Taxmann’s Budget Expectations viz-a-viz the Finance Bill, 2021

  • Blog|Income Tax|
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  • 6 Min Read
  • By Taxmann
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  • Last Updated on 7 April, 2021
  1. Introduction
    Every year, before the presentation of the Union Budget, we release a document which includes our recommendation as well as expectations from the upcoming Union Budget.Our expectations aren’t our wish lists. We identify the gaps in existing statute that have been brought to the fore due to Court Rulings, change in circumstances or difficulties being faced by the taxpayers.The post-budget comparative study shows that the tax administration and the legislature are moderately responsive and look around for the original ideas for implementing the same. It is definitely a welcome and refreshing change as a two-way communication has impliedly been established between the lawmakers and the public.Our pre-budget publications can be accessed from the link given below:

      1. [2021] 123 taxmann.com 24 (Article)
      2. [2020] 113 taxmann.com 180 (Article)
      3. [2019] 106 taxmann.com 302 (Article)
      4. [2018] 89 taxmann.com 274 (Article)

    This write up makes a comparative study of the changes suggested by Taxmann viz-a-viz the changes proposed in the Finance Bill, 2021 in the realm of Income-tax Act, 1961.

  2. Changes suggested v. Proposals in Finance Bill
    Suggestions Proposals in Finance Bill
    Allowability of depreciation on Goodwill
    The Supreme Court in the case of CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com 222 (SC) held that the goodwill arising on amalgamation of companies would be eligible for depreciation as it is covered under Explanation 3(b) to Section 32(1) under the expression ‘any other business or commercial rights of a similar nature’. After the judgment of the Apex Court, various High Courts have taken the similar stand. We have recommended that the definition of intangible asset [as provided in the Explanation 3 to Section 32(1)] should include purchased goodwill, i.e., goodwill arising on amalgamation of companies, for the purpose of depreciation on intangible assets. The Finance Bill, 2021 proposes an amendment to Clause (ii) Section 32(1) to provide that ‘goodwill of a business or profession’ shall not be eligible for depreciation. Further, an amendment has been proposed to Explanation 3 to Section 32(1) which defines the expression ‘assets’. It has been proposed that ‘goodwill of a business or profession’ shall not be treated as ‘asset’ for Section 32(1).
    Curative amendment under Section 10(50)
    The Finance Act, 2020, has extended the scope of Equalisation Levy to cover within its scope the consideration received or receivable for e-commerce supply or services made or facilitated by an e-commerce operator. A consequential amendment was made to Section 10(50) in respect of such income. Though the scope of equalisation levy was expanded with effect from 01-04-2020, but the exemption was provided in respect of income arising from any e-commerce supply or services made or provided or facilitated on or after 01-04-2021. We have recommended that section 10(50) should be revisited to provide an exemption in respect of the income arising from any e-commerce supply or services made or provided or facilitated on or after 01-04-2020. The Finance Bill, 2021 has proposed an amendment to section 10(50) to provide that exemption under Section 10(50) will apply for the e-commerce supply or services made or provided or facilitated on or after 01-04-2020.
    No deduction of employee’s contribution to welfare funds if paid after the relevant due dates
    Taxpayers and Revenue department are often at loggerheads on the issue of allowability of deduction to the employer in respect of payment of employee’s contribution to EPF and ESI. The CBDT vide circular no. 22/2015 dated 17-12-2015 has clarified that the employer’s contribution of ESI & EPF shall be allowed even if it is deposited after the due dates as prescribed under the provisions of the relevant statutes governing such funds but before the due date of filing of ITR. However, the circular says that it will not apply to employees’ contributions. Since circulars aren’t binding on courts, we have witnessed various judgments favouring assessees on this issue. Therefore, we suggested a suitable amendment in forthcoming budget. The Finance Bill, 2021 proposes to insert a new Explanation to Section 36(1)(va) to clarify that the provision of section 43B does not apply and deemed to never have been applied for the purposes of determining the ‘due date’ under this clause. A similar amendment has been proposed to section 43B that this provision does not apply and deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of section 2(24)(x) applies.
    Tax on transfer of a capital asset to partner on dissolution or reconstruction
    Income-tax Act distinguishes the partnership firm from its partners. This implies that the taxability of a partnership firm shall be different from its partners. When a partner introduces the capital into the firm, the partners shall be subject to capital gains in accordance with Section 45(3) and in case of retirement or dissolution of the firm the provisions of Section 45(4) comes into play. However, there is no provision in the Act to deal with a situation where a partner reduces his share in the firm and in lieu of that gets some compensation from the new partners. In the case of Anik Industries Ltd. v. Dy. CIT [2020] 116 taxmann.com 385 (Mumbai ITAT), it was held that compensation received by the existing partner for reduction in the profit-sharing ratio would not tantamount to capital gains chargeable to tax under section 45(1) as there was no dissolution and the firm continued its business. We have also witnessed the Bombay High Court’s ruling in case of PCIT v. R.F. Nangrani HUF [2018] 93 taxmann.com 302 wherein it was held that amount received by retiring partner from firm on account of goodwill will not be subjected to tax as capital gains in his hands. We have recommended that these loopholes should be plugged by the Govt. As per the existing provisions of section 45(4), when a firm transfers any capital asset to its partners on dissolution or otherwise, the profit or gain arising from such transfer is chargeable to tax in the hands of the firm under the head capital gain. The capital gain is charged to tax in the year in which such transfer takes place. Section 45(4) is proposed to be substituted by the Finance Bill, 2021 to provide that in a case where a partner receives during the previous year any capital asset at the time of dissolution or reconstitution of the firm and the capital asset represents the balance in the capital account of the partner in the books of the firm. In this situation, the profit and gains arising from the distribution of such capital asset to the partner shall be chargeable to tax as income of the firm under the head capital gains. The income shall be chargeable to tax in the hands of the firm in the year in which the capital asset is received by the partner. Further, a new section 45(4A) is proposed to be inserted to provide that in a case where a partner receives any money or other asset, the profits or gains arising from receipt of such money or other assets by the partner shall be chargeable to income-tax as income of the firm under the head Capital gains.
    No MAT on dividend income of a foreign company
    It is pertinent to noted that the Finance Act, 2020 has abolished the dividend distribution tax (DDT) with effect from Assessment Year 2021-22. Therefore, the dividend declared, distributed or paid on or after 01-04-2020 is now taxable in the hands of the shareholder. Thus, if a foreign company receives dividend in respect of its investment in India, it shall be liable to pay MAT on such dividend income even if such income is chargeable to tax at a rate lower than the rate of MAT. Thus, it was recommended that Section 115JB should be amended to provide that dividend income and expenses claimed in respect thereof to be added back or reduced from the net profit while computing MAT in case of foreign company. The Finance Bill, 2021 has proposed to amend section 115JB to provide that dividend income and expenses claimed in respect thereof to be added back or reduced from the net profit if such income is taxed at lower than MAT rate due to DTAA. It should be noted that the dividend income shall be taxable in the hands of a foreign company in accordance with the provisions of the Act or relevant DTAA, whichever is more beneficial.
    Time limit to file ITR of partners if the firm is liable for TP Audit
    The due date to file the return of income of an individual, who is a partner in a firm whose accounts are required to be audited, is the same as that of a firm. Thus, where due date for filing of return in case of firm is 31st October of the Assessment Year, the same due date would be applicable for filing of return in case of partners. However, this benefit is not available in case firm is liable to file TP audit report. The due date for filing of return in case of firm liable for TP audit is 30th November of the Assessment Year. In 30th Edition of the Master Guide to the Income-tax Act, we have mentioned that a partner shall file his return of income on or before 31st October if firm, in which he is a partner, is liable to file TP audit report in Form 3CEB or is required to be audited under any other law. The Finance Bill, 2021 proposes that the due date for filing of return of income for partners of a firm, which is required to furnish report referred to in section 92E, shall be 30th November of the assessment year.
    Advance tax liability on dividend income
    With effect from Assessment Year 2021-22, the Finance Act, 2020 has moved to the traditional system of taxation of dividend whereby the domestic company would no longer be required to pay DDT on the dividend declared, distributed or paid to the shareholder on or after 01-04-2020 and, consequently, the shareholders shall be liable to pay tax on such dividend. Thus, it was recommended that Section 234C should be amended to provide relaxation from levy of interest if the shortfall in payment of advance tax is attributable to wrong estimation or under-estimation of the dividend income. Section 234C is proposed to be amended by the Finance Bill, 2021 to provide that if the shortfall in the advance tax instalment or the failure to pay the same on time is on account of dividend income, no interest under section 234C shall be charged provided the assessee has paid full tax in subsequent advance tax instalments. However, this benefit shall not be available in respect of the deemed dividend as referred to in Section 2(22)(e).

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