Significant Amendments by Finance Act (2)2009

1. Significant Amendments by Finance Act (2)2009 CA. Divakar Vijayasarathy

2. Presentation Schema • 40(b)(v) Partners Remuneration • 40A (3A) • Explanation 6 to 43(6) • Sec 44AD • Sec 50C/56(2)(vii)/49 • New Pension Scheme • Sec 56(2)(viii)145A • Sec 194 C • 115JA/JAA/JB

3. Presentation Schema • Misc: • 80E • 80G(5) • 80U • 194I • 44AE • Wealth Tax Act • Case Laws: • Capital Gains – 49(1) • TDS 194 j(hospitals)

4. Rates of Taxation

5. Rates of Taxation

6. Sec 49(4) & Sec 56(2)(vii) • Sec 56(2)(vii) inserted wef 01-10-2009: • Aggregate sum of money exceeding Rs 50,000 or • Any receipt of a movable or immovable property where the benefit exceeds Rs 50,000 • Benefit could be without consideration or inadequate consideration • Cost of acquisition of the asset received shall be FMV for the purpose of 56(2)(vii) s

7. Case Study 1: Sec 49(4) & 56(2)(vii) • An assessee is purchasing a property for Rs 50 lacs. The guideline value of the property is Rs 60 lacs. What would be tax implications in the hands of the buyer and the seller?

8. Case Study 1: Sec 49(4) & 56(2)(vii) • In the hands of Seller: • Guideline value of the property shall be regarded as sale consideration for the purposes of capital gains • In the case of Buyer: • Rs 10 lacs (Rs 60lacs – Rs 50 lacs) shall be regarded as Income from Other Sources – Sec 56(2)(vii) • Cost of Acquisition of the property shall be Rs 60 lacs

9. Case Study 2: Sec 56(2)(vii) • An assessee received the following assets from his friends during the previous year. Discuss the tax implications:

10. Case Study 2: Sec 56(2)(vii)

11. New Pension Scheme – Sec 80CCD • Available for all individuals including self employed • Maximum investment restricted to • 10% of salary earned or • 10% of gross total income • Contributions eligible for deduction (max Rs 1 lac) • EET concept of taxation • If maturity amount is reinvested for annuity purchase within the same previous year – no income shall accrue to the assessee. • However the annuity received subsequently shall be liable to taxation in the year of receipt.

12. Tax Concession for NPS Trust • Income of the trust shall be exempt u/s 10(44) • Any dividends paid to the trust shall not be subject to dividend distribution tax u/s 115O • No securities transaction tax shall be levied on transactions made by the NPS – Sec 113A of Finance Act (2) 2004 • The trust shall receive all its income without deduction of TDS- Sec 197A

13. Explanation 6 to 43(6): WDV • An assessee is engaged in the business of growing and manufacturing Tea. • According to Rule 8- 40% of income from growing and manufacturing tea shall be regarded as business income. • The remaining 60% of income shall be regarded as agricultural income.

14. Explanation 6 to 43(6) : WDV • The Honorable Supreme Court has held in CIT vs Doom Doma India Ltd (2009) 310 ITR 392: • According to Explanation 6 to Sec 43(6)- depreciation actually allowed shall be reduced from the opening balance to arrive at WDV. • Where an assessee is engaged in composite business (agri and non agri)- depreciation to the extent of non agri business shall be deemed to be allowed.

15. Amendment : Explanation 7 to 43(6) • Where an assessee has both agri and non agri business • For computing the written down value of assets the total amount of depreciation shall be computed • As if the entire income is derived from the business (non agri) • The depreciation so computed shall be deemed to be the depreciation actually allowed under this Act.’.

16. Illustration : Pre and Post Amendment

17. Illustration : Pre and Post Amendment

18. Presumptive Taxation – Sec 44AD

19. Presumptive Taxation – Sec 44AE

20. Partner’s Remuneration – Sec 40(b)(v) Pre Amendment Situation :

21. Partner’s Remuneration – Sec 40(b)(v) Post Amendment: No distinction between professional and non professional firms

22. Sec 115 JB –Dimunition in the Value of Assets • Net Profit as per Books : Rs 100 lacs • Adjustments: • Provision for bad and doubtful debts : Rs 10 lacs • Provision for reduction in investments : Rs 5 lacs • Provision for contingent liabilities : Rs 8 lacs • Provision for Income Tax : Rs 12 lacs • Compute book profit for the purpose of Sec 115JB

23. Sec 115JB – Provisions

24. Sec 115 JB –Dimunition in the Value of Assets Provision for bad and doubtful debts and reduction in value of investments are “Provisions for Diminution in Value of Assets” hence not covered by Sec 115JB – The Honorable Supreme Court of India held in the case of CIT vs HCL Comnet Systems and Services Ltd (2008) 305 ITR 409 and Kolkatta Tribunal in Jt CIT vsUsha Martine Industries Ltd (2007) 104 ITD 249

25. Amendment – Finance Act (2)(2009) Amendment is with Retrospective Effect – hence could affect pending assessments

26. Summary MAT Rates

27. Power of Attorney Transactions • Sec 50C provides for Stamp Value taxation (as sale consideration) where the sale consideration is lower than Stamp Value • Tax planning instances of transfer using: • Power of Attorney • Sale Agreement

28. Sec 50C : Amendment • The words “assessable” has been inserted in Sec 50C • “Assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty

29. Sec 53A of Transfer of Property Act 1882 Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract,

30. Sec 53A of Transfer of Property Act 1882 then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:

31. Implications of the Amendment • Power of attorney transactions would be regarded as transfer – Sec 2(47) read with Sec 53A of Transfer of Property Act 1882 • Sale consideration or guideline value (whichever is higher) would be regarded as consideration – Sec 50C • Affect Segment: • Real Estate Brokers • Short term investors • Builders and Real Estate Promoters

32. TDS on Contract Payments – Sec 194C

33. TDS on Rental Payment – Sec 194 I

34. Mandatory PAN – Sec 206AA • Any person entitled to receive any sum or income or amount, on which TDS is applicable shall furnish his PAN to the deductor. • Else TDS shall be deducted at the higher of the following rates: • at the rate specified in the relevant provision of this Act; or • at the rate or rates in force; or • at the rate of twenty per cent. The Section is effective from 01-04-2010

35. Interest on Enhanced Compensation • According to Sec 45(5) read with Sec 2(47): • Compulsory acquisition is regarded as transfer • Initial compensation is taxable in the year in which whole or part of the compensation is received • Enhanced compensation is taxable in the year of receipt

36. Interest on Enhanced Compensation • Interest on enhanced compensation is payable from the date of acquisition till the date of receipt • Such interest is received along with enhanced compensation or subsequently at a later stage • In which year is this interest taxable • Relevance of Sec 145 need to be examined

37. Court Ruling on Interest received • Interest on enhanced compensation for land acquired under Land Acquisition Act, accrues from year to year and cannot be assessed in one lump sum in year in which it is awarded by the Court. • Supreme Court in Rama Bai vs. CIT [1990] 181 ITR 400 • K.S. Krishna Rao vs. CIT [1990] 181 ITR 408). • CIT vs. T.N.K. GovindarajuluChetty [1987] 165 ITR 231

38. Amendment – Finance Act • Interest on enhanced compensation shall be taxable as Income from Other Sources – Sec 56(2)(viii) • Such interest shall be taxable only in the year of receipt – Sec 145 A • A flat deduction of 50% of such interest received shall be allowed as a deduction irrespective of the amount spent – Sec 57(iv)

39. Miscellaneous Amendments

40. Recent Relevant Case Laws and Circulars

41. Indexation on 49(1) transactions

42. Circular 7/2009

43. Circular 8/2009

44. COMMISSIONER OF INCOME TAX, MADURAI • Vs • M/s SRI MANGAYARKARASI MILLS (P) LTD 2009-TIOL-86-SC-IT

45. 40A(3) Payments – Salem Case • Assessee had made certain cash deposits in to the account of a District Cooperative Sugar Mill • The payments were made at the instance of the sugar mill • The value of the transactions exceeded Rs 20,000. • AO disallows the payment u/s 40A(3) • Assessee claims payments made for business expediency – Proviso to Sec 40A(3)

46. 40A(3) Payments – Salem Case • The CIT (A) and the Tribunal pass an order in favour of the assessee • Madras High Court held that: • The payment was made to a quasi Government organisation • Payment was made at the insistence of the recipient • Payment was made by cash owing to business expediency • Revenue’s appeal dismissed CIT Salem vs BG Subramaniamdtd August 18th 2009

47. Sec 50C : Hard Realities • An assessee (96 years old) sold a property to Indian Oil Corporation for Rs 99 lacs • The guideline value of the property was Rs 3.92 crores • The purchaser has not made a reference u/s 47A of the Indian Stamp Act for fair value determination • No appeal was made by the seller under the Stamp Act • The AO issues as order considering the sale consideration to be Rs 3.92 crores u/s 50C

48. Sec 50C : Hard Realities • The assessee filed a writ petition with Madras High Court • The AO’s argument: • No appeal for 47A valuation • Time limit for assessment u/s 143(3) • Sec 50C • Assessee’s argument: • Option u/s 50C(2) to refer to a Valuation Officer • Non appeal against 47A is not a ground for order

49. Sec 50C : Hard Realities • Madras High Court held: • Writ petition is allowed • Order is set aside • Valuation report to be obtained u/s 50C(2) • Assessment to be done based on the valuation report. N. Meenakshivs ACIT Chennai – Madras High Court dated 11th September 2009

50. Assessment of Chief Minister’s Income • MrLalu Prasad Yadav – the ex Honorable Chief Minister of Bihar filed his income tax with the following details: