Paper 7 Direct Tax Laws How to prepare for November...

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Paper 7 – Direct Tax Laws How to prepare for November 2017 Examination and Recent amendments CA. Priya Subramanian & CA. Aparna Chauhan Online Mentoring on Cloud Campus Organised by BoS, ICAI © The Institute of Chartered Accountants of India Date: August 27, 2017

Transcript of Paper 7 Direct Tax Laws How to prepare for November...

Paper 7 – Direct Tax Laws How to prepare for November 2017

Examination and Recent amendments

CA. Priya Subramanian & CA. Aparna Chauhan

Online Mentoring on Cloud Campus Organised by BoS, ICAI

© The Institute of Chartered Accountants of India

Date: August 27, 2017

Disclaimer Statement

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1 • This lecture has been delivered by faculty members to supplement the Study Material,

Practice Manual and other content

2 • The views expressed in this lecture are of the Faculty Member.

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• The content of this video lecture has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its committees

Students are advised to refer to e-Lectures

available on the Students LMS for this

and other topics

Free Access

Register with your Student Registration Number and Start

learning immediately

3

Students Learning Management System (LMS) http://studentslms.icai.org

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The e-Lectures, PPT, Podcasts and Video lectures on ICAI Cloud

Campus aim to supplement the Study Material, Practice Manual

and Supplementary Study Material

The lecture recordings are made according to the syllabus and laws existing/ applicable as on the date

of recording.

Due to changes in law, there is likely to be some time gap

between these changes and the recording of updated lectures.

Hence, students are advised to refer to the Study Material

including Supplementary Study Material, if any, and other

relevant legislation for latest provisions/ amendments required

for forthcoming examination.

Important Notes

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Whether there is any change in syllabus of Paper 7 – Direct Tax Laws in November, 2017

examination vis-à-vis May, 2017 examination?

What is the applicable Finance Act for November, 2017 Examination?

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Income-tax Act, 1961 as amended by the Finance Act, 2016.

The relevant assessment year is A.Y.

2017-18.

Significant Notifications/Circulars issued upto 30th April,

2017 are relevant.

Query: What is the Assessment Year Applicable for November 2017 Examination?

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What are the BoS publications relevant for November, 2017

Examination?

© ICAI, 2016

Study Material – November, 2015 edition

Supplementary Study Paper – 2016

Practice Manual - December 2016 Edition

Select Cases in Direct and Indirect Tax Laws – 2016 –September 2016

Revision Test Paper (RTP) for November 2017 Examination

Query: What are the BoS publications relevant for November 2017 Examination?

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Supplementary Study Paper 2016

• Amendments made by the Finance Act, 2016

• Significant notifications/circulars issued between 1.5.2015 and 30.4.2016

Revision Test Paper (RTP) for November 2017 Examination

• Statutory Update containing significant notifications/ circulars issued between 01.05.2016 and 30.04.2017

Query: Where to study the Latest Amendments Relevant for November 2017 Examination?

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Where Do We Study the Latest Amendments and Case Laws Relevant for November, 2017 Exam?

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Judicial Update (Latest case laws)

Select Cases in Direct and Indirect Tax Laws [September 2016 Edition]

Judicial Update – webhosted at BOS Knowledge Portal

What should be the approach for effective self-study and attaining conceptual clarity in this paper?

When should one start doing Practice Manual? Should Practice Manual be taken up at the end after completing all the chapters?

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After reading a topic of the Study Material thoroughly, work out questions from the corresponding chapter of the Practice Manual.

Prepare short summaries of each chapter

Read each chapter of the Study Material thoroughly for conceptual clarity.

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How to Self-study Effectively and Attain Conceptual Clarity?

© ICAI, 2016

Thereafter, compare your answers with the answers given.

Repeat this process for each topic - Read the Study Material,

work out questions from the Practice Manual and compare your answers to identify your

mistakes.

So, after first round of study, you have understood the concept,

summary of each chapter is ready with you and you have worked out questions in the

Practice Manual

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How to Self-study Effectively and Attain Conceptual Clarity?

© ICAI, 2016

The entire syllabus needs to be revised twice before the

commencement of Examination

The time taken will be lesser in each consecutive revision

During your first revision, work out the Practice Manual once

again

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How to Self-study Effectively and Attain Conceptual Clarity?

How to self-assess the preparation?

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Solve past year question papers with the help of Suggested Answers as well as Mock Test Papers hosted on the Institute’s website within the time span of three hours to self-assess your preparedness for the examination.

Further, solve the questions in the Revision Test Paper to self-assess

your preparation for the examination.

How to self-assess the preparation?

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How to improve performance in the examination?

How to get good marks?

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Answer the questions with due emphasis on the provisions of law

In case of computational problems, supplement your computation with working notes/explanatory notes. Support your treatment with the provisions of law and/or case laws.

Relate and apply ratio of court rulings in case law based questions

Mentioning section numbers will add value to your answer

State your assumptions/views clearly

Write all the parts of the same question one after the other in continuation.

Query: How to Score Good Marks in this Paper ?

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What is the Ideal Manner of Answering a Case Law Based Question ?

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First of all, it is important to identify the issue raised in the question.

Then, you may briefly discuss the related provision of law.

Thereafter, if you remember the name of the case, mention that the issue has been dealt with in the said case.

What is the Ideal Manner of Answering a Case Law Based Question ?

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You may then highlight the decision of the case, by bringing out the rationale of the Court’s

decision.

Apply the rationale of the Court’s decision to the case on hand and give a conclusion as to whether

the contention of the assessee or Assessing Officer, as the case may

be, is correct or not.

Basic Concepts

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Rates of Tax

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Rates of Tax

Individual/HUF/AOP/BOI and every artificial juridical person

• Basic Exemption limit and rate of tax

remain the same

Firms/ LLP

• 30% of the total income

Domestic Companies

• Where the total turnover or gross receipt in the previous year 2014-15 does not exceed Rs. 5 crore

• 29% of the total Income

• In case of other domestic companies

• 30% of the total income

Foreign Companies

• 40% of total income

New option Rate of Tax for Domestic Company (Section 115BA)

25 % of Total Income

Setup and registered on or after 1st March,

2016

the company is not engaged in any business

other than the business of manufacture or production of any article or thing and research in relation to, or

distribution of, such article or thing manufactured or

produced by it; and

the company while computing its total income has not claimed any benefit under section 10AA, additional depreciation under section

32(1)(iia), investment allowance under section 32AC or section 32AD, deduction under section 33AB and section 33ABA, weighted

deduction for scientific research or social science and statistical research under section 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB),

deduction under section 35AC in respect of expenditure on eligible projects and schemes, investment linked tax deduction under section 35AD, weighted deduction under section 35CCC and 35CCD in respect of expenditure incurred by a company on

notified agricultural extension project and notified skill development project; further, while computing its total income, it

has not claimed benefit of deduction under Chapter VI-A under the heading “Deductions in respect of certain incomes” other than

the provisions of section 80JJAA

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Surcharge

Individual/HUF/AOP/BOI/Artificial juridical person

Total income exceeds Rs. 1 crore

@15% of Income-tax

Co-operative societies/Local Authorities/Firms/LLPs

Total income exceeds Rs. 1 crore

@12% of Income-tax

Domestic company

Total income is > Rs. 1 crore but ≤ Rs. 10 crore

@7% of income-tax

Total income is > Rs. 10 crore

@ 12% of Income-tax

Foreign Company

Total income is > Rs. 1 crore but ≤ Rs. 10 crore

@2% of income-tax

Total income is > Rs. 10 crore

@ 5% of Income-tax

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Increase in Rebate under section 87A from Rs. 2,000 to Rs. 5,000

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Rs. 2,000

(upto A.Y.2016-17)

Rs. 5,000

(from A.Y.2017-18)

Rebate under section 87A

Determination of residential status of

companies based on POEM

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Income which do not form part of total Income

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Exemption under section 10(34) not to apply to dividend chargeable to tax in accordance with section 115BBDA

Section 115BBDA has been inserted to provide that any income by way of aggregate dividend in excess of Rs. 10 lakh shall be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm who

is resident in India, at the rate of 10%.

Simultaneously, a proviso has been inserted in section 10(34) to provide that the exemption available thereunder in respect of dividend received

by a shareholder from a domestic company would not apply to income by way of dividend chargeable to tax under section 115BBDA.

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Example

A Ltd., a domestic company, declared dividend of Rs. 170 lakh for the year F.Y.2015-16 and distributed the same on 10.7.2016. Mr. X, holding 10% shares in A Ltd., receives dividend of Rs. 17 lakh in July, 2016. Mr. Y, holding 5% shares in A Ltd., receives dividend of Rs. 8.50 lakh. Discuss the tax implications in the hands of A Ltd., Mr.X and Mr.Y, assuming that Mr.X and Mr.Y have not received dividend from any other domestic company during the year.

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Solution

(i) The dividend of Rs. 170 lakh declared and distributed in the P.Y.2016-17 is subject to dividend distribution tax under section 115-O in the hands of A Ltd. First of all, the dividend received has to be grossed up by applying the rate of 15%. The gross dividend is Rs. 200 lakh [Rs. 170 lakh × 100/85]. Dividend distribution tax @17.304% is Rs. 34.608 lakh.

(ii) In the hands of Mr. X, dividend received upto Rs. 10 lakh would be exempt under section 10(34). Rs. 7 lakh, being dividend received in excess of Rs. 10 lakh, would be taxable@10% as per section 115BBDA. Such dividend would not be exempt under section 10(34). Therefore, tax payable by Mr. X on dividend of Rs. 7 lakh under section 115BBDA would be Rs. 72,100 [i.e., 10% of Rs. 7 lakh + cess@3%].

(iii) In the hands of Mr. Y, the entire dividend of Rs. 8.50 lakh received would be exempt under section 10(34), since only dividend received in excess of Rs. 10 lakh would be taxable under section 115BBDA.

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Payment from NPS Trust to an employee on closure of his account or on his opting out of the pension scheme exempt to the extent of 40% of such payment [Section 10(12A)]

New clause (12A) has been inserted in section 10 to provide that any payment from National Pension

System Trust to an employee on account of closure or his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed

40% of the total amount payable to him at the time of closure or his opting out of the scheme, shall be

exempt from tax.

However, the whole amount received by the nominee, on death of the assessee shall be exempt

from tax.

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Superannuation Fund

Any payment from an approved superannuation fund made by way of transfer to the account of an employee under a notified pension scheme referred to in section 80CCD is exempt under section 10(13).

The amount of any contribution upto Rs.1.50 lakh to an approved superannuation fund by the employer in respect of an employee would be an exempt perquisite. If the contribution exceeds Rs.1.50 lakh in respect of any employee, the excess would become a taxable perquisite in his hands.

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Income from House Property

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Extension of period for completion of construction from 3 years to 5 years, for claiming higher deduction of upto Rs. 2 lakh in respect of interest on capital borrowed for construction of self-occupied house property

Time period for completion of construction (from the end of the financial year

in which capital was borrowed)

5 years

(from A.Y.2017-18)

3 years

(upto A.Y.2016-17)

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Example

For claiming higher deduction of upto Rs.2 lakh in A.Y.2017-18 in respect of interest on capital borrowed on 1.6.2011 for construction of self-occupied house property, the last date, on or before which construction has to be completed, is-

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Special provision for arrears of rent and unrealized rent received subsequently [New Section 25A]

New Section 25A

Arrears of Rent / Unrealised Rent

(i) Taxable in the year of receipt/realisation

(ii) Deduction@30% of rent received/realised

(iii) Taxable even if assessee is not the owner of the property in the financial year of receipt/realisation.

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New section 25A(2) provides a deduction of 30% of arrears of rent or unrealised rent

realised subsequently by the assessee.

Example Mr. Anand sold his residential house property in March, 2016.

In June, 2016, he recovered rent of Rs. 10,000 from Mr. Gaurav, to whom he had let out his house for two years from April 2010 to March 2012. He could not realise two months rent of Rs. 20,000 from him and to that extent his actual rent was reduced while computing income from house property for A.Y.2012-13.

Further, he had let out his property from April, 2012 to February, 2016 to Mr. Satish. In April, 2014, he had increased the rent from Rs. 12,000 to Rs. 15,000 per month and the same was a subject matter of dispute. In September, 2016, the matter was finally settled and Mr. Anand received Rs. 69,000 as arrears of rent for the period April 2014 to February, 2016.

Would the recovery of unrealised rent and arrears of rent be taxable in the hands of Mr. Anand, and if so in which year?

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Solution

Computation of income from house property of Mr. Anand for A.Y.2017-18

Particulars Rs.

(i) Unrealised rent recovered 10,000

(ii) Arrears of rent received 69,000

79,000

Less: Deduction@30% 23,700

Income from house property 55,300

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Since the unrealised rent was recovered in the P.Y.2016-17, the same would be taxable in the

A.Y.2017-18 under section 25A, irrespective of the fact that Mr. Anand was not the owner of

the house in that year. Further, the arrears of rent was also received in the P.Y.2016-17, and

hence the same would be taxable in the A.Y.2017-18 under section 25A, even though Mr.

Anand was not the owner of the house in that year. A deduction of 30% of unrealised rent

recovered and arrears of rent would be allowed while computing income from house property

of Mr. Anand for A.Y.2017-18.

Profits and Gains From Business

or Profession

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Non-compete fee received/receivable for not carrying on a profession chargeable under the head “Profits and gains of business or profession” [Section 28(va)]

Clause (va) of section 28 has been amended to bring the non-compete fee received/receivable (which are recurring in nature) in relation to not carrying out any profession, within the scope of profits and gains of business or profession.

Further, the proviso to section 28(va) has been amended to clarify that receipts for transfer of right to carry on any profession, which are chargeable to tax under the head "Capital gains", would not be taxable as profits and gains of business or profession.

Section 55 has also been amended to provide that, for the purposes of sections 48 and 49, the cost of acquisition and cost of improvement in relation to a capital asset, being right to carry on any profession, shall also be taken as Nil.

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Assessees engaged in the business of transmission of power eligible for additional depreciation [Section 32(1)(iia)]

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Upto A.Y.2016-17

Manufacture or production of an article or thing

Generation or generation and

distribution of power

From A.Y.2017-18

Manufacture or production of an article

or thing

Generation, transmission or

distribution of power

Deduction under section 32AC to be available in the year of installation in respect of actual cost of new plant and machinery acquired in the P.Y.2015-16 and P.Y.2016-17, if the actual cost of such new plant and machinery acquired in the relevant previous year exceeds Rs. 25 crores, even if the new plant and machinery has not been installed in the relevant previous year but has been installed on or before 31.3.2017

section 32AC(1A) has been amended to provide that acquisition of the plant and machinery, the actual cost of which exceeds Rs. 25 crore, has to be made in the relevant previous year. However, installation may be made by 31.03.2017 in order to avail the benefit of deduction of 15%.

Where the installation of the new asset is in a year other than the year of acquisition, the deduction under this sub-section shall be allowed in the year in which the new asset is installed, provided the installation is on or before 31.3.2017.

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Example C

om

pa

ny

Actual cost of new plant and

machinery (Rs. )

Previous year of acquisition

Previous Year of installation

Assessment Year in which deduction u/s 32AC can be

claimed

Deduction u/s 32AC

(Rs. )

B Ltd. 40 crores P.Y.2015-16 P.Y.2016-17 A.Y.2017-18 6 crores

C Ltd. 50 crores P.Y.2016-17 P.Y.2016-17 A.Y.2017-18 7.50 crores

D Ltd. 60 crores P.Y.2016-17 P.Y.2017-18 - -

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NBFCs eligible for claim of deduction for provision for bad and doubtful debts [Section 36(1)(viia)]

Non-Banking Financial Companies (NBFCs) are also engaged in financial lending to different sectors of society, sub-clause (d) has been inserted in section 36(1)(viia) to provide deduction on account of provision for bad and doubtful debts of an amount not exceeding 5% of total income (before making any deduction under section 36(1)(viia) and Chapter VI-A) in the case of NBFCs also.

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Sum payable to Indian Railways for use of railway assets allowable as deduction in the year in which the liability to pay such sum is incurred, only if payment is made on or before the due date of filing of return [Section 43B] In order to encourage timely payment of dues to Railways for use of the Railway assets, clause (g) has been inserted in section 43B to expand its scope to include any sum payable by the assessee to the Indian Railways for use of Railway assets, within its ambit.

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Increase in threshold limit of gross receipts/turnover under section 44AD of a business to be eligible for opting the presumptive taxation scheme

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Increase in threshold limit of eligible

business from Rs.1 crore to Rs. 2 crore

Salary, interest, remuneration paid to partner as per section 40(b) not deductible

Advance tax to be paid on or before 15th

March of the financial year

In case of non-offering of income as per

section 44AD for five continuous years, eligible assessee

cannot opt for section 44AD for the next five

AYs after the assessment year of

first non-option

Example:

Particulars A.Y.2017-18 A.Y.2018-19 A.Y.2019-20

Gross receipts (Rs. ) 1,80,00,000 1,90,00,000 2,00,00,000

Income offered for taxation (Rs. ) 14,40,000 15,20,000 10,00,000

% of gross receipts 8% 8% 5%

Offered income as per presumptive taxation scheme u/s 44AD

Yes Yes No

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Let us consider the following particulars relating to a resident individual, Mr. A, being an eligible assessee whose gross receipts do not exceed Rs. 2 crore in any of the assessment years between

A.Y.2017-18 to A.Y.2019-20 -

In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under section 44AD for A.Y.2017-18 and A.Y.2018-19 and offers income of Rs. 14.40 lakh and Rs. 15.20 lakh on gross receipts of Rs. 1.80 crore and Rs. 1.90 crore, respectively.

However, for A.Y.2019-20, he offers income of only Rs. 10 lakh on turnover of Rs. 2 crore, which amounts to 5% of his gross receipts. He maintains books of account under section 44AA and gets the same audited under section 44AB. Since he has not offered income in accordance with the provisions of section 44AD(1) for five consecutive assessment years, after A.Y.2017-18, he will not be eligible to claim the benefit of section 44AD for next five assessment years succeeding A.Y.2019-20 i.e., from A.Y.2020-21 to 2024-25.

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Note

Section 44AB makes it obligatory for every person carrying on business to get his accounts of any previous year audited if his total sales, turnover or gross receipts exceed Rs. 1 crore. However, if an eligible person opts for presumptive taxation scheme as per section 44AD(1), he shall not be required to get his accounts audited if the total turnover or gross receipts of the relevant previous year does not exceed Rs. 2 crore. The CBDT, has vide its Press Release dated 20th June, 2016, clarified that the higher threshold for non-audit of accounts has been given only to assessees opting for presumptive taxation scheme under section 44AD.

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Presumptive Taxation Scheme for assessees engaged in eligible profession [Section 44ADA]

New section 44ADA has been inserted in the Income-tax Act, 1961

providing a presumptive taxation scheme for estimating

the income of an assessee:

who is engaged in any profession referred to in section 44AA(1) such as

legal, medical, engineering or architectural profession

or the profession of accountancy or technical consultancy or interior decoration or any other

profession as is notified by the Board in the Official

Gazette; and

whose total gross receipts does not exceed fifty lakh rupees in a previous year,

at a sum equal to 50% of the total gross

receipts, or, as the case may be , a sum higher than the aforesaid sum claimed to have been

earned by the assessee.

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Meaning of Eligible Assessee:

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Eligible Assessees

Resident assessee engaged in notified profession u/s 44AA(1)

Total gross receipts ≤

Rs. 50 lakhs

Income computation and disclosure standards (ICDS) [Notification No. 3079(E) dated 29-09-2016]

The Central Government has, in exercise of the powers conferred under section 145(2), notified ten income computation and disclosure standards (ICDSs) to be followed by all assessees (other than individuals and HUFs who are not required to get their accounts of the previous year audited in accordance with section 44AB), following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “ Income from other sources”.

All the notified ICDSs are applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts.

In the case of conflict between the provisions of the Income‐tax Act, 1961 and the notified ICDSs, the provisions of the Act shall prevail to that extent.

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ICDS Title

I Accounting Policies

II Valuation of Inventories

III Construction Contracts

IV Revenue Recognition

V Tangible Fixed Assets

VI The Effects of changes in foreign exchange rates

VII Government Grants

VIII Securities

IX Borrowing Costs

X Provisions, Contingent Liabilities and Contingent Assets

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Significant Deviations impacting Computation of Taxable Income 1. ICDS I: Accounting Policies

Non-consideration of the concepts of Prudence and Materiality Examples of non-consideration of prudence in the ICDSs:

(i) The requirement in ICDS VII on Government Grants that recognition of a Government grant shall not be postponed beyond the date of actual receipt, even if conditions attached to the grant are not fulfilled.

(ii) Absence of requirement of “reasonable certainty of ultimate collection” for recognition of revenue from service transactions and use of resources by others yielding interest, royalties and dividends in ICDS IV on Revenue Recognition.

(iii) Non-recognition of expected losses on construction contracts and contract costs, recovery of which is not probable, as an expense immediately, in ICDS III on Construction Contracts.

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ICDS II: Valuation of Inventories

• In case of dissolution of a partnership firm or association of persons or body of individuals, Paragraph 24 of ICDS II on Valuation of Inventories requires the inventory on the date of dissolution to be valued at the net realisable value, notwithstanding whether business is discontinued or not.

• This requirement in ICDS II is in deviation from the Supreme Court ruling in Shakti Trading Co. vs. CIT (2001) 250 ITR 871, where it was held that if the firm is dissolved due to death of a partner and the surviving partners reconstitute the firm and continue the business as before, the firm is entitled to adopt cost or market price, whichever is lower.

Valuation of inventory on the date of dissolution of a firm, where the business is continued by a partner(s)

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ICDS III : Construction Contracts

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Point in time of recognition of expected loss on construction contracts

AS 7 vis-à-vis ICDS III:

• AS 7 permits recognition of expected loss on construction contract as well as contract costs, recovery of which is not probable, as an expense immediately. It also permits recognition of expected loss immediately as an expense, when it is probable that total contract costs will exceed total contract revenue.

• The absence of specific requirement in ICDS III to recognize such expected losses on

construction contracts immediately as expense represents a significant deviation from AS 7 as well as judicial rulings permitting immediate recognition of such losses as long as the same are in accordance with the accounting standard or justified by the principle of prudence or by the nature and circumstances of the contract. #

ICDS III : Construction Contracts

Treatment of penalties arising from delays caused by the contractor in completion of the contract

• Paragraph 11 of AS 7 permits decrease in contract revenue as a result of penalties arising from delays caused by the contractor in the completion of the contract.

• However, ICDS III does not permit such reduction in contract revenue.

AS 7 vis-à-vis ICDS III:

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ICDS III : Construction Contracts

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Point in time of recognition of retention money

AS 7 vis-à-vis ICDS III:

ICDS III requires retention money to be treated as part of contract revenue and recognized on percentage of completion method. As per paragraph 10 of ICDS III, “Contract Revenue” shall comprise of the initial amount of revenue agreed in the contract, including retentions. However, as per paragraph 10 of AS 7, contract revenue should comprise the initial amount of revenue agreed in the contract. #

Deviation from judicial precedents:

In CIT v. Associated Cables (P) Ltd. (2006) 286 ITR 596 (Bom.) and CIT v. Ignifluid Boilers (I) Ltd. (2006) 283 ITR 295 (Mad), it was held that the payment of retention money in the case of contract is dependent on satisfactory completion of contract work. The right to receive the retention money accrues only after the obligations under the contract are fulfilled and, therefore, it would not amount to income of the assessee in the year in which the amount is retained. ##

ICDS VII: Government Grants

The Supreme Court in, CIT v Ponni Sugar Mills (2008) 306 ITR 392, observed that it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy.

If the object of the subsidy scheme was to enable the assessee to run the business more profitably, then, the receipt was on revenue account.

On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand an existing unit, then, the receipt of the subsidy was on capital account.

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ICDS VII: Government Grants

ICDS VII deals with the treatment of government grants.

Except in case of government grant relating to a depreciable fixed asset and the subsidy or grant by the Central Govt. for the corpus of the trust/institution established by the Central or State Govt., which has to be reduced from written down value or actual cost, all other grants have to be recognized as upfront income or as income over the periods necessary to match them with the related costs which they are intended to compensate.

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ICDS VII: Government Grants

Further, in line with the requirement in ICDS VII, sub-clause (xviii) has been included in the definition of income under section 2(24).

Accordingly, assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement, by whatever name called, by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee is included in the definition of income.

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ICDS VII: Government Grants

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Recognition of Government Grants

AS 12 provides that Government Grants should not be recognized until there is a reasonable assurance that the enterprise will comply with the conditions attached to them and the grants will be received.

Paragraph 4(1) of ICDS VII also provides that Government Grants should not be recognized until there is a reasonable assurance that the enterprise will comply with the conditions attached to them and the grants will be received. This requirement is in line with AS 12. However, Paragraph 4(2) of ICDS VII goes on to provide that recognition of government grant shall not be postponed beyond the date of actual receipt. Therefore, as per ICDS VII, initial recognition of government grants cannot be postponed beyond the date of actual receipt even in a case where all the recognition conditions in accordance with AS 12 are not met.

ICDS IX : Borrowing Cost

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ICDS IX deals with the treatment of borrowing costs.

It requires borrowing costs which are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalized as part of the cost of that asset.

ICDS IX : Borrowing Cost

• ICDS IX, however, does not provide any minimum period for treating an asset as a qualifying asset (except in the case of inventories)##. However, for the purpose of computing the general borrowing costs to be capitalised, a qualifying asset would be such asset that necessarily require a period of 12 months or more for its acquisition, construction or production.

As per AS 16, “qualifying asset” is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. #

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AS 16 vis-à-vis ICDS IX:

Treatment of income earned from temporary investment of borrowed funds

AS 16 vis-à-vis ICDS IX

Paragraph 11 of AS 16 permits income earned on temporary investment of borrowed funds pending their expenditure on the qualifying asset to be deducted from borrowing costs incurred. ICDS IX however, does not permit such reduction from borrowing costs.

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Suspension of capitalization of borrowing costs

AS 16 vis-à-vis ICDS IX

AS 16 permits suspension of capitalization of borrowing costs during extended periods in which active development is interrupted. ICDS IX does not permit suspension of capitalization of borrowing costs in such cases.

Condition for recognition of Provision

AS 29 vis-à-vis ICDS X:

AS 29 requires recognition of a provision when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation

ICDS X requires recognition of a provision only when it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation.

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ICDS X: Provisions, Contingent Liabilities & Contingent Assets

ICDS X : Provisions, Contingent Liabilities & Contingent Assets

Condition for recognition of Contingent Asset

AS 29 vis-à-vis ICDS X:

Both AS 29 and ICDS X provide that a contingent asset should not be recognized. Further, both AS 29 and ICDS X require contingent assets to be assessed continually. Thereafter, recognition of contingent assets and related income is required in – AS 29, if inflow of economic benefits is “virtually certain”; ICDS X, if inflow of economic benefits is “reasonably certain”.

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Write-off of bad debts

years.

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Amount of debt taken into account in computing the income of the assessee on the basis of notified ICDSs to be allowed as deduction in the previous year in which such debt or part thereof becomes irrecoverable

Under section 36(1)(vii), deduction is allowed in respect of the amount of any bad debt or part thereof which is written off as irrecoverable. Therefore, write off in the books of account is an essential condition.

Due to early recognition of income under tax laws, it is possible that in certain cases, income-tax is paid on income which may not be realized in future. In such cases, there would also be no possibility of claiming bad debts since the income would not have been recognized in the books of account as per the Accounting Standards and consequently, cannot be written off as bad debts in books of account.

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Capital Gains

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Period of holding of unlisted shares to qualify as a long-term capital asset to be reduced from “more than 36 months” to “more than 24 months” [Section 2(42A)]

Third proviso has been inserted in section 2(42A) with effect from A.Y.2017-18 to provide that a share of a

company (not being a share listed in a recognized stock exchange in India) would be treated as a short-term capital

asset if it was held by an assessee for not more than 24 months immediately preceding the date of its transfer.

Thus, the period of holding of unlisted shares for being treated as a long-term capital asset has been reduced from

“more than 36 months” to “more than 24 months” from A.Y.2017-18.

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Stamp duty value on the date of agreement may be adopted as full value of consideration of immovable property, being land or building or both, if whole or part of the consideration has been received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, on or before the date of the agreement for the transfer of such immovable property [Section 50C]

Adoption of stamp duty value on the date of transfer as full value of consideration under

section 50C

Adoption of stamp duty value on the date of agreement as

full value of consideration under section 43CA

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Amendment in section 50C to ensure parity in tax treatment vis-a-vis section 43CA

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Section 43CA

Transfer of an asset, being land or building or both, held as stock-in-

trade

Stamp duty value on the date of agreement may be adopted as

consideration

Whole or part of consideration should be received by any mode other than cash on or before the

date of agreement

Section 50C

Transfer of capital asset, being land or building or both.

Stamp duty value on the date of agreement may be adopted as

consideration

Whole or part of consideration should be received by A/c payee

cheque/bank draft or ECS through a bank A/c on or before

the date of agreement

Exemption of long-term capital gains on investment in notified units of specified fund

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Conditions

Investment of LTCG in

units of specified

fund

Investment within 6

months after the date of

transfer

Maximum investment is

Rs. 50 lakhs

Units should not be

transferred for a period of 3

years

Long-term capital gains on shares of private companies to be subject to concessional rate of tax@10% in the hands of non-corporate non-residents and foreign companies [Section 112(1)(c)]

Since some courts have opined that shares of a private company are not "securities", section

112(1)(c) has been amended to provide that long-term capital gains arising to a non-corporate non-resident or a foreign company from the transfer of

a capital asset, being shares of a company not being a company in which the public are

substantially interested, shall also be chargeable to tax at the concessional rate of 10%, without

indexation benefit, in the hands of non-corporate non-residents and foreign companies.

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Set-off and Carry Forward & Set-off of

Losses

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Filing of return of loss on or before the due date under section 139(1) mandatory for carry forward of loss from specified business under section 73A [Section 80]

Section 80 has been amended so as to provide that the loss

determined as per section 73A shall not be allowed to be

carried forward and set off if such loss has not been

determined in pursuance of a return filed in accordance with

the provisions of section 139(3).

Correspondingly, section 139(3) requiring filing of

return of loss mandatorily within the time allowed under

section 139(1) for claiming carry forward of losses under

sections 72(1), 73(2), 74(1) and 74A(3) has been amended to include reference to section

73A(2).

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Deductions from Gross Total Income

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Additional deduction for interest on loan borrowed for acquisition of self-occupied house property by an

individual [Section 80EE]

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Conditions

Value of house ≤

Rs. 50 lakhs

Loan should be sanctioned during the P.Y.2016-17

Loan sanctioned ≤ Rs. 35 lakhs

The assessee should not own any residential house on the

date of sanction of loan

Example

Mr. A purchased a residential house property for self-occupation at a cost of Rs. 45 lakh on 1.6.2016, in respect of which he took a housing loan of Rs.35 lakh from Bank of India@11% p.a. on the same date. Compute the eligible deduction in respect of interest on housing loan for A.Y.2017-18 under the provisions of the Income-tax Act, 1961, assuming that the entire loan was outstanding as on 31.3.2017 and he does not own any other house property.

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Solution

Particulars Rs.

Interest deduction for A.Y.2017-18

(i) Deduction allowable while computing income under the head “Income from house property”

Deduction under section 24(b) Rs. 3,20,833

[Rs. 35,00,000 × 11% × 10/12]

Restricted to 2,00,000

(ii) Deduction under Chapter VIA from Gross Total Income

Deduction under section 80EE Rs. 1,20,833

(Rs. 3,20,833 – Rs. 2,00,000)

Restricted to

50,000

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Monetary limit for maximum deduction under section 80GG increased

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Rs. 2,000 p.m.

(upto A.Y.2016-17)

Rs. 5,000 p.m.

(from A.Y.2017-18)

Maximum limit of deduction u/s 80GG

Example

Mr. Ganesh, a businessman, whose total income (before allowing deduction under section 80GG) for A.Y.2017-18 is Rs. 4,60,000, paid house rent at Rs. 12,000 p.m. in respect of residential accommodation occupied by him at Mumbai. Compute the deduction allowable to him under section 80GG for A.Y. 2017-18.

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Solution

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The deduction under section 80GG will be computed as follows:

(i) Actual rent paid less 10% of total income

• Rs. 1,44,000 minus 10% of Rs. 4,60,000 = Rs. 98,000 (A)

(ii) 25% of total income (25% of Rs. 4,60,000)

• = Rs. 1,15,000 (B)

(iii) Amount calculated at Rs. 5,000 p.m.= Rs. 60,000 (C)

Deduction allowable (least of A, B and C) = Rs. 60,000

Tax incentives for new start-ups [Section 80-IAC]

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In order to provide an incentive to start-ups and aid their growth in the early phase of their business, new section 80-IAC has been inserted.

Accordingly, a deduction of 100% of the profits and gains derived by an eligible start-up from an eligible business is allowed for any three consecutive assessment years out of five years beginning from the year in which the eligible start up is incorporated.

Meaning of eligible start-up:

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Company or LLP engaged in eligible business

Incorporated during the period 1.4.2016-31.3.2019

Total turnover ≤ Rs.25 crores in any P.Y. from P.Y.2016-17 to

P.Y.2020-21

Holds a certificate of eligible business from the notified IMBC

Meaning of eligible business :

Innovation,

Development,

Deployment,

commercialization

of new products, processes or services

driven by technology or intellectual property

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Deductions in respect of profits and gains from housing projects [New Section 80-IBA]

the project is approved by the competent

authority between 1st June, 2016 and 31st

March, 2019;

the project is completed within a

period of three years from the date of approval by the

competent authority:

Where the gross total income of an assessee includes any profits and gains

derived from the business of developing and building housing projects, an amount

equal to 100% of the profits and gains derived from such business is allowable as

deduction under new section 80-IBA, subject to fulfilment of certain conditions.

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Deduction in respect of employment of new employees [New Section 80JJAA]

In order to extend this employment generation incentive to all sectors,

section 80JJAA has been substituted.

Accordingly, where the gross total income of an assessee to whom section 44AB applies, includes any profits and gains derived from

business, a deduction of an amount equal to 30% of additional employee cost incurred in the course of such business in the previous

year, would be allowed for three assessment years including the assessment year relevant

to the previous year in which such employment is provided.

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Conditions to be fulfilled:

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The business should not be formed by splitting up, or the reconstruction, of an existing business

The business is not acquired by the assessee by way of transfer from any other person or as a result of any

business reorganisation

The report of the accountant, giving the prescribed particulars, has to be furnished along with ROI

The deduction would be allowed only subject to fulfilment of the following conditions:

Example Mr. A has commenced the operations of manufacture of computers on 1.4.2016.

He employed 350 new employees during the P.Y.2016-17, the details of whom are as follows -

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No. of employees

Date of employment Regular/ Casual

Total monthly emoluments per employee (Rs.)

(i) 75 1.4.2016 Regular 24,000

(ii) 50 1.5.2016 Casual 17,000

(iii) 125 1.5.2016 Regular 26,000

(iv) 100 1.9.2016 Regular 24,000

Example (Cont.)

Compute the deduction, if any, available to Mr. A for A.Y.2017-18, if the profits and gains derived from manufacture of computers that year is Rs. 75 lakhs and his total turnover is 2.16 crores.

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Solution

Mr. A is eligible for deduction under section 80JJAA since he is subject to tax audit under section 44AB for A.Y.2017-18, as his total turnover exceeds Rs. 1 crore and he has employed “additional employees” during the P.Y.2016-17.

Additional employee cost = Rs. 24,000 × 12 × 75 [See Working Note below] = Rs. 2,16,00,000

Deduction under section 80JJAA = 30% of Rs. 2,16,00,000 = Rs. 64,80,000.

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Solution (Cont.)

Particulars No. of workmen

Total number of employees employed during the year 350

Less: Casual employees employed on 1.5.2016 who do not participate in recognized provident fund

50

Regular employees employed on 1.5.2016, since their total monthly emoluments exceed Rs. 25,000

125

Regular employees employed on 1.9.2016 since they have been employed for less than 240 days in a year.

_100

_275

Number of “additional employees” __75

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Number of additional employees

Assessment of Various Entities

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What is a Business Trust?

Trust registered as :

- Real Estate Investment Trusts (REITs) under SEBI (REIT) Regulations, 2014

- Infrastructure Investment Trusts (InvITs) under SEBI (Invit) Regulations, 2014

The units of REITs and Invits are required to be listed on a recognised stock exchange in accordance with SEBI regulations

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Tax treatment of rental income arising to REIT from real estate property directly held by it

Section Particulars Tax treatment

10(23FCA)

(Effective from A.Y.2016-

17)

Rental income of REIT from directly owned real estate asset

Any income of a business trust, being a REIT, by way of renting or leasing or letting out any real estate asset owned directly by such business trust

Exempt in the hands of REIT

115UA(3)

(Effective from A.Y.2016-17)

Distributed income received by unit holder

The distributed income or any part thereof, received by a unit holder from the REIT, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such REIT

Deemed income of unit holder

194LBA

(Effective from 1.6.2015)

Distribution by REIT to unit holders of rental income from real estate assets directly owned by it

TDS@10% in case of distribution to a resident unit holder.

TDS at rates in force in case of distribution to a non-resident unit holder.

194-I

(Effective from 1.6.2015)

Rental income received or credited to a REIT

Where the income by way of rent is credited or paid to a business trust, being a REIT, in respect of any real estate asset, owned directly by such business trust.

Tax is not deductible at source

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Dividend distributed by SPV to business trust exempt from levy of DDT [Section 115-O] Related amendment in sections: 10(23FC), 10(23FD), 115UA& 194LBA

Dividend distributed by SPV to the

business trust would be exempt from levy

of DDT.

Such dividend received by the business trust and its investor shall not be taxable in the hands of business trust or the unit holders;

Exemption from levy of DDT would be applicable only in cases where the business trust either holds 100% of the share capital of the SPV or

holds all of the share capital other than that which is required to be held by any other entity as part of any direction of any Government or

specific requirement of any law to this effect or which is held by Government or Government bodies;

However, this exemption would not be applicable in respect of any amount declared, distributed or paid at any time by the domestic company out of its accumulated profits or current profits upto the

date of acquisition by the business trust of the specified holding [as per (a) above] in the SPV.

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Impact on MAT computation To be excluded from book profit for levy of MAT

Notional gains/loss on transfer of shares of SPV to a business trust in exchange of units allotted by the business trust &

Notional gains/loss on change in carrying amount of such units

Gains/Loss on transfer of units of business trust, which have been allotted in exchange of shares of SPV

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Impact on MAT Further, the amount of loss/gain on transfer of units of the business trust

(which were allotted in exchange of shares of SPV) has to be deducted /added to compute book profit for levy of MAT.

The amount of loss/gain has to be determined taking into consideration

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The cost of the shares exchanged with the units of business trust

In a case where the shares are

carried at cost

In a case where the shares are

carried at a value other than the

cost through P&L A/c

The carrying amount of shares at the time of exchange

.

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Year Value of shares held in SPV

Value of units of BT

Notional gains credited to P&L A/c

Gains on transfer of units credited to P & L A/c

MAT Adjustment

F.Y.2012-13 100 lakhs

F.Y.2013-14 120 lakhs 20 lakhs -

F.Y.2014-15 130 lakhs 10 lakhs -

F.Y.2015-16 170 lakhs 40 lakhs - 40 lakhs

F.Y.2016-17 200 lakhs 30 lakhs - 30 lakhs

F.Y.2017-18 210 lakhs (Sale Price)

10 lakhs - 10 lakhs

+80 lakhs

Non-applicability of MAT in respect of certain foreign companies [Section 115JB]

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Existence of DTAA with the country of residence of the foreign company

Additional condition to be satisfied for non-applicability of MAT

(i)

The foreign company is a resident of a country or a specified territory with which India has a DTAA under section 90(1) or the Central Government has adopted any agreement between specified associations for double taxation relief under section 90A(1)

It should not have a permanent establishment in India in accordance with the provisions of such Agreement

(ii)

The foreign company is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above

It is not required to seek registration under any law for the time being in force relating to companies.

Existence of DTAA with the country of residence of the foreign company

Additional condition to be satisfied for non-applicability of MAT

(i)

The foreign company is a resident of a country or a specified territory with which India has a DTAA under section 90(1) or the Central Government has adopted any agreement between specified associations for double taxation relief under section 90A(1)

It should not have a permanent establishment in India in accordance with the provisions of such Agreement

(ii)

The foreign company is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above

It is not required to seek registration under any law for the time being in force relating to companies.

Tax incentives to International Financial Services Centres [Sections 10(38), 111A, 115JB & 115-O]

Exemption from levy

of STT

•Provisions of Chapter VII of the Finance (No.2) Act, 2004 providing for levy of STT, not to apply to taxable securities transactions entered into by any person on a recognised stock exchange located in IFSC where the consideration for such transaction is paid or payable in foreign currency, thereby exempting such transactions from STT with effect from 1st June, 2016.

Exemption from levy

of CTT

•The provisions of Chapter VII of the Finance Act, 2013 providing for levy of CTT, not to apply to taxable commodities transactions entered into by any person on a recognised association located in unit of IFSC where the consideration for such transaction is paid or payable in foreign currency, thereby exempting such transaction from CTT with effect from 1st June, 2016.

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Tax incentives to International Financial Services Centres [Sections 10(38), 111A, 115JB & 115-O]

•Second proviso has been inserted in section 10(38) to exempt tax on long-term capital gains in respect of income arising from transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre even when securities transaction tax is not paid in respect of such transaction.

Exemption of LTCG even if STT not paid:

•Second proviso has been inserted in section 111A(1) to provide that short term capital gains arising from transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre would be taxable at a concessional rate of 15% even when securities transaction tax is not paid in respect of such transaction.

Levy of STCG@15% even if STT is not paid

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Tax incentives to International Financial Services Centres [Sections 10(38), 111A, 115JB & 115-O] Concessional rate of MAT@9%:

• Sub-section (7) has been inserted in section 115JB to provide that in case of a company, being a unit located in International Financial Services Centre and deriving its income solely in convertible foreign exchange, the minimum alternate tax shall be chargeable at the rate of 9% instead of 18.5%.

Exemption from levy of DDT:

• Sub-section (8) has been inserted in section 115-O to provide that no tax on distributed profits shall be chargeable in respect of the total income of a company being a unit located in International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after 1st April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend.

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New Taxation Regime for Securitisation Trusts [Section 115TCA]

Exemption of income of securitisation trust from the activity of securitisation

• The income of securitisation trust from the activity of securitisation shall continue to be exempt under section 10(23DA).

No exemption under section 10(35A) to investor:

• However, exemption in respect of income of investor from securitisation trust under section 10(35A) would not be available in respect of distributed income received by them on or after 1.6.2016. Thereafter (i.e., on or after 1.6.2016), any income received from securitisation trust would be taxable in the hands of investors.

Taxability of income from securitisation trust in the hands of the investor [Section 115TCA(1)]:

• New section 115TCA(1) provides that the income accruing or arising to, or received by, a person, being an investor from the securitisation trust, out of investments made in the securitisation trust, shall be taxable in the hands of investor in the same manner and to the same extent as if the investor had made investment directly in the underlying assets and not through the trust

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Equalisation levy [Chapter VIII of the Finance Act, 2016]

In order to address these challenges, Chapter VIII of the Finance Act, 2016, titled "Equalisation Levy", provides for an equalisation levy of 6% of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.

Further, in order to reduce burden of small players in the digital domain, it is also provided that no such levy shall be made if the aggregate amount of consideration for specified services received or receivable by a non-resident from a person resident in India or from a non-resident having a permanent establishment in India does not exceed Rs. 1 lakh in any previous year.

Mea

nin

g o

f “S

pec

ifie

d S

erv

ice

”:

(1) Online advertisement;

(2) Any provision for digital advertising space or any other facility or service for the purpose of online advertisement;

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Tax on Accreted Income of certain Trusts/Institutions

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6

Assessment Procedure

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Rationalisation of provisions relating to filing of return of income [Section 139] Mandatory filing of

return if total income before giving effect to exemption u/s

10(38) in respect of long-term capital

gains exceed basic exemption limit

Reduction of time limit for filing

belated return:

Belated return can be revised:

Return not deemed to be defective if

self-assessment tax is not paid before

furnishing the return

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Scope of permissible adjustments while processing a return under section 143(1)(a) expanded

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Disallowance of loss claimed, if return is filed beyond due date u/s 139(1)

Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return

Disallowance of deduction u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if return is filed beyond due date u/s 139(1)

addition of income appearing in Form 26AS or Form 16A/16 which has not been included in computing the total income in the

return

Mandatory processing of return of income before issuance of assessment order [Section 143(1D)]

However, the return has to be processed before

the issuance of an order under section 143(3).

Section 143(1D) has now been substituted to provide that the processing of a return is not necessary before the expiry of the one year

from the end of the financial year in which the return is made, where notice has been issued

to the assessee under section 143(2).

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Time limits for completion of assessment, reassessment and recomputation [Section 153]

Section Proceeding New Time limit for completion of assessment or reassessment

153(1) Order of assessment u/s 143 or 144 21 months from the end of the assessment year in which the income was first assessable

153(2) Order of assessment, reassessment or recomputation u/s 147

9 months from the end of the financial year in which the notice u/s 148 was served

153(3) Fresh assessment u/s 143/144/147 where the original assessment has been set aside, cancelled and referred back to the Assessing Officer by an order u/s 254/263/264

9 months from the end of the financial year in which the said order u/s 254 is received by the PCC/CC/PC/CIT or the order u/s 263 or u/s 264 is passed by the PC/CIT Principal Chief Commissioner (PCC) / Chief Commissioner (CC) / Principal Commissioner (PC) / Commissioner of Income-tax (CIT).

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Time limits for completion of assessment, reassessment and recomputation [Section 153] Section Proceeding New Time limit for completion of assessment or

reassessment

153(4) Where a reference is made to the TPO u/s 92CA(1) during the course of proceeding for assessment or reassessment:

An additional time period of 12 months is available for completion of assessment/reassessment in such cases:

Completion of assessment u/s 143 or u/s 144.

33 months from the end of the assessment year in which the income was first assessable

Completion of assessment/ reassessment/re-computation u/s 147

21 months from the end of the financial year in which notice u/s 148 is served

Completion of fresh assessment in pursuance of an order u/s 254 (received by the PCC or CC/PC or CIT) or an order passed by the PC or CIT u/s 263 or u/s 264

21 months from the end of the financial year in which such order u/s 254 is received by the PCC or CC/PC or CIT or such order u/s 263 or 264 is passed by the PC or CIT, as the case may be

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Appeals & Revision

Reduction in time limit for rectification of mistake apparent from the record by the Appellate Tribunal [Section 254(2)]

For bringing in certainty to the order of Appellate Tribunal, section 254(2) has been amended to provide that the

Appellate Tribunal may rectify any mistake apparent from the record in its order at any time within six months from

the end of the month in which the order was passed

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Raising the total income limit of the cases that may be decided by single member bench of Appellate Tribunal [Section 255(3)]

The limit for a single member

bench was revised last year from Rs. 5 lakh to Rs. 15 lakh

In order to further expedite the process of dispute resolution at the

appellate tribunal level, section 255(3) has been amended to provide that a

bench comprising of a single member may dispose of a case where the total income as computed by the Assessing

Officer in the said case does not exceed Rs. 50 lakh

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Penalties

Penalty leviable for under-reporting of income and mis-reporting of income [New section 270A]

Section 270A(1) empowers the Assessing Officer, Commissioner (Appeals) or the Principal Commissioner or Commissioner to direct levy of penalty, during the course of proceedings under the Income-tax Act, 1961, if a person has under reported his income. Such penalty shall be imposed by an order in writing by such authority

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Cases of under-reporting of income [Section 270A(2)]:

Case (A) (B)

(1) Return of income has been filed

Income assessed Income determined in the return processed under section 143(1)(a);

(2) No return of income has been filed

Income assessed Basic exemption limit

(3) Reassessment Income reassessed Income assessed or reassessed immediately before such re-assessment

(4) Return of income has been filed and assessment/ reassessment is made on the basis of MAT/AMT provisions

The amount of deemed total income assessed or reassessed as per the provisions of section 115JB or 115JC

The deemed total income determined in the return processed u/s 143(1)(a)

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Is greater than

Case (A) (B)

(5) No return of income is filed and assessment/ reassessment is made on the basis of MAT/AMT provisions

the amount of deemed total income assessed as per the provisions of section 115JB or 115JC

The basic exemption limit, in case of an assessee being an individual, HUF, AOP, BOI, in respect of whom the provisions of AMT are applicable

(6) Reassessment as per the provisions of sections 115JB or 115JC

The amount of deemed total income reassessed as per the provisions of sections 115JB or 115JC

The deemed total income assessed or reassessed immediately before such reassessment

Further, a person would be considered to have under-reported his income if the income assessed or reassessed has the effect of reducing the loss or converting such loss into income

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Quantum of penalty leviable

Section Case Penalty

(1) 270A(7) Under reporting of income 50% of tax payable on under-reported income

(2) 270A(8) Where under reporting of income results from misreporting of income by any person

200% of tax payable on such under-reported income

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Immunity from imposition of penalty and prosecution [New section 270AA]

An assessee may make an application to the Assessing Officer for grant of immunity from imposition of penalty under section 270A and initiation of proceedings under

section 276C or section 276CC, if he

pays the tax and interest payable as per the order of assessment under section 143(3) or reassessment under section 147, within the period

specified in such notice of demand; and

does not prefer an appeal against such assessment/reassessment order

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• The assessee can make such application in the prescribed form and verified in the prescribed manner within one month from the end of the month in which the order of assessment or reassessment is received

Time limit for making application [Section

270AA(2)]

• The Assessing Officer shall pass an order accepting or rejecting the application for immunity from penalty under section 270A or prosecution under section 276C or section 276CC within a period of one month from the end of the month in which such application is received. However, in the interest of natural justice, no order rejecting the application shall be passed by the Assessing Officer unless the assessee has been given an opportunity of being heard

Time limit for passing order accepting or

rejecting application for immunity from penalty

and prosecution [Section 270AA(4)]

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Deduction, Collection & Recovery of Tax

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Increase in threshold limits and reduction of rates for deduction of tax at source in respect of certain payments [Chapter XVII-B]

In order to rationalise the rates and base for TDS provisions, the existing threshold limits for deduction of tax at source and the rates of deduction of tax at source have been revised with effect from 1st June, 2016.

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Revision in threshold limits for deduction of tax at source from certain payments:

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Section Nature of payment

Threshold limit (Rs. )

Upto 31.5.2016

From 1.6.2016

(1) 192A

Payment of accumulated balance due to an employee participating in recognized provident fund

30,000

50,000

(2) 194BB Winnings from horse race 5,000 10,000

(3) 194C Payment to contractors (revision of threshold of aggregate payment in a year)

75,000 1,00,000

(4) 194D Insurance commission 20,000 15,000

(5) 194G Commission on sale of lottery tickets 1,000 15,000

(6) 194H Commission or brokerage 5,000 15,000

(7) 194LA

Payment of compensation or enhanced compensation on compulsory acquisition of immovable property

2,00,000

2,50,000

Reduction in rate of tax to be deducted at source in respect of certain payments

Section Nature of payment

Rate of TDS

Upto 31.5.2016

From 1.6.2016

(1) 194DA Payment in respect of life insurance policy 2% 1%

(2) 194EE Payments in respect of deposits under National Savings Scheme

20% 10%

(3) 194G Commission on sale of lottery tickets 10% 5%

(4) 194H Commission or brokerage 10% 5%

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In addition, the rate of TDS under section 194D in respect of insurance commission has

been reduced from 10% to 5%.

Examples

(i) Payment made Rs. 1,80,000 to Mr. Bharat for compulsory acquisition of his house as per law of the State Government.

(ii) Payment of commission of Rs.14,000 to Mr. Y.

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Solution

(i) As per section 194LA, any person responsible for payment to a resident, any sum in the nature of compensation or consideration on account of compulsory acquisition under any law, of any immovable property, is responsible for deduction of tax at source if such payment or the aggregate amount of such payments to the resident during the financial year exceeds Rs. 2,50,000. In the given case, no liability to deduct tax at source is attracted as the payment made does not exceed Rs. 2,50,000.

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Solution (Cont.)

(ii) As per section 194H, any person (other than an individual or HUF) who is responsible for paying commission or brokerage to a resident shall deduct tax at source @5% if the amount of such income or the aggregate of the amounts of such income credited or paid during the financial year exceeds Rs. 15,000.

Since the commission payment made to Mr. Y does not exceeds Rs. 15,000, the provisions of section 194H are not attracted.

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Advance tax payment scheme to be the same for companies and other assessees [Section 211]

Differential advance tax payment schedule for companies and other assessees under section

211(1) [upto 31.5.2016]

Common advance tax payment schedule for both corporates and non-corporates (other than an eligible assessee in respect of eligible business referred to in section 44AD) from 1st June 2016

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Common advance tax payment schedule

Due date of installment Amount payable

On or before 15th June Not less than 15% of advance tax liability

On or before 15th September Not less than 45% of advance tax liability, as reduced by the amount, if any, paid in the earlier installment.

On or before 15th December

Not less than 75% of advance tax liability, as reduced by the amount or amounts, if any, paid in the earlier installment or installments.

On or before 15th March

The whole amount of advance tax liability as reduced by the amount or amounts, if any, paid in the earlier installment or installments.

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Eligible assessee computing profits on presumptive basis under section 44AD to pay advance tax by 15th March

An eligible assessee, opting for computation of profits or gains of business on presumptive basis in

respect of eligible business referred to in section 44AD, shall be required to

pay advance tax of the whole amount in one instalment on or before the 15th

March of the financial year.

However, any amount paid by way of advance tax on or before 31st March shall also be treated as advance tax

paid during each financial year on or before 15th March.

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For any query on this subject

CA. Priya Subramanian

Faculty, Direct Taxes

• E-mail: [email protected]

CA. Aparna Chauhan

Faculty, Direct Taxes

• E-mail: [email protected]

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Thank You

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