A Booster Shot for GIFT City

This article has been co-authored by Lovina Mathias Daniel (Manager, Deloitte India).

IFSC journey so far

Budget 2021 proposals were directed to achieve the "AtmaNirbhar Bharat” mission of the government for building a resilient Indian economy. It rested on 6 pillars, amongst which one was physical and financial capital, and infrastructure. Growth of International Financial Services Centre (IFSC) was part of the Financial Capital proposal of Budget 2021. The government aimed at supporting the development of a world class Fin-Tech hub at the Gujarat International Finance Tec-City (GIFT City) IFSC. Various tax incentives were provided for units located in IFSC by the Finance Act, 2021 to make it a hub for financial services in the world, namely tax holiday on capital gains for aircraft leasing companies, tax exemption for aircraft lease rentals paid to foreign lessor, tax incentives for relocating foreign funds into IFSC as well as to non-residents on income from non-deliverable forward contracts, and allowing tax exemption for the investment division of foreign banks located in IFSC.

Following regulations have been passed during the financial year (FY) 2021-22 till date to make IFSC an all-inclusive global financial hub:

a)      International Financial Services Centres Authority (Market Infrastructure Institutions) Regulations, 2021;

b)      IFSCA (Banking) (Second Amendment) Regulations, 2021;

c)      IFSCA (Bullion Exchange) (Amendment) Regulations, 2021;

d)      IFSCA (Issuance and Listing of Securities) Regulations, 2021;

e)      Amendment to the IFSCA (Banking) Regulations, 2020;

f)       IFSCA (Capital Market Intermediaries) Regulations, 2021; and

g)      IFSCA (Insurance Intermediary) Regulations, 2021.

Further regulations were also introduced for registration of insurance business, procedure for making registrations, procedures for approvals and compliance management. Guidelines for operations of insurance offices and insurance intermediary offices were also introduced.

IFSCs provided Indian corporates easier access to global financial markets and promoted further development of financial markets in India.

Major policy initiatives proposed in Budget 2022

Budget 2022 aims at continuing to provide impetus for growth by laying parallel track of a blueprint for the AmritKaal and big public investment for modern infrastructure. Financing of investments is one of the priorities to achieve the said growth objective. The major policy initiatives proposed to be introduced in case of IFSC are as under:

• World-class foreign universities and institutions are proposed to be allowed to offer courses in financial management, FinTech, science, technology, engineering and mathematics in IFSC. The same will be free from domestic regulations, except for those notified by the IFSCA. The objective is to facilitate availability of high-end human resources for financial services and technology. Clarity may be required on whether income earned by such universities and educational institutions for courses in financial services sector will be included in the definition of the term “financial services” by the IFSCA and would it be eligible for income tax holiday under section 80LA of the Income-tax Act, 1961 (the Act).

•  An International Arbitration Centre (IAC) is proposed to be set up in the GIFT City for timely settlement of disputes under international jurisprudence. IFSCA was in talks with the Union Law Ministry for setting up an IAC in the GIFT City, which is expected to be along the lines of Singapore International Arbitration Centre or London Commercial Arbitration Centre. This proposal will ensure efficient and effective dispute resolution.

• Sovereign green bonds are proposed to be issued by the government for mobilising resources towards green infrastructure. The proceeds are proposed to be deployed in public sector projects which will help in reducing the carbon intensity of the economy. Services for global capital for sustainable and climate finance in the country will be facilitated in the IFSC GIFT City. Where the sovereign green bonds are listed on the stock exchanges in the IFSC, the rate of tax on interest on such bonds could be 4% (plus applicable surcharge and cess) subject to prescribed conditions.  

Further the IFSCA had also constituted an Expert Committee to recommend an approach towards the development of the Sustainable Finance Hub at IFSC and provide a road map for the same. The aim is to achieve India’s aspiration to be a frontrunner in climate action by making IFSC a gateway for channelising foreign capital into India. IFSC can play a main role in raising financial resources for climate change adaptation and mitigation actions of this scale, since this requires active participation of international investors.

Major tax reforms in Finance Bill, 2022

The key tax changes proposed in the Finance Bill, 2022 (the Bill) relevant or having implications to IFSC are outlined below:

• It is proposed to amend section 10(4E) of the Act to exempt income of a non-resident from offshore derivative instruments, or over the counter derivatives issued by an offshore banking unit (OBU). Currently the exemption was only available to non-deliverable forward contracts. However, what constitutes offshore derivative instruments and over the counter derivatives has not been defined, and thus, these definitions may be prescribed under the IFSCA regulations.

• It is proposed to amend section 10(4F) of the Act to extend the exemption of royalty and interest income from lease of aircraft, also to lease of ships to non-residents on payment by units in IFSC.

• Income arising from transfer of ship which was leased by a unit of IFSC commencing operation on or before 31 March 2024 is proposed to be eligible for deduction under section 80LA of the Act. Currently this deduction is available only to transfer of aircraft leased from a unit in IFSC.

• Income received by a non-resident from portfolio of securities or financial products or funds which is managed by or administered by any portfolio manager on behalf of such non-resident, and management services in an account maintained with an OBU in IFSC is proposed to be exempted by section 10(4G) of the Act.

• Explanation (aa) to section 56(viiab) of the Act containing the definition of specified fund is proposed to be amended so as to include a Category I or Category II Alternative Investment Fund, which is regulated under the IFSCA Act, 2019 within its purview. Currently the said definition covers such AIFs regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012. Thus, prescribed companies that receive investments from AIF Category I and II regulated by the IFSCA shall also be excluded from the application of income from other sources, where investments are received at a price which is more than the fair market value of the company’s shares.

Dil Mange More

Several relaxations and benefits are already available to investors and units in the GIFT City IFSC. However, to make it a more attractive proposition, investors would expect further relaxations and policy initiatives.

• Branches of Indian entities though eligible to set-up a unit in IFSC are facing regulatory challenges.

• Eliminating the need for withholding tax on transactions through the stock exchanges in IFSC GIFT City.

• Eliminating the applicability of GAAR to any transactions by IFSC units.

• Provide certainty of tax holiday to units set-up in the GIFT City IFSC, in view of India signing the OECD Pillar 2 statement[1] which prescribes a minimum tax rate.

• Extend the tax holiday period from 10 years to 20 years.

• Provide certainty of a lower tax rate post the tax holiday period. Rate of tax for units set-up in the GIFT City IFSC to be at par with IFC peers across the world.

• Provide tax benefits to resident Indian investors in the GIFT City IFSC. Exemption for long-term capital gains was provided under section 10(38) of the Act to both residents and non-residents investing in the listed securities on the Indian stock exchanges. Thus, in order to give an impetus to the capital markets in IFSC exchanges, tax exemptions should also be provided to Indian residents.

• Tax exemptions have been provided to corporates setting-up in IFSC but the individuals physically working in such IFSC Gift City are not at par with individuals working in overseas IFC, where the individual tax rate is low. Given that “humans make corporations” tax benefits should also be extended to individuals working in IFSC with proper monitoring and compliance mechanism. 

The policy initiatives and tax benefits proposed to be introduced in Budget 2022 by the government is a welcome move. It is expected to give a boost to the IFSC and make it globally more competitive. However, IFSC in India is still at a nascent stage and several reforms, policy initiatives and tax incentives will go a long way in making India a world class Fin-Tech hub.

Information for the editor for reference purposes only

Customs Amendment Overrules Canon India on jurisdiction issue: A Probe

This article has been co-authored by Sneha Ghosh (Consultant).

The separation of powers between the legislature, the executive and the judiciary forms one of the core tenets of the Indian Constitution. The Constitution of India, 1950 (‘Constitution’) however allows judicial review of legislative and administrative actions. When legislative or administrative actions are held to be unconstitutional, ultra vires or invalid, the only recourse available to the legislature and the executive is to amend the law and rectify the defect as pointed out by the judiciary. This is also known as legislative overruling of judicial decisions. The set of amendments proposed in Finance Bill, 2022 (‘Finance Bill’) to the provisions of the Customs Act, 1962 (‘Customs Act’), such as the definition of ‘proper officer’ under Section 2(34), ‘officers of customs’ under Section 3 and to Section 5, coupled with clause 96 of the Finance Bill are solely intended to overrule the effect of the Apex Court’s decision in Canon India Private Limited v. CC, Civil Appeal No. 1827 of 2018 [TS-75-SC-2021-CUST] (‘Canon India’). In this article, we will scrutinise the proposed amendment in light of the Apex Court judgment in case of Canon India.

Brief background

The issue regarding interpretation of the term ‘proper officer’ first surfaced before the Karnataka High Court in the case of Devilog Systems India v. CC, 1995 (76) ELT 520 (Kar.). The taxpayer had challenged the validity of show cause notice issued by Assistant Collector of Customs (Audit) basis ground that it did not qualify as ‘proper officer’ for Section 28 of the Customs Act. The High Court observed that Section 28 empowers only ‘proper officer’ to issue show cause notice. The High Court then read the definition of ‘proper officer’ under Section 2(34), the extract of which is reproduced as under: 

“‘proper officer' in relation to any functions to be performed under this Act means the officer of customs who is assigned those functions by the Board or the Collector of Customs”

The High Court observed that ‘officer of customs’ must be empowered in respect of specific functions under the Customs Act in order to form ‘proper officer’. In the absence of any provision of the Customs Act or notification empowering the Assistant Commissioner of Customs (Audit) to exercise power and perform duties of ‘proper officer’ under Section 28 of the Customs Act, the officer was bereft of any power to issue show cause notice. 

The ratio of this decision also impacted investigations undertaken by Customs Preventive Wing and Directorate of Revenue Intelligence (‘DRI’). The Apex Court in the case of CC v. Syed Ali, 2011 (265) ELT 17 (SC) held that officers of the Preventive Wing although ‘officers of customs’, did not by that virtue alone qualify as proper officers for the purpose of Section 28 of the Customs Act. Mere appointment of a person as an officer of customs with territorial jurisdiction, does not ipso facto confer any authority to exercise the statutory powers entrusted to proper officers. The Central Board for Indirect Taxes and Customs (‘CBIC’) sought to rectify the defect by issuing Notification No. 44/2011-Cus (NT) dated July 6, 2011 (‘Notification 44/2011’), whereby DRI and Commissioner (Preventive) were inter alia assigned the functions of ‘proper officer’ for the purposes of Section 28. For the prior period, Section 28 was amended by insertion of Sub-section (11), entrusting officer of customs with the powers of proper officer for the purpose of Section 17. 

For several years, the issue was thought to have been settled, until the judgment of Mangali Impex Limited v. UOI, [TS-178-HC-2016(DEL)-CUST] The Delhi High Court was therein concerned with power of DRI to issue show cause notices for the period prior to 2011. Incidentally, the judgment of Syed Ali, pronounced on February 18, 2011, was succeeded by certain amendments in Section 28 of the Customs Act with respect to limitation period. An explanation was inserted clarifying that demand for the period prior to amendment will be governed by unamended Section 28. The High Court observed that there was a conflict in Explanation and Sub-section (11) of Section 28. Sub-section (11) could not override the Explanation contained in statute book. In the terms of Explanation, demands for the period prior to 2011 would be governed by Section 28 sans Sub-section (11). Consequently, the officers of DRI did not qualify as ‘proper officers’ for the period prior to 2011.

Decision in Canon India

The Apex Court in the case of Cannon India was concerned with the authority of DRI to issue show cause notices post the amendment in 2011. The Apex Court noted that Section 2(34) of the Customs Act defines the expression ‘proper officer’ as officers of customs empowered to undertake particular functions. In this regard, two notifications arose for consideration – Notification No. 17/2002-Cus (NT) dated March 7, 2003 (‘Notification 17/2002’) and Notification 40/2012-Cus (NT) dated May 2, 2012 (‘Notification 40/2012’). The Central Government vide Notification 17/2002 had appointed officers of DRI as Commissioners, Additional Commissioners and Deputy, Assistant Commissioners of Customs and the CBIC vide Notification 40/2012 assigned functions under Section 28 to Deputy and Assistant Commissioners of Customs.  

The Apex Court opined that the power to appoint DRI as officers of customs exists only under Section 6 of the Customs Act, whereby the Central Government is empowered to entrust the functions of CBIC or officer of customs to any of its officers. The CBIC was not empowered to confer DRI with any functions under the Customs Act. Further, Notification 40/2012 was held to be invalid as it was issued in exercise of non-existent power under Section 2(34). The Apex Court accordingly held that DRI did not form ‘proper officer’, and show cause notice issued by DRI was quashed for want of jurisdiction. The Apex Court also held that two separate officers could not exercise the powers of ‘proper officer’ of issuing show cause notice in respect of same case. 

At the outset, it is pertinent to point out that CBIC is the parent agency for DRI; additionally, officers of DRI are not treated as ex-cadre. The Central Government issued Notification 17/2002 appointing DRI officers as officers of customs only under Section 4(1) of the Customs Act. Once DRI officers form officers of customs, the CBIC is empowered to confer duties and powers on such officers. The CBIC has exercised this power under Notification 44/2011 and Notification 40/2012. A conjoint reading of Notification 17/2002, Notification 44/2011 and Notification 40/2012 would also result in DRI officers qualifying as proper officers in respect of Section 28. It is noted that Section 6 merely empowers the Central Government to appoint its officers as ‘officers of customs’. The provision is referring to officers who were not appointed as officers of customs, but are being entrusted with the functions and the powers of officers of customs. Further, the CBIC was always vested with the power to assign function of proper officer to any officer of customs. Thus, Notification 44/2011 and 40/2012 even if wrongly issued under Section 2(34), would not hinder the grant of authorisation.

Effects of the proposed amendments 

The Central Government left with no redressals against the order of Full Judge Bench (three-judges) of the Apex Court in Canon India, was constrained to legislatively overrule the judicial decision. To this extent several amendments have been proposed in Finance Bill. To begin with, the definition of proper officer under Section 2(34) has been proposed to be amended to cover such officers of customs who have been assigned those functions by the CBIC under Section 5 of the Customs Act. Section 3 enlisting the classes of ‘officers of customs’ has been proposed to be amended to specifically include officers of DRI. Further, Section 5 has been proposed to be amended to empower the CBIC to issue notifications to assign functions of ‘proper officer’ to an officer of customs. 

By virtue of this proposed amendment, it becomes clear that DRI officers do not qualify as proper officers merely by their insertion in Section 3 of the Customs Act as ‘officers of customs’. A notification under Section 5, assigning specific functions to such officers is required to be issued. It might be argued that Notification 44/2011, although issued under Section 2(34), fills this lacuna by assigning DRI with the functions of ‘proper officer’ under Section 28. It is trite law that as long as the power exists under a statute, a notification cannot be invalidated only because it has been erroneously issued under another provision of the statute. The Finance Bill further proposes to allow CBIC to confer two or more officers with the authority to exercise concurrent powers. Notably, these amendments are prospective in nature, and hence will cover situations where DRI issues show cause notices after these amendments come into effect. 

Coming to Clause 96 of the Finance Bill, one gets the sense of the true intent and extent of the amendments. Clause 96 is a non-obstante clause which anoints the provisions with an overriding effect over any decision of any Courts. It provides retrospective validation to any act of customs officers done prior to these amendments. Further, the clause also provides validation to any notification assigning functions to any officer. This amendment tends to completely nullify the decision in Canon India by not only validating the issuance of show cause notices by DRI retrospectively, but also validating Notification 17/2002, Notification 40/2021 and Notification 44/2011.

In light of such pointed amendments, a pertinent question arises as to the fate of the matters already decided as well as matters pending adjudication on this very issue. The explanation to Clause 96 clarifies that matters proceedings which are pending as on the date of commencement of Finance Act, 2022 (‘Finance Act’) alone will be covered by aforesaid retrospective provisions. 

At the outset, it is amply clear that the provision for retrospective validation of actions will be applicable on cases where DRI has already issued show cause notices which are yet to be adjudicated as on the date on which the Finance Act comes into effect. The issue that however comes to fore is what is scope of the expression ‘proceeding.…pending’. Does it only cover proceedings where demands are yet to adjudicated or does it also cover proceedings where demand has also been adjudicated by way of an Order-in-Original, whether in favour or against the taxpayer, and are pending before appellate authority or High Courts in writs. In any event, it will be interesting to see the fate of differentiation between taxpayers against whom proceedings are pending vis-à-vis taxpayer against whom proceedings have reached some level of certainty, in light of test of equality under Article 14 of the Constitution.

Virtual Digital Assets – A Special Tax Regime

This article has been co-authored by Nikhil Shah (Manager, Direct Tax, Nexdigm).

BACKGROUND

India has become one of the largest market for Cryptocurrencies. Indians have parked nearly $ 6.6 billion[1] in cryptocurrencies until May this year, as compared to $ 923 million until April 2020. India ranks 11 out of 154 nations in terms of cryptocurrency adoption, as per blockchain data firm Chainalysis. While this growth has given Indian cryptocurrency exchanges a reason to celebrate and attract global investors, the regulatory framework around the same has remained always unclear and ambiguous. Reserve Bank of India (RBI) in its Financial Stability Report in the year 2013 warned the public against banking on Cryptocurrencies as they posed challenge to the economy in the form of regulatory, operational, and legal risks. Later, RBI in its circular "Prohibition on dealing in Virtual Currencies” dating 6th April 2018 [2] prohibited the entities regulated by it from dealing in/ providing any services w.r.t virtual currencies, with a 3-month ultimatum to those already engaged in such services.

However, on 4th March 2020, the Supreme Court has given its landmark judgement on the said issue reviving the market of Cryptocurrencies by holding them valid under the constitution thereby giving a new lease of life to crypto companies, dealers and exchanges.

While the legality of crypto currencies is still not certain there were also issues on classification of crypto currencies on the tax side and overall tax implications on the same. Accordingly, a separate scheme of taxation is proposed in the Finance Bill 2022 for Digital Assets.

SCHEME FOR TAXATION OF VIRTUAL DIGITAL ASSETS

Taxation of virtual digital assets:

• Finance Bill 2022 proposes to insert section 115BBH to Income-tax Act, 1961 (‘Act’) to provide for taxation of income from transfer of any virtual digital asset. The applicable tax rate shall be 30% plus applicable surcharge and cess. There would not be any benefit of income slabs or minimum exemption limit.

• Under section 2(47A) of the Act, definition of virtual digital assets has been included. The definition is wide enough to cover cryptocurrencies, Non-Fungible Tokens (NFT) or any other type of digital assets.

• It is also proposed that no deduction in respect of any expenditure (other than cost of acquisition) shall be allowed. Further, no allowance / set off of any loss on transfer of digital assets shall be allowed under any provision of the Act to the taxpayer. Such loss shall also not be allowed to be carried forward to subsequent years for set-off.

Taxation on gift of virtual digital assets:

• It is also proposed to amend deemed gift tax provisions under section 56(2)(x) of the Act to provide for taxation of the gifting of virtual digital assets in the hands of the recipient. However, gifts from relatives would continue to enjoy the exemption like other gifts/assets.

• Thus, in case of gift, the fair market value shall be deemed to be the income of the recipient of these assets. However, how to arrive at the fair market value needs to be examined and it is better that Government provides some clarity here.

• Also, in case of gift there could be double taxation – once when the receiver receives digital asset as a gift and again once he sells the digital assets on the full sales value as for that taxpayer the cost of acquisition is zero. The Government should clarify on this aspect also.

Withholding tax:

• It is proposed to insert section 194S to the Act to provide for deduction of tax of 1% on payment for transfer of virtual digital asset to a resident. Where such payment is in kind or in exchange of another virtual digital asset or cash is not sufficient to meet the liability of deduction of tax, the person before making the payment for such transfer shall ensure that the tax has been paid in respect of such consideration.

• This withholding tax is to be deducted and paid by person responsible for making payment to taxpayer who has transferred digital asset.

• It is also proposed that no tax deduction is to be made if:

o   Consideration payable by specified person does not exceed INR 50,000 during the financial year

o   In any other case, the consideration payable does not exceed INR 10,000 during the financial year.

Specified person means:

-  Individuals and HUF having income other than business or professional income

-  Individuals and HUF having business or professional income where the gross receipts / turnover/ sales does not exceed INR 10 million (in case of business) and INR 5 million in case of profession in the immediately preceding year

• In case of tax to be deducted by specified persons, there would be no requirement of obtaining Tax Deduction Account Number (TAN) as also of deducting tax at higher rates where the income recipient has not filed income tax return for the prior year.

NEXDIGM VIEWS

A specific taxation scheme is certainly a welcome move as it is expected to provide much required clarity on the taxation of transactions in digital assets and is also expected to increase the tax base. However, it appears that the provisions are adverse in comparison to other investment class / assets.

One will also have to see how the norms for determination of fair market valuation get prescribed considering the peculiar nature of these assets.

Also, while the taxation appears to be simple for residents, it would be interesting to understand the taxation in hands of non-resident. Whether such income would deem to accrue or arise in India would be dependent on situs of the virtual digital asset and finding the situs would be next to impossible.

With the introduction of withholding tax provisions, it appears that crypto exchanges may have to carry out the compliances.

It would be pertinent to note that Government has a right to tax any income (whether its legal or illegal) and hence merely introduction of tax provisions for Digital Asset would not make them legal.

ITC Under GST – Self Assessed, or Vendor Assessed?

This article has been co-authored by Nikita Maheshwari (Manager, TMSL).

The media is swamped with budget discussions on what lies in store for the public. Tax stalwarts are deciphering the budget and giving their valuable inputs on what the amendments could mean for taxpayers. Amidst all this pandemonium, a small but significant change has been slyly put up in the Finance Bill, 2022 from GST perspective.

Section 41 of the CGST Act, 2017 has been amended in the following fashion:

A bird’s eye view of the above amendment gives the impression that ITC shall now be available on a self-assessment basis instead of provisional assessment. However, the amendment could have a far-reaching impact for taxpayers. In this article we wish to discuss the implications of this specific change. Whilst there are other changes in ITC provisions as well i.e., Section 16(2), 16(4), 42, 43 and 43A, this article covers our comments specifically on Section 41 only. 

Historical relevance

Indirect taxes from time immemorial have been computed and paid on self-assessment basis. Whether it be Central Excise, Service tax or VAT, tax payment are computed by the assessee after deducting input tax credit from the output tax. Needless to say, the input tax credit was determined by the assessees on their own, basis the input invoices accounted for. Under the Central Excise and Service tax, there was no requirement of matching of invoices as furnished by the supplier to avail such credit. Regardless, in certain cases, the invoices issued was required to be countersigned by the inspector of central excise or the superintendent before excisable goods were removed form the factory.   

VAT being the most recent indirect tax law prior to GST brought in the condition of matching of Input VAT credit. However, the same was reviewed by authorities during assessments and audits. Any credit which was mismatched was disallowed by the authorities. Interestingly, an assessee got multiple attempts to revise returns under VAT which is absent under the GST regime.

Implications of amendment in Section 41

When GST regime was rolled out, the Government had an ambition to make ITC available under GST provisionally until the supplier uploaded his returns and the recipient accepted, modified, or rejected such credit. However, within a few months, the Government realised that the same may not get implemented. Hence, in 2019 they introduced a dynamic statement of credit available (basis the output supplies declared by the supplier) namely GSTR 2A. The recipients were expected to reconcile their ITC with such statement and avail matched credit. A liberty was provided to the recipient to avail credit in excess of the matched credit. Such provisional credit was earlier 20% of the matched credit, which was subsequently reduced to 10% and 5%. Finally, w.e.f. 1 January 2022, the Government has removed availment of any provisional credit. Thus, now an assessee can only avail matched credit.

The question that arises here is – Then what difference does Section 41 make?

Well, amended Section 41 states that the ITC under GST will now be self-assessed; which means that a taxpayer would have to shoulder the responsibility of availing correct credit. And how does one do that? The taxpayer would have to match ITC as per books with ITC as per GSTR 2B. Once that matches, the taxpayer can avail such credit. In a situation where a credit is availed without such matching, it shall become the responsibility of the taxpayer to reverse such credit and reclaim once the supplier has finally uploaded his returns and credit is reflected. Therefore, the authorities are shifting the burden to verify if the credit availed by an assessee is appropriate or not. By incorporating the same in the legislation, itself, the Government has made this sacrosanct as well.

It must be noted that recently in the case of LGW Industries Limited & Ors. [WPA NO.23512 OF 2019], the Calcutta High Court held that transactions entered into by petitioners are valid and genuine as they are in possession of relevant supporting documents. Moreover, it was held that the petitioners have performed reasonable due diligence to identify the suppliers under question and ensured that credit is also reflected in GSTR 2A.

GSTR 2B which is the ITC verification document for a recipient gets auto populated from GSTR 1 of the supplier. The issue that arises is how would the recipient know that the supplier has paid relevant tax along with GSTR 3B? With effect from 1 January 2022, the Government has restricted filing of GSTR 1 if GSTR 3B of previous period is not filed. However, due to the sequence of the returns, the recipient would only come to know of a lapse in the next month. This will give rise to interest implications on tax remaining unpaid on the recipient.

Maximum taxpayers in the country are medium and small businesses. It shall become an extremely cumbersome activity for them to follow through this extensive procedure of reconciling ITC, identifying unreconciled ITC, check whether vendor has paid tax for reconciled ITC, follow up with vendors for unreconciled ITC and so on and so forth.

Conclusion

The GST regime was built upon the foundation of seamless credit. But the way the ITC provisions are evolving point in opposite direction. Multiple litigations have been fought on whether the recipient should be made responsible for the supplier’s misdoings, but the Government seems to be indifferent. Rather they keep adding to the compliances in one way or another.

The most developed nations with robust IT infrastructure in place have not been able to implement the self-assessed matching credit system. Even in India, taxpayers are grappling with ITC provisions and the compliance thereof. What the Government is trying to do, is best defined as ‘lex non cogit ad impossibilia’ which means asking to comply with something that is impossible. Making the provisional ITC claim as final self-assessed claim in absence of GST audit by professionals shall hurt the taxpayers in the long run. This is because by the time they are assessed or audited by department, the interest amount would have become mammoth.

However, it may be noted that this is not the first time that the GST lawmakers have expressed their intent to do away with provisional ITC. It was also discussed in the 43^rd GST Council meeting that the word “claim” should be removed from Section 41 and also the concept of provisional ITC was discussed to be redundant in absence of GSTR 1/2/3 model. This discussion indicated the Council’s objective to phase out provisional ITC scheme under GST and has been acted upon in this budget. Thus this should not really come as a surprise for the taxpayers.

With such far reaching implications, one may only wonder as to how far it is fair to put taxpayers in such a spot where they feel helpless and exasperated! Moreover, the Government at some point needs to stop amending the ITC provisions and live with what they have created. The taxpayers need stability the most, leave apart the fairness of provisions.

Budget 2022 – A New Code for Availing and Utilising ITC under GST

This article has been co-authored by Bhadresh Vyas (Director, KC Mehta & Co.) & Tapas Ruparelia (Associate Director, K. C. Mehta & Co.).

When the GST law was implemented, it was expected that the budgets thereafter would not have many amendments on the Indirect tax front apart from changes in relation to Customs law and Customs tariff given that the changes under GST are to be made on the recommendation of the GST Council which meets frequently. The Finance bill, however, every year brings in noteworthy amendments to the GST law. This budget presented this year being the fifth budget after the introduction of the GST law, was no different as the finance bill contains significant amendments to the GST Act.

Amongst others, this budget brings a slew of amendments which pertain to availment and utilisation of Input Tax Credit (‘ITC’). One can say that this budget is a code on availment and utilisation of ITC going forward.

Changes in time limit to avail the ITC:

Good news first. The time limit prescribed under Section 16 (4) for availing the ITC in respect of any invoice has been extended to 30^th November of the subsequent year as against the due date of furnishing the GSTR 3B for the month of September of the subsequent financial year. This increase in time limit to avail the ITC would come as a relief for many taxpayers as there would be some additional time available after the finalisation of the books of accounts post which any missed ITC can be availed.

It is to be noted that earlier, the time limit was linked with the due date of filing the return for the month of September of the subsequent year, which was 20 October. This time limit has now been extended till 30 November. This means that the ITC of invoices pertaining to the previous financial year can be availed in the returns filed on or before 30 November. One would be able to file the returns up to the month of October by such date. Thus, while the time limit to avail the ITC seems to be increased by 2 months, the actual increase is effectively one month. It is worth noting that the time limit to issue a credit note or making rectification of any omission or incorrect particulars furnished in earlier returns has also been extended till 30^th November of the subsequent year giving ample time to reflect any year adjustments made at the time of finalisation of the books of accounts.

Restrictions on availment of ITC

In the last year’s budget, a provision was introduced to state that ITC shall be allowed only if the invoices have been uploaded by the supplier on the portal and communicated to the recipient in form GSTR 2B [giving a blessing to Rule 36 (4)]. Just when one would have thought that all the possible restrictions have been introduced by the Government, the current budget proposes to introduce additional restrictions in availing the ITC which are as follows:

• A new clause (ba) to Section 16 (2) has been inserted to provide that ITC shall be allowed only if it is not restricted in the details communicated to him in form GSTR 2B.
• The situations in which the said ITC shall be restricted are proposed to be covered in the new Section 38 which are as follows:
  • The supplier has made the supply within a specified period after taking registration
  • The supplier has defaulted in payment of tax for a specified period
  • The tax liability as per the details of outward supplies disclosed in the GSTR 1 by the Supplier exceeds the tax actually paid by him by a specified limit
  • The supplier has availed ITC in excess of what is available to him as per his GSTR 2B above a specified limit
  • The supplier has defaulted in paying tax in the proportion of ITC to cash prescribed under Section 49 (12)
  • The supplier is amongst the class of persons specified

In terms of the amended Section 38, the GSTR 2B on the basis of which ITC would be availed by the recipient would seemingly bifurcate the ITC available into restricted ITC and ITC that is free to be availed.

Reversal of ITC in certain cases

Section 41 is proposed to be replaced to provide that the in case where ITC has been availed by the recipient and the tax payable on such supply has not been paid by the supplier, the recipient shall be required to reverse the said ITC along with interest.

It is also provided that the said ITC can be re availed by the recipient when the supplier makes the payment of tax.

It is interesting to note that the amendment to Section 41 seeks to make the recipient liable for not only reversal of ITC but also payment of interest on account of a default on the part of the supplier. It is to be noted that the invoices are reflected in the GSTR 2B on the basis of the GSTR 1 filed by the suppliers whereas the payment of tax would be done by the supplier at the time of filing his GSTR 3B. In order to avail the ITC, now one would also be required to track the status of filing of GSTR 3B by the suppliers over and above tracking of ITC reflected in the GSTR 2B. Also the due date for filing GSTR 3B by both the supplier and the recipient would normally be 20^th of the subsequent month. In such a case, a recipient cannot force his supplier to file his GSTR 3B before him so that he can take the ITC without having to worry of interest liability subsequently.

It is also to be noted that the proposed amendment also allows re availment of ITC once the tax is paid by the supplier. In this connection, the following questions arise:

1. The imposition of interest is specifically provided under Section 41 and not under Section 50 which states that interest will be payable only in case ITC has been wrongly availed and utilised and not in case where the wrongly availed ITC has not been utilised. Whether interest would apply if a taxpayer is required to reverse ITC under Section 41 but has sufficient balance of ITC lying with him?
2. When the defaulting buyer pays his tax dues, he would also pay the interest for the delay in making payment to the Government. Interest being compensatory in nature, whether the recipient will be granted a refund of the interest paid under Section 41?
3. Whether the time limit specified under Section 16 (4) shall be applicable for re availment of the ITC under Section 41? Currently ITC required to be reversed for non-payment to suppliers within 180 days can be re availed without any time limit as and when the payment is made to the supplier. It is expected that the facility to re avail the ITC under Section 41 shall also not be hit by the time limit specified under Section 16 (4).

Restrictions on utilisation of the ITC

Subsection (12) is proposed to be inserted to Section 49 to give powers to the Government to specify a maximum proportion of output tax liability that may be discharged through electronic credit ledger.

It is to be noted that Rule 86B was brought in with effect from 1 January 2022 which restricted the payment of output liability using ITC to the extent of 99% of the total liability i.e. mandating payment 1% of the output tax liability though electronic cash ledger in specified cases. The said rule seems to have now received blessings under the Act.

Under the erstwhile regime, it has been held by courts in a catena of judgements that ITC once availed is as good as cash for the purpose of discharge of output liability. Can this restriction on use of ITC which has finally settled into the Electronic Credit Ledger after satisfying all the conditions, be looked at as a violation of Article 14 of the Constitution of India?

Conclusion

The amendments to the GST Law proposed in the current budget seek to revamp the entire process of availing as well as utilising ITC by the recipients. The amendments put the recipients in a much onerous position by requiring them to ensure compliance by the suppliers as well as payment of interest for the default of suppliers. It is to be noted the Courts have held[1] that recovery from a buyer cannot be made unless the Government has first exhausted all the remedies against the buyer. It remains to be seen as to whether these amendments would stand the test of principles laid down by the courts time and again.

Before we part

The amendment to the GST Act takes a considerable time to get implemented given that the identical amendments have to be passed by all the states in their legislative assembly following the due process of law. Most of the amendments proposed in the last year’s budget were brought in force from 1 January 2022. A similar time frame may be expected for the present amendments also to be enforced. This time gap should be utilised by the industry to get geared up with the changes to:

1. Ensure proper KYC / due diligence of the vendors
2. Identify vendors who are prone to non-compliance
3. Renegotiate the contracts with vendors to safeguard own interests in case of defaults by vendors
4. Align the procurement and payment processes to ensure payments are made to only compliant vendors

Questions Around Proposed Withdrawal of Sec.115BBD

1.0  Introduction  

Section 115BBD was inserted through Finance Act, 2011 in the statute book to incentivize repatriation of dividends by foreign companies to Indian Shareholder companies. This concessional taxation at the rate of 15 per cent was brought in on the basis of representation made by the Industry to encourage repatriation of dividends from foreign companies or subsidiaries. The then Hon’ble Finance Minister while introducing this provision observed as under-

“It has been represented that the taxation of foreign dividends in the hands of resident taxpayers at full rate is a disincentive for their repatriation to India and they continue to remain invested abroad. For the year 2011-12, I propose a lower rate of 15 per cent tax on dividends received by an Indian company from its foreign subsidiary. I do hope these funds will now flow to India.”

It may also be noted that Indian companies distributing dividends were charged dividend distribution tax at the rate of 15 per cent plus applicable surcharge etc under Sec.115 O.

On the basis of encouraging results, the Sec.115BBD originally introduced for one year got extended year wise and then the same was converted into a permanent provision through  Finance Act 2014, by the then Hon’ble Finance Minister Sri. Arun Jaitley. The following observations were made by the Finance Minister in his budget speech for the year 2014-15.-

"The concessional rate of tax at 15 per cent on dividends received by Indian companies from their

The existing   provisions of the Section 115BBD  read as under-

Tax on certain dividends received from foreign companies.

115BBD. (1) Where the total income of an assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of—

(a) the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen per cent; and

(b) the amount of income-tax with which the assessee would have been chargeable had its total income been reduced by the aforesaid income by way of dividends.

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing its income by way of dividends referred to in sub-section (1).

(3) In this section,—

  (i) "dividends" shall have the same meaning as is given to "dividend" in clause (22) of section 2 but shall not include sub-clause (e) thereof;

 (ii) "specified foreign company" means a foreign company in which the Indian company holds twenty-six per cent or more in nominal value of the equity share capital of the company.

2.0  It is now proposed in the Finance Bill 2022 that the provisions of section 115BBD shall be made inoperative from 1st of April 2023 (from AY 2023-24). The Memorandum explaining the Provisions in the Finance Bill 2022 observes as under-

“Finance Act, 2020 abolished the dividend distribution tax provided in section 115-O to, inter-alia, provide that dividend shall be taxed in the hands of the shareholder at applicable rates plus surcharge and cess.”

“In order to provide parity in the tax treatment in case of dividends received by Indian companies from specified foreign companies’ vis a vis dividend received from domestic companies, it is proposed to amend section 115BBD of the Act to provide that the provisions of this section shall not apply to any assessment year beginning on or after the 1stday of April, 2023.”

3.0  The proposal to withdraw this provision would dispirit Indian companies making outbound investments. The comparison drawn with the repeal of Sec. 115 O in the memorandum justifying the withdrawal of this provision is in practical terms not justified as this provision was mainly brought in to encourage repatriation of profits in the form of dividends back to Indian companies. On account of this provision, enhanced repatriation of funds from abroad was noticed by the then Hon’ble Finance Minister in 2014 Budget speech.  Equating domestic company dividends with foreign company dividends is not appropriate in view of different geographical markets and other risk parameters.  In the era of Indian corporates scaling up their outbound investments the time tested incentive of concessional tax on foreign company dividends deserves to be continued.

Even under FEMA regulations the Reserve Bank of India closely monitors outbound investments in terms of profit repatriation under the Annual Performance analysis. The present proposal would only motivate the corporates deferring repatriation of profits back into the country. This decision would significantly impact Startup companies making outbound investments having global expansion plans and structuring India as their headquarters base.

4.0  It is pertinent to note the amended provisions of section 80M (effective form AY 2021-22) in respect of inter-corporate dividends which provide a deduction in respect of dividends received from a foreign company and in turn distributed to the shareholders of the recipient Indian company. Foreign company was also included in these amended provisions. This provision would remove the cascading effect of tax on dividends, particularly in those cases where onward distribution of dividends to the shareholders of the recipient Indian companies was carried out on or before the due date as per the provision of Section 80M. Many Startup companies at the parent company level could be incurring huge losses in spite of earning profits at subsidiary level and receiving dividends. In such cases the Startup Indian parent company may not distribute any dividends to its shareholders and thereby would not avail the benefit of section 80M. Consequently such companies get taxed as per the new proposal on the dividends received from the foreign subsidiaries.

5.0  Conclusion

In view of the above practical situation explained, it is a well-deserved case of representing for restoration of concessional tax regime on dividend received from foreign companies. The said representation is all the more justified in promoting India as an ideal headquarter jurisdiction of various Startup companies that are coming up. This would incentivize Startup industry in a big way.

India’s Approach to Taxing Cryptocurrencies

The Indian Government has usually been averse in allowing the Cryptocurrencies to become a mainstay in India. With unclear laws to bans by RBI on payments for purchase of digital currencies, the Government has tried it all to not let these digital currencies grow. But, the budget of 2022 is a clear indication that the Government has realised that despite any action, they can't just wish Cryptos away. In this Budget, the Finance Minister has announced measures which in a way legitimize these cryptocurrencies and yet, add more roadblocks to these transactions possibly to still discourage the average investor. Let's discuss the changes below in detail.

1. Virtual Digital Assets – Cryptocurrencies defined

The Finance Bill, 2022 has coined the term ‘Virtual Digital Assets’ which is used to represent all types of cryptocurrencies, crypto tokens and includes non-fungible tokens (NFTs). It includes all current cryptocurrencies such as Bitcoin, Ethereum, Ripple, Tether or any other cryptocurrency which may be evolved in the future.  The definition has been kept open ended to capture each and every type of such cryptographic tokens in any form whatsoever. The Government has also been given the power to include any digital asset as a ‘Virtual Digital Asset’ or to exclude one. The latter possibly being given to exclude the proposed token to be issued by RBI.

2. Income from transfer of cryptocurrencies to be taxed at a flat rate of 30% plus surcharge and cess.

This budget for the first time has clearly specified a rate for taxation of cryptocurrencies putting to rest the speculation on how exactly they should be taxed. The Finance Bill provides that income on transfer of cryptocurrencies would be taxed at 30% after adjusting only the cost of acquisition of such cryptocurrency. No deduction is going to be provided for any other expenditure or allowance.

The tax rate proposed here is the highest tax rate applicable currently to any resident taxpayer. The rate is almost akin to the tax applicable on gambling or lottery. The rate of 30% would be applicable irrespective of the slab of an individual taxpayer, or even if the taxpayer is a corporate enjoying the tax rate of 22% or even 15%. Surcharge and cess would also be applicable on the total tax amount.

While the introduction of this tax has provided some certainty of taxation, the fact that only cost of acquisition would be deductible has still left multiple challenges for the taxpayer. Further, the term cost of acquisition has also not been defined adding to the confusion. Costs such as exchanging fees, wallet charges, etc which are commonly incurred while trading of cryptocurrencies would not be deductible. Where cryptocurrencies are acquired by way of mining, it could be debatable whether cost of equipment, electricity and other allied costs would be considered as part of cost of acquisition or not.

3. TDS to be applicable at the rate of 1% on purchase of Cryptocurrency

The Finance Bill has introduced a TDS rate of 1% on the purchase of any Cryptocurrency if the total purchase exceeds Rs.50,000 (for individual/HUF buyers)/Rs.10,000 (for other buyers) from a seller. The primary purpose of introducing this nominal rate seems to be to collate all the data in respect of the trading of cryptocurrency. However, the implementation of this provision is not as straightforward as it seems. 

First, this is a very difficult step to implement on the Crypto Exchanges. These exchanges work in a manner similar to stock exchanges and the buyer and seller don’t have the visibility to each other’s information, let alone PAN. Current regulations do not mandate that each seller furnish its PAN on these exchanges.  In case of non-availability of PAN, the higher rate prescribed under Sec 206AA would become applicable. Further, if the seller has not filed its return, an even higher rate under Sec 206AB would be applicable.  Even if a transaction is entered into between two cryptocurrencies without involving actual Rupee or any other regular currency, TDS is still required to be deducted on such transactions. Live trading on a cryptoexchange makes it virtually impossible to comply with these norms.

To add to this complexity are decentralised exchanges, which conduct the transaction without the help of any central server across the globe capturing the barest of information possible.  It is also important to know that the people buying crypto currencies today are from all walks of life and not established businesses. They don't always have a TAN and will have no clue on how to go about fulfilling compliances above.

The difficulty in complying with this TDS provision would only lead to high default rates and the possibility of significant penalties for non-compliances. The better approach, at least initially, would have been to set a regulation for these cryptoexchanges and to have them report the transactions in the annual SFT report already furnished by banks and stock exchanges. The Government would have been able to capture a significant amount of data on trading of the cryptocurrencies which could be compared with the annual returns to determine whether appropriate tax is being paid on such income or not.

4. Profit on sale of Cryptocurrencies is not capital gains

Income from Cryptocurrencies has been dealt by in the Finance Bill in a separate section (115BBH) of the Income Tax Act and hence it is not being considered as capital gains. This is important for all those investors who are holding significant value of cryptocurrencies as individuals. Not only the highest rate of tax would be applicable on such income, but there will be no restriction of the highest rate of surcharge. If an individual has an income of more than Rs. 5 Crores from sale of cyrptocurrencies, then the highest surcharge of 37% will apply and the effective tax rate would become 43% on such crypto without any provision of indexation.

But, these provisions come into effect from April 1, 2022 and an individual can book profit on cryptocurrencies held for a period of more than 3 years in the current financial year and treat it as long term capital gains and enjoy the reduced tax rate of 20% and indexation. However, one should be ready to expect some challenges by the tax authorities on this treatment.

5. Loss from Cryptotrading not to be adjusted with any other income or being carried forward

This is going to be another pain point for small investors and traders. Most of them see Cryptocurrencies as another form of investment just like stock markets and commodity. The proposed law disallows set-off of loss from trading of cryptocurrencies with any other type of income. Further, the law also proposes to disallow any carry forward of such losses to any subsequent financial years.

Both these proposals are a big discouragement to the investors or traders of cryptocurrency and might even lead to unnecessary volatility at year end where such persons would try to square off their holdings to minimise their losses in an year.

5. More clarity needed for FEMA/GST

While the budget has tried to bring certainty around tax on cryptocurrencies, there are still issues under Foreign Exchange Management Act (FEMA) and Goods and Services Tax (GST) which need to be addressed.

Current FEMA laws require that all residents undertake all transactions outside India through a bank in India. These transactions are strictly governed and monitored by the Reserve Bank of India and even minor infractions are dealt with a heavy hand. However, the transactions in cryptocurrencies happen electronically and it is virtually impossible to draw a national border around these transactions. The buyer and seller can be sitting in absolutely two different countries and trade cryptocurrencies in any volume at the click of button without the intervention of any bank or authorised dealer. The Government needs to prepare a detailed framework on how to handle these international transactions with the people of India having clear certainty on how to handle these transactions. One suggestion could be to setup a large bank like organisation who could be the intermediary to undertake all such transactions legally.

The treatment of sale of cryptocurrencies under GST is also net clear. As per the current provisions any good or service, unless specifically exempted or excluded, are taxable under GST. List of exclusions covers ‘money’ which covers Indian or foreign currency and even promissory notes or bills of exchange. And while cryptocurrencies also want to be recognised as a legal tender, the current laws do not recognise them as one. So, there is still doubt in the mind of all professionals, whether GST would be applicable on the sale of all cryptocurrencies. 

While the lure of taxing these transactions to augment revenue would be fairly high, a more growth-oriented approach can be to exempt these transactions under GST and to levy a tax equivalent to Securities Transaction Tax. This will enable Government to augment revenue without adding significant complexity to the growth of cryptocurrencies.

Conclusion

While we can continue to debate on how to best regulate cyptocurrencies, the proposed law is a welcome step for all cryptocurrency enthusiasts. We all need to acknowledge now that cryptocurrencies are here to stay, and it is best that we figure out a way on how to regulate them in a constructive manner instead of trying to curtail them. The Government may not allow their use as a legal tender. However, just like stocks, commodities and derivatives, cryptocurrencies have showcased their utility in an electronic world over the last decade or so. With deep technical expertise available in our country, India is rightly poised to take advantage of this crypto revolution and become a leader in this domain. The Government just needs to keep the dialogue open and allow the growth in a regulated manner protecting the interests of the small people.

The GST (Googly, Simplification and Tarrifisation) in Customs

This article has been co-authored by Ruchita Shah (Principal Associate, Economic Laws Practice (ELP)).

The Budget Proposals announced by the Hon’ble Finance Minister include several amendments proposed in the Customs Act, 1962 (‘Customs Act’), Customs Tariff and various Notifications. The key Budget proposals for the Customs law can broadly be summarized as those pertaining to Googly, Simplification and Tarrifisation which are explained below, albeit not in the same order. 

• Simplification by omitting unwanted exemptions: 

• • The Hon’ble Finance Minister in her Budget Speech of 2020-2021 had emphasized on rationalization of Customs exemptions owing to some of them becoming outdated. A detailed review process in this regard is being undertaken ever since by inviting inputs from various stakeholders, including the public at large. While several such exemptions have been withdrawn till date, after an exhaustive review, further phasing out of around 350 exemption entries has been announced in this year’s Budget Speech.
  • To avoid recurrence of a similar problem of exemptions being outdated, Section 25(4A) was inserted in the Customs Act last year whereby conditional exemptions have a limited validity i.e., upto 31st March falling immediately after two years from granting exemption. This is of course subject to certain exclusions such as exemptions pertaining to international commitments under Free Trade Agreements, Information Technology Agreements; Foreign Trade Policy benefits as in the case of Advance authorization; etc. which continue to remain valid for a longer period. In pursuance of this, the end date of exemption has been now specified for various conditional exemption notification entries. 

• Tarrifisation by moving to a simpler and comprehensive Customs tariff: 

• • The Budget speech of the last year also mentioned putting in place a revised customs structure free from distortions. As a further step in this direction, unconditional exemption entries of various exemption notifications are being moved to the Customs tariff itself.
  • The amendments in the tariff are proposed to be effective from May 01, 2022 and the following approach has been adopted to implement this:
    • For items where there is no change in effective rate of Basic Customs Duty (BCD) – Amendments have been proposed in the tariff and would become effective from May 01, 2022. In the interim, the underlying exemption notifications would continue to operate.
    • For items where there is change in the effective rate of BCD – Amendments with the revised rates have been proposed in the tariff and would become effective from May 01, 2022. To operationalize the revised rates in the interim period, simultaneous amendments have also been made in the underlying exemption notifications. 

• Googly
  • Clause 96 of the Finance Bill, 2022 unfortunately gives validity to a lot of the past acts undertaken by officers of Customs in pursuance of their appointment and assigning functions by the Central Government or CBIC. This may effectively amount to giving retrospective validity to actions such as issuance of show cause notices undertaken by DRI officers which have otherwise been held to be ultra vires the Customs Act by the Hon’ble Supreme Court inter alia in the case of Canon India Pvt. Ltd. vs. Commissioner of Customs reported in [TS-75-SC-2021-CUST]. This is clearly one more retrospective amendment to overcome the law laid down by the Hon’ble Supreme Court, even when this Government has always maintained that they would not engage in such practices.   

• • The proposed amendment in Section 14(1) of the Customs Act empowers the Government to prescribe rules to impose additional obligations on the importer and checks to be exercised with respect to valuation of the imported goods where there is a ‘reason to believe’ that the value of such goods may not be declared truthfully or accurately. This could have a far-reaching impact and one would need to see the actual fine print of the Rules in this regard. 

• • The Finance Bill, 2022 has proposed various amendments in the Advance Ruling mechanism under the Customs Act. The proposed amendment in Section 28J of the Customs Act seeks to restrict the validity of an Advance Ruling for a period of three years or till there is a change in the underlying law / facts, whichever is earlier. While we have seen similar provisions existing in the past as regards extending validity of SVB orders beyond three years (till there is a change in circumstances), the present proposal is clearly going back in times. It is also unclear whether the assessee will be required to re-apply seeking validation of the ruling post completion of the three year time period. 

While we do have some googlies, on an overall basis, the Customs proposals and amendments reflect a step in the right direction and moving towards a Good and Simpler Tax regime. 

Finance Bill 2022 - Case Laws Overruled

The Finance Bill 2022 has made several amendments, nullifying the well-settled judgements/judicial pronouncements of hon'ble High Courts and the hon'ble Supreme Court.

The Finance Bill 2022 through amendments has overruled the following judgments rendered in the context of allowance of following expenses.

1.      Disallowance under section 14A in absence of any exempt income

The Hon. Delhi High Court in Cheminvest Ltd v. CIT [TS-5471-HC-2015(DELHI)-O] has held that if there is no exempt income there can be no question of making any disallowance under section 14A of the Act. Similar view has also been taken by Hon. Del High Court in CIT v. Holcim India (P) Ltd [TS-640-HC-2014(DEL)-O], Pr. CIT v IL & FS Energy Development Company Ltd [TS-5745-HC-2017(DELHI)-O] and PCIT v. Kohinoor Project Pvt. Ltd [TS-5493-HC-2020(BOMBAY)-O]. In all these decisions, it has been held that in the absence of investments yielding any exempt income there cannot be any disallowance of expenses under section 14A. In absence of any tax free income earned by the assessee company in respect of aforesaid investments, disallowance under section 14A cannot be made as was held in CIT v Shivam Motors (P) Ltd [TS-6147-HC-2014(ALLAHABAD)-O], Pr. CIT v. Oil Industries Development Board [TS-7416-HC-2018(DELHI)-O], PCIT v. GVK Project & Technical Services Ltd [TS-5137-SC-2019-O]. 

Based on judicial precedents, taxpayer took a view that any expenditure incurred on investments on which no exempt income has been earned during the relevant financial year, there should be no disallowance under section 14A of the Act.

It is proposed to include a clarificatory provision that the expenditure has to be disallowed, even though no exempt income has been earned during a previous year provided expenses have been incurred in earning such income.

The Finance Bill 2022 proposes to insert an Explanation to section 14A of the Act, to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. This amendment will take effect from 1st April 2022.

This amendment proposed in the Finance Bill 2022 overrules several judgements of the hon'ble High Courts.

2.      Disallowance of freebees to Doctors and payments made for infraction of law by insertion of Explanation 3 to Section 37

Finance Bill 2022 proposes to clarify legal position emanating from conflicting rulings on the scope of disallowance of expenses u/s 37 with effect from 1st April 2022;

Proposes to add another Explanation to Section 37(1) to cover expenses:

(a)  incurred for any purpose which is an offence or prohibited by any law in India or outside India,

(b) to provide any benefit or perquisite to a person (whether or not carrying on a business or exercising a profession), for whom acceptance of such benefit or perquisite is in violation of the law governing the conduct of such person,

(c)  to compound an offence under domestic or foreign law;

Finance Bill 2022 remarks that judgments allowing deduction on expenses incurred for a purpose which is an offence under foreign law or for compounding of an offence for violation of foreign law are against the intention of the law as the statute does not say that the Explanation 1 applies only to the violation of domestic law.

Also clarifies on freebies given to the Doctors by Pharmaceutical companies that any expense incurred in providing various benefits in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible u/s 37(1) for being prohibited by the law.

Expense incurred in providing various benefits in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible u/s 37(1) for being prohibited by the law.

Expenses incurred on doctors were allowed as business expenditure in the following decisions, namely DCIT v PHL Pharma (P) Ltd [TS-5005-ITAT-2017(MUMBAI)-O], Solvay Pharma India Ltd v. Pr. CIT [TS-6181-ITAT-2018(MUMBAI)-O], Aristo Pharmaceuticals (P.) Ltd v. ACIT [TS-6614-ITAT-2019(MUMBAI)-O], Aishika Pharma (P.) Ltd v. ITO [TS-6012-ITAT-2019(DELHI)-O], India Medtronic (P.) Ltd v. DCIT  [TS-6966-ITAT-2018(MUMBAI)-O], Solvay Pharma India Ltd v. Pr. CIT [TS-6181-ITAT-2018(MUMBAI)-O], Cadila Pharmaceuticals Ltd v. DCIT  [TS-7089-ITAT-2017(AHMEDABAD)-O], Troikaa Pharmaceuticals Ltd v. DCIT [TS-7890-ITAT-2019(AHMEDABAD)-O], J.B. Chemicals and Pharmaceuticals Ltd v. DCIT [TS-158-ITAT-2021-Mum], Smt. Sucharita Kar v. ITO [ITA No. 2239/Kol/2014; AY 2010-11; date of order 14/12/2016] (Kol “D” Bench), Amit Ghosh v. DCIT [ITA No. 1412/Kol/2016; date of order 9/3/2018] (Kol ITAT “C” Bench), UCB India Pvt Ltd v. ITO [ITA No.6681, 6682, 6455 & 6558/Mum/2013; date of order 18/5/2016] (Mum “K” Bench), Life Line Biotech Ltd. v. ITO (ITA No. 5727/Del/2017) (Delhi Trib.), Sun Pharmaceuticals Inds. Ltd. v. DCIT [ITA Nos.922 & 1234/Ahd/2017 (By Revenue) and ITA Nos.929 & 1237/Ahd/2017 (By Assessee); date of order 29/03/2019] [Ahd ITAT], Dr Reddy’s Laboratories Ltd v. Addl. CIT  [TS-6072-ITAT-2017(HYDERABAD)-O], Cadila Pharmaceuticals Ltd v. DCIT [TS-7089-ITAT-2017(AHMEDABAD)-O], Edwards Life Science (India) Pvt. Ltd. v DCIT [TS-8936-ITAT-2018(MUMBAI)-O],, Amit Ghose v. DCIT [TS-5848-ITAT-2018(KOLKATA)-O], India Medtronic (P.) Ltd. v. DCIT (2018) [TS-5283-ITAT-2018(MUMBAI)-O], India Medtronic (P.) Ltd. v. DCIT (2019) (Mumbai - Trib.), India Medtronics Pvt Ltd v. DCIT [ITA No 7263/Mum/2018; Date of order 13/09/2019], India Medtronic (P.) Ltd. v. DCIT (2019) (Mumbai - Trib.), Emcure Pharmaceuticals Ltd. v. DCIT  [TS-5656-ITAT-2018(PUNE)-O], Emcure Pharmaceuticals Ltd v. DCIT, DCIT v. Aristo Pharmaceuticals Pvt Ltd [TS-8938-ITAT-2018(MUMBAI)-O], Serum Institute of India Ltd v. DCIT [ITA No. 549 & 550/PUN/2016; AY 2011 & 2012-13; date of order 12-10-2018] (Pune ITAT “A” Bench), Gennova Biopharmaceuticals Ltd v. ACIT [ITA No.3033 & 3034/PUN/2017; AY 2012-13 & 2013-14; date of order 6/8/2019] (Pune ITAT” A” Bench), Piramal Healthcare Ltd v. DCIT [ITA No. 1257/Mum/2014; AY 2009-10; date of order 7/5/2019] (Mum ITAT “J” Bench), Medley Pharmaceuticals Ltd. v. DCIT [2020] [TS-6586-ITAT-2020(MUMBAI)-O], Indoco Remedies Ltd. v.  DCIT [TS-7012-ITAT-2020(MUMBAI)-O], Raman & Weil Pvt Ltd v. DCIT  ICARUS Health Care P. Ltd v ACIT [TS-107-ITAT-2021(CHNY)], Pr. CIT v. Merck Ltd (2020) [TS-6042-HC-2019(BOMBAY)-O], Pr. CIT v Merck Ltd, Pearless Hospitex Hospital and Research Centre Ltd v. DCIT, DCIT v. Heal Kraft India Pvt Ltd., Aishika Pharma (P.) Ltd v. ITO, Glenmark Pharmaceuticals Ltd v. ACIT-LTU, Mumbai [ITA No 5651/Mum/2017 (AY 2013-14 date of order 21/8/19],  ACIT v. Novartis Healthcare Pvt Ltd, Aishika Pharma (P.) Ltd v. ITO [TS-6012-ITAT-2019(DELHI)-O], DCIT Circle-1, Thane v. Bayer Pharmaceuticals Pvt. Ltd. [ITA No.6222/Mum/2018 dated 18.09.2019], ACIT v. Geno Pharmaceuticals Ltd, Johnson & Johnson Ltd v. Addl. CIT, ACIT v. Geno Pharmaceuticals Ltd [TS-6616-ITAT-2014(PANAJI)-O] , etc.

The Hon’ble Allahabad High Court in the case of CIT v. Pt. Vishwanath Sharma (2009) [TS-5252-HC-2008(ALLAHABAD)-O] (All) has held as follows:

“ …….. A distinction has already been made by the authorities while allowing deduction to the assessee in respect to commission which the assessee has paid to private doctors since in their case, the payment of commission cannot be said to be an offence under any statute but in respect to Government doctors such payment could not have been allowed as it is an offence under the statutes as stated above.”

The Allahabad High Court has approved the finding of the authority that the payments made to private doctors cannot be disallowed under Explanation to section 37(1) of the Act by relying upon the MCI Regulations 2002.

The Nagpur Bench of Bombay High Court has in the case of PCIT v. Goldline Pharmaceuticals Pvt. Ltd. [TS-23-HC-2022(BOM)] allowed sales promotion expenditure /doctors spend holding that CBDT Circular on doctors spend disallowance issued on 1/8/2012 is prospective in nature and therefore would have application from A.Y. 2013-14 and not for Doctors spend related to earlier years. The Bombay High Court has not commented on the adverse Himachal Pradesh HC decision in the case of Confederation of Indian Pharmaceutical Industry v. CBDT wherein the validity of CBDT Circular disallowing Doctors spend was upheld. The Bombay High Court has also not commented on whether MCI guidelines are applicable to Pharmaceutical companies or not.

The Rajasthan High Court after referring to the decision of Max Hospital v. Medical Council of India [TS-6242-HC-2014(DELHI)-O] has in the case of Anil Gupta v. Addl. CIT (ITA No. 485/2008; Date of order 18/07/2017) (Raj HC) held that the jurisdiction of MCI is limited to take action against the registered medical professionals only under the MCI Regulations and has no jurisdiction to pass any order affecting the rights / interest of any hospital. The court further held that even otherwise in income tax proceedings the medical ethics will not be taken into consideration. At the most even if it is a professional misconduct it is to be dealt with by but by the Medical Council of India. The income tax authorities cannot decide the medical ethics when the original authority has partly allowed the expenses.

Pharma companies would no longer be possible to draw support from above favourable rulings regarding non applicability of MCI guidelines to Pharma Companies, and therefore it would now be essential to build support for the core argument – i.e., the expenses are not in contravention of MCI guidelines/Regulations.

Explanation 1 to section 37(1) provides any expenditure incurred by an assessee for any purpose which is an offence or prohibited by law shall not be deemed to be have been incurred for the purpose of business and no deduction or allowance shall be made in respect of such expenditure.

In the absence of any express mention, the word ‘law’ used unqualifiedly should be construed to mean Indian law and not foreign law. it can be contended that the Legislature has used and defined the term ‘law’ to generally refer to laws for the time being in force which are applicable to the territory to which the respective Act applies. Whenever the term ‘law’ has been used without any qualifications or adjectives, it would invariably refer to Indian laws only. Further, even if a particular provision of law is intended to be made operative in relation to aspects or causes beyond the territory of India, the same has to be provided expressly or by necessary implications and cannot under any circumstances be presumed. The taxpayers contended that the term ‘law’ used in the context of section 37(1) ought to mean making a reference to Indian laws only. Thus, any fine levied under any foreign law ought not to be considered as violation of law as contemplated under section 37(1) of the Act. In this connection, reference is also be made tothe Mumbai Tribunal decision in the case of Air India Ltd v. DCIT [TS-65-ITAT-2007(MUM)-O] rendered in context of section 43B. In this decision, “law for the time being in force” has been regarded to refer to Indian laws alone, a similar connotation may also be applied for interpreting the term ‘law’ for the purposes of deduction under section 37(1) of the Act. The Allahabad High Court in the case of Abdul Hameed v. Mohd. Ishaq AIT 1975 All 166 while interpreting the ‘law’ as used in the phrase ‘forbidden by law’ in section 23 of the Indian Contract Act, 1872 has held the same would include not only an Act and Ordinance but also any other instrument which has the force of law. In arriving at this conclusion, the Court has in principle applied the definition of “Indian laws” a contained in the Central General Clauses Act. 1897.

This was so  meant in Mylan Laboratories Ltd v DCIT [TS-8532-ITAT-2019(HYDERABAD)-O] and CIT v. Desiccant Rotors International (P.) Ltd [TS-5416-HC-2011(DELHI)-O].

3.      Clarification regarding disallowance of Cess and Surcharge

Section 40(a)(ii) provides that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession".

The Hon'ble Bombay High Court in the case of Sesa Goa Limited v. JCIT [TS-5261-HC-2020(BOMBAY)-O] and the Hon'ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Limited v. JCIT [TS-6774-HC-2017(RAJASTHAN)-O], relying upon the CBDT Circular Dt. 18-05- 1967 have held that 'education cess' can be claimed as an allowable deduction while computing the income chargeable under the heads "profits and gains of business or profession". The above decisions were later followed in Gloster Ltd. V. ACIT [TS-5042-ITAT-2021(KOLKATA)-O], Honeywell Technology Solutions Lab Pvt. Ltd. V. DCIT (ITA No. 1210/ Bang/ 2018; AY 2010-11; date of order 7/1/2021) (Bang “B” Bench) Source: IDBI Bank Ltd.  V. DCIT [TS-5245-ITAT-2021(MUMBAI)-O], J.B. Chemicals and Pharmaceuticals Ltd vs DCIT [TS-158-ITAT-2021-Mum], DCIT v. Mahindra Life Space Developers Ltd [TS -112-ITAT-2021-Mum], Agrawal Coal Corporation Pvt. Ltd. v. ACIT , MSM Discovery Pvt. Ltd. v. ACIT, Tata Autocomp Hendrickson Supervisions Pvt. Ltd. v. DCIT, Philips India Ltd v. ACIT [TS-326-ITAT-2020(Kol)], Sicpa India Pvt. Ltd. v. Addl. CIT [TS-154-ITAT-(DEL)], Midland Credit Management India Pvt. Ltd. (2020), Reckitt Benckiser I Pvt. Ltd. v. DCIT [TS-6965-ITAT-2020(KOLKATA)-O], P. N. Gadgil Jewellers P. Ltd. v. ACIT (2020), Symantic Software India P. Ltd. v. DCIT (2020), Atlas Copco (India) Limited v. ACIT [2019], Havells India Ltd v ACIT [TS-580-ITAT-2020(DEL)], DCIT v. Kotle Patil Developers Ltd [TS-655-ITAT-2020(PUN)-TP], Aptean India Pvt. Ltd. v. DCIT [TS-595-ITAT-2020(Bang)-TP], Tata Consultancy Services Ltd. v. Addl. CIT [TS-601-ITAT-2020(Mum)-TP], Voltas Ltd v. ACIT [TS-342-ITAT-2020-MUM-TP], Sony Pictures Networks India Private Limited v. ACIT [TS-508-ITAT-2020-MUM-TP], KEC International Ltd. v. DCIT [TS-489-ITAT-2020-MUM-TP], DCIT v. Graphite India Ltd. (ITA No.472 and 474 and Co. No.64 and 66/Kol/2018; dated 22/11/ 2019) (Kol. Tribunal), Tata Steel Ltd (ITA No 5616,4043/M/2012; dated 12/9/2019) (Mumbai Tribunal), Peerless General Finance and Investment and Co. Ltd. (ITA No.1469 and 1470/Kol/2019; dated 5/12/2019) (Kol. Tribunal), Atlas Copco India Ltd v. ACIT [TS-848-ITAT-2019-PUN-TP], Bajaj Allianz General Insurance Company Ltd (ITA No 1111,1112/Pn/2017; dated 24/7/2017), DCIT v. GE BE Pvt. Ltd. [TS-650-ITAT-2020-BANG-TP], ACIT v. Persistent systems (P) Ltd (ITA No.1232/MUM/Pun/2017; AY 2013-14; date of order 28/02/2020) and Grasim Industries Ltd (Successor to Aditya Birla Nuvo Ltd) (ITA No 2525/M/2014; dated 20 December 2019).

Thus, with a view to nullify these judgements, the Finance Bill 2022 has proposed to include an Explanation retrospectively in the Act itself to clarify that for the purposes of this sub-clause, the term "tax" includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. This amendment is proposed to take effect retrospectively from 1st April 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years.

4.      Cash Credits under section 68

Several judicial pronouncements have discussed the scope of onus of proof, particularly in cases where the sum is credited as share capital, share premium, etc.  In the case of CIT v. Lovely Exports (P.) Ltd [TS-85-SC-2008-O], the Supreme Court held that if share application was received by the Assessee company from alleged bogus shareholders, whose names were given to the Assessing Officer, then Department was free to proceed to reopen their individual assessments but the amount of share money would not be regarded as undisclosed income under Section 68 of the Assessee company. Similar rulings were given in CIT v. Kamdhenu Steel & Alloys Ltd [TS-808-HC-2011(DELHI)-O], CIT v. Arunanda Textiles (P) Ltd. (2011), CIT v. Dwarkadhish Investment (P.) Ltd [TS-5547-HC-2010(DELHI)-O], CIT v. Value Capital Services (P.) Ltd [TS-99-HC-2008(DELHI)-O]. The Supreme Court in CIT v. Steller Investment Ltd.[TS-5033-SC-2000-O], has held that only identity and creditworthiness of creditor and genuineness of transactions for explaining the credit in the books of account is sufficient, and the onus does not extend to explaining the source of funds in the hands of the creditor.

To supersede these favorable rulings, Section 68 was amended from A.Y. 2013-14 to provide that the nature and source of any sum credited, at share capital, share premium, etc., in the books of a closely held company shall be treated as explained only if the source of fund is also explained by the recipient assessee company in the hands of the resident shareholder.

The Delhi High Court in a very recent judgement in the case of PCIT v. Agson Global (P.) Ltd. [TS-31-HC-2022(DEL)] has held that:

"addition under section 68 of the Act is not attracted when assessee-company routes its own accounted money back to itself, through other entities, as share capital/premium especially when the same is done through banking channels.AO cannot make any additions under section 68 where assessee-company loans its funds to other entities which then invest it back in assessee company as share capital unless the funds so routed back are assessee-company's unaccounted money. Routing of assessee-company's duly accounted money back to itself may violate other laws, but that does not attract section 68."

Thus, with a view to supersede several judgements, it has been proposed in the Finance Bill 2022 to amend the provisions of section 68 of the Act. The provision required that the source of “share application money, share capital, share premium or any such amount by whatever name called” was to be explained by the Indian company that received funds as credit. This has now been extended to also include loans and borrowings/any other liability credited in the books of the assessee. Further loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor or entry provider.

However, this additional onus of proof of satisfactorily explaining the source in the hands of the creditor, would not apply if the creditor is a well-regulated entity, i.e., it is a Venture Capital Fund, Venture Capital Company registered with SEBI.

This amendment will take effect from 1st April 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.

Thus, it has now become mandatory to explain the source of the source also in order to establish the identity, creditworthiness and genuine-ness parameters under section 68 of the Income Tax Act.

5.       Validity of assessment or other income-tax proceedings initiated or completed in the name of a non- existing entity, pursuant to business re-organisation /amalgamation

It is a settled position of law that assessment or any other income-tax proceedings initiated or completed in the name of any non-existing entity, is null and void-ab-initio. The Hon'ble Supreme Court in the case of PCIT v. Maruti Suzuki Ltd. [TS-5166-SC-2019-O] has categorically held that initiation of assessment proceedings against a predecessor corporate entity which had ceased to exist pursuant to a scheme of amalgamation, was void-ab-initio.

In order to nullify this decision, the Finance Bill 2022, has proposed to insert section 170(2A), to provide that

• The assessments/ proceedings under the Act to be treated as valid and legal during the course of business reorganisation process (vide court/ Tribunal of IBC process) in the hands of the predecessor and such assessments shall be deemed to be made on the successor on completion of such business re-organisation (mergers / demergers)

• The successor to file modified return (to capture changes on account of re-organisation) of income within a period of 6 months from the end of the month in which the business re-organisation order is received

This amendment will take effect from 1st April 2022.

6 .  Amendments in Section 148A -New Re-Assessment Regime

The Finance Act 2021 has substituted the old re-assessment regime with a new re-assessment regime, by substituting the then existing sections 147-151 with the new sections. In this new re-assessment regime, the well-settled and established legal position in respect of mandatory condition of formation of an independent reason to believe, of escapement of income, by the jurisdictional assessing authority, has been replaced with the presence of any flagged information as per the risk management strategy of CBDT or the final audit objection of C&AG, suggesting that income of the assessee has escaped assessment.

It is proposed to amend section 148 to enable the Assessing Officer to issue notice under section 148 without taking prior approval of the specified authority if the AO has already obtained prior approval under section 148A(d).

It is proposed to expand the scope of the term “information that suggest that income has escaped assessment" to include the following:

• any audit objection to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act

• any information received under an agreement referred to in section 90 or section 90A of the Act

• any information made available to the Assessing Officer under the scheme notified under section 135A

• any information which requires action in consequence of the order of a Tribunal or a Court

Now, the Finance Bill 2022 has proposed to amend the clause (b) of sub-section (1) of the section 149(1)(b) to provide that a notice under section 148 shall be issued only for the relevant assessment year after three years but prior to ten years from the end of the relevant assessment year where the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented,

(a) in the form of an asset; or

(b) expenditure in respect of a transaction or in relation to an event or occasion; or

(c) an entry or entries in the books of account,

which has escaped assessment amounts to or likely to amount to 50 lakh rupees or more.

Further, the Finance Act 2021, has subsumed the erstwhile block assessments pursuant to search action under section 132 or survey under section 133A, within the newly substituted re-assessment regime, and has provided that such search/survey cases can be reopened only for previous three assessment years only.

However, the Finance Bill 2022, has once again proposed the enabling of re-opening of such cases up-to 6 preceding assessment years.

Fortunately, the recent undermentioned judgements of the hon'ble High Courts, holding the reassessment notices issued under old section 148, on or after 1.4.2021, as bad in law, are not touched as the matter is subjudiced before the Supreme Court which has admitted the SLP against the Allahabad High Court decision in the case of Ashok Kumar Agarwal v. Union of India [TS-6697-HC-2021(ALLAHABAD)-O]:

(i)   Mon Mohan Kohli v. ACIT [TS-6605-HC-2021(DELHI)-O]

(ii)  Ashok Kumar Agarwal v. Union of India [TS-6697-HC-2021(ALLAHABAD)-O]

(iii)  Bpip Infra (P.) Ltd. v. ITO [TS-6696-HC-2021(RAJASTHAN)-O]

(iv) Manoj Jain v. Union of India [TS-5026-HC-2022(CALCUTTA)-O]

(v)  Bagaria Properties and Investment (P.) Ltd. v. UOI [TS-6157-HC-2021(CALCUTTA)-O]

7.  Amendment in Faceless Assessment under section 144B:

The existing section 144B inserted by the Finance Act 2021, has now been proposed to be replaced with a new section 144B.

In this new section 144B, by-default right of personal hearing through video conferencing to the assesses, in line with the recent amendments in the Faceless Appeal Scheme, has been vested in the assesses.

However, at the same time, the existing section 144B(9), mandating that the entire assessments proceedings shall be considered as non-est in law, if the prescribed procedure of conduct of faceless assessments in section 144B is not being complied with, has been proposed to be omitted.

In several Judgements, the faceless assessments have been set-aside, on the grounds of non-adherence to the prescribed assessment procedure in section 144B(9), will now get overruled:

(i)     DJ Surfactants v. National E-Assessment Centre [TS-6014-HC-2021(DELHI)-O]

[Where Assessing Officer had made an addition to petitioner-company's declared income under section 68 on account of purported unexplained unsecured loans and petitioner attempted to establish genuineness of unsecured loans received by it and sought personal hearing, which was not granted by Assessing Officer, impugned order was to be set aside and Assessing Officer was directed to pass fresh order]

(ii)    SAS Fininvest LLP v. National e-Assessment Centre [TS-6198-HC-2021(DELHI)-O]

[Where no prior show cause notice as well as draft assessment order had been issued before passing final assessment order under section 143(3), there was a violation of principles of natural justice as well as mandatory procedure prescribed under Faceless Assessment Scheme, hence, impugned assessment order was to be set aside.]

(iii)  Trendsutra Client Services (P.) Ltd. v. ACIT [TS-6376-HC-2021(BOMBAY)-O]

[Where in faceless assessment NFAC passed a final assessment order under section 143(3), read with section 144B, against assessee without issuing any show cause notice which was mandatory requirement for faceless assessment under section 144B as well as serving draft assessment order, impugned assessment order was to be set aside.]

(iv)  Gandhi Realty (India) (P.) Ltd. v. Assistant/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer

[Non-service of draft assessment order on assessee where variations prejudicial to him are proposed, as required by the mandatory procedure u/s 144B, will render a Faceless Assessment non-est by operation of section 144B(9) even if Department followed other requirements of natural justice like issuance of notice u/s 143(2),furnishing documents to assessee and allowing him hearings from time to time.]

(v)    K L Trading Corporation v. National e-Assessment Centre in W.P. (C) 4774/2021 dated 16.4.2021 (Delhi High Court).

The Legislature, to provide a favour of revenue authorities, has chosen to omit section 144(9), which was inserted to ensure principles of natural justice in the conduct of faceless assessments.

8. Amendment to section 263

Since it was not clear as to who has the power under section 263 to revise the order of the TPO passed under section 92CA, an amendment is proposed.

Favourable rulings in the case of JCB India Ltd [TS-26-ITAT-2022(DEL)-TP], Essar Steel Ltd.  [TS-698-ITAT-2012(Mum)-TP] and Tata Communications Limited [TS-361-ITAT-2013(Mum)-TP] nullified wherein revisionary jurisdiction over TPO’s order was rejected. The Tribunals held that the Commissioner has no power to revise order passes u/s 92CA(3) by the TPO.

The Revamped Faceless Assessment Procedures – Unsolved Pandora’s Box

This article has been co-authored by Sunil Bhat (Senior Manager, Deloitte Haskins and Sells LLP).

In this digital era, the technological advancements have significantly changed the lifestyle and business ecosystem is not exception to this. The extensive use of technology and internet have necessitated digitalization which facilitates rapid and wide circulation as well as easy access to data, information, records on a real-time basis from remote location.

The Tax Administration Reform Commission under the Chairmanship of Dr. Parthasarathi Shome recommended automation and use of technology for administration of tax. The rapid growth in technology has significantly changed the ways in which people and business interact with each other. This has also compelled the governments to revamp the tax administration with the help of technology.

The extensive use of artificial intelligence, machine learning and data analytics tool for monitoring tax compliance have automated routine tax compliance and also put check-and-balances to identify mismatches which necessitated the tax department to gear-up for using the technology for next phase of administration.

The faceless assessment was first envisaged by Finance Minister in 2018 for improving effectiveness of tax administration and represent a paradigm shift in the functioning of the Income Tax Department to give shape to the Digital India vision of the Prime Minister.

The Budget 2018 envisaged[1] the Central Government to frame a scheme for the purpose of making assessments to impart greater efficiency, transparency and accountability by eliminating the interface between the tax officer and the taxpayer in the course of proceedings, optimising utilisation of the resources through economies of scale and functional specialisation and introducing a team-based assessment with dynamic jurisdiction.

The faceless assessment scheme contemplated issue of notice by a Central Cell without disclosing the name, designation or location of the tax officer and random allocation of cases selected for scrutiny to assessment units. The Central Cell was intended to act as the single point of contact between the taxpayer and the tax department.

The Central Government first notified faceless assessment scheme in 2019[2]. This scheme was later modified and section 144B was introduced[3]  in2021. This section itself is a self-contained code prescribing procedures to be followed during the conduct of faceless assessments.

However, the remote assessment units failed to observe the mandatory provisions of the e-assessment scheme inter-alia by not issuing the draft assessment order when adjustments are proposed, not providing an opportunity of personal hearing sought by the taxpayer and the notice calling for details were is issued with tight deadlines.

Accordingly, taxpayers filed writ petitions before the High Court questioning the validity of the assessment orders without following the prescribed procedures. In few instances the High Courts have set-aside[4] the assessment orders treating the same as non-est and deemed to have never been passed as the same were not passed in conformity with the requirements of the Faceless Assessment Scheme/ section 144B. However, in few other instances the High Courts[5] have quashed the orders and the matter was remanded to NFAC to conduct the assessment proceedings by following the due procedure as contemplated by section 144B/ Faceless Assessment Scheme

Proposal in Budget 2022

The existing provisions of section 144B relating to faceless assessment are proposed to be amended by aiming to resolve the difficulties faced in its implementation. The revamped faceless assessment procedures are broadly in line with the current assessment procedures. However, following key changes are proposed:

• Under the existing provisions, it was optional for tax authorities to grant an opportunity of personal hearing. However, the amended provisions mandate personal hearing if the taxpayer or his authorized representative makes requisition for the same when the tax authorities have proposed adjustments to returned income
• As per the existing provisions, the assessment is treated as non est (null & void) if the procedures laid down for faceless assessment under section 144B were not followed by the tax authorities. However, now the said section is proposed to be omitted with retrospective effect (i.e. w.e.f. 1-4-2021)
• He proposed provisions are applicable to regular assessment[6] as well as reassessment[7] cases. The provisions also delegates power to lay down standards, procedures and processes for effective functioning of the various centres and units.
• The requirement to set-up Regional Faceless Assessment Centres is done away under proposed provisions.

Key challenges faced by taxpayers during the faceless assessment concluded in 2021

While the amended provisions lay-down code for faceless assessment, it is pertinent to note that the National Faceless Assessment Centre (NFAC) and the Assessment Units (AU) have chosen to ignore various provisions while issuing the assessment order. The key challenges faced by the taxpayer inter-alia include:

• Assessment order issued without granting opportunity of personal hearing when specifically sought by the taxpayer
• The details/ explanation submitted by the taxpayer not considered and orders issued stating taxpayer has failed to furnish the details
• Assessment order issued without providing draft assessment order as required by the law. Few instances the draft order is issued as final assessment order without considering the submissions made by the taxpayer in response to such draft order.
• Notice seeking information issued without providing adequate time to furnish the response. Bulky information sought seeking responses within 2 to 3 days including holidays.
• Notices are issued to the e-mail ID mentioned in the ITR even-if the new e-mail ID is updated in profile on designated portal. It is noticed that few cases employees would have left the organization, and this would result in unintended failure on part of the taxpayer in responding to notices.
• Notice containing standard questionnaire with bulky information is issued to all the taxpayers even in a case wherein most of the information sought is not relevant to the facts of the particular taxpayer. Further, tax officers seek information like copies of all ledger extract with supporting invoice, copies of bank statement with narration for each entry in the passbook, invoices for all addition to fixed assets, etc.  which would not be feasible to furnish in e-assessment proceedings for medium and large taxpayers.
• While issuing the assessment orders the tax officers compute assessed income as per the intimation issued by CPC instead of return of income furnished by the taxpayer. The tax officers fail to consider the rectification applications made by the taxpayer against the intimation and also submissions made by the taxpayer during the assessment in respect of such adjustments. Further, in most of the instances, the intimations issued by CPC would include adjustments exceeding the jurisdiction conferred under section 143(1) of the Act.
• The tax officers conducting faceless assessment do not rectify mistakes apparent from the records in the assessment order despite of filing application seeking rectification. Further, the jurisdictional assessing officers also do not act on such applicating stating they are not conferred with right to pass rectification orders in timely manner (they often say jurisdiction not transferred). Instances where there are demands pending rectification, the CPC recovers the same from refunds due to the taxpayer for other years
• When opportunity of personal hearing is granted, the tax officers do not attend the hearing at scheduled time. Opportunity for personal hearing is provided to various taxpayer on same date and the taxpayers/ authorized representatives are directed to await for their turn.

Way forward:

• The faceless assessment scheme without any personal interaction between the taxpayer and the tax officer would surely lead to collective benefit for all stakeholders and will pave the way for making the entire tax journey (return filing – assessment – appeal – outcome) convenient as well as transparent for the taxpayers and boost the confidence of taxpayers and multinational enterprises in the tax administration of the country.

Further, the centralised monitoring of cases, and standard operating procedures would help to complete the assessment in timely manner and also eliminate procedural lapses and avoid litigations around these issues.

• However, in the recent past it is observed that the tax officers in many instances have failed to observe the mandatory procedures prescribed under the code for conducting the faceless assessment and thereby writ petitions were filed by taxpayers before various High Courts challenging the validity of such orders. Considering the obvious lapses in the procedures, the Courts in many cases have held that such assessment orders are null and void.
• Further, the tax officers’ approach of conducting assessment in traditional manner by seeking bulky details, seeking details based on standard checklist without evaluating the requirement to the facts of the case of the taxpayer would not yield qualitative assessment and results revenue leakage. Accordingly, the Government should give adequate training and guidance to the field officers to conduct the assessments by following the due procedure of law in a true spirit and under a holistic approach.
• The current provisions treat assessment as null and void if the mandatory procedures laid down for faceless assessment are not followed by the tax officer. Despite of such stringent provisions, the High Courts have remanded the cases back to the tax officer to conduct the proceedings following due procedures prescribed under the law and granting opportunity to the taxpayer instead treating the proceedings as void ab initio. Despite the directions of High Court, whether a fair opportunity of being heard would be still granted to the taxpayer in these cases is a big question 

The proposal to delete such provisions with retrospective effect would be suicidal as the same would not envisage any accountability on part of NFAC/ AU for any procedural laps while conducting the proceedings. This may continue procedural lapses on part of the tax officers and put unnecessary litigation, temporally payment of additional taxes by the taxpayers.

• In view of the above, the government should also prescribe necessary checks and balance to impose accountability on the tax officers and thereby ensure that the tax officers conduct quality assessments and avoid making obvious untenable additions which would result into undesired litigation for taxpayers as well as department.

Updated Tax Return – Third Innings with Additional Tax Cost

This article has been co-authored by Vasudevan G (Manager, Globeview Advisors LLP).

With the ever-expanding data collection drive by the Revenue to track financial transactions of taxpayers, there is a constant nudge on the taxpayers to pay taxes on their true and correct income. Many taxpayers have witnessed the data available with the tax administration in the AIS statement for the last couple of years.

With the intent of promoting voluntary inclusion of income in the tax returns while also recognising the limited time available to the assessee to revise their ITRs (2-5 months) and to reduce litigation, the Finance Bill 2022 has proposed to introduce the provision for filing of an Updated Tax Return.[1] (“UTR”), within 24 months from the end of the relevant assessment year (“AY”). Some of the salient features of UTR are:

1)  UTR can be filed whether or not an original or belated, or revised return was filed by the assessee.

2) UTR cannot be a return of loss, nor can it result in a refund or have the effect of decreasing the total tax liability or increasing the refund. In other words, the assessee cannot claim any benefits through the UTR.

3) The filing of UTR is subject to payment of additional tax as below:

-          25% of addition tax + interest liability, if filed within 12 months from the end of the relevant AY;

-          50% of additional tax and interest liability for the next 12 months post-period mentioned above.

4)  Filing of UTR is a one-time opportunity for any given AY.

5) The tax on the income disclosed in the UTR shall be computed after allowing the credit for advance tax, withholding taxes, DTAA benefits etc.

6)  Appropriate interest due under Sections 234A (if applicable) and 234B must be factored in.

7) UTR assessments would be completed within nine months from the end of the financial year in which the UTR is filed. Assessment is likely to be faceless.

8)  The amendments regarding UTR would take effect from 01.04.2022.

As per the finance bill provisos, the filing of UTR is not allowed in the following circumstances:

1) If any assessment or reassessment or recomputation or revision proceedings under the Act is pending or has been completed for the relevant AY.

2) Where certain proceedings under Section 132, 132A, 133A (search, survey etc.) has been initiated against the assessee. In this case, UTR cannot be filed for relevant AY as well as for two AY preceding such AY.

3) If AO has information in respect of the assessee under certain legislations dealing with financial offences and such information is already communicated to the assessee.

4) Information from foreign jurisdictions received under an agreement referred under Section 90 and 90A of the Act.

5) If any prosecution proceedings have been initiated for the relevant AY.

6) Where the person or class of person has been notified by CBDT in this regard.

While the apparent time limit available for filing a UTR is up to 24 months from the end of the relevant AY, the effective timelines, in some cases, can be much shorter. This can be illustrated as under:

If the issuance of notice under Section 143(2) is considered as the initiation of assessment proceedings, the filing of UTR beyond the date of such notice would not be possible. For example, in the case of AY 2022-23, if notice u/s 143(2) is issued on or before 30.06.2023, a UTR cannot be filed beyond this date. The effective time limit available where an assessment is eventually initiated reduces to a maximum of six months calculated from the due date for filing a belated or revised return.

It may also be noted from the above table that assessment of non-TP cases usually would get completed prior to the issuance of scrutiny notice u/s 143(2) for the subsequent year. In such cases, the assessee may choose to file UTR for the subsequent year after considering the nature of addiction in the assessment to avoid penal consequences for the subsequent year(s).

Even if assessment proceedings are not initiated, one should consider filing UTR subject to peculiar facts, considering the chances of subsequent initiation of reassessment proceedings. A comparison of tax and penal costs on additions through reassessment process and additional tax payment by filing UTR is provided below:

Notes:

1. It is assumed that immunity from penalty proceedings have not been availed.

2. In normal assessment cases, the requirement of benefit analysis does not arise. If the assessment is initiated, UTR cannot be filed.

Thus, a few situations wherein the UTR would be relevant are described below:

1)  Where based on the AIS, the taxpayer notes additional tax is payable;

2)  Where a tax position is claimed by the assessee in, say, year 1, 2 and 3 and year 1 position is not acceptable in the assessment (say based on the subsequent adverse Court ruling), the assessee could file UTR for years 2 and 3.

A few issues/points arise based on the current wordings of the UTR provisions.

1) Provisions relating to UTR being a procedural amendment, the filing of UTR should be allowed starting from 01.04.2022 for previous AYs, i.e. AY 2021-22 and AY 2020-21. 

2) The primary intent of proposing to allow the filing of UTR is to enable the assessee to include all the income attributable to them, as reported in SFT/AIS of the Assessee.

3) The scheme for filing of UTR is unattractive where the additional income that may be included in UTR is on account of a debatable issue, wherein the penal consequences become defensible.

4) It is not expressly stated that the penal provisions are not attracted to the additional disclosure made by the assessee in a UTR. Since the additional income disclosed would become the returned income of the assessee, the occasion of levying penalty on additional income does not arise. However, an express clarification in this regard would clarify the legal position. 

5) Alternatively, the assessee may consider availing immunity from penal consequences under Section 270AA on additional income for cases not involving misreporting of income.

6) Setting off losses against additional income is not specifically barred. Thus, the assessee might be able to set off losses while returning additional income, subject to overall taxability remaining the same or exceeding the tax liability as per the previously filed ITR.

7) Wherever applicable, the assessee preferring to file UTR might need to obtain a revised tax audit report or revised transfer pricing report. No clarity in this regard has been provided under the Act. The same guidance/ principles as relevant while filing a revised return of income would apply for UTR, too, as regards filing of other reports.

8) The language of the proposed provision does not permit filing a loss return. However, in the interest of the assessee concerned, reduction of accumulated losses by returning higher income under UTR should be allowed.

9) Similarly, UTR resulting in a reduction of the refund attributable to the assessee may also be allowed.

10) In cases involving genuine hardships, it would always be advisable to approach CBDT under Section 119 for condonation of delay in filing the ITR rather than filing a UTR.

To conclude, the provision for filing UTR could provide an assessee with a third-inning to disclose their income and come clean before the Revenue, however, this time with a payment of additional tax. The additional tax payment, in some cases, can provide substantial relief to the assessee in comparison to the assessment route involving levy of penalty and resultant litigation.

There is a radical suggestion that UTR filing may be permitted even if a case is selected for the regular assessment. This would allow a taxpayer to close the subsequent litigation by paying additional tax if a debatable issue is not accepted in the tax assessment. The downside of such an approach would be that taxpayers would be encouraged to take a “chance” in the tax returns. Such a downside may be addressed by ensuring that UTR filing during the assessment may be permitted only after ensuring that the proposed addition is not on account of a deliberate misreporting of the income and after being confirmed in the faceless assessment proceedings.   

The jury is still out on whether the UTR scheme is voluntary compliance or a soft amnesty. But surely, it would help in reducing the litigation and is a step in the right direction.

Encouraging Voluntary Compliances & Reducing Litigation

This article has been co-authored by Hemlata Bhungare (Chartered Accountant) & Mukti Gosar (Chartered Accountant).

1. Background

The fourth budget speech of the Hon’ble Finance Minister Mrs. Nirmala Sitharaman clearly laid down the roadmap for rebound of the Indian economy post pandemic. The Hon’ble Finance Minister in her budget speech, acknowledged the citizens of India for immensely participating in the Indian growth story. The Government continues to bring slew of tax reforms directed towards stabilising and establishing India’s global reputation by way of introducing tax incentives, rationalization of existing provisions, addressing the challenges faced by the genuine taxpayers and inching towards a simplified tax regime. Time and again through various path-breaking reforms, the government has intended to simplify and reduce tax compliance burden, retain confidence and faith of the honest taxpayers and in turn, honoured their contribution to the nation. In light of this background, we have encapsulated below of two key amendments in the area of tax compliance and litigation as proposed by the Finance Bill, 2022:

2. Introduction of Voluntary filing of Updated Return

A. Budget Proposal

In the current scenario, a taxpayer furnishes its return of income within the due dates prescribed under section 139(1) of Income tax Act,1961 (‘Act’). Similarly, where the taxpayer has: a) failed to furnish its return of income within the prescribed due dates, a belated return under section 139(4)  of the Act; and b) wishes to rectify an error post furnishing its original return of income or intends to revisit its tax position, a revised return under section 139(5) of the Act, can be furnished on or before 3 months prior to the end of the relevant assessment year or before the completion of assessment, whichever is earlier. This window available for filing a revised return or belated return is very limited (having a 9-month period from the end of the given tax year) and has resulted into hardship to the genuine taxpayers. In order to address the difficulties faced by taxpayers, reduce reassessment and to reinstate the principles of voluntary compliance by the taxpayers, it is proposed in the Union Budget 2022 to insert sub-section 8A to the existing section 139 of the Act to enable a taxpayer in filling an updated tax return within 24 months from the end of the relevant assessment year in the prescribed form along with the proof of payment of taxes (including additional tax of 25% or 50%) together with interest and late return filing fee, if applicable. This new provision shall be available to the taxpayers irrespective of the fact whether a return of income was filed for a given year or not. However, it is proposed that such window of filing updated return for a particular year can be availed only once for such year. Further, these proposed provisions shall not be applicable to the taxpayer where the updated return would result into a loss or decrease the tax liability or result into a refund or increase in the refund. Also, there are prescribed categories of taxpayers who shall not be eligible to file updated return as narrated below:

• Where search has been initiated or books of accounts or assets have been requisitioned;
• Where a survey (other than survey conducted for TDS / TCS matters) has been conducted under section 133A of the Act;
• Where notice issued in case of money, bullion or jewellery and books of accounts requisitioned in the case of any other person belonging to the taxpayer;
• Where a notice issued to the effect that any books of accounts or documents, seized or requisitioned under section 132 of the Act or section 132A in case of other person, pertains to, or any other information contained therein related to, such person.

In all the above cases, taxpayer is not eligible to file updated tax return for the year in which search is initiated or survey is conducted, or requisition is made and two immediately preceding years.

Further, newly inserted sub section 8A to section 139 provides that no updated return shall be furnished for the relevant assessment where:

• updated return has already been furnished;
• any proceedings for assessment or reassessment or re-computation or revision are ongoing or concluded;
• the assessing officer has any information with him for the relevant assessment year under the Prevention of Money Laundering Act, 2002 or the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015; or the Prohibition of Benami Property Transactions Act, 1988; or The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976; or under exchange agreement from foreign countries and same has been communicated to taxpayer prior to the date of furnishing of updated return;
• prosecution proceedings have been initiated prior to the date of furnishing of update return;
• Any other person as prescribed by the Central Board of Direct Taxes.

Consequentially, with a view to streamline the collection of additional tax by virtue of furnishing of updated return, a new section 140B of the Act is proposed to be inserted.

Where no return of income has been furnished by the taxpayer, an additional tax shall be paid along with applicable fees. Also, while computing additional tax, relief shall be available for taxes withheld or MAT credit as per section 115AA or foreign tax credit. Also, once the update return is furnished, the tax authorities may issue scrutiny notice within a period of 3 months from the end of the year in which updated return is filed. In such a case, the tax authorities would need to issue necessary assessment order (after perusing necessary information / documents submitted by the taxpayer) within the 9 months period from the end of the year in which update return is filed. These proposed amendments shall be effective from the financial year 2021-22.

B. Challenges / Issues

Some of the key challenges / issues arising from these proposals are as under:

• Updated Return resulting into benefit of taxpayer - As mentioned above, these proposals shall not be applicable to the taxpayer where the updated return would result into a loss or decrease the tax liability or result into a refund or increase in the refund. However, taxpayer may furnish updated return on account of TDS credit mis-match or a foreign corporate taxpayer may wish to avail credit of tax withheld. Considering that in these cases, there could be decrease in tax liability or increase in refund, these taxpayers would be not allowed to obtain benefit of these proposals and therefore it is imperative that the Government provide a level playing field for both tax authorities and taxpayer.
• Updated Return reducing loss – If the updated return is a return of loss then the above proposal shall not be applicable. However, where an original return has been filed with a loss of say INR 50 lacs and thereafter taxpayer wishes to file an updated return by reducing the loss to say INR 20 lacs, even in such case which is in the interest of the tax authorities, the taxpayer shall not be allowed to file the updated return.
• Updated Return during the assessment proceedings – The above proposals do not provide opportunity to taxpayer to voluntarily furnish updated return with payment of additional tax once assessment proceeding are initiated which may result into undue hardship. If the intent of the proposal is to facilitate compliance in a litigation free environment, then such updated return should be allowed to be filed even though the assessment proceedings are initiated (but perhaps before specific issue is raised by the tax authorities).
• MAT/AMT Credit - Where an original / revised / belated tax return is filed after paying taxes under MAT/AMT and thereafter taxpayer opts to file updated return (computing additional MAT/AMT), clarity is required whether such tax and additional tax so paid shall be allowed as MAT/AMT credit in the subsequent years.
• Set-off against Assessed income - Where taxpayer has filed an updated return and paid tax as well as additional tax (based on updated return) and thereafter tax authorities propose to make adjustments over and above the income disclosed in update return, whether the additional tax paid would be allowed to be set-off against the final tax demand is another open issue which requires due consideration.
• Additional time for assessment - Once an updated return is furnished by the taxpayer it gives a fresh window to the tax authorities to assess the income. In spite, of voluntary disclosure by the taxpayer in the updated return it shall not immune him from detailed scrutiny assessments.
• Levy of Surcharge and Cess - Whether surcharge and cess shall be levied on such additional tax as computed on taxes payable (inclusive of surcharge and cess) is another area which requires clarity.

C. Concluding Thoughts

These proposed amendments provide special privilege in the form of one-time window (for a given year) to voluntary furnish updated return and the same can act as a boon to the innocent/genuine taxpayers who struggle to comply within timelines. Further, the penalty provisions have been amended from the financial year 2016-17 and accordingly in the event of under-reporting of income or mis-reporting of income the taxpayer shall be liable to pay 50% or 200% of the amount of tax payable on under-reporting. Accordingly, these proposed amendments may attract the non-compliant taxpayer as well as taxpayer which has adopted aggressive tax position at the time of filing tax return to settle the matter by paying tax and additional tax on total income reported in updated return without entering litigation.

3. Deferring Revenue’s appeals on identical question of law

A. Budget Proposal

The huge costs, repetitive filing of appeals by the tax authorities involves a lot of time and efforts from tax authorities as well as the taxpayers’ side. To add, multiple issues for multiple years result in multiple appeals lying before the judiciary. In lot of cases, it is observed that the tax authorities tend to prefer an appeal before the higher Appellate authorities in spite of such matter pending for adjudication before higher judicial forum in to order to keep the issue alive until the conclusion by Supreme court. Thus, to reduce amount of litigation before the higher forum on identical issue, it is proposed in the Union Budget 2022 that if there is a question of law in case of taxpayer which is identical to the question of law already pending before jurisdictional High Court or Supreme Court, repetitive filling of appeal shall be kept in abeyance until such question of law has been decided by High Court or Supreme Court. The above proposition has been provided by insertion of a new section 158AB of the Act and shall be applicable from financial year 2021-22.

Further, it is proposed that where collegium [comprising of 2 or more Principal Commissioner of Income Tax (‘PCIT'), Chief Commissioner of Income tax (‘CCIT’) or Commissioner of Income Tax (‘CIT’)] is of the opinion that an identical question of law in case of a taxpayer is already pending for adjudication before the jurisdictional High Court or Supreme Court in the taxpayer’s own case or in case of any other tax payer for any particular year, collegium may decide and intimate the jurisdictional PCIT or CIT not to file an appeal on identical issue and accordingly the jurisdictional PCIT or CIT shall direct the jurisdictional tax officer. In relation to above, an application shall be furnished with the Appellate Tribunal or jurisdictional High Court intimating on the above decision within the prescribed time limits post consultation and acceptance by the taxpayer.  Further, where the taxpayer is not in consensus with the tax authorities, a recourse to appeal proceedings can be adopted as available in normal course of time.

The existing provision of section 158AA of the Act also provided for similar arrangement, however it is restricted to deferment in filling of appeals with the Supreme Court on identical issues of law covered in the taxpayer’s own case. The proposed new section 158AB of the Act has extended the beneficial provisions of deferment in filling appeals before the jurisdictional High Court and take the cognisance of identical issues pending in the case of any other taxpayer. Also, in the extant provisions of section 158AA of the Act, PCIT or CCIT were empowered to frame an opinion and thereafter direct the jurisdictional tax officer to keep filing of an appeal before Tribunal in abeyance. Whereas the proposed provisions of section 15BAB empowers collegium (comprising of 2 or more CCIT or PCIT, may or may not be having jurisdiction over the taxpayer) to decide and inform PCIT or CCIT of taxpayer’s jurisdiction to keep filing of an appeal before High court or Tribunal in abeyance. Thus, the scope of the proposed provisions of section 158AB is much wider than the extant provisions of section 158AA of the Act. Consequentially, it is also proposed to insert sunset clause for no direction to be issued under section 158AA of the Act on or after April 1, 2022.

B. Challenge / Issue

There could be cases wherein multiple grounds / issues could be a part of appeal before the appellate authorities or cross appeals filed by taxpayer or tax authorities. In such cases, whether taxpayer should grant consent on one of the ground/issues involving question of law (which is identical to the question of law pending before High Court or Supreme Court in any other taxpayer’s case) and thereby keeping in abeyance or jeopardising the other issues is an area that requires consideration.

C. Concluding Thoughts

Till today, there are plethora of matters pending before Supreme court on identical issue despite being the existing provision under section 158AA of the Act to defer filling of appeals before Supreme court by tax authorities. The judicious implementation of the section 158AB of the Act by the tax authorities may showcase reduction of repeated litigation by avoiding multiple appeals on industry issues. It needs to be observed in the near future how tax authorities adopt these proposed provisions in order to reduce litigation at higher forums.

The above amendments proposed by Finance Bill 2022 are genuine attempt made towards reducing the litigation by providing mechanism to defer appeals in case of common legal issue or repeated issues.

Amendments on Reassessment, Search & Survey - An Analysis

This article has been co-authored by Padam Shah (Chartered Accountant) & Nehal Shah (Chartered Accountant).

The Hon'ble Union Finance Minister Nirmala Sitharaman has presented the Union Budget 2022-23 of India on the 1st of February, 2022 which contains various amendments relating to Income tax matter.

In this article, major amendments made relating to procedures to be followed in search/survey cases as well as reassessment are discussed in subsequent paras.

The Finance Bill 2022, proposes to insert/ amend to section relating to Income Escaping Assessment on the following aspects:

1.       Increasing the period of limitation of framing search assessments:

Provisions of Section 153 of the Act deals with Time limit for completion of assessment, reassessment and re-computation and Explanation 1 to such Section provides for exclusion of certain period while computing period of limitation. Finance Bill 2022 has proposed to introduce new clause (xii)  to be inserted retrospectively from 1st April, 2021, to provide exclusion of the period of limitation  in cases of Searches initiated on or after 1st Day of April'2021,The period of limitation for the purpose of assessment, reassessment or recomputation, ( not exceeding one hundred eighty days) commencing from the date on which a search is initiated under section 132 or a requisition is made under section 132A and ending on the date on which the books of account or other documents, or any money, bullion, jewellery or other valuable article or thing seized under section 132 or requisitioned under section 132A, as the case may be, are handed over to the Assessing Officer having jurisdiction over the assessee,

(a) in whose case such search is initiated under section 132 or such requisition is made under section 132A; or

(b) to whom any money, bullion, jewellery or other valuable article or thing seized or requisitioned belongs to; or

(c) to  whom  any books  of  account  or documents seized or requisitioned pertains or pertains to, or any information contained therein,

TAKE AWAY FROM AMENDMENT:

The increase in period available to the Assessing Officer for framing the assessments is only in the cases of search assessment and cases emanating from search. No enhancement of period of limitation is made to survey related cases.

2.      Prior Approval necessary for assessment in cases of search, survey  or requisition.

Under the new schema of Search assessments( relevant provisions of Section 147 to 151)  which was inserted by the Finance Act 2021 in, there was no provision of prior approval of superior authority before passing of such assessment orders. It is proposed to insert a new section 148B with effect from 1st April, 2022 to provide that no order of assessment or reassessment or re-computation under the Act shall be passed by an Assessing Officer below the rank of Joint Commissioner, except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director, in respect of assessments consequent to search, survey and requisition to reduce avoidable inaccuracies.

TAKE AWAY FROM AMENDMENT

The insertion of new Section is similar to Section 153D which provided similar prior approval in cases of search conducted prior to 01-04-2021. The amendment seems to have made to restrict Assessing Officer passing search assessment orders without taking prior approval of their Higher Authorities. The Specific task has been assigned to such higher authorities so that complex seized material, AO’s wisdom in analysing such material or assessee’s explanation is duly taken care before passing final order in case of search.

3.       Information for issuance of notice u/s.148 – Explaination-1

It is proposed to amend Explanation 1 to section 148 to provide as to what now constitute “Information” for the purpose of issuance  of notice relating to  escaped assessment. The brief comparison between the existing provision of section 148 as per Finance Act, 2021 and the proposed amendment is as under:

TAKE AWAY FROM AMENDMENT

The proposed amendment seeks to delete the word “flagged” in clause (i) to Explanation 1 to section 148.

The proposed amendment also seeks to substitute clause (ii) with four new sub-clauses to include any audit objection, or any information received from a foreign jurisdiction under an agreement or directions contained in a court order, or information received under a scheme notified under section 135A.

Accordingly the scope of information has been substantially enlarged to include virtually all tax information available with the Assessing Officer.

4.      Deemed information  in the cases of searches

It is proposed to amend Explanation 2 of section 148 retrospectively with effect from 1st April 2021 to omit the reference to “three” assessment years preceding the assessment year relevant to the year of search.  The Finance Act 2021 provided that where the Assessing Officer was deemed to have information which suggests that income  chargeable to tax  has escaped assessment for three assessment years immediately preceding the assessment year  relevant to the previous year  in which search is initiated etc.

TAKE AWAY FROM AMENDMENT

Now, in the cases of search, the Assessing Officer would be deemed to have  information  for all the  assessment years covered within a period of ten years as per section 149  Thus, anomaly prevailing in existing provisions of Section 148 and 148A of the Act i.e provisions of section 148        allowing AO to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or requisition is made(not having deemed satisfaction beyond three years) and Section 148A mandating AO to carry enquires or allowing opportunity to assessee before issuing notice u/s 148 of the Act(not applicable in the case of search) is removed.

5        Criteria for issuance of notice beyond the period of three years but not more than ten years from the end of the relevant Assessment Year:

(A)     Clause (b) of Sub-Section (1) of Section 149 has been proposed to be amended so as to provide that a notice under section 148 shall be issued only for the relevant assessment year after three years but prior to ten years from the end of the relevant assessment year where the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented,

(a) in the form of an asset; or

(b) expenditure in respect of a transaction or in relation to an event or occasion; or

(c) an entry or entries in the books of account,

The brief comparison between the current provision of Section 149  as amended by the Finance Act, 2021 and proposed amendment by the Finance Act, 2022 is as under:

TAKE AWAY FROM AMENDMENT

The proposed amendment seeks to enlarge the scope for issuance of notice which now proposes to include not only the asset but also expenditure or any entries in the Books of account (which may includes accounted entries which the Assessing Officer is having information that the same has escaped the assessment. )

(B) Further, the Finance Bill proposes to insert  new sub-section (1A) in section 149 to provide that notwithstanding anything contained in sub-section (1) of the said section, where the income chargeable to tax represented in the form of an asset or expenditure in relation to an event or occasion of the value referred to in clause (b) of sub-section (1) of the said section, has escaped assessment and the investment in such asset or expenditure in relation to such event or occasion has been made or incurred, in more than one previous years relevant to the assessment years within the period referred to in clause (b) of sub-section (1) of the said section, notice under section 148 shall be issued for every such assessment year for assessment, reassessment or recomputation, as the case may be.

TAKE AWAY FROM AMENDMENT

The  proposed amendment to section149(1)(b) contain the phrase fifty lakh rupees or more as compared to the phrase fifty lakh rupees or more for that year  as per the existing provisions of section 149(1)(b).  Moreover on a conjoined reading of  section 149(1A)  read with section 149(1)(b) suggest that the limit  of  fifty lacs or more  is not to be restricted to one year  for which  the notice is to be issued but to more than one year within the block as per clause (b) of sub-section (1) to section 149, for which notice under section 148 shall be issued for every such assessment year.

However the new sub-section (1A) does not contain any reference to an entry or entries in the books of account, which has escaped assessment as proposed in 149(1)(b).

This proposed amendment will take effect from 1st April, 2022.

6.       Approval for issuance of notice u/s. 148 and for conducting an inquiry u/s.148A.

The Finance Bill proposes to insert a new proviso to the effect that requirement for approval to issue notice under section 148 shall not be required to be taken by the Assessing Officer if he has passed an order under 148A(d) with prior approval in that case stating that the income is escaping assessment. Also it proposes to omit the requirement of approval of specified authority in clause (b) of section 148A. The brief comparison between the existing provision of section 148 as per Finance Act, 2021 and the proposed amendment regarding the approvals require for issuance of notice is as under:

7.       Bar on issuance of notice u/s. 148/153A/153C

The Finance Bill 2022 proposed retrospective amendment with effect from 1st April, 2021  to  amend the First Proviso to Section 149(1) of the act  to provide that no notice under section 148 or section 153A or section 153C shall be issued if such notices could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of section 149 or section 153A or section 153C, as the case may be, as they stood immediately before the commencement of the Finance Act, 2021.

8     New Section 79A: - No set off of losses consequent to search, requisition and survey( applicable from AY 2022-23)

The proposed Section provides that notwithstanding anything contained in the Act, where consequent to a search proceeding under Section 132 of the Act/Section 132A of the  Act / survey proceedings under Section 133A of the Act (other than survey for withholding tax compliances under Section 133A(2A) of the IT Act), total income of the  taxpayer includes any undisclosed income, then, no set off of any loss/unabsorbed depreciation loss is permitted against such undisclosed income.

The term "undisclosed income"

(i) any income of the previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132 or a requisition made under section 132A or a survey conducted under section 133A, other than that conducted under sub-section (2A) of section 133A, which has—

(a) not been recorded on or before the date of search or requisition or survey, in the books of account or other documents maintained in the normal course relating to such previous year; or

(b) not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search or requisition or survey, or

(ii) any income of the previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the previous year which is found to be false and would not have been found to be so, had the search not been initiated or the survey not been conducted or the requisition not been made.

TAKE AWAY FROM AMENDMENT

The above provisions for not allowing set off of assessed/unassessed business loss/depreciation loss(Whether brought forward or other wise) available with assessee will lead to higher tax collection pursuant to income disclosed/determined due to search and may lead to discouragement of tax evasion.

9       Other Miscellaneous Amendments

(i)  Section 132(8) of the  Act provides that the books of accounts and other documents seized shall not be retained by the authorized officer for a period exceeding thirty days from the order of assessment, unless his reasons are recorded in writing and on approval of the listed authorities.

It is proposed to amend  above section to provide provisions contained  therein to also be applicable to an order of reassessment or recomputation made in search cases.

(ii) Similar amendments to include orders of reassessment and recomputation have also been proposed to be made under Sub-section (1) Clause (i) and Sub-section (4) of Section 132B of the IT Act which relates to application of seized or requisitioned assets.

(iii) The scope of Section 271AAB, 271AAC an 271AAD of the IT Act is proposed to be expanded to empower  the Commissioner  (Appeals) in addition to the AO to levy penalty under such provisions as are applicable in other cases of levy of penalty like 270A, 271 etc.

(iv) Finance Bill 2022 proposed to amend the definition of "specified date" in clause (a) Explanation to section 271AAB to make it also applicable to a notice issued under section 148 in case where search is initiated on or after 1st April, 2021.

CONCLUSIONS

In Memorandum explaining  provisions of Income tax introduced in Budget for 2021-22 and more particularly in relation to insertions of new sections relating to reassessment and search proceedings, it was mentioned that “The Bill proposes a completely new procedure of assessment of such cases. It is expected that the new system would result in less litigation and would provide ease of doing business to taxpayers as there is a reduction in time limit by which a notice for assessment or reassessment or re-computation can be issued.”  However in present budgets, diagonally  opposite views are expressed and  various amendments as discussed herein above are proposed to be brought to Statue which has not only extended the period covered by such provisions but also scope of such provisions.

Amendments to Faceless Assessment Scheme - Decoded!

This article has been co-authored by Nehal Shah (Chartered Accountant) & Rujuta Munshi (Chartered Accountant).

In the Union Budget 2019, the Finance Minister proposed the introduction of a scheme of faceless e-assessment. The scheme seeks to eliminate the human interface between the taxpayer and the income tax department. On 13th August 2020, the present government unveiled another landmark reform in the taxation regime of India and with the launch of ‘Transparent Taxation–Honouring the Honest’, it ushered in major structural and procedural changes in the form of faceless assessment, faceless appeals and Taxpayer’s Charter.  To achieve objective of promoting an efficient and effective tax administration, minimizing physical interface, increasing accountability and introduction of team-based assessments etc, the Central Government has undertaken many changes under relevant provisions of the Act on time to time basis and present article deals with various amendments brought by The Hon'ble Union Finance Minister Nirmala Sitharaman in present Union Budget 2022-23 of India presented on the 1st of February, 2022.

(I) EXTENSION OF TIME LIMIT FOR INTRODUCTION OF FACELESS SCHMES UNDER SECTION 92CA, 144C, 253 AND 264A

1  As per existing provisions of the Act,  faceless schemes are also envisaged u/s 92CA, 144C, 253 AND 264A and now it is proposed to extend the date for issuing directions for commencement of faceless schemes for the purposes of these sections till 31st March 2024.  The same is tabularised herein below:

KEY TAKE AWAY

The Extension of time limit will provide Government/CBDT sufficient time to ensure smooth functioning of faceless schemes in above areas and certain issues faced in present faceless schemes are resolved.

(II)  RESTRUCTURING VARIOUS ASPECTS OF FACELESS ASSESSMENT SCHEME

The Finance Bill seeks to streamline the process and overcome many operational challenges related to the ‘Faceless Assessment Scheme. The Same are summarised herein below:

(A) Personal hearing through video-conferencing mode need to be provided when asked by assessee- removal of discretionary power of authorities in allowing such hearing

2 On Plain reading of existing Faceless Assessment Scheme along with relevant CBDT circular dated 23/11/2020, it was not mandatory on part of Income Tax Authorities to grant personal hearing in case such a request is received from the assessee or his authorized representative.

2.1  As per Standard operating procedure (sop) for personal hearing through video conference under the faceless assessment scheme, 2019( CIRCULAR F. NO. PR. CCIT/NeAC/SOP/2020-21, DATED 23-11-2020), “Where any modification is proposed in the draft assessment order (DAO) issued by any AU and the Assessee or the authorized representative in his/her written response disputes the facts underlying the proposed modification and makes a request for a personal hearing, the CCIT ReAC may allow personal hearing through Video Conference, after considering the facts & circumstances of the case, as below:-

2.2  As per substituted Section 144B of the Act by present Finance Bill, clause(viii) of Sub Section 6 provides "where the request for personal hearing has been received, the income-tax authority of relevant  unit shall allow such hearing, through National Faceless Assessment Centre, which shall be conducted exclusively through video conferencing or video telephony, including use of any telecommunication application software which supports video conferencing or video telephony, to the extent technologically feasible, in accordance with the procedure laid down by the Board”

2.3  KEY TAKE AWAYS

(a) The proposed amendment through use of words “shall allow such hearing” as opposed to the words “may approve the request for personal hearing” will resolve major issue of assessee relating to providing natural justice before completion of assessment  procedure would be resolved.

(b) Hon'ble Delhi High court in recent decision of BHARAT ALUMINIUM COMPANY LTD in W.P.(C) 14528/2021 & CM APPL. 45702/2021 dated 14/01/2022,  has read 'may' as 'shall' in the provision that gives discretion to the chief commissioner or the director general to grant a personal hearing. The Hon'ble Court has held that an assessee has a vested right to personal hearing and the same has to be given, if an assessee asks for it. The right to personal hearing cannot depend upon the facts of each case. The proposed amendment in Section 144B seems to have been introduced in line with Verdict of court.

(c) Recently Hon'ble Calcutta High court in the case of Neerja Rateria Vs National Faceless Assessment Centre Delhi and Ors. W.P.O. No. 969 of 2021 dated 05/10/2021 quashed faceless assessment order for not providing video conferencing link. Though Hon'ble Court has held that “Quashing of this assessment order will not prevent the respondent assessing officer to pass fresh assessment order after giving effective opportunity of hearing and observing principle of natural justice”.  By introducing such amendment, Government has   resolved major issues faced by Assessee for not providing natural justice and subsequent long drawn litigation.

(iii) In a matter before the Supreme Court in the case of  Central Board Of Direct Taxes V/s Lakshya Budhiraja [2021] 131 taxmann.com 51, (01st October 2021) Additional Solicitor General submitted that department is having a second look on Faceless Appeal Scheme, 2020 and sought a period of three months as it may require change of law. In line with such contention and to remove the anomaly in providing personal hearing through video conferencing, CBDT has brought Faceless Appeals Scheme, 2021 on 28th December, 2021 wherein discretionary power for providing “video hearing” was removed and similar amendment has also been brought in Faceless Assessment Scheme by making suitable amendment in Section 144B of the Act.

(d) Similar amendment should be brought in Faceless Penalty Scheme, 2021.

(B) REMOVAL OF SECTION 144B(9)

The existing provision of Section 144B(9) provides that “ Notwithstanding anything contained in any other provision of this Act, assessment made under sub-section (3) of section 143 or under section 144 in the cases referred to in sub-section (2) [other than the cases transferred under sub-section (8)], on or after the 1st day of April, 2021, shall be non est if such assessment is not made in accordance with the procedure laid down under this section”

However, It is also proposed to omit the existing sub-section (9) of the said section 144B retrospectively from the 1st April, 2021. The removal of such non-obstante provision which renders faceless assessment invalid if these were not in consonance with the provisions of the scheme may undesirably affects tax payers who could seek relief from the Hon'ble Courts when NEAC has failed to follow procedure laid down u/s 144B of the Act. In last one year, many tax payers have faced the issues of not allowing proper opportunity of being heard by AO at NEAC, order passed without providing draft assessment order, order passed without considering submission filed by assessee etc and all these issues would be adversely affected by removal of sub-section.  The provisions fixing responsibility of AO or  other authorities at NFAC must be brought on statue simultaneously.

Removal of such provision may not make entire assessment order invalid if proper procedure is not followed but simultaneously, from catena of Judgements rendered by various courts, it need to appreciate that any such omission, will not make deficient order as valid order in eyes of law. 

(C) Other Amendments

OTHER COMPARATIVE  MAJOR CHANGES IN Section 144B of the Act are tabularised herein below:

(D) FLOW CHART REFLECTING PROCEDURE TO BE FOLLOWED FOR COMPLETION OF ASSESSMENT (Other than cases covered by Section 144C of the Act as there is no variation in erstwhile procedure)

KEY ISSUES

(i) On chronological reading of provision of section 144B of the Act, if Review Unit makes variation in income / loss determination proposal of assessment Unit which is accepted by Assessment Unit, such unit is required to prepare draft order. This draft order is sent to NFAC. When there is a variation, opportunity of being heard including show cause notice/ draft Assessment Order need to be provided to Assessee as same is prejudicial to interest of Assessee. The suitable amendment need to be made in the provisions.

(ii) There is no provision for providing copy of draft Assessment Order (other than draft Assessment Order u/s 144C of the Act ) before completing assessment proceedings.

(iii) The sub section 6(vii) states that in case where a variation is proposed in the income or loss determination proposal or the draft order, and an opportunity is provided to the assessee by serving a notice calling upon him to show cause as to why the assessment should not be completed as per such income or loss determination proposal, the assessee or his authorised representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the income-tax authority of the relevant unit.

The provisions of section 144B(1) of the Act, which defines the procedure for completing the faceless assessment, only states that when there is a variation, prejudicial to the interest of the Assessee which are proposed to be made to the income of Assessee, show cause notice is required to be provided to Assessee but there is no provision for providing copy of draft Assessment Order and  income / loss determination proposal. Thus, both provisions of the act need to be aligned with each other.

Section 68 - Know Your Creditor!

This article has been co-authored by Krutika Chitre (Principal Associate, Khaitan & Co.).

The Union Budget for 2022 (Budget) was announced by the Hon’ble Finance Minister on 1 February 2022. Amidst the uncertainty of the pandemic, the Budget was presented as a blueprint to foster economic growth and rev up the economy. Focussed on infrastructure development and fintech advancements, the Budget showed the government’s focus and pragmatism on sustainably stabilising macro indicators.

While the Budget did not spring up many drastic changes, a few proposed amendments have raised some eyebrows. The broad focus of this Budget has been to plug loopholes, strengthen authorities (eased reopening of assessments, etc) and clarify positions by overruling certain positive rulings all done with an underlying intent of increasing tax collections. This article discusses the amendments proposed to the regime governing unexplained cash credits and related penalty provisions.

Background

Sections 68 to 69D of the Income-tax Act, 1961 (IT Act) bring to tax unexplained cash credits, investments and money. Perennially at the centre of debate and controversy, these provisions have always been highly litigious and an unexplained source of turmoil between taxpayers and tax authorities.

Section 68 of the IT Act imposes an onus on the taxpayer to provide a ‘satisfactory’ explanation as to the nature and source of any sum (in the nature of share capital, unsecured loan, etc) credited in his books of accounts. If a taxpayer is unable to discharge this onus, the amounts in question are treated as the taxable income of the taxpayer and charged to tax at a higher rate of 60% (as opposed to the highest slab rate of 30%) plus applicable surcharge, cess and penalties.

Since the section remains silent on what constitutes a ‘satisfactory’ explanation, several courts have in the past laid down and limited the taxpayer’s obligations to satisfying the “ICG Test”, i.e., providing details about the Identity, Creditworthiness and Genuineness of the payer and genuineness of the transaction as sufficient discharge of a taxpayer’s onus under the section. Once this burden has been discharged by the taxpayer, courts have held that tax authorities may choose to initiate proceedings against such payer, if warranted.

Pertinently, in 2012 Section 68 of the IT Act was amended vis a vis unlisted companies to provide that where the sum credited in the books of accounts of a company is in the nature of share application money, share capital, share premium or any such amount, the taxpayer’s explanation would be considered satisfactory only if the shareholder (being a resident) of the company also offers an explanation about the nature and source of the sum credited. Vide this amendment, the taxpayer was not only required to prove the source of funds but also the source of such source

While the amendment introduced was specific to credits in the nature of share application money, share capital, share premium or similar credits, tax authorities often invoked the provision to make enquiries in case of loans and borrowings, though strictly outside the purview of Section 68. This once again became the epicentre of litigation with aggrieved taxpayers approaching judicial forums. Ruling in favour of taxpayers, the Bombay High Court (in Gaurav Triyugi Singh vs ITO [TS-5009-HC-2020(BOMBAY)-O]) and Karnataka High Court [Kumar Nirav and Nivesh vs ACIT [TS-5488-HC-2020(KARNATAKA)-O]) as recently as 2020 reiterated that the taxpayer was not required to prove the source of source in all situations, such as in case of loans and borrowings.

Proposed Amendment

As per the proposed Budget amendment to Section 68, the onus of proving the source of source has been extended not just to credits in the nature of share capital and related receipts but also to loans and borrowings. Accordingly, the taxpayer would be required to not just provide details of the lender (i.e., the taxpayer’s source) but also explain the source of funds in the hands of such lender.

The Memorandum to the Budget has justified this amendment as a move to curb the “pernicious practice of conversion of unaccounted money by crediting it to the books of assesses through a masquerade of loan or borrowing.” The Memorandum has further referred to judicial pronouncements which “created doubts” about the onus of proof and the requirements of Section 68 in cases of loans and borrowings to buttress the amendment.

Accordingly, the Budget proposed to amend the provisions of Section 68 of the IT Act to provide that the nature and source of any sum (including in the form of a loan, borrowing, other liability) credit in the books of a taxpayer would be treated as explained only if the source of funds is also explained in the hands of the creditor. Exemptions from this requirement have been provided in case of the creditor is a well-regulated entity, i.e., a Venture Capital Fund, Venture Capital Company registered with SEBI. These amendments are proposed to be effective prospectively from Assessment Year 2023-24.

The Budget also seeks to amend Section 271AAC which was introduced from 1 June 2013 and enlists the penalty provisions in respect of additions made under Sections 68, 69, 69A, 69B, 69C and 69D. Currently under the IT only an assessing officer is empowered to impose a penalty on a taxpayer in situations where Section 68 is invoked. Thus, in a situation where the order of the assessing officer was to be modified at the appellate level, the Commissioner of Income Tax (Appeals) (CIT(A)) had no power to impose a penalty. This provision was not aligned with other penalty provisions under the IT Act (Chapter XXI) which provide concomitant powers to the CIT(A) to impose penalties, as well. Accordingly, with the intention of further deterring taxpayers from non-compliance, the power to impose a penalty for a Section 68 offence has also been provided to the CIT(A).

Conclusion

While the proposed amendment has been introduced to plug a lacuna, it adds heavily to the taxpayer’s woes essentially requiring them to conduct a diligence of the lender and seeking details of its source of income. Further, there is no clarity on what constitutes ‘satisfactory information’ which is a very subjective criterion leaving the door for litigation unlocked.

Requirement to maintain details of source of source of share capital (amendment introduced in 2012) in comparison to a similar requirement for loan looks a lesser evil of sorts in comparison. As generally share capital is a long-term commitment and the shareholder will be interested in the well-being of the investee company. And is thus, more likely to provide details of its source when called upon to avoid any adverse inferences being drawn against its investee. A loan on the other hand would be returned sooner or later and hence imposing such requirements on loan transactions could result in a lot of practical difficulties for taxpayers. Ultra-short term loans, bridge finance, etc. taken for very short period of time will be repaid very quickly and such transactions will be under the tax authorities lens (during assessment / reassessment proceedings) after a gap of years. Getting information for such short terms loans may pose practical challenges.

If the proposed amendments are incorporated into the Act, in the absence of a satisfactory explanation regarding source of lender, a transaction could be taxed in the hands of the taxpayer leading to an effective outflow on account of tax, penalty, etc. in excess of 80% of the amount of borrowing. Such an onerous provision, if used in an unfettered manner, is likely to halt and set the journey of ease of doing business in India, in reverse gear.

What should taxpayers do?

There is no substitute to diligent record keeping and Section 68 and alike provisions will always keep taxpayers on their toes. Robust documentation would be the most important defence available in cases where the tax authorities and courts would test the amended provisions of Section 68 on loans and borrowings.

Generally before lending any sum, a lender will do its diligences on the credit history, repayment capacity, etc. of the borrower. Since the implications of an adverse assessment and additions under Section 68 are huge, one will need to tread very cautiously when availing of loans and borrowings and do a reverse KYC of sorts on the source of the lender. While this would also depend on the amount of co-operation extended by the lender, it is imperative that these details be collected and retained by the parties at the time of initiation of the loan transactions itself to avoid hassles and anxieties later as these transactions will be scrutinized a couple of years (or more) later and by then it is likely that the loan would have been repaid and the borrower may not have any influence on / recourse to the lender to provide details regarding its source. 

Views expressed, if any, are personal views of the authors and should not be treated as legal advisory.

New Reassessment Proceedings: Wider Powers - The Onset of Litigation

This article has been co-authored by Nikhil Mutha (Director, Ernst & Young LLP).

Introduction:

Finance Act, 2021 revamped the provisions in relation to reassessment proceedings. The primary intent of the change was to reduce the timelines within which such proceedings can be conducted to provide certainty on tax assessments and enhance the ease of doing business.

Alongside reducing the timelines to initiate reassessment proceedings from 6 years to 3 years after the end of the assessment year, the legislature also inserted a provision which provided an authority to initiate proceedings up to 10 years from the end of the relevant assessment year.  Such extended timelines, which goes beyond the earlier timelines of 6 years is brought in with an intent to assess serious tax fraud cases as evident from the Budget Speech of 2021.

Finance Bill, 2022 has proposed further amendments in the aforesaid provisions. With these changes and Instructions issued by the CBDT recently (interalia dealing with reopening of AY 2015-16), it appears that the scope of initiating such proceedings have been substantially widened, largely on a mechanical basis, considering the information made available to the Tax Authorities through various databases.

In the above background, the present article highlights the                                                    

Changes proposed by Finance Bill, 2022

a)    Expanding the scope of initiating reassessment proceedings upto 10 years

The provisions of section 149, interalia, provide for initiation of reassessment proceedings beyond 3 years and upto 10 years from the end of the relevant assessment year. The present framework provides that such reopening can be undertaken only if the assessing officer has in his possession books of accounts, documents or evidence which reveal that income, represented in the form of asset, has escaped assessment and amounts to or is likely to amount to INR 50,00,000 or more for that year.

However, such action cannot be undertaken for past years if such years have become time barred under the erstwhile reassessment provisions.  The intent of introducing such extended timelines was to cover serious tax fraud cases as also evident from the FM’s Budget Speech.

While the language which does not only rely on information but requires possession of documents revealing escapement of income and especially considering the intent, it appeared that these provisions were meant for cases like search, survey, requisition, etc.

In the backdrop of Budget 2022, we witnessed the CBDT issuing Instruction dated 10 December 2021 directing the field officers to provide information through Verification Report Upload (VRU) functionality for the purpose of initiating reassessment proceedings in relation to AY 2015-16 which falls within the extended period under section 149 of the Act.  On perusal of such instructions, it is evident that the ask of the CBDT seeking information was not only limited to cases of serious tax evasion but also included the following:

i) Information arising out of Internal Audit objections;

ii) Information arising out of any order of Court, appellate order, order of NCLT etc; and

iii) Cases involving addition in any assessment year on recurring issue of law or fact.

Thus, effectively the field officers have been directed to generalise the extended time limit of upto 10 years from the end of the relevant assessment years and such message from the apex administrative body clearly contravened the intent with which such extended timelines were enacted.

The Finance Bill, 2022 has automatically extended the 10 years period for matters of search, survey and cases of requisition. With such change, it was expected that the provisions of initiating reassessment in an extended period would be diluted. However, to our surprise, the scope of such provisions is proposed to be widened. The Finance Bill, 2022 now provides that the extended time limit can also apply for income escaping assessment which is represented in the form of:

i)  Expenditure in respect of transaction 

ii) Expenditure in relation to an event or occasion

iii) Entry or entries in books of account

Thus, it appears from the plain language of the proposed provision that the legislature intends to cover cases beyond undisclosed income represented in the form of asset which could include debatable positions around claim of expenditure or transactions which are duly reported in the books of account.  While one can argue that the original intent of covering cases of serious tax fraud should not be lost sight of in applying such extended timeline but in absence of any clear language in this regard and the approach/ directive followed by the CBDT, the matter is likely to result in substantial litigation.

b)    Expanding the scope of information basis which reassessment can be initiated

As we are aware, the new provision of reassessment is based on ‘information’ suggesting escapement of income (as against ‘reason to believe’ that income has escaped assessment which existed prior to Finance Act 2021 changes). Thus, the scope of ‘information’ shall necessarily drive the cases which shall be picked up for reassessment.

The scope of information in the present framework is exhaustively defined to be:

(i)  Information ‘flagged’ in accordance with the risk management strategy (‘RMS’) formulated by the Board

(ii) ‘Final objection’ raised by the Comptroller and Auditor General of India

In relation to clause (i) above, the Finance Bill 2022 proposes to omit the term ‘flagged.’ The concept of flagged was believed to keep check on the information available as per RMS with certain authority filtering such information since not every information could form the basis for initiation of reassessment proceedings.  Omission of such concept means every information collated as per the RMS could be used to initiate reassessments which reduces the objectivity in the procedure.

In relation to clause (ii) above, the Finance Bill substitutes ‘any final audit objection of C&AG’ with ‘any audit objection.’

Under the old provision, if the Tax Authority defended the assessment in audit objection and yet sought to reopen, the Courts did not permit reopening. In case of Indian and Eastern Newspaper Society vs CIT [TS-5019-SC-1979-O], the Supreme Court held reopening on the basis of audit objection to be invalid stating that the tax authority must come to the satisfaction of income having escaped assessment on his own and borrowed satisfaction from audit wing is not permitted.

The Finance Act, 2021 had overruled the aforesaid decision of the Supreme Court by making final audit objections of C&AG as a part of information for initiating reassessment proceedings. However, Finance Bill proposes to extend the basis to ‘any audit objection.’ There are two kinds of audit of income tax assessments:

i)  Internal Audit by IT departments itself (Revenue Audit)

ii) Audit by C&AG

In view of the proposed change, the legislature intends not to confine the powers of reassessment to final audit objection but to extend the same to any audit objection, irrespective of whether the same is acceptable to the assessing officer.  Moreover, such basis is also extended to revenue audits. The legislature ought to have confined the scope at least to final audit objection, absence of which leads to substantial enhancement of the scope of reassessment proceedings and likelihood of litigation.

Additionally, the Finance Bill proposes to include the following within the scope of information:

i)  any information received from authorities of foreign jurisdiction;

ii) any information made available to the Assessing Officer under the scheme notified under section 135A;

iii) any information which requires action in consequence of the order of a Tribunal or a Court.

It can be seen from the above insertion that the same is borrowed from the aforementioned CBDT Instruction. Insertion of such additional clauses makes it obligatory on the part of the tax authorities to reopen the cases of taxpayer whose reported transactions are not in consistent with the information available with the Department or any conflicting decision of the Tribunal or Court, even if the same would withstand the test of law in light of favourable judicial precedents. The language also does not seem to be restricting it to the decision in assessee’s own case, which means decision in case of any other taxpayer can also form the basis for initiating reassessment proceedings.

Even earlier, the tax authorities were having the above set of information within its possession which as they deemed fit were used to initiate the reassessment proceedings.  The new reassessment provision have codified various types of information under the law providing less to no discretion to the tax authorities of not initiating reassessment proceedings in deserving cases.

c)    Information in scheme notified under section 135A

As discussed above, the Finance Bill proposes to extend the scope of information basis which reassessment proceedings can be initiated to information collated in the scheme notified under section 135A.  The said section provides for faceless collection of information under specified sections within the department. 

No scheme has been notified till date and it is unclear as to what incremental information the department would have at itsdisposal while most of the information would also be parallely available in the RMS system.  Nonetheless, such information is now proposed to be part of the law and the same will be acted upon by the tax authorities. 

The important aspect here to note is that initiation of reassessment basis information available under section 135A is not subject to the provisions of section 148A which provides an opportunity to the assessee to defend the initiation of proceedings at the outset by making necessary submissions.  Thus, any information collated under section 135A is not found to have been reported by the taxpayer the same will invite initiation of reassessment proceedings without providing an opportunity to the assessee to explain the difference as a part of pre-notice procedure.  This would lead to unnecessary litigation and serious hardship for the taxpayer. 

Snapshot of key differences between the erstwhile provision (ie pre Finance Act 2021) and the new provisions post Finance Act 2021 and those proposed by Finance Bill, 2022)

Concluding thoughts

The Finance Act, 2021 revamped the provision of reassessment with an intent to reduce timelines and provide certainty.  Such objective could have also been achieved without disturbing the erstwhile provisions of reassessment and simply making changes in timelines under section 149 of the Act.  This is especially considering that the erstwhile provisions have been well settled in terms of interpretation by various Courts.  However, a completely new set of provision stands enacted which are also meant to override some of the settled principles of reassessment.  Such approach coupled with changes proposed by Finance Bill, 2022 seems far from providing certainty.

It is important to note that the Finance Act, 2021 provided for extended time limit up to 10 years with an intent to cover cases of serious tax evasion.  Now, Finance Bill, 2022 has proposed to automatically extend such 10 years period for cases like search, etc. Hence, further expanding the scope of such extended timelines to any transaction of expenditure and transaction duly accounted for in the books of account gives rise to a question - Whether the revamped provision results in reducing the timelines from 6 years to 3 years or effectively extends the timeline from 6 years to 10 years?  Such a thought is also supplemented by the aforementioned CBDT Instruction of December 2021 which directed the tax authorities to initiate reassessment proceedings under the new provisions for AY 2015-16 basis reasons which are not just cases of tax evasion but also cases of general litigation around debatable positions. Hence, it is highly recommended that the provision for initiation of reassessment proceedings under the extended timelines up to 10 years is modified to provide certain parameters/ conditions marrying with the intent of exercising such powers only in cases of serious tax evasion.

The department is also seen to be heavily relying on various databases and analytics to conduct the assessment proceedings. While such approach makes assessments more objective and acts as a good deterrent against tax evasion but at the same time it needs to be ensured that the information is substantiated with some corroborative evidence before using against the assessee or initiating the reassessment proceedings. Thus, before initiating reassessment proceedings basis the information obtained as per the scheme notified under section 135A, an opportunity should be provided as per the mechanism laid down under section 148A.  Also, it is suggested that only final objection is considered as information for the purpose of initiating reassessment since in practice it is seen that many of the audit objections are not based on cogent reasoning which could unnecessarily warrant reopening of assessment in many cases.

As a matter of practice, it is seen that tax authorities, under the threat of being questioned, are conservative in handling such matters and on receipt of information, without appreciating merits of the case, they are likely to propose initiation of reassessment proceedings. The general feedback from the Officer is let the proceeding take its normal course of litigation.  Such an approach coupled with widening of the scope of reassessment (in terms of the basis for initiation which includes - information from various sources, any audit objection or even a conflicting decision of any tribunal or court), is likely to result into significant increase in litigation. Thus, it is imperative that the discretion of granting the approvals to proceedings by the Specified authorities is exercised objectively upon appreciating the facts and merits of each case.

Reassessment proceedings are meant to be exercised on an exceptional basis and cannot be seen as parallel to a normal scrutiny assessment proceeding. It is important to keep this distinction alive in practice, else the entire purpose of reducing the timelines for initiation of reassessment proceedings and enhancing the ease of doing business shall stand compromised. At the same time considering that the initiation of reassessment proceedings in most cases going forward is likely to be based on data analytics, it is important that tax payers are diligent in reporting all the transactions in the tax return as well as in maintaining reconciliations for any differences in reporting of the transactions with various Government agencies.

Credits: Authors acknowledge the contribution of CA Pranav Lodha in this article.

Crypto Taxation – One Step Forward

This article has been co-authored by Ipsita Agarwalla (Member, International Tax, Nishith Desai Associates).

Crypto tax seems to have created a buzz amongst participants in the crypto ecosystem with user sign ups jumping by 30%-50% on crypto platforms on the budget day.[1] As the crypto industry in India was raging, the Government announced the much-awaited tax regime for taxation of virtual digital assets (“VDAs”) in India applicable from financial year 2022-23. It is important to bear in mind that taxation of VDAs should not be considered as regulation of VDAs. On the regulatory front, the question of nature and classification of VDAs is still in limbo. However, recognition of VDAs in tax laws, does provide some much needed clarity to the sector.

Meaning of VDAs

An exhaustive but broad meaning has been given to VDAs. Non-fungible tokens have specifically been included in the definition of VDAs as a separate category. The government has also reserved the power to notify / exclude any digital asset from the definition of VDA. Indian currency and foreign currency are not included within the ambit of VDAs. The use of words ‘information’, ‘code’, ‘number’ makes the definition of VDA all encompassing. Further, the presence of ‘or otherwise’ in the phrase “generated through cryptographic means or otherwise”, may be interpreted to mean that any information or code which is generated through non-cryptographic means could also be covered under definition of VDA. Therefore, questions regarding scope of VDA remain and absence of clarity may lead to confusion and litigation in future.

Manner of taxation

The government proposes to tax income from VDAs in a manner similar to gambling wins.[2] Any income from transfer of VDAs will be subject to tax at flat rate of 30% (plus applicable surcharge and cess) irrespective of the period of holding. Prior to this amendment, it was possible to categorise transactions as either trading income and claim expenses or claim long term capital gain rate of 20% based on the facts of the case. The Budget also provides that taxpayers will not be permitted to take any deductions (except the cost of acquisition) while computing income from transfer of VDAs. The taxable event seems to be income from ‘transfer’ of VDAs. Section 2(47) of the Income-tax Act, 1961 (“ITA”) defines transfer in an inclusive manner to include sale, exchange relinquishment of asset. Therefore, it may be possible to interpret that in case of crypto to crypto transactions, both the buyers and sellers will be subject to tax at 30%.

Set off or carry forward of losses from VDAs have also not disallowed. Therefore, while the investors will pay 30% tax on income from VDAs, they will not be permitted to take any benefit of losses from VDAs against income under any other heads of income from tax perspective. Having said this, it is unclear whether intra-head adjustment of losses i.e. set off of loss within VDA class will be permitted or not.

Further, the amendments have also proposed application of the infamous gift tax under section 56(2)(x) on VDAs. Therefore, going forward receipt of VDA by taxpayers for a value less than its fair market value should be subject to tax under head income from other sources. However, there is no clarity whether such recipient will get a step up in cost on subsequent sale of VDAs. This may result in double taxation of income. Issue of promotional tokens by crypto exchanges, airdrop of tokens etc. are likely to be impacted by this change. Having said this, absence of guidance on valuation of VDAs may pose a challenge on implementation of this gift tax.

Withholding taxes

With the intent to track transactions in relation to VDAs, the government has also proposed to introduce withholding provision on person responsible for paying consideration for transfer of VDA. The aforesaid withholding provision should technically be applicable on the buyer of VDAs and crypto exchanges (marketplace) should not be considered as ‘person responsible for paying consideration’, the obligation to withhold tax under section 194S may practically be on crypto-exchanges in most cases. However, there may be issues in complying with the withholding obligation in absence of knowledge of identity of the counter party. Further, the Budget also mandates withholding in cases where transactions are undertaken in kind. This seems to be an onerous condition for investors and may create cash flow issues. Apart from this, withholding tax provisions is also likely to block capital of the users till the end of the financial year, which may hamper trading volumes in this upcoming industry.

There are also instances, especially in the tech sector, wherein employers pay salary in form of tokens to their employees. In such cases, an issue may arise on whether the employers are liable to withhold taxes as per section 192 as salary payment or under section 194S as consideration for transfer of VDAs. While this may be tricky for employers, from employee’s perspective, it may not make much of a difference as both salary income and income from transfer of VDAs are taxable at 30% without any deductions. Similar issues may also arise in cases where consideration for services rendered is discharged in crypto currency. In such cases as well, it will be important to analyze applicability of section 194S versus 194J on the service provider as it may be considered to be discharging consideration for transfer of VDAs by the service recipient. Similar conflicts may also arise where winnings from gambling or gaming is paid out in tokens or crypto where section 194B or 194S may apply. Clarity on such issues would be welcome, particularly since the government has expressed its willingness to address any potential gray areas due to the introduction of this amendment.

What next?

As the crypto industry matures and, it is expected that more issues are likely to arise in future. To this extent, the amendments in the Budget are just the beginning of clarifications on taxation of income from VDAs. Reports suggest that income-tax returns from next year will have separate column for disclosing crypto income.[3] Individuals, employees, consultants, fund managers, artists, actors and others who are receiving consideration or payments in the form of tokens, cryptos or NFTs should watch the final wording of these proposals closely to assess their tax exposures under various sections of the proposed law.

Changes in Levy of Interest Provisions: A Boon or Bane?

Introduction

The Union Budget 2022, the year's most anticipated economic event, has finally been released. Nirmala Sitharaman, the Finance Minister of India, has provided a plethora of reasons to be optimistic about the country's future economic growth. The budget speech and Economic Survey 2021 reflected the country's economic recovery following the harsh Covid-19 waves. Deficit reduction, increased foreign exchange reserves, and robust GDP growth reassured the country and its policymakers that we are on the right track. The Finance Minister praised taxpayers for their enthusiastic contributions to the cause, citing buoyant Goods and Services Tax collections.

The Lok Sabha was presented with tax proposals, both direct and indirect taxes. There have been numerous changes announced in the GST laws, one of which is an amendment to Section 50(3) of the Act, i.e. interest on delayed payment of tax. However, It is unclear whether this particular amendment will result in relief for taxpayers or more litigation for them. This article will go over both the positive and negative aspects of this amendment.

The Positive

The Finance Minister had previously proposed this amendment at the 45th GST Council Meeting, which was held on September 17, 2021, in Lucknow, Uttar Pradesh. The following is an excerpt from the 45th GST Council Press Release:

“In the spirit of the earlier Council decision that interest is to be charged only in respect of net cash liability, section 50 (3) of the CGST Act to be amended retrospectively, w.e.f. July 01, 2017, to provide that interest is to be paid by a taxpayer on “ineligible ITC availed and utilized” and not on “ineligible ITC availed”. It has also been decided that interest in such cases should be charged on ineligible ITC availed and utilized at 18% w.e.f. July 01, 2017.”

The existing sub-section (3) of section 50 of the CGST Act is produced below:

(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council.

Following a reading of the above provision, it is clear that the taxpayer is required to pay interest on any excess claim of ITC availed, regardless of whether the extra ITC has been utilized or not. Excess ITC claims can either be the result of an honest error made by the taxpayer or they can be made on purpose. The taxpayer's intent can be ascertained by determining whether the taxpayer has taken advantage of the aforementioned ITC or not. As a result, the taxpayers who have claimed the ITC in excess but have not used should receive a benefit in the form of a waiver of the interest cost.

Numerous cases have been reported in which the taxpayers had claimed an excessive amount of ITC and were required to pay interest on the reversal, regardless of whether the excess ITC was used or not, and the interest levy was waived in certain cases by the Courts.

Hon’ble Patna High Court in the case of M/s Commercial Steel Engineering Vs State of Bihar [TS-251-HC-2020(TEL)-NT]  held that the ITC availed but not utilized for tax payment doesn’t invite penal consequences of Section 73 of CGST Act, 2017 and interest cannot be recovered on mere availment of ITC which was not utilized.

That is why, as part of the Finance Bill, 2022, a final amendment has been presented by the Finance Minister, putting an end to all the issues and unnecessary litigations by specifying that no interest shall be requested against the taxpayer in respect to the excess input tax credit claimed but not utilized.

The new sub-clause (3) of section 50 of the CGST Act is produced below:

“(3) Where the input tax credit has been wrongly availed and utilized, the registered person shall pay interest on such input tax credit wrongly availed and utilized, at such rate not exceeding twenty-four percent. as may be notified by the Government, on the recommendations of the Council, and the interest shall be calculated, in such manner as may be prescribed.”.

This is one of the notable decisions made by the Finance Minister, as taxpayers who would have been unsure about taking input tax credit on certain transactions can now do so without affecting GST Returns. The aforementioned exercise would keep the taxpayers’ input tax credit from lapsing under Section 16(4) of the CGST Act. After the substitution of the said provision, the taxpayers will be charged no interest amount in respect to the excess input tax credit claimed but not utilized. The use of the word “and” signifies that fulfillment of both the conditions i.e. availment and utilization are necessary for liability to pay interest on account of any wrong availment.

Furthermore, Notification No. 13/2017 – Central Tax, dated June 28, 2017, has been amended to notify the rate of interest under subsection (3) of Section 50 of the CGST Act as 18 percent.

The Negative

The existing Section 50(3) of the Act dealt with a very specific scenario involving Section 42(10) or 43(10), which were never implemented, and as a result, there was never any discussion about paying interest under Section 50(3) of the Act. The proposed Section 50(3) will apply to all cases in which ITC is wrongfully availed and utilized.

The amendments to sub-section (3) of Section 50 of the CGST Act are being substituted retrospectively, with effect from July 1, 2017, to provide for the levy of interest at 18 percent on input tax credit wrongfully availed and utilized.

For both tax authorities and courts, this would pose a challenge due to a rise in refund litigations. As there have been numerous cases in which:

1. Taxpayers have paid 24 percent interest in cases where the ITC was excessively claimed and not utilized; 
2. Taxpayers have paid 24 percent interest in the cases where the ITC was excessively claimed and utilized.

In the first case, the department must refund the full 24 percent interest paid by taxpayers where the ITC was excessively claimed but not utilized, and in the second case, the department must refund the balance 6 percent to taxpayers where the ITC was excessively claimed but utilized.

Critical issues

There are certain critical issues that woud be faced by every taxpayer on this:

• Whether section 54 on refunds would permit applications beyond two years for such refund?;
• Whether Supreme court order on Covid extensions could be used for filing these applications?;
• Cases under which taxpayer has suo-moto deposited interest can they be appealed against?
• These amendments will take time to be notified in official gazette, what would be the stand of the department till then?.

Conclusion

This is a remarkable initiative taken by the Government to examine provisions that penalize innocent taxpayers and create barriers in the pursuit of the GST's ultimate objective, which is the seamless flow of credit to recipients. As a result of the practical difficulties businesses encounter in adopting and complying with such rules, the Government decided to repeal this onerous provision.

However, clarification from the Government is considered necessary regarding the refund of the interest that was previously paid in accordance with an existing provision to settle the doubt that has arisen among taxpayers.

Business Reorganisation - Pressing Need for Clarity!

This article has been co-authored by Jay Parmar (Member, Aurtus Consulting LLP) & Harsh Shah (Member, Aurtus Consulting LLP).

1.             Backdrop

1.1. Section 170 of the Income tax Act, 1961 (‘IT Act’) governs the allocation of tax liability in case of succession of business. It provides that the predecessor shall be assessed with respect to income earned up to the date of succession and the successor shall be taxed thereafter. This section envisages separate assessments on both, the predecessor as well as the successor on their respective incomes. In a rare scenario, where the predecessor “cannot be found”, the tax officer can assess the successor in respect of income earned by the predecessor in the year of succession as well as a year before the said year.

1.2. Generally, re-organization of business by way of amalgamation, de-merger or merger which is undertaken through a scheme as per provisions of section 230 to 234 of Companies Act, 2013 entail a huge time lag between initiation of process (by way of filing an application) and getting final order approving the scheme. Also, such re-organizations take effect from an ‘Appointed Date’ (i.e., date from which merger / demerger takes effect) which is frequently, a retrospective date.

1.3. While the application for such business re-organization is underway before the adjudicating authority / tribunal, the income tax proceedings and assessments are carried on and often completed on the predecessor entity. However, courts in the past have held that such proceedings and consequent assessment on the predecessor (which has been amalgamated with the successor entity) is illegal as the predecessor ceases to exist.

1.4. A landmark ruling on this issue was rendered by Hon’ble Supreme Court in the case of Maruti Suzuki India Ltd.  [TS-429-SC-2019]  wherein it was held that initiation of assessment proceedings against a non-existent company was void-ab-initio and the assessment order is substantively illegal.

1.5. With a view to address the said issue, certain amendments are proposed in section 170 of the IT Act w.e.f. 1st April 2022, which are discussed in subsequent paragraphs.

2.             Amendments in relation to business re-organization

2.1. Finance Bill 2022 has proposed to introduce a new deeming fiction through sub-section (2A) to Section 170 of IT Act dealing with ‘business re-organization’. By virtue of the deeming provision, the assessments / reassessments / any proceedings (either pending or completed) on the predecessor entity during pendency of business re-organization before the adjudicating authority / courts, are deemed to have been made on the successor and all provisions of the IT Act shall apply accordingly.

2.2. The term ‘business re-organization’ is proposed to mean the re-organization of business involving amalgamation or de-merger or merger of business of one or more persons. Further, the term ‘pendency’ is proposed to mean the period commencing from the date of filing of application for such re-organization of business before the High Court or tribunal or the date of admission of an application for corporate insolvency resolution by the Adjudicating Authority as defined in section 5(1) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and ending with the date on which the order of such High Court or tribunal or such Adjudicating Authority, as the case may be, is received by the Principal Commissioner or the Commissioner.

2.3. Despite the proposed amendments, the matter does not get completely resolved and certain questions may arise owing to the interpretational issues on account of the language employed in the proposed amendment. Some of the key issues which need consideration are discussed below:

a)      Re-organization through fast-track route

Section 233 of Companies Act, 2013 permit merger / demerger of a holding company with a wholly owned subsidiary, small companies etc under a fast-track route subject to compliance of conditions stipulated therein. Such schemes are subject to final approval of Regional Director (‘RD’) and does not require any approval from a National Company Law Tribunal (‘NCLT’) as prescribed under section 230-232 of the Companies Act, 2013.

As discussed above, the term ‘pendency’ is defined to mean period starting from the date when application for re-organization is filed with a tribunal and ending with the order of such tribunal being received by the Principal Commissioner / Commissioner. It is important to note that there is no reference to the application made to or order passed RD in the said definition. Considering the manner in which ‘pendency’ is defined, re-organization of business through a fast-track route might not get covered by amendments proposed in section 170 of the IT Act since business re-organization under fast-track route is not a court, or a tribunal driven process.

Considering the explanation provided in the memorandum to Finance Bill 2022, it seems that the intention of the legislature could not have been to exclude business re-organizations through fast-track route from the applicability of the proposed amendments. This could have been erroneously missed out which may be addressed at the time of enactment of Finance Bill, 2022.

b)      Demerger of Business Undertaking

As per the current scheme of taxation, assessment is always carried out qua an entity and not qua an undertaking which is owned by such an entity. An undertaking is never assessed independently dehors the company owning such undertaking. Hitherto, in case of business re-organization involving transfer of an undertaking, assessment proceedings have always been carried out in the name of predecessor / demerged entity and not in the name of successor / resulting entity.

Based on the amendment proposed through sub-section (2A) to Section 170, assessment completed, or proceedings initiated on the demerged company during the pendency of scheme before tribunal shall be deemed to have been made on the successor i.e., resulting company.

This leads to an absurd and unintended situation wherein the assessment completed on the demerged company (which would inter-alia include assessment of the income pertaining to the business retained by the demerged entity as well) shall be deemed to have been made in the name of resulting company. Consequently, resulting company would become liable to pay the tax demand pursuant to the assessment carried out on the demerged entity. The memorandum explains that the intent of the amendment is to ensure that proceedings on the predecessor are not considered to be invalid in case when predecessor ceases to exist. In case of a demerger, the demerged company continues to exist even after business re-organization and hence such deeming fiction may not be warranted in the context of a demerger.

Considering the current scheme of taxation and the manner in which assessments / proceedings are carried out, it would be important for the government to have a relook at the proposed amendment and address the anomaly at the time of enactment of Finance Bill, 2022.

c)       Restructuring of entities without any business operations

As discussed above, the term business re-organization is defined to mean re-organization of business involving amalgamation / demerger, etc. Also, the term pendency has been defined to mean period between the date of application for re-organization of business before High Court / tribunal and ending with the date on which order passed by High Court / tribunal is received by Principal Commissioner / Commissioner.

On reading definition of ‘business re-organization’ and ‘pendency’, a question arises as to whether amalgamation / demerger / merger of entities merely holding assets (eg. shares, securities, immovable properties as investments) or for that matter when re-organization is merely of the passive assets and not business per se would fall within the ambit of the proposed amendment or not. Considering the language in the proposed amendment, one could possibly argue that re-organization which does not involve business may not get covered by the proposed amendment. However, this could a be matter of significant long-drawn litigation.

d)      Timing of proceedings / assessment order vis-à-vis pendency of re-organization

Applicability of amendment proposed through sub-section (2A) to Section 170 under various scenarios has been discussed below:

Scenario 1 – Assessment order is passed in the name of predecessor after order of court / tribunal is received by concerned tax authorities

In the above scenario, a question arises as to whether assessment order passed by the tax department in the name of predecessor entity after the order of court / tribunal (approving amalgamation) is received by the Commissioner is valid as per the amendments proposed in section 170. On reading of the language proposed in Section 170, one may infer that only an assessment order passed during the pendency of a business reorganization is sought to be legalized. One could possibly argue that assessment completed in the name of predecessor after the receipt of court / tribunal order by the Commissioner should not be regarded as deemed to have been made on the successor and considering the fact that predecessor would cease to exist, any assessment made in the name of such entity may be considered as void and illegal.

Further, in a scenario where initiation of proceedings and completion thereof is carried out in the name of predecessor after the order of adjudicating authority / tribunal is received by Commissioner / Principal Commissioner, one may argue that such issue of notice and the order passed on the predecessor should not be regarded as deemed to have been made on the successor and considering that predecessor would cease to exist any assessment made in the name of such entity may be considered as void and illegal.

In both the aforesaid scenarios, the ratio laid down by Hon’ble Supreme Court in the case of Maruti Suzuki India Ltd (supra) may continue to apply to the effect that amalgamating entity ceases to exist on amalgamation and any order passed in the name of predecessor is substantively illegal.

Scenario 2 – Assessment order is passed after the appointed date but before filling of application before court / tribunal

Before discussing the implications of the proposed amendments in the above scenario, it is worthwhile to note the observation of Hon’ble Supreme Court in case of Dalmia Power Ltd [TS-785-SC-2019] which is reproduced as under:

“ In the present case, Appellant Nos.1 and 2/Transferee Companies filed their original Returns of Income on 30.09.2016 and 30.11.2016 respectively. Thereafter, they entered into Schemes of Arrangement and Amalgamation with 9 Transferor Companies in 2017. The Schemes were finally sanctioned and approved by the NCLT, Chennai vide final orders dated 20.04.2018 and 01.05.2018. The Appointed Date as per the Schemes was 01.01.2015. Consequently, the Transferor/ Amalgamating Companies ceased to exist with effect from the Appointed Date, and the assets, profits and losses etc. were transferred to the books of the Appellants/ Transferee Companies/Amalgamated Companies.”

The Hon’ble Supreme Court observed that, upon the approval of the scheme, the amalgamating company ceased to exist with effect from the Appointed Date. This is line with the landmark decision of the Hon’ble Supreme Court in the case of Marshall Sons & Co [TS-5102-SC-1996-O].

In the Illustration given above, assessment order is passed after the appointed date but before the date of filling of application of re-organization with court / tribunal. As per the proposed amendment in Section 170, only such assessments which are made on the predecessor entity between the date of application of business re-organization and the date on which order of court / tribunal is received by concerned tax authority are deemed to have been made on the successor. The assessment order passed by the tax authorities on the predecessor entity prior to the date of filling of application for re-organization with court / tribunal is strictly not covered within the ambit of the proposed amendments.

Relying on the observation of Hon’ble Supreme Court in case of Dalmia Power Ltd (supra) alongwith the decision of the said Court in the case of Maruti Suzuki (supra), a question arises as to whether one could possibly argue that since the predecessor company does not remain in existence after the Appointed Date, the assessment order passed in the name of predecessor company after the Appointed Date but prior to the date of filling of application for re-organization with the court / tribunal  may be regarded as void and illegal.

In this context, a contra argument which would be taken by the tax officer would be that the predecessor company was actually in existence at the time when assessment order was passed and ceased to exist retrospectively only after the scheme was made effective i.e., after the order was passed by the tribunal.

While the above stated scenario does not strictly fit within the ambit of the proposed amendment, it is important that the Government addresses such scenarios and proposes appropriate amendments.

e)      Merger of businesses

The term ‘business re-organization’ has been defined to include merger of business of one or more persons. The term ‘merger’ is not defined under the IT Act and hence one may interpret this term as understood in general parlance.

The phrase ‘merger of business of one or more persons’ could cover such transactions which otherwise does not satisfy the definition of ‘amalgamation’ and ‘demerger’. Few transactions which may get covered could be relating to the transfer of business through slump sale, transfer of business undertaking by way of a non-tax neutral demerger, non-tax neutral merger of companies with active business, merger of LLPs / firms carrying on a business etc. An important element of the amendment is determining the time period involved during “pendency” of a business reorganization, since it is only an assessment / reassessment, etc made during pendency, which is deemed to have been made on the successor. The term “pendency” defined under Explanation (ii) to Section 170(2A) refers to the period commencing from date of filing of an application for business reorganization before the High Court or Tribunal or date of admission of an application for corporate insolvency resolution and ending with the date on which the order of such High Court, Tribunal of the adjudicating authority involved in the IBC proceedings is received by the Principal Commissioner / Commissioner. Hence, it seems that the amendment necessary applies only to a business reorganization which involves filing of an application before High Court, Tribunal, etc. Hence, while a non-tax neutral merger or demerger or even a slump sale effected through a Court or a Tribunal is likely to be covered under the amendment, a simplicitor slump sale effected on the basis of a contract between two parties, may not be covered under the said amendment. Having said that, since the proposed amendment does not explicitly specify as to what constitutes ‘merger of business’ and hence it would be helpful if government provides some guidance on this matter to avoid any ambiguity.

2.4. The proposed amendment will have a significant impact on the third-party deals involving amalgamation / merger etc as the successor or the acquirer will have to bear the risk of tax liabilities pertaining to period prior to the appointed date in case where assessment order has been passed during pendency of re-organization. The acquirer / successor might consider seeking appropriate indemnity or insist on value adjustment. With regard to the ongoing deals, the successor or the acquirer may consider relooking at commercials in case where substantial tax demands have been raised on predecessor pursuant to proceedings / assessments completed during the pendency of re-organization.

3.             Modification of returns by entities involved in re-organization

3.1. Pursuant to the business re-organizations, the affairs of the entities involved in re-organization completely change with effect from the date such re-organization takes place. However, huge time lag between initiation of process by filing an application and getting final order approving the scheme impairs the ability of entities to file revised return / modified tax returns (to give impact of re-organization) since the due date of returns prescribed under the IT Act in most of the cases lapse.

3.2. The issue of filling of return of income after the due date to give effect to re-organization had come up before Hon’ble Supreme Court in the case of Dalmia Power Ltd. (supra). Hon’ble Supreme Court had ruled in favour of the taxpayer to allow filing of revised return after the prescribed due date in order to give effect to the scheme of arrangement. Despite ruling of Supreme Court on this very issue, there was significant litigation as there was no mechanism prescribed under the IT Act which allowed entities to file revise / update their return post receipt of order of the adjudicating authority / court.

3.3. With an intent to address the aforesaid issue, Finance Bill 2022 has proposed to insert a new section 170A to the IT Act, to enable the entities going through business re-organization to file the modified returns (only to give impact of the re-organization) for the period between the date of effectivity (i.e. Appointed Date in the Scheme) of the order and the date of issuance of final order of the competent authority. Such modified return is required to be filed within 6 months from the end of the month in which order sanctioning the re-organization is passed by the adjudicating authority / court.

3.4. It is important to note that the proposed amendment provides mechanism allowing successor entity to file modified return pursuant to re-organization of business. However, it does not specifically provide any mechanism allowing predecessor to file modified return. Considering the same, there would be an anomaly in case of a demerger. There could be cases where income pertaining to the undertaking which is transferred would have been offered in the return of income filed by the predecessor and the same income pertaining to the acquired undertaking (after the Appointed Date) would be offered in the modified return filed by the successor entity pursuant to re-organization. This would lead to practical difficulty even for the tax department while assessing income of predecessor as well as successor.

3.5. Further, as discussed above considering the definition of re-organization there is an ambiguity as to whether re-organization of entities not having any business activity would get covered by the proposed insertion of new section 170A to the IT Act or not. In case where a view is adopted that re-organization of entities not having any business activity does not get covered within the ambit of new section then in such a scenario benefit of filling modified return would not be available even to the successor entity.

3.6. It seems that the aforesaid issues might not have been envisaged while drafting the language which is currently proposed for insertion of Section 170A to the IT Act. Hence, it would be imperative for the Government to revisit the current language and carry out appropriate changes while enacting Finance Bill 2022 allowing predecessor and successor to file modified returns in all cases of restructuring to ease the compliance burden and reduce unwarranted litigation.

4.             Modification of notice of demand pursuant to order of Adjudicating Authority under IBC

4.1. Finance Bill 2022 has proposed to introduce new section 156A under the IT Act to provide a mechanism to modify the notice of demand (in respect of tax, interest, penalty etc.) pursuant to an order of the Adjudicating Authority as defined in section 5(1) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

4.2. Hon’ble Supreme Court in the case of Ghanshyam Mishra & Sons Pvt Ltd vs Edelweiss Asset Reconstruction Company Ltd & Ors [LSI-216-SC-2021(NDEL)] held that once a resolution plan is duly sanctioned under IBC, the claims provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and all other stakeholders including central government. In case tax dues do not form a part of resolution plan, such liability shall stand extinguished, and the tax authorities will not be entitled to continue any proceedings in relation to the same.

4.3. Considering decision of Hon’ble Supreme Court, the proposed insertion of Section 156A to IT Act empowering the tax officers to modify or revise notice of demand basis the order of Adjudicating Authority is a welcome move. This will ease down the burden on the taxpayer and avoid unnecessary disputes.

5.             Conclusion

The close look at the amendments proposed in section 170 by Finance Bill 2022 suggests that government has tried to nullify the impact of judicial precedents in context of the proceedings made on predecessor entities and attempted to provide certainty regarding the manner and timing of filling of modified returns by the entities pursuant to re-organization. However, considering the language of the proposed amendments several issues arise which remain unaddressed. Also, the manner in which these amendments have been proposed does not seem to serve the purpose with which the government has proposed these amendments. In any case, it may be noted that where a tax officer passes an order on a non-existing entity after the conclusion of the business reorganization (for instance, a merger approved by the NCLT), the said action is not sought to be legalized by the proposed amendment, since such an assessment would not have been carried out during the pendency of the merger, but would have rather been carried out post the conclusion of the merger.  It would be very helpful if government revisits the proposed amendments in Section 170 and addresses the anomalies at the time of enactment of Finance Bill 2022.

Tedious Benefits

Section 190(1) of the Income Tax Act provides that tax on income shall be payable by deduction or collection at source or by advance payment or by payment under Section 192(1A).  Part-B of Chapter XVII of the Income Tax Act has expanded over a period of time with new and new categories being introduced for tax deduction.  Finance Bill, 2022 has introduced one more weapon in the armory in the form of Section 194R.

In terms of Section 28(iv) the value of any benefit or perquisite whether convertible into money or not arising from business or exercise of profession is taxable under the head profits or gains from business or profession.  This clause was inserted by Finance Act, 1964.  Nearly 60 years later the Memorandum explaining the Finance Bill states as under:

As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite.  However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.  Accordingly, in order to widen and deepen the tax base, it is proposed to insert Section 194R……

Over a period of time, the tax administration would have clearly understood as to what would constitute benefits or perquisites that can be taxed in the hands of the recipient.  Number of assessments would have taken place involving dealers, distributors, retail outlets, business entities, and tax payment could have been ensured on such benefits.  A questionnaire during assessment or scrutiny would have been more than sufficient to identify cases where such benefits have not been reported.  After nearly 60 years the Government makes a statement that reporting is not happening and a TDS tool is required to widen and deepen the tax base.

Section 194 R is likely to create the following challenges:

(i) The tax deductor will have to examine the nature of the transaction and first examine whether Section 28(iv) is applicable or not.  Applicability of Section 28(iv) by itself is the subject matter of a number of decisions.  The Supreme Court in the case of Commissioner Vs. Mahindra and Mahindra Ltd. [TS-5197-SC-2018-O] has held that prima facie the income must arise from business or profession and the benefit has to be in some other form rather than the shape of money.

(ii) Increase in cost of compliance since it would not be easy to identify benefits and perquisites provided to various parties when most of the expenses may be grouped under sales promotion or marketing.

(iii) The threshold of Rs.20,000/- is extremely low and businesses will have to waste significant resources in identifying applicability of Section 194 R.

(iv) In a manufacturing sector involving a supply chain of wholesalers, dealers and retail outlets, there are sales related incentives which could take the form of gift articles ranging from ordinary gifts to costly items.  Electronic gadgets, gold coins, household gadgets are quite common.  While there is no payment involved in these segments Section 194 R provides that the person responsible for providing the benefit before releasing the benefit has to ensure that tax has been paid in respect of such benefit.  This would only increase the expenditure for the entity releasing the benefit since tax has to be paid which would involve a cash outflow in addition to the amount incurred for purchasing the gift or article meant for incentivizing the dealers.

(v) There could be benefits which are not capable of measurement such as loyalty points or reward points which can be encashed within a time frame.

(vi) The scope and ambit of benefits / perquisites would be a matter of interpretation.  For example, if a company handles the dispute or litigation pertaining to its dealer network and incurs expenditure by way of legal fees, would it amount to a benefit or perquisite?

(vii) When foreign travel / accommodation related expenses are incurred for a dealer to celebrate business target achievements, can it be said that there is benefit provided to such dealers? 

(viii) Applicability of Section 28(iv) or otherwise which was a localized issue will now become viral due to the universal applicability of TDS provisions.

(ix) Businesses will have to spend significant time distinguishing discounts and benefits as the lines are likely to get blurred on account of the TDS provisions.

(x) Associated questions are likely since there seems to be a tendency with the GST Department to assume that if tax has been withheld there is necessarily a supply of service which would attract GST.

(xi) Issues are also likely for partnership firms where a partner is allowed use of residential premises, car, telephone or is provided specific benefits.  The applicability of Section 28(iv) to these items have been the subject matter of litigation and this litigation would spill over to the firms.

(xii) Issues are likely with reference to subsidies / grants; whether the subsidy is for setting up business or prior to commencement of business or whether it has the character of revenue receipt or capital receipt.

A case at point would be juxtaposing facts pertaining to a decision under Section 28(iv) to Section 194 R.  In the case of ACIT Vs. Ram Kripal Tripathi [TS-5262-HC-1980(ALLAHABAD)-O], disciples contributed funds for the purchase of a car for the assessee who was engaged in giving discourses on Vedanta.  The disciples had collected amounts from different persons; deposited the same in the bank and out of these contributions, the car was purchased.  The car was registered in the name of the assessee. The Allahabad High Court confirmed the applicability of Section 28(iv).  Now, on these facts who should deduct TDS under Section 194 R?

Impact of Proposed Changes in Taxation of Trusts

This article has been co-authored by Chandrashekara Acharya (Senior Manager, Deloitte Haskins & Sells LLP).

Union Budget - 2022 has proposed certain amendments in provisions governing charitable trusts and institutions.

Objective of amendments

Currently, exemptions to charitable trusts or institutions is available under following two regimes:

• Regime for any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred in section 10(23C)(iv),(v),(vi) and (via) of the Income-tax Act, 1961 (“the Act”).

• Regime for the trusts registered under section 12AA/12AB of the Act.

Until FY 2019-20, certain trusts/institutions could qualify for exemption under both the regimes. Budget 2020 rationalised these provisions to mandate that an entity could get itself registered under only one of the exemption regimes.

Budget 2022 has taken the next step in this direction of further rationalization of both exemption regimes by:

• Ensuring effective monitoring of charitable trusts and institutions

• Bringing consistency in the provisions of the two exemption regimes; and

• Providing clarity on taxation in certain circumstances.

Summary of key amendments

Key amendments proposed to achieve above objectives are discussed below:

a.       Amendments on taxation of income

Tax on accreted income (in the nature of exit tax where a trust ceases to be a charitable trust), which was applicable only for trusts registered under section 12AA/12AB of the Act has been extended to institutions approved under section 10(23C)(iv),(v),(vi) and (via) of the Act.

Mode of computation of taxable income is prescribed in case of non-availability/denial of exemption to trusts and institutions.

Under current provisions, entire exemption granted to trusts and institutions are denied in case of certain violations like unreasonable benefit passed on to trustees or other specified persons and investment of trust funds in non-specified modes. It is proposed that tax will be levied only on income pertaining to violation (that is to the extent of unreasonable benefit passed on and investment in non-specified modes) instead of denying exemption on entire income of trust or institution. Further, mode of taxation, rate of tax etc., are also prescribed for income of trusts and institutions taxable due to such violations.

b.      Conditions on application of income by trusts and institutions

Under the existing provisions of the Act, a trust or institution is required to apply 85% of its income during any previous year. However, if it is not able to apply 85% of its income during the previous year, it is allowed to accumulate such income for a period not exceeding 5 years. Conditions for such accumulation of income and taxation of accumulated income in case of different types of violations (such as non-application of accumulated income) are streamlined to bring consistency between two exemption regimes.

Any sum payable by a trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it irrespective of the previous year in which the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed by it.

c.       Implications of passing on unreasonable benefits to trustees and other specified persons

Restriction on passing on unreasonable benefit to trustees or other specified persons is extended to institutions registered under section 10(23C)(iv),(v),(vi) and (via) of the Act.

Where income of charitable trusts and institutions, is applied for the benefit of the trustees or other specified persons. penalty of 100% to 200% of amount applied for benefit of trustees or other specified persons is proposed to be levied.

d.      Procedural changes

Trusts and institutions are required to maintain prescribed books of accounts, where their total income, without giving effect to exemption under section 10(23C), section 11 or section 12 of the Act, exceeds maximum amount not chargeable to tax.

Mandate to file return of income in order to claim tax exemption extended to institutions registered under section 10(23C)(iv),(v),(vi) and (via) of the Act.

Procedure for cancellation of registration/approval based on reference from jurisdictional assessing officer due to specified violation (such as income of trust or institution applied other than for objects for which it is established, activity carried out by the trust is not genuine or not in accordance with conditions subject to which it was registered etc.) is streamlined.

Deduction claimed by the donor with respect to the donation given to any research association, university, college, other institution or company referred to in section 35(1)(ii),(iia) and 35(1)(iii) of the Act shall be disallowed unless such research association, university, college or other institution or company files the statement of donations.

In case of voluntary Contributions for the renovation and repair of temples, mosques, gurudwaras, churches etc., notified under clause (b) of sub-section (2) of section 80G, donees are given an option to consider it as part of corpus fund subject to certain conditions.

Implications of proposed amendments

While one of the objectives of proposed amendment is to bring consistency in two exemption regimes, one key difference continues to remain between the two exemption regime which pertains to income from commercial/business activities.

In case of trusts [engaged in advancement of any other object of general public utility as per section 2(15)] registered under section 12AA/12AB, exemption is not denied even if trust earns income from business/commercial activities, provided that such activity is in the course of its charitable purpose and does not exceed 20% of total receipts. Further in cases of trusts engaged in education, medical relief etc., registered under section 12AA.12AB, exemption is allowed, even if trust earns income from business/commercial activities without any threshold limit.

However, university, educational institution, hospital etc registered under section 10(23C) would be denied exemption if they earn any income from business/commercial activities.

This differential tax treatment in two exemption regimes needs to be streamlined.

In case of referral by assessing officer to CIT regarding cancellation of registration/approval due to specified violation, time limit of 6 months for decision by CIT and deferment of assessment till decision of CIT on cancellation of registration are welcome steps as this would avoid multiple litigation on eligibility of trust for registration/exemption with assessing officer and CIT.

Allowing application of income only on actual payment could cause hardship to trusts and institutions in cases where there is a liability to pay over more than 5 years and hence option of accumulation of income for future application cannot be availed. In such cases, trusts and institutions would be compelled to pay tax on receipts even though such receipts are applied over a period of time.

Conclusion

Key changes in taxation of trusts proposed in the budget such as bringing consistency in two exemption regimes, taxation of amount only to the extent of violation such as investment in non-specified modes instead of denial of full exemption, conditions for application of income, process for cancellation of approval/registration etc., are expected to bring much needed certainty and clarity to taxpayers.

Watch Out Charitable Organizations!

This article has been co-authored by Gurvinder Parmar (Technical Director, BSR & Co. LLP).

The Union Budget 2022, similar to the last few budgets has brought in significant changes for the non-profit sector. The entire not-for-profit regime has already undergone an overhaul in the last two budgets with the introduction of mandatory renewal of registrations every five years and several related changes to operationalize the same. Several changes were also made in the Foreign Contribution (Regulation) Act, 2010 impacting receipt of foreign contribution by the sector in September 2020.

Currently, two parallel exemption regimes exist for non-profit organizations depending on the objects and activities they carry out. Solely educational institutions, hospitals and certain non-profits are eligible to obtain tax exemption under Section 10(23C) of the Income-tax Act, 1961 (‘IT Act’) (referred to as first regime) while the other charitable organizations obtain tax exemptions under Section 11, by virtue of registration under Section 12AB of the IT Act (referred to as second regime). The intention of both the regimes is to grant similar benefits and tax exemptions. However certain differences exist leading to certain advantages/disadvantages of operating under one regime vis-a-vis the other. Additionally, there were several open issues resulting in unnecessary litigation before various judicial authorities due to absence of clarity in the existing income-tax provisions.

The memorandum to the Finance Bill states that the proposed amendments seek to rationalize the provisions of both the exemption regimes by-

1. Ensuring their effective monitoring and implementation
2. Bringing consistency in the provisions of the two exemption regimes and
3. Providing clarity on taxation in certain circumstances

The key amendments proposed are –

1.       Maintenance of books of accounts

• All charitable organizations whose total income exceeds the maximum amount not chargeable to tax, shall also maintain books of accounts and other documents in such form and manner and at such place as may be prescribed. The earlier requirement only mandated audit of accounts.’

• The rationale for this amendment is to ensure proper implementation of both the exemption regimes. While organizations subject to audit must already maintain books of account in some form and manner, a specific provision to this effect should lead to uniformity and minimum standards defined for the sector.

These provisions shall be made applicable from AY 2023-24

2.       Penalty for passing on unreasonable benefits to trustees or specified persons

• Where charitable organizations mis-use funds by applying the same towards the benefit of ‘Specified Persons’ defined u/s 13(3) of the IT Act, a new section 271 AAE has been introduced to provide for penalty under both the regimes. The penalty will be equivalent to the sum applied for the benefit of the specified persons in the first instance. In case of repeat default, the penalty will be twice the amount of such amount applied.

• Section 271AAE seeks to operate without prejudice to any other provision of Chapter XXI, thereby, if penalty is applicable under any other provision also, it would be applicable in addition to the specific penalty

• The penal provisions are rightfully meant to reprimand misuse of exemption provisions for the benefit of related parties. It will be equally important that the tax officer examines the reasonableness of any such payments holistically to avoid undue hardship in genuine cases.

These provisions shall be made applicable from AY 2023-24

3.       Consistency in Section 12AB and 10(23C) provisions

Following amendments are introduced to bring parity in sections governing charitable organizations registered under section 10(23C) and 12AB

These provisions shall be made applicable from AY 2023-24

4.       Expansion of reasons for cancellation of registration

• As per the proposals, the circumstances under which registration of an organization can be cancelled is being expanded under both the regimes. The registration may have been obtained under the automated approval system, as a provisional registration, a re-registration, or an approval in certain cases like change in objects etc.

• The powers of the Principal Commissioner / Commissioner of Income-Tax (‘PCIT/CIT’) to undertake a detailed enquiry have been expanded; such enquiries can be undertaken either suo-moto or on reference made by the Assessing Officer (‘AO’) and may lead to the cancellation of the registration if ‘specified violations’ are observed. The time limit for the order cancelling the registration shall be passed before the expiry of six months from the end of the quarter in which enquiry is initiated by the PCIT/CIT. There was no time limit prescribed earlier, this will bring time bound finality to any proceedings.

• Specified Violation’ has been defined to include situations where -

—   Income has been applied other than towards the objects of the organization

—   Business activities undertaken are not incidental to the main objects and separate books are not maintained

—   Income has been applied for private religious purposes, not ensuring for the benefit of the public

—   Income has been applied for the benefit of any particular religious community or caste

—  The activities of the organization are not genuine or carried out in accordance with all or any of the conditions subject to which it was registered 

—   Organization has not complied with requirements of any other law, non-compliance of which has attained finality or not been disputed

• With these amendments, the triggers for cancellation, the process and timelines have been clearly spelt out and one could expect greater scrutiny of auto renewals and other non-genuine cases.

These provisions shall be made applicable from AY 2022-23

5.       Exemption available on payment basis only

• Application of income shall be considered only on actual payment basis even if the organization follows a mercantile basis of accounting resulting in cash basis of accounting for tax purposes

• Organizations will need to evaluate their expenditures carefully to ensure that 85% application for a financial year is met while adhering to the requirement of cash basis of accounting. All year end provisions will need to be paid by 31 March to claim the expenditure.  This may cause inconvenience to the organisations; however, the application of expenses will be available when paid in subsequent years.

The provisions shall be made applicable from AY 2022-23

6.       Voluntary Contributions for Renovation / Repairs of Religious Structure

• Voluntary contributions received for repair / renovation of religious structures may be treated as a corpus donation at the option of the organization

• Requisite conditions related to corpus i.e., used for the specific purpose, non-application of the corpus for making donations to other organisations, maintaining the corpus as separately identifiable and investing as per guidelines specified under section 11(5) must be adhered to else the corpus shall be taxable in the year of violation.

The provision shall be made applicable retrospectively from AY 2021-22

7.       Computation of income in case of violation of provisions

• In case of certain specific violations made by a charitable organization, the entire exemption available to the organization shall not be denied and only such income applied in violation of the prescribed provisions shall be taxed. This is a welcome clarification as there was ambiguity and the organizations were often denied exemption for small amounts of income applied in violation of the provisions leading to protracted litigation. This includes the following circumstances –

• Organizations who accumulate income under Section 11(2) but unable to apply the same within the requisite period or violate conditions prescribed for such accumulation
• Payment made to specified persons in violation of section 13(1)(c)
• Investments made in violations of section 11(5)

• These incomes shall be taxed at special rate calculated as the aggregate as per the newly introduced section 115BBI as under

• The amount of income tax calculated @ 30% on the aggregate of specified income and
• The amount of income tax which the assessee would have been chargeable had the total income been reduced by aggregate of specified income

These provisions shall be made applicable from AY 2023-24

8.       Computation of income in case of denial of tax exemption

• In cases of complete denial of tax exemption in certain cases such as non-filing of return of income within due dates, non-filing of audit report and commercial activities exceeding 20 per cent, taxable income shall be computed after allowing deduction only for revenue expenses incurred.

• Expenses incurred out of corpus funding, loans and borrowings shall not be allowed as a deduction. This is in line with the existing computation mechanism for charitable organisations as such sources of funds are not treated as an income source for the organisation. 

These provisions shall be made applicable from AY 2023-24

Overall implications

The proposed amendments are welcome on several fronts by bringing in clarity, thereby reducing avenues for disputes. With the alignment of sections 10(23C) and 12AB provisions (first and second regime organizations) there will be equal compliance burden on all categories of charitable organizations and any unintended advantages of one regime over the other are removed. It will be important for organizations in the first regime to evaluate their compliance vis-a-vis related party transactions, also any triggers for exemption being challenged as exit taxes on cancellation of registration is now equally applicable to them.

Scope of cancellation of registration by the authorities has been widened providing the authorities expanded grounds for cancellation and this could result in a larger number of organizations being subject to taxes on accreted income.

Charitable organizations operating with various service level arrangements with related parties are likely to be under greater scrutiny due to the introduction of specific penalties on related party transactions where undue benefit is derived. At the same time, restriction of tax liability only on the specified income in cases of specified violations under Section 13 provides clarity on the tax liability for organizations and is likely to reduce long drawn litigations.

The road ahead for charitable organizations spells greater compliance and the need for adequate systems and processes to continue enjoying tax exemptions in a seamless manner.

India Opens the Door to the Crypto Tax Maze!

This article has been co-authored by Amar Kumar (Chartered Accountant, Singhvi Dev & Unni LLP).

The Finance Minister has introduced a new regime – Tax on income from Virtual Digital Assets (VDA), - on transactions involving Cryptocurrencies, which could also extend to other token-based transactions using the block-chain technologies. The introduction of the new regime is akin to entering a maze. As we discern the provisions, more questions arise, but we want to believe it’s moving towards the goal - tax certainty for the crypto world.

CHARGE OF TAX

Why are transactions in Crypto - income?

Income-tax is a levy on income. Under the Income-tax Act the liability to tax is attracted either on the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a hypothetical income, which does not materialize.[1]

Originally, the first Cryptocurrency i.e., bitcoin, came into existence through a decentralized and distributed ledger system gathering its value based on its demand and supply within the block-chain. Assuming the world did not accept the Cryptocurrency as a medium of exchange for a service or good which can be measured in “fiat currency”, it really would be no different from either an entry in a ledger or a coin in a video game!

Today, with the explosion of this new tokenized world, the transactions in the block-chain can be equated to some form of fiat currency or a commodity whose value is represented in fiat currency. It is in this backdrop that the transactions involving VDAs could be construed as real income, akin to a barter transaction where the money’s worth is the medium to measure.

Is it a gain from a capital asset?

The characterization of the income is a debate, particularly in the context of VDAs qualifying as capital assets. VDAs should qualify as a capital asset, since the term ‘capital asset’ is defined to include property of any kind. On the contrary, doubts exist on it qualifying as an asset in light of its inherent volatility, its characteristics as a medium of exchange and concerns on enforceability of ownership rights.

The legislative intent appears to recognize VDAs as capital assets. The regulators have directly provided for a specific computation and rate of tax on the income arising from the transfer of any VDA. The term “transfer” has been defined in the Income Tax Act in relation to a capital asset. Further support for the view is found in the proposal on taxing gift of VDAs under Section 56(2)(x), which proposes to include VDAs under the definition of “property”, which in turn refers to capital assets.

This view would be relevant for the tax positions on historical transactions. The income from VDAs could be determined on principles as applicable to transactions involving sale of securities to determine whether it is trading income or capital gains.

After 31 March 2022, the characterization of the income arising from VDAs is not of much relevance, as there is a specific regime providing for a rate of tax, with no deductions or carry forward of losses, for all incomes arising from the transfer of a VDA. However, there are more turns in the maze which are to be navigated – What is a VDA? What is ‘transfer’ of a VDA? If not recognized by law, are there legally enforceable rights which are transferred?

WHAT IS A VDA?

The regulators have proposed a broad definition to the term VDA, and at times you would think it probably is beyond the Cryptocurrency transactions as well.

Characteristics of a VDA

The definition specifically includes non-fungible tokens (NFTs) and other tokens unless excluded through a notification.

An unintended ambiguity - will the wallets in retail apps, reward points & in-game coins be considered as VDAs?

Given the all-encompassing definition of VDAs, any digitally represented balance attributable to a specific user could be covered within the definition of VDAs. This may cover cashback points in payment aggregator applications, loyalty points accumulated on membership cards specific to shopping outlets, credit card reward points, promotional balance and virtual coins provided to users in online games and other applications. The foregoing is not an exhaustive list, and VDAs could cover any digital representation of any asset, property etc., if the characteristics discussed above are satisfied.

If the definition is to be construed narrowly, it could be contended that if the issuer of cashback points, reward points and tokens stipulates that these virtual points have no inherent monetary value and are not transferrable to any other user (apart from the initial accrual of the points for a user) and can only be used in-app or in-store to be eligible for a discount while making an eligible purchase, then these points would not satisfy the criteria of being transferred and being traded electronically, and consequently be outside the ambit of VDAs.

To address the above ambiguity, a clarification from the government would help allay the concerns regarding the probable unintended applicability of the VDA taxation regime.

WHAT IS TRANSFER OF A VDA?

The regulations propose to levy a tax, at the rate of 30%, on the income from the transfer of a VDA. The term transfer is defined in the Act, in the context of capital assets and typically represents a sale, exchange or relinquishment of the Asset or the extinguishment of any rights therein. In the context of the Cryptocurrencies, we look at select transactions to discuss whether they tantamount to a transfer or raise further ambiguity.

Is Generation of a VDA a transfer?

For a Cryptocurrency miner, by convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block, which is an incentive for miners to support the network, and it provides a way to initially distribute coins into circulation, since there is no central authority to issue the Cryptocurrency.

A mining transaction does not involve a transfer of VDAs from one person to another (staying true to the peculiar characteristic of a decentralized network). As such, the coins are created or mined by the miner and enter circulation. There is no ‘transfer’ of the mined cryptocurrency to the miner.

It appears that the intent of the legislature is to introduce a transitory regime for taxation of VDAs by placing the trigger of taxation at the stage of conversion of VDAs to fiat currency or conversion to another VDA having reference to the fiat equivalent of such VDAs. A clarification from the board would help, considering the technological attributes specific to VDAs. Currently, it is ambiguous if the receipt of cryptocurrency by the miners will trigger a tax under Section 56(2)(X) and how the same could be valued.

Acquiring a NFT say Collectibles; is it a transfer?

Several brands have started offering NFTs to its users under a direct sale or by an auction. These NFTs are minted using smart contracts and they are tracked and stored on the Blockchain.

Typically, in the context of Collectibles the rights of the Collector/Owner appear to be limited to the use of the Collectible in defined scenarios e.g. for the purpose of sharing or promoting on social media platforms, blogs, digital galleries, or other digital media; or  within decentralized virtual environments, virtual worlds, virtual galleries, virtual museums, or other navigable and perceivable virtual environments, including simultaneous display of multiple copies of the Works within one or more virtual environments. 

Another emerging transaction model pertains to the merging of a NFT art with the exclusive physical commodity. This would typically involve sale of NFTs of 3D artwork featuring the tangible underlying (for ex. Footwear). In exchange for payment, the user is granted the NFT ownership with a future option to redeem the NFT for the underlying physical object (subject to applicable terms and conditions imposed by the issuer of the NFT).

Acquiring a NFT does not generally result in an acquisition of all the underlying intellectual property rights by the user. The acquisition of the NFT merely is the right to sell an authenticated NFT, or the right to display such NFT in a suitable environment (e.g., the metaverse).

Does the acquisition of a NFT tantamount to a “transfer” or is it a grant of a right? The proposals do provide the legislature with the powers to exclude certain types of NFT / tokens from the definition of VDA. It would augur well to have immediate clarifications for this fast-emerging segment.

Sale of VDA - Peer to Peer (P2P) transactions

Several platforms enable users to use fiat currency funds in exchange for certain Supported Cryptocurrencies with other Users on the platforms in so-called “P2P transactions.” In a P2P transaction, usually the platform will hold the digital currency in escrow between the two counterparties until payment in fiat currency funds between the buyer and seller is confirmed by the respective parties. Such Supported Cryptocurrency is released to the wallet of the buyer as soon as the payment is confirmed. The platform typically does not take custody or facilitate transfer of the fiat currency funds in this model, and the transfer of the fiat currency funds is solely between Users.

In a P2P transaction, the resident seller being the transferor of the VDA, as envisaged under the proposal, is liable to tax on the appreciation in value of the VDA. The buyer is required to deduct tax at source under Section 194S of the Act at the rate of 1%.

The reporting of these transactions and the liability of the non-resident seller / resident buyer would need further clarification.

Sale of VDA – On a centralized exchange

Centralized exchanges (‘CEX’) commonly facilitate trades between users by maintaining an order book. An order book is a collection of buy and sell orders posted by traders. Orders are requests to buy or sell a certain amount of a specific cryptocurrency at a certain price. CEXs aggregate orders from their users and then use special software to match and execute the corresponding buy and sell orders.

CEX users do not actually exchange crypto or fiat currencies with each other. Instead, when they deposit their funds onto an exchange, the exchange takes over the custody of those assets and issues a corresponding amount of IOUs to the trader. The exchange tracks every user’s IOUs internally as they change hands in trades and only converts them into actual currency upon withdrawal of funds.

The tax implications will be like a P2P transaction; however, on the TDS, the person responsible for deduction of tax is likely to be the CEX.

LOOKING AHEAD

The introduction of a taxation regime for Cryptocurrency is a welcome move. While the intent for the same appears to be to bring to the tax net the gains made in the Cryptocurrency markets, a broad-brush approach of classifying and taxing the transfer of Cryptocurrencies and NFT’s may lead to a disconnect between the evolving business models and the taxation regime. 

It should be acknowledged that the Web3 technology is not limited to gains arising on account of high volatility in the Cryptocurrency markets. As the markets mature and technologies evolve further, the tax regime would need to address the peculiarities of the underlying technology and the new business models.

Further, the interplay of The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (‘Crypto Bill’) (yet to be introduced), which was initially intended to prohibit all private cryptocurrencies in India, while allowing for certain exceptions to promote the underlying technology of cryptocurrency and its uses, with the taxation regime remains to be seen. More clarity on the legalization of Cryptocurrencies and technology relating to NFTs, smart contracts is expected once the Crypto Bill is introduced.

Disclaimer: The views expressed in this article are the personal views of the authors. The authors acknowledge the significant contributions of Mr. Varun Korada to the above article. 

Tax on Foreign Dividend – Change in Policy, Suggestions & Possible Outcomes

This article has been co-authored by Kshamin Shah (Deputy Manager, K C Mehta & Co.).

The Finance Bill 2022 has proposed removing section 115BBD. Section 115BBD grants concessional rate of tax for Indian companies receiving dividend from foreign entities, where ICo owns atleast 26% of FCo. Once passed, the ICo is likely to be taxed at 25.2% rather than the current rate of 17.2%.

Since years, there has been a continuous decline in the overall tax rate of dividend. This started in 2011 where the FM decided to introduce 115BBD with a view to encourage companies to bring foreign dividend. What started as a temporary measure, was made permanent in 2014. All tax changes were generally aimed at reducing tax on foreign dividends. Suddenly, in 2020, DDT was abolished, which resulted in a steep increase in the overall tax for Indian companies and Indian promoters. The current proposal further increases this tax rate.

The following table provides the historical dividend rates. Note a steady decline from 54% to 36%, and then increase to 64%.

Note that for the above computation, we have assumed corporate tax rate for a foreign company to be 25%. This computation considers tax at all levels: Corporate tax levied in the foreign country, tax payable by ICo, and ultimately by Indian resident non-corporate shareholders.

Accordingly, in a structure wherein an Indian Company invests outside India, the profits are taxed at three layers:

A.     In foreign jurisdiction

B.     In the hands of Indian Company receiving it, and

C.   In the hands of the ultimate shareholder (if dividend is not declared in the same year as received or in the succeeding year).

Accordingly, if a Group earns a profit of say INR 100, it will have to pay tax of INR 64 and shall receive INR 36 in it’s hand, whereas if it incurs a loss of INR 100, the entire loss is to be borne by the Group. This results into economic disparity, which was tried to be solved when the said Section was permanently brought into in 2014.

It should be noted that almost all countries in Europe provide exemption for dividend received by a European company from its overseas subsidiary. In 2017, even US implemented a similar policy where foreign dividend received by a US company will be exempt in US. This exemption is to reduce the multiple layers of taxation that dividend is generally subjected to, and thereby ensuring that economic disparity does not exist.

In India, simple act of receiving foreign dividends is likely to be taxed at a higher rate. Such dividend will be exempt only if the dividend is distributed in the same or next year, upto return due date. This is extremely restrictive, especially since the onward distribution itself will result in an even higher tax burden for the resident shareholder.

Suggestions

Current dividend tax policy is complicated, inefficient and highly unfavourable for Indian MNC and Indian promoters. India should either introduce participation exemption, where dividend from non-portfolio investments is exempt in case it is received by an Indian company. The idea is to remove multiple levels of dividend taxation. This will make India a competitive destination from a tax perspective, for global expansion.

If a straightaway exemption seems difficult, ICo can give credit to the corporate tax paid by FCo. This is known as Underlying Tax Credit (UTC). Currently, India grants UTC only for investment in Mauritius and Singapore.

Conclusion

This move will further discourage repatriation to India. It is a regressive step towards global competitiveness of Indian MNCs.

Considering this, a structure where the need to repatriate dividend to India reduces may be preferred by MNC Groups going forward, which may result in Groups creating intermediate holding companies, which may lack economic substance, and thereby attracting stringent anti-abuse provisions of MLI and GAAR.

In case of asset-light successful start-ups led by Flipkart, there is a trend to externalise the structure. This strategy has been successfully followed by several companies, even the asset-heavy companies. This amendment is likely to make such move even more popular.

Considering reduction in corporate tax rate and increase in repatriation tax rate, it makes more sense to consider a change in the capital structure, like introduction of higher debt for funding foreign entity.

Lastly, since the amendment will be effective post 1st April 2022, companies can consider bringing dividend from overseas before that.

Taxability of Trusts - A Comprehensive Overview & Takeaways

This article has been co-authored by Vartik Choksi (Partner, G.K. Choksi & Co.) & Mukesh Dholakiya (Chartered Accountant).

“Wrap your head around something”. This phrase come in mind while reading  significant overhaul changes in provisions of the Income Tax relating to taxation of Trust, institutions etc covered by sections u/s 11, 12 or 10(23C). In this article, significant changes made in taxation of charitable trust are discussed.

1.  The nature of amendments are bifurcated in following categories:-

(i) Amendments for ensuring effective monitoring and implementation of exemptions provided u/s. 11, 12 and 10(23C) of the Act.

(ii)  Amendments bringing consistency in the provisions of the two exemption regimes i.e. u/s. 11 and u/s 10(23C) of the Act.

(iii) Amendments providing clarity on taxation in certain circumstances.

2. Amendments for ensuring effective monitoring and implementation of exemptions provided u/s. 11, 12 and 10(23C) of the Act.

2.1  Mandatory maintenance of books of account (Amendment to Section 12A of the Act)

Presently, the trusts or institutions are required to get their accounts audited if the total income exceeds the basic threshold limit, however, there is no specific provision providing for maintenance of books of accounts under the Act.

Effective from A.Y. 2023-24, clause (b) of sub-section (1) of section-12A and 10th proviso to clause (23C) of section-10 have been amended to provide for mandatory maintenance of books of account and other document in prescribed format and place if income of Trust or Institution before claiming exemption u/s. 11 or 10 (23C) as the case may be exceeds the maximum amount which is not chargeable to tax.

2.2 Levy of penalty u/s. 271AAE for passing unreasonable benefits to Trustee or persons specified u/s. 13(3) r.w.s. 13(1)(c) and as per Twenty First Proviso to Section- 10(23C) of the Act. ( New Provisions)

(a) New section-271AAE is proposed to be inserted from A.Y. 2023-24 to provide for imposition of penalty on Trust/Institution claiming exemption u/s. 11/10(23C), in the case where any part of income of the such entity is applied for the benefit of persons specified u/s 13(3) r.w.s. 13(1)(c) and  by 21st Proviso of section 10(23C) the Act as the case may be.

(b) The quantum of penalty, in the case of first time violation, shall be, equal to the amount of income so applied and for subsequent violation twice the amount of such income. 

(c) The penalty under this section is over and above the penalty that may be levied under any other provisions of Chapter-XXI of the Act. 

KEY TAKEAWAY FROM THE AMENDMENT

(i) The above provisions are inserted in the Act to restrict trust/other institutions which are passing unreasonable benefits to trustees or there is misuse of funds.

It should be noted that reasonable payments made to specified person in consideration for service or goods provided by him would not be regarded as application of income of the Trust for the benefit of such persons. However, it would be the responsibility of the Trust to bring on record the evidence of providing goods on service by specified persons at  arms-length value . If Trust/Institution fails to prove that such payments are made for goods or service provided at arms-length value, then, the registration of Trust may be cancelled and penalty u/s.271AAE shall be imposed.

(iii) Penalty u/s 271AAE of the Act is in addition to other penalties envisaged in the Act for additions/disallowance on account of above violation ( such as provisions of Section 270A)

2.3 Reference to the Principle CIT or CIT for the cancellation of registration u/s.12AB/12AA or approval u/s. 10(23C) of the Act.

With a view to streamline the provisions for cancellation of registration u/s.12AB/12AA and approval u/s. 10(23C) of the Act and with a view of monitor such registration/approval granted under automated approval system, following amendments are proposed from 1st April, 2022:-

Procedure for enquiry by PCIT or CIT into the registration u/s.12AB/12AA or approval u/s. 10(23C)  

(A)         Circumstances under which an Enquiry can be initiated:-

It is proposed to amend the provision of section-12AB and fifteenth proviso to section-10(23C).  To that effect, sub-section-(4) of section-12AB and fifteenth proviso of section-10(23C) have been substituted and identically worded. As per the amendment, PCIT/CIT will conduct an enquiry where registration/provisional registration u/s 12AB or approval u/s 10(23C) has been granted, and subsequently,

(a) he notices that  one or more specified violations have occurred during any previous year;

(b) he has received a reference from the AO under the second  proviso to section 143(3) for any previous year, or

(c) such case has been selected in accordance with the risk management strategy, formulated by the Board from time to time, for any previous year,

(B)         Procedure for enquiry:-

(i) PCIT/CIT call for such documents or information from the trust or institution or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence or otherwise of any specified violation u/s 12AB(4) or Explanation 2 to Fifteen Proviso to section 10(23C).

(ii) pass an order in writing cancelling the registration/approval of such trust or institution, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violation have taken place;

(iii) pass an order in writing refusing to cancel the registration/approval of such trust or institution, if he is not satisfied about the occurrence of one or more such specified violation

(iv) forward a copy of the order under clause (ii) or (iii), as the case may be, to the Assessing Officer and such trust or institution.

(C) The term “specified violation” is proposed to be defined by inserting an Explanation to sub-section (4) of section 12AB and Explanation 2 to Fifteen Proviso to section 10(23C) of the Act to mean the following violation:-

(a)  where any income of the trust or institution has been applied other than for the objects for which it is established; or

(b) the trust of institution  has income from profits and gains of business which is not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or

(c) the trust or the institution has applied any part of its income from the property held under a trust for private religious purposes which does not ensure for the benefit of the public; or (this point is not included Explanation 2 to Fifteen Proviso to section 10(23C)).

(d)  the trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income  for the  benefit of any particular religious community or caste (this point is not included Explanation 2 to Fifteen Proviso to section 10(23C)).

(e)  any activity being carried out by the trust or the institution

(i)  is not genuine; or

(ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered/approved; or

(f) the trust or the institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1) of section 12AB, and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.

KEY TAKEAWAY FROM THE AMENDMENT 

As per Page No 99 of Memorandum amending the  provisions of Section 13(1)(d), the income of the trust claimed to be exempt u/s 11 and applied in violation to respective provisions.   has to be included in the total income of trust. This means that the entire income which is claimed as exempt u/s 11 may not be taxable unless the registration of trust is cancelled

(i) It is pertinent to note that definition of “specified violation”  empowering CIT to cancel registration includes , any activity carried out by the trust which is not genuine or not in accordance with its object for which approval is granted

It may happen that when Trust obtains its approval or same is renewed, CIT/PCIT in such approval/renewal may mention that Trust would not apply income of trust in violation of Section 13(1)(c) or make investment in violation of 13(1)(d). Even otherwise, concerned authorities may consider such violation as specified violation for cancellation of Registration of Trust. By insertion of above amendment in both the section, CIT would be empowered to cancel registration of Trust which has long lasting repercussion.

(D)         Time limit for passing aforesaid order –

[Section 12AB(5) /Explanation 1 to fifteenth proviso to clause (23C) of section-10]

Sub-section (5) of section 12AB / Explanation 1 to fifteenth proviso to clause (23C) of section-10 of the Act are proposed to be substituted/inserted to provide that the aforesaid order shall be passed before expiry of the period of six months, calculated from the end of the quarter in which the first notice is issued by the PCIT/CIT on or after the 1st  day of April, 2022, calling for any document or information, or for making any inquiry, under clause (i) of 12AB(4) or of Explanation 1 to fifteenth proviso to clause (23C) of section-10 of the Act is the case may be.

(E)         Procedure for sending reference to PCIT/CIT by AO as per second proviso to section-143(3) of the Act

It is proposed to insert another proviso in sub-section (3) of section 143 of the Act providing that where the AO is satisfied that any trust or institution under has committed any specified violation, as defined in the Explanation 2 to fifteenth proviso to clause (23C) of section 10 or Explanation to sub-section (4) of section 12AB, as the case may be, he shall,

(a) send  a  reference  to  the  PCIT/CIT to withdraw the approval or registration, as the case may be; and

(b) no order making an assessment of the total income or loss of such entity shall be made by AO without giving effect to the order passed by the PCIT/CIT under clause (ii) or (iii) of the fifteenth proviso to clause (23C) of section 10 or clause (ii) or (iii) of sub-section (4) of section 12AB

Consequentially, it is also proposed to amend the provisions of clause (iii) of Explanation to section 153 by deleting the reference to trusts or institution under the first regime and to insert a new clause (xiii) to provide that the period commencing from the date on which the Assessing Officer makes a reference to the PCIT/CIT  under the second proviso to sub-section (3) of section 143 or is deemed to have been made under Explanation 3 to the fifteenth proviso to clause (23C) of section 10, and ending with the date on which the copy of the order under clause (ii) or (iii) of fifteenth proviso to clause (23C) of section 10 or clause (ii) or (iii) of sub-section (4) of section 12AB, as the case may be, is received by the Assessing Officer shall be excluded in computing the period of limitation.

3.          Amendments Bringing consistency in the provisions of two exemption regimes i.e. u/s. 11 and u/s. 10(23C) and amendments providing clarity on taxation of certain income in certain circumstances.

Brief overview of amendments proposed w.e.f. A.Y. 2023-24

KEY TAKEAWAY FROM THE AMENDMENT

(i) As per amended provisions of Section 13(1(c) of the Act, when income or part of the Income of the Trust/Institution is used or applied directly or indirectly for the benefit of any person referred in Section 13(3), only such part of income  will not be eligible for exemption  u/s 11 & 12 of the Act. These provisions are proposed to be rationalized to deny exemption only to that portion of income which has been applied in violation of the provisions of IT Act.

Similar amendment has been proposed in Section 13(1)(d) of the Act when funds of Trust are invested or deposited in any one or more forms other than specified modes and in such cases, income to the extent of such deposits/investments shall be excluded while computing income as per provisions of Section 11 & 12 of the Act.

The interpretation of above amendments suggest that decision of Hon'ble  Karnataka High Court, in the case of CIT Vs Fr. Mullers Charitable Institutions [TS-5130-HC-2014(KARNATAKA)-O] (SLP dismissed by Hon'ble Supreme Court) is reversed. The Court in above case has held that “perusal of section 13(1)(d) of the Act, makes it clear that it is only the income from such investment or deposit, which has been made in violation of section 11(5) of the Act, that is liable to be taxed and violation of section 13(1)(d) does not result in denial of exemption under section 11 to the total income of the assessee trust.

(ii) There needs to be clarity on issue with respect to the year of taxation of such investments made in violation to Section 11(5) read with 13(1)(d) of the Act i.e year of making investments or year of discovery of such investment of  Trust by Income Tax Authorities. Logically such investment should be subject matter of addition in the year of the investments.

(iii)  It is again clarified that above computation of income in the hands of Trust would be in addition to separate levy of penalty u/s 271AAE of the Act as discussed above.

(iii)  Proposed amendments brought in Section 13(1)(c) or 13(1)(d) are affecting income computation u/s 11/12 of the Act and not u/s Section 10(23C) of the Act.  Above provisions relating to income liable to be taxed in the hands of Trust/institutions are surprisingly not made applicable to institution approved u/s 10(23C).

(iv) However, for violation u/s 13(3) of the Act( income of trust applied directly or indirectly for benefit of any person mentioned)  by such institutions approved u/s 10(23C), as per twenty first proviso to such section, such income/part of income/property shall be income of specified person in relevant previous year. However, on the plain of read of Finance Bill, similar provisions of taxation in the hands of specified persons are not proposed in the case of Trust claiming exemption u/s 11/12 of the Act.

CONCLUSION

It is seen that on year to year basis, significant amendments are brought for taxation of Trust/Institutions u/s 11 to 13 and 10(23C) of the Act in piecemeal manner. Cost of compliances has  drastically increased for such non-profit making organizations carrying out genuine charitable activities. More over, there are uncertainties looming around neck of the Trustees.  Accordingly provisions of taxation need to be redrafted completely from scratch so as to provide clarity on taxation of such Trusts.

Section 14A – An End to the Long-Standing Conundrum?

• If an amendment is made to plug a loophole, bona fide transactions that occurred before the amendment will not be impacted.

• An amendment which is “for the removal of doubts” cannot be presumed to be retrospective even if such language is used, if it alters or changes the law as it earlier stood.

• Ambiguity in the language of any provision to be resolved in favour of the assessee.

The current proposal for amendment in section 14A expressly mentioned that it is proposed for removal of doubts. The existing litigation surrounding the subject issue suggest that the current provision is not bad in law and provides unreasonable benefit to the assessee.

In light of the above, the time will only decide whether the proposal will end the controversy, or it will further get flaired up atleast for the period till March 31, 2022.

(With inputs from Ms. Pooja Dukhiya)

Cryptic Start to Cryptocurrency Tax!

This article has been co-authored by Harshal Sutaria (Chartered Accountant) & Shaili Bheda (Chartered Accountant).

Amid uncertainty, ambiguity, speculation and unparallel buzz around the regulatory and tax aspect of digital currency / tokens in India, the Indian Government has finally by way of Budget 2022 has shed some light on their intent and attempted to provide direction with respect to taxability of digital currencies / assets.

The Hon’ble Finance Minister in her speech stated there has been a phenomenal increase in transactions in virtual digital assets (VDA) and consequently, it is imperative to provide for a specific tax regime for transactions affecting VDA. In light of the same, it is proposed in the Budget 2022 to tax income from transfer of VDA at a flat rate of 30%, similar to the tax rate on winnings from lottery, game shows, puzzles, etc. 

The Hon’ble Finance Minister in Union Budget 2022 also announced the launch of India's own digital currency based on Blockchain technology. The Reserve Bank of India (RBI) shall introduce digital currency, its central bank digital currency (CBDC) in the fiscal year beginning April 2022. Like various other countries India will have its own virtual form of a fiat currency and unlike other private digital tokens or crypto tokens, the CBDC will be regarded as bank notes. A successful implementation of the digital currency would not only curb black money and reduce cash management which will result in substantial savings but would also counter the fad for private digital or crypto tokens which according to the Government’s past stance lacks any fundamentals.

In the ensuing paragraphs, we have attempted to discuss the proposed provisions which will advent taxing of income on transfer of VDA and also, the open points / key areas where appropriate and timely clarification is warranted to bring certainty in the tax proposals.

Tax provisions surrounding Virtual Digital Assets in India

The Hon’ble Finance Minister in the latest budget has proposed to levy a tax on virtual digital asset. In this regard, section Section 2(47A) is proposed to be inserted to the Income-tax Act, 1961 (‘Act’) which defines virtual digital assets (VDA) to cover not only digital tokens, i.e., crypto tokens but also Non-Fungible Tokens (NFTs) and any other digital asset as notified by the Government.

New scheme has been proposed with respect to taxation of VDA in form of Section 115BBH which shall be effective from fiscal year 2022-23. As per the proposed provisions, income from transfer of VDA is proposed to be taxed at a flat tax rate of 30 percent irrespective of purpose and period of holding. It is also interesting to note that no expenditure in the nature of deduction / allowance shall be considered in computing the income except for the cost of acquisition of such VDA.

Further, while computing the total income of the taxpayer for a given year, loss arising from transfer of VDA shall not be eligible to be set off against any other income. Also, in case of loss arising from transfer of VDA, the same shall not be allowed to be carried forward to subsequent years.

Further, Section 56(2)(x) of the Act has been proposed to be amended to include VDA in the definition of property. Thus, gifting of VDA (between unrelated parties) over the threshold of INR 50,000 is proposed to be taxed in the hands of the recipient.

In order to maintain and collect the details in respect such transactions, the finance minister has proposed to introduce withholding tax on consideration on transfer of VDA by residents taxpayers. In this regards, section 194S is proposed to be introduced from 1 July 2022 which provides that  tax at the rate of one percent would be required to be withheld by the person paying consideration for transfer of VDA. However, tax would not be required to be withheld by following persons –

It has also been clarified that the Individual or HUF (as covered above) responsible for paying consideration on transfer of VDA would not be liable to obtain TAN or undertake the recently introduced verification of non-filer of return of income.

The said bill also proposes that if tax has been deducted under section 194S,
then no tax is required to be collected or deducted under any other provision of Chapter XVII of the Act.

Further, in case the transfer of VDA is carried out in kind or partly in cash or partly in kind and the cash component is not sufficient to meet the withholding liability in respect of the transaction, the person responsible for making payment of consideration on transfer of VDA shall ensure that the appropriate tax has been paid in respect of such consideration before making payment of such consideration.

Currently the proposed tax regime surrounding VDA announced in Budget 2022 is met with divergent views across the industry players in India. While some believe that this is a welcome move by the Government which will help in providing clarity, others believe that steep tax rate of 30% coupled with no deductions and set off of losses is deterrent to the interest of the investors and miners.

While the long awaited ask for clarity on taxation of VDA seems to be addressed by the Budget, clear directives / regulations will be required to be issued to address various open areas to mitigate practical difficulties which would be faced by industry players, some of which are highlighted below.

Key issues emanating from proposed amendment –

Issues pursuant to insertion of section 2(47A) –

• Definition of foreign currency - In the proposed section 2(47A), VDA has been defined to mean any information or code or a number or token excluding foreign currency and Indian currency. Further, explanation to the proposed amendment stated that foreign currency would be stated to mean the foreign currency as defined under Foreign Exchange Management Act, 1999 (FEMA). As per FEMA, foreign currency means any currency other than Indian currency. There are several countries which have adopted cryptocurrencies or some of the cryptocurrencies as their legal currencies (for e.g., EL Salvador has adopted Bitcoin as their legal currency). On literal interpretation, this might imply that Bitcoin is a foreign currency and consequently, may be argued that such currency is outside the ambit of VDA in India. While going by the Hon’ble FMs speech this does not seem to be the intention of the Government, timely clarification in this regard would be welcome to match the intent of the Indian authorities and reduce litigation arising, if any.

Issues pursuant to amendment in section 56 of the Act –

• Fair market value of VDA - As per the proposed amendment in section 56 of the Act, VDA has been added to the definition of property and as a result, gift of VDA from one person to another person (in case both the above persons are not relative), would be taxable in the hands of the recipient. As per the provisions of section 56(2)(x) of the Act, fair market value (FMV) of the VDA would be considered as the income in the hands of recipient. However, the current rules do not prescribe methodology to calculate FMV of the VDA. One would have to wait for the final budget and amendment in the relevant rules to see the methodology for arriving at FMV of VDA. Having said so, given the nature of VDA being very volatile and prominence of foreign players, it may be difficult to assert methodology for arriving at the FMV of VDA.
• Cost of acquisition in the hands of the transferee – As per the current provisions, when a capital asset is transferred by a person to another person as a gift, cost of acquisition of the previous owner is available to the transferee of the gift. However, there is no similar clarity under proposed amendments on the cost of acquisition to be considered on the subsequent transfer of such asset i.e., whether cost to previous owner would be available while computing the cost of acquisition. For example, Mr A. transfers VDA as a gift to his son Mr. B (covered under the definition of relative) the same shall be exempt in the hands of Mr B. However, when Mr. B in turn transfers such VDA, no clarity is provided with respect to the cost of acquisition available in the hands of Mr. B.

Issues pursuant to insertion of section 115BBH –

• Set off of losses within section 115BBH - Proposed section 115BBH specifies that no loss arising on transfer of VDA shall be allowed to be set off against any other income. However, the section is silent in respect of inter head setoff of losses against the gain arising from multiple transactions on transfer of VDA. For example, Mr. X undertakes multiple transaction during the fiscal year, i.e., he sold Bitcoin and incurred a loss of INR 5,000 and Mr. X further during the said fiscal year also sold NFTs making a gain of INR 7,000. The current provisions do not explicitly provide clarity whether the loss of INR 5,000 on transfer of Bitcoin would be allowed to be set off against gain on transfer of NFT. While this might not the intention of the Government, appropriate clarification in this regard would be welcome to set certainty towards the voluminous transactions that an investor may undertake of VDA.

• Taxability in the hands of Miner – Miners play an important role in creation of VDA. Basically, miners are the individuals who undertake series of complex transaction related algorithms to generate the VDA. The miners then either offload the VDA on several exchanges or sell to third parties. The proposed provisions states that any income received by the taxpayer on transfer of VDA would be taxable. Further, no deduction in respect of any expenditure other than cost of acquisition of VDA would be allowed in the hands of the transferor of VDA. However, as VDA is self-generated asset to a miner, there is an ambiguity whether the expenses incurred by a miner in creation of VDA would be allowable while arriving at the income from transfer of such VDA. 

• Income in Barter transaction – As discussed above, the proposed provisions state that any gain on transfer of VDA after deducting cost of acquisition would be taxable in the hands of the transferor. However, in practice, there are various service providers who accept VDA in lieu of services performed. In such a scenario, the proposed provisions do not provide any clarity on the valuation of the income to be taxed in the hands of service provider.

• Method to be followed to determine cost of acquisition – As stated above, cost of acquisition of the VDA is the only expenses which a transferor of VDA can deduct from the income received from transfer of VDA while arriving at the taxable income on transfer of VDA. While in case of NFT, each token is uniquely identifiable the same does not hold true for crypto tokens wherein challenges would be faced in accurately calculating the cost of acquisition. In practice, the traders and investors, may have bought relevant VDA at different intervals at different cost. The proposed provisions do not prescribe any method to arrive at the cost of acquisition of the VDA. In the absence of guidelines, there is no clarity with respect to the method to be followed for calculating the cost i.e., FIFO, LIFO or weighted average.

• Applicability to Non-resident – The proposed provisions provide for charging of tax on total income of all taxpayers, including non-residents. As, VDA are virtual in nature, if one would argue to apply the provisions on source-based taxation rules, it would pose a serious challenge. For e.g., Mr. M (Non-resident Individual) transfer VDA to Mr. N (Indian Resident) from outside India and Mr. M has other income arising or accruing from India for which he pays taxes and files return of income in India. Would the proposed provisions be applicable to Mr. M? Also, whether Mr. M would be able to classify the said income from transfer of VDA as other income and be able to claim DTAA benefit? While such farfetched taxability may not be the intent of the Government, necessary clarification in this regard will assist in bringing certainty amongst the industry players.

Issues pursuant to insertion of section 194S -

• Applicability of Equalisation Levy 2.0 – As per the extant provisions of Equalisation Levy, non-resident e-commerce operator who is facilitating online sale of goods or services to a resident, shall be liable to collect and pay equalisation levy at the rate of 2% on the consideration received from the resident. As per the proposed provisions of section 194S, any person responsible for paying to a resident consideration for transfer of VDA shall be liable withhold tax at the rate of 1%, subject to certain exemptions. In practice, there are various digital exchanges which are non-resident which assist Indian residents in trading in VDA. While the proposed provisions provide clarity that once, a person is liable to withhold tax under the proposed provisions of section 194S, they would not be liable to withhold or collect any tax under the said chapter. However, equalisation levy being different provisions, there is an ambiguity whether, the non-resident digital exchanges would be liable to withhold tax under section 194S as well as collect equalisation levy on the said consideration.

• Applicability of section 206AA and 206AB of the Act – As per the proposed provisions, Individual or HUF (who would fulfil certain conditions) are not liable to undertake higher withholding of tax in case the payee is a non-filer of return of income as per the provisions of section 206AB of the Act. However, no such clarification has been provided with respect to section 206AA of the Act i.e., non–availability of PAN. Thus, as per current provisions in absence of PAN, higher withholding tax at the rate of 20% would be applicable, which may lead to various issues such as excessive compliance requirement in the hands of the transferee of VDA, working capital issues, etc.  Further, the aforementioned relaxation is only provided to certain Individuals or HUFs, which means that any other person paying consideration would be liable to undertake the compliances from 206AB perspective, which lead to practical difficulties due to voluminous transactions and substantial compliance requirements.

• Withholding in swap transactions – As per the proposed provisions, person responsible for paying consideration for transfer of VDA shall be liable to withhold tax even in a scenario where consideration for transfer of VDA is paid in kind. Consequently, the digital exchanges would be liable to withhold tax even in case of swap of VDA (purchase of Ethereum against sale of Bitcoin). This may lead to unwarranted practical difficulties in the hands of digital exchanges and investors. 

Other broader implications -

• Advance tax – As per the extant provision, taxpayer is liable to discharge their tax liability in the form of advance tax on the income earned by them in a fiscal in prescribed quarterly instalments. However, for certain incomes such as dividends, income from capital gains, which are earned in subsequent quarter, taxpayer is not liable to interest on default in payment of advance tax instalments. However, the current Budget 2022 amendments do not provide for any relaxation towards, income from transfer of VDA. Consequently, taxpayer would be liable to pay interest on default in payment of advance tax instalments even if, the income from transfer of VDA was earned in subsequent quarters and no income was earned in a particular quarter.

Concluding remarks by the authors -

• While the current Budget 2022 provides much needed clarity on the tax implication on VDA, the same does not have any footing that the Government has acknowledged VDA as legal. The same is also evident in the taxability proposed on transfer of VDA which is akin to taxability of income earned from lottery, horse race, etc. Also, there are several judicial precedents, wherein, tax has been levied on income earned from illegal activities.

• On the tax front, while the Government has not only laid out taxability of income on transfer of VDA but also outlined withholding tax provision, which will assist in keeping track of transactions. Having said so, due to lack of regulatory framework and global nature of the transactions coupled with absence of a centralised regulatory authority will pose serious challenges in traceability of these transactions.

• Also, it remains to be seen whether the Union Budget 2022 has in reality put an end to the uncertainty and ambiguity around taxability of virtual assets or has it just opened a pandora’s box from a litigation and compliance perspective. At least going by the above, it seems that Government would have to undertake substantial tweaks while finalising the Finance Act or provide relevant clarity to mitigate uncertainties.

No Trust on Trusts

INTRODUCTION

The applicability of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (hereinafter referred to as “the TOLA”) was deferred from time to time due to situation created by COVID-19 pandemic and it finally came into effect from 1-4-2021.  By this Act, sweeping changes were made in the process of registration and/or renewal of various charitable institutions (e.g., charitable or religious trusts, medical and educational institutions), which,  inter alia, provided that a Charitable Institution could not enjoy dual exemption under both the sections  10(23C) and 12A of the Income Tax Act, 1961 (“the Act”) and it was required to opt for any one of them.  This necessitated comparison of the pros and cons of the said two provisions.  The charity institutions could have been spared this exercise if the changes now proposed by the Finance Bill, 2022 (hereinafter referred to as “the Bill”) were made then. 

TWO SETS OF AMENDMENTS

The Bill proposes amendments to remove the differences between the trusts or institutions exempt u/s. 10 and 11, without merging the two.  Moreover, amendments now proposed for trusts covered by section 11 are made applicable to trusts covered by section 10 also.  In this way, we find two sets of similar proposed amendments. For this purpose, the Bill describes the trusts and institutions into two regimes as follows: 

1. Regime for any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 (hereinafter referred to as trust or institution under first regime); and
2. Regime for the trusts registered under section 12AA/12AB (hereinafter referred to as trust or institution under the second regime).

OBJECT OF THE AMENDMENTS

The Bill proposes to rationalise the provisions of both the exemption     regimes by-

1. ensuring their effective monitoring and implementation.
2. bringing consistency in the provisions of the two exemption regimes; and
3. providing clarity on taxation in certain circumstances.

OVERVIEW OF THE PROPOSED AMENDMENTS

1. Maintenance of Books of accounts

Although the trusts or institutions under both the regimes are required to get their accounts audited if their total income exceeds the prescribed limit, there is no specific provision under the Act providing for the books of accounts to be maintained by them, except in relation to incidental business  carried out a trust. The Bill provides that  such trust or institution (under both the regimes) shall keep and maintain books of account and other documents in such form and manner and at such place, as may be prescribed.  It is implicit that for getting their accounts audited, the trusts or institutions maintain such books of accounts as enables an Auditor to report thereon.  But now, the trusts or institutions would be required to maintain such books of accounts and other records as may be prescribed.  It is likely that such prescribed accounts would enable gathering of information relevant for the purposes of the Act, (e.g. details of voluntary contributions received, investment of corpus funds/ accumulated funds, and so on).  

No monetary penalty is muted for failure to maintain the prescribed books of accounts as is provided in section 271A of the Act in other cases. But this is no cause for rejoice, as penal consequences are harsher.  The maintenance of the prescribed books of accounts is a necessary condition for availing exemption by trusts under both the regimes and the failure to do so will be tantamount to specified violation, resulting into cancellation of the registration and therefore, the provisions relating to accredited income contained in section 115TD would become applicable.

2. Audit

Under the existing law, the trusts under both the regimes are required to get their accounts audited if their gross receipts exceed the specified sum and are required to furnish the audit report within the due date.  But, now this requirement is proposed to be converted into a condition for availing exemption which will be subjected to penal consequences as stated in the preceding paragraph relating to maintenance of accounts.

3. Amendments relating to benefits to specified persons

Existing law: In case of trusts under second regime, section 13(1)(c) provides that no exemption under section 11 or 12 will be available if any part of the income or property of the trust or the institution is during the previous year used or applied, directly or indirectly for the benefit of any trustee or specified person. However, sub-section (6) of section 13 provides an exception in respect of educational or medical facilities to them.   There was no such provision in case of trusts under the first regime.

Proposed: The Bill proposes to insert twenty-first proviso to clause (23C) of section 10 to provide that if the trusts of first regime apply directly or indirectly the income or part of income or its property for the benefit of specified persons, such income or part of income or property shall be deemed to be the income of such person of the previous year in which it is so applied.  [The amendment does not provide for denial of exemption].  

Under the existing law, the registration of trusts under the first regime was liable to cancellation upon provision of benefits to specified persons.  But there was no clarity as to what could be the amount of income subject to penal taxation for such violation. 

The bill provides that the benefits provided to related persons under both the regimes will be  treated as “specified income” and will be subjected to following consequences:

• Such income will be taxed at the rate of 30% without any deduction under the newly inserted section 115BBI.  
• Such specified income will be liable to penalty u/s. 271AAE. [Section 271AAE is discussed later in detail].
• The application of income for purposes other than objects is considered as an instance of “specified violation”, for which registration can be cancelled the provisions of section 115TD become applicable.

4. Penalty U/s. 271AAE

In order to discourage such misuse of the funds of the trust or institution by specified persons, it is proposed to insert a new section 271AAE in the Act to provide for penalty on trusts or institution under both the regimes which is equal to amount of income applied by such trust or institution for the benefit of specified person where the violation is noticed for the first time during any previous year and twice the amount of such income where the violation is notice again in any subsequent year. The proposed section seeks to operate without prejudice to any other provision of chapter XXI. Thus, if any penalty is leviable under any of the other provisions of this chapter, in addition to the proposed penalty, that penalty would also be applicable.

5. Reference to PCIT/CIT for cancellation of registration/approval

The TOLA provided for grant of provisional registration/approval in an automated manner.  It is now felt that non-genuine trusts or institutions do not get exemption provided by these provisions. Moreover, in the existing law, the provisions relating to reference for cancellation of trusts were different under both the regimes and there was no time limit to decide on references for the withdrawal by the PCIT/CIT.

In order to address the above issues, the Bill lays down the following circumstances when the registration/approval of a trust or institution can be cancelled:

• Occurrence of one or more “specified violations” during any previous year. [The “specified violations” are described hereinafter].
• Reference from the Assessing Officer under the second proviso to section 143(3); and
• Selection of the case under the risk management strategy of CBDT.

6. Specified violations

In case of the second regime, the term “specified violation” is proposed to be defined by inserting an Explanation to sub-section (4) of section 12AB of the Act to mean the following violation :-

1. Income is applied for purposes other than its objects. [Granting of unreasonable benefits to related persons may be deemed as application of income for other purposes].
2. Income from profits and gains of business which is not incidental to the attainment of its objectives.  
3. Separate books of account are not maintained by it in respect of such non-incidental business.
4. the trust or the institution under the second regime has applied any part of its income from the property held under a trust for private religious purposes which does not enure for the benefit of the public; or
5. Application of any part of its income for the benefit of any particular religious community or caste;
6. Activities caried are not genuine.
7. Activities are not being carried out in accordance with all or any of the conditions subject to which it was registered.
8. Non-compliance with  the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1) of section 12AB, and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.

In case of the first regime, the term “specified violation” is proposed to be defined in the same manner except that the violations stated at serial numbers 4 and 5 hereinabove are not applicable to them.

7. Time limit for passing order for cancellation 

For both the regimes, the Bill provides that order for cancellation of registration/approval by PCIT/CIT shall be passed before expiry of the period of six months, calculated from the end of the quarter in which the first notice is issued by the Principal Commissioner or Commissioner, on or after the 1st day of April, 2022, calling for any document or information, or for making any inquiry.

It is also clarified that where reference for cancellation of registration or approval is made on or before the 31st March, 2022 by the Assessing Officer such references shall be dealt with in the manner provided under the existing law.

8. Procedure to be followed for cancellation

The Bill proposes that in case of both the regimes, the Principal Commissioner or Commissioner shall—

• call for such documents or information from the fund or trust or institution or any university or other educational institution or any hospital or other medical institution or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence of any specified violation.
• pass an order in writing cancelling the approval of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution, on or before the specified date, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years if he is satisfied that one or more specified violation has taken place.
• pass an order in writing refusing to cancel the approval of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution, on or before the specified date, if he is not satisfied about the occurrence of one or more specified violations.
• forward a copy of the order under clause (ii) or (iii), as the case may be, to the Assessing Officer and such fund or trust or institution or any university or other educational institution or any hospital or other medical institution.

8. Consequential amendments relating to cancellation of registration

The Bill proposes that if the Assessing Officer is satisfied that the trusts under any of the regimes has committed any specified violation, he shall send a reference to the PCIT/CIT to withdraw the approval or to cancel the registration, as the case may be and he shall not make an assessment of the total income or loss of such fund or institution without giving effect to the order passed by the PCIT/CIT on such reference.

Another consequential amendment is proposed in section 153 to provide that the period commencing from the date on which the Assessing Officer makes a reference to the PCIT/CIT and ending with the date on which the copy of the order is received by the Assessing Officer shall be excluded in computing the period of limitation.

These amendments are applicable to both the regimes.

9. Circumstances when registration of trust can be cancelled

As per the proposed amendments, trusts under both the regimes may be denied exemption and their registration/approval is liable to cancellation if they violate any of the following conditions:

• Committing one or more of the “specified violations”
• Reference from the Assessing Officer under the proviso to section 143(3).
• If the case has been selected in accordance with the Risk Management Strategy of CBDT.

10.  Bringing consistency in the provisions of the two regimes

The following provisions will take effect from the 1^st April 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent years:

a) Furnishing of Return of Income

At present, the trusts in the first and second regimes are required to furnish their return of income under sections 139(4C) and 139(4A) respectively.  But whereas in case of the trusts under the second regime, the furnishing of a return of income is a necessary condition for availing exemption under section 12A, there is no such condition in the case of the first regime. 

The Bill now proposes to insert twentieth proviso to clause (23C) of section 10 of the Act to provide that any trust or institution under the first regime will be required to furnish the return of income for the previous year as a condition for availing exemption.

b) Prohibition regarding benefits to specified persons extended to first regime

Under section 13 of the Act, trusts or institutions under the second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person. It is proposed to insert twenty first proviso in clause (23C) of section 10 of the Act to provide that where the income or part of income or property of any trust or institution under the first regime, has been applied directly or indirectly for the benefit of any person referred to in sub-section (3) of section 13, such income or part of income or property shall be deemed to be the income of such person of the previous year in which it is so applied. The provisions of sub-section (2), (4) and (6) of section 13 of the Act shall also apply to trust or institution under the first regime.

c) Accumulation Provisions

Presently the following differences persist in the two regimes:

1. If there is shortfall in application of income, the Trusts under the second regime are allowed to accumulate the same subject to fulfilment of certain conditions, e.g. (i) furnishing of Form no. 10 within the due date; (ii) specifying the purpose and period of the proposed accumulation’ (iii) investing or depositing the money accumulated in the forms and modes specified in sub-section (5) of section 11. There is no similar provision in case of the first regime. 
2. If there is shortfall in application of income, the Trusts under the second regime have the option of applying the same in the immediate next year subject to fulfilment of certain conditions, e.g. furnishing of Form no. 9A within the due date and specifying the reason for shortfall in application of income. There is no similar provision in case of the first regime. 
3. In case of second regime, it is provided that if the income accumulated as per para a) above is not applied within 5 years, it shall be taxed in 6^th year. There is no such specific provision in the case of first regime and so, it is taxed in the 5^th year itself.

Out of above three differences, the Bill proposes to remove two differences covered by para a) and c) above by proposing as follows:

• The trusts under the first regime will also be allowed to accumulate the unspent amount upon the similar conditions as are appliable in case of the trusts under the second regime. 
• The year of taxability of unspent accumulated amount in case of the second regime is advanced from 6^th year to 5^th year. 

However, the Bill does not remove the difference stated in para b) hereinabove.

In case of the trusts of second regime, in computing the period of five years referred to in sub-clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, is excluded.  Similar provision is proposed in case of trusts of first regime. 

d) Tax on accredited income i.e. Exit Tax applied to trusts under first regime also

Chapter XII-EB, consisting of sections 115TD, 115TE and 115TF was introduced by the Finance Act, 2016. It provides for the taxation of accreted income of the trust falling in second regime, in certain cases. If a trust dissolves or merges with another charitable institution, no exit tax is payable by it.  But if it converts into a non-charitable organization or gets merged with a non-charitable organisation or a charitable organisation with dissimilar objects or does not transfer the assets to another charitable organisation, it is subjected to exit tax. There is no similar provision in case of the first regime. 

Hence, it is proposed to amend the provisions of section 115TD, 115TE and 115TF of the Act to make them applicable to any trust or institution under the first regime as well.

e) Assessing Officer’s power to allow application of income for other purposes

Where due to circumstances beyond the control of the person in receipt of the income, any income invested or deposited cannot be applied for the purpose for which it was accumulated or set apart, the Assessing Officer may, on an application made to him in this behalf, allow such person to apply such income for such other purpose in India as is specified in the application by that person and as is in conformity with the objects of the trust except for inter-trust payments. Presently, this power is available to the Assessing Officer in case of trusts under the second regime only. The Bill proposes to grant similar powers to the Assessing Officer in case of trusts under the first regime, as well.

11.  Computation of taxable income

Presently, the trusts under both the regimes are governed by the provisions of sections 10, 11 to 13 of the Act and so long they enjoy exemption and their income is computed under these provisions.  The five heads of income (i.e. sections 14 to 59) are not applicable to it. But there is no clarity as to how their income would be taxed in the event of denial of exemption or cancellation of registration.    Upon denial of exemption pursuant to cancellation of registration, the trust’s income is taxed under the five heads of income and if a trust is not carrying any commercial activity or does not own a business undertaking, its income is taxed under residual head of “Income from other sources”  under sections 56 and 57 of the Act. While allowing deductions under clause (iii) of section 57, controversy arises as the application of income by a trust is not considered as an expenditure incurred wholly and exclusively for the purpose of making or earning such income.

Further, there is no uniformity between the provisions for cancellation of registration and taxation of the two regimes.

According to the proposed amendments, a trust’s income, under both the regimes, may have to be computed under either or more of the following circumstances:

• Taxation of specified income at special rate
• When it is denied exemption pursuant to cancellation of registration.
• When it has made specified violations
• Exit tax i.e. tax on accredited income
• Otherwise i.e. when it is neither denied exemption nor it has made specified violations.

The law relating to computation under the above circumstances is stated hereinafter. But before proceeding to do so, it is pointed out that “application of Income” would be recognized on cash basis only.  See discussion under para 11 hereinafter also.

a) Taxation of “specified income” at “special rate”

Presently, a trust, under both the regimes, may be denied exemption if it grants a small amount of unreasonable benefit to related persons, or it fails to keep a small amount of the trust funds in specified modes. But, as stated earlier, there is no clarity how the income will be taxed. The Bill proposes that in addition to denial of exemption, such income would be treated as “specified income” and will be subjected to a special rate of tax.

The following amounts will be treated as “specified income” in case of both the regimes:

• Only that part of income which is applied for benefit to specified person.
• Only that part of income which has not been invested in specified modes.
• If 85% of income is not applied and no application is made for its accumulation, the amount of shortfall in application.
• That part of the accumulated income: 

1. which is applied for purposes other than charitable or religious purposes.
2. which ceases to remain invested or deposited in any of the specified forms or modes.
3. is not utilised for the purpose for which it was accumulated.
4. Is credited or paid any other trust or institution

In case of a trust under the second regime, in addition to that part of the income which is applied for the benefit of a particular religious community or caste is also treated as “specified income”.  This is not applicable to trusts under the first regime.

A Trust under the first regime is granted the option to apply its income in the next year by following the prescribed conditions.  If it fails to do so, the shortfall  will be treated as “specified income”.  No such option is available to a trust under the first regime.

Special Rate of tax

All the above specified income are also required to be taxed at special rate. Hence, it is proposed to insert new section 115BBI in the Act providing that where the total income of any assessee being a trust under the first or second regime, includes any income by way of any specified income, the income-tax payable shall be the aggregate of

1. the amount of income-tax calculated at the rate of thirty per cent on the aggregate of specified income; and
2. the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of specified income referred to in clause (i).

Further, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act in computing the specified income.

Under the existing law, if any part of the income or any property of the trust is used or applied during the previous year, directly or indirectly, for the benefit of specified categories of persons or the trust funds are invested in contravention of the specified modes, the trust was chargeable at the maximum marginal rate i.e. 42.44% for the assessment years 2021-22 and 2022-23.  The Bill proposes to reduce the rates to 30% and also makes it applicable to only that part of the income which is so used for the benefit of the specified persons and is not invested in the prescribed manner.

b) Computation of income when a trust is denied exemption pursuant to cancellation of registration

The Bill further provides that in the event of cancellation of registration the income of the trusts chargeable to tax, under both the regimes, shall be computed after  allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of the trust or institution, subject to fulfilment of the following conditions :-

1. 1. 1. such expenditure is not from the corpus standing to the credit of such trust or institution as on the last day of the financial year immediately preceding the previous year relevant to the assessment year for which the income is being computed;
2. 1. 2. such expenditure is not from any loan or borrowing;
      3. claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income in the same or any other previous year; and
      4. such expenditure is not in the form of any contribution or donation to any person.
      5. Disallowance will be made for cash payment and non deduction of TDS as provided in sections 40(a)(ia), 40A(3) and 40A(3A).
3. 1. 6. No set off of loss of earlier year(s).

It is important to note that no deduction is allowed for capital expenditure.

Specified income and anonymous donations are taxed at rates specifically provided for them.  Presently, non-exempt income is taxed as an A.O.P. under section 164(2) of the Act, i.e. on slab rates of tax.  After the proposed amendments, it is controversial whether the provisions of section 164(2) will continue to apply or the non-exempt income will be taxed at special rate of 30%.  See sub-para (e) hereinafter also.

c) Computation when there is a “specified violation”

In case of specified violation by a trust under any of the regimes, apart from imposition of tax at special rates, the Assessing Officer may direct that such person shall pay by way of penalty––

1. a sum equal to the aggregate amount of income of such person applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 12, where the violation is noticed for the first time during any previous year; and
2. a sum equal to two hundred per cent, of the aggregate amount of income of such person applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 12, where the violation is noticed again in any subsequent year.

d) Tax on accredited income i.e. Exit tax

in addition to the income-tax chargeable in respect of the total income of such specified person, the accreted income of the specified person as on the specified date shall be charged to tax and such specified person shall be liable to pay additional income-tax (herein referred to as tax on accreted income) at the maximum marginal rate @ 42.744% on the accreted income.

The “accredited income” means the amount by which the aggregate fair market value of the total assets of the trust or institution, as on the specified date, exceeds the total liability of such trust or institution computed in accordance with the method of valuation as may be prescribed.

It should be noted that clause (i) of sub-section (3) of section 115TD (after proposed amendment) provides that if the registration of a trust under any of the regimes is cancelled, it shall be deemed, for the purposes of sub-section (1), to have converted into any form not eligible for registration.  Clause (a) of sub-section (1) of section 115TD provides that if a trust has converted into any form which is not eligible for grant of registration, then the trust, in addition to the income-tax chargeable in respect of its total income, its accredited income will be liable to additional income tax  at maximum marginal rate of tax as provided in the sub-section. This provision had far-reaching and adverse consequences.

e) Computation of income in other cases

Presently, when a trust fails to apply or accumulate 85% of its gross receipts, the shortfall is subjected to tax at normal rates on slab rate basis u/s. 164(2) of the Act. The Bill proposes to provide for mechanism for computation of income within the corners of four sections, viz. 10 and 11 to 13.  Any shortfall in computation of income is treated as violation of the conditions of registration and is likely to attract the special rates of tax.  However, no consequential amendment is made in the provisions of section 164(2) and so, a controversy is likely to arise.

12.  Option to notified temples, mosques, gurudwaras, churches, etc. to treat voluntary contributions as corpus of the trust

As per the provisions of section 11(1)(d) of the Act, a voluntary contribution can be treated as a corpus donation if there is a specific direction to this effect from the donor. Although the notified places of worship mentioned above receive voluntary contributions from donors whose intention is to donate the sums towards corpus, the specific direction from them is not available, in many cases and so, the said notified places of worship are unable to satisfy the condition for treating a voluntary contribution as corpus.

With a view to tackling the problem stated hereinabove, the Finance Bill 2022 proposes to grant an option to the trusts or institutions referred to in section 10(23C)(v) and 11 to treat the voluntary contributions as corpus donations subject to the prescribed conditions.  The Bill further provides for consequences if the conditions are violated.

For further details on this topic, refer to the Author’s another article published under the heading “Option to treat voluntary contributions as corpus donations sans specific direction from the donors”.

13. Clarification that application will be allowed only when it is actually paid

Trust or institution under both the regimes are required to apply 85% of their income for the purposes specified. As is evident from the word “ application”, it means actually paid. This is the position which has been held by different courts also. Accordingly it is being clarified by inserting Explanations “[Explanation 3 to clause (23C) of section 10 and Explanation to section 11] to provide that any sum payable by any trust under      the first or second regime shall be considered as application of income in the previous year in which such sum is actually paid by it irrespective of the previous year in which  the liability to pay such sum was incurred by such trust according to the method of accounting regularly employed by it. It is further proposed to insert proviso to the proposed Explanations [Explanation 3 to clause (23C) of section 10 and Explanation to section 11] to provide that where during any previous year, any sum has been claimed to have been applied by such trust, such sum shall not be allowed as application in any subsequent previous year.

14. APPLICABLE DATES OF THE PROPOSED AMENDMENTS

All the proposed amendments will take effect from 1^st April, 2023 and will accordingly apply to the assessment year 2023-24 and subsequent assessment years, except the following:

• The provisions relating to reference to the PCIT/CIT for the cancellation of registration which will take effect from 1^st April, 2022.
• The provisions granting option to treat the voluntary contributions as corpus by notified places of worship which will take effect retrospectively from 1^st April 2021 and will accordingly apply in relation to the assessment year 2021-22 and subsequent years.

15. INCONSISTENT PROVISIONS BETWEEN TWO REGIMES – NOT TACKLED BY AMENDMENTS

Although the Bill proposes to do away with the differences in the provisions relating to the trusts under the two regimes, some differences remain between the two. For example, in case of a trust under the second regime, capital gain on transfer of a capital asset is not included in its income if the net consideration is applied in the manner stated in sub-section (1A) of Section 11.   Moreover, when a registration is granted to a trust under the second regime, then the provisions of sections 11 and 12 apply in respect of any income derived from property held under trust of any assessment year for which assessment proceedings are pending.  Such provisions are not applicable to a trust under the first regime.

16. SUMMARY

The Bill describes the various trusts and institution entitled to exemption under sections 10 and 11 to 13 into two regimes and attempts to provide similarity between the terms and conditions applicable to the two regimes.  Certain conditions were applicable to trusts under the second regime only.  They have been proposed to be made applicable to the trusts under the first regime also.  Few new amendments proposed for trusts of the second regime have been made applicable to the trusts under first regime also.  Although there is greater similarity between the two, the separate identity of the two regimes is retained and so, there are two sets of amendments in the Bill.

The Bill seeks to provide clarity in the matter of computation of income of trusts under both the regimes and chargeability of tax upon them. 

The concepts of “specified income”, “special rate of tax”, “specified violations” and the circumstances under which a registration can be cancelled are well-defined. 

Option is granted to certain notified places of worship to treat the voluntary contributions received by it as corpus donations subject to certain conditions. 

17. CONCLUSION - TRAILER OF A HORROR STORY

At the time of granting re-registration to the existing trusts and allotting URN (unique registration number) under the new procedure effective from 1-4-2021, the PCIT/CIT imposed as many as 18 conditions in Form 10AC as conditions subject to which registration was granted. Many of such conditions are not there in sections 10 and 11 to 13, by virtue of which exemption is granted to a trust.  Obviously, while imposing various conditions through Form 10AC, the PCIT/CIT exceeded his authority.  The Bill now provides for some of the conditions which have been laid down in Form 10AC.  Such ratification operates prospectively.  There are still a few conditions which have not yet been imposed by the Bill also.

For example, the 12^th condition of Form 10AC mandates that no asset shall be transferred without the knowledge of jurisdictional Commissioner of Income Tax to anyone, including to any Trust/Society/Non Profit Company etc.  There is no prescribed form for intimation to jurisdictional Commissioner of Income Tax.  The consequences of failure are devastating and are illustrated by the following chart.

THE END – WHIMSICAL, CONFISCATORY AND UNCONSTITUTIONAL SHOW

TDS on Benefits or Perquisites of Business - Expanse & Complexity

Introduction:

1. Section 2(24) defines the term “Income” in inclusive manner by including therein 28 different types of receipts being treated as “Income”. One of the transactions i.e. clause (vd), provides for value of any benefit or perquisites which is taxable under section 28(iv).

1.1.   Section 28 provides for eighteen different types of income which are required to be treated as “Profits and Gains from Business or Profession”. Of these, one of the clauses i.e. (iv) provides for the value of any benefit or perquisites taxable as “Profits and Gains from Business or Profession”.