Satish Aggarwal & Associates Chartered Accountants ================================================ Circular No.03/ 2014- Direct Taxes Dated: 17th July, 2014 HIGHLIGHTS OF BUDGET 2014

The Finance Bill 2014 was presented in the Parliament by the Finance Minister on 10.07.2014. The finance bill envisages fiscal deficit of 4.1% of GDP for the current financial year and estimates the fiscal deficit of 3.6% of the GDP for the financial year 2014-15.

A. DIRECT TAXES

(b) PERSONAL TAXATION

(i)

Income tax exemption limit

The personal Income Tax exemption limit has been proposed by the Finance Minister as under:-

a) The exemption limit for individuals has been increased from existing Rs.2.0 lakhs to Rs.2.50 lakhs.

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Satish Aggarwal & Associates Chartered Accountants ================================================ b) The exemption limit for Senior Citizens up to the age of 60 years and above but up to 80 years of age has been increased from existing Rs.2.5 lakhs to Rs.3 lakhs.

c) There is no change in the exemption limit from the existing exemption limit of Rs.5 lakhs for Senior Citizens aged 80 years or above.

d) There is no change in the slab rates, surcharge and education cess for any assessee.

(ii) Increase in limit of deduction under section 80C

It is proposed to increase the limit of deduction u/s 80 C for investment in tax saving schemes from the existing Rs.1 lakh to Rs.1.50 lakhs.

Simultaneously, the limit for investment in PPF has been increased from existing Rs.1 lakh to Rs.1.50 lakhs per annum.

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Satish Aggarwal & Associates Chartered Accountants ================================================ B.

BUSINESS INCOME

(i)

Investment allowance to a manufacturing company

A new provision has been sought to be introduced to allow deduction of 15% of the amount invested up to Rs.25 crores in new plant and machinery in a year is acquired and installed between the periods 1st April, 2014 to 31st March, 2017. The provision introduced earlier in the Finance Act, 2013 for investment in plant & machinery of Rs.100 crores or above between 1st April, 2013 to 31st March, 2015 will continue to operate parallelly.

(ii)

Extension of deduction under section 80IA for power sector

The entities eligible for deduction under section 80IA in the power sector have been granted deduction from their profits for eligible activities commencing up to 31st March, 2017. The sunset date for eligibility of deduction was earlier 31st March, 2014. The tax holiday is available to the undertakings set up for generation, distribution, transmission including substantial renovation and modernization of existing network of transmission or distribution of power.

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Satish Aggarwal & Associates Chartered Accountants ================================================ (iii)

Dividend distribution tax

The Dividend distribution tax payable by the corporate assessees has been effectively increased by 3.475% including the surcharge and education cess. The Dividend Distribution tax is proposed to be computed by grossing up the amount of dividend by the effective rate of Dividend Distribution tax.The dividend would be grossed up by adding 16.995%. The effective rate of dividend distribution tax would now go up by 3.475% and would now be 20.47%. (iv)

Concessional rate of tax on overseas borrowings Section 194 LC

At present concessional rate of withholding tax of 5% has been provided for on payment of interest by an Indian Co. to a non-resident on monies borrowed in foreign currency under loan agreement or through issue of long-term infrastructure Bonds at any time on or after 1st July,2012 but before 1st July, 2015.

The Budget proposal seeks to broaden and liberalise the scope of above provision to cover payment of interest on any long term bonds not limited to infrastructure bond. The period of concession for 5% withholding tax from Interest on long term bonds tax has also been extended from 1st October,2014 to 1st July,2017.

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Satish Aggarwal & Associates Chartered Accountants ================================================ (v)

Receipt of dividend from foreign companies to be taxed @ 15%

The receipt of dividend from foreign companies is taxable @15% by an Indian entity which has at least 26% stake in the foreign entity.

The above provision was

applicable till the assessment year 2014-15, the benefit of which has been extended like any other provision without any defined time limit.

(vi)

Business Income Investment linked deduction u/s 35AD extended to slurry pipelines for transportation of Iron ore and semi conductor wafer fabrication manufacturing units.

(vii)

Deduction for contribution under the corporate social responsibility as per the new Companies Act, 2013

The new Companies Act, 2013 has provided for compulsory spending towards corporate social responsibility for specified companies (which have net worth of Rs.500 crores or more, or turnover of Rs.1000 crores or more or a net profit of Rs.5 crores or more during any financial year).

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Satish Aggarwal & Associates Chartered Accountants ================================================ There was a doubt as to whether the amount spent on contribution towards Corporate Social Responsibility (CSR) would be eligible for deduction u/s 37(1) of the Act or not. The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not specifically mentioned in section 30 to 36 of the Act shall be allowed if the same is incurred wholly and exclusively for the purpose of carrying business or profession.

As CSR expenditure is not incurred for the purpose of carrying on business, such expenditure cannot be allowed under the existing provision of section 37(1) of the Act. To clear the ambiguity the budget proposal clarifies, the expenditure incurred on CSR by the specified companies shall not be deemed to have been incurred for the purpose of carrying on business or profession.

Therefore, the expenditure

incurred on CSR shall be disallowed u/s 37(1) of the Act. As per the Budget memo the objective of CSR is to share burden of the Government in providing social services by the specified companies. If such expenditure is allowed as tax deduction, this would result in subsidising one – third of such expenses by the Government by way of tax expenditure.

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Satish Aggarwal & Associates Chartered Accountants ================================================ However, it is further clarified if any CSR expenditure is in the nature as described in section 30 to 36 of the Act, it shall be allowed as deduction under those sections subject to fulfilment of any specified conditions, if mentioned in future. This amendment is applicable from 1 st April, 2015 and will accordingly apply in relation to the assessment year 2015-2016 and subsequent years.

The activities

notified by CBDT u/s 35AC, 35CCA, 35CCB, 35CCC and 35D are eligible activities under the corporate social responsibility as specified in schedule VII in terms of section 135 of the Companies Act, 2013. The activities are eligible for weighted deduction @150% of the expenditure.

(viii)

Disallowance of expenditure due to non deduction/non deposit of tax at source. At present the prescribed expenditure on which tax is deductible or has been deducted and has not been deposited with the tax authorities is disallowed and the amount is added to the income of the assessee. The deduction for expenditure is allowed in the year of payment of tax deducted/deductible at source. The budget provides for disallowance of 30% of the amount of expenditure u/s 40(a) (ia) of the Act as against 100% disallowance of expenditure that is to be made at present for non deposit of applicable tax at source for resident tax assessees.

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Satish Aggarwal & Associates Chartered Accountants ================================================ The budget also proposes to widen the scope of section 40(a) (ia) to include all expenditure on which tax at source is deductible. At present all expenditure on which tax is deductible is not subject to disallowance u/s 40(a) (ia). The expenditure on payment of salary and directors sitting fee is proposed to be covered under section 40(a) (ia). The budget proposal also clarifies that in case the applicable Tax deducted at source from Non-resident is paid before the due date of filing the return of income of the deductor the expenditure would be eligible for business deduction.

(ix)

Losses from speculations business At present as per the explanation to Section 73 of the Act gain or profit arising on sale or purchase of shares by a corporate entity is treated as speculative in nature. An amendment is proposed to exempt the operation of this explanation to corporate entities whose principal nature of business is trading in shares.

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Satish Aggarwal & Associates Chartered Accountants ================================================ C.

CAPITAL GAINS

(i)

Period of holding for qualification as long-term capital asset An amendment is proposed in the Act to increase the period of holding for unlisted securities (i.e. shares of a private limited company or an unlisted public limited company) and units of mutual fund (other than equity oriented mutual fund) to 36 months from the present 12 months to quality as a long term capital asset.

(ii)

Taxability of forfeited Advance against sale of a Capital Asset. The forfeiture of advance or other money received for transfer of a capital asset is sought to be made taxable under the head Income from other sources under section 56(2) (ix) of the act. At present the forfeiture of advance was not taxable in the year of receipt and the amount forfeited was reduced from cost of the capital asset in the year of sale. Therefore if any advance received for transfer of a Capital asset including immoveable property and shares held as investment is forfeited without transfer. It shall be taxable under the head ‘Income from other Sources’ in the year in which forfeiture is made. The provision has been made effective from 01.04.2014, in view of which forfeiture of advance even before the introduction of the budget would be subject to tax.

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Satish Aggarwal & Associates Chartered Accountants ================================================ (iii)

Prohibition on Purchase of property outside india for claiming deduction from capital gains. At present deduction u/s 54 and 54F from capital gains is available on purchase of property in India or abroad against sale of house property or a Capital asset other than the residential house property as the case may be. The budget proposes to amend the provision to state that the investment in residential house property to be eligible for claiming deduction of Capital gains u/s 54 & 54F should only be in India and the property purchased abroad would not be considered for claiming deduction u/s 54 or 54F of the Income Tax Act, 1961. It has also been clarified that deduction u/s section 54 or 54F will be available only for one residential house.

(iv)

Purchase of Capital gains bonds for claiming deduction from capital gains restricted to Rs.50 lakhs.

As per the present provisions of the section 54EC of the Act the assessee was eligible for a deduction of up to Rs.50 lakhs for purchase of eligible capital gains bonds within six months from date of property in a year. The budget proposes to make an amendment to state that the amount of Rs.50 lakhs would only be allowed to be invested in capital gains bonds in total whether in the year of sale or subsequent assessment year

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Satish Aggarwal & Associates Chartered Accountants ================================================ As per the present provision, there was no prohibition in investing Rs.50 lakhs each in two financial years. For example, if a property was sold in October,2013 the individual or HUF was eligible for investment of Rs.50 lakhs in the financial year 2013-14 and another Rs.50 lakhs in the financial year 01.04.2015 as both the investments were within the period of six months from the date of sale. The amendment proposes to restrict the investment to Rs.50 lakhs in total u/s 54EC of the Act.

(v)

Deduction for payment of interest from self occupied house property

At present a deduction of Rs.1.50 lakhs is allowed for interest paid on loan availed for investment in a self occupied house property. The limit of deduction is proposed to be raised to Rs.2 lakhs per annum.

(vi)

Chargeability of compensation received on compulsory acquisition of property It has been provided in the Budget proposals that income tax would be chargeable only on finalisation of compensation for compulsory acquisition of property and not on receipt of interim compensation on acquisition of property.

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Satish Aggarwal & Associates Chartered Accountants ================================================ The Budget proposal may result in many cases in irrecoverability of tax due on jurisdiction of the compensation order.

D.

International taxation Transfer Pricing The budget has introduced the concept of roll back in Advance Pricing Agreements (APA) to provide for the applicability of APA entered into for future transactions to be made applicable to transactions undertaken in previous 4 years in specified circumstances. The budget has also introduced the range for determination of Arms Length Price (ALP). It is also proposed to allow multiple year data for comparative analysis to determine Arms Length Price (ALP) instead of allowing the Data of only one year at present.

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Satish Aggarwal & Associates Chartered Accountants ================================================ E.

Regarding charitable trusts (i)

Deduction under section 10 not to be allowed to a Trust registered under section 12AA or approved under section 10(23C). An amendment is proposed in the Act to provide that a Charitable Institution would not be permitted to claim deduction u/s 10 (7) if it is granted registration u/s 12AA.

Similarly,(other than on entity envisaged section

10(1) or 10 (23C)) which has been approved or notified for claiming benefit of exemption u/s 10(23C), under clause IV, V VI and VI(a) would not be entitled to claim benefit of exemption under other provisions of section 10, other than in respect of Agricultural Income. The educational institutions, hospitals etc. are mostly registered u/s 12AA and are also eligible for claiming exemption u/s 10 (23C). These institutions would however continue to be eligible for claiming exemption u/s 10(23C) in spite of their registration u/s 12AA of the Act. (ii)

Disallowance of Depreciation on Capital Asset applied for Charitable purpose. At present purchase of capital assets is treated as an application of Income of Charitable Organisation. It is also allowed the claim of depreciation on

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Satish Aggarwal & Associates Chartered Accountants ================================================ purchase of such capital assets treated as application of income. The Act is being amended to provide that in case the purchase of capital assets has been treated as application of Income, no depreciation would be permissible on such capital assets. (iii)

Cancellation of registration of the trust or institution in certain cases. As per the provisions of Section 12AA, the Registration granted to a Trust or Institution is valid till such time it is cancelled by the Commissioner. The Commissioner has the power at present to cancel the registration under two circumstances namely:

a)

The activities of the Trust or Institution are not genuine.

b)

The Activities are not being carried out in accordance with the objects of the Trust or the Institution.

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Satish Aggarwal & Associates Chartered Accountants ================================================ The scope of power of the Commissioner of Income Tax to cancel the registration is being widened substantially. The registration can after the amendment be cancelled apart from the above mentioned two circumstances in the below mentioned circumstances as well:(a)

Its income does not ensure the benefit of general public

(b)

It is for benefit of any particular religious community or caste (in case it is established after the commencement of the Act),

(c)

Any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc. Or

(d)

(iv)

Its funds are invested in prohibited modes.

No Reopening of assessment of trust or institution granted registration u/s 12AA As per the provisions of Income Tax Act 1961, a Trust or an Institution is eligible for claiming exemption u/s 11 and 12 only after Registration u/s 12AA to it has been granted.

As per the provisions of the Act, the Registration is granted only

prospectively after 01.06.2007.

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Satish Aggarwal & Associates Chartered Accountants ================================================ The budget proposes that no action for reopening of assessment u/s 147 shall be taken by the Assessing Officer in case of such Trust or Institution for earlier years merely on the reasoning that such Trust or Institution has not obtained the registration u/s 12AA for the earlier assessment years. The objects and activities of such trust or institution should had ever be same for those years on the basis of which such registration has been granted to it. The above concession is available with the rider that in case the registration for such entity has been refused or cancelled after registration, the provision would not be applicable.

F.

Business Income The presumptive income u/s 44AE for plying of heavy duty vehicles i.e. trucks and vehicles other than heavy goods vehicles is being enhanced to Rs.7,500/- per month from the existing rate of Rs.5,000/- per month for heavy goods vehicles and Rs.4,500/- per month from the existing rate of Rs. 3,150/- per month for vehicles other than heavy goods vehicles.

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Satish Aggarwal & Associates Chartered Accountants ================================================ G.

Procedural changes for verification of TDS. (i)

Power of Survey

At present the power of survey is contained in Section 133A of the Act by virtue of which the Income Tax Authority is empowered to enter in premises in which business or profession is carried on by an assessee.Similar power has been extended to the Income Tax Authority for verification of payment of Tax deducted or collected at source.

However, the Authority acting under this

section shall not have the power to impound or retain in its custody the books of account or documents inspected by it or make inventory of any cash/stock or other valuables. The survey party shall be entitled to place identification marks on books of Accounts, or other documents, extracts or copies thereof.

(ii)

Reference to valuation officer under section 142A The Assessing Officer is proposed to be allowed to make a reference to the Valuation Officer to estimate the value including fair market value of any assets, property or investment for making any assessment or reassessment. The Assessing Officer may make the reference irrespective of the fact that he

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Satish Aggarwal & Associates Chartered Accountants ================================================ is satisfied or not satisfied about the correctness or completeness of the accounts of the Assessee. The Valuation Officer is required to submit his valuation report within a period of 6 months from the date from which reference for valuation is made to him. The period beginning from the day reference for valuation is made and ending with the date of receipt of valuation report shall be excluded from the time envisaged u/s 153 and 153B for computing the time barring limit for completing the assessment. It being a procedural amendment it would be applicable to all pending assessments as at 1st October, 2014.

(iii)

Mode of acceptance or repayment of loans and deposits

As per the existing provisions of s.269SS of the Act the acceptance of a loan or deposit in excess of Rs.20,000/- otherwise then by an account payee cheque attracts penalty equivalent is the amount of such loan or deposit. It is proposed to clarify that payment made by way of Internet Banking and payment gateways shall not be deemed to be violation of the provisions of s.269SS and 269T. It may be worthwhile to mention here that recently the

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Satish Aggarwal & Associates Chartered Accountants ================================================ Delhi High Court had held that transfer of loans and advances by journal of entries does not attract the provision of s.269SS or 269T.

(iv)

Prosecution for failure to produce account books and documents or get accounts audited u/s 142(2A) A new provision to enable the department to launch prosecution proceedings against an assessee for wilful failure to comply with a direction to produce account books and documents as required by any notice issued to him or wilful failure to comply with a direction issued for special audit u/s 142(A) is being enacted.

(v)

The assessment or reassessment in case of third party for seizure from the searched premises u/s 153(C) As per the present provision, books of accounts, documents, article or bullion found from the premises of a third person triggers an assessment or reassessment in the hands of a third person i.e. the person other than searched person on handing over the documents on bullion or any other valuables or things to the Assessing Officer having jurisdiction on him for past six assessment years. Regd Office: 4/5 B Asaf Ali Road, New Delhi-110002, Email: [email protected] Telefax: +911123262956:23252943:23277630 Visit us at www.satishca.com

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Satish Aggarwal & Associates Chartered Accountants ================================================ A welcome amendment is proposed to clarify that no such assessment would be made on such third person unless the books of accounts, other valuables articles or things have bearing on the determination of income of such third person. In case you require further clarifications/information, you may contact Mr Dharender Kumar at our office landline numbers, or write to us at [email protected].

With personal regards, (Satish Aggarwal) Partner Satish Aggarwal & Associates 4/5B Asaf Ali Road New Delhi- 110002 Telefax: -91-011- 23262956, 23277630, 23254923 Mobile No;- 09212021280 Email: [email protected] Website:- www.satishca.com

Pc5/gs// Budget

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