Union Budget 2023-24 | 45+ Recommendations and Expectations

By Research & Advisory Team

The theme for the Union Budget 2023-24

• Support
• Recover
• Growth

Three words summarise the Central Government’s focus in the three years of the pandemic. During its worst phase, the Govt. announced a stimulus package to support and recover the Indian economy. Now, the focus is shifted to growth. It is witnessed by the whopping increase of 14% in the budgeted capital expenditure for 2022-23.

The COVID-19 pandemic severely impacted the Indian economy. India witnessed a negative 6.6% GDP growth in 2020-21. However, with the Government’s expansionary fiscal measures and stimulus, the Indian GDP bounced back in 2021-22. Both the stock market and the Indian economy have shown a V-shaped recovery. For the year 2022-23, despite global inflationary pressure, tightening of liquidity by central banks, and sharp appreciation of the US dollar, the RBI is confident of achieving a GDP growth rate of 7%.

In our opinion, for the upcoming budget, the Government should take steps to achieve the target of USD 5 trillion GDP in the next couple of years. The Government should commit capital expenditures to build ports, roads, airports and other infrastructure. The focus should be on improving the Logistics Performance Index (LPI) and reach in the top 25 Countries. The focus should be to cut the logistics cost from 13–14% of the GDP to around 8%. Any improvement in LPI will directly benefit the agricultural and manufacturing sectors.

Thus, upscaling and balancing the infrastructure and the digitisation of agencies to make them work not in silos but in synchronisation. And this should lay down the theme of the upcoming budget.

Plenty of funds will be needed for the capital expenditure on the infrastructure. For that, the exchequer will put efforts into ramping up the revenue. The current Government will present its last full budget before going for the general election in 2024. Despite that, we do not expect any remarkable reduction in the tax rate.

It will not be wrong to say Winter Growth is coming.

Our Expectations and Recommendations

This document includes a list of our apprehensions and recommendations for the upcoming budget. Our approach in preparing this document is to highlight the need of the Industries and the asymmetry and conflict between different provisions that should be plugged to bring clarity to the law.

Here is a list of our recommendations and expectations for the Union Budget 2023-24 for amendment in the Income-tax and GST Laws.

1. Tax recovery mechanism on sale of securitised assets
2. Simplified Taxation Scheme for Charitable Trusts
3. Relaxation from 1st proviso to Section 68 in case of loans taken from banks
4. Time limit to pass an order under Section 201(3) if the assessee fails to deposit TDS
5. Empower the assessee to file an appeal against the order of CIT(A) imposing a penalty
6. Clarity over ‘Situs of VDA’ to determine taxability in India
7. Determination of FMV for the purpose of Section 28(iv)
8. Tax benefits to promote solar energy
9. Amount to be deposited under Capital Gain Account Scheme
10. Appeal against the order of AO for a refund of tax deducted under Section 195
11. Alignment between Section 194-IA and Section 50C/Section 43CA
12. Income-tax benefits to business trusts on the issuance of Rupee Denominated Bonds
13. Stay granted by ITAT should not be vacated automatically after the expiry of 365 days
14. Exemption to be given on transfer of shares in the scheme of amalgamation, which is held as stock-in-trade
15. Concessional tax regimes for Firm/LLPs
16. A deduction should be allowed for the ‘Maintenance Charges’ while computing income from let-out property
17. Section 153 should be amended to include Principal Chief Commissioner or Chief Commissioner in line with Sections 263 and 264
18. Define ‘Seller’ for TDS under Section 194Q
19. Taxability of dividend income under the head profits and gains from business or profession
20. Need for an enabling provision to deduct tax under Section 194N as cash withdrawn is not an income
21. Section 54B exemption should be allowed even if the new agricultural land is purchased before the sale of agricultural land
22. Tax deducted in the foreign country should be treated as income of the assessee
23. Long-term capital gain referred to in Section 112A should be taxed at 10% instead of MMR in the hands of business trust
24. Definition of SPV under the Income-tax Act should be the same as defined under SEBI’s regulations on REITs and InVITs
25. Clarification required for pass-through of losses incurred by Business trust and Securitisation trust
26. Section 36(iva) should be amended to include the impact of the amendment made under Section 80CCD in respect of Central Government contributions up to 14%
27. Consequential amendment needed in the Proviso to Section 206C(5) due to omission of Section 203AA
28. Start-ups may be penalised for not fulfilling conditions under Section 80-IAC
29. Capital gain provisions should not contain the reference of any particular year in respect of the sovereign gold bonds scheme
30. Enhance the scope to apply for a lower tax collection certificate
31. Condition to pay emoluments by specified modes under Section 80JJAA should be applicable in case of new businesses also
32. Seller for the purpose of TCS under Section 206C(1F) should include Individual or HUF
33. Audit might be necessary for claiming exemption under Section 80-IBA
34. Deduction of tax on dividends paid by any mode other than cash
35. Enhance the scope of not being an assessee-in-default
36. Higher rate of interest for non-deposit of TCS amount
37. No Section 44AD benefit for speculative business
38. Allow payment of advance tax in a single instalment in case Section 44AE presumptive scheme is opted
39. Time-limit may be specified for passing an order in case of default in deduction of tax from the payment made to non-resident
40. Taxability of capital gains in case of a JDA entered into by assessees other than an Individual or HUF
41. Meaning of the term ‘Month’ and computation thereof
42. Allow use of Electronic Credit Ledger balance for payment of pre-deposits
43. Provision to levy interest on refund paid erroneously
44. Enabling provision to split up a composite supply
45. Remand back by appellate authority should be allowed
46. Rationalisation of formula for calculation of refund in case of export under CIF contract is made without payment of tax

1. Tax recovery mechanism on sale of securitised assets

Securitisation is a process which allows banks and other financial institutions to auction properties to recover the loan amount on the borrower’s failure to repay.

In most cases where the assets are taken over as part of the recovery of borrowing, there is no mechanism to ensure that the tax dues are secured in the process of the sale of properties.

The borrower has no money to pay the tax as he is already bankrupt or faces financial difficulties. Further, no part of the sale consideration reaches him as sale proceeds are collected directly by the bank or Asset Reconstruction Company (ARC). The banks or ARCs have no statutory obligations to make payments of taxes levied on the borrower.

In recent case law, the Mumbai Tribunal[1] has also highlighted this legal lacuna in the recovery of tax on the sale of securitised assets. Thus, it is recommended that the Government brings a suitable amendment to ensure that the tax liability is duly recovered from the borrower whose property is sold. Alternatively, it may be provided that if it is not possible to recover tax from the borrower on account of financial difficulties, the tax dues may be recovered from the bank/ARC.

2. Simplified Taxation Scheme for Charitable Trusts

Presently, charitable trusts and institutions can claim an exemption under any of the following two regimes:

(a) Institutions approved by the Principal Commissioner or Commissioner of Income-tax (“PCIT / CIT”) under Section 10(23C); and

(b) Trusts registered under Section 12AA/ 12AB of the Income-tax Act (‘IT Act’ or ‘the Act’)

In the last couple of years, many amendments have been introduced to the provisions relating to the taxation of charitable and religious trusts. With these amendments, many differences between both regimes have been diluted, and many issues have been addressed. However, the following inconsistencies still remain;

(a) Explanation 1(2) to Section 11(1) provides an option to treat the subsequent year’s application as the current year’s application. However, Section 10(23C) does not offer a similar option.

(b) Capital gains arising to a charitable institution are not chargeable to tax if the institution invests the net consideration in acquiring a new capital asset [Section 11(1)A]. This concession is not available under Section 10(23C).

(c) Under Section 10(23C), there are two categories of institutions, approval-based and non-approval, whereas, in Section 12A, the exemption is allowed only to the registered institutions.

To simplify the tax provisions, it is recommended that the above gaps should be removed and the approval-based category of exemption under Section 10(23C) be merged with the tax regime under Sections 11 to 13.

3. Relaxation from 1^st proviso to Section 68 in case of loans taken from banks

Section 68 of the Income-tax Act provides that if any sum is found credited in the books of accounts, and the assessee offers no explanation about the nature and source thereof or the Explanation offered by him is not satisfactory, in the opinion of the Assessing Officer, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

The Finance Act, 2022 inserted a new proviso to provide that the nature and source of the loan, borrowing or any other liability credited in the books of an assessee shall be treated as explained only if:

(a) the person in whose name such credit is recorded also offers an explanation about the nature and source of such sum so credited; and

(b) Such an explanation, in the opinion of the Assessing Officer, has been found to be satisfactory.

This newly inserted proviso emphasises on the sum credited by way of loans, borrowings or any other liability of an assessee, irrespective of the status of the lender.

Thus, it has created a genuine hardship for those who have obtained loans from Banks, NBFCs, and Public Financial Institutions. There should be no question about the genuineness and creditworthiness of loans taken from these institutions. Therefore, it is recommended that Govt. amends Section 68 to carve out an exception for the loans taken from these institutions.

 

4. Time limit to pass an order under Section 201(3) if assessee fails to deposit TDS

Section 201(3) of the Act prescribes the time limit for the Assessing Officer to pass an order deeming a person to be an assessee-in-default for failure to deduct the tax from a person resident in India. The said order can be passed before the expiry of 7 years from the end of the financial year in which payment or credit was made or 2 years from the end of the financial year in which the correction statement was furnished by the assessee.

The section prescribes the time limit for the assessee who has failed to deduct the tax at source. In contrast, no time limit has been prescribed where the assessee has failed to deposit tax after deduction.

As a deductor is considered an assessee-in-default under Section 201(1) in both cases, that is, failure to deduct tax and failure to deposit tax after deduction, there should be a time limit for passing an order of assessee-in-default in both circumstances.

Thus, it is recommended that Government should suitably amend the provisions of Section 201.

5. Empower the assessee to file an appeal against the order of CIT(A) imposing a penalty

The Finance Act, 2022 amended Sections 271AAB, 271AAC, and 271AAD to enable the Commissioner (Appeals) to levy penalties along with the Assessing Officer.

This change is effective from Assessment Year 2022-23. Before AY 2022-23, only Assessing Officer had the power to levy penalties and the appeal against the same lies before the Commissioner (appeals). Since CIT(A) also has the power to impose penalties, an appeal against the order of CIT(A) would fall before the Tribunal.

The appealable orders against which an appeal can be filed before the Tribunal have been specified under Section 253, but it contains no reference to the order passed under Sections 271AAB, 271AAC and 271AAD. This disparity arises as the Finance Act, 2022 failed to make a consequential amendment to Section 253.

Thus, it is recommended that an amendment be made to Section 253 to allow the assessees to file an appeal before the Tribunal against the orders passed by Commissioner (Appeals) imposing such penalties.

6. Clarity over ‘Situs of VDA’ to determine taxability in India

The Finance Act, 2022 introduced a new ‘flat rate’ scheme under Section 115BBH for the taxation of income arising from the transfer of Virtual Digital Assets (‘VDA’) with effect from the assessment year 2023-24. This scheme applies evenly to both resident and non-resident assessees.

To determine the taxability of the income arising to a non-resident from the transfer of VDA, among other factors, one needs to identify the situs of VDA. If the situs of a VDA is in India, the income arising to a non-resident on its transfer shall be taxable in India subject to the provisions of Section 9(1)(i) and DTAA. The situs/location of an asset matters only for non-resident assessees and not ordinarily resident assessees. In the cases of these assessees, if an asset located outside India is transferred outside India and sale proceeds are received outside India, no taxability arises because of Section 5 of the Act [except in the case of shares/interest as referred to in Explanation 5 to Section 9(1)(i)]. Such assessees will only be taxed in India in respect of income accruing or arising through the transfer of any property, asset or capital asset situated in India.

Section 115BBH of the Act only provides for the tax rate and how income from the transfer of VDA shall be computed, and it does not provide for the determination of the situs of such assets. Thus, it is recommended that the Govt. should bring clarity over the determination of the situs of VDA to avoid any unwanted litigation.

A reference may also be taken from the HMRC’s guidance on “Crypto-assets: tax for individuals”, which included a section on the situs of crypto-assets. The HMRC guidance states that ‘throughout the time an individual is UK resident, the exchange tokens they hold as beneficial owner will be located in the UK.’ In other words, the situs will track the residence of the holder.

(Read more: Taxation of Virtual Digital Assets (VDAs) on Taxmann.com/Practice)

7. Determination of FMV for the purpose of Section 28(iv)

Section 28 of the Act provides a list of all receipts or income that are chargeable to tax under the head of business income. Section 28(iv) provides that the value of any benefit or perquisite, whether convertible into money or not, arising from the business or the exercise of a profession, is chargeable to tax as business income.

The Finance Act, 2022 has inserted a new Section 194R in the Act for the deduction of tax from the benefit or perquisite arising from business or profession. The value liable for tax under section 194R is the value or aggregate value of any benefit or perquisite that is liable to be taxed in the hands of the resident payee under Section 28(iv) or any other provision as clarified by the CBDT[2].

Section 28(iv) or Section 194R does not prescribe any valuation method of benefit or perquisite, nor does it empower CBDT to prescribe any valuation rules. Thus, it becomes difficult to determine what amount shall be brought to tax under this provision. Though the CBDT[3] in Question 5 has specified that the purchase price or sale price, as the case may be, shall be the value of the benefit or perquisite, this guidance is not sufficient to determine the value of every benefit or perquisite. Therefore, it is recommended that the necessary valuation mechanism shall be put in place to tax the income under Section 28(iv) and deduction of tax under Section 194R.

8. Tax benefits to promote solar energy

India is the world’s third-largest producer of renewable energy, but still, a long way to go. Despite a significant push from the Government, solar installation in India has not attained the desired momentum.

Many countries have tried innovative tax exemptions to scale up the investment in solar panels. In 2018, the Turkish Govt. introduced a tax exemption for taxpayers who sell excess electricity produced by installing rooftop solar power on the roofs or walls of the buildings they own or have taken on rent. The maximum installation of solar power was 10kW, which has recently been increased to 50kW. Sweden has also enhanced the subsidy rate for the tax reduction for installing solar cells from 15% to 20% w.e.f. 01-01-2023.

To meet the 2030 Solar Mission Target, the Govt. should announce tax benefits for companies installing solar panel plants and for taxpayers installing solar rooftop power systems.

9. Amount to be deposited under Capital Gain Account Scheme

Section 54F of the Income-tax Act allows exemption to an Individual and HUF from the long-term capital gains arising from transferring a capital asset other than a residential house property.

The exemption is allowed if the amount of net consideration is invested in a new house property within the prescribed time limit. If such net consideration is not invested by the due date of filing the income-tax return, then the assessee is required to deposit the amount in the capital gain account scheme.

‘Net Consideration’ is the full value of the consideration received or accruing from the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. However, it ignores a few situations where the net consideration to be invested will fall short of money available in hand, such as:

(a) Where stamp duty value is higher than the full sales consideration;

(b) Deduction of tax at source (TDS) by the purchaser while remitting sales consideration; and

(c) Receipt of consideration in instalments.

In all of the situations mentioned above, the actual amount received by the person is less than the sales consideration used for the computation of capital gains. Thus, there would be a shortfall in the amount required to be invested in the capital gain account scheme to claim Section 54F exemption. The Assessing Officer often challenges Section 54F exemption by concluding that the assessee was required to deposit sales consideration which was taken into consideration for computing capital gains.

The Delhi Tribunal has ruled[4] that while computing exemption under Section 54F, the actual sale consideration received was to be taken into account and not stamp duty valuation under Section 50C.

It is recommended that Govt. should revisit the definition of ‘net consideration’ to bring clarity under the law so as to avoid any litigation.

10. Appeal against the order of AO for a refund of tax deducted under Section 195

The Finance Act 2022 inserted a new Section 239A to claim a refund on denying the obligation to deduct tax in certain cases. The deductor could file an application before the Assessing Officer to get the refund of tax deducted under Section 195 on any income (other than interest) if no tax deduction was required.

The Assessing Officer may make such inquiry as he considers necessary and pass an order in writing to either allow or reject such application within 6 months from the end of the month in which the application is received. However, the AO cannot reject an application without providing a hearing opportunity to the assessee. If the assessee is not satisfied with the order passed by the Assessing Officer, he may go into appeal Section 246A against such order before the Commissioner (Appeals).

Before the insertion of Section 239A, a taxpayer had no recourse to approach the Assessing Officer to obtain a refund of the tax so deducted and paid. The taxpayer had to follow the appellate process under Section 248 by filing an appeal before the Commissioner (Appeals) to obtain a refund of such tax deducted and deposited to the Central Govt.

However, Section 249, prescribing manner and time limits for filing an appeal before CIT(A), still contains the reference to Section 248. Therefore, the necessary amendments shall be brought to substitute the reference of Section 248 with Section 239A in Section 249.

11. Alignment between Section 194-IA and Section 50C/Section 43CA

Section 194-IA provides that any person buying an immovable property from a resident seller shall deduct tax at the rate of 1% from the sales consideration or the stamp duty value of such property, whichever is higher. The tax shall be deducted if the amount of sales consideration or stamp duty value is Rs. 50 lakhs or more.

Section 50C/43CA contains the special provision for computation of the full value of consideration in case of transfer of immovable property. These provisions do not define ‘consideration’. On the other hand, Explanation (aa) to Section 194-IA provides that the “consideration for transfer of any immovable property” shall include all charges of the nature of club membership fee, car parking fee, electricity or water fee, maintenance fee, advance fee or any other charges of similar nature, which are incidental to the transfer of immovable property.

For deduction of tax Section 194-IA, the ‘consideration’ as referred to above is compared with the stamp duty value (SDV), and not the consideration before including the charges incidental to transfer. In other words, ‘consideration’ for Section 194-IA and Section 43CA differ when one buys directly from the builder. In the matter of resale flats, perhaps, ‘consideration’ for both Section 50C and Section 194-IA will tally in most cases. Thus, it is recommended that the common definition of ‘consideration’ is adopted for Sections 43CA, 50C and 194-IA by bringing in necessary amendments.

12. Income-tax benefits to business trusts on the issuance of Rupee Denominated Bonds

Rupee Denominated Bonds (RDBs) are an innovative type of bond linked to the Rupee but issued to overseas investors. As RDBs are issued and denominated in Indian currency, it protects Indian issuer from currency risk and transfers the risk of currency fluctuation to investors buying these bonds.

A person investing in RDBs can earn two types of income: interest and capital gains. To promote Rupee denominated borrowing from overseas, the Income-tax Act provides certain benefits in respect of income arising from RDBs, which are as under:

Section	Issuer/Borrower	Investor/Assessee	Benefit
Interest Income
Section 10(4C)	Indian Company or Business Trust	Non-resident or Foreign company	Interest payable in respect of RDBs issued during the period between 17-09-2018 and 31-03-2019 is exempt from tax
Section 115A read with Section 194LC	Indian Company or Business Trust	Non-resident or Foreign company	Interest payable in respect of RDBs (if not exempt under section 10(4C)) is taxable at a concessional rate of 5% (or 4% if bonds are listed on a recognised stock exchange in IFSC)
Section 115A read with Section 194LD	Indian Company	Qualified Foreign Investor	Interest payable in respect of RDBs (if not exempt under section 10(4C)) is taxable at a concessional rate of 5%
Section 115AD read with Section 194LD	Indian Company	Foreign Institutional Investors	Interest payable in respect of RDBs (if not exempt under section 10(4C)) is taxable at a concessional rate of 5%
Capital Gains
Section 47(viiaa)	Indian Company	Non-resident	Transfer of RDBs by one non-resident to another non-resident outside India is not considered as ‘transfer’ for capital gain.
Section 47(viiab)	Indian Company	Non-resident	Transfer of RDBs by a non-resident on a recognised stock exchange located in any IFSC is not considered as ‘transfer’ for purpose of capital gain provided the consideration is paid or payable in foreign currency. Thus, no capital gain shall arise in such cases.
Section 10(4D)	Indian Company	Specified Fund	Transfer of RDBs on a recognised stock exchange located in any IFSC is exempt from tax provided the consideration is paid or payable in foreign currency.
Fifth proviso to Section 48	Indian Company	Non-resident	Gains arising on account of appreciation of Rupee against a foreign currency at the time of redemption of Rupee denominated bond shall ignored while computing capital gain.

The detailed guidelines for issuing Rupee Denominated Bonds overseas are set out in the RBI’s Circular No. 17, dated 29-09-2015, as amended from time to time. As per RBI Guidelines, any corporate or body corporate is eligible to issue Rupee Denominated Bonds overseas. Business Trusts (i.e., Real Estate Investment Trusts (REITs) or Infrastructure Investment Trusts (InvITs) ) are also eligible to issue RDBs.

Income-tax benefits (except under Section 10(4C) and Section 194LC) are allowed only when an Indian company issues the RDBs. But, as per RBI’s circular, business trusts can also issue RDBs. Thus, to remove this anomaly, it is suggested to bring the requisite amendment under Section 194LD, Section 47 and Section 48 and allow the benefit even if business trusts issue the RDBs.

13. Stay granted by ITAT should not be vacated automatically after the expiry of 365 days

Section 254(2A) of the Act contains provisions for the disposal of appeals by the Tribunal. The first proviso to Section 254(2A) provides that if an assessee makes an application for the stay of proceedings, the Tribunal may, after considering the merits of the application, pass an order of stay for a period not exceeding 180 days from the date of the order. The Tribunal shall dispose of the proceedings within that period of stay.

Where the Tribunal does not dispose of the appeal within the original period of stay, and the delay is not attributable to the assessee, the Tribunal may extend the period of stay for a total period of 365 days (365 days including 180 days granted previously).

Further, the third proviso to Section 254(2A) provides that if the Tribunal does not dispose of the appeal within the period allowed (original plus extended), the order of stay shall stand vacated after the expiry of 365 days even if the delay in disposing of the appeal is not attributable to the assessee.

In Dy. CIT v. Pepsi Foods Ltd. [2021] 126 taxmann.com 69 (SC), the Supreme Court has held that the object of the third proviso to Section 254(2A) (i.e., automatic vacation of stay on completion of 365 days even if the assessee is not responsible for the delay) is discriminatory and is liable to be struck down as it violates Article 14 of the Constitution of India. The Apex Court further held that the third proviso should be read without the word “even” and “is not”. Thus, any order of stay shall stand vacated after the expiry of the mentioned period only if the delay in disposing of the appeal is attributable to the assessee. After these words are struck down, the third proviso shall be read as under:

Provided also that if such appeal is not so disposed of within the period allowed under the first proviso or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, if the delay in disposing of the appeal attributable to the assessee.

Thus, it is expected that the Govt. may bring an amendment in the third proviso to Section 254(2A) as held by the Hon’ble Supreme Court in the above case.

(Read more: Appeal before Income Tax Appellate Tribunal (ITAT) on Taxmann.com/Practice)

14. Exemption to be given on transfer of shares in the scheme of amalgamation, which is held as stock-in-trade

As per Section 47(vii), any transfer of a capital asset, being shares held by a shareholder in the amalgamating company (transferor), under a scheme of amalgamation is not regarded as transfer provided the specified condition are satisfied. Thus, no tax implication arises in the hands of the shareholder at the time of allotment of shares of the amalgamated company (transferee) in lieu of shares held as a capital asset in the amalgamating company (transferor).

The above exemption is available only when the shareholders hold the shares as capital assets. If such shares are held as stock-in-trade, no exemption is provided, and profits and gains arising from the transfer of shares will be chargeable to tax under the head ‘profits and gains from business and profession’.

This differential tax treatment purely based on the nature of investment made by the shareholders is arbitrary. Thus, it is recommended that Govt. should bring parity and amend Section 47(vii) to extend the benefit of exemption to shares that are held as stock-in-trade.

(Read more: Transfer of capital asset as a result of business restructuring on Taxmann.com/Practice)

15. Concessional tax regimes for Firm/LLPs

The Government has introduced concessional and alternative tax regimes for domestic companies, individuals, HUF and cooperative societies. However, partnership firms and LLPs are still taxable at a flat rate of 30%. It is recommended that Govt. introduce corresponding concessional tax regimes for the firms and LLPs.

16. A deduction should be allowed for the ‘Maintenance Charges’ while computing income from let-out property

Maintenance Charges are mandatory charges paid by the owner of a flat/house to the housing society for the upkeep and maintenance of the common area. These charges are not deductible under Section 23 while computing the income from house property. The proviso to Section 23(1) provides for the deduction of only taxes paid to the local authority. The Mumbai Tribunal, in the case of Rockcastle Property (P.) Ltd. v. ITO [2021] 127 taxmann.com 381 (Mumbai – Trib.), has affirmed that ‘society maintenance charges’ paid by the assessee, by no stretch of the imagination, could be held to be taxes paid to the local authority. Hence, it couldn’t be allowed as a deduction while computing income from house property.

As maintenance charges are compulsory and paid monthly or quarterly, it is recommended that Govt. should allow its deduction while computing the income from let-out and deemed let-out house properties.

(Read more: Computation of income from house property on Taxmann.com/Practice)

17. Section 153 should be amended to include Principal Chief Commissioner or Chief Commissioner in line with Sections 263 and 264

The revisionary powers under Section 263 and Section 264 have been extended to the Principal Chief Commissioner and Chief Commissioner. However, a reference to Principal Chief Commissioner or Chief Commissioner is still missing in clause (c) of Explanation 1 to Section 263(1). Similarly, in Section 153, the reference to the Principal Chief Commissioner or Chief Commissioner is missing for the orders passed under Sections 263 and 264.

Therefore, it is recommended that the consequential amendments shall also be made in Section 153 w.r.t. reference to orders passed under Section 263, Section 264 and clause (c) of Explanation 1 to Section 263(1).

(Read more: Revision of orders prejudicial to revenue and Revision in favour of assessee on Taxmann.com/Practice)

18. Define ‘Seller’ for TDS under Section 194Q

The Finance Act, 2020 and Finance Act, 2021 had inserted Section 206C(1H) and Section 194Q under the Income-tax Act, respectively. These provisions require the collection or deduction of tax on the sale or purchase of goods, as the case may be.

Section 206C(1H) imposes an obligation on the seller to collect tax from the buyer of goods, and Section 194Q requires a buyer to deduct tax from the sum paid or payable to the seller of goods. As both sections apply to one transaction (sale and purchase of goods), a transaction might be covered under both provisions in some situations. Where it does, the buyer shall have the first obligation to deduct the tax. In other words, the seller will not have any obligation to collect tax under Section 206C(1H) in such a scenario.

A transaction always involves two parties – seller and buyer. Thus, it is imperative to define the meaning of the ‘seller’ and ‘buyer’ in both sections. Section 206C(1H) defines both ‘seller’ and ‘buyer’. However, Section 194Q defines the meaning of ‘buyer’ only. With regard to the seller, it is provided that the seller can be any person resident in India, but its meaning has not been defined explicitly.

Further, the Government can exclude any person from such definitions. For instance, the Central Government or the State Governments are not treated as buyers. Thus, a seller shall not be liable to collect tax where the goods are sold to the Central Government or the State Governments. Hence, there will be no cash inflow in the hands of the Central Government on account of TCS.

However, in the inverse situation under Section 194Q, where the Central Government or State Governments are the sellers of goods, the buyer would deduct tax from the sum paid or payable to the Government because Section 194Q applies to selling goods to any person resident in India without any exception. Thus, in this case, the Central Government or State Government, being a seller, would receive sale proceeds net of TDS.

Considering the ambiguity, the CBDT issued Circular No. 20, dated 25-11-2021, to clarify that the Central Government or the State Government will not be considered a ‘seller’ for tax deduction under Section 194Q. It is recommended that the Government should amend Section 194Q to provide the meaning of ‘seller’ in the provision itself.

(Read more: TDS on Purchase of Goods on Taxmann.com/Practice)

19. Taxability of dividend income under the head profits and gains from business or profession

With effect from Assessment Year 2021-22, the Finance Act, 2020 has abolished the dividend distribution tax (DDT) and moved to the classical system of taxation of dividend. Thus, a domestic company shall not be liable to pay DDT on the dividend declared, distributed or paid on or after 01-04-2020 and consequently, such dividend shall be taxable in the hands of shareholders. As dividend is now taxable in the hands of shareholders, the timeless controversy of its taxability under the relevant head of income would come to the fore again.

In the Income-tax Act, there are five heads of income – Salary, House Property, Business or Profession, Capital Gain and Other Sources. Income from other sources is a residuary head of income and sweeps in all taxable incomes which fall outside the other four heads of income. The provisions relating to the taxability of residuary income are contained in Section 56. The relevant provisions read as under:

“Income from other sources

56. (1)Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely:—

(i) dividends;

(ia)…………………………..;

(ib)…………………………..;

(ic)…………………………..;

(id) income by way of interest on securities, if the income is not chargeable to income-tax under the head “Profits and gains of business or profession”;

(ii) to (xi)……………………………….”

Clauses (i) to (xi) of Section 56(2) provide for the chargeability of various incomes under the head of other sources. Clause (i) explicitly specifies that dividend shall be taxed under the head of ‘income from other sources’. However, for several other items of income specified in Clauses (ia) to (xi), the provision is qualified by the phrase ‘if such income is not chargeable to income-tax under the head’ Profits and gains of business or profession’. For instance, as per clause (id), interest on securities is chargeable to tax under the head of other sources only when it is not chargeable to income-tax under the head “Profits and gains of business or profession”. The exclusion of the said phrase from clause (i) suggests that the dividend income can never be taxed as a business income and must always be taxed under the head of ‘income from other sources’.

However, the taxability of dividend income under the head’ business or profession’ when it is connected to the business carried on by the assessee (for example, dividend received in respect of shares held as stock-in-trade) has always been a matter of turf war.

The Delhi High Court, in the case of CIT v. Excellent Commercial Enterprises & Investments Ltd. [2005] 147 Taxman 558 (Delhi), held that where shares are held by the assessee as a stock-in-trade, then it could not be said that the dividend income would fall as an income from other sources as contemplated under section 56. The Supreme Court, in the case of Brooke Bond & Co. Ltd. v. CIT [1986] 28 Taxman 426 (SC), held that the nature of the dividend income must be determined having regard to the true nature and character of the income.

It is recommended that like other clauses, dividend income should be taxable under the head of ‘income from other sources’ if it is not chargeable to income-tax under the head ‘Profits and gains of business or profession’. Section 56(2)(i) should be read as under:

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—

(i) dividends [, if such income is not chargeable to income-tax under the head “Profits and gains of business or profession”];

(Read more: Taxation of Dividend on Taxmann.com/Practice)

20. Need for an enabling provision to deduct tax under Section 194N as cash withdrawn is not an income

Section 194N was introduced by the Finance (No. 2) Act, 2019, which was subsequently substituted with a new provision by the Finance Act, 2020. This provision requires deduction of tax at source from the cash withdrawn by a person from his account maintained with a bank, cooperative bank or a post office.

Section 194N is covered under Chapter XVII which relates to the collection and recovery of tax. Section 4 and Section 190 contain the enabling provisions for the deduction and recovery of tax.

Section 4(1) provides that income tax shall be levied in respect of the total income of the relevant year. Section 4(2) provides that in respect of income chargeable under sub-section (1), income tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

Section 190 relates to the deduction/collection of tax and payment of advance tax. Sub-section (1) of the said section provides that:

“Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) of section 192, as the case may be, in accordance with the provisions of this Chapter.”

This provision explicitly provides that the collection and deduction of tax shall be made in respect of the income of the assessee. If the amount received cannot be categorised as income in the hands of the receiver on which tax is leviable, no tax can be deducted/collected at source.

TDS on cash withdrawal was introduced to promote a cashless economy and discourage payments in cash. Section 194N requires tax deduction from the amount withdrawn from the accounts. However, it contradicts with provisions of Section 4 and Section 190. There is no income component in cash withdrawn from a bank account, thus, the question of TDS should not arise.

The Supreme Court has affirmed this proposition in the case of CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 178 Taxman 505 (SC) that if a particular income falls outside section 4(1), then TDS provisions cannot come in. The Madras High Court, in the case of Tirunelveli District Central Co-operative Bank Ltd. v. JCIT [2020] 119 taxmann.com 21 (Madras), has also held that tax cannot be deducted under Section 194N if cash withdrawn is not an income of the account holder.

Thus, it is expected that Govt. may bring a suitable amendment under the law to end any possible litigation on this provision.

(Read more: TDS on cash withdrawals on Taxmann.com/Practice)

21. Section 54B exemption should be allowed even if the new agricultural land is purchased before the sale of agricultural land

Section 54B provides an exemption to an Individual or HUF from the capital gains arising from the transfer of agricultural land. The exemption is allowed if capital gains are invested in a new agricultural land within the prescribed time limit.

The provisions of Section 54B provide relief when the capital gain arising from the transfer of agricultural land is invested in another agricultural land within two years after the date of transfer. Sections 54 and 54F also allow capital gain exemption if the assessee purchases a residential house either within one year before the date of the transfer or within two years after the date of transfer of the original asset.

Unlike Section 54/54F, Section 54B does not allow the capital gain exemption if the assessee purchases agricultural land before the date of transfer of old agricultural land. It is recommended that the deduction under Section 54B should be allowed even if the assessee purchases the new agricultural land before selling the original agricultural land.

(Read more: Capital gain exemption under Section 54B on Taxmann.com/Practice)

22. Tax deducted in the foreign country should be treated as income of the assessee

Section 198 of the Income-tax Act, 1961 provides that the tax deducted at source should be included in the gross total income of the assessee. The bare provision of Section 198(1) is reproduced below:

‘All sums deducted in accordance with the foregoing provisions of this Chapter shall, for the purpose of computing the income of an assessee, be deemed to be income received’

Section 198 is covered under Chapter XVII of the Income-tax Act, which includes deduction/collection of taxes under Sections 192 to 206C. Thus, any tax deducted or collected under the Income-tax Act shall be deemed as income of the assessee and accordingly, it is added to the gross total income of the assessee.

However, the computation of income is often disputed if taxes have been withheld outside India and the corresponding income is offered to tax in India. In the absence of an explicit provision in this regard, the assessee includes the net income (i.e., the amount so remitted to India after withholding of taxes) to his gross total income. In contrast, the Assessing Officer assesses the gross amount.

This conflict arises due to the absence of a reference in Section 198 of taxes withheld outside India. Section 198 provides a deeming fiction with respect to the taxes deducted or collected as per the provisions of the Income-tax Act, 1961 and does not include taxes withheld outside India.

As the taxes paid outside India are eligible for the foreign tax credit under Section 90/90A read with Rule 128, it is apprehended that the amendments may be made to Section 198 to bring the income earned outside India at par with the income earned in India.

(Read more: Foreign Tax Credit (FTC) on Taxmann.com/Practice)

23. Long-term capital gain referred to in Section 112A should be taxed at 10% instead of MMR in the hands of business trust

A business trust (REIT or InVIT) is governed by Section 115UA, read with Section 10(23FC), 10(23FCA) and Section 10(23FD) of the Income-tax Act. A business trust is structured as a hybrid pass-through entity, allowing it to pass certain income to its unit-holders. Consequently, such incomes are exempt at the level of business trust and taxable in the hands of the unit-holders.

The incomes that a business trust is allowed to pass through to its unit holders are as follows:

(a) Dividend received from SPV;

(b) Interest received from SPV; and

(c) Rental income from real estate properties directly owned by REITs.

The pass-through status is provided to the business trust only in respect of the aforesaid incomes, and all other incomes are chargeable to tax in the hands of the business trust. Such other income is taxable under Section 115UA at a maximum marginal rate (i.e., 42.744%) except the capital gains covered under Section 111A and Section 112. Section 111A provides for a concessional tax rate of 15% in respect of short-term capital gain arising from the transfer of listed equity shares, equity-oriented mutual funds or units of a business trust. Whereas Section 112 provides for a concessional tax rate of 20% in case of long-term capital gain.

The Finance Act, 2018, inserted a new Section 112A in the Income-tax Act to tax the income arising from the transfer of a long-term capital asset, being a listed equity share or a unit of an equity-oriented fund or a unit of a business trust at the rate of 10% on the amount of capital gain in excess of Rs. 100,000. However, no consequential amendment was made under Section 115UA. Thus, it is recommended that the capital gains covered under Section 112A should be charged to tax at the rate of 10% and not at MMR in the hands of the business trust.

(Read more: Tax on long-term capital gain from sale of securities chargeable to STT on Taxmann.com/Practice)

24. Definition of SPV under the Income-tax Act should be the same as defined under SEBI’s regulations on REITs and InVITs

To boost investment in Real Estate and Infrastructure sectors, the Government introduced the concept of Real Estate Investment Trusts (REITs) and Infrastructure Investment trusts (InVITs).

REITs or InVITs are regulated by SEBI through SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014, respectively. The structure of REITs or INVITs is similar to that of a mutual fund, wherein money is collected from the general public for investing on their behalf in income-generating real estate properties or infrastructure projects. REITs or InVITs invest in real estate properties or infrastructure projects, respectively, either directly or through Special Purpose Vehicles (SPV). Under SEBI (Real Estate Investment Trusts) Regulations, 2014, SPV is defined as a company or LLP in which REIT holds at least 50% of the equity share capital or interest. Whereas, under SEBI (Infrastructure Investment Trusts) Regulations, 2014, SPV is defined to mean a company or LLP in which InVIT holds the controlling interest and at least 51% of the equity share capital or interest. Further, under both regulations, SPV has to meet certain other conditions pertaining to investment and the nature of activities.

As far as tax implication of investing in REITs or InVITs is concerned, they are given pass-through status under the Income-tax Act whereby they are allowed to pass certain income, inter-alia, interest, rent and dividends received from SPV to their unit holders without paying the income-tax at their end. However, under Income-tax Act, SPV is defined to mean an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration. The definition of SPV as provided under the Income-tax Act is, to some extent, different from the definition as provided under aforesaid SEBI Regulations. The two basic differences in the definition of an SPV are as follows:

(a) As per SEBI Regulations, SPV can be an Indian company or LLP. However, the Income-tax Act recognises only an Indian company as SPV. Thus, if an SPV is incorporated as LLP, then pass-through status shall not be available to business trust in respect of income received from such SPV; and

(b) As per SEBI Regulations, REIT is not required to have a controlling interest in SPV. However, as per Income-tax Act, REIT should have the controlling interest and at least 50% equity shareholding in SPV.

Considering these differences in the definition of SPV under the Income-tax Act vis-à-vis SEBI Regulations, it is recommended to amend the definition of SPV under Income-tax Act to align it with the definition as provided under SEBI regulations.

(Read more: Taxation of REIT/InVIT on Taxmann.com/Practice)

25. Clarification required for pass-through of losses incurred by Business trust and Securitisation trust

The tax is eliminated at the pool level and levied at the investor level in a pass-through regime. In other words, income earned by an entity is exempt from tax in its hands, and the same is taxable in the hands of its investor or unit-holders in the same manner and to the same extent as if the investment in underlying assets has been made directly by the investors.

In the Income-tax Act, three types of entities, namely Category I & Category II AIFs, Securitisation Trust and Business Trust, are accorded a pass-through status. Securitisation Trusts enjoy the pass-through status for the entire income, whereas others are provided with this status in respect of certain specified income only.

Income-tax Act contains provisions for the pass-through of income. However, there is no guidance on the treatment of losses incurred by them. The Finance (No. 2) Act, 2019, has amended Section 115UB to allow carry forward of losses, other than the losses under the head “Profits and gains of business or profession” at the investor level in case of Category I and II AIFs. The memorandum explaining the Finance (No.2) Bill, 2019, has explained the reasons behind such amendment as follows:

“Pass-through of losses are not provided under the existing regime and are retained at AIF level to be carried forward and set off in accordance with Chapter VI. In order to remove the genuine difficulty faced by Category I and II AIFs, it is proposed to amend section 115UB to provide that………”

However, no similar amendment has been made in respect of the Securitisation Trust and Business Trust.

Thus, it is recommended that Section 115UA and Section 115TCA should be amended to bring clarifications in this regard.

(Read more: Pass-Through Income on Taxmann.com/Practice)

26. Section 36(iva) should be amended to include the impact of the amendment made under Section 80CCD in respect of Central Government contributions up to 14%

Section 80CCD was amended by the Finance (No. 2) Act, 2019 to provide that the Central Government employees shall be allowed a deduction for the amount deposited in the NPS in respect of contribution made by the employer to the extent of 14% of salary in the previous year. Post amendment maximum admissible deduction in case of an employee would be as under:

(a) 14% of the salary, if the contribution is made by the Central Government.

(b) 10% of the salary, if the contribution is made by any other employer.

To allow deduction of such contribution, Section 36(iva) provides that deduction shall be allowed to the employer with respect to the contribution made by the employer towards NPS to the extent it does not exceed 10% of the salary of the employee.

Since the contribution of the Central Govt. towards NPS has increased from 10% to 14%, the consequential changes should be made in Section 36 to bring harmony between both sections.

(Read more: Deduction for contribution to the pension scheme on Taxmann.com/Practice)

27. Consequential amendment needed in the Proviso to Section 206C(5) due to omission of Section 203AA

The Proviso to Section 206C(5) provides that the Director-General of Income-tax (Systems)/NSDL or the person authorised by it shall prepare and deliver to the buyer referred to in Section 206C(1) or to the licensee or lessee referred to in Section 206C(1C), a statement specifying the amount of tax collected and other prescribed particulars. Section 203AA, read with Rule 31AB, provides that such a statement is required to be furnished in Form No. 26AS by the 31^st of July following the financial year during which taxes are collected.

The Finance Act, 2020, has omitted Section 203AA with effect from 01-06-2020, and a new section 285BB has been introduced from the same date. Consequently, the CBDT omitted Rule 31AB. A new Rule 114-I has been inserted to provide that the Principal Director General of Income-tax (Systems), the Director-General of Income-tax (Systems) or any person authorised him shall upload such annual information statement in Form No. 26AS in the registered account of the assessee.

As Section 203AA has been omitted, corresponding omissions must also be made in the provisions of TCS. Thus, it is recommended that the Government should make consequential amendments by omitting Proviso to Section 206C(5).

(Read more: Annual Information Statement (AIS) on Taxmann.com/Practice)

28. Start-ups may be penalised for not fulfilling conditions under Section 80-IAC

Income-tax Act contains provisions to allow various exemptions and deductions to start-ups. Section 56(2)(viib) provides an exemption from the angel tax to the start-up if it fulfils the conditions prescribed under notification No. GSR 127(E), dated 19-02-2019, issued by the DPIIT. Section 80-IAC provides deduction to the eligible start-up as defined therein up to 100% of the business profits for three consecutive assessment years.

A Proviso has been inserted to Section 56(2)(viib) by the Finance (No. 2) Act, 2019 to provide that in case of failure to comply with the conditions specified in the notification issued by DPIIT, the consideration received from the issue of shares, as exceeding the fair market value of such shares, shall be deemed to be the income of the company chargeable to tax for the previous year in which such failure takes place. Penal provisions under Section 270A were also introduced in case of failure to fulfil the conditions.

However, Section 80-IAC does not contain any provision to withdraw the deduction if the start-up fails to fulfil the prescribed conditions. It is apprehended that a corresponding amendment could be made to Section 80-IAC to withdraw the deduction if the assessee company fails to comply with the conditions prescribed in the DPIIT’s notification.

(Read more: Deduction to an eligible start-up on Taxmann.com/Practice)

29. Capital gain provisions should not contain the reference of any particular year in respect of the sovereign gold bonds scheme

Sovereign Gold Bond (SGB) Scheme is an investment scheme of the Central Government which offers investors an alternative to holding gold in physical form. There are several benefits of investing in SGBs. An individual is not liable to pay capital gain tax on the redemption of SGBs. Section 47 of the Income-tax Act provides that any transfer of Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual shall not be treated as a transfer for the purpose of capital gain.

Section 47 refers to the Sovereign Gold Bond issued under the Sovereign Gold Bond Scheme, 2015. However, the Central Government issues a new Sovereign Gold Bond scheme every year. Thus, section 47 should be suitably amended to remove reference to any particular year from the Sovereign Gold Bond Scheme.

A similar amendment is also required under the Fourth proviso to Section 48, which provides the benefit of indexation while computing long-term capital gain arising from the transfer of Sovereign Gold Bond.

(Read more: Transactions not regarded as ‘transfer’ for capital gains on Taxmann.com/Practice)

30. Enhance the scope to apply for a lower tax collection certificate

An assessee can apply to the Assessing Officer to issue a certificate for collection of tax at lower rates under Section 206C(9). Such a certificate shall be issued if the existing and estimated tax liability of the assessee justifies tax collection at a lower rate. This benefit is only available to the persons covered under sub-section (1) and (1C) of Section 206. The assessee covered under sub-section (1F) (sale of motor vehicle), (1G) (remittance of foreign currency under LRS or sale of an overseas tour package) and (1H) (sale of goods) does not have the option to approach the assessing officer to issue lower tax collection certificate. It is suggested that the benefit of applying for a lower collection certificate shall also be extended to the persons covered under Sub-section (1F), (1G) and (1H) of Section 206C.

(Read more: Certificate to collect TCS at lower Rate on Taxmann.com/Practice)

31. Condition to pay emoluments by specified modes under Section 80JJAA should be applicable in case of new businesses also

Section 80JJAA of the Income-tax Act provides that every assessee earning business income and liable to the tax audit can claim a deduction under this provision for additional employee cost. The deduction shall be allowed for 30% of the additional employee cost in three assessment years.

However, such deduction shall be allowed only if the assessee fulfils certain conditions. One of the conditions is that emoluments must be paid by any of the following modes:

(a) An account payee cheque;

(b) Account payee bank draft;

(c) By use of electronic clearing systems through a bank account; or

(d) Other prescribed electronic modes, i.e. Credit/debit card, IMPS, RTGS etc.

This condition is applicable in the case of an existing business only. To move towards digital India initiative, it is expected that the above condition regarding payment of emoluments through the above modes may be extended in the case of new businesses also.

(Read more: Deductions in respect of employment of new employees on Taxmann.com/Practice)

32. Seller for the purpose of TCS under Section 206C(1F) should include Individual or HUF

The Finance Act, 2016 inserted sub-section (1F) to Section 206C to bring high-value transactions within the tax net. This provision provides that every person, being a seller, who receives any amount as consideration for the sale of a motor vehicle of the value exceeding Rs. 10 lakhs, shall collect tax from the buyer at the rate of 1% of the sale consideration.

The term ‘seller’ has been defined under clause (c) of Explanation to Section 206C. This clause defines the meaning of seller with respect to sub-section (1) and sub-section (1F) of Section 206C. However, to include an individual or a HUF within the meaning of ‘seller’, it provides that total sales, gross receipts or turnover of such individual or HUF from the business or profession carried on by him should exceed Rs. 1 crore in case of business or Rs. 50 lakh in the case of the profession during the financial year immediately preceding the financial year in which the goods of the nature specified in the Table in sub-section (1) are sold. This Explanation has inadvertently omitted to give a reference of sub-section (1F) of Section 206C.

It is recommended that clause (c) of the Explanation to Section 206C should be amended to mention the reference of Sub-section (1F) also. This Explanation should read as under:

(a) “seller” with respect to sub-section (1) and sub-section (1F) means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or cooperative society and also includes an individual or a Hindu undivided family whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which the goods of the nature specified in the Table in sub-section (1) or sub-section (1F) are sold.

(Read more: Tax Collected at Source (TCS) on Taxmann.com/Practice)

33. Audit might be necessary for claiming exemption under Section 80-IBA

Deductions under Chapter VI-A are broadly categorised under 5 parts as follows:

(a) Part A: General

(b) Part B: Deductions in respect of certain payments

(c) Part C: Deduction in respect of certain incomes

(d) Part CA: Deduction in respect of other incomes

(e) Part D: Other deductions

Almost all sections providing profit-linked deductions under Part C of Chapter VI-A require an assessee to fulfil certain conditions. One of such conditions is to get the book of accounts audited by a Chartered Accountant and furnish a report of such audit electronically in the specified form (i.e., the audit report is furnished in Form 10CCB to claim deduction under Section 80-IA).

Deduction prescribed under Section 80-IBA is also a profit-linked deduction. This section provides that an assessee deriving profits and gains from the business of developing and building housing projects is eligible to claim a deduction under this provision. 100% of the profits and gains derived from this business are deductible under this provision. To claim the deduction, the assessee has to comply with various conditions as to the size of the plot of land, residential unit, stamp duty value, and the time limit for completing the project. However, the condition of getting the books of account audited is not a prerequisite for claiming this deduction.

It is expected that Section 80-IBA, being a profit-linked deduction, would also require the assessee to get his book of accounts audited to be eligible to claim such a deduction.

(Read more: Profits from Housing projects on Taxmann.com/Practice)

34. Deduction of tax on dividends paid by any mode other than cash

Section 194 provides for the deduction of tax from dividends. The tax has to be deducted by every Indian company or company that has made the arrangements for the declaration and payment of dividends within India. However, no tax shall be deducted from the payment of dividends to an individual shareholder if the payment is made by any mode other than cash and the aggregate amount of dividend paid or distributed to him during a financial year does not exceed Rs. 5,000.

The relaxation from the deduction of tax is available if the dividend is paid by any mode other than cash. This provision provides a negative list of the prohibited mode of payment. Whereas various provisions, inter-alia, Section 40A(3), Section 269SS, Section 269T, Section 269ST, etc., provide a positive list of the permissible mode of payment. Therefore, it is recommended that similar to other provisions, Section 194 should have a positive list of the permissible mode of payment, that is, an account payee cheque or account payee bank draft or use of an electronic clearing system through a bank account or through such other electronic mode as may be prescribed.

A similar amendment is also recommended in Sections 80D, 80GGA, 80G and 36(1)(ib).

35. Enhance the scope of not being an assessee-in-default

If any person responsible for the collection of tax at source fails to collect the whole or any part of the tax or, after collection fails to deposit the same to the credit of the Central Government, then he shall be deemed to be assessee-in-default. A collector is not deemed to be in default if the amount is received from a person who has considered such an amount while computing income in return and has paid the tax due on such declared income. The receiver will have to obtain a certificate to this effect from a Chartered Accountant in Form No. 27BA and submit it electronically.

However, this relief is allowed only in respect of Sub-sections (1) and (1C) of Section 206C. It is recommended to extend this benefit to the persons covered under Sub-section (1F), (1G) and (1H) of Section 206C.

(Read more: Assessee-in-default on Taxmann.com/Practice)

36. Higher rate of interest for non-deposit of TCS amount

Section 201 provides the consequences in case of any failure to deduct or to pay the tax deducted at source. The provision provides that the deductor shall be liable to pay interest at the rate of 1% per month/part of the month in case there is a failure to deduct tax. However, where a deduction has been made, but tax has not been deposited, the interest is levied at the rate of 1.5% for every month or part of the month.

In contrast to the above, Section 206C prescribed only a single rate of interest. If the collector fails to collect TCS or, after collecting, fails to deposit it with Govt., interest is levied at the rate of 1% for every month or part month. It is expected that the Govt. may bring parity in the penal provision for both defaults. Section 206C could be amended to provide a higher rate of interest in case tax has been collected but not deposited to the credit of the Central Govt.

(Read more: Consequences of failure to collect or pay TCS on Taxmann.com/Practice)

37. No Section 44AD benefit for speculative business

Section 44AD provides that an assessee being a resident individual, HUF or a partnership firm (excluding LLP) carrying on any business, is eligible to declare its income at the presumptive rate of 6% or 8% as the case may be.

However, the following persons cannot opt for provisions of Section 44AD:

(a) Person carrying on the business of plying, hiring or leasing goods carriages referred to in Section 44AE;

(b) Persons carrying on professions as referred under Section 44AA(1);

(c) Persons earning income in the nature of commission or brokerage; or

(d) Person carrying on agency business.

Income-tax Act does not restrict the person carrying on speculative business to opt for the presumptive taxation scheme prescribed under Section 44AD. However, instructions appended to the ITR Form 4 provide that income from the speculative business is not required to be computed under Section 44AD. It is expected that instead of clarifying in the instructions to the ITR, it may be provided specifically in the provision itself to avoid any litigation on this point.

(Read more: Speculative Business and Presumptive Scheme for Businesses under Section 44AD on Taxmann.com/Practice)

38. Allow payment of advance tax in a single instalment in case Section 44AE presumptive scheme is opted

Section 211 of the Income-tax Act provides the due dates and the amount of advance tax payable in instalments by the taxpayers. This provision provides that a taxpayer is required to pay the advance tax in four instalments during the financial year on the specified due dates. However, this provision allows the taxpayers who have opted for a presumptive taxation scheme under Section 44AD and Section 44ADA to pay 100% of advance tax by 15^th March of the financial year.

As there are more presumptive taxation schemes allowed under Sections 44AE, 44B, 44BB, etc., this option to pay advance tax in a single instalment is allowed only for those who have opted for Section 44AD and 44ADA presumptive scheme. Where the analogy behind such a provision was to extend this option to only resident taxpayers, then this option should be allowed to those resident taxpayers as well who have opted for Section 44AE presumptive scheme. Thus, it is recommended that the option to pay the entire advance tax in a single instalment should be extended to assessees who have opted for the Section 44AE presumptive scheme.

(Read more: Advance Tax and Presumptive Scheme for Transporters under Section 44AE on Taxmann.com/Practice)

39. Time-limit may be specified for passing an order in case of default in deduction of tax from the payment made to non-resident

As per Section 201 of the Income-tax Act, if a person responsible for the deduction of tax at source, fails to deduct the whole or any part of the tax or after deduction fails to deposit the same to the credit of the Central Government, then he shall be deemed to be an assessee-in-default.

Sub-section (3) of Section 201 provides that no order deeming a deductor to be an assessee-in-default, on failure to deduct the tax from a person resident in India, shall be passed after the expiry of 7 years from the end of the financial year in which payment is made, or credit is given or after the expiry of 2 years from the end of the financial year in which correction statement is furnished, whichever is later. However, these time limits are applicable only when TDS defaults are related to payments made to a person resident in India. In other words, sub-section (3) does not apply if there is a default in the tax deduction with respect to payments made to a non-resident.

As no time limit has been prescribed under the Act for passing an order against a person who defaults in deducting or depositing tax with respect to payments made to a non-resident, various courts have held that the department can take action in a reasonable time but what should be a reasonable time, is quite controversial.

Hence, the Government may make a necessary amendment under sub-section (3) of section 201 to specify the time limit for passing an order of assessee-in-default where a person defaults in deducting or depositing tax in respect of payments made to a non-resident. It is recommended that the Govt. should bring both provisions to par.

(Read more: Consequences of failure to deduct or pay TDS on Taxmann.com/Practice)

40. Taxability of capital gains in case of a JDA entered into by assessees other than an Individual or HUF

The Finance Act, 2017 inserted sub-section (5A) in Section 45 to provide that capital gains arising in the case of JDAs shall be chargeable to tax in the year in which the competent authority issues a completion certificate. This provision is applicable only in cases where the owner of immovable property is an Individual or HUF. The law does not provide taxability if any other assessee has entered into JDAs. Thus, it is recommended that the Govt. should bring clarity regarding the taxability of capital gains in case JDAs are entered into by any assessees other than an Individual or HUF.

(Read more: Computation of capital gains in case of Joint Development Agreements (JDA) on Taxmann.com/Practice)

41. Meaning of the term ‘Month’ and computation thereof

As per the provisions of Section 201(1A), in case of failure to deduct TDS, interest is to be paid at the rate of 1.5% from the date of deduction to the date of payment. Any part of the month shall be considered as one full month. So, the understanding should be that if TDS is deducted on 23^rd April 2017 and payment is made on 8^th May 2017, and interest should be paid for one month.

However, Income-tax Dept. calculates interest for 2 months because it considers April and May as two separate calendar months. So, the scenario is that even if the TDS is late by 1 day, interest is calculated for 2 months which seems absurd.

The ITAT in the case of Bank of Baroda v. DCIT [2017] 88 taxmann.com 103 (Ahmedabad – Trib.) also held that interest was to be levied only for the actual period of delay, i.e., from the date on which tax was deducted and till date on which tax was deposited. If such a period exceeds one month, then the full month’s interest is leviable.

42. Allow use of Electronic Credit Ledger balance for payment of pre-deposits

Under the GST laws, the pre-deposit for filing an appeal can be made through the electronic cash ledger. The law does not contain any specific provision for making such payment from the electronic credit ledger. The law states that the balance in the electronic credit ledger can be utilised towards the payment of output tax[5] , but this would be subject to conditions and restrictions. Also, the law states that the balance of ITC can be utilised only towards the payment of self-assessed output tax[6].

The revenue and taxpayer often argue whether the pre-deposit can be paid using the balance in the electronic credit ledger. Dealing with this issue, the Orissa High Court[7] held that the credit balance in the electronic credit ledger could not be used for paying the pre-deposit amount. However, the Bombay High Court[8] and the Allahabad High Court[9] have held that the credit balance in the electronic credit ledger can be used for paying the pre-deposit amount.

Section 107(6)(b) does not use the term “tax” but uses the term “sum” for the payment of pre-deposit. Thus, the entire dispute revolves around the issue of whether the pre-deposit is an output tax liability. Hence, it is recommended that necessary amendments should be carried out in the provisions relating to the payment of pre-deposit.

43. Provision to levy interest on refund paid erroneously

Section 50 of the CGST Act is a governing provision that deals with the interest levy. It provides the following two specific scenarios where interest is levied and required to be paid by the taxpayer:

(a) Delay in payment of output tax; and

(b) ITC wrongly availed and utilised.

Apart from the above, there is no other governing provision that levies interest. In a few scenarios where the law intends to charge interest on the taxpayer, it explicitly takes references to the above two provisions. For example, in the case of provisional assessment, where the final liability assessed is more than the provisionally assessed liability, the provision of Section 80 refers to Section 50(1) for the computation of the interest on the differential liability (i.e. delay in payment of output tax). Similarly, the second proviso to Section 16(2) refers to Section 50(1), if the recipient fails to pay the supplier within 180 days of the invoice.

There are scenarios where a refund of tax has been erroneously granted to the taxpayer, and subsequently, the same is required to be paid back by the taxpayer along with the interest and penalty. However, there is no substantive provision in the law to charge interest on repayment of the refund paid erroneously.

In the case of India Carbon Ltd. v. State of Assam[10], the Hon’ble Supreme Court held that interest could not be levied until there is a substantive provision in the Act of the same. Further, in the case of J.K. Synthetics Ltd. v. The Commercial Tax Officer[11], the Supreme Court held that the provision of payment of interest must be construed as substantive law and not adjectival. It must be construed strictly and cannot be levied unless there is a specific provision for recovery of interest.

Despite the above judgements, the GST authorities issued a show-cause notice demanding such a refund along with interest. It is expected that the substantive provision for levying the interest in such cases could be introduced.

44. Enabling provision to split up a composite supply

The GST law provides the concept of composite supply wherein the goods and services supplied in a bundle are taxed together. In such cases, the provisions that apply to the principal supply apply to all other supplies in such bundle.

In dealing with the validity of GST payable under reverse charge on ocean freight for the import of goods under CIF terms, the Supreme Court held[12] that the definition of the composite supply does not empower the legislature to artificially split its components. Under the CIF, charging GST on ocean freight would amount to levying tax separately on the freight component, which is not permitted as per the provisions of composite supply. In view of this, the Supreme Court held that the reverse charge on ocean freight is ultra vires as it violates the principle of ‘composite supply’.

Similarly, by levying GST on hospital room rent charged by clinical establishments, the department has again artificially split the composite supply of health care services. The room rent should be exempted as it’s a component of composite supply where health care services are the principal element exempted from GST.

If the Government intends to provide a separate tax treatment to a component of composite supply, then such splitting of the composite supply should be backed by the GST Act. Thus, the necessary amendment could be made in the provisions of composite supply to enable a separate treatment of certain components in composite supply.

45. Remand back by appellate authority should be allowed

Section 107(11) of the CGST Act, 2017 provides that where an appeal is made to the appellate authority, it has the power to pass an order confirming, modifying or annulling the demand against which the appeal has been made. However, the law explicitly restricts referring the decision/ order back to the adjudicating authority. In other words, remanding back is not permitted under GST. Yet there are some cases where the appellate authorities refer the cases back to the adjudicating authorities.

In the erstwhile Excise laws, until 2011, there was a provision to refer back to the adjudicating authorities for fresh adjudication, but the Finance Act 2011 removed the same. Even after such removal, the practice of remanding back cases was being followed. An argument was taken that the power of the appellate authority to modify the decision/ order itself contains the power to remand the case back.

In view of the above ambiguity, the Courts[13] have held that Commissioner (Appeal) can still remand the matter back to the adjudicating authority. On the contrary, in a few other cases, the Courts have held that in view of the specific deletion of the impugned provision, the Commissioner (Appeal) cannot remand the matter.

Notably, in the year 2007, the Supreme Court[14] noted that the powers of the Commissioner (Appeals) to remand back the cases to adjudicating authorities had been done away with as the part of the provision that specifically contained the power of remanding back has been removed.

The GST regime also contains a specific provision that the appellate authority cannot remand back the cases. However, the practice of remanding back is still followed and is also necessary in some cases. In view of the above, necessary amendments should be made to the GST law providing the power of remanding back of cases to appellate authorities in some specific cases.

46. Rationalisation of formula for calculation of refund in case of export under CIF contract is made without payment of tax

Section 54(3) of the CGST Act, 2017 provides for the refund of the balance of ITC where export is made without payment of tax under bond or letter of undertaking. The refund formula for the same is as under:

Refund amount = [(Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services)/Adjusted total turnover] * Net ITC

In the given formula, regarding the turnover of the zero-rated supply of goods, the Explanation to Rule 89(4) of the CGST Rules[15] provides that the value of goods exported out of India would be taken as lower of the following values:

(a) Free on Board (FOB) value declared in the Shipping Bill or Bill of Export form, as the case may be; or

(b) The value declared in tax invoice or bill of supply.

Notably, for the export of goods under CIF contracts, the exporter has to separately report the FOB value of goods, insurance and freight expenses in the shipping bill. The FOB value reported in the shipping bill would always be less than the value as per the tax invoice. The GSTN system, in this case, picks the FOB value as per the shipping bill. Thus, the refund amount would always be reduced proportionately to the value of insurance and freight expenses. This would result in a loss of refund amount pertaining to the value of insurance and freight. This loss would be significant in cases where the cost of packing and transporting comprises a considerable proportion of value. The formula for the calculation of refund of ITC should be rationalised, and in the case of CIF contracts, the CIF value of the goods should be considered for the calculation of refund.

Inputs from

CA Naveen Wadhwa, CA Dipen Mittal, CA Rahul Singh, CA Tarun Kumar, CA Ashish Gupta, CA Manila Mehta, CA Karishma Malhan and CA Monika Singla

Disclaimer:

• • This document is solely for the information and may not be used for any other purpose or distributed to any other party without our prior written consent.
  • Our comments are based on the existing laws and the judicial interpretation prevailing in India. We have no responsibility to update this document for events or circumstances occurring subsequently.
  • The comments in this memorandum are purely a matter of legal interpretation and are not binding upon anyone. The Govt. and judicial authorities may always take a different view.
  • We have provided our comments on the provisions of the Income Tax Act, 1961, Goods & Services Tax (GST) and the Rules thereunder. We have not analysed the provisions of other legislation.
  • The document is prepared by identifying the asymmetry and conflict between different provisions that should be plugged to bring clarity in the law.
  • We have also taken reference to international best practices to suggest some changes in the law.

---

[1] Abbasbhai A. Upletawala v. ITO [2022] 143 taxmann.com 384 (Mumbai – Trib.)

[2] Circular No. 12/2022, dated 16-6-2022

[3] Circular No. 12/2022, dated 16-6-2022

[4] Sunil Miglani v. DCIT [2020] 115 taxmann.com 91 (Delhi – Trib.)

[5] Section 49(4) of the CGST Act, 2017

[6] Section 41(1) of the CGST Act, 2017

[7] Jyoti Construction v. Deputy Commissioner of CT & GST, Jajpur [2021] 131 taxmann.com 104 (Orissa) dated 07-10-2021

[8] Oasis Realty v. Union of India [2022] 143 taxmann.com 5 (Bombay) dated 16-09-2022

[9] Tulsi Ram and Company Vs Commissioner [2022] 143 taxmann.com 6 (Allahabad) dated 23-09-2022

[10] 1997 taxmann.com 1668 (SC), dated 16-07-1997

[11] 1994 taxmann.com 370 (SC), dated 09-05-1994

[12] Union of India Vs. Mohit Minerals (P) Ltd. [2022] 138 taxmann.com 331 (SC)

[13] CCE v. Medico Labs 2004 taxmann.com 436 (Gujarat)

[14] Mil India Ltd v. Commissioner of Central Excise 2007 taxmann.com 1271 (SC)

[15] Inserted vide Notification No. 14/2022–Central Tax, Dated 05-07-2022 w.e.f. 05-07-2022