Finance Bill 2010 –

Direct Tax Proposals

 OBJECT/SCOPE

To deliberate upon direct tax proposals of

Finance Bill 2010 ( of February 26, 2010)
 Basic Objective of FM to Taxation in
Finance Bill 2010
 Taxation
 While formulating them (tax proposals), I have
been guided by the principles of sound tax
administration as embodied in the following
words of Kautilya:

"Thus, a wise Collector General shall conduct

the work of revenue collection.... in a manner
that production and consumption should not be
injuriously affected.... financial prosperity
depends on public prosperity, abundance of
harvest and prosperity of commerce among
other things." (Para 117 of Speech of Budget)
3
 FM on Direct Tax Code from Budget
Speech
 25. I am happy to inform the
Honourable Members that the
process for building a simple tax
system with minimum exemptions
and low rates designed to promote
voluntary compliance, is now nearing
completion. On the Direct Tax Code
the wide-ranging discussions with
stakeholders have been concluded. I
am confident that the Government
will be in a position to implement the
Direct Tax Code from April 1, 2011
4
 Supreme Court on Relevance of
Budget Speech/Memorandum etc
 Per Justice S.B.Sinha in R&B Falcon 301 ITR 289:

“CBDT has the requisite jurisdiction to

interpret the provisions of the Income Tax Act.
The interpretation of CBDT being in the realm
of executive construction, should ordinarily
held to be binding, except where it violates
any provision of the law or is contrary to any
judgment rendered the courts…..even in
certain situation a representation made be an
authority like finance minister presenting the
bill before the parliament may also be found
bound thereby…where a representation is
made by maker of the legislation at the time of
introduction of the bill…..the same carries a
great weight..”

5
 Supreme Court on Relevance of
Budget Speech/Memorandum etc
 Other interesting rulings of general use
on Role of Explanatory Memo/ Budget
Speech:

 SC ruling in K.P.Varghese 131 ITR 597

 SC in Navnet Jhaberi 56 ITR 198
 Justice Markandey Katju in his book on
Interpretation of Tax Statues

6
 Proposals at a glance
• Settlement Commission Scope expanded..

• Charitable Trust Taxation – Commercial

Activity Threshold introduced…

• MAT increased from 15 to 18%

• Non resident Taxation : SC ruling in

Inshikawajima re-nullified with extended
language
7
 Proposals at a glance

• R&D promoted…weighted deduction

enhanced

• SEZ anomaly in tax benefit computation –

retrospective operation clarified

• Gift Transactions : Welcome Clarifications

• Conversion of LLP into Company – Tax

Neutral if conditions satisfied of sec 47(xiiib)
8
 Proposals at a glance
• Personal Income Tax (Individual; HUF AOP;
BOI; Artificial Juridical Person) – Basic Tax
Exemption Limit (in INR- Lacs) (AY 2011-
2012) Slab Rate Changes (“L” stands for INR
Lacs)
Rate %age Sr Citizen Women resident Others
resident
10% 2.4L to 5L 1.9L to 5L 1.6L to 5L

20% 5L to 8L 5L to 8L 5L to 8L

30% 8L above 8L above 8L above

9
 Proposals at a glance
• On domestic companies Surcharge reduced
from 10 to 7.5%

10
 Clause by Clause Analysis
Charitable Trust Taxation: Clause 3:Section
2(15) provided advancement of general public
utility shall loose charitable character if involves
Carrying on of commercial activities…w.e.f AY
09-10
Particular Earlier Amendment
Status proposed
Extent of No Threshold Upto INR 10Lacs for
Commercial criteria “receipts” from
Activity for Commercial
Charity – activities- no loosing
Pecuniary of charitable status
Limit 11
 Section 2(15) Charitable trust

Chd ITAT ruling in HP Environment case 125

TJ 98 (services incidental rendered without
rofit motive not hit by new amendment);
DHC ICAI Foundation 226 CTR 27 ; (merely
ecause some remuneration is taken for
ncidental accounting projects at instance of
ovt – amended proviso not applies)

12
 Section 2(15) Charitable trust

Latest Delhi ITAT ruling in Cane Development

33 DTR 170 Held if partly charitable objects

re there, exemption u/s 11;12 is there and
whatever action can be taken is possible at
nal assessment stage and not 12A
egistration stage

Bang ITAT (contra) 317 ITR 65 AT

13
 Clause by Clause Analysis
Charitable Trust Taxation: Section 12AA(3)

Clarified w.e.f 1 June 2010 that CIT has power

to cancel registration of section 12A Clause 7

Judicial Precedents Nullified:

Hyd Bench of ITAT in 106 ITD 256 Sri

Chaitanya & Pune Bench of ITAT in 119 TTJ 261
ETC

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 Clause by Clause Analysis
Non Resident Taxation: Scope of 9(1)(v);(vi)
And (vii) Retrospective amendment from
1/6/1976 Clause 4
Issue Whether Rendition and Utilization both
are required to be satisfied for Indian
Taxability of services? SC ruling in IHI 288 ITR 408
Legislative Background: Earlier Explanation
reinforced with more WORDS prima-facie Doubtful and
Unhealthy amendment : as SC seems to have
Read down the law constitutionally & further, SC has
issued notice in related matter on assessee’s SLP
(No25295/2009) over Kar High Court ruling in
225 CTR 220
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 Earlier Budget/2009 change
 Anomaly in SEZ Unit Deduction u/s 10AA
removed (Parity in Numerator and
Denominator) from AY 2010- 2011
 MADE NOW RETROSPECTIVELY APPLICABLE
FROM AY 2006-2007 FROM EARLIEST DATE
Earlier Formulae 2009 Budget Change
For Deduction For Deduction
Computation Computation

Profits of business of Profits of business of

Unit* Export Turnover Unit* Export Turnover
of Unit/Total Turnover of Unit/Total Turnover
of Business of of Business of
Assessee undertaking/unit 16
 Clause by Clause Analysis

Section 35(2AB) – Scientific Research Weighted

Deduction (clause 9) – PHARMA SECTOR boost

Particular Earlier limit Amendment

proposed
Inhouse 150% of 200% of
research specified specified
expense expense
Contribution to
outside 125% of sum 150% of sum
approved paid paid
institution etc 17
 Clause by Clause Analysis

Section 35(1)(iii) – List of Scientific Research

Associations to include “undertaking engaged in

social science or statistical research – their

income would be exempt u/s 10(21) –
contribution eligible for deductions etc in hands
of payer

Clause 5,9,26, 32,34

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 2009-Budget Change
Section 35AD – Investment Linked Tax Incentive for
Specified Business (clause 10; 13; 17;24;28) – For AY
2010-2011 – Key Points;

 for cold chain facility for specified products; for warehouse facilities
for agricultural produce (business commences after 1/4/2009) and
laying & operating a cross country natural gas pipeline distribution
network (business commences after 1/4/2007/ 1/4/2009)
 For all capital expense (excl land ; goodwill and financial
instrument)
 loss of specified business – only adjustable against profits of the
specified business – indefinite carry forward – section 73A

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 Clause by Clause Analysis
Section 35AD (refer above slide) expanded to
include 2 star hotel IRRESPECTIVE OF
LOCATION (tourism sector boosted) AY
2011-2012 – Clause 10,23 (business of building
and operating hotel)

Further, Parity introduced with Petroleum

Regulations of hitherto specified criteria in
Income Tax Act of pipeline capacity (AY 2010-
11)
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 Clause by Clause Analysis

Section 40(a)(ia) Clause 12:

Disallowance for expense for TDS default With
retrospective effect from 2010-2011
Particular Earlier Amendment
proposed
Time Limit for Only last Now extended
TDS deposition month TDS for whole year
could be tax deduction
deposited by
ITR filing date

21
 Clause by Clause Analysis
Section 40(a)(ia) Clause 12:
Disallowance for expense for TDS default With
retrospective effect from 2010-2011

Remedies Explorable:

a) Revised Return u/s 139

b) Rectification u/s 154 (Precedents: SC in 34
ITR 143; 50 ITD 348 etc)- apparent mistake
c) Caution: SC in Goetze (new claims without
revised return not possible)
22
 Clause by Clause Analysis

Section 201(1A) Clause 42:

Rate of Interest for non payment of TDS/tax
withheld: with effect from 1/7/2010 (two
limbs)

Particular Earlier Amendment

proposed
Rate of interest One percent 1.5% per
%age per month/part month/part of
of month month

23
 Clause by Clause Analysis

Tax Audit Threshold Limit : Section 44AB

Clause 14,15 from AY 2011-2012
(Related change in Presumptive Tax Scheme)

Particular Earlier Amendment

proposed
Business 40 Lacs (INR) 60 Lacs

Profession 10 Lacs (INR) 15 Lacs

24
 Clause by Clause Analysis

Section 44AB : Tax Audit Penalty Section 271B

(Clause 50)

Particular Earlier Amendment

proposed
Max Penalty INR 1 Lac INR 1.5 Lac
Amt

25
 Clause by Clause Analysis
Section 44BB versus 44AD Clause 16,17: AY
2011-2012 (Huge impact in terms of tax computation)

Latest Advance Ruling in Geofizyka Torun

p.zo.o. (Precedents noted here:[vide AC(IT) vs.
Paradigm Geophysical (P) Ltd.[(2008) 25 SOT
94]; ONGC vs. DC(IT) (ITA No2145/D/2004);
DC(IT) vs. Schlumberger Seaco Inc. (50 ITD
346); DIT (Intrnl.Taxation) vs. Jindal Drilling
Industries Ltd. (ITA No. 3416(Del) of 2003].

26
 Clause by Clause Analysis
Section 44BB versus 44AD Clause 16,17: AY
2011-2012

Proposed Now: That 44DA would supersede

over 44BB (The applicant IN AFORESAID
ADVANCE RULING has been providing the seismic
data acquisition, processing and interpretation
services to various oil and gas exploration and
production companies in India: Such services are
aimed at increasing the exploration success of its
customers and assisting them in maximizing the
production from their existing reservoirs )

27
 Clause by Clause Analysis
Section 47(xiiib) :Company to LLP conversion
not be regarded as TRANFER for CAPITAL
GAINS LEVY provided:
i) Total Sales < INR 60 Lacs in any of three preceding
years
ii) Shareholders of Co – Partners in LLP with same
proportion of Shareholding in co.
iii) No consideration apart from Profit sharing in LLP
and Capital Contribution
iv) All assets and liabilities moves
v) No amount paid from accumulated profits for 3yrs
prd from conversion date, to any partner
vi) Erstwhile shareholders shares minimum Profits of
50% in LLP for 5 yrs from conversion date
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 Clause by Clause Analysis

Other related amendments:

i) Business Loss and Unabsorbed Dep of Co

to be allowed in hands of LLP if above
conditions fulfilled
ii) If conditions un-complied, benefit availed
to be chargeable profits of LLP in default
year
iii) Mat Credit not transferable (Section
115JAA)
29
 Clause by Clause Analysis

Other related amendments:

i) Section 35DDA(4A) benefit of unavailed

VRS expense available to successor LLP
ii) Proportionate depreciation benefit to
predecessor Co and successor LLP
iii) Cost of Capital asset for Successor LLP =
Cost of Acquisition for Predecessor Co.
iv) Block of Assets WDV for LLP = WDV of
predecessor CO on conversion date
30
 Clause by Clause Analysis
Section 56 (2)(VII) : Unrelated Party “Gift”
Transactions etc

1. SCOPE EXPANDED: to include transfer to firm or

closely held company (on/after 1/6/2010) QUA
SHARES IN CLOSELY HELD COMPANY ONLY
(hitherto only Indl and HUF’s included)

Exempted List: transfer specified in section 47(via);

(vic); (vicb); vid and (vii)- only specified
amalgamation and demerger (Co- LLP conversion
not there? And what about general slump Sale? etc)

31
 Clause by Clause Analysis
Section 56 (2)(VII) : Unrelated Party “Gift”
Transactions etc

2. WELCOME CLARIFICATION : that Section

56(2) applies qua Capital Asset Qua
Recipient and not to Stock In trade; Raw
Material and Consumable Stores (for
recipient) (from 1/10/2009)

32
 Clause by Clause Analysis
Section 56 (2)(VII) : Unrelated Party “Gift”
Transactions etc

3. WELCOME CLARIFICATION : that Section

56(2) applies qua immovable Property only
vis a vis ZERO CONSIDERTION and not in
inadequate consideration cases

33
 Clause by Clause Analysis
Section 56 (2)(VII) : Unrelated Party “Gift”
Transactions etc

4. Bullion Added in the list of specified property

(from 1/6/2010- AY 2011-2012)

5. REFERENCE TO DVO: Section 142A linked

with section 56(2)

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 Clause by Clause Analysis

Section 80CCF : Deduction in respect of Long

Term Infrastructure Bonds (clause 24)
FROM AY 2011-2012
Particular Earlier limit Amendment proposed
Long Term Zero/Nil Max INR 20,000
Infrastruct
ure Bonds

35
 Clause by Clause Analysis

Contribution to Central Government Health

Scheme : Section 80D FROM AY 2011-2012

Particular Earlier Scope Amendment proposed

Nature of Health Insurance Central Govt Health
Scheme Policies Scheme included

36
 Clause by Clause Analysis
Housing and Real Estate Sector: Section 80IB(10)
EXTENSION OF TIME LIMT OF COMPLETION FROM 4
YEARS TO 5 YEARS (FROM APPROVAL YEAR END)- FOR
PROJECTS APPROVED ON/AFTER 1/4/2005

Particular Earlier Scope Amendment proposed

Built-up 5% of total For projects pending for
area of built up area completion approved after
shops/Com or 2000 sq 1/4/2005 for income
mercial feet (lower) pertaining to 2010-11
area asst year onwards: 3% or
(allowed) 5,000 sq feet (higher)
37
 Clause by Clause Analysis

Particular Earlier Time Amendment proposed

Limit of
Completion
Section 31/3/2010 31/7/2010 (CLAUSE
80-ID 28)
Deduction
of hotel in
(TO PROVIDE MORE
National TIME FOR FACILITIES
Capital TO BE SET UP IN
Territory
LIGHT OF
COMMONWEALTH
GAMES IN OCT 2010)
38
 Clause by Clause Analysis

 Tax Deduction at Source –thresh holds revamped-

INR (basic exemption)
Particular Existing Rate Amendment/Proposal
w.e.f 1/7/2010

194C Contractor 20,000 (single 30,000 (single

Payment transaction) transaction)

50,000 (aggregate 75,000 (aggregate of

of transactions for transactions for
whole year) whole year)
194h Commission 2,500 5,000
Brokerage

39
 Clause by Clause Analysis
 Tax Deduction at Source –thresh holds revamped-
INR
Particular Existing Rate Amendment/Proposal
w.e.f 1/7/2010

194I Rentals 1,20,000 1,80,000

194J 20,000 30,000

Professional/Technical
Services

194B Lottery Winnings 5,000 10,000

194BB Horse Race 2,500 5,000
Winning
194D Insurance 5,000 20,000
Commission 40
 Clause by Clause Analysis

 Section 203(3) – TCS and TDS Certificate by deductor

(EARLIER dispensed)

 NOW:

 Since said certificate constitute important documentary

evidence for deductee/collecttee, proposed that
deductor shall continue to issue said certificates

 Clause 43,44

41
 Clause by Clause Analysis

 Scope of Income Tax Settlement Commission Section

245A(b)

 Meaning of term “Case” and ITSC scope expanded:

Search Assessment cases: During Pendancy (notice
issued u/s 153A and assessment not completed) provided
Additional amount of income tax payable is INR 50 Lacs

 Existing limit of additional tax payable for general cases

increased from INR 3 Lacs to INR 10 Lacs

 18 Months Time limit to ITSC for passing orders from

month end in which application made (on/after 1/6/2010)
(existing application of June 2007 to June 2010 to be
disposed within 12 months)

42
 Clause by Clause Analysis

 High Court : Power to Condone Delay

 P&h High Court following Hongo SC in Shergarh Cooperative :
Held No power ITA 654/2009

 CM No.
Delhi High Court in orders dated 4/9/2009 incl
11031/2008 in ITA No.932/2008 : held power
available

 Allahabad High Court: Mohd Farooq : Held Power not

available (Full Bench)

 CIT vs. Grasim

Industries (27 DTR 130 Bombay High Court) and
ACIT vs. Mahavir Prasad (26 DTR 105 Chhattisgarh
High Court). – no power
43
 Clause by Clause Analysis

 High Court : Power to Condone Delay

 Section 260A(2A): Proposed to specifically provide

from 1/10/1998 Power to High Court to condone
delay is available

44
 Clause by Clause Analysis

 Other changes: In brief

 Document Identification No DIN: deferred section 282B: to

be issued after 1/7/2011

 Non Life Insurance Companies: Parity with IRDA guidelines

in income recognition vis a vis unrealized gains in
investment appreciation

 Extension of Time Limit for Notification related to CPU

Bangalore Section 143(1B): till 31.3.2011

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 Clause by Clause Analysis

 Impact on Sectors of Budget Changes:

 MAT increase: Cash strapped companies Hit spl

Infrastructure, Oil and Gas Exploration and IT Companies

 Higher MAT rate in Income tax act better to Direct tax MAT
Model

 When in Direct Tax Code no place to Settlement commission

– why scope expansion in Income Tax Act for one year

 Gifts tax on company purchasing shares can be disincentive

for business reorganization within a group and give rise to
litigation on VALUATION front

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 Latest Judicial Developments
 LANDMARK SC RULING IN DHAIRYA CONSTRUCTIONS
SUBJECT: REOPENING SECTION 148
"Having examined the record, we find that in this
case, the Department sought reopening of the
assessment based on the opinion given by the
District Valuation Officer (DVO). Opinion of the DVO
per se is not an information for the purposes of
reopening assessment under
Section 147 of the Income Tax Act, 1961. The AO
has to apply his mind to the information, if any,
collected and must form a belief thereon. In the
circumstances, there is no merit in the Civil Appeal. The
Department was not entitled to reopen the
assessment.Civil appeal is, accordingly, dismissed. No
order as to costs"

47
 Latest Judicial Developments
Bombay High Court on Section 148: Reopening
Feb 2010

a) Prashant Joshi (Expl II to section 147 in context of

reopening after 143(1)/intimation)

b) Purity Techtextile and Godrej Agrovet (CAG

objection not “tangible material” for reopening)

c) Balkrishna Hiralal Wani (even after 143(1) in terms

of SC in Kelvinator case – tangible material must for
reopening)

Under all the above rulings- under WRIT jurisdiction –

148 Notices were quashed
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 Latest Judicial Developments
 LANDMARK SC RULING ON BAD DEBT: SECTION
36(1)(vii): T.R.F Ltd:

This position in law is well settled. After 1st

April,     1989,   it    is   not    necessary     for   the  
assessee    to
establish      that       the       debt,     in    fact,      has 
Become irrecoverable. It is enough if the bad debt is
Written off   as    irrecoverable       in     the    accounts
of the assessee.

49
 Latest Judicial Developments
 LANDMARK SC RULING ON Section 80IB Excise
Refund Whether entitled for Deduction there under

SC SLP DISMISSAL AFTER ACTIVE

CONSIDERATION ON REVENUE’S SLP IN
DHARAM PAL PREM CHAND:

UNDERLYING DHC RULING 317 ITR 353

50
Thank You
CA.KAPIL GOEL
9910272806
cakapilgoel@gmail.
com