, share capital, share premium or such amount, by
whatever name called, in the accounts of such company shall be deemed to be
not satisfactory unless the person, being a resident, in whose name such
credit is recorded in the books of such company also explains, to the
satisfaction of the Assessing Officer, the source of sum so credited as share
application money, share capital, etc. in his hands. Otherwise, the explanation
offered by the assessee-company shall be deemed as not satisfactory,
consequent to which the sum shall be treated as income of the company.
(iv) However, this proviso would not apply if the person in whose name such sum
is recorded in the books of the closely held company is a Venture Capital Fund
(VCF) or a Venture Capital Company (VCC) registered with SEBI.
(Effective fromA.Y.2013-14)
6

(b) Unexplained money, investments etc. to attract maximummarginal rate of tax
@30%[Newsection 115BBE]
(i) At present, the unexplained money, investments, expenditure etc. which are
deemed as income under section 68 or section 69 or section 69A or section
69B or section 69C or section 69D, are subject to the normal rates of tax
applicable to the assessee.
(ii) In case of individuals, HUFs etc., there is a benefit given by way of basic
exemption limit, and slab rate of tax. Therefore, there were cases where the
unexplained money, though deemed as income, was not subject to tax on
account of the amount being lower than the basic exemption limit or subject to
tax at a lower slab rate of, say, 10%.
(iii) In order to control laundering of unaccounted money by availing the benefit of
basic exemption limit, the unexplained money, investment, expenditure, etc.
deemed as income under section 68 or section 69 or section 69A or section 69B
or section 69C or section 69D would now be taxed at the maximum marginal rate
of 30% (plus surcharge and cesses) with effect from A.Y.2013-14.
(iv) No basic exemption or allowance or expenditure shall be allowed to the
assessee under any provision of the Income-tax Act, 1961 in computing such
deemed income.
3. RESIDENCE AND SCOPE OF TOTAL INCOME
(a) Gains fromoffshore transactions to be taxed if underlying assets are located
in India [Sections 9(1)(i), 2(14), 2(47) &195(1)]
Clarificatory amendments have been made in sections 2(14), 2(47), 9(1)(i) and
195(1), in the context of judicial decisions, to tax gains from off-shore transactions
where the value is attributable to the underlying assets located in India. These
amendments reassert the source rule of taxation wherein the state where the actual
economic nexus of income is situated has a right to tax the income irrespective of
the place of residence of the entity deriving income. These provisions have been
introduced retrospectively with effect from 1
st
April, 1962.
Certain judicial pronouncements have created apprehension about the scope and
purpose of sections 9 and 195. Further, there are certain issues in respect of
income deemed to accrue or arise where there are conflicting decisions of various
judicial authorities.
Therefore, there is a need to provide clarificatory retrospective amendment to reinstate
the real legislative intent in respect of scope and applicability of section 9 and 195 and
also to make other clarificatory amendments for providing certainty in law.
(i) Under section 9, certain incomes are deemed to accrue or arise in India. This is
a legal fiction created to tax income, which may or may not arise in India and
7

would not have been taxable but for the deeming provision created by this
section. Section 9(1)(i) provides that all income accruing or arising, directly or
indirectly, through or from any business connection in India, or through or from
any property in India or through or from any asset or source of income in India or
throughthe transfer of a capital asset situated in India is taxable in India.
The legislative intent of this clause is to cover incomes, which are accruing or
arising, directly or indirectly from a source in India. The section codifies the
source rule of taxation, which signifies that where a corporate structure is
created to route funds, the actual gain or income arises only in consequence of
the investment made in the activity to which such gains are attributable and not
the mode through which such gains are realized. This principle which supports
the source countrys right to tax the gains derived from offshore transactions
where the value is attributable to the underlying assets, is recognized
internationally by several countries.
Consequently, Explanation 4 has been inserted to clarify that the expression
through shall mean and include and shall be deemed to have always meant
and included by means of, in consequence of or by reason of.
Further, Explanation 5 has been inserted to clarify that an asset or a capital
asset being any share or interest in a company or entity registered or
incorporated outside India shall be deemed to be and shall always be deemed
to have been situated in India, if the share or interest derives, directly or
indirectly, its value substantially fromthe assets located in India.
(ii) Section 2(14) defines a capital asset to mean property of any kind held by an
assessee, whether or not connected with his business or profession.
An Explanationhas been inserted to clarify that property includes and shall be
deemed to have always included any rights in or in relation to an Indian
company, including rights of management or control or any other rights
whatsoever.
(iii) Section 2(47) provides an inclusive definition of transfer, in relation to a
capital asset. Explanation 2has been inserted below section 2(47) to clarify
that transfer includes and shall be deemed to have always included
(1) disposing of or parting with an
asset or any interest therein, or
- directly or indirectly,
- absolutely or conditionally,
- voluntarily or involuntarily
(2) creating any interest in any asset
in any manner whatsoever
by way of an agreement (whether entered into in India or outside India) or
otherwise.
The above transactions would be deemed as a transfer notwithstanding that
such transfer of rights has been characterized as being effected or dependent
8

upon or flowing from the transfer of a share or shares of a company registered
or incorporated outside India.
(iv) Under section 195(1), the obligation to deduct tax at source from interest and
other payments to a non-resident, which are chargeable to tax in India, is on
any person responsible for paying to a non-resident or to a foreign company.
The words any person used in section 195(1) is intended to include both
residents and non-residents. Therefore, a non-resident person is also required
to deduct tax at source before making payment to another non-resident, if the
payment represents income of the payee non-resident, chargeable to tax in
India. Therefore, if the income of the payee non-resident is chargeable to tax,
then tax has to be deducted at source, whether the payment is made by a
resident or a non-resident.
Explanation 2 has been inserted to clarify that the obligation to comply with
section 195(1) and to make deduction thereunder applies and shall be deemed
to have always applied and extends and shall be deemed to have always
extended to all persons, resident or non-resident, whether or not the non-
resident has :-
(a) a residence or place of business or business connection in India; or
(b) any other presence in any manner whatsoever in India.
(Effective retrospectively from1
st
April, 1962)
(b) Consideration for use or right to use of computer software is royalty within
the meaning of section 9(1)(vi)
As per section 9(1)(vi), any income payable by way of royalty in respect of any right,
property or information is deemed to accrue or arise in India. The term royalty
means consideration for transfer of all or any right in respect of certain rights,
property or information. There have been conflicting court rulings on the
interpretation of the definition of royalty, on account of which there was a need to
resolve the following issues
Does consideration for use of computer software constitute royalty?
(i) Is it necessary that the right, property or information has to be used directly by
the payer?
(ii) Is it necessary that the right, property or information has to be located in India
or control or possession of it has to be with the payer?
(iii) What is the meaning of the term process?
In order to resolve the above issues arising on account of conflicting judicial
decisions and to clarify the true legislative intent, Explanations 4, 5 & 6have been
inserted with retrospective effect from 1
st
June, 1976.
Explanation 4 clarifies that the consideration for use or right to use of computer
software is royalty by clarifying that, transfer of all or any rights in respect of any
9

right, property or information includes and has always included transfer of all or any
right for use or right to use a computer software (including granting of a licence)
irrespective of the medium through which such right is transferred.
Consequently, the provisions of tax deduction at source under section 194J and
section 195 would be attracted in respect of consideration for use or right to use
computer software since the same falls within the definition of royalty.
Note - The Central Government has, vide Notification No.21/2012 dated 13.6.2012
to be effective from1
st
J uly, 2012, exempted certain software payments fromthe
applicability of tax deduction under section 194J . Accordingly, where payment is
made by the transferee for acquisition of software froma resident-transferor, the
provisions of section 194J would not be attracted if -
(1) the software is acquired in a subsequent transfer without any modification by
the transferor;
(2) tax has been deducted either under section 194J or under section 195 on
payment for any previous transfer of such software; and
(3) the transferee obtains a declaration fromthe transferor that tax has been so
deducted along with the PAN of the transferor.
Explanation 5clarifies that royalty includes and has always included consideration
in respect of any right, property or information, whether or not,
(a) the possession or control of such right, property or information is with the
payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
Explanation 6 clarifies that the term process includes and shall be deemed to have
always included transmission by satellite (including up-linking, amplification,
conversion for down-linking of any signal), cable, optic fibre or by any other similar
technology, whether or not such process is secret.
st
J une, 1976)
(c) Specified class or classes of persons, making payment to the non-resident, to
mandatorily make application to Assessing Officer to determine the
appropriate proportion of sumchargeable to tax [Section 195(7)]
(i) Under section 195(1), any person responsible for paying to a non-corporate
non-resident or to a foreign company, any interest or any other sum
chargeable under the provisions of the Act (other than salary), has to deduct
tax at source at the rates in force.
(ii) Under section 195(2), where the person responsible for paying any such sum
chargeable to tax under the Act (other than salary) to a non-resident, considers
that the whole of such sum would not be income chargeable in the hands of
10

the recipient, he may make an application to the Assessing Officer to
determine, by general or special order, the appropriate proportion of such sum
so chargeable. When the Assessing Officer so determines, the appropriate
proportion, tax shall be deducted under section 195(1) only on that proportion
of the sum which is so chargeable.
(iii) Consequent to introduction of retrospective amendments in section 2(47),
section 2(14) and section 9(1), new sub-section (7) has been inserted in section
195 to provide that, notwithstanding anything contained in sections 195(1) and
195(2), the CBDT may, by notification in the Official Gazette, specify a class of
persons or cases, where the person responsible for paying to a non-corporate
non-resident or to a foreign company, any sum, whether or not chargeable
under the provisions of this Act, shall make an application to the Assessing
Officer to determine, by general or special order, the appropriate proportion of
sum chargeable to tax. Where the Assessing Officer determines the appropriate
proportion of the sum chargeable, tax shall be deducted under sub-section (1)
on that proportion of the sum which is so chargeable.
Consequently, as per new sub-section (7), where the CBDT specifies a class
of persons or cases, the person responsible for making payment to a non-
corporate non-resident or a foreign company in such cases has to mandatorily
make an application to the Assessing Officer, whether or not such payment is
chargeable under the provisions of the Act.
(Effective from1
st
J uly, 2012)
(d) Validation of demands etc. under Income-tax Act, 1961 in certain cases
[Section 119 of the Finance Act, 2012]
(i) Section 119 of the Finance Act, 2012 provides for validation of demands raised
under the Income-tax Act, 1961 in certain cases in respect of income accruing
or arising, through or from transfer of a capital asset situated in India, in
consequence of
(1) the transfer of a share or shares of a company registered or incorporated
outside India or
(2) an agreement, or otherwise, outside India.
(ii) Accordingly,
(1) any notice sent, or
(2) any notice purporting to have been sent, or
(3) any taxes levied, demanded, assessed, imposed or collected or
recovered, or
(4) any taxes purporting to have been levied, demanded, assessed, imposed
or collected or recovered
11

under the provisions of the Income-tax Act, 1961 during any period prior to
coming into force of the validating section shall be deemed to have been
validly made and such notice, levy, demand, assessment, imposition,
collection or recovery of tax -
(1) shall be valid and
(2) shall be deemed always to have been valid and
(3) shall not be called in question on
(i) the ground that the tax was not chargeable or
(ii) any other ground including that it is a tax on capital gains arising out
of transactions which have taken place outside India.
(iii) Further, any taxes levied, demanded, assessed, imposed or deposited before
the date of commencement of the Finance Act, 2012 and chargeable for the
period prior to that date, but not collected or recovered before that date, may
be collected or recovered and appropriated in accordance with the provisions
of the Income-tax Act, 1961, as amended by the Finance Act, 2012, and the
rules made thereunder.
Consequently, there would be no liability or obligation to make refund on
account of such transactions.
(iv) The validating section shall operate notwithstanding anything contained in any
judgment, decree or order of any Court or Tribunal or any Authority.
(v) The validation shall take effect from coming into force of the Finance Act, 2012
i.e. 28
th
May, 2012.
4. INCOMES WHICH DO NOT FORMPART OF TOTAL INCOME
(a) Exemption of income of Prasar Bharati (Broadcasting Corporation of India)
[Section 10(23BBH)]
Clause (23BBH) has been inserted in section 10 with effect from A.Y.2013-14 to exempt
any income of the Prasar Bharati (Broadcasting Corporation of India) established under
section 3(1) of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990.
(b) Removal of sectoral restrictions on VCUs [Sections 10(23FB)]
(i) Under section 10(23FB), income of a SEBI regulated Venture Capital Fund
(VCF) or Venture Capital Company (VCC), derived from investment in a
Venture Capital Undertaking (VCU), is exempt from taxation, provided the VCU
is engaged in only nine specified businesses.
(ii) Since the SEBI regulates the working of VCF, VCC and VCU, there is no
necessity of having separate conditions under the Income-tax Act, 1961
imposing sectoral restrictions on the business of a VCU. Therefore, in order to
avoid multiplicity of conditions in different regulations for the same entities, the
12

restriction that VCU should be engaged in only nine specified businesses has
now been removed so that the VCU is allowed to be governed by the
conditions imposed by its regulator, namely, SEBI.
(iii) Therefore, the definition of VCU under section 10(23FB) has been amended.
Accordingly, a VCU means a VCU referred to in the SEBI (VCF) Regulations,
1996 made under the Securities and Exchange Board of India Act, 1992.
(c) Exemption in respect of income received by certain foreign companies in India
in Indian currency fromsale of crude oil to any person in India [Section 10(48)]
(i) A mechanism has been devised, in the national interest, to make payment to
certain foreign companies in India in Indian currency for import of crude oil.
(ii) In order to provide exemption in respect of such income in the hands of the
foreign company, especially since the payment is made in the interest of the
nation, new clause (48) has been inserted in section 10 to exempt any income
of a foreign company received in India in Indian currencyon account of sale
of crude oil to any person in India.
(iii) The following conditions have to be fulfilled for claim of such exemption
(a) The money has been received under an agreement or arrangement which
is either entered into, or approved by, the Central Government;
(b) The foreign company, as well as the arrangement or agreement, are
notified by the Central Government having regard to the national interest.
(c) The foreign company is not engaged in any other activity in India, except
receipt of income under such arrangement or agreement.
(d) Exemption to be denied to a charitable trust having its main object as
advancement of any other object of general public utility if its trading receipts
exceed the specified threshold irrespective of withdrawal of approval or
cancellation of registration or rescindment of notification [Section 10(23C) &13]
Related amendment in section: 143(3)
(i) Under sections 11 and 12, income of any charitable trust or institution is exempt
if such income is applied for charitable purposes in India and such institution is
registered under section 12AA. Likewise, under section 10(23C) also, exemption
is provided in respect of approved or notified charitable funds or institutions.
(ii) The definition of charitable purpose under section 2(15) includes
advancement of any other object of general public utility as charitable
purpose provided that it does not involve carrying on of any activity in the
nature of trade, commerce or business.
13

(iii) However, as per the second proviso to section 2(15), advancement of any
other object of general public utility would continue to be a charitable
purpose in the relevant previous year even if it carries on a trading activity, if
the total receipts from any activity in the nature of trade, commerce or
business, or any activity of rendering any service in relation to any trade,
commerce or business does not exceed ` 25 lakhs in that year. However, if
such receipts exceed ` 25 lakhs in the next year, then the trust will lose its
charitable status for that year.
(iv) Thus, a charitable trust or institution pursuing advancement of object of
general public utility may be a charitable trust in one year and not a charitable
trust in another year depending on the aggregate value of receipts from
commercial activities.
(v) Therefore, no exemption would be available to a trust or institution for the
previous year in which the receipts from commercial activities exceed ` 25
lakhs. However, this temporary excess in one year may not be treated as
altering the very nature of the trust or institution so as to lead to cancellation of
registration or withdrawal of approval or rescinding of notification issued in
respect of trust or institution.
(vi) Therefore, there is need to ensure that if the purpose of a trust or institution
does not remain charitable in a previous year on account of the commercial
receipts exceeding the specified threshold of ` 25 lakhs, then, such trust or
institution would not be entitled to get benefit of exemption in respect of its
income for that previous year in which the commercial receipts exceed the
specified threshold. The denial of exemption would be compulsory by
operation of law and would not be dependent on any approval being withdrawn
or registration being cancelled or a notification being rescinded.
(vii) Accordingly, sections 10(23C) and 13 have been amended to ensure that such
trust and institution does not get benefit of tax exemption under section
10(23C) or 11 or 12 in the year in which its receipts from commercial activities
exceed the specified threshold of ` 25 lakhs, whether or not the registration or
approval granted or notification issued is cancelled, withdrawn or rescinded in
respect of such trust or institution.
Further, section 143(3) has been amended to provide that, in such a
circumstance, no effect shall be given by the Assessing Officer to the
exemption provisions under section 10(23C) while making an assessment of
the total income or loss of the trust or institution for the previous year.
(Effective retrospectively fromA.Y. 2009-10)
Example
An institution having its main object as advancement of object of general public utility
received ` 30 lakhs in aggregate during the P.Y.2011-12 froman activity in the nature of
trade. It applied 85%of its receipt fromsuch activity during the same year for its main
object i.e. advancement of object of general public utility.
14

(i) What would be the tax consequence of such receipt and application thereof by the
institution for the P.Y.2011-12?
(ii) If the institution receives ` 23 lakhs in aggregate during the P.Y.2012-13 froman
activity in the nature of trade, what would be the tax consequence?
Answer
(i) As the main object of the institution is advancement of object of general public
utility, the institution will lose its charitable status for the P.Y.2011-12, since it has
received ` 30 lakhs from an activity in the nature of trade. The application of 85%
of such receipt for its main object during the year would not help in retaining its
charitable status for that year. The institution will lose its charitable status and
consequently, the benefit of exemption of income for the P.Y.2011-12, irrespective
of the fact that its approval is not withdrawn or its registration is not cancelled.
(ii) However, if the institution receives only ` 23 lakhs in aggregate from an activity in
the nature of trade during the P.Y.2012-13, then, it will not lose its charitable
status for the P.Y.2012-13, since receipt of upto ` 25 lakhs in a year from such
activity is permissible. The institution can claim exemption for P.Y.2012-13 subject
to fulfillment of other conditions under sections 11 to 13.
5. PROFITS AND GAINS OF BUSINESS OR PROFESSION
(a) Benefit of additional depreciation@20% extended to newplant and machinery
acquired and installed in power sector undertakings [Section 32(1)(iia)]
(i) Under section 32(1)(iia), additional depreciation at the rate of 20% of the actual
cost of new machinery or plant (other than ships and aircraft) is allowable to an
assessee engaged in the business of manufacture or production of any article or
thing in the year of acquisition and installation. This is in addition to the normal
depreciation allowable under section 32(1) at the prescribed rates.
(ii) With a view to encourage investment in plant or machinery by assessees
engaged in the business of generation or generation and distribution of power,
the benefit of additional depreciation has now been extended to such assessees.
(iii) Consequently, assessees engaged in manufacture or production of any article
or thing as well as assessees engaged in the business of generation or
generation and distribution of power can claim an additional depreciation at
20% of the cost of new plant or machinery (other than ships and aircraft)
acquired and installed during the previous year.
(Effective fromA.Y. 2013-14)
Example
Lights and Power Ltd. engaged in the business of generation of power, furnishes
the following particulars pertaining to P.Y. 2012-13. Compute the depreciation
allowable under section 32 for A.Y.2013-14, while computing its income under the
head Profits and gains of business or profession. The company has opted for the
15

depreciation allowance on the basis of written down value.
Particulars `
1. Opening Written down value of Plant and Machinery (15%
block) as on 01.04.2012 (Purchase value ` 8,00,000)
5,78,000
2. Purchase of second hand machinery (15% block) on
29.12.2012 for business purpose
2,00,000
3. Machinery Y (15% block) purchased and installed on
12.07.2012 for the purpose of power generation
8,00,000
4. Acquired and installed for use a new air pollution control
equipment on 31.07.2012
2,50,000
5. New air conditioner purchased and installed in office premises
on 08.09.2012
3,00,000
6. New machinery Z (15% block) acquired and installed on
23.11.2012 for the purpose of generation of power
3,25,000
7. Sale value of an old machinery X, sold during the year
(Purchase value ` 4,80,000, WDV as on 01.04.2012
` 3,46,800)
3,10,000
Answer
Computation of depreciation allowance under section 32 for the A.Y. 2013-14

Particulars
Plant and
Machinery
(15%)
(`)
Plant and
Machinery
(100%)
(`)
Opening WDV as on 01.04.2012 5,78,000 -
Add: Plant and Machinery acquired during the year
- Second hand machinery 2,00,000
- Machinery Y 8,00,000
- Air conditioner for office 3,00,000
- Machinery Z 3,25,000 16,25,000
- Air pollution control equipment - 2,50,000
22,03,000 2,50,000
Less: Asset sold during the year 3,10,000 Nil
Written down value before charging depreciation 18,93,000 2,50,000

Normal depreciation
100% on air pollution control equipment - 2,50,000
Depreciation on plant and machinery put to use for
16

less than 180 days@ 7.5% (i.e., 50% of 15%)
- Second hand machinery (` 2,00,000
7.5%)
15,000
- Machinery Z (` 3,25,000 7.5%) 24,375 39,375
15% on the balance WDV being put to use for more
than 180 days (` 13,68,000 15%)

2,05,200

Additional depreciation
- Machinery Y (` 8,00,000 20%) 1,60,000
- Machinery Z (` 3,25,000 10%) 32,500 1,92,500 Nil
Total depreciation 4,37,075 2,50,000
Notes:
(1) Power generation equipments qualify for claiming additional depreciation in
respect of new plant and machinery from A.Y. 2013-14.
(2) Additional depreciation is not allowed in respect of second hand machinery.
(3) No additional depreciation is allowed in respect of office appliances. Hence, no
depreciation is allowed in respect of air conditioner installed in office premises.
(4) Additional depreciation is not allowed in respect of an asset whose actual cost
is allowed as deduction in computing the income chargeable under the head
Profit and Gains of business or profession. It is presumed that the new air
pollution control equipment installed is eligible for 100% depreciation.
Therefore, no additional depreciation is allowed in respect of the same.
(b) Extension of sunset clause for claiming weighted deduction @ 200% of
expenditure on in-house scientific research and development incurred by a
company [Section 35(2AB)]
(i) Under section 35(2AB), a weighted deduction of 200% of expenditure incurred
on in-house research and development facility as approved by the prescribed
authority (not being expenditure in the nature of cost of any land or building) is
allowed to a company which is engaged in the business of bio-technology or in
any business of manufacture or production of any article or thing. However, the
deduction was restricted to such expenditure incurred on or before 31
st
March,
2012.
(ii) In order to encourage the corporate sector to continue to spend on in-house
research and development, the benefit of weighted deduction has been
extended by a further period of 5 years i.e. up to 31
st
March, 2017.

17

(c) Expansion of scope of specified business for provision of investment-
linked tax deduction under section 35AD
(i) At present, investment-linked tax deduction is available in respect of the
following specified businesses, namely,
setting-up and operating cold chain facilities for specified products;
setting-up and operating warehousing facilities for storing agricultural
produce;
laying and operating a cross-country natural gas or crude or petroleum oil
pipeline network for distribution, including storage facilities being an
integral part of such network;
building and operating a hotel of two-star or above category, anywhere in
India;
building and operating a hospital, anywhere in India, with at least 100
beds for patients;
developing and building a housing project under a scheme for slum
redevelopment or rehabilitation framed by the Central Government or a
State Government, as the case may be, and notified by the CBDT in
accordance with the prescribed guidelines.
developing and building a housing project under a notified scheme for
affordable housing framed by the Central Government or State
Government; and
production of fertilizer in India.
(ii) 100% of the capital expenditure incurred during the previous year, wholly and
exclusively for the above businesses would be allowed as deduction from the
business income. However, expenditure incurred on acquisition of any land,
goodwill or financial instrument would not be eligible for deduction.
(iii) Further, the expenditure incurred, wholly and exclusively, for the purpose of
specified business prior to commencement of operation would be allowed as
deduction during the previous year in which the assessee commences
operation of his specified business provided that such amount incurred prior to
commencement should be capitalized in the books of account of the assessee
on the date of commencement of its operations.
(iv) The Finance Act, 2012 has extended the investment-linked tax deduction
under section 35AD to three newbusinesses, namely
(1) setting up and operating an inland container depot or a container
freight station notified or approved under the Customs Act, 1962;
(2) bee-keeping and production of honey and beeswax; and
(3) setting up and operating a warehousing facility for storage of sugar.
18

(v) Deduction under section 35AD is allowed to the above mentioned new
Specified businesses only if the date of commencement of operations of such
business is on or after 1
st
April, 2012.
(d) Weighted investment-linked tax deduction for certain specified businesses
[Section 35AD(1A)]
The following specified businesses would be eligible for weighted
deduction@150% of the capital expenditure (including capital expenditure incurred
before commencement of operations and capitalized in the books of account on the
date of commencement of operations) under section 35AD(1A), if they commence
operations on or after 1
st
April, 2012
(i) setting up and operating a cold chain facility;
(ii) setting up and operating a warehousing facility for storage of agricultural
produce;
(iii) building and operating, anywhere in India, a hospital with at least 100 beds for
patients;
(iv) developing and building a housing project under a scheme for affordable
housing framed by the Central Government or a State Government. Such
scheme should be notified by the CBDT in accordance with the prescribed
guidelines; and
(v) production of fertilizer in India.
(e) Owner of a hotel eligible for investment-linked tax deduction even if he
transfers the operation of the hotel to another person [Section 35AD(6A)]
(i) As per section 35AD, as it stands at present, an assessee engaged in the
business of building and operating a hotel, of 2-star or above category in India,
becomes eligible for deduction under section 35AD only if he owns and
operates the hotel himself.
(ii) However, on account of the franchisee business structure which is prevalent in
hotel industry, the owner of the hotel generally outsources the operation of the
hotel to another person.
(iii) Therefore, in order to clarify that the hotel owner would continue to be eligible
for the investment-linked tax deduction in such cases, sub-section (6A) has
been inserted in section 35AD.
(iv) New sub-section (6A) provides that where the assessee builds a hotel of two-
star or above category as classified by the Central Government and
subsequently, while continuing to own the hotel, transfers the operation of
the said hotel to another person, the assessee shall be deemed to be carrying
19

on the specified business of building and operating a hotel. Therefore, he
would be eligible to claim investment-linked tax deduction under section 35AD.
(v) Therefore, sub-section (6A), in effect, provides that the assessee shall be
deemed to be carrying on the specified business of building and operating
hotel if -
(1) The assessee builds a hotel of two-star or above category;
(2) Thereafter, he transfers the operation of the hotel to another person;
(3) He, however, should continue to own the hotel.
(Effective retrospectively fromA.Y.2011-12)
Example
Mr. A commenced operations of the businesses of setting up a warehousing facility for
storage of food grains, sugar and edible oil on 1.4.2012. He incurred capital
expenditure of ` 80 lakh, ` 60 lakh and ` 50 lakh, respectively, on purchase of land
and building during the period J anuary, 2012 to March, 2012 exclusively for the above
businesses, and capitalized the same in its books of account as on 1
st
April, 2012.
The cost of land included in the above figures are ` 50 lakh, ` 40 lakh and ` 30 lakh,
respectively. Further, during the P.Y.2012-13, it incurred capital expenditure of ` 20
lakh, ` 15 lakh & ` 10 lakh, respectively, for extension/ reconstruction of the building
purchased and used exclusively for the above businesses. Compute the income under
the head Profits and gains of business or professionfor the A.Y.2013-14 and the
loss to be carried forward, assuming that Mr. A has fulfilled all the conditions specified
for claimof deduction under section 35AD and has not claimed any deduction under
Chapter VI-A under the heading C. Deductions in respect of certain incomes. The
profits fromthe business of setting up a warehousing facility (before claiming
deduction under section 35AD and section 32) for the A.Y. 2013-14 is ` 16 lakhs,
` 14 lakhs and ` 31 lakhs, respectively.
Answer
Computation of profits and gains of business or profession for A.Y.2013-14
Particulars ` (in
lakhs)
Profit from business of setting up of warehouse for storage of edible oil
(before providing for depreciation under section 32)
31
Less: Depreciation under section 32
10% of ` 30 lakh, being (` 50 lakh ` 30 lakh + ` 10 lakh) 3
Income chargeable under Profits and gains from business or
profession

28

20

Computation of income/loss fromspecified business under section 35AD

Particulars
Food
Grains
Sugar Total
` (in lakhs)
(A) Profits from the specified business of setting
up a warehousing facility (before providing
deduction under section 35AD)
16 14 30
Less: Deduction under section 35AD
(B) Capital expenditure incurred prior to 1.4.2012
(i.e., prior to commencement of business) and
capitalized in the books of account as on
1.4.2012 (excluding the expenditure incurred on
acquisition of land) = ` 30 lakh (` 80 lakh ` 50
lakh) and ` 20 lakh (` 60 lakh ` 40 lakh)

30

20

50
(C) Capital expenditure incurred during the
P.Y.2012-13
20 15 35
(D) Total capital expenditure (B +C) 50 35 85
(E) Deduction under section 35AD
150% of capital expenditure (food grains) 75
100% of capital expenditure (sugar) 35
Total deduction u/s 35AD for A.Y.2013-14 75 35 110
(F) Loss from the specified business of
setting up and operating a warehousing
facility (after providing for deduction under
section 35AD) to be carried forward as per
section 73A (A-E)

(59)

(21)

(80)
Notes:
(1) Weighted deduction@150% of the capital expenditure is available under
section 35AD for A.Y.2013-14 in respect of specified business of setting up
and operating a warehousing facility for storage of agricultural produce which
commences operation on or after 01.04.2012. Food grains constitute
agricultural produce and therefore, the capital expenditure incurred for setting
up a warehousing facility for storage of food grains is eligible for weighted
deduction@150% under section 35AD.
(2) Deduction of 100% of the capital expenditure is available under section 35AD
for A.Y.2013-14 in respect of specified business of setting up and operating a
warehousing facility for storage of sugar, where operations are commenced on
or after 01.04.2012.
(3) However, since setting up and operating a warehousing facility for storage of
edible oils is not a specified business, Mr. A is not eligible for deduction under
21

section 35AD in respect of capital expenditure incurred in respect of such
business.
(4) However, Mr. A can claim depreciation@10% under section 32 in respect of
the capital expenditure incurred on buildings. It is presumed that the buildings
were put to use for more than 180 days during the P.Y.2012-13.
(5) Loss from a specified business can be set-off only against profits from another
specified business. Therefore, the loss of ` 80 lakh from the specified
businesses of setting up and operating a warehousing facility for storage of
food grains and sugar cannot be set-off against the profits of ` 28 lakh from
the business of setting and operating a warehousing facility for storage of
edible oils, since the same is not a specified business. Such loss can,
however, be carried forward indefinitely for set-off against profits of the same
or any other specified business.
(f) Weighted deduction in respect of expenditure incurred on notified agricultural
extension project [Section 35CCC]
(i) In order to incentivize the business entities to provide better and effective
agriculture extensive services, new section 35CCC has been inserted to
provide a weighted deduction of a sum equal to 150% of expenditure incurred
by an assessee on agricultural extension project in accordance with the
prescribed guidelines.
(ii) The agricultural extension project eligible for this weighted deduction shall be
notified by the Board.
(iii) In case deduction in respect of such expenditure is allowed under this section
then, no deduction in respect of such expenditure shall be allowed under any
other provisions of the Act in the same or any other assessment year.
(g) Weighted deduction in respect of expenditure incurred by companies on
notified skill development project [Section 35CCD]
(i) The National Manufacturing Policy (NMP) has been notified by the Department
of Industrial Policy & Promotion (DIPP) vide Press Note dated 4th November,
2011. As per the notified NMP, the government will provide weighted standard
deduction of 150% of the expenditure (other than land or building) incurred on
Public Private Partnership (PPP) project for skill development in the ITIs in
manufacturing sector. This is to encourage private sector to set up their own
institution in coordination with National Skill Development Corporation.
(ii) In order to encourage companies to invest on skill development projects in the
manufacturing sector, a new section 35CCD has been inserted to provide for a
weighted deduction of a sum equal to 150% of the expenditure (not being
expenditure in the nature of cost of any land or building) on skill development
project incurred by the company in accordance with the prescribed guidelines.
22

(iii) The skill development project eligible for this weighted deduction shall be
notified by the Board.
(iv) In case deduction in respect of such expenditure is allowed under this section
then, no deduction of such expenditure shall be allowed under any other
provisions of the Act in the same or any other assessment year.
Example
Isac limited is a company engaged in the business of biotechnology. The net profit
of the company for the financial year ended 31.03.2013 is ` 15,25,890 after debiting
the following items:
S.No. Particulars `
1. Purchase price of raw material used for the purpose of in-
house research and development
1,80,000
2. Purchase price of asset used for in-house research and
development wrongly debited to profit and loss account:

(1) Land 5,00,000
(2) Building 3,00,000
3. Expenditure incurred on notified agricultural extension
project
1,50,000
4. Expenditure on notified skill development project:
(1) Purchase of land 2,00,000
(2) Expenditure on training for skill development 2,50,000
5. Expenditure incurred on advertisement in the souvenir
published by a political party
75,000
Compute the income under the head Profits and gains of business or profession
for the A.Y. 2013-14 of Isac Ltd.
Answer
Computation of income under the head Profits and gains of business or
profession for the A.Y.2013-14
Particulars ` `
Net profit as per profit and loss account 15,25,890
Add: Items debited to profit and loss account, but
to be disallowed

Purchase price of Land used in in-house
research and development - being capital
expenditure not allowable as deduction under
section 35

5,00,000

23

Purchase price of building used in in-house
research and development - being capital
expenditure, 100% of which is allowable as
deduction under section 35(1)(iv) read with
section 35(2)

-

Expenditure incurred on notified agricultural
extension project (to be treated separately)

1,50,000

Expenditure incurred on notified skill
development project - Purchase of land - being
capital expenditure not qualifying for deduction
under section 35CCD

2,00,000

Expenditure incurred on notified skill
development project - Expenditure on training
for skill development (to be treated separately)

2,50,000

Expenditure incurred on advertisement in the
souvenir published by a political party not
allowed as deduction as per section 37(2B)

75,000

11,75,000
27,00,890
Less: Purchase price of raw material used for in-
house research and development qualifies for
200% deduction under section 35(2AB). Since,
it is already debited to profit and loss account
balance 100% is allowed.

1,80,000

Less: Expenditure incurred on notified agricultural
extension project qualifies for 150% deduction
under section 35CCC.

2,25,000

Less: Expenditure incurred on training for skill
development in a notified skill development
project qualifies for 150% deduction under
section 35CCD.

3,75,000

7,80,000
Profit and gains frombusiness 19,20,890
Note : The expenditure incurred on advertisement in the souvenir published by a
political party is disallowed as per section 37(2B) while computing income under the
head Profit and Gains of Business or Professionbut the same would be allowed
as deduction under section 80GGB fromthe gross total income of the company.
(h) Increase in threshold limits of total sales / turnover / gross receipts for
applicability of tax audit [Section 44AB]
Related amendment in Section: 44AD
(i) As per section 44AB, every person carrying on business is required to get his
accounts audited if the total sales, turnover or gross receipts in the previous
24

year exceed ` 60 lakh. Similarly, a person carrying on a profession is required
to get his accounts audited if the gross receipts from the profession in the
previous year exceed ` 15 lakh.
(ii) In order to reduce the compliance burden of small businesses and
professionals, the limits of total sales, turnover and gross receipts for tax audit
under section 44AB has been increased as follows:
Particulars Existing limit
(A.Y. 2012-13)
Newlimit (from
A.Y. 2013-14)
Business Total sales, turnover
or gross receipts
> ` 60 lakhs > ` 1 crore
Profession Gross receipts > ` 15 lakhs > ` 25 lakhs
(iii) Accordingly, every person carrying on business would now be required to get
his accounts audited if the total sales, turnover or gross receipts in business
exceed ` 1 crore in the previous year. Similarly, a person carrying on a
profession would be required to get his accounts audited if the gross receipts
in profession exceed ` 25 lakh in the previous year.
(iv) Consequently, the threshold limit of turnover/gross receipts for the purpose of
applicability of presumptive taxation scheme under section 44AD has been
increased from ` 60 lakh to ` 1 crore. This scheme would now include within
its scope, businesses (other than businesses specifically excluded as per sub-
section (6) therein) with total turnover/gross receipts up to ` 1 crore. 8% of
total turnover/gross receipts would be deemed to be the business income of
the assessee.
(i) Presumptive taxation provisions not to apply to profession, brokerage or
commission income or agency business [Section 44AD(6)]
(i) As per the provisions of section 44AD, an assessee carrying on a business
other than the business of plying, hiring or leasing goods carriages referred to
in section 44AE and whose turnover or gross receipts in the previous year
does not exceed ` 1 crore, can declare a sum equal to 8% of the total turnover
or gross receipts as the profit and gains of such business to be chargeable to
tax. Such an assessee is not required to maintain books of account under
section 44AA or get its accounts audited under section 44AB.
(ii) Sub-section (6) has been inserted in section 44AD to specifically exclude the
applicability of the presumptive provisions of section 44AD in respect of -
(a) a person carrying on profession as referred to in section 44AA(1) i.e.,
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 (namely, authorized
25

representatives, film artists, company secretaries and profession of
information technology have been notified by the Board for this purpose);
(b) a person earning income in the nature of commission or brokerage; or
(c) a person carrying on any agency business.
(Effective retrospectively fromA.Y. 2011-12)
6. CAPITAL GAINS
(a) Modification in the conditions to be satisfied in case of amalgamation and
demerger for not being regarded as transfer [Section 47(vii) &2(19AA)]
(i) As per section 47(vii), any transfer by a shareholder in a scheme of
amalgamation of a capital asset being a share or shares held by him in the
amalgamating company is not regarded as a transfer if,
(a) any transfer is made in consideration of the allotment to him of any share
or shares in the amalgamated company, and
(b) the amalgamated company is an Indian company.
(ii) However, in a case where a subsidiary company amalgamates with the holding
company, it is not possible to satisfy the condition mentioned in (a) above, i.e.,
the requirement of the amalgamated company (the holding company) to issue
shares to the shareholders of the amalgamating company (subsidiary
company), since the holding company is itself the shareholder of the subsidiary
company and cannot issue shares to itself.
(iii) Therefore, section 47(vii) has been amended so as to exclude the requirement of
issue of shares to the shareholder where such shareholder itself is the
amalgamated company. However, the amalgamated company will continue to be
required to issue shares to the other shareholders of the amalgamating company.
For example, let us take a case where A Ltd. holds 60% of shares in B Ltd. B
Ltd. amalgamates with A Ltd. Since A Ltd. itself is the shareholder of B Ltd., A
Ltd., being the amalgamated company, cannot issue shares to itself. However,
A Ltd. has to issue shares to the other shareholders of B Ltd.
(iv) Likewise, in the case of a demerger, there is a requirement under section
2(19AA)(iv) that the resulting company has to issue its shares to the
shareholders of the demerged company on a proportionate basis. However, it
is not possible to satisfy this condition where the demerged company is a
subsidiary company and the resulting company is the holding company.
Therefore, section 2(19AA) has been amended to exclude the requirement of
issue of shares where resulting company itself is a shareholder of the
demerged company. However, the resulting company would still have to issue
shares to the other share holders of the demerged company.

26

(b) Cost of acquisition of the capital asset transferred by a sole proprietorship or
firmto a company on succession, to be taken as cost to the previous owner
i.e. the predecessor proprietor or firm, where such succession is not regarded
as transfer under section 47 [Section 49]
(i) As per the provisions of section 49, the cost of acquisition of the asset in the
hands of the successor owner is deemed to be the cost of the asset to the
previous owner in the cases mentioned therein, where the transfer of asset
from one person to another is not treated as transfer under section 47.
(ii) Under section 47, in case a sole proprietorship concern or a firm is succeeded
by a company in the business carried on by it, as a result of which the sole
proprietorship or the firm sells or otherwise transfers any capital asset to the
company, subject to fulfilling certain conditions, the same shall not be regarded
as transfer and the capital gain tax shall not be applicable on such transaction.
However, section 49 which enlists cases where cost to previous owner is taken
as cost of acquisition in the hands of the transferee (for example, in the case
of transfer by way of gift, inheritance etc.) does not cover a situation where a
sole proprietorship or firm is succeeded by a company.
(iii) Therefore, in such cases, there was an ambiguity as to what should be taken
as cost of acquisition of the capital asset in the hands of the successor-
company, when the asset is subsequently transferred by the company.
(iv) In order to remove the ambiguity, section 49 has been amended to provide that
the cost of acquisition of the various capital assets in the hands of the
successor company in such cases shall be taken to be the cost of acquisition
of the respective asset in the hands of the sole proprietorship or the firm, as
the case may be.
(v) Further, as per the provisions of Explanation 1to section 2(42A) defining short
term capital asset, for determining the period for which the capital asset is held
by the transferee, the period of holding of the asset by the previous owner
shall also be considered in circumstances mentioned in section 49(1).
(vi) Therefore, in case the asset becomes the property of the company on account
of succession of a sole proprietorship concern or firm by the company, then, in
order to determine the period of holding of such asset in the hands of the
company, the period for which such asset was held by the sole proprietorship
concern or the firm, as the case may be, shall also be considered.
(vii) Therefore, when the capital asset is sold or transferred by the successor
company, for computing capital gains on such transfer
Cost of acquisition to
company
= Cost of the asset to the predecessor firm or
sole proprietorship concern
Period of holding (for
determining whether capital
gains is LTCG or STCG)

=
Period of holding of the
predecessor firm or sole
proprietorship concern

+
Period of
holding of the
company
(Effective from1
st
April, 1999)
27

Example
Neerja was carrying on the textile business under a proprietorship concern, Neerja
Textiles. On 21.07.2012 the business of Neerja Textiles was succeeded by New
Look Textile Private Limited and all the assets and liabilities of Neerja Textiles on
that date became the assets and liabilities of New Look Textile Private Limited and
Neerja was given 52% share in the share capital of the company. No other
consideration was given to Neerja on account of this succession.
The assets and liabilities of Neerja Textiles transferred to the company included an
urban land which was acquired by Neerja on 19.7.2009 for ` 9,80,000. The
company sold the same on 30.03.2013 for ` 15,00,000.
Discuss the tax implication of the above mentioned transaction and compute the
income chargeable to tax in such case(s).
Answer
Taxability in case of succession of Neerja Textiles by NewLook Textile Private
Limited
As per provisions of section 47(xiv), in case a proprietorship concern is succeeded by
a company in the business carried by it and as a result of which any capital asset is
transferred to the company, then the same shall not be treated as transfer and will not
be chargeable to capital gain tax in case the following conditions are satisfied:
1. all the assets and liabilities of sole proprietory concern becomes the assets
and liabilities of the company.
2. the shareholding of the sole proprietor in the company is not less than 50% of
the total voting power of the company and continues to so remain as such for a
period of 5 years from the date of succession.
3. the sole proprietor does not receive any consideration or benefit in any form
from the company other than by way of allotment of shares in the company.
In the present case, all the conditions mentioned above are satisfied therefore, the
transfer of capital asset by Neerja Textiles to New Look Textiles Private Limited
shall not attract capital gain tax provided Neerja continues to hold 50% or more of
voting power of New Look Textiles Private Limited for a minimum period of 5 years.
Taxability in case of transfer of land by NewLook Textiles Private Limited
As per the provisions of section 49(1) and Explanation 1to section 2(42A), in case a
capital asset is transferred in the circumstances mentioned in section 47(xiv), the cost of
the asset in the hands of the company shall be the cost of the asset in the hands of the
sole proprietor. Consequently, for the determining the period of holding of the asset, the
period for which the asset is held by the sole proprietor shall also be considered.
Therefore, in the present case, the urban land shall be a long-term capital asset since it
is held for more than 36 months by New Look Textile Private Limited and Neerja
Textiles taken together. Cost of acquisition of land in the hands of the company shall be
` 9,80,000 i.e., the purchase cost of the land in the hands of Neerja.
28

Computation of capital gain chargeable to tax in the hands of NewLook
Textile Private Limited
Particulars `
Net Sale Consideration 15,00,000
Less: Indexed cost of acquisition
852
852
9,80,000 (Refer Note 1)

9,80,000
Long-termcapital gain 5,20,000
Note:
1. The cost inflation index of F.Y. 2012-13 is notified by CBDT to be 852 vide
Notification No. 38/2012 dated 17.09.2012.
2. The year of transfer and the year in which the company first held the asset are
the same in this case, which is the reason why the numerator and the
denominator for calculating the indexed cost of acquisition would remain the
same. Therefore, in effect, there is no benefit of indexation in this case.
However, as per the view expressed by Bombay High Court in CIT v. Manjula
J . Shah 16 Taxman 42, in case the cost of acquisition of the capital asset in
the hands of the assessee is taken to be cost of such asset in the hands of the
previous owner, the indexation benefit would be available from the year in
which the capital asset is acquired by the previous owner. If this view is
considered, the indexed cost of acquisition would have to be calculated by
taking the CII of F.Y.2009-10, being the year in which the capital asset was
acquired by the previous owner, Neerja, as the denominator, in which case,
the capital gains chargeable to tax would undergo a change.
(c) Fair market value of the capital asset on the date of transfer to be taken as
sale consideration, in cases where the consideration is not determinable
[Section 50D]
(i) Recently, some of the courts have ruled that, in case of transfer of a capital asset
for which the sale consideration is not determinable, the gain arising from transfer
of such asset shall not be taxable, due to failure of the machinery provision.
(ii) Consequently, a new section 50D has been inserted by the Finance Act, 2012
providing that, in case where the consideration received or accruing as a result
of the transfer of a capital asset by an assessee is not ascertainable or cannot
be determined, then, for the purpose of computing income chargeable to tax as
capital gains, the fair market value of the said asset on the date of transfer
shall be deemed to be the full value of consideration received or accruing as a
result of such transfer.

29

(d) Extension of capital gain exemption under section 54B to a HUF [Section 54B]
(i) Under section 54B, the capital gain arising on the transfer of land which was
used for agricultural purposes by an individual or his parents during the 2
years immediately preceding the date of transfer shall not be charged to tax to
the extent of cost of acquisition of new agricultural land acquired within a
period of 2 years after the date of transfer.
(ii) The aforesaid exemption was so far available only to an individual assessee.
Section 54B is now amended to extend the benefit of such an exemption to a
Hindu Undivided Family also.
(iii) Therefore, the capital gain arising on the transfer of land used for agricultural
purposes, for 2 years immediately preceding the date of transfer by an
assessee, being an individual or his parent, or a Hindu Undivided Family
shall not be charged to tax if such assessee purchases a new agricultural land
within a period of 2 years after the date of transfer. The capital gain would be
exempt to the extent of cost of acquisition of new agricultural land acquired.
(e) Exemption of long-termcapital gains on transfer of residential property if the
sale consideration is used for subscription in equity of a new start-up
manufacturing SME company to be used for purchase of newplant and
machinery [NewSection 54GB]
(i) The National Manufacturing Policy (NMP) was announced by the Government
in 2011 to encourage investment in the SME segment (Small and Medium
Enterprises) in the manufacturing sector.
(ii) Section 54GB has been inserted to exempt long term capital gains on sale of a
residential property (house or plot of land) owned by an individual or a HUF in
case of re-investment of sale consideration in the equity shares of an eligible
company being a newly incorporated SME company engaged in the
manufacturing sector, which is utilized by the company for the purchase of new
plant and machinery.
(iii) In order to qualify as an eligible company under section 54GB the company
should be
(1) incorporated in the financial year in which the capital gain arises or in the
following year on or before the due date of filing return of income by the
individual or HUF;
(2) engaged in the business of manufacture of an article or thing;
(3) a company in which the individual or HUF holds more than 50% of the
share capital or 50% of the voting rights, after the subscription in shares
by the individual or HUF; and
(4) a company which qualifies to be a Small or Medium Enterprise (SME) under
the Micro, Small and Medium Enterprises Development Act, 2006 i.e.,
investment in the equipment is more than ` 25 lakhs but less than ` 10 crore.
30

(iv) The following conditions should be satisfied for claim of exemption of long-term
capital gains under this section -
(1) The amount of net consideration should be used by the individual or HUF
before the due date of furnishing of return of income under section
139(1), for subscription in equity shares of the eligible company.
(2) The amount of subscription as share capital is to be utilized by the
eligible company for the purchase of new plant and machinery within a
period of one year from the date of subscription in the equity shares.
(3) If the amount of net consideration subscribed as equity shares in the
eligible company is not utilized by the company for the purchase of plant
and machinery before the due date of filing of return by the individual or
HUF, the unutilized amount shall be deposited in an account with any
specified bank or institution before such due date of filing return of
income. The return of income furnished by the assessee, should be
accompanied by the proof of such deposit.
(4) The said amount is to be utilized in accordance with any scheme which
may be notified by the Central Government in the Official Gazette.
(v) The amount of net consideration utilized by the company for purchase of new
plant and machinery and the amount deposited as mentioned in (iv) above, will
be deemed to be the cost of new plant and machinery for the purpose of
computation of capital gains in the hands of individual or HUF.
(vi) New plant and machinery does not include -
(1) any machinery or plant which, before its installation by the assessee, was
used either within or outside India by any other person;
(2) any machinery or plant installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest house;
(3) any office appliances including computers or computer software;
(4) any vehicle; or
(5) any machinery or plant, the whole of the actual cost of which is allowed
as a deduction, whether by way of depreciation or otherwise, in
computing the income chargeable under the head Profits and gains of
business or profession of any previous year.
(vii) Quantumof exemption under section 54GB
If cost of new plant and machinery Net consideration of residential
house, entire capital gains is exempt.
If cost of new plant and machinery < Net consideration of residential
house, only proportionate capital gains is exempt i.e.

Amount invested in new plant and machinery
LTCG
Net consideration

31

(viii) The exemption under this section would not be available in respect of transfer
of residential property made after 31
st
March, 2017.
(ix) If the amount deposited by the company as mentioned in point (iv) above, is
not utilized wholly or partly for the purchase of new plant and machinery within
the period specified, then, the amount of capital gains not charged to tax under
section 45 on account of such deposit by the company shall be charged to tax
under section 45 as income of the assessee for the previous year in which the
period of 1 year from the date of subscription in the equity shares by the
assessee expires.
(x) If the equity shares of the company acquired by the individual or HUF or the
new plant and machinery acquired by the company are sold or transferred
within a period of five years from the date of acquisition, the amount of capital
gains earlier exempt under section 54GB shall be deemed to be the income of
the individual or HUF chargeable under the head Capital Gains of the
previous year in which such equity shares or such new plant and machinery
are sold or otherwise transferred. This would be in addition to the capital gains
arising on transfer of shares by the individual or HUF or capital gains arising on
transfer of new plant and machinery by the company, as the case may be.
These are safeguards to restrict the transfer of the shares of the company and
of the plant and machinery for a period of 5 years to prevent diversion of these
funds.
Example
Mr. Akash sold his residential property on 2
nd
February, 2013 for ` 90 lakh and paid
brokerage@1%of sale price. He had purchased the said property in May 2000 for
` 24,36,000. In J une, 2013, he invested ` 75 lakh in equity of A (P) Ltd., a newly
incorporated SME manufacturing company, which constituted 63%of share capital
of the said company. A (P) Ltd. utilized the said sumfor the following purposes
(a) Purchase of new plant and machinery during J uly 2013 ` 65 lakh
(b) Included in (a) above are ` 6 lakh for purchase of computers and ` 8 lakh for
purchase of cars.
(c) Air-conditioners purchased for ` 1 lakh, included in the (a) above, were
installed at the residence of Mr. Akash.
(d) Amount deposited in specified bank on 28.9.2013 ` 10 lakh
Compute the chargeable capital gain for the A.Y.2013-14. Assume that Mr. Akash is
liable to file his return of income on or before 30
th
September, 2013 and he files his
return on 29.09.2013.
32

Answer
Computation of taxable capital gains for A.Y.2013-14
Particulars `
Gross consideration 90,00,000
Less: Expenses on transfer (1% of the gross consideration) 90,000
Net consideration 89,10,000
Less: Indexed cost of acquisition (Refer Note below)
(` 24,36,000 852/406)

51,12,000
37,98,000
Less: Exemption under section 54GB
(` 37,98,000 ` 60,00,000 /` 89,10,000)

25,57,576
Taxable capital gains 12,40,424
Deemed cost of newplant and machinery for exemption under section 54GB
Particulars ` `
(1) Purchase cost of new plant and machinery
acquired in July, 2013

65,00,000
Less: Cost of office appliances, i.e., computers 6,00,000
Cost of vehicles, i.e., cars 8,00,000
Cost of air-conditioners installed at the residence
of Mr. Akash

1,00,000

15,00,000
50,00,000
(2) Amount deposited in the specified bank before
the due date of filing of return

10,00,000
Deemed cost of newplant and machinery for
exemption under section 54GB
60,00,000
Note: The cost inflation index of F.Y. 2012-13 is notified by CBDT to be 852 vide
Notification No. 38/2012 dated 17.09.2012.
(f) Assessing Officer enabled to make a reference to the Valuation Officer in case the
assessee has taken the fair market value as the cost of acquisition of the asset in
accordance with the estimate made by the Registered Valuer [Section 55A]
(i) In a case where the value of the asset as claimed by the assessee is in
accordance with the estimate made by a registered valuer, the Assessing
Officer may refer to the Valuation Officer under section 55A if he is of the
opinion that the value of asset claimed by the assessee is less than the fair
marketvalueof the asset i.e., in cases where the fair market value is taken to
be the sale consideration of the asset. However, so far, under the existing
provisions, where the value of the asset as claimed by the assessee is in
33

accordance with the estimate made by a registered valuer, the Assessing
Officer could not refer a case to the Valuation Officer where the fair market
value is taken as the cost of acquisition of the asset. For example, let us
take a case where the asset is acquired before 1
st
April, 1981 and the fair
market value of the asset as on 1
st
April, 1981 is taken as the cost of
acquisition at the option of the assessee. The assessee may declare a higher
fair market value as cost of acquisition so as to reduce his capital gains and
consequent tax liability.
(ii) Consequently, section 55A has been amended to provide that the Assessing
Officer may refer to the Valuation Officer in a case where the value of asset, as
claimed by the assessee is in accordance with the estimate made by a
registered valuer, and the Assessing Officer is of the opinion that the value so
claimed is at variancewith the fair market value of the asset.
(iii) As a result, the Assessing Officer can now make a reference to the Valuation
Officer even in a case where the fair market value of the asset as on
01.04.1981 is taken as the cost of the asset, if he is of the view that there is
any variation between the value as on 01.04.1981 claimed by the assessee in
accordance with the estimate made by a registered valuer and the fair market
value of the asset on that date.
(Effective from1
st
J uly, 2012)
(g) Non-residents and foreign companies to be subject to tax at a concessional
rate of 10% (without indexation benefit or currency fluctuation) on long-term
capital gains arising fromtransfer of unlisted securities [Section 112]
(i) Section 112 provides for the manner of computation of tax liability where the
total income of an assessee includes any income, arising from the transfer of a
long-term capital asset, which is chargeable under the head "Capital Gains.
Such long-term capital gains, included in the total income of the assessee,
would be subject to tax@20%.
(ii) In case the tax payable on long-term capital gains arising on transfer of listed
securities exceeds 10% of capital gains computed without the benefit of
indexation, such excess shall be ignored for computing the tax payable by the
assessee. However, this benefit is not available in respect of unlisted
securities, which are subject to tax@20% with indexation benefit.
(iii) The above provisions contained in section 112 are applicable for both resident
and non-resident assessees.
(iv) Under section 115AD, where the total income of a Foreign Institutional Investor
includes long-term capital gains on sale of unlisted securities, the same would
be taxable@10%, without the benefit of indexation or currency fluctuation.
(v) In order to bring parity in tax rate on long-term capital gains (arising on sale of
unlisted securities) applicable to non-residents and FIIs, section 112 has been
amended to provide that, in the case of non-corporate non-residents and
foreign companies, long-term capital gains arising from transfer of unlisted
34

securities would be subject to tax@10% without giving effect to indexation
provision under second proviso to section 48 and currency fluctuation under
first proviso to section 48.
7. INCOME FROMOTHER SOURCES
(a) Any sumof money or property received by a HUF without consideration or for
inadequate consideration from its members to be exempt from tax
[Explanation to Section 56(2)(vii)]
(i) As per section 56(2)(vii), any sum of money or property received without
consideration or for inadequate consideration, by an individual or HUF shall be
chargeable to tax, subject to certain conditions. However, if such sum of
money or property is received from a relative, then, the provisions of section
56(2)(vii) are not applicable.
(ii) The definition of relative as per the Explanation to section 56(2)(vii) for
applicability of exclusion provision only contains reference to relatives in
relation to an individual, though the taxability provisions under section
56(2)(vii) are attracted both in the case of individuals and HUFs.
(iii) Therefore, to remove the unintended inequity, the existing definition of
relative is replaced with a new definition including therein, in case of a HUF,
any member thereof, as its relative. Therefore, if a Hindu Undivided Family
receives any sum of money or property from its member without consideration
or for inadequate consideration, then, the same shall not be chargeable to tax
as per the provisions of section 56(2)(vii).
st
October, 2009)
Example
Discuss the taxability or otherwise of the following in the hands of the recipient
under section 56(2)(vii) the Income-tax Act, 1961 -
(i) Akhil HUF received ` 75,000 in cash fromniece of Akhil (i.e., daughter of
Akhils sister). Akhil is the Karta of the HUF.
(ii) Nitisha, a member of her fathers HUF, transferred a house property to the HUF
without consideration. The stamp duty value of the house property is ` 9,00,000.
(iii) Mr. Akshat received 100 shares of A Ltd. fromhis friend as a gift on occasion
of his 25
th
marriage anniversary. The fair market value on that date was ` 100
per share. He also received jewellery worth ` 45,000 (FMV) fromhis nephew
on the same day.
(iv) Kishan HUF gifted a car to son of Karta for achieving good marks in XII board
examination. The fair market value of the car is ` 5,25,000.
(v) Ms. Kratika purchased a land from PMC Co. a partnership concern for
` 7,15,000. The stamp duty value of the same was ` 12,00,000.
35

Answer
Taxable/
Non-taxable
Amount
liable to tax
(`)
Reason
(i) Taxable 75,000 Sum of money exceeding ` 50,000
received without consideration from a
non relative is taxable under section
56(2)(vii). Daughter of Mr. Akhils sister is
not a relative of Akhil HUF, since she is
not a member of Akhil HUF.
(ii) Non-taxable Nil Immovable property received without
consideration by a HUF from its relative
is not taxable under section 56(2)(vii).
Since Nitisha is a member of the HUF,
she is a relative of the HUF. However,
income from such asset would be
included in the hands of Nitisha under
64(2).
(iii) Taxable 55,000 As per provisions of section 56(2)(vii), in
case the aggregate fair market value of
property, other than immovable property,
received without consideration exceeds
` 50,000, the whole of the aggregate
value shall be taxable. In this case, the
aggregate fair market value of shares
(` 10,000) and jewellery (` 45,000)
exceeds ` 50,000. Hence, the entire
amount of ` 55,000 shall be taxable.
(iv) Non-taxable Nil Car is not included in the definition of
property for the purpose of section
56(2)(vii), therefore, the same shall not
be taxable.
(v) Non-taxable Nil Immovable property acquired for
inadequate consideration is not taxable
under section 56(2)(vii).
(b) Consideration received in excess of FMV of shares issued by a closely held
company to be treated as income of such company, where shares are issued
at a premium[Section 56(2)(viib)]
(i) New clause (viib) has been inserted in section 56(2) to bring to tax the
consideration received from a resident person by a company, other than a
36

company in which public are substantially interested, which is in excess of the
fair market value (FMV) of shares.
(ii) Such excess is to be treated as the income of a closely held company taxable
under section 56(2) under the head Income from Other Sources, in cases
where consideration received for issue of shares exceeds the face value of
shares i.e. where shares are issued at a premium.
(iii) However, these provisions would not be attracted where consideration for
issue of shares is received:
(1) by a Venture Capital Undertaking (VCU) from a Venture Capital Fund
(VCF) or Venture Capital Company (VCC); or
(2) by a company from a class or classes of persons as notified by the
Central Government for this purpose.
(iv) Fair market value of the shares shall be the higher of, the value as may be
(a) determined in accordance with the prescribed method; or
(b) substantiated by the company to the satisfaction of the Assessing Officer,
based on the value of its assets on the date of issue of shares.
For the purpose of computation of FMV, the value of assets would include the
value of intangible assets being goodwill, know-how, patents, copyrights,
trademarks, licences, franchises or any other business or commercial rights of
similar nature.
(v) Consequently, sub-clause (xvi) is inserted to section 2(24) defining income to
provide that, any consideration received for issue of shares as exceeds the fair
market value of the shares referred to in section 56(2)(viib) shall be considered
as income in the hands of the company.
Example
The following are the details of the shares issued by Ray (P) Ltd. Discuss the
applicability of provisions of section 56(2)(viib) in the hands of the company:
Face
value of
shares
(`)
FMV of
shares

(`)
Issue
price of
shares
(`)

Applicability of section 56(2)(viib)
(i) 100 120 130 The provisions of section 56(2)(viib) are
attracted in this case since the shares are
issued at a premium (i.e., issue price exceeds
the face value of shares). The excess of the
issue price of the shares over the FMV would
be taxable under section 56(2)(viib). ` 10 (`
130 - ` 120) shall be treated as income in the
hands of Ray (P) Ltd.
37

(ii) 100 120 110 The provisions of section 56(2)(viib) are
attracted since the shares are issued at a
premium. However, no sum shall be
chargeable to tax under the said section
as the shares are issued at a price less
than the FMV of shares.
(iii) 100 90 98 Section 56(2)(viib) is not attracted since
the shares are issued at a discount,
though the issue price is greater than the
FMV.
(iv) 100 90 110 The provisions of section 56(2)(viib) are
attracted in this case since the shares are
issued at a premium. The excess of the
issue price of the shares over the FMV
would be taxable under section
56(2)(viib). Therefore, ` 20 (` 110 - `
90) shall be treated as income in the
hands of Ray (P) Ltd.
8. DEDUCTIONS FROMGROSS TOTAL INCOME
(a) Life insurance premiumup to 10%of minimumcapital sumassured to qualify
for deduction under section 80C, in respect of policies issued on or after
1.4.2012
Related amendment in section: 10(10D)
(i) Under section 80C, deduction in respect of premium or any sum paid for life
insurance policy, other than contract for a deferred annuity, is allowed to an
individual or a HUF only to the extent of such premium or other payment made
not in excess of 20% of actual capital sum assured.
(ii) According to section 10(10D), any sum received under a life insurance policy
including the sum allocated by way of bonus on such policy is exempt.
However, in case the premium payable for any of the years during the term of
the policy exceeds 20% of the actual capital sum assured, then the exemption
under section 10(10D) would not be available.
(iii) The actual capital sum assured referred to in aforesaid sections would be
calculated as per the Explanationto section 80C(3) i.e., while computing actual
capital sum assured, the value of premium to be returned or any benefit by
way of bonus or otherwise to be received over and above the sum actually
assured shall not be taken into account.
(iv) The Finance Act, 2012 has reduced the permissible limit of 20% of the actual
capital sum assured to 10% of the actual capital sum assured in respect of the
insurance policies to be issued on or after 1
st
April, 2012.
38

(v) Hence, the deduction under section 80C for premium or other payment made
on insurance policy, other than a contract for a deferred annuity, shall be
restricted to the 10% of the actual sum assured, in case the insurance policy is
issued on or after 1
st
April, 2012.
(vi) Similarly, no exemption under section 10(10D) shall be granted to the
assessee, in case the premium payable for any of the years during the term of
the policy exceeds 10% of the capital sum assured in case the life insurance
policy is issued on or after 1
st
April, 2012.
(vii) Also, Explanation to section 80C(3A) has been introduced to provide that, in
respect of the life insurance policies to be issued on or after 1
st
April, 2012, the
actual capital sum assured shall mean the minimumamount assured under
the policy on happening of the insured event at any time during the term of the
policy, not taking into account -
(1) the value of any premium agreed to be returned; or
(2) any benefit by way of bonus or otherwise over and above the sum
actually assured which is to be or may be received under the policy by
any person.
(viii) Section 10(10D) also makes reference to the above mentioned Explanationto
section 80C(3A) for the meaning to be assigned to actual capital sum
assured for the life insurance policies to be issued on or after 1
st
April, 2012.
(ix) In effect, in case the insurance policy has varied sum assured during the term
of policy then the minimum of the sum assured during the life time of the policy
shall be taken into consideration for calculation of the actual capital sum
assured for the purpose of section 80C and section 10(10D), in respect of life
insurance policies to be issued on or after 1
st
April, 2012.
(x) The following is a tabular summary of the amendments effected in section
10(10D) and section 80C -
FromA.Y.2013-14
In respect of policies issued
between 1.4.2003 and 31.3.2012
In respect of policies issued on or
after 1.4.2012
Exemption u/s
10(10D)
Deduction u/s
80C
Exemption u/s
10(10D)
Deduction u/s
80C
Any sum
received under a
LIP including the
sum allocated by
way of bonus is
exempt.
However,
exemption would
Premium paid
to the extent of
20% of actual
capital sum
assured
qualifies for
deduction u/s
80C.
Any sum received
under a LIP
including the sum
allocated by way
of bonus is
exempt. However,
exemption would
not be available if
Only premium
paid to the
extent of 10%
of minimum
capital sum
assured
qualifies for
deduction u/s
39

not be available if
the premium
payable for any
of the years
during the term of
the policy
exceeds 20% of
actual capital
sum assured.
the premium
payable for any of
the years during
the term of the
policy exceeds
10% of minimum
capital sum
assured under the
policy on the
happening of the
insured event at
any time during
the term of the
policy.
80C.
(b) One time deduction for investment by a resident individual in listed equity
shares as per notified scheme [Newsection 80CCG]
(i) In the Budget Speech, a new scheme was proposed to be introduced to
encourage flow of savings in financial instruments and improve the depth of
domestic capital market.
(ii) Accordingly, new section 80CCG has been introduced to provide for a one-
time deduction to a resident individual who has acquired listed equity shares in
a previous year in accordance with a scheme notified by the Central
Government.
(iii) The deduction would be 50% of amount invested in such equity shares or
` 25,000, whichever is lower. The maximum deduction of ` 25,000 would be
available on investment of ` 50,000 in such listed equity shares.
(iv) The following conditions have to be satisfied for claiming the above deduction
(a) The gross total income of the assessee for the relevant assessment year
should be less than or equal to ` 10 lakh.
(b) The assessee should be a new retail investor as per the requirement
specified under the notified scheme.
(c) The investment should be made in such listed shares as may be specified
under the notified scheme.
(d) The minimum lock-in period in respect of such investment is three years
from the date of acquisition in accordance with the notified scheme.
In addition to the above, other conditions may also be prescribed, subject to
fulfillment of which, deduction under section 80CCG can be claimed.
(v) If the individual, after having claimed such deduction, fails to comply with any
of the conditions in any previous year, say, he sells the shares before three
years, then, the deduction earlier allowed shall be deemed to be the income of
40

the previous year in which he fails to comply with the condition. The income
shall, accordingly, be liable to tax in the assessment year relevant to such
previous year.
(vi) If deduction has been claimed and allowed under this section for any
assessment year, the assessee would not be allowed any deduction under this
section for any subsequent assessment year.
(c) Eligible age for senior citizen reduced from65 years to 60 years for availing
increased deduction under section 80D &80DDB
(i) The Finance Act, 2011 had amended the effective age of a senior citizen being
an Indian resident from 65 years of age to 60 years for the purposes of
application of various tax slabs and rates of tax under the Income-tax Act,
1961 for income earned during the financial year 2011-12 (A.Y.2012-13).
(ii) However, the eligible age for senior citizen was not correspondingly reduced
for applicability of provisions contained in other sections. Therefore, in order to
bring uniformity, the age for qualifying as a senior citizen has now been
amended for the purpose of section 80D and section 80DDB.
(iii) As per section 80D, a deduction of ` 15,000 is allowed in respect of premium
paid towards a health insurance policy for the assessee or his family (spouse
and dependant children) and a further deduction of ` 15,000 is also allowed
for premium paid in respect of health insurance policy for parents. Where the
premium is paid to effect or keep in force an insurance on the health of any
person who is a senior citizen, the deductions are allowable up to a higher sum
of ` 20,000 instead of ` 15,000.
(iv) Section 80DDB provides for a deduction in respect of medical treatment of
specified disease or ailment up to ` 40,000 of an individual or his dependant or
any member of the Hindu Undivided Family, in case the assessee is a Hindu
Undivided Family. This deduction is enhanced to a maximum of ` 60,000
where the amount is for the medical treatment of the above mentioned
person(s) who is a senior citizen.
(v) Under section 80D & 80DDB the effective age of a senior citizen for availing
the benefit of above mentioned higher deduction was 65 years or more at any
time during the relevant previous year. The said age of 65 years has now been
reduced to 60 years.
(d) Deduction for expenditure on preventive health check-up [Section 80D]
(i) As per section 80D, in case of an individual, a deduction is allowed in respect
of premium paid to effect or keep in force an insurance on the health of self,
spouse and dependent children or any contribution made to the Central
Government Health Scheme, up to a maximum of ` 15,000 in aggregate. A
41

further deduction of ` 15,000 is also allowed in case the premium is paid for
the health insurance taken for the health of parents.
An increased deduction of ` 20,000 (instead of ` 15,000) shall be allowed in
case any of the persons mentioned above is a senior citizen.
Further, deduction would be allowed only if the payment of insurance premium
is made in any mode other than cash.
(ii) Section 80D has been amended to provide that deduction to the extent of
` 5,000 shall be allowed in respect payment made on account of preventive
health check-up of self, spouse, dependent children or parents made during
the previous year. However, the said deduction of ` 5,000 is within the overall
limit of ` 15,000 or ` 20,000, as the case may be.
(iii) In effect the maximum deduction allowable under this section in any
assessment year shall be to the extent of ` 15,000 for self, spouse and
dependent children (` 20,000 in case any of the persons are senior citizen) in
respect of the following payments made -
(1) to effect or keep in force an insurance on the health of self, spouse or
dependent children.
(2) on account of contribution to the Central Government Health Scheme
(3) on account of preventive health check-up of self, spouse or dependent
children.
(iv) A further deduction up to ` 15,000 (` 20,000 in case either of parents are
senior citizens) is allowable
(1) to effect or keep in force an insurance on the health of parents.
(2) on account of preventive health check-up of parents.
(v) The maximum deduction allowable in respect of expenditure on preventive
health check-up of self, spouse, dependent children and parents would be
` 5,000.
(vi) Further it is provided that, for claiming such deduction under section 80D, the
payment can be made:
(1) by any mode, including cash, in respect of any sum paid on account of
preventive health check-up;
(2) by any mode other than cash, in all other cases.
Example
Mr. A, aged 40 years, paid medical insurance premiumof ` 12,000 during the
P.Y.2012-13 to insure his health as well as the health of his spouse. He also paid
medical insurance premiumof ` 17,000 during the year to insure the health of his
42

father, aged 63 years, who is not dependent on him. He contributed ` 2,400 to
Central Government Health Scheme during the year. He has incurred ` 3,000 in
cash on preventive health check-up of himself and his spouse and ` 4,000 by
cheque on preventive health check-up of his father. Compute the deduction
allowable under section 80D for the A.Y.2013-14.
Solution
Deduction allowable under section 80D for the A.Y.2013-14
Particulars ` `
Actual
Payment
Maximum
deduction
allowable
A. Premiumpaid and medical expenditure incurred
for self and spouse

(i) Medical insurance premium paid for self and spouse 12,000 12,000
(ii) Contribution to CGHS 2,400 2,400
(iii) Exp. on preventive health check-up of self & spouse 3,000 600
17,400 15,000
B. Premiumpaid and medical expenditure incurred
for father, who is a senior citizen

(i) Mediclaim premium paid for father, who is over 60
years of age
17,000 17,000
(ii) Expenditure on preventive health check-up of father 4,000 3,000
21,000 20,000

Total deduction under section 80D (15,000 +
20,000)
35,000
Notes
(1) The total deduction under A. (i), (ii) and (iii) above should not exceed
` 15,000. Therefore, the expenditure on preventive health check-up for self
and spouse would be restricted to ` 600, being (` 15,000 - ` 12,000 - ` 2400).
(2) The total deduction under B. (i) and (ii) above should not exceed ` 20,000.
Therefore, the expenditure on preventive health check-up for father would be
restricted to ` 3,000, being (` 20,000 - ` 17,000).
(3) In this case, the total deduction allowed on account of expenditure on
preventive health check-up of self, spouse and father is ` 3,600 (i.e., ` 600 +
` 3,000), which is less than the maximum permissible limit of ` 5,000.
43

(e) No deduction in respect of cash donation exceeding of ` 10,000 [Section 80G
&Section 80GGA]
(i) As per section 80G, deduction is provided in respect of donations, being sum
of money, made to certain funds, charitable institutions, etc. subject to
fulfillment of the specified conditions.
(ii) Similarly, section 80GGA provides for deduction in respect of certain donations
for scientific research or rural development made to research associations,
universities, colleges or other associations/institutions, subject to fulfillment of
the specified conditions.
(iii) Sub-section (5D) and (2A) have been inserted in section 80G and 80GGA,
respectively, to provide that no deduction shall be allowed in respect of
donation of any sum exceeding ` 10,000 unless such sum is paid by any mode
other than cash.
(f) Extension of sunset clause for tax holiday under section 80-IA for power-
sector undertakings [Section 80-IA(4)(iv)]
(i) As per the provisions of section 80-IA(4)(iv), a deduction of 100% of profits and
gains is allowed for 10 consecutive assessment years to an undertaking which:
(a) is set up in any part of India for the generation or generation and
distribution of power if it begins to generate power at any time during the
period beginning on 1
st
April, 1993 and ending on 31
st
March, 2012;
(b) starts transmission or distribution by laying a network of new transmission
or distribution lines at any time during the period beginning on 1
st
April,
1999 and ending on 31
st
March, 2012;
(c) undertakes substantial renovation and modernization of existing network
of transmission or distribution lines at any time during the period
beginning on 1
st
April, 2004 and ending on 31
st
March, 2012.
(ii) This time limit has been extended by one year i.e., from 31
st
March, 2012 to
31
st
March, 2013, to enable undertakings which start generation, or
transmission or distribution of power during the period between 1
st
April, 2012
and 31
st
March, 2013 or which undertakes substantial renovation and
modernization of the existing network of transmission or distribution lines
between 1
st
April, 2012 and 31
st
March, 2013 to avail benefit of deduction
under this section.
(g) Deduction in respect of interest on deposits in savings accounts [NewSection
80TTA]
(i) Section 80TTA has been introduced to provide that in case the gross total
income of an assessee, being an individual or a Hindu Undivided Family,
44

includes any income by way of an interest on deposits in a saving account (not
being time deposits, which are deposits repayable on expiry of fixed periods),
deduction up to ` 10,000 in aggregate shall be allowed while computing the
total income of such assessee. Such deduction shall be allowed in case the
saving account is maintained with:
(1) a banking company to which the Banking Regulation Act, 1949, applies
(including any bank or banking institution referred to in section 51 of that Act);
(2) a co-operative society engaged in carrying on the business of banking
(including a co-operative land mortgage bank or a co-operative land
development bank); or
(3) a post office.
(ii) However, if the aforesaid income is derived from any deposit in a savings
account held by, or on behalf of, a firm, an AOP/BOI, no deduction shall be
allowed in respect of such income in computing the total income of any partner
of the firm or any member of the AOP or any individual of the BOI.
(iii) In effect the deduction under this section shall be allowed only in respect of the
income derived in form of the interest on the saving bank deposit (other than
time deposits) made by the individual or Hindu Undivided Family directly.
Example
Mr. Gurnam, aged 62 years, earned professional income (computed) of ` 5,50,000
during the year ended 31.03.2013. He has earned interest of ` 14,500 on the saving
bank account with State Bank of India during the year. Compute the total income of
Mr. Gurnamfor the assessment year 2013-14 fromthe following particulars:
(i) Life insurance premiumpaid to Birla Sunlife Insurance in cash amounting to ` 25,000
for insurance of life of his dependent parents. The insurance policy was taken on
15.07.2012 and the sumassured on life of his dependent parents is ` 1,25,000.
(ii) Life insurance premiumof ` 25,000 paid for the insurance of life of his major son
who is not dependent on him. The sumassured on life of his son is ` 1,75,000 and
the life insurance policy was taken on 18.04.2011.
(iii) Life insurance premiumpaid by cheque of ` 22,500 for insurance of his life. The
insurance policy was taken on 08.09.2012 and the sumassured is ` 2,00,000.
(iv) Subscription to long-terminfrastructure bonds amounting to ` 25,000.
(v) Premiumof ` 16,000 paid by cheque for health insurance of self and his wife.
(vi) ` 1,500 paid in cash for his health check-up and ` 4,500 paid in cheque for health
check-up for his parents.
(vii) Paid interest of ` 6,500 on loan taken frombank for MBA course pursued by his
daughter.
45

(viii) A sumof ` 15,000 donated in cash to an institution approved for purpose of section
80G for promoting family planning.
(ix) Contribution ` 10,500 made in cash to an electoral trust.
Answer
Computation of total income of Mr. Gurnamfor the Assessment Year 2013-14
Particulars ` ` `
Professional Income (computed) 5,50,000
Interest on saving bank deposit _14,500
Gross Total Income 5,64,500
Less: Deduction under Chapter VIA
Under section 80C (See Note 1)
Life insurance premium paid for life insurance of:
- major son 25,000
- self ` 22,500 restricted to 10% of ` 2,00,000 20,000 45,000
Under section 80D (See Note 3)
Premium paid for health insurance of self and wife by
cheque
16,000
Payment made for health check-up:
- Self ` 1,500
- His Parents ` 4,500
` 6,000 restricted to _5,000 21,000
Under section 80E
For payment of interest on loan taken from bank for
MBA course of his daughter
6,500
Under section 80GGC
Contribution to electoral trust 10,500
Under section 80TTA (See Note 5)
Interest on savings bank account ` 14,500 restricted to 10,000 _93,000
Total Income 4,71,500
Notes:
(1) As per section 80C, no deduction is allowed in respect of premium paid for life
insurance of parents whether they are dependent or not. Therefore, no deduction is
allowable in respect of ` 15,000 paid as premium for life insurance of dependent
parents of Mr. Gurnam.
As per the amendment made by Finance Act, 2012, deduction shall be allowed in
46

respect of premium paid for life insurance only to the extent of 10% of sum assured
in respect of insurance policy issued after 01.04.2012. In case the insurance policy
is issued before 01.04.2012, deduction of premium paid on life insurance policy
shall be allowed up to 20% of sum assured.
Therefore in the present case, deduction of ` 25,000 is allowable in respect of life
insurance of Mr. Gurnams son since the insurance policy was issued before
01.04.2012 and the premium amount is less than 20% of ` 1,75,000. However, in
respect of premium paid for life insurance policy of Mr. Gurnam himself, deduction
is allowable only up to 10% of ` 2,00,000 since, the policy was issued after
01.04.2012 and the premium amount exceeds 10% of sum assured.
(2) Deduction under section 80CCF for subscription to long-term infrastructure fund
was allowed up to A.Y. 2012-13. Therefore, no deduction for the same is allowable
for A.Y. 2013-14.
(3) As per section 80D, in case the premium is paid in respect of health of a person
specified therein and for health check-up of such person who is a senior citizen i.e.,
aged 60 years or more, deduction shall be allowed up to ` 20,000. Further, as per
amendment made by Finance Act, 2012, deduction up to ` 5,000 in aggregate shall
be allowed in respect of health check-up of self, spouse, children and parents. In
order to claim deduction under section 80D, the payment for health-check up can be
made in any mode including cash. However, the payment for health insurance
premium has to be paid in any mode other than cash.
Therefore, in the present case, deduction of ` 16,000 is allowed in respect of
premium paid for health insurance of self and wife, since Mr. Gurnam is a senior
citizen and the payment is made by cheque. Also, the aggregate value of premium
paid for health insurance and the payment for health check-up is ` 17,500 (` 16,000
+ ` 1,500), which is less than ` 20,000. Further, deduction up to a maximum of
` 5,000 is allowable in respect of health check-up of self and his parents. This
implies that ` 3,500 is allowable for health check-up of parents which falls within the
additional limit of ` 20,000 for mediclaim premium and expenditure on preventive
health check-up of parents.
(4) As per the Finance Act, 2012, no deduction shall be allowed under section 80G in
case the donation is made in cash of a sum exceeding ` 10,000. Therefore, no
deduction is allowed under section 80G in respect of donation made to institution
approved therein. However, there is no such restriction for contribution to an
electoral trust which qualifies for deduction under section 80GGC.
(5) As per section 80TTA, deduction shall be allowed from the gross total income of an
individual or Hindu Undivided Family in respect of income by way of interest on
deposit in the savings account included in the assessees gross total income,
subject to a maximum of ` 10,000. Therefore, a deduction of ` 10,000 is allowable
from the gross total income of Mr. Gurnam, though the interest from savings bank
account is ` 14,500.

47

9. ASSESSMENT OF VARIOUS ENTITIES
(a) Concessional rate of tax on interest on borrowings in foreign currency by
Indian companies [Section 115A]
Related amendment in section: 194LC &195
(i) Interest payable by an Indian company to a foreign company or a non-
corporate non-resident in respect of borrowing made in foreign currency from
sources outside India between 1.7.2012 and 30.6.2015 would be subject to tax
at a concessional rate of 5% on gross interest (as against the rate of 20% of
gross interest applicable in respect of other interest received by a non-
corporate non-resident or foreign company from Government or an Indian
concern on money borrowed or debt incurred by it in foreign currency).
(ii) To avail this concessional rate, the borrowing should be from a source outside
India under a loan agreement or by way of issue of long-term infrastructure
bonds approved by the Central Government.
(iii) The interest to the extent the same does not exceed the interest calculated at
the rate approved by the Central Government, taking into consideration the
terms of the loan or the bond and its repayment, will be subject to tax at a
concessional rate of 5%.
(iv) Such interest paid by an Indian company to a non-corporate non-resident or a
foreign company would be subject to TDS@5% under section 194LC.
(v) Accordingly, section 195 would include, within its scope, interest payments to
foreign companies and non-corporate non-residents, other than interest
covered under section 194LB and section 194LC.
Note It may be noted that last year, a provision was introduced in the Income-tax
Act, 1961 to enable the Central Government to notify infrastructure debt funds to be
set up in accordance with the prescribed guidelines, the income fromwhich would
be exempt fromtax. Interest income received by a non-corporate non-resident or
foreign company fromsuch fund was also subject to tax at a concessional rate of
5%on the gross amount of such interest income as compared to tax@20%on other
interest income received by the non-resident froman Indian concern. Such interest
was also subject to TDS@5%under section 194LB. This is similar to the benefit
given this year by way of concessional rate of tax @5%on interest on overseas
borrowings in foreign currency by Indian companies under a loan agreement or by
way of issue of long-terminfrastructure bonds.
(b) Income received or receivable by a non-resident entertainer, from
performance in India included within the scope of Section 115BBA and rate of
tax thereunder increased from10% to 20%
Related amendment in section: 194E
(i) Under section 115BBA, the income of a sportsman (including an athlete) who
is not a citizen of India and is a non-resident, received or receivable by way of
48

participation in any game (other than a game the winning wherefrom are
taxable under section 115BB) or sport in India or advertisement or contribution
of any article relating to any game or sport in India in newspapers, magazines
or journals, is being subject to tax at the rate of 10%.
(ii) Similarly, any amount guaranteed to be paid or payable to a non-resident
sports association or institution in relation to any game (other than a game the
winnings from which are taxable under section 115BB) or sport played in India
is being subject to tax at the rate of 10%.
(iii) Where any income referred to in section 115BBA is payable to a non-resident
sportsman (including an athlete) who is not a citizen of India or to a non-
resident sports association or institution, then as per section 194E, the person
responsible for making such payment, has to deduct income-tax thereon at the
rate of 10% at the time of credit of such income to the account of payee or at
the time of payment thereof to the payee, whichever is earlier.
(iv) The Double Tax Avoidance Agreement (DTAA) maintains a parity between a
non-resident sportsman and non-resident entertainer (such as theatre, radio or
television artists and musicians). Globally, the tax rates are the same for an
entertainer and sportsperson, ranging between 10% to 30%. Therefore, in
order to provide for a simple uniform tax basis for a non-resident entertainer
who is not a citizen of India and a non-resident sportsman and to align the
same with international tax practices, the tax rate prescribed under section
115BBA has been increased from 10% to 20%, and made applicable to both
non-resident entertainer and non-resident sportsperson.
(v) Therefore, the following income shall be charged to tax at the rate of 20% as
per the provisions of section 115BBA w.e.f. A.Y. 2013-14:
(1) the income of a non-resident sportsman (including an athlete) who is not
a citizen of India, by way of participation in any game (other than a game
the winnings from which are taxable under section 115BB) or sport in
India or advertisement or any contribution of article in relation to any
game or sport in India; or
(2) any amount guaranteed to be paid or payable to any non-resident sports
association or institution in relation to any game (other than a game the
winnings from which are taxable under section 115BB) or sport played in
India; or
(3) income of a non-resident entertainer who is not a citizen of India,
received or receivable from his performance in India
(vi) Consequently, section 194E has been amended w.e.f. 1
st
July, 2012 to provide
that tax shall be deducted at source on the income referred to in section
115BBA at the rate of 20%.

49

(c) Dividends received by Indian companies fromspecified foreign companies to
be entitled to concessional rate of tax for one more year [Section 115BBD]
(i) Dividends received by Indian companies from specified foreign companies
are subject to a concessional tax rate of 15% on gross dividend as against the
normal tax rate of 30% on net dividend. This amendment was effected by the
Finance Act, 2011 to be applicable for A.Y.2012-13.
(ii) Accordingly, the rate of 15% was applied on gross dividend, in the sense, that
no expenditure would be allowable in respect of such dividend.
(iii) Specified foreign company means a foreign company in which the Indian
company holds 26% or more in nominal value of the equity share capital of the
company.
(iv) Therefore, this concessional rate would not be applicable in respect of
dividend received from a foreign company in which the holding of the Indian
company is less than 26% of the nominal value of the equity share capital.
(v) Accordingly, if the total income of an Indian company, includes income by way
of dividend declared, distributed or paid by a specified foreign company, the
income tax payable would be the aggregate of
(a) Income-tax @15% on gross dividend from such specified foreign
company; and
(b) Income-tax with which the assessee would have been chargeable had its
total income been reduced by such dividend.
(vi) The benefit of this concessional rate of 15% on gross dividend received by an
Indian company from a specified foreign company has been extended for
A.Y.2013-14 also.
Example
A Ltd., an Indian company, receives the following dividend income during the P.Y.
2012-13 -
(1) fromshares held in XYZ Inc., a foreign company, in which it holds 25%of
nominal value of equity share capital ` 80,000;
(2) fromshares held in PQR Inc., a foreign company, in which it holds 30%of
nominal value of equity share capital ` 1,85,000.
(3) fromshares held in Indian companies ` 90,000.
A Ltd. has paid remuneration of ` 18,000 for realising dividend, the break up of
which is as follows
(1) ` 4,000 (XYZ Inc.)
(2) ` 9,000 (PQR Inc.)
(3) ` 5,000 (Indian companies)
50

The business income of A Ltd. computed under the provisions of the Act is ` 40
lakh. Compute the total income and tax liability of A Ltd., ignoring MAT.
Answer
Computation of total income of A Ltd. for A.Y. 2013-14
Particulars `
Profits and gains of business or profession 40,00,000
Income from other sources (See Note below) 2,61,000
Total income 42,61,000
Note Dividend income taxable under Income fromother sources
Particulars `
From XYZ Inc. net dividend (i.e., ` 80,000 ` 4,000) is taxable
at normal rates
76,000
From PQR Inc. gross dividend is taxable@15% u/s 115BBD [no
deduction is allowable in respect of any expenditure as per section
115BBD(2)]
1,85,000
From shares in Indian companies ` 90,000 exempt under section
10(34) since dividend distribution tax would have been paid under
section 115-O [As per section 14A, no deduction is allowable in
respect of expenditure incurred to earn exempt income]

Nil
2,61,000
Computation of tax liability of A Ltd.
Particulars `
Tax@15% under section 115BBD on ` 1,85,000 (gross dividend) 27,750
Tax@30% on balance income of ` 40,76,000 12,22,800
12,50,550
Add: Education cess@2% and Secondary and higher education
cess@1%
37,517
Tax liability 12,88,067
(d) Net profit as per profit and loss account prepared in accordance with the
respective Act governing insurance companies, banking companies,
electricity companies etc. to formthe basis for computation of book profit for
levy of MAT in case of such companies [Section 115JB]
(i) Section 115JB(1) provides for levy of MAT on companies. As per section
115JB(2), every company shall prepare its profit and loss account for the
relevant previous year in accordance with the provisions of Parts II and III of
Schedule VI to the Companies Act, 1956.
51

(ii) However, as per the proviso to section 211(2) of the Companies Act, 1956,
certain companies like insurance companies, banking companies, companies
engaged in generation or supply of electricity etc., are allowed to prepare their
profit and loss account in accordance with the form specified in or under the
Act governing such class of company.
(iii) Therefore, in order to align section 115JB(2) with the proviso to section 211(2) of
the Companies Act, 1956, sub-section (2) of section 115JB has been substituted
to require such companies to prepare their profit and loss account for the
relevant previous year in accordance with the provisions of the Act governing
such company. Companies, other than companies referred to in the proviso to
section 211(2) of the Companies Act, 1956, shall continue to prepare their profit
and loss account for the relevant previous year in accordance with the provisions
of Part II of Schedule VI to the Companies Act, 1956. Reference to Part III has
been omitted since Revised Schedule VI applicable in respect of financial
periods commencing from 1
st
April, 2011 does not contain Part III.
(iv) Further, Explanation3 has been inserted to provide an option to such companies
(banking companies, insurance companies etc., to which the proviso to section
211(2) of the Companies Act, 1956 apply) to prepare its profit and loss account
for the relevant previous year relating to an assessment year commencing on or
before 1
st
April, 2012 (i.e., up to A.Y.2012-13), either in accordance with the
provisions of Part II and Part III of Schedule VI to the Companies Act, 1956 or in
accordance with the provisions of the Act governing such company.
(v) Also, it has been provided that any income accruing or arising to a company
from life insurance business referred to in section 115B would not be subject to
MAT. [Sub-section (5A) of section 115JB]
(Effective retrospectively fromA.Y.2001-02)
(e) Amount standing in the revaluation reserve relating to a retired or disposed
asset, to be subject to minimumalternate tax, if the same is not credited to
profit and loss account [Explanation 1 to section 115JB]
(i) As per Explanation 1 to section 115JB, the amount withdrawn from the
revaluation reserve and creditedto profit and loss account, to the extent it
does not exceed the amount of depreciation on account of revaluation of
assets is reduced while calculating the book profits. In effect, the revaluation
reserve credited to profit and loss account, to the extent the same is in excess
of the amount of depreciation on account of revaluation of assets, is subject to
minimum alternate tax.
(ii) It was observed that, in some cases, the amount standing in the revaluation
reserve was taken directly to general reserve account on disposal of the
52

revalued asset without being credited to the profit and loss account due to
which the gain on account of such revaluation was not subject to minimum
alternate tax.
(iii) With a view to bring such a gain within the ambit of the minimum alternate tax
provisions, Explanation 1to section 115JB is amended to provide that the book
profits shall be increased by the amount standing in revaluation reserve
relating to the revalued asset on the retirement or disposal of such asset, in
case the same is not credited to the profit and loss account.
(f) Levy of Alternate MinimumTax (AMT) extended to all persons claiming profit-
linked deductions, other than companies [Chapter XII-BASections 115JC to
115JF]
(i) Last year, the Finance Act, 2011 introduced the concept of AMT in relation to LLPs
and accordingly the LLPs were subject to AMT @ 18.5% of adjusted total income.
(ii) Though the concept of Alternate Minimum Tax (AMT) was similar to MAT in
case of corporates, however, the tax base in the case of LLPs was the
adjusted total income computed as per the Income-tax Act, 1961 and not the
book profit computed after making the specified adjustments to the profit as
per the profit and loss account prepared in accordance with Schedule VI to the
Companies Act, 1956.
(iii) The Finance Act, 2012 has now extended the levy of AMT to certain persons
other than companies, in order to widen the tax base vis--vis profit-linked
deductions. Accordingly, any person other than a company, who has claimed
deduction under any section (other than section 80P) included in Chapter VI-A
under the heading C Deductions in respect of certain incomes or under
section 10AA would be subject to AMT with effect from A.Y.2013-14. [Section
115JEE]
The provisions of AMT would, however, not be applicable to an individual,
HUF, AOP, BOI, whether incorporated or not, or artificial juridical person, if the
adjusted total income of such person does not exceed ` 20 lakh. [Section
115JEE]
(iv) Accordingly, where the regular income-tax payable by a person, other than a
company, for a previous year computed as per the provisions of the Income-
tax Act, 1961 (other than Chapter XII-BA) is less than the AMT payable for
such previous year, the adjusted total income shall be deemed to be the total
income of the person. Such person shall be liable to pay income-tax on the
adjusted total income @ 18.5% [Section 115JC].
(v) Adjusted total income would mean the total income before giving effect to
Chapter XII-BA as increased by the deductions claimed, if any, under
53

(1) any section (other than section 80P) included in Chapter VI-A under the
heading C Deductions in respect of certain incomes; and
(2) section 10AA.
(vi) Such persons to whom this section applies should obtain a report in the
prescribed form from a Chartered Accountant certifying that the adjusted total
income and the AMT have been computed in accordance with the provisions of
this Chapter. The report has to be furnished on or before the due date of filing
of return under section 139(1).
(vii) Section 115JE specifically provides that save as otherwise provided in this
Chapter, all other provisions of this Act shall apply to a person referred to in
this Chapter. Hence, all other provisions relating to self-assessment under
section 140A, advance tax, interest under sections 234A, 234B and 234C,
penalty etc. would also apply to a person who is subject to AMT.
Tax credit for AMT [Section 115JD]
Related amendment in sections: 140A, 234A, 234B &234C
(viii) AMT paid in excess of the regular income-tax payable under the provisions of
the Income-tax Act, 1961 for the year would be eligible for credit to be carried
forward and set-off against income-tax payable in the later year to the extent of
excess of regular income-tax payable under the provisions of the Act over the
AMT payable in that year. The balance tax credit, if any, shall be carried
forward to the next year for set-off in that year in a similar manner.
(ix) AMT credit can be carried forward for set-off upto a maximum period of 10
assessment years succeeding the assessment year in which the credit
becomes allowable.
(x) No interest shall, however, be payable on such tax credit.
(xi) If the amount of regular income-tax or AMT is reduced or increased as a result
of any order passed under the Income-tax Act, 1961, the amount of tax credit
allowed under section 115JD would also vary accordingly.
(xii) Section 140A has been correspondingly amended to provide that for
determination of self-assessment tax payable, interest payable under section
234A and assessed tax, tax credit claimed to be set-off in accordance with
section 115JD has also to be reduced.
(xiii) Such tax credit allowed to be set-off in accordance with the provisions of
section 115JD has to be reduced from the amount of tax on total income
determined under section 143(1) or on regular assessment on which interest
under section 234A is leviable for default in furnishing return of income.
Similar amendment has been made in section 234B levying interest for default
in payment of advance tax, to enable reduction of tax credit under section
115JD while computing assessed tax.
54

Likewise, in section 234C levying interest for deferment of advance tax, such
tax credit under section 115JD has to be reduced for computing tax due on
the returned income.
Example
Mr. Rajesh has income of ` 45 lakhs under the head Profits and gains of business
or profession. One of his businesses is eligible for deduction@100%of profits
under section 80-IB for A.Y.2013-14. The profit fromsuch business included in the
business income is ` 20 lakhs. Compute the tax payable by Mr. Rajesh, assuming
that he has no other income during the P.Y.2012-13.
Answer
Computation of regular income-tax payable under the provisions of the Act
Particulars `
Profits and gains of business or profession 45,00,000
Less: Deduction under section 80-IB 20,00,000
Total Income 25,00,000
Tax payable
Up to ` 2,00,000 Nil
10% on next ` 3,00,000 30,000
20% on next ` 5,00,000 1,00,000
30% on balance ` 15,00,000 4,50,000
5,80,000
Computation of Alternate MinimumTax (AMT)
Particulars `
Total Income as per the Income-tax Act, 1961 25,00,000
Add: Deduction under section 80-IB 20,00,000
Adjusted Total Income 45,00,000
AMT = 18.5%45,00,000 = 8,32,500
Since the regular income-tax payable as per the provisions of the Act is less than
the AMT, the adjusted total income of ` 45 lakhs would be deemed to be the total
income of Mr. Rajesh and he would be liable to pay tax@18.5% thereof. The tax
payable by Mr. Rajesh for the A.Y.2013-14 would, therefore, be ` 8,32,500 plus
education cess@2% and secondary and higher education cess@1%, totaling
` 8,57,475.
Mr. Rajesh would be eligible for credit to the extent of ` 2,60,075 [` 8,57,475
55

` 5,97,400 (i.e. 5,80,000 + 3% cess)] to be set-off in the year in which tax on total
income computed under the regular provisions of the Act exceeds the AMT. Such
credit can be carried forward for succeeding 10 assessment years.
(g) Conversion of an Indian branch of foreign company into an Indian subsidiary
company [Insertion of NewChapter XII-BB] [Newsection 115JG]
(i) The provisions of this section apply to a foreign company engaged in banking
business in India through its branch situated in India, which is converted into
an Indian subsidiary company in accordance with the scheme framed by RBI.
(ii) If the conditions notified by the Central Government in this behalf are satisfied,
then capital gains arising from such conversion would not be chargeable to tax
in the assessment year relevant to the previous year in which such conversion
takes place.
(iii) Also, the provisions of the Act relating to computation of income of foreign
company and Indian subsidiary company would apply with such exceptions,
modifications and adaptations as specified in the notification.
(iv) Further, the benefit of set-off of unabsorbed depreciation, set-off and carry
forward of losses, tax credit in respect of tax paid on deemed income relating
to certain companies available under the Act shall apply with such exceptions,
modifications and adaptations as specified in the notification.
(v) If the conditions specified in the scheme of RBI or notification issued by the
Central Government are not complied with, then, all the provisions of the Act
would apply to the foreign company and Indian subsidiary company without
any benefit, exemption or relief under this section.
(vi) If the benefit, exemption or relief has been granted to the foreign company or
Indian subsidiary company in any previous year and thereafter, there is a
failure to comply with any of the conditions specified in the scheme or
notification, then, such benefit, exemption or relief shall be deemed to have
been wrongly allowed.
(vii) In such a case, the Assessing Officer is empowered to re-compute the total
income of the assessee for the said previous year and make the necessary
amendment. This power is notwithstanding anything contained in the Income-
tax Act, 1961.
(viii) The provisions of rectification under section 154, would, accordingly, apply and
the four year period within which such rectification should be made has to be
reckoned from the end of the previous year in which the failure to comply with
such conditions has taken place.
(ix) Every notification under issued under this section shall be laid before each
House of Parliament.
56

(h) Removal of cascading effect of DDT in multi-tier corporate structure [Section
115-O]
(i) Dividend Distribution Tax (DDT)@15% is leviable on dividends declared,
distributed or paid by a domestic company. Such dividend is exempt in the
hands of the shareholder.
(ii) In order to provide a partial relief from double taxation of dividends, sub-
section (1A) was inserted in section 115-O by the Finance Act, 2008.
Accordingly, a holding company receiving dividend from its subsidiary
company can reduce such dividend received from dividends declared,
distributed or paid by it. For this purpose, a holding company is one which
holds more than 50% of the nominal value of equity shares of the subsidiary.
(iii) There are certain conditions to be fulfilled to avail this benefit. They are -
(1) the subsidiary company should have actually paid the dividend
distribution tax on the dividend declared, distributed or paid by it;
(2) the holding company should be a domestic company; and
(3) the holding company should not be a subsidiary of any other company.
(iv) However, the above provision removed the cascading effect of DDT only in a
two-tier corporate structure.
(v) In order to remove the cascading effect of DDT in a multi-tier corporate
structure also, section 115-O has been amended to remove the condition
mentioned in (iii)(3) above and modify the condition in (iii)(1) above.
Therefore, in case any domestic company receives any dividend during the
year from any subsidiary company and such subsidiary company has paid the
DDT as payable on such dividend, then, dividend distributed by the holding
company in the same year, to the extent of dividend received from the
subsidiary, shall not be subject to DDT under section 115-O, irrespective of
whether the holding company is a subsidiary of any other company.
(Effective from1
st
J uly, 2012)
(i) Taxability of income of VCCs/VCFs in the hands of the investor on accrual
basis [Section 115U]
(i) At present, SEBI registered Venture Capital Funds (VCFs) and Venture Capital
Companies (VCC) enjoy a pass through status under sections 10(23FB) and
115U. Income of such VCF/VCC is exempt under section 10(23FB), if such
VCC/VCF invests in unlisted shares of a Venture Capital Undertaking (VCU).
Under section 115U, income is taxed in the hands of the investor on receipt
basis through VCC/VCF in the like manner and to the same extent as if the
investment is directly made by the investor in the VCU.
(ii) In order to prevent deferral of taxation in the hands of the investor, section
115U has been amended to provide that income accruing to VCCs and VCFs
57

would be taxable in the hands of the investor on accrual basis.
The income accruing or arising to or received by the VCC or VCF during a previous
year, from investments made in VCU, if not paid or credited to the investor, shall be
deemed to have been credited to the account of the investor on the last day of 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.
However, where income has been so included on accrual basis in the total
income of the investor in the previous year, then it shall not be included again
at the time such income is actually paid to him by the VCC/VCF.
(j) Increase in presumptive rate of daily tonnage income [Section 115VG]
(i) The aggregate of tonnage income of each qualifying ship would constitute the
tonnage income of a tonnage tax company.
(ii) The tonnage income of each qualifying ship is calculated as follows -
Tonnage income of
each qualifying ship
= Daily tonnage
income
Number of days of
operation of qualifying
ship in the previous year
(iii) The presumptive rate of daily tonnage income has been increased with effect
from A.Y.2013-14 as given in the table below
Qualifying ship
having net tonnage
Amount of daily tonnage income
Upto A.Y.2012-13 FromA.Y.2013-14
1,000 ` 46 for each 100 tons ` 70 for each 100 tons
> 1,000 10,000 ` 460 +
` 35 for each 100 tons
exceeding 1,000 tons
` 700 +
> 10,000 25,000 ` 3,610 +
` 5,470 +
> 25,000 ` 7,810 +
` 11,770 +
10. DOUBLE TAXATION RELIEF
(a) Meaning to be assigned to a termused in DTAA by way of notification to be
effective fromthe date such DTAA came into existence [Section 90 &90A]
(i) Under section 90, the Central Government is empowered to enter into an
agreement with the government of foreign countries or specified territories for
58

the purpose of granting relief specified under the section. The Central
Government has, in exercise of such power, entered into Double Taxation
Avoidance Agreements (DTAAs) with various countries for providing relief in
respect of double taxation.
(ii) Likewise, under section 90A, the Central Government is empowered to adopt
and implement an agreement between a specified association in India and any
specified association in a specified territory outside India for granting relief
specified in the section, which includes primarily double taxation relief.
(iii) Under sub-section (3) of sections 90 and 90A, the Central Government is
empowered, by way of a notification, to assign a meaning to any term used in
the agreement which is neither defined in the Act nor in the agreement.
(iv) The notification under section 90(3) or section 90A(3) provides a legal frame
work to clarify the intent and objective of the term as understood at the time of
negotiation, resulting in formalization of the agreement. Thus, the clarification
should normally apply from the date when the agreement in which the term is
used came into force.
(v) Therefore, in order to clarify the true legislative intent, Explanation 3has been
inserted in sections 90 and 90A to provide that in case any term used in the
agreement as mentioned in section 90(1) or section 90A(1) which is not
defined under the agreement or in the Act and the meaning to such term is
assigned by way of a notification under section 90(3) or section 90A(3), such
meaning assigned would be deemed to have come to effect from the date on
which the said agreement came into force and not from the date of the said
notification.
(vi) The amendment in section 90 will take effect retrospectively from 1
st
October,
2009 and the amendment in section 90A shall take effect retrospectively from
1
st
June, 2006.
(b) Tax Residence Certificate (TRC) - a necessary but not sufficient condition for
claiming treaty benefits [Section 90 &90A]
(i) The DTAAs under section 90 and section 90A are intended to provide relief to
the taxpayer, who is resident of one of the contracting country to the
agreement. Such tax payer can claim relief by applying the beneficial
provisions of either the treaty or the domestic law.
(ii) However, in many cases, taxpayers who were not residents of a contracting
country also resorted to claiming the benefits under the agreement entered
into by the Indian Government with the Government of the other country. In
effect, third party residents claimed the unintended treaty benefits.
(iii) Therefore, sections 90 and 90A are amended to provide that the non-resident
to whom the agreement referred to in section 90(1) and section 90A(1) applies,
shall be allowed to claim the relief under such agreement if a TRC obtained by
59

him from the Government of that country or specified territory is furnished,
containing such particulars as may be prescribed, declaring his residence of
the country outside India or the specified territory outside India, as the case
may be.
(iv) The submission of TRC containing prescribed particulars shall be a necessary
but not sufficient condition for availing benefits of the agreements referred
to in these sections. In effect, further conditions can be stipulated for claiming
treaty benefits, in addition to the requirement of submission of TRC.
11. TRANSFER PRICING AND OTHER PROVISIONS TO CHECK AVOIDANCE OF TAX
(a) Transfer Pricing Officer empowered to examine any international transaction
not reported by the assessee [Sections 92CA(2B) &92CA(2C)]
(i) Under section 92CA(1), the Assessing Officer may, with the previous approval
of Commissioner, refer the determination of arms length price in respect of an
international transaction to the Transfer Pricing Officer (TPO). Once reference
is made under section 92CA(1), the TPO can exercise all powers that are
available to the Assessing Officer under section 92C(3) for computing the ALP
and pass an order.
(ii) Section 92E casts an obligation on every person who has entered into an
international transaction during the year to furnish a report in the prescribed
format before the Assessing Officer containing such details as may be
prescribed within the prescribed time limit.
(iii) In case the assessee does not furnish the particulars of such a transaction in
the report furnished under section 92E, then, the Assessing Officer would
normally not be aware of such an international transaction and, in turn, would
not be able to refer such transaction to the TPO.
Such a transaction may come to the notice of the TPO subsequently during the
course of proceeding before him. In case the TPO determines the arms length
price in respect of such non-reported international transaction, the same is
open to be challenged by the assessee in absence of specific power enabling
the TPO to determine arms length price of such transaction. The assessee
may challenge such an action although the basis of the action is non-reporting
of transaction by him at first instance.
(iv) Therefore, express powers are now given to the TPO to determine the arms
length price in respect of such transaction which comes to his notice during the
course of proceeding pending before him, in case the assessee has not filed a
report under section 92E.
Sub-section (2B) has been inserted retrospectively in section 92CA to provide
that, where in respect of an international transaction, the assessee has not
furnished the report under section 92E and such transaction comes to the
60

notice of the TPO during the course of proceeding before him, the transfer
pricing provisions shall apply as if such transaction is referred to the TPO by
the Assessing Officer under section 92CA(1).
(Effective retrospectively from1st J une, 2002)
(v) Further, sub-section (2C) has been inserted to provide that, the retrospective
insertion of sub-section (2B) shall not empower the Assessing Officer either to
assess or reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise increasing the
liability of the assessee under section 154, for any assessment year for which
the proceedings have been completed before 1
st
July, 2012.
Therefore, the power given to the TPO under sub-section (2B) to determine
arms length price in respect of the transaction not reported by the assessee, can
be exercised only in respect of the cases pending before the Assessing Officer
and completed assessments cannot be reopened by exercising such power.
(Effective from1st J uly, 2012)
(b) Penalty provisions made more stringent in cases where the assessee fails to
keep and maintain information and document, etc in respect of an
international transaction [Section 271AA]
(i) The penalty provisions in respect of international transaction are broadly
covered under section 271BA providing for levy of penalty of ` 1 lakh in cases
where any person fails to furnish a report from an accountant as required by
section 92E, section 271AA providing for penalty for failure to keep and
maintain information and document in respect of international transaction and
section 271G which provides for penalty in case of failure to furnish information
or document under section 92D.
(ii) These penalty provisions do not provide for levy of penalty in case of non-
reporting of an international transaction in a report filed under section 92E or
maintaining or furnishing of incorrect information or document. Therefore, with
a view to conceal information regarding an international transaction, it is
possible that some taxpayers may not furnish the report and pay a nominal
penalty of ` 1 lakh, which is very low in comparison to the quantum of
international transaction.
(iii) Therefore, in order to provide a check on such a practice and ensure compliance
with the transfer pricing regulations, section 271AA has been substituted to
provide that, the Assessing Officer or Commissioner (Appeals) may direct the
person entering into a international transaction to pay a penalty@2% of the value
of the international transaction entered into by him, if the person:
(1) fails to keep and maintain any such document and information as required
by secion 92D(1) and section 92D(2);
61

(2) fails to report such international transaction which is required to be
reported; or
(3) maintains or furnishes any incorrect information or document.
(iv) The penalty under section 271AA shall be in addition and not in substitution of
penalty under section 271BA and 271.
(Effective from1
st
J uly, 2012)
(c) Transfer Pricing Regulations to apply to specified domestic transactions
[Section 92 &92BA]
Related amendment in section: 40A(2), 80A, 80-IA(8) &(10), 92C, 92CA, 92D,
92E, 271, 271AA, 271G
(i) Under section 40A(2), the Assessing Officer is empowered to disallow
expenditure incurred between related parties to the extent the same is not
reasonable. Further, under Chapter VI-A, the Assessing Officer can re-
compute the income (on the basis of fair market value) of the undertaking to
which profit-linked deduction is provided if there are transactions with the
related parties or other undertakings of the same entity at a value that does not
correspond to the market value of the goods or services. However, these
sections do not provide for any particular method to determine reasonableness
of expenditure or fair market value to re-compute the income of the
undertaking in such related transactions.
(ii) In CIT vs. Glaxo SmithKline Asia (P) Ltd (2010) 195 Taxman 35, the Supreme
Court had opined that in order to reduce litigation, the Ministry of Finance
should consider the applicability of the transfer pricing regulations to such
related party domestic transactions. This suggestion was made after
examining the complications arising in cases where fair market value is to be
assigned to transactions between domestic related parties,
Income from domestic related party transactions to be subject to transfer
pricing [Section 92(2A)]
(iii) Section 92 provides that any income arising from an international transaction
shall be computed having regard to the arms length price. In order to provide
objectivity in determination of income from domestic related party transactions
and determination of reasonableness of expenditure between related domestic
parties, the provisions of section 92 have been extended to include within its ambit
the specified domestic transactions. Sub-section (2A) has been inserted in section
92 to provide that, any allowance for an expenditure or interest or allocation of any
cost or expense or any income in relation to the specified domestic transaction
shall be computed having regard to the arms length price. However, as per
section 92(3), the provisions of this section would not apply if such allowance for
expense or interest under section 92(2A) has the effect of reducing the income
chargeable to tax or increasing the loss, as the case may be.
62

Meaning of specified domestic transaction [New Section 92BA]
(iv) New section 92BA has been inserted to provide the meaning of specified
domestic transaction. As per new section 92BA, for the purpose of sections 92,
92C (Computation of arms length price), 92D (Maintenance and keeping of
information and documents) and 92E (Furnishing of report from an accountant),
in case of an assessee the specified domestic transaction shall mean any of the
following transactions, not being an international transaction, namely,-
(1) any expenditure in respect of which payment has been made or is to be
made to a related person referred to in section 40A(2)(b);
(2) any transaction referred to in section 80A i.e., inter-unit transfer of goods
and services by an undertaking or unit or enterprise or eligible business to
other business carried on by the assessee or vice versa, for consideration
not corresponding to the market value on the date of transfer;
(3) any transfer of goods or services referred to in section 80-IA(8) i.e., inter-
unit transfer of goods or services between eligible business and other
business, where the consideration for transfer does not correspond with
the market value of goods and services;
(4) any business transacted between the assessee carrying on eligible
business and other person as referred to section 80-IA(10);
(5) any transaction, referred to in any other section under Chapter VI-A or
section 10AA, to which provisions of section 80-IA(8) or section 80-IA(10)
are applicable; or
(6) any other transaction as may be prescribed,
(v) However, the above mentioned transactions shall not be treated as specified
domestic transaction in case the aggregate of such transactions entered into
by the assessee in the previous year does not exceed a sum of ` 5 crore.
Arms length price and income of a specified domestic transaction to be
computed in the same manner as applicable to an international transaction
[Sections 92 & 92C]
(vi) In order to determine the arms length price in respect of the specified domestic
transaction, the provisions of section 92 and 92C shall apply to the specified
domestic transaction as they apply to the international transaction. Accordingly, the
methods of computation of arms length price for an international transaction would
be applicable to a specified domestic transaction also.
Persons entering into a specified domestic transaction to maintain information
and documents and furnish report of an accountant [Section 92D & 92E]
(vii) With a view to create legally enforceable obligation on assessees entering into
a specified domestic transaction to maintain proper documentation and obtain
and furnish report of a Chartered Accountant on or before the specified date,
63

the provisions of section 92D and 92E have been made applicable to a
specified domestic transaction as they apply to an international transaction.
Reference to Transfer Pricing Officer for computation of arms length price of
specified domestic transaction [Section 92CA]
(viii) The provisions of section 92CA have been amended to make them applicable in
respect of specified domestic transaction also. Accordingly, where any person has
entered into an international or a specified domestic transaction in any previous
year, the Assessing Officer can with the previous approval of the Commissioner, if
he considers necessary or expedient to do so, refer the computation of the arms
length price of such transaction to the Transfer Pricing Officer (TPO).
When such reference is made, TPO can call upon the assessee to produce
evidence in support of the computation of arms length price made by him in
respect of such transaction.
The TPO has to pass an order determining the arms length price in respect of the
specified domestic transaction after considering the evidence, documents, etc.
produced by the assessee and after considering the material gathered by him. He
has to send a copy of his order to the Assessing Officer as well as the assessee.
However, the powers available to the TPO to determine the ALP of other
international transactions identified subsequently in the course of proceedings
before him, is not available in respect of other specified domestic transaction
i.e., the TPO can determine the ALP in respect of other international
transaction that came to his notice subsequently during the course of
proceedings but such power is not available in respect of specified domestic
transaction subsequently identified.
Penalty provisions to apply to specified domestic transactions as they apply
to an international transaction [Sections 271, 271AA, 271BA & 271G]
(ix) The penalty provisions under section 271, 271AA, 271BA and 271G shall apply
to the specified domestic transaction as they apply to an international
transaction defined under section 92B.
Accordingly, the amount added or disallowed in computing total income under
section 92C(4) in the case of an assessee who has entered into a specified
domestic transaction shall be deemed to represent concealed income and
penalty under section 271(1)(c) ranging between 100% to 300% of the amount
of tax sought to be evaded would be attracted.
Failure to furnish the report under section 92E from an accountant would
attract penalty of ` 1,00,000 under section 271BA.
In addition,
(i) in case of failure to keep and maintain information, document as required
under section 92D(1) or 92D(2); or
64

(ii) failure to report such specified domestic transaction which is required to
be reported; or
(iii) maintain or furnishes incorrect information or document
penalty under section 271AA at 2% of the value of each transaction would be
attracted.
Penalty@2% of value of specified domestic transaction would be attracted
under section 271G for failure to furnish the prescribed information or
document as required under section 92D(3) within the period of 30 days from
the date of receipt of notice or the extended period not exceeding another 30
days, as the case may be.
No adjustment to expenditure under section 40A(2) if the transaction is carried
out at arms length price
(x) A proviso has been inserted in section 40A(2)(a) to provide that no
disallowance on account of any expenditure in respect of payment which has
been made or is to be made to a related person, being excessive or
unreasonable having regard to the fair market value, shall be made in respect
of a specified domestic transaction referred to in section 92BA, if such
transaction is at arms length price i.e., no adjustment shall be made under
section 40A(2) in relation to the specified domestic transaction in case the
same is carried out at arms length price even though the arms length price so
determined may be at variance with the fair market value.
The related person as mentioned in section 40A(2) includes, inter alia, a
company, firm, association of persons or Hindu undivided family having a
substantial interest in the business or profession of the assessee or any
director, partner or member of such company, firm, association or family, or
any relative of such director, partner or member. The said meaning is
amended to include that the related person in relation to a company shall
include any other company carrying on business or profession in which the first
mentioned company has substantial interest.
Market value to be the arms length price of goods or services in a specified
domestic transaction [Section 80A & 80-IA(8)]
(xi) As per the provisions of section 80A(6), in a case where the goods or services
held for the purpose of the undertaking or unit or enterprise or eligible
business are transferred to any other business carried on by the assessee or
where any goods or services held for the purposes of any other business
carried on by the assessee are transferred to the undertaking or unit or
enterprise or eligible business, the transfer price of such goods and services
shall be determined at the market value of such goods or services as on the
date of transfer.
Clause (iii) has been inserted in Explanation to section 80A(6) to clarify that
market value in relation to any goods or services sold, supplied or acquired,
65

means the arms length price as defined under section 92F of such goods or
services, if it is a specified domestic transaction referred to in section 92BA
i.e., the aggregate value of all such transaction specified in section 92BA
exceeds ` 5 crore.
Therefore, in case the transfer of goods and services between undertaking or
unit or enterprise or eligible business and any other business of the assessee
takes place at the arms length price, such arms length price shall be the
market value for the purpose of section 80A(6), and no further adjustment
would be required in respect of the same, if the transaction is a specified
domestic transaction.
(xii) Similarly, for the purpose of section 80-IA(8), the market value, in relation to
any goods or services transferred between the eligible business and any other
business carried on by the assessee, shall mean -
(1) the price that such goods or services would ordinarily fetch in the open
market; or
(2) the arms length price as defined under section 92F, where the transfer of
such goods or services is a specified domestic transaction referred to in
section 92BA.
Profit fromtransactions between an assessee carrying on eligible business and
other assessees to be determined as per arms length price [Section 80-IA(10)]
(xiii) Under section 80-IA(10), 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-IA and any other person is so arranged that the transaction
produces excessive profits to the eligible business.
It has now been provided that if the aforesaid arrangement between the assessee
carrying on the eligible business and any other person is a specified domestic
transaction referred to in section 92BA, then, the amount of profit of such
transaction shall be determined having regard to arms length price as defined
under section 92F and not as per the reasonable profit from such transaction.
(d) Meaning of International transaction amplified [Section 92B]
(i) The meaning of international transaction provided under section 92B, though
all-encompassing, was not very specific, leaving scope for varying
interpretations by the courts of law as to the inclusion or otherwise of certain
transactions. Some assessees, taking the benefit of varied interpretations, did
not report many transactions in the transfer pricing audit report.
(ii) Therefore, Explanation to section 92B is inserted retrospectively with effect
from 1.4.2002, being the date from which transfer pricing provisions came into
66

force, to amplify the scope of the terms international transaction and
intangible property.
(iii) Accordingly, the scope of international transaction shall include:
Transactions Amplification of scope of terms used
(1) Purchase, sale,
transfer, lease or use
of tangible property
Tangible property includes -
building,
transportation vehicle,
machinery, equipment, tools, plant,
furniture,
commodity or
any other article, product or thing;
(2) Purchase, sale,
transfer, lease or use
of intangible
property, including
transfer of ownership
or the provision of
use of certain rights
Use of certain rights refer to
land use,
copyrights, patents, trademarks,
licences, franchises,
customer list, marketing channel,
brand, commercial secret,
know-how,
industrial property right,
exterior design or practical and new
design or
any other business or commercial rights
of similar nature;
(3) Capital financing any type of long-term or short-term
borrowing,
lending or guarantee,
purchase or sale of marketable securities or
any type of advance, payments or
deferred payment or receivable or any
other debt arising during the course of
business;
(4) Provision of services provision of market research,
market development,
marketing management,
administration,
technical service,
repairs,
67

design,
consultation,
agency,
scientific research,
legal or accounting service;
(5) Business restructuring
or reorganization
entered into by an
enterprise with an
associated enterprise
All such transactions are included in the
definition of international transaction, whether
or not it has bearing on the profit, income,
losses or assets of such enterprises at the time
of the transaction or at any future date.
(iv) the expression intangible property shall include:
Type of
intangible
asset in
relation to
Examples of each type of intangible asset
(1) Marketing Trademarks
trade names
brand names
logos
(2) Technology Process patents
patent applications
technical documentation such as laboratory
notebooks
technical know-how
(3) Artistic literary works and copyrights
musical compositions
copyrights
maps
engravings
(4) Data
processing
proprietary computer software
software copyrights
automated databases
integrated circuit masks and masters
(5) Engineering industrial design
product patents
trade secrets
engineering drawing and schematics
blueprints
proprietary documentation
68

(6) Customer customer lists
customer contracts
customer relationship
open purchase orders
(7) Contract favourable supplier
contracts,
licence agreements
franchise agreements
non-compete agreements
(8) Human trained and organised work force
employment agreements
union contracts
(9) Location leasehold interest
mineral exploitation rights
easements
air rights
water rights
(10) Goodwill institutional goodwill
professional practice goodwill
personal goodwill of professional
celebrity goodwill
general business going concern value
(11) methods, programmes, systems, procedures, campaigns, surveys,
studies, forecasts, estimates, or technical data;
(12) any other similar item that derives its value from its intellectual
content rather than its physical attributes.
st
April, 2002)
(e) Permissible variation between ALP and Transfer Price to be notified by the
Central Government not to exceed 3%[Section 92C]
(i) Section 92C requires application of the most appropriate method for
determination of Arms Length Price (ALP). Where more than one price is
determined by the most appropriate method, the ALP shall be the arithmetical
mean of such prices. However, as per the second proviso to section 92C(2),
as it stands with effect from 1.10.2009 (after the amendment by the Finance
(No.2) Act, 2009), if the ALP so determined is within 5% of transfer price, then
no adjustment is required to be made and the transfer price would be deemed
to be the ALP of the international transaction.
(ii) The amendment by the Finance (No.2) Act, 2009 has put to rest the
controversy on whether the said 5% represented a tolerance band or a
69

standard deduction, and clarified that the same was a tolerance band to be
computed as a percentage of transfer price.
(iii) Last year, vide the Finance Bill, 2011, the permissible variation at a standard
rate of 5% of the transfer price for all segments of business activity and range
of international transactions was substituted by such percentage of the transfer
price, as may be notified by the Central Government in this behalf.
Accordingly, the Central Government is empowered to prescribe the rate of
permissible variation for different segments of business activity and class of
international transactions. This amendment was effective from financial year
2011-12. This year, the Finance Act, 2012 has restricted the maximum
permissible variation to 3%, with effect from financial year 2012-13 i.e. the limit
of permissible variation notified by the Central Government cannot exceed 3%.
(f) Introduction of Advance Pricing Agreements [Sections 92CC &92CD]
Related amendment in Section: 246A
(i) 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.
(ii) Keeping in mind the benefits offered by the APAs, sections 92CC and section
92CD have been introduced in the transfer pricing regime to provide a framework
for formulation of APAs between the tax payer and the income-tax authorities.
(iii) Section 92CC enables the Board (with the approval of the Central
Government), to enter into an APA with any person undertaking an
international transaction.
(1) The APA shall relate to an international transaction to be entered intoby
such person. The APA shall be entered into for the purpose of determination
of the arms length price or specifying the manner in which arms length price
shall be determined, in relation to such international transaction.
(2) The manner for determination of arms length price referred above may
include methods referred to in section 92C(1) or any other method with
necessary adjustments or variations.
(3) In case an APA has been entered into in respect of any international
transaction, the arms length price in relation to that transaction shall be
determined in accordance with that APA notwithstanding any contrary
provisions contained in section 92C or section 92CA i.e., the provisions of the
APA shall apply overriding the provisions of section 92C or section 92CA,
which are normally applicable for determination of arms length price.
(4) The APA shall be valid for such period as specified in the agreement,
which shall in no case exceed five consecutive previous years.
70

(5) The APA so entered into shall be binding on:
(a) the person in whose case, and in respect of the transaction in
relation to which, the APA has been entered into; and
(b) the Commissioner and the income-tax authorities subordinate to
him, in respect of the said person and the said transaction.
(6) The APA shall not be binding if there is any change in law or facts having
bearing on such APA.
(7) In case the Board finds that the APA so entered into has been obtained
by the person by way of fraud or misrepresentation of facts, the Board is
empowered to pass an order declaring any such APA to be voidab initio,
with the approval of Central Government.
(8) As a result of declaration of an APA as voidab initio:
(a) all the provisions of the Act shall apply to such person as if such
APA had never been entered into.
(b) The period beginning with the date of such APA and ending on the
date of order declaring the APA as voidab initio, shall be excluded
for the purpose of computation of any period of limitation under this
Act (for example period of limitation specified in the section 153,
153B etc). This is irrespective of anything contained in any other
provision of the Act.
(c) In case the period of limitation after exclusion of the above
mentioned period is less than 60 days, such remaining period of
limitation shall be extended to 60 days.
(9) The Board is empowered to prescribe a scheme specifying the manner,
form, procedure and any other matter generally in respect of the APA.
(10) If an application is made by a person for entering into an APA, then, the
proceeding, in respect of such person for the purpose of this Act, shall be
deemed to be pending.
(iv) Section 92CD provides for the following procedure for giving effect to an APA-
(1) In case a person has entered into an APA and prior to the date of
entering into such APA, he has furnished the return of income under the
provisions of section 139 in respect of any assessment year relevant to a
previous year to which the APA applies, then, such person shall, within a
period of three months from the end of the month in which the said
agreement was entered into, furnish a modified return, notwithstanding
any contrary provision contained in section 139.
(2) Such modified return shall be in accordance with and limited to the
provisions of such APA i.e., modifications can only be made on account
of such APA in the return to be filed.
71

(3) All other provisions of this Act shall apply as if the modified return is a
return furnished under section 139, unless anything to the contrary is
provided in this section.
(4) If the assessment or reassessment proceedings for an assessment year
relevant to a previous year to which the APA applies have been
completed before the expiry of period allowed for furnishing of modified
return, the Assessing Officer shall, in a case where modified return is filed
in accordance with the provisions of this section, proceed to assess or
reassess or re-compute the total income of the relevant assessment year
having regard to and in accordance with the APA.
Such order for assessment or reassessment or re-computation of total income
shall be passed within a period of 1 year from the end of the financial year in
which the modified return was furnished. This shall apply notwithstanding the
period of limitation contained under section 153 or 153B or 144C.
The appeal against such order shall lie to Commissioner (Appeals).
[Section 246A]
(5) The assessment or reassessment proceedings for an assessment year
shall be deemed to have been completed where
(i) an assessment or reassessment order has been passed; or
(ii) no notice has been issued under section 143(2) till the expiry of the
limitation period provided under the said section.
(6) Where the assessment or reassessment proceedings for an assessment
year relevant to the previous year to which the APA applies, are pending on
the date of filing of modified return, the Assessing Officer shall proceed to
complete the assessment or reassessment proceedings in accordance with
the APA taking into consideration the modified return so furnished.
In this case, the time period of completion of pending assessment or
reassessment mentioned under section 153 or 153B or 144C shall be
extended by 12 months. This shall apply notwithstanding the period of
limitation contained under section 153 or 153B or 144C.
(Effective from1
st
J uly, 2012)
(g) Income shall be deemed to have escaped assessment in case the assessee
fails to furnish report under section 92E in respect of any international
transaction [Explanation 2 to section 147]
(i) Explanation 2 to section 147 provides for certain circumstances where it is
deemed that income has escaped assessment for the purpose of section 147.
(ii) As per the transfer pricing provisions, the transaction value at which an
international transaction takes place has to be compared with the arms length
72

price and the difference is to be adjusted in the income of the person entering
into an international transaction subject to certain conditions.
In case where an international transaction is not reported by the assessee, the
transaction price of such transaction is never benchmarked against arms length
principle. It therefore becomes necessary that non-reporting of international
transactions should lead to a presumption of escapement of income.
(iii) Therefore, the scope of Explanation 2 to section 147, deeming cases where
income is deemed to have escaped assessment, has been expanded to
provide that in case where the assessee has failed to furnish a report in
respect of any international transaction which he was supposed to furnish
under section 92E i.e., either by way of non-filing of report under section 92E
or by not reporting any transaction in the report under section 92E, then, such
non-reporting or non-filing would be considered as a case of deemed
escapement of income for the purpose of assessment or reassessment under
section 147.
(iv) These provisions would take effect from 1
st
July, 2012. An Explanationhas been
inserted in section 147 and 149 to clarify that the provisions so amended therein
would also apply to any assessment year prior to A.Y.2013-14.
12. INCOME TAX AUTHORITIES
Director of Income-tax to be included in the definition of Commissioner [Section
2(16)]
Section 117 gives power to the Central Government to appoint such persons as income-
tax authorities as it thinks fit. Clause (c) of section 116, enlisting the various income-tax
authorities, refer to Directors of Income-tax or Commissioners of Income-tax. The post of
a Commissioner and post of a Director of Income-tax are interchangeable.
Therefore, section 2(16) has been amended to reflect this position by including a Director
of Income-tax within the meaning of Commissioner together with the Commissioner of
Income-tax appointed under section 117(1).
st
April, 1988)
13. ASSESSMENT PROCEDURE
(a) Assessment to be made individually in search cases even where the
authorization or requisition mentions the name of more than one person
[Section 292CC]
(i) Under section 132 and section 132A, an authorization can be issued or a
requisition can be made, as the case may be, where the Director General or the
Director, in consequence of information in his possession, has reason to believe
that any person is in possession of any money, bullion, jewellery or other valuable
article or thing. In such a case, he may authorize the income-tax authorities
73

mentioned therein to enter and search any building, place, vehicle, etc. and seize
any such books of accounts, other documents, undisclosed property, etc.
(ii) In a case where search is initiated under section 132 or requisition is made
under section 132A, assessment is to be completed under the provisions of
section 153A or section 153C or section 143(3).
(iii) Recently, a court has ruled that in search cases under section 132 arising on
the basis of warrant of authorization, such warrant must be issued individually
to all the parties involved in such search. If the warrant is issued jointly, then,
the assessment will have to be made collectively in the name of all the persons
in the status of association of persons/body of individuals and not in their
individual capacity.
(iv) However, this court ruling did not convey the true legislative intent. In order to
reflect the correct legislative intent, section 292CC has been inserted to
provide that:
(1) it shall not be necessary to issue an authorization under section 132 or
make a requisition under section 132A separately in the name of each
person;
(2) where an authorization under section 132 has been issued or a
requisition under section 132A has been made mentioning therein the
name of more than one person, the mention of such names of more than
one person on such authorization or requisition shall not be deemed to
construe that it was issued in the name of an association of persons or
body of individuals consisting of such persons;
These provisions would apply irrespective of anything contrary contained in
any other provision of the Act.
(v) Further, even if an authorization under section 132 has been issued or
requisition under section 132A has been made mentioning therein the name of
more than one person, the assessment or reassessment shall be made
separately in the name of each of the persons mentioned in such authorization
or requisition.
st
April, 1976)
(b) Extension of due date for filing of return of income and tax audit report in case
of all assessees undertaking international transaction [Section 44AB &139(1)]
(i) The due date for filing of a transfer pricing report under the provisions of section
92E in Form 3CEB and filing of return of income under section 139(1) in case of
corporate assessees who have undertaken international transactions during the
relevant previous year was extended from 30
th
September to 30
th
November of
the assessment year by the Finance Act, 2011 w.e.f. A.Y. 2011-12.
(ii) The benefit of the extended due date would now also be available to non-
corporate assessees who have undertaken international transactions during
74

the relevant previous year. The due date for filing of a transfer pricing report
under the provisions of section 92E in Form 3CEB and filing of return of
income under section 139(1) in case of such assessees has also been
extended from 30
th
September to 30
th
November of the assessment year by the
Finance Act, 2012, w.e.f. A.Y. 2012-13.
(iii) Consequently, clause (ii) of Explanation to section 44AB defining specified
date, on or before which the tax audit report should be furnished, has been
amended to co-relate the same with due date for filing return of income under
section 139(1). Accordingly, in case of assessees undertaking international
transaction, the specified date would be 30
th
November of the assessment year
and in case of other assessees, 30
th
September of the assessment year.
(c) Mandatory filing of ROI by every resident having any asset (including financial
interest in any entity) located outside India [Section 139(1)]
Related amendment in sections: 147 &149
(i) Every resident and ordinarily resident having
(1) any asset (including financial interest in any entity) located outside India or
(2) signing authority in any account located outside India
is required to file a return of income in the prescribed form compulsorily,
whether or not he has income chargeable to tax.
(ii) The return of income should be verified in the prescribed manner and provide
such particulars as may be prescribed.
(iii) Further, income chargeable to tax shall be deemed to have escaped
assessment for the purpose of section 147, where a person is found to have
any asset (including financial interest in any entity) located outside India.
Accordingly, the Assessing Officer can serve a notice under section 148 on
such assessee requiring him to furnish a return of income within the specified
period, for the purpose of making an assessment, reassessment or
recomputation under section 147.
(iv) The first proviso to section 147 provides that, where an assessment under
section 143(3) has already been made by the Assessing Officer for the
relevant assessment year, then, no action under the said section can be taken
after expiry of 4 years from the end of relevant assessment year. The
exception would be in cases where income has escaped assessment on
account of failure on the part of the assessee to file a return of income under
section 139 or in response to a notice issued under section 142(1) or section
148 or to disclose, fully and truly, all material facts necessary for his
assessment for that assessment year.
A second proviso has now been inserted in section 147 to provide that the
75

provisions of the above mentioned first proviso shall not apply in a case where
income chargeable to tax, in relation to an asset (including financial interest in
an entity) located outside India, has escaped assessment for any assessment
year. In effect, in such cases, the Assessing Officer can initiate assessment
proceedings under section 147 even after the expiry of 4 years inspite of the
assessee having
(i) duly furnished his return of income and
(ii) fully and truly disclosing all material facts necessary for his assessment
for that assessment year.
(v) An extended time limit of sixteen years would be available for issue of notice
under section 148 for an assessment or reassessment, in case income in
relation to such assets (including financial interest in any entity) located
outside India has escaped assessment [Section 149]. The provision of an
extended time limit is due to the reason that gathering information relating to
assets located outside India takes substantially more time due to extra
procedural requirements and laws of other nations.
(vi) These provisions would take effect from 1
st
July, 2012. An Explanationhas been
inserted in section 147 and 149 to clarify that the provisions so amended therein by
the Finance Act, 2012, would also apply to any assessment year prior to A.Y.2013-
14. This also applies in respect of the amendment in section 147 deeming income to
have escaped assessment where the assessee has failed to furnish a report as
required under section 92E in respect of any international transaction.
Note: Similar amendments have been made in section 17 of the Wealth-tax Act, 1957
on the above lines (i.e. sections 147 and 149 of the Income-tax Act, 1961), i.e., -
(i) deeming wealth to have escaped assessment where a person is found to have
any asset (including financial interest in any entity) located outside India,
(ii) non-applicability of the four year time limit for issue of notice and
(iii) provision of an extended time limit of sixteen years for issue of notice for
assessment or reassessment in such cases where wealth is deemed to have
escaped assessment.
(d) Processing of return of income under section 143(1) not necessary in a case
where notice has been issued under section 143(2) to the assessee for
scrutiny of return [Section 143(1D)]
(i) As per section 143(1), every return of income is to be processed and refund, if any,
due is to be issued to the tax payer. There are cases where demand for taxes is
raised after scrutiny of return of income under section 143(3) although the refund
may have been issued earlier at the time of processing under section 143(1).
(ii) Therefore, sub-section (1D) to section 143 has been inserted to provide that,
76

notwithstanding anything contained in section 143(1), the processing of a return
under section 143(1) shall not be necessary, where a notice of assessment has
been issued to the assessee under section 143(2) for scrutiny of the return.
(iii) However, this provision cannot be applied if the processing of return under
section 143(1) is completed and intimation has already been issued.
(Effective from1
st
J uly, 2012)
(e) Dispute Resolution Panel empowered to consider any matter arising during
the assessment proceeding even if that matter is not raised by the eligible
assessee [Explanation to section 144C(8)]
(i) Dispute Resolution Panel (DRP) had been constituted in order to ensure
speedy resolution of cases in which any variation has been made on account
of any order of the Transfer Pricing Officer passed under section 92CA(3) i.e.,
transfer pricing issues in case of person entering into an international
transaction or in case of a foreign company.
(ii) As per section 144C(8), the DRP may confirm, reduce or enhance the
variations proposed in the draft order of the Assessing Officer.
(iii) Recently, it was held in a court decision that the power of DRP is restricted
only to the issues raised in the draft assessment order and therefore, it cannot
enhance the variation proposed in the order as a result of any new issue which
comes to the notice of the DRP during the course of proceedings before it.
However, this decision did not reflect the true intent of the legislature.
(iv) In order to reflect the correct legislative intent, an Explanation has been
inserted to section 144C(8) retrospectively to provide that, the power of the
DRP to enhance the variationas mentioned in section 144C(8) shall include
and shall be deemed to have always included the power to consider any matter
arising out of the assessment proceedings relating to the draft order. This
power to consider any issue shall be irrespective of whether the matter was
raised by the eligible assessee or not.
(v) While exercising the aforesaid power for considering any matter arising out of
the assessment proceedings relating to the draft order, the DRP can only
enhance the variation. The power of reducing the variation is not accorded to
DRP in respect of such matters.
st
April, 2009)
(f) The time limit for completion of assessment in search cases mentioned under
section 144C to be notwithstanding the time limit mentioned under section
153B [Sections 144C(4) &144C(13)]
(i) As per the provisions of section 144C, the Assessing Officer has to pass an
assessment order -
77

(1) in a case where the eligible assessee intimates his acceptance of the
variation made, within 1 month from the end of the month of receipt of the
assessees acceptance of the variation made in the draft order is received.
(2) in a case where no objections are received from the eligible assessee
within 30 days of receipt by him of the draft order, within 1 month from the
end of the month in which the period of filing of objection by the eligible
assessee expires.
(3) in case objection is filed by the eligible assessee, within 1 month from the
end of the month in which the direction of DRP is received by the
Assessing Officer.
These time limits of passing the assessment order mentioned under section 144C
are notwithstanding the time limit of assessment mentioned under section 153.
(ii) A similar provision has been incorporated in cases where an assessment order
to be passed in a search and seizure case is referred to the DRP. In effect, the
Assessing Officer has to pass the assessment order in a search case referred
to the DRP within the above time limits mentioned under section 144C and
these time limits shall be notwithstanding the period of limitation contained
under section 153B.
st
October, 2009)
(g) Extension of time limit for issue of notice to a person treated as an agent of
non-resident under section 163, in a case where income of the non-resident
has escaped assessment [Section 149(3)]
(i) As per section 149(3), if the person on whom a notice under section 148 is to
be served is a person treated as an agent of a non-resident under section 163
and the assessment, reassessment or re-computation in pursuance of the
notice is to be made on him as the agent of such non-resident, there is a time
limit of two years from the end of the relevant assessment year, beyond which
such notice cannot be issued.
(ii) The time limit of twoyears has now been extended to sixyears from the end
of the relevant assessment year.
(Effective from1
st
J uly, 2012)
(iii) It is also clarified that the extended time limit of six years shall also be
applicable for any assessment year beginning on or before 1st April, 2012.
(h) Time limit for completion of assessments and reassessments extended by 3
months [Sections 153 &153B]
The time limit for assessment or reassessment under section 143(3), 147, 153A,
etc, and also the time limit of assessment in case a reference is made under section
92CA to the Transfer Pricing Officer has been extended by 3 months.
78

The following shall be the time limit for assessment or reassessment under section 153:
Proceeding under
section
Current time limit
for completion of
assessment or
reassessment
New time limit
for completion
of assessment
or
reassessment
Applicability
of new time
limit
143(3) or 144 21 months from the
end of the
assessment year in
which the income
was first
assessable
2 years from the
end of the
assessment year
in which the
income was first
assessable
In case income
is first
assessable in
the A.Y. 2010-
11 or any
subsequent
assessment
year
143(3) or 144,
where reference
under section
92CA(1) is made
during the course
of assessment
proceeding (Refer
Note below)
33 months from the
end of the
assessment year in
which the income
was first
assessable
3 years from the
end of the
assessment year
in which the
income was first
assessable
With respect to
income first
assessable in
the A.Y. 2009-
10 or any
subsequent
assessment
year
147 9 months from the
end of the financial
year in which the
notice under
section 148 was
served
1 year from the
end of the
financial year in
which the notice
under section
148 was served
Where notice
under section
148 is served
on or after
01.04.2011.
147, where
reference under
section 92CA(1) is
made during the
course of
assessment
proceeding (Refer
Note below)
21 months from the
year in which the
notice under
section 148 was
served
2 years from the
end of the
financial year in
which the notice
under section
148 was served
Where the
notice under
section 148 is
served on or
after
01.04.2010.
Fresh assessment
under section
143(3)/144/147
where the original
assessment has
been set aside,
cancelled and
9 months from the
year in which the
said order under
section 254 is
received by the CIT
or the order under
1 year from the
end of the
financial year in
which the said
order under
section 254 is
received by the
Where order
under section
254 is received
by the CIT or
order under
section 263 or
section 264 is
79

referred back to
the Assessing
Officer by an order
under section
254/263/264
section 263 or
section 264 is
passed by the CIT
CIT or the order
under section
263 or section
264 is passed by
the CIT
passed by the
CIT on or after
01.04.2011.

Fresh assessment
under section
143(3)/144/147
where the original
assessment has
been set aside,
cancelled and
referred back to
the Assessing
Officer by an order
under section
254/263/264 and
reference made to
Transfer Pricing
Officer under
section 92CA(1)
during the course
of fresh
assessment
proceedings
(Refer Note
below)
21 months from the
year in which the
said order under
section 254 is
received by the CIT
or the order under
section 263 or
section 264 is
passed by the CIT
2 years from the
end of the
financial year in
which the said
order under
section 254 is
received by the
CIT or the order
under section
263 or section
264 is passed by
the CIT
Where order
under section
254 is received
by the CIT or
order under
section 263 or
section 264 is
passed by the
CIT on or after
01.04.2010.
Note: In cases where reference is made under section 92CA(1) during the course of
assessment proceedings, the new time limit would be applicable where such
reference is made-
(i) on or after 01.07.2012, or
(ii) before 01.07.2012 but an order under section 92CA(3) has not been made
before such date
(Effective from1
st
J uly, 2012)
The following shall be the time limit for assessment or reassessment under section 153B:
Proceeding under
section
Current time limit
for completion of
assessment or
reassessment
Newtime limit for
completion of
assessment or
reassessment
Applicability
of new time
limit
153A for the
assessment year
relevant to the
21 months from the
year in which the
2 years from the
year in which the
In case where
the last of
authorizations
80

previous year in
which search is
conducted and for
6 assessment
years immediately
preceding the
assessment year
relevant to the
previous year in
which search was
conducted
last of the
authorizations for
search under
section 132 or for
requisition under
section 132A was
executed
last of the
authorizations for
search under
section 132 or for
requisition under
section 132A was
executed
for search
under section
132 or for
requisition
under section
132A was
executed
during the
financial year
2010-11 or
any
subsequent
financial year
153A for the
assessment year
relevant to the
previous year in
which search is
conducted and for
6 assessment
years immediately
preceding the
assessment year
relevant to the
previous year in
which search was
conducted and
reference made to
Transfer Pricing
Officer under
section 92CA(1)
during the course
of assessment
proceeding (Refer
Note below)
33 months from the
year in which last of
the authorizations
for search under
section 132 or for
requisition under
section 132A was
executed
3 years from the
year in which last
authorizations for
search under
section 132 or for
requisition under
section 132A was
executed
In case where
the last of the
authorizations
for search
under section
132 or for
requisition
under section
132A was
executed
during the
financial year
2009-10 or
any
subsequent
financial year
In case of a person
assessed under
section 153C for
the assessment
year relevant to the
previous year in
which search is
conducted and for
6 assessment
years immediately
21 months from the
the authorizations
for search under
section 132 or for
requisition under
section 132A was
executed
or
2 years from the
the authorizations
for search under
section 132 or for
requisition under
section 132A was
executed
or
In a case
where last of
the
authorizations
for search
under section
132 or for
requisition
under section
132A was
81

preceding the
assessment year
relevant to the
previous year in
which search was
conducted
9 months from the
year in which books
of account or
documents or
assets seized or
requisitioned are
handed over to the
jurisdictional
Assessing Officer
under section 153C
whichever is later
1 year from the end
of the financial year
in which books of
account or
documents or
assets seized or
requisitioned are
handed over to the
jurisdictional
Assessing Officer
under section 153C
whichever is later
executed
during the
financial year
2010-11 or
any
subsequent
financial year
In case of a person
assessed under
section 153C for
the assessment
year relevant to the
previous year in
which search is
conducted and for
6 assessment
years immediately
preceding the
assessment year
relevant to the
previous year in
which search was
conducted and
reference made to
Transfer Pricing
Officer under
section 92CA(1)
during the course
of assessment
proceeding (Refer
Note below)
33 months from the
the authorizations
for search under
section 132 or for
requisition under
section 132A was
executed
or
21 months from the
year in which books
of account or
documents or
assets seized or
requisitioned are
handed over to the
jurisdictional
Assessing Officer
under section 153C
whichever is later
36 months from the
the authorizations
for search under
section 132 or for
requisition under
section 132A was
executed
or
24 months from the
year in which books
of account or
documents or
assets seized or
requisitioned are
handed over to the
jurisdictional
Assessing Officer
under section 153C
whichever is later
In case where
last of the
authorizations
for search
under section
132 or for
requisition
under section
132A was
executed
during the
financial year
2009-10 or
any
subsequent
financial year
Note: In cases where reference is made under section 92CA(1) during the course of
assessment proceedings, the new time limit would be applicable where such
reference is made-
(i) on or after 01.07.2012, or
(ii) before 01.07.2012 but an order under section 92CA(3) has not been made
before such date.
(Effective from1
st
J uly, 2012)
82

Note Similar amendments have been made in the provisions of section 17A of the
Wealth-tax Act, 1957 increasing the time limit of assessment by 3 months. The
existing and the new time limits for assessment are shown in the table below-
Proceeding
under section
Current time limit
of completion of
assessment or
reassessment
New time limit
for of completion
assessment or
reassessment
Applicability of
new time limit
16 21 months fromthe
end of the
assessment year in
which the net wealth
was first assessable
2 years fromthe
end of the
assessment year
in which the net
wealth was first
assessable
In case where
the net wealth is
first assessable
in the
assessment year
2010-11 or any
subsequent
assessment year
17 9 months fromthe
year in which the
notice under section
17(1) was served
1 year from the
end of the
financial year in
which the notice
under section
17(1) was served
Where the notice
under section
17(1) is served
on or after
01.04.2011.
Fresh assessment
where the original
assessment has
been set aside,
cancelled and
referred back by
an order under
section 23A/24/25
9 months fromthe
year in which the
said order under
section 23A/24 is
received by the CIT
or the order under
section 25 is passed
by the CIT
One year fromthe
end of the
financial year in
which the said
order under
section 23A/24 is
received by the
CIT or the order
under section 25
is passed by the
CIT
Where the order
under section
23A/24 is
received by the
CIT or order
under section 25
is passed by the
CIT on or after
01.04.2011.
(Effective from1
st
J uly, 2012)
(i) Time limit for completion of assessment or reassessment to be extended in
case information is sought by a competent authority under an agreement
referred to in section 90 or section 90A [Section 153 &153B]
(i) In case an assessee is having income or assets outside India, information is
sought from the tax authorities situated outside India, while completing an
assessment or reassessment proceeding. Section 90 and section 90A provides
for information exchange with the foreign tax authorities for prevention of
evasion or avoidance of income tax chargeable under this Act or under the
83

corresponding law in force in that country or specified territory, as the case
may be.
(ii) Section 153 and 153B provide the time limit for completion of assessment or
reassessment. The time taken in obtaining information (from foreign tax
authorities) is excluded from the time prescribed for completion of assessment
or reassessment under section 153 and 153B in the case of an assessee.
The time period to be excluded would begin from the date on which a
reference for exchange of information is made by a competent authority under
an agreement referred to in section 90 or 90A and end with the date on which
information so requested is received by the Commissioner. The maximum
period of exclusion was, however, 6 months.
(iii) However, since obtaining information consequent to foreign inquiries generally
take longer time, the maximum time limit has been extended from 6 months to
1 year.
(Effective from1
st
J uly, 2012)
(j) The Central Government to notify class or classes of cases of search, where
compulsory issue of notice for assessing or reassessing the total income of
immediately preceding six assessment years not required [Sections 153A &153C]
Related amendment in section: 296
(i) As per section 153A, it is compulsory to issue a notice for filing of tax returns
for six assessment years immediately preceding the assessment year relevant
to the previous year in which search is conducted under section 132 or
requisition is made under section 132A.
(ii) The Central Government has now been empowered to notify class or classes
of cases [except the cases where any assessment or reassessment has
abated]in which the Assessing Officer shall not be required to issue notice for
initiation of assessment or reassessment of total income for six assessment
years immediately preceding the assessment year relevant to the previous
year in which the search was conducted or requisition was made.
(iii) As a result of the amendment in section 153A and section 153C, the assessment
proceedings in the class or classes of cases so notified shall be carried out only
for the assessment year relevant to the previous year in which search was
conducted or requisition was made, except in cases where any assessment or
reassessment in respect of any of the earlier six years has abated.
(iv) Every such notification issued by the Central Government shall, as soon as
may be after its issue, be laid before each House of Parliament while it is in
session, for a total period of thirty days. If both Houses agree in making any
modification in the notification, the notification will thereafter have effect only in
such modified form. If both Houses agree that the notification should not be
issued, the notification shall thereafter have no effect [Section 296].
(Effective from1
st
J uly, 2012)
84

14. SETTLEMENT COMMISSION
Substantial interest to be determined on the basis of beneficial ownership of
shares carrying not less than 20% voting power/ beneficial entitlement to profits on
the date of search [Explanation to Section 245C]
(i) As per clause (a) of Explanation to section 245C, if any individual who has
substantial interest in the business or profession of the specified person, then, he
and his relative would be treated as an applicant in relation to the specified person.
Likewise, the Explanationalso specifies as to who can be the applicant in case of
other entities (like, firms, companies, etc.) having substantial interest in the
business or profession of the specified person.
(ii) Further, a person is deemed to have a substantial interest in a business or
profession, in case the person is the beneficial owner of shares carrying not less
than 20% voting power or he is beneficially entitled to not less than 20% of profits of
such business or profession at any time during the previous year.
(iii) The Explanationto section 245C has been amended to provide that for deeming a
person to have a substantial interest in a business or profession, the beneficial
ownership of shares carrying not less than 20% of the voting power or the beneficial
entitlement to not less than 20% of profits shall be determined with reference to the
date of search(instead of at any time during the previous year).
(iv) Therefore, an applicant in relation to the specified person can apply to the
Settlement Commission, inter alia, if he has substantial interest in the business or
profession of the specified person on the date of search.
(Effective from1
st
J uly, 2012)
15. ADVANCE RULINGS
(a) Provision of advance ruling to determine the applicability of GAAR introduced
[Section 245N]
Related amendment in section : 245R
(i) The Finance Act, 2012 has introduced General Anti-Avoidance Rules (GAAR)
by insertion of new Chapter X-A. Section 95 provides that an arrangement
entered into by an assessee may be declared to be an impermissible
avoidance agreement notwithstanding anything contained in the Income-tax
Act, 1961. Consequently, the tax arising therefrom may be determined subject
to the provisions of this Chapter. Further, section 144BA has been introduced
to provide for a GAAR Approving Panel. These provisions are to be made
effective only from 1.4.2014 i.e. A.Y. 2014-15, in order to provide more time to
both taxpayers and the tax administration to address the issues arising from
GAAR provisions.
(ii) However, any taxpayer, resident or non-resident, can approach the Authority
for Advance Ruling (AAR) for a ruling as to whether an arrangement to be
85

undertaken by him is an impermissible avoidance agreement under the GAAR
provisions. Such reference can be filed on any date on or after 1.4.2013 to
seek an advance ruling regarding an arrangement to be undertaken.
(iii) Consequently, sub-clause (iv) has been inserted in the definition of advance
ruling under section 245N(a). Accordingly, advance ruling would, inter alia,
mean a determination or decision by the AAR as to whether an agreement,
which is proposed to be undertaken by any person being a resident or non-
resident, is an impermissible avoidance agreement as referred to in Chapter X-
A or not. Further, sub-clause (iiia) has been inserted in section 245N(b) to
provide that an applicant, would, inter alia, mean a person referred to in sub-
clause (iv) of section 245N(a).
(iv) Section 245R provides the procedure on receipt of application by the AAR.
The AAR may, after examining the application and the records called for, pass
an order either allowing or rejecting the application. However, the AAR shall
not allow the application where the question raised in the application relates to
a transaction or issue which is designed prima facie to avoid income-tax,
exceptin the case of a resident applicant falling within such class or category
of persons notified by the Central Government or in the case of an applicant
falling under sub-clause (iiia) of section 245N(b). The exception in the
case of an applicant falling under sub-clause (iiia) of section 245N(b) has
been included by the Finance Act, 2012.
Note Since the provisions of GAAR contained in new Chapter X-A are
applicable only from A.Y.2014-15, they are not relevant for May 2013 and
November 2013 examinations. Therefore, the provisions of Chapter X-A and
consequential amendments thereto (other than provision for advance ruling)
have not been dealt with in this Supplementary Study Paper.
(b) Increase in fees for filing application before Authority for Advance Rulings
[Section 245Q]
(i) The fees prescribed under section 245Q(2) for making an application for
advance ruling is ` 2,500.
(ii) Section 254Q(2) has been amended to provide that the said fee would be
` 10,000 or such fee as may be prescribed, whichever is higher.
(Effective from1
st
J uly, 2012 i.e., for any application for advance ruling filed on or
after 1
st
J uly, 2012)
16. APPEALS AND REVISION
(a) Appeal against the order of the Assessing Officer under sections 153A/ 153C
passed in pursuance of direction of the DRP to lie to Income-tax Appellate
Tribunal [Sections 246A &253]
(i) Section 253 enlisting appealable orders before Appellate Tribunal has been
amended to provide that in case an order is passed by the Assessing Officer
86

under section 153A or section 153C in pursuance of the direction of the DRP
or an order passed under section 154 in respect of such order, the appeal
against the same shall lie directly to the Income-tax Appellate Tribunal.
(ii) Consequently, section 246A enlisting the appealable orders before
Commissioner (Appeals) has been amended to exclude an order or
assessment or reassessment under section 153A passed in pursuance of the
direction of the DRP.
st
October, 2009)
(b) Income-tax authorities authorized to file an appeal to Income-tax Appellate
Tribunal against the order passed in pursuance of the directions of the
Dispute Resolution Panel [Sections 253 &254]
(i) As per section 144C(8), the DRP has the power to confirm, reduce or enhance
the variation proposed in the draft order. Under section 144C(10), the
directions given by the Dispute Resolution Panel (DRP) are binding on the
Assessing Officer. The Income-tax Department does not have any right to file
an appeal against the directions given by the DRP whereas the taxpayer has
been given a right to appeal directly to the Income-tax Appellate Tribunal
(ITAT) against the order passed by the Assessing Officer in pursuance of the
directions of the DRP.
(ii) In order to remove this inequity, sub-section (2A) is inserted in section 253 to
provide that:
(1) in case the Assessing Officer passes any order completing the
assessment or reassessment in pursuance of the direction issued by the
DRP under section 144C(5), in respect of any objection filed by the
assessee under section 144C(2) on or after 1
st
July, 2012, and
(2) the Commissioner objects to such direction issued by the DRP, then the
Commissioner may direct the Assessing Officer to file an appeal to the
Appellate Tribunal against the order.
(iii) Every appeal under sub-section (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).
(iv) Further, the Assessing Officer or the assessee, as the case may be, on receipt
of a notice that an appeal has been filed against the order passed in
pursuance of the directions of the DRP under this section by the other party,
may file a memorandum of cross-objections, against such order or any part of
such order of the Assessing Officer within 30 days of receipt of such notice.
This is irrespective of the Assessing Officer or the assessee, as the case may
be, not having filed an appeal against such order or any part thereof.
Such memorandum shall be disposed of by the Appellate Tribunal as if it were
an appeal presented within the specified time period.
87

(v) In respect of every appeal filed under section 253(2A), the Appellate Tribunal,
where it is possible, may hear and decide such appeal within a period of 4
years from the end of the financial year in which such appeal is filed. [Section
254(2A)]
(Effective from1
st
J uly, 2012)
17. PENALTIES
Penal provisions on undisclosed income found during the course of search made
more stringent [Newsection 271AAB]
Related amendment in sections: 271AAA, 246A
(i) At present, penalty is leviable @10% of undisclosed income under section 271AAA,
if the undisclosed income relates to -
(1) the previous year which has ended before the date of search, but the due date
of filing return has not expired before the date of search and the return has not
been furnished; or,
(2) the previous year in which search is conducted.
However, no penalty is leviable if the assessee admits the undisclosed income in a
statement under section 132(4) recorded in the course of search and specifies the
manner in which such income has been earned and pays the tax together with
interest, if any, in respect of such income.
(ii) Consequently, undisclosed income (for the current year in which search takes place or the
previous year which has ended before the search and for which the due date of filing of
return has not expired and the return is yet to be filed) found during the course of search
attracts no penalty if such undisclosed income is admitted in the course of search and
penalty@10%, if such undisclosed income is not admitted in the course of search.
(iii) In order to deter the practice of concealing income, the penal provisions have been
made more stringent by insertion of new section 271AAB which provides for levy of
penalty on undisclosed income found during the course of a search, which has been
initiated on or after 1st July, 2012, which relates to specified previous year, i.e.-
(1) the previous year which has ended before the date of search, but the due date
of filing return of income for the same has not expired before the date of
search and the return has not yet been furnished;
(2) the previous year in which search is conducted.
(iv) Accordingly, under new section 271AAB,
(1) penalty@10% would be attracted, if undisclosed income is admitted during
the course of searchin the statement furnished under section 132(4), and the
assessee explains the manner in which such income was derived, pays the
tax, together with interest if any, in respect of the undisclosed income, on or
before the specified date (i.e., the due date of filing return of income or the
date on which the period specified in the notice issued under section 153A
88

expires, as the case may be) and furnishes the return of income for the
specified previous year declaring such undisclosed income.
(2) If undisclosed income relating to the specified previous year is not admitted
during the course of search in the statement furnished under section 132(4)
but the same is disclosed in the return of incomefiled after the date of
search and the tax along with the interest, if any, is paid before the specified
date, then, the taxpayer will be liable for penalty@20% of undisclosed income.
(3) In all other cases, penalty ranging from 30% to 90% of undisclosed income
would be attracted.
(v) Undisclosed income, for the purpose of this section, means:
(1) any income of the specified previous year represented, either wholly or partly,
by any money, bullion, jewellery or other valuable article or thing or any entry
in the books of account or other documents or transactions found in the course
of a search under section 132, which has-
(a) not been recorded on or before the date of search in the books of account
or other documents maintained in the normal course relating to such
previous year; or
(b) otherwise not been disclosed to the Chief Commissioner or
Commissioner before the date of search; or
(2) any income of the specified previous year represented, either wholly or partly,
by any entry in respect of an expense recorded in the books of account or
other documents maintained in the normal course relating to the specified
previous year which is found to be false and would not have been found to be
so had the search not been conducted.
(vi) No penalty under section 271(1)(c) is leviable in respect of such undisclosed income.
(vii) Further, the provisions of section 271AAA would not be applicable where search is
initiated under section 132 on or after 1
st
July, 2012.
(viii) An order imposing penalty under section 271AAB would be appealable under
section 246A before the Commissioner (Appeals).
(ix) Section 274 providing for the procedure for imposing penalties and section 275
providing for a bar of limitation for imposing penalties, shall, to the extent relevant
apply to penalty under section 271AAB.
(Effective from1
st
J uly, 2012)
18. OFFENCES &PROSECUTION
(a) Increased limits for applicability of rigorous punishment under section 276C,
276CC, 277, 277A &278
(i) The punishable offences as well as the prosecution for such offences under
the Income-tax Act, 1961 are discussed under Chapter XXII. Prosecution
89

provisions under the Income-tax Act, 1961 are used as a tool for effective
enforcement of tax laws and deterring tax avoidance and tax evasion.
(ii) Under sections 276C (Punishment for willful attempt to evade tax, etc), 276CC
(Punishment for failure to furnish returns of income), 277 (Punishment for making
false statement in verification) and 278 (Punishment for abetment of false return,
etc), in a case where the amount of tax, penalty or interest, as the case may be,
which would have been evaded by a person exceeds ` 1,00,000, he shall be
punishable with rigorous imprisonment for a term which shall not be less than six
months but which may extend to seven years and with fine. In case the amount
which would have been evaded by a person does not exceed ` 1,00,000, he shall
be punishable with rigorous imprisonment for a term which shall not be less than
three months but which may extend to three years and with fine.
Since the threshold of ` 1,00,000 was introduced more than three and a half
decades back, in 1975, the same has now been increased to ` 25,00,000. The
maximum term of imprisonment where the amount which would have been
evaded by a person does not exceed ` 25,00,000 has been reduced from 3
years to 2 years.
Therefore, in case the amount sought to be evaded exceeds ` 25,00,000, the
assessee may be punishable with rigorous imprisonment for a term not less
than 6 months extended to a maximum of 7 years and with fine. In case the
amount sought to be evaded is less than or equal to ` 25,00,000 the person
may be punishable with rigorous imprisonment which shall not be less than 3
months extended to a maximum of 2 years with fine.
The maximum time limit for rigorous imprisonment under section 277A,
imposing punishment for falsification of books of account or document, etc,
has also been reduced from 3 years to 2 years.
(Effective from1
st
J uly, 2012)
(b) Prosecution mechanismstrengthened [Sections 280A, 280B, 280C &280D]
(i) In order to further strengthen the prosecution mechanism new sections 280A,
280B, 280C and 280D have been inserted with effect from 1
st
July, 2012
(1) providing for constitution of Special Courts for trial of offences.
(2) application of summons trial for offences under the Act to expedite
prosecution proceedings as the procedures in a summons trial are
simpler and less time consuming.
(3) providing for appointment of public prosecutors.
(ii) Constitution of Special Courts & Offences triable by Special Court
[Sections 280A &280B]
(1) Under section 280A, for the purpose of trial of offences under Chapter XXII
i.e. Offences & Procecution, one or more courts of Magistrate of the first
class may be designated by the Central Government, in consultation with
the Chief Justice of the High Court, by way of a notification as Special Court
90

for such area or areas or for such cases or class or group of cases as may
be specified in the notification.
(2) A Special Court, while trying an offence punishable under the Act, shall
also try any other offence with which the accused may be charged, under
the Code of Criminal Procedure, 1973.
(3) Under section 280B, the offences punishable under Chapter XXII, shall be
triable only by the Special Court, if so designated, for the area or areas or
for cases or class or group of cases, as the case may be, in which the
offence has been committed. This is notwithstanding anything containing
in the Code of Criminal Procedure, 1973
(4) However, a court competent to try offences under section 292 which has
been designated as a Special Court under this section, shall continue to
try the offences before it or offences arising under the Act after such
designation. Further, a court competent to try offences under section 292,
which has not been designated as a Special Court under this section, may
continue to try such offence pending before it till its disposal.
(5) Further, notwithstanding anything contained in the Code of Criminal
Procedure, 1973, a Special Court may take cognizance of the offence for
which the accused is committed for trial, upon a complaint made by an
authority authorized in this behalf under the Act.
(iii) Trial of offences as summons case [Section 280C]
(1) The Special Court shall, notwithstanding anything contained in the Code
of Criminal Procedure, 1973, try an offence under Chapter XXII
punishable with imprisonment not exceeding two years or with fine or with
both, as a summons case.
(2) When an offence is so tried as a summons case, the provisions of the
Code of Criminal Procedure, 1973, as applicable in the case of trial of
summons case, would be applicable.
(iv) Application of Code of Criminal Procedure, 1973 to proceedings before
Special Court [Section 280D]
(1) The provisions of the Code of Criminal Procedure, 1973, including the
provisions regarding bails and bonds, would apply to proceedings before
a Special Court, unless otherwise provided under the Income-tax Act,
1961.
(2) The person conducting the prosecution before the Special Court shall be
deemed to be a Public Prosecutor.
(3) The Central Government may also appoint a Special Public Prosecutor
for any case or class or group of cases.
91

(4) A person shall be qualified for appointment as a Public Prosecutor or a
Special Public Prosecutor only if he has been in practice as an advocate
for at least seven years, requiring special knowledge of law.
(5) Every person appointed as Public Prosecutor or Special Public
Prosecutor under this section shall be deemed to be a Public Prosecutor
within the meaning of section 2(u) of the Code of Criminal Procedure,
1973. The provisions of the Code of Criminal Procedure, 1973, would
have effect accordingly.
(Effective from1
st
J uly, 2012)
19. MISCELLANEOUS PROVISIONS
Relaxation of time limit for satisfying the conditions, the non-compliance of which
would result in withdrawal of recognition of recognized provident fund [Rule 3 of
Part A of Fourth Schedule to the Income-tax Act, 1961]
(i) Rule 4 of Part A of the Fourth Schedule to the Income-tax Act, 1961, provides for
the conditions which are required to be satisfied by a provident fund for receiving or
retaining recognition under the Income-tax Act, 1961.
(ii) Clause (ea) of the said Rule provides that for receiving and retaining recognition
under the Income-tax Act, 1961, the fund shall be a fund of an establishment
(1) to which the provisions of section 1(3) of the Employees Provident Funds and
Miscellaneous Provisions Act, 1952 apply; or
(2) which has been notified by the Central Provident Fund Commissioner under
section 1(4) of the said Act.
(iii) Further, such establishment is required to obtain exemption under section 17 of the
said Act from the operation of all or any of the provisions of any scheme referred to
in that section.
(iv) In case where a provident fund has been accorded recognition on or before
31.3.2006 and such provident fund does not satisfy the conditions set out in clause
(ea) of Rule 4 or any other condition specified by the Board on or before 31.3.2012,
the recognition granted is withdrawn.
(v) The above time limit specified in the proviso to Rule 3(1) of Part A of the Fourth
Schedule for a recognized provident fund, where it has received recognition on or
before 31.03.2006, for satisfying the conditions set out in clause (ea) of Rule 4 and
any other conditions such as the Board may notify, has now been extended from
31.3.2012 to 31.3.2013. Therefore, only if the fund does not satisfy such conditions
on or before 31.3.2013, the recognition granted to the fund shall be withdrawn.
(Effective from1
st
April, 2012)
92

20. PROVISIONS FOR DEDUCTION AND COLLECTION OF TAX
(a) Tax not to be deducted at source in case aggregate of interest which is
payable to an individual or Hindu Undivided Family on debentures does not
exceed ` 5,000 [Proviso to section 193]
(i) Under section 193, tax is required to be deducted at the rates in force by a
person responsible for paying to a resident, any income by way of interest on
securities.
(ii) The proviso to section 193 provides for certain exemptions i.e., cases where
tax need not be deducted at source.
(iii) One such exemption provided in clause (v) of the proviso is in a case where, a
person is responsible for paying interest to a resident individual on listed
debentures of a company, in which the public are substantially interested. Tax
is not required to be deducted at source in case the interest or aggregate of
interest paid or likely to be paid during a financial year by the company to such
individual does not exceed ` 2,500 and the interest is paid by an account
payee cheque.
(iv) For the purpose of reducing the compliance burden on small assessees and
companies, clause (v) of the proviso has been substituted w.e.f. 1
st
July, 2012
to provide that a company, in which the public are substantially interested, is
not required to deduct tax at source, in case the interest is payable to an
individual or Hindu Undivided Family in respect of any debenture issued
(whether or not listed in a recognized stock exchange)by the company, if:
(1) the amount of interest or the aggregate amount of such interest paid or
likely to be paid on such debentures during the financial year by the
company to such individual or Hindu Undivided Family does not exceed
` 5,000; and
(2) such interest is paid by the company by an account payee cheque.
(Effective from1
st
J uly, 2012)
(b) Tax to be deducted under section 194J on any remuneration paid to a director,
other than in the nature of salary on which tax is deductible under section 192
(i) At present, a company, being an employer, is required to deduct tax at the
time of payment of salary to its employees including Managing director/Whole
time director. However, there is no specific provision for deduction of tax on
the remuneration paid to a director which is not in the nature of salary.
(ii) Therefore, section 194J has been amended to provide that tax is required to
be deducted@10% on any remuneration or fees or commission, by whatever
name called, paid to a director, which is not in the nature of salary on which
tax is deductible at source under section 192.
(Effective from1
st
J uly, 2012)
93

(c) Threshold limit for non-deduction of tax at source on payment of
compensation on compulsory acquisition of immovable property increased
[Section 194LA]
(i) Under the section 194LA, a person responsible for paying to a resident, any
compensation or enhanced compensation or consideration or enhanced
consideration on compulsory acquisition of immovable property (other than
agricultural land) under any law for the time being in force is required to deduct
tax at the rate of 10% in case the compensation or consideration exceeds ` 1
lakh in aggregate during the financial year.
(ii) In order to reduce the compliance burden on small assessees, the above
mentioned threshold limit of ` 1 lakh for attracting TDS provisions under
section 194LA has been increased to ` 2 lakh.
(iii) Now, the person responsible for making payment in respect of compulsory
acquisition of the immovable property (other than agricultural land) shall not be
required to deduct tax at source in case the compensation or the consideration
paid or payable by way of a single payment or aggregate of payments during
the financial year does not exceed ` 2 lakh.
(Effective from1
st
J uly, 2012)
Table showing comparative position of TDS provisions prior to and from
1.7.2012
Section Upto 30.6.2012 On or after 1.7.2012
193 Exemption under clause (v) of
the proviso available only in
respect of payment of interest
(i) on debentures listed in a
recognized stock
exchange;
(ii) to resident individuals;
(iii) not exceeding ` 2500 in
aggregate
Exemption under clause (v) of the
proviso available only in respect
of payment of interest
(i) on debentures, whether or
not listed in a recognized
stock exchange;
(ii) to resident individuals and
HUFs
(iii) not exceeding ` 5,000 in
aggregate.
194E TDS@10% on certain
payments or credits to
(i) non-resident sportsman,
who is not a citizen of
India; or
(ii) non-resident sports
associations or
institutions.
TDS @ 20% on certain payments
or credits to -
(i) non-resident sportsman who
is not a citizen of India; or
(ii) non-resident sports
associations or institutions;
or
(iii) non-resident entertainer who
is not a citizen of India.

94

194J Directors remuneration, fees
and commission not included
within the scope of section
194J.
Directors remuneration, fees and
commission, by whatever name
called, other than in the nature of
salary on which tax is deductible
under section 192, included within
the scope of section 194J.
194LA TDS provisions attracted if
payment or aggregate payment
of compensation on compulsory
acquisition of immovable
property exceeds ` 1 lakh.
TDS provisions attracted if
payment or aggregate payment of
compensation on compulsory
acquisition of immovable property
exceeds ` 2 lakh.
(d) Eligible age for senior citizen reduced from65 years to 60 years for the
purpose of section 197A(1C)
(i) The Finance Act, 2011 had amended the effective age of a senior citizen being
an individual, resident in India, from 65 years of age to 60 years for availing
the benefit of higher basic exemption limit under the Income-tax Act, 1961 for
income earned during the F.Y.2011-12 (A.Y. 2012-13).
(ii) However, the eligible age for senior citizen was not correspondingly reduced in
various other beneficial provisions of the Act. Therefore, in order to ensure
uniformity, the age of a senior citizen to qualify for the benefit under section
197A(1C) has also been reduced to 60 years.
(iii) Accordingly, no deduction of tax at source shall be made in the case of an
individual resident in India of the age of 60 years or more at any time during
the previous year, under section 193 (interest on securities) or section 194
(dividends) or section 194A (interest other than interest on securities), if such
individual furnishes a declaration in the prescribed form (Form No. 15H) to the
effect that the tax on his estimated total income of the previous year in which
such income is to be included in computing his total income will be nil.
(Effective from1
st
J uly, 2012)
(e) No tax to be deducted in case of payment made to notified institutions,
associations etc. [Section 197A(1F)]
(i) Tax is required to be deducted from certain payments as per the provisions of
Chapter XVII-B of the Income-tax Act, 1961. However, such requirement may
cause genuine hardship to the deductee in certain cases.
(ii) Therefore, to alleviate the hardship and compliance burden in such cases,
section 197A provides that no deduction of tax would be made in certain cases
on submission of declaration in writing to the person responsible for paying
income of the nature specified therein to the effect that tax on estimated total
income of the previous year in which such income is to be included in
computing his/its total income will be nil.
95

(iii) Further, sub-section (1F) has been inserted in section 197A to provide that, no
deduction of tax shall be made from such specified payments to such
institution, association or body or class of institutions or associations or bodies
as may be notified by the Central Government in the Official Gazette in this
behalf.
(iv) Therefore, in respect of such specified payments made to notified bodies, no
tax is to be deducted at source.
(Effective from1
st
J uly, 2012)
(f) Tax to be collected at source on sale of certain minerals to be used for trading
purposes [Section 206C(1)]
(i) Under section 206C, tax is required to be collected at source by the seller at
the specified rate on certain goods like alcoholic liquor, tendu leaves, scrap
etc. at the time of sale.
(ii) One of the significant segments of Indian economy is the mining sector.
However, trading of minerals is largely unregulated, leading to non-reporting or
under-reporting of minerals trading transactions for the taxation purpose.
(iii) For collecting tax at the earliest point of time and improving reporting
mechanism of transactions in mining sector, the Finance Act, 2012 has
provided that tax at the rate of 1% shall be collected by the seller from the
buyer of the certain minerals, namely, coal, lignite or iron ore.
(iv) However, the seller shall not collect tax on sale of the said minerals if the
same are purchased by the buyer for personal consumption. Further, the seller
of these minerals shall not collect tax if the buyer declares that these minerals
are to be utilized for the purposes of manufacturing, processing or producing
articles or things and not for trading purposes.
(v) Some of the minerals can also be used for generation of power. The existing
provisions, however, do not enable the buyer to file a declaration to this effect
for claiming exemption from the requirement of tax collection at source by the
seller. Therefore, it has been provided that the seller of these minerals shall
not collect tax if the buyer declares that these minerals are to be utilized for the
purposes of generation of power.
(Effective from1
st
J uly, 2012)
(g) Cash sale of jewellery or bullion exceeding specified threshold to attract TCS
[Section 206C(1D)]
(i) Sub-section (1D) has been inserted in section 206C to provide that tax is to be
collected at source@1% of sale consideration by the seller from the buyer,
where the sale of jewellery or bullion (excluding any coin or any other article
weighing 10 grams or less) is in cash and the sale consideration
(1) for jewellery exceeds ` 5 lakh,
96

(2) for bullion exceeds ` 2 lakh
In such cases, tax has to be collected at source by the seller from the buyer
irrespective of the purpose of its use, whether for manufacturing or trading or
for personal use.
(ii) The purpose of this requirement is to reduce the quantum of cash transaction
in bullion and jewellery sector and curb the flow of unaccounted money in the
trading system of bullion and jewellery.
(iii) Buyer for the purpose of this transaction shall mean a person who obtains in
any sale, goods of the nature specified therein
(iv) Consequential amendments have been made in
(1) Sub-section (2) of section 206C to provide that the power to recover tax
by collection under section 206C(1D) shall be without prejudice to any
other mode of recovery.
(2) Sub-section (3) of section 206C to provide that any person collecting any
amount under section 206C(1D) shall pay the same to the credit of the
Central Government within the prescribed time.
(3) Sub-section (9) of section 206C to empower the Assessing Officer to give
certificate for collection of tax at any lower rate than the rate specified in
section 206C(1D).
(4) Definition of seller to include reference to goods specified in sub-section
(1D) thereunder.
(5) Explanation to section 206C to provide that jewellery has the same
meaning assigned to it in Explanationto section 2(14)(ii), which contains
an inclusive definition of the term jewellery i.e. jewellery includes
(a) ornaments made of gold, silver, platinum or any other precious
metal, or any alloy containing one or more of such precious metals,
whether or not containing any precious or semi-precious stone, and
whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any
furniture, utensil or other article or worked or sewn into any wearing
apparel.
(Effective from1
st
J uly, 2012)
(h) Payer not to be treated as an assessee-in-default for non-deduction of tax at
source, if such tax is paid by the resident payee &due date of filing the return of
the payee would be deemed as the date of payment of taxes [Section 201]
Related amendment in section: 40(a)(ia) &206C
(i) The provisions of Chapter XVII-B require deduction of tax at source by the
payer on certain specified payments at the specified rates if the payment
97

exceeds specified threshold. In case he fails to deduct tax at source in
accordance with the provisions of this Chapter, he is deemed to be an
assessee-in-default under section 201(1) in respect of the amount of such non-
deduction.
(ii) However, as per section 191, a person shall be deemed to be an assessee-in-
default in respect of non/short deduction of tax only in cases where the payee
has also failed to pay the tax directly. Therefore, the payer cannot be treated
as an assessee-in-default in respect of non-deduction or short-deduction of tax
if the payee has discharged his tax liability. However, the payer is liable to pay
interest under section 201(1A) on the amount of non-deduction or short-
deduction of tax.
(iii) Section 201 has been amended to provide that the payer (including the principal
officer of the company) who fails to deduct the whole or any part of the tax on the
amount credited or payment made to a resident payee shall not be deemed to be
an assessee-in-default in respect of such tax if such resident payee
(1) has furnished his return of income under section 139;
(2) has taken into account such sum for computing income in such return of
income; and
(3) has paid the tax due on the income declared by him in such return of
income,
and the payer furnishes a certificate to this effect from an accountant in such
form as may be prescribed.
Accountant shall have the same meaning as assigned to it in Explanationto
section 288(2).
(iv) The date of deduction and payment of taxes by the payer shall be deemed to be
the date on which return of income has been furnished by the resident payee.
(v) Further, where the payer fails to deduct the whole or any part of the tax on the
amount credited or payment made to a resident and is not deemed to be an
assessee-in-default under section 201(1) on account of payment of taxes by
such resident payee, interest under section 201(1A)(i) i.e., @1% p.m. or part of
month, shall be payable by the payer from the date on which such tax was
deductible to the date of furnishing of return of income by such resident payee.
(Effective from1
st
J uly, 2012)
(vi) Consequential amendment to section 201 Amendment in section
40(a)(ia)
Consequently, in cases where such person responsible for deducting tax is not
deemed to be an assessee-in-default on account of payment of taxes by the
resident payee, it shall be deemed that the payer has deducted and paid the tax
on such sum on the date of furnishing return of income by the resident payee.
98

Since the date of furnishing the return of income by the resident payee is taken
to be the date on which the payer has deducted tax at source and paid the
same, the expenditure/payment in respect of which the payer has failed to
deduct tax at source shall be disallowed under section 40(a)(ia) in the year in
which the said expenditure is incurred. Such expenditure will be allowed as
deduction in the subsequent year in which the return of income is furnished by
the resident payee, since tax is deemed to have been deducted and paid by
the payer in that year.
(vii) Parallel amendment to section 201 Amendment in section 206C
Likewise, section 206C relating to tax collection at source has also been
amended with effect from 1
st
July, 2012, to clarify the deemed date of discharge
of tax liability by the buyer or licensee or lessee. Any person responsible for
collecting tax at source, other than a seller of jewellery or bullion, would not
be deemed to be an assessee-in-default for failure to collect tax on the amount
received from a buyer or licensee or lessee or on the amount debited to the
account of the buyer or licensee or lessee, if such buyer or licensee or lessee
has furnished his return of income under section 139, taking into account such
amount for computing income and paid the tax due on the income declared by
him in such return of income. Further, the person should also furnish a certificate
to this effect from an accountant in the prescribed form.
In such cases, interest shall be payable by the collector from the date on which
tax was collectible to the date of furnishing return of income by such buyer or
licensee or lessee.
(Effective from1
st
J uly, 2012)
(i) Time limit for passing an order, declaring an assessee to be assessee-in-
default under section 201, extended in certain cases
(i) Section 201(3) provides the time limit for passing an order deeming a person
to be an assessee-in-default for non-deduction or short-deduction of tax at
source from any payment made to a person resident in India.
(ii) In a case where TDS statement referred to in section 200 has been furnished,
the time limit for passing such an order is two years from the end of the
financial year in which the statement is filed.
(iii) In a case where TDS statement referred to in section 200 has notbeen filed,
the time limit for passing such an order is four years from the end of the
financial year in which the payment is made or credit is given.
(iv) The time limit for passing an order in case where TDS statement referred to in
section 200 has not been filed, has now been extended from four years to six years
from the end of the financial year in which the payment is made or credit is given.
st
April, 2010)
99

(j) Drawing or Disbursing Officer to be the person responsible for paying in
case of payment by Central Government or State Government [Section 204]
(i) Under section 204, a person responsible for paying has been defined to
include, inter alia, the employer, company or its principal officer or the payer.
However, it is not clear as to who is the person responsible for paying the sum
to the payee, in case the payment is made or sum is credited by or on behalf
of Central Government or State Government.
(ii) In order to clarify the meaning of person responsible for paying in case of
payment by or on behalf of Central Government or State Government, it has
now been provided that the Drawing and Disbursing Officer or any other
person (by whatever name called) responsible for crediting, or as the case may
be, making payment shall be the person responsible for paying within the
meaning of section 204.
(Effective from1
st
J uly, 2012)
(k) Senior Citizens, not having profit and gains of business or profession, exempt
frompayment of advance tax [Section 207]
(i) Under section 208, every assessee is required to pay advance tax if the tax
liability for the previous year is ` 10,000 or more.
(ii) It is observed that, in case of senior citizens who have passive source of
income like interest, rent, etc., the requirement of payment of advance tax
causes genuine compliance hardship.
(iii) Therefore, in order to reduce the compliance burden on such senior citizens
exemption from payment of advance tax has now been provided to a resident
individual-
(1) not having any income chargeable under the head Profits and gains of
business or profession; and
(2) of age 60 years or more.
Such senior citizens need not pay advance tax and are allowed to discharge
their tax liability (other than TDS) by payment of self-assessment tax.
(Effective from1
st
April, 2012)
(l) Stringent penal provisions for delay in furnishing of TDS/TCS statements
and/or for furnishing incorrect information in TDS/TCS statements [Sections
234E, 271H, 272A &273B]
(i) Under the income-tax law, every person responsible for deduction of tax at
source is required to furnish quarterly statement of TDS containing the details
of deduction of tax made during the quarter by the prescribed due dates i.e.,
15
th
of the month following each quarter in respect of the first three quarters
and 15
th
May for the last quarter ending on 31
st
March.
100

Non-filing of TDS statement within the prescribed due date results in delay in
granting of credit of TDS to the deductee. Consequently, it leads to a delay in
issuing refunds to the deductee tax payers or raising of demand against the
deductee tax payers.
(ii) Further, in many cases, the deductors are not furnishing correct information
relating to PAN of the deductee, amount of tax deducted, etc. in the TDS
statement. This again causes problems in granting credit of TDS to the deductee.
(iii) Since credit for TDS is granted to the deductee on the basis of information
furnished by the deductor, it is necessary to ensure that the deductor furnishes
the right information in respect of tax deduction. Similar is the situation in case
of TCS statements.
(iv) Under section 272A, penalty of ` 100 per day is levied for delay in furnishing of
TDS/TCS statements. This penal provision has not proved to be effective to
deter late furnishing of TDS/TCS statements. Further, there is no specific penalty
under the Act for furnishing of incorrect information in the TDS/TCS statements.
(v) Therefore, the penal provisions have now been made more stringent to deter
delay in furnishing of TDS/TCS statement and/or furnishing incorrect
information in the TDS/TCS statement
(a) A fee of ` 200 for every day would be levied under new section 234E for
late furnishing of TDS/TCS statement from the due date of furnishing of
TDS/TCS statement to the date of furnishing of TDS/TCS statement.
However, the total amount of fee shall not exceed the total amount of tax
deductible/collectible and such fee has to be paid before delivering the
TDS/TCS statement. Such fees would be attracted in respect of tax
deducted or collected at source on or after 01.07.2012.
(b) In addition to said fee, a penalty ranging from a minimum of ` 10,000 to a
maximum of ` 1,00,000 shall also be levied under new section 271H for
not furnishing TDS/TCS statement within the prescribed time or furnishing
incorrect information in the said statements in respect of tax deducted or
collected at source on or after 01.07.2012. Consequently, with effect from
1.7.2012, penalty shall not be leviable under section 272A in respect of
such failure.
(vi) Since late furnishing of TDS/TCS statements would attract levy of fees under
section 234E, no penalty under section 271H shall be levied for delay in
furnishing of TDS/TCS statement, if the TDS/TCS statement is furnished
within one year of the prescribed due date after payment of tax deducted or
collected along with applicable interest and fee. However, if the delay is
beyond the period of one year, both fee under section 234E and penalty under
section 271H would be leviable.
101

(vii) Section 273B has been amended to provide that no penalty under section
271H shall be levied if the deductor proves that there was a reasonable cause
for the failure.
(Effective from1
st
J uly, 2012)
(m) Provision for rectification and appeal in relation to intimation under section
200A [Sections 154, 156 &246A]
Related amendment in section: 220
(i) Under section 200A, an intimation is generated specifying the amount payable
or refundable after processing of the TDS statement. However, at present,
there is no provision for appeal or rectification in relation to such intimation and
such intimation is also not deemed as a notice of demand.
(ii) Therefore, the Finance Act, 2012 has provided that such intimation would be
deemed as a notice of demand under section 156. Further, the intimation
generated after processing TDS statement shall be subject to rectification under
section 154. Such intimation would also be appealable under section 246A.
(iii) Since the intimation generated after processing the TDS statement under
section 200A(1) would be deemed as a notice of demand under section 156,
consequently, interest under section 220 would be attracted for failure to pay
the tax specified in the intimation. However, interest under section 201(1A) is
leviable for non-payment of tax specified in the intimation. Therefore, it has
now been provided that in cases where interest is charged for any period
under section 201(1A) on the tax specified in the intimation under section
200A, then, interest under section 220(2) would not be levied on the same
amount for the same period.
(Effective from1
st
J uly, 2012)
(n) No reduction of tax deductible but not deducted and tax collectible but not
collected, while computing advance tax liability [Section 209]
(i) As per the provisions of section 209, the amount of advance tax payable by a
person is computed by reducing the amount of income-tax which would be
deductible or collectible at source during the financial year from any income
which has been taken into account in computing the total income.
(ii) Some courts have opined that in case where the payer pays any amount (on which
tax is deductible at source) without deduction of tax at source, the payee shall not
be liable to pay advance tax to the extent tax is deductible from such amount.
(iii) With a view to make such a person (payee) liable to pay advance tax, a
proviso has been inserted in section 209(1)(d). Accordingly, the amount of tax
deductible at source but not so deducted by the payer shall not be reduced
from the income tax liability of the payee for determining his liability to pay
advance tax.
102

(iv) In effect, only if tax has actually been deducted at source, the same can be
reduced for computing advance tax liability of the payee. Tax deductible but not
so deducted cannot be reduced for computing advance tax liability of the payee.
(v) Similarly, only if tax has actually been collected at source, the same can be
reduced for computing advance tax liability of the buyer or licensee or lessee.
Tax collectible but not so collected cannot be reduced for computing advance tax
liability of the buyer or licensee or lessee.
(Effective from1
st
April, 2012)
Example
Discuss whether the person making payment is liable to deduct tax at source in the
following circumstances. Also compute the amount of tax to be deducted.
(i) Interest of ` 1,750 paid by Histax Ltd. to Yash and ` 4,500 to his HUF on
15.05.2012, by way of account payee cheque on account of debentures of the
company held by themseparately. Debentures of Histax Ltd. are listed in Bombay
Stock Exchange.
(ii) Interest of ` 5,750 paid by United Ltd. to Yamini and ` 4,785 to J anak HUF on
31.01.2013, by way of account payee cheque on account of debentures of the
company held by them. Debentures of United Ltd. are not listed on a recognised
stock exchange in India.
(iii) Interest of ` 11,700 on recurring deposit credited to Mr. Pritam.
(iv) HNY Ltd. paid ` 5,00,000 to non-resident entertainer on 18.07.2012 in respect
performance in an event of promotion of a new product.
(v) Delhi Sports Magazine paid ` 2,00,000 to Shane Warne, a non-resident cricketer,
for writing an article for the September issue. The payment for the same was made
on 25.06.2012.
(vi) Sitting fees of ` 15,700paid to director of the company on 28.08.2012.
(vii) ` 1,50,000 paid to Mr. A on 25.03.2013 by Delhi State Government on compulsory
acquisition of his urban land.
Answer
Tax
deductible
or not
Amount of tax to
be deducted at
source (`)
Reason
(i) Not
deductible

Nil

As per the proviso to section 193 the
company shall not be liable to deduct tax
at source on the interest less than ` 2,500
paid to a resident individual in respect of
listed debentures by way of account payee
cheque before 1.7.2012. Therefore, no tax
103

Deductible

450
(` 4,50010%)
shall be deducted at source on the interest
paid to Yash by Histax Ltd. provided Yash
is a resident in India during the year.

Tax shall be deducted at source on
interest paid by Histax Ltd. to the HUF of
Yash on 15.05.2012 under section 193.

(ii) Deductible

Not
deductible
575
(` 5,750 10%)

Nil
United limited is liable to deduct tax at
source on the interest paid to Yamini on
account of debentures under section 193,
since the payment exceeds ` 5,000.

As per the proviso to section 193 a
company shall not be liable to deduct tax
at source on the interest paid to a resident
individual or Hindu Undivided Family in
respect of debentures, whether or not
listed on a recognized stock exchange in
India, if such payment made does not
exceed
` 5,000 during the year and the same is
paid by way of account payee cheque on
or after 1.7.2012. Therefore, United Ltd. is
not liable to deduct tax at source on
interest paid to Janak HUF, provided
Janak HUF is resident in India.

(iii) Not
deductible
Nil As per the provisions of section 194A, tax
shall not be deducted at source on interest
paid on account of recurring deposit.

(iv) Deductible 1,00,000
(` 5,00,000 20%)
As per the provisions of section 194E, any
person making payment to a non-resident
entertainer on or after 1.7.2012, which is
taxable under section 115BBA, shall
deduct tax at source@20%.

(v) Deductible 20,000
(` 2,00,000 10%)
As per the provisions of section 194E, any
person making payment to a non-resident
sportsperson before 1.7.2012, which is
taxable under section 115BBA, shall
deduct tax at source@10%.
104

(vi) Deductible 1,570
(` 15,700 10%)
According to section 194J, the company
shall be liable to deduct tax at
source@10% under this section on any
fees paid to a director on or after 1.7.2012,
on which the tax is not deductible under
section 192.

(vii) Not
deductible
Nil No tax shall be deducted at source under
section 194LA in case the consideration or
enhanced consideration during the year
does not exceed ` 2,00,000.

21. WEALTH TAX
(a) Residential house not to be charged to wealth-tax in case the same is allotted to
an employee etc, having gross annual salary less than ` 10 lakh [Section 2(ea)]
(i) As per section 2(ea), an asset being a house shall not be charged to wealth-
tax in case the same is meant wholly and exclusively for residential purposes
and is allotted by a company to an employee or an officer or any director who
is in whole time employment, whose gross annual salary is less than ` 5 lakh.
The said limit is now increased from ` 5 lakh to ` 10 lakh, taking into
consideration the general increase in salary as well as inflation since the last
revision of this limit by the Finance (No. 2) Act, 1998.
(iii) Therefore, in case a house, meant wholly and exclusively for residential
purpose, is allotted by the company to an employee or an officer or any
director who is in whole time employment and the gross annual salary of such
employee or officer or director does not exceed ` 10 lakh, then, such house
shall not be charged to wealth-tax in the hands of the company.
(b) Reserve Bank of India to be exempt frompayment of wealth-tax [Section 45]
(i) Section 45 of the Wealth-tax Act, 1957 provides for the cases in respect of
which the said Act would not apply.
(ii) Clause (k) is inserted in section 45 retrospectively with effect from 1.4.1957 to
provide that the Reserve Bank of India incorporated under the Reserve Bank
of India Act, 1934 would not be liable to pay wealth-tax under this Act.
st
April, 1957)

105

SIGNIFICANT NOTIFICATIONS ISSUED BY THE CBDT BETWEEN
1
st
JULY, 2011 AND 30
th
JUNE, 2012
1. Notification No. 49/2011 dated 6.9.2011
Notification of allowances and perquisites exempt under section 10(45)
The Finance Act, 2011 has inserted new clause (45) in section 10 to exempt specified
allowances and perquisites received by Chairman or any other member, including retired
Chairman or member of the Union Public Service Commission (UPSC). The exemption
would be available in respect of such allowances and perquisites as may be notified by
the Central Government in this behalf.
Accordingly, the Central Government has notified the following allowances and
perquisites for serving Chairman and members of UPSC, for the purpose of exemption
under section 10(45) -
(i) the value of rent free official residence,
(ii) the value of conveyance facilities including transport allowance,
(iii) the sumptuary allowance and
(iv) the value of leave travel concession.
In case of retired Chairman and retired members of UPSC, the following have been
notified for exemption under section 10(45):
(i) a sum of maximum ` 14,000 per month for defraying the service of an orderly and
for meeting expenses incurred towards secretarial assistance on contract basis.
(ii) the value of a residential telephone free of cost and the number of free calls to the extent
of `1,500 pm (over and above free calls per month allowed by the telephone authorities)
This notification shall be effective retrospectively from 1
st
April, 2008.
2. Notification No. 52/2011 dated 23-09-2011 (as amended by Notification No. 6/2012
dated 14-2-2012)
Specification of bonds for interest exemption under section 10(15)(iv)(h)
Section 10(15)(iv)(h) exempts interest payable by any public sector company in respect
of such bonds or debentures specified by the Central Government by notification in the
Official Gazette. The notification would also specify the conditions subject to which the
exemption would be available.
Accordingly, in exercise of the powers conferred in section 10(15)(iv)(h), the Central
Government has specified the issue of tax free, secured, redeemable, non-convertible
bonds of National Highways Authority of India (NHAI), Indian Railways Finance
Corporation Ltd. (IRFCL), Housing and Urban Development Corporation Ltd.(HUDCL)
and Power Finance Corporation (PFC) to be issued during the financial year 2011-12, the
interest on which would be exempt under the said section.
The tenure of the bonds shall be ten or fifteen years. It shall be mandatory for the
subscribers to furnish their PAN to the issuer. Further, it has been provided that such
106

benefit shall be admissible only if the holder of such bonds registers his or her name and
the holding with the said entity.
Relaxation of time limit for submission of quarterly statements in case of a
deductor being an office of Government
The CBDT has, through this notification, notified the Income-tax (Eighth Amendment)
Rules, 2011 which shall come into force on 1
st
November, 2011. The said amendment
Rules have given effect to following amendments:
(a) Rule 31A Statement of deduction of tax under section 200(3)
(i) Rule 31A(2) has been substituted to extend the time limit for submission of
quarterly statements in case the deductor is an office of Government :
Date of ending of the quarter
of the financial year
Due date in the case of a deductor,
being an office of Government
30th June 31st July of the financial year
30th September 31st October of the financial year
31st December 31st January of the financial year
31st March 15th May of the financial year
immediately following the financial
year in which deduction is made
For other deductors, the due dates as prescribed earlier (i.e., 15
th
July, 15
th

October and 15
th
January of the financial year for quarters ending 30
th
June,
30
th
September and 31
st
December of the financial year, respectively) would
continue to be applicable.
(ii) In Rule 31A(4), clause (vii) has been inserted which requires the deductor to
furnish, at the time of preparing statements of tax deducted, particulars of
amount paid or credited on which tax was not deducted in view of the
furnishing of declaration under section 197A(1) or 197A(1A) or section
197A(IC) by the payee.
(b) Rule 37BA Credit for tax deducted at source for the purposes of section 199
Rule 37BA(1) provides that credit for tax deducted at source and paid to the Central
Government shall be given to the person to whom the payment has been made or
credit has been given (i.e., the deductee) on the basis of information relating to
deduction of tax furnished by the deductor to the income-tax authority or the person
authorized by such authority.
Clause (i) of Rule 37BA(2) has four sub-clauses (a) to (d) providing for the specific
instances where income of the deductee is assessable in the hands of another
107

person, consequent to which credit for tax deduction at source shall be given to the
other person in those specific cases.
Clause (i) of Rule 37BA(2) has been substituted to provide that where under any
provisions of the Act, the whole or any part of the income on which tax has been
deducted at source is assessable in the hands of a person other than the deductee,
credit for the whole or any part of the tax deducted at source, as the case may be,
shall be given to the other person and not to the deductee. In effect, the specific
situations have been substituted by a general provision.
However, the deductee should file a declaration with the deductor and the deductor
should report the tax deduction in the name of the other person in the information
relating to deduction of tax referred to in sub-rule (1) of Rule 37BA.
4. Notification G.S.R. 844(E) dated 25-11-2011
Increase in limit for subscription to public provident fund
As per Paragraph 3(1) of Public Provident Fund Scheme, 1968, the maximum limit for
subscription by an individual, on his behalf or on behalf of a minor of whom he is the
guardian, is ` 70,000.
In exercise of the powers conferred by section 3(4) of the Public Provident Fund Act,
1968, the Central Government has amended Paragraph 3(1) of the Public Provident Fund
Scheme, 1968 to increase the maximum limit to ` 1,00,000. Such contribution to PPF
would qualify for deduction under section 80C.
5. Notification No. 5/2012 dated 6-2-2012
Notification of formand particulars of Annual Statement to be furnished by a non-
resident having Liaison Office in India
(a) Section 285 requires that a non-resident having a liaison office in India, set up in
accordance with the guidelines issued by the RBI under the Foreign Exchange
Management Act, 1999, shall furnish an annual statement in respect of the activities
of the liaison office during the financial year before the jurisdictional Assessing
Officer. Such statement shall be furnished within 60 days from the end of such
financial year, in such form and containing such particulars as may be prescribed.
(b) Consequently, the CBDT has, vide this notification, prescribed the form and
particulars of the Annual Statement to be furnished by the non-resident having
Liasion Office in India. The statement shall be given in Form 49C and shall be
submitted in the electronic form along with the digital signature.
(c) The statement is to be verified by a Chartered Accountant or by the Authorized
Signatory i.e., the person authorized by the non-resident in this behalf.
(d) The procedure for filing such Annual Statement shall be specified by the Director
General of Income-tax (Systems). He shall also ensure that appropriate policies for
108

security, archival and retrieval in relation to such statements furnished, are
formulated and implemented.
6. Notification No. 7/2012 dated 14-2-2012 (as amended by Notification No. 13/2012
dated 6-03-2012)
Specification of bonds for interest exemption under section 10(15)(iv)(h)
(a) Section 10(15)(iv)(h) exempts interest payable by any public sector company in
respect of such bonds or debentures specified by the Central Government by
notification in the Official Gazette. The notification would also specify the conditions
subject to which the exemption would be available.
(b) Accordingly, in exercise of the powers conferred in section 10(15)(iv)(h), the Central
Government has specified the issue of tax free, secured, redeemable, non-
convertible bonds of the Rural Electrification Corporation Limited (RECL), to be
issued during the financial year 2011-12, the interest on which would be exempt
under the said section.
(c) The tenure of the bonds shall be ten or fifteen years. It shall be mandatory for the
subscribers to furnish their PAN to the issuer. Further, it has been provided that
such benefit shall be admissible only if the holder of such bonds registers his, her or
its name and the holding with the said entity.
(d) Such exemption shall be available if such bonds are issued by way of public issue
and not by way of a private placement.
Specification of body/ authority/ Board/ Trust/ Commission for exemption under
section 10(46)
(a) Section 10(46) exempts any specified income arising to a body/ authority/ Board/
Trust/ Commission which has been constituted with the object of regulating or
administering any activity for the benefit of the general public and is not engaged in
any commercial activity, if the same is notified by the Central Government in this
regard subject to certain conditions mentioned the notification.
Accordingly, the Central Government has notified that for the purposes of section
10(46), the following income arising to the National Skill Development Corporation
(NSDC), a body constituted by the Central Government, for F.Y. 2011-12 to F.Y.
2015-16, shall not be chargeable to tax:
(i) long-term or short-term capital gain out of investment in an organization for
skill development;
(ii) dividend and royalty from skill development venture supported or funded by
NSDC;
109

(iii) interest on loans to Institutions for skill development;
(iv) interest earned on fixed deposits with banks; and
(v) amount received in the form of Government grants.
(b) Such exemption shall apply if:
(i) the activities and the nature of the specified income of NSDC remain
unchanged throughout the financial year, and
(ii) NSDC files its return of income in accordance with section 139(4C)(g).
Specification of body/ authority/ Board/ Trust/ Commission for exemption under
section 10(46)
(a) Section 10(46) exempts any specified income arising to a body/ authority/ Board/
Trust/ Commission which has been constituted with the object of regulating or
administering any activity for the benefit of the general public and is not engaged in
any commercial activity, if the same is notified by the Central Government in this
regard subject to certain conditions mentioned the notification.
Accordingly, the Central Government has notified that for the purposes of section
10(46), the following income arising to the Competition Commission of India (CCI), a
Commission established under section 7(1) of the Competition Act, 2002, for F.Y.
2011-12 to F.Y. 2015-16, shall not be chargeable to tax:
(i) amount received in the form of Government grants;
(ii) fee received under the Competition Act, 2002; and
(iii) interest income accrued on Government grants and interest accrued on fee
received under the Competition Act, 2002.
(b) Such exemption shall apply if:
(i) the activities and the nature of the specified income of CCI remain unchanged
throughout the financial year, and
(ii) CCI files its return of income in accordance with section 139(4C)(g).
Depreciation on wind mill installed after 31.03.2012 restricted to 15%
As per the existing provisions, the plant and machinery in the nature of renewable energy
devices being:
(a) Wind mills and any specially designed devices which run on wind mills
(b) Any special devices including electric generators and pumps running on wind
energy
110

are entitled to depreciation@80% under section 32.
The CBDT has, vide this notification, restricted the eligibility of claiming
depreciation@80% to such wind mills and special devises installed on or before
31.03.2012. Accordingly, such plant and machinery installed on or after 1
st
April, 2012
shall be entitled to depreciation at the general rate applicable to plant & machinery i.e.,
15%. However, such plant and machinery installed on or before 31
st
March, 2012 shall
continue to claim depreciation@80%.
Rule 10AB inserted to provide for Other method of determination of arms length
price
Section 92C(1) provides for determination of arms length price of an international
transaction by any of the methods listed therein, being the most appropriate method,
having regard to the nature of transaction or class of transaction or class of associated
persons or functions performed by such persons or such other relevant factors as the
Board my prescribe. The methods listed in section 92C(1) include (a) Comparable
uncontrolled price method, (b) resale price method, (c) cost plus method, (d) profit
split method, (e) transactional net margin method. In addition, it also includes (f) such
other method as may be prescribed by the Board.
Accordingly, Rule 10AB has been inserted in the Income-tax Rules, 1962 to provide that
for the purposes of section 92C(1)(f), the other method for determination of the arms'
length price in relation to an international transaction shall be any method which takes
into account the price which has been charged or paid, or would have been charged or
paid, for the same or similar uncontrolled transaction, with or between non-associated
enterprises, under similar circumstances, considering all the relevant facts.
Consequently, Rule 10B providing for the determination of arms length price by any of
the methods listed therein, being the most appropriate method, has been amended to
include such other method as provided in Rule 10AB.
II. CIRCULARS
1. Circular No.4/2011 dated 19-7-2011
Guidelines for prior permission under section 281 to transfer or create charge
on the assets of the business
The CBDT has, through this circular, issued guidelines for granting of prior
permission under section 281 of the Income-tax Act, 1961 to transfer or create a
charge on the assets of the assessee to ensure uniformity on the issue -
a) The taxpayer is required to apply in the prescribed form at least thirty days
prior to the proposed date of transaction.
b) Prior permission under section 281 to be granted by the Assessing Officer only
under the following specified circumstances -
111

(i) If there is no demand outstanding and there is no likelihood of demand
arising in the next six months, then the permission should be granted.
(ii) If undisputed demand is outstanding and there is no likelihood of demand
arising in next six months, then, the taxpayer should pay the same along
with interest due thereon and then permission should be granted.
(iii) If there is disputed demand outstanding, then the taxpayer should obtain
stay for the same and indemnify the outstanding demand by way of bank
guarantee or sufficient assets or by Department retaining the first charge
on the assets proposed to be transferred or on which such charge is
being created, to the extent of such demand. Thereafter, the permission
under section 281 would be granted by the Assessing Officer.
(iv) If demand is likely to arise in the next six months, then the Assessing
Officer should explore the possibility of action prescribed under section
281B.
c) There would be only one level of intervention i.e., at the level of the range
head for granting permission. The cases in which Assessing Officer would
require such approval would be where -
(i) value of assets being transferred or on which charge is being created, or
(ii) the amount of charge being created
is rupees ten crores or more.
d) The timelines for granting/refusing permission under section 281 by the
Assessing Officer are as follows:
(i) If there is no demand outstanding and there is no likelihood of demand
arising in the next six months, then the Assessing Officer should grant the
permission within ten working days of the receipt of the application.
(ii) If undisputed demand is outstanding and there is no likelihood of demand
arising in next 6 months, then the Assessing Officer should grant
permission within ten working days of payment of the outstanding
demand along with interest due.
(iii) If there is disputed demand outstanding and the taxpayer has obtained
stay and indemnified the demand, then the Assessing Officer should
grant the permission within ten working days of the indemnification of the
demand.
(iv) If demand is likely to arise in the next six months and the Assessing
Officer is considering actions prescribed under section 281B for the
assets excluding the asset under consideration, then the Assessing
Officer should grant the permission within fifteen working days of the
receipt of the application.
(v) If the taxpayer does not pay the undisputed outstanding demand or his
application for stay of disputed demand is rejected or he is unable to
indemnify the outstanding demand, the application shall be disposed of
112

within a period of ten working days. In case the permission is not being
granted, a speaking and reasoned order conveying refusal would be
issued with the approval of the Range head within ten working days of
expiry of time given to the taxpayer to pay the undisputed demand or
rejection of his stay application, as the case may be.
e) These time limits should be followed scrupulously by the Assessing Officers.
f) The validity of the letter granting permission under section 281 would be one
hundred and eighty days from the:
(i) date of issue of approval, or
(ii) service of order of attachment under section 281B,
whichever is earlier.
g) Once the asset is transferred or charge is created, the taxpayer should submit
the documents, in this regard, to the Assessing Officer for his record.
2. Circular No. 7/2011 dated 27-09-2011
Procedure for refund of TDS under section 195 to the person deducting tax in
cases where tax is deducted at a higher rate prescribed in the DTAA
The CBDT has, through this circular, modified Circular No.07/2007, dated
23.10.2007 which laid down the procedure for refund of tax deducted at source
under section 195 of the Income-tax Act, 1961 to the person deducting tax at source
from the payment to a non-resident. The said Circular allowed refund to the person
making payment under section 195 in the circumstances indicated therein as the
income does not accrue to the non-resident or if the income is accruing, no tax is
due or tax is due at a lesser rate. The amount paid to the Government in such
cases to that extent does not constitute tax.
The said Circular, however, did not cover a situation where the tax is deducted at a rate
prescribed in the relevant DTAA which is higher than the rate prescribed in the Income-
tax Act, 1961. Since the law requires deduction of tax at a rate prescribed in the
relevant DTAA or under the Income-tax Act, 1961 whichever is lower, there is a
possibility that in such cases excess tax is deducted relying on the provisions of relevant
DTAA.
Accordingly, in order to remove the genuine hardship faced by the resident
deductor, the Board has modified Circular No. 07/2007, dated 23-10-2007 to the
effect that the beneficial provisions under the said Circular allowing refund of tax
deducted at source under section 195 to the person deducting tax at source shall
also apply to those cases where deduction of tax at a higher rate under the relevant
DTAA has been made while a lower rate is prescribed under the domestic law.

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