Disallowance for non-deduction of tax from payment to resident in respect of Income from Other sources

Budget 2017, insert a new section 58(1A)(ia), it provides that the provision of section 40(a)(ia) will apply in computing income chargeable under the head “ income from other sources” as they apply in computing income chargeable under the head of “ profit and gains of business & profession”.

Under the current provision of section 58 disallowance incudes disallowances such as disallowance of cash expenditure, disallowance for non-deduction of tax from payment to non-resident, etc, now it applies to resident also in section 58.

The amendment is applicable from the Previous year 2017-18 and will accordingly apply in relation to assessment year 2018-19 and subsequent years.

Concessional Tax rate under section 194 LD –Extension of eligible period thereof (Budget 2017)

Budget 2017, amend the provision of section 194LD to provides that

lower TDS at the Rate of five percent will now be available

on interest payable before 1^st July 2020 to FII and QFIs on their investments in Government securities and rupee denomination corporate bonds

provided that the rate of interest does not exceed the rate notified by the Central Government in this behalf.

Existing provision of section 194LD provides lower TDS at the rate of five percent on interest payable at any time on or after 1st June, 2013 but before the 1st July, 2017.

The amendment will be applicable from the previous year 2017-2018.

Concessional rate of tax on interest in case of overseas borrowings –extension period thereof.

Budget 2017, amend the section 194LC to provide that the

concessional rate of five per cent. TDS on interest

payable to a non-resident

by a specified company on borrowings made by it in foreign currency

from sources outside India under a loan agreement or by way of issue of any long-term bond including long-term infrastructure bond

will now be available in respect of borrowings made before the 1st July, 2020.

This amendment will be applicable from the previous year 2017-18 and will accordingly apply in relation to assessment year 2018-19 and subsequent years.


Budget 2017 also proposed to extend the benefit of section 194LC to rupee denominated bonds issued outside India before the 1st july 2020.

This amendment will take retrospectively from 1st April 2016.

Existing provision of section 194LC provides that the concessional rate of tax available on borrowing made under loan agreement at any time on or after the 1st July, 2012, but before the 1st July, 2017; or by way of any long-term bond including long-term infrastructure bond on or after the 1st October, 2014 but before the 1st July, 2017, respectively.

Budget 2017 extends the concessional rate of TDS to boost the economy by way of introduction of foreign capital.

Secondary Adjustment in Certain cases (New Section 92CE inserted) -International taxation -Budget 2017

In order to align India’s transfer pricing provisions with the OECD Transfer Pricing Guidelines and international best practices, Budget 2017 proposes to insert a new section 92CE in the IT Act to provide that a taxpayer would be required to carry out a secondary adjustment where a primary adjustment to transfer price has been made in certain stipulated circumstances.

Secondary adjustment can be made only when,

Ø The amount of primary adjustment made in any previous year exceed one crore rupees, and

Ø The primary adjustment is made in respect of an assessment year commencing after 1^st day of April 2016.

Conditions under which secondary adjustment can make:

Where a primary adjustment to transfer price,—

Ø has been made suo motu by the assessee in his return of income;

Ø made by the Assessing Officer has been accepted by the assessee;

Ø is determined by an advance pricing agreement entered into by the assessee under section 92CC;

Ø is made as per the safe harbour rules framed under section 92CB; or

Ø is arising as a result of resolution of an assessment by way of the mutual agreement

procedure under an agreement entered into under section 90 or section 90A for avoidance of double taxation,

Where, as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed in such manner as may be prescribed.

For the purposes of this section,—

(i) “associated enterprise” shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;

(ii) “arm’s length price” shall have the meaning assigned to it in clause (ii) of section 92F;

(iii) “excess money” means the difference between the arm’s length price determined in primary adjustment and the price at which the international transaction has actually been undertaken;

(iv) “primary adjustment” to a transfer price means the determination of transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee;

(v) “secondary adjustment” means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.’.

Limitation of Interest Deduction (Section 94B) -International taxation –Budget 2017

New Section 94B is inserted by Budget 2017, to limit the interest that can be deducted in computing a company’s profit for tax purposes.

It is aimed at bringing India’s tax regime in line with the recommendations contained in action 4 of the OECD/G20 base erosion and profit shifting (BEPS) project, which are primarily designed to target cross –border profit shifting through excessive interest payments and as a result, protect the tax base.

It is further proposed that the debt is deemed to have been issued by an associated enterprise/ related parties, where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee such lender or deposits a corresponding matching amount of funds with the lender.

This amendment will be effective from previous year 2017-18 and apply in relation to assessment year 2018-2019 and subsequent years.

 “Clause 43 of the Bill seeks to insert a new section 94B in the Income-tax Act relating to limitation on interest deduction in certain cases.

Sub-section (1) of the said section seeks to provide that where an Indian company, or a permanent establishment of a foreign company in India being the borrower, pays interest or similar consideration exceeding one crore rupees which is deductible in computing income chargeable under the head "Profits and gains of business or profession" in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest, as specified in sub-section (2).

It is further proposed to provide that where the debt issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee such lender or deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise. Sub-section (2) of the said section seeks to provide that for the purposes of sub-section (1), the expression "excess interest" shall mean an amount of total interest paid or payable in excess of thirty per cent. of earnings before interest, taxes, depreciation, and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less.

Sub-section (3) of the said section seeks to provide that nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance.

Sub-section (4) of the said section seeks to provide that where for any assessment year, the interest expenditure is not wholly deducted against income under the head "Profits and gains of business or profession", so much of the interest expenditure as has not been so deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed as deduction against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year to the extent of maximum allowable interest expenditure in accordance with sub-section (2). It is further provided that no interest expenditure shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed.

Sub-section (5) of the said section seeks to define the expressions "associated enterprise", "debt" and "permanent establishment".

This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-2019 and subsequent years.”

Exempt entities - Restriction on exemption in case of corpus donation (Budget 2017)

Now the Corpus donation given by exempt entities to another exempt entity out of current year receipt/income of such donor is not considered as application of income in the hand of donor trust or other exempt entity.

Earlier it considered as application of income in the hands of donor trust but is not considered as income of the recipient trust.

Budget 2017 proposed to to insert a new Explanation to section 11 of the Act to provide that any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1) of section 11, being contributions with specific direction that theyshall form part of the corpus of the trust or institution, shall not be treated as application of income.

It is also proposed to insert a proviso in clause (23C) of section 10 so as to provide similar restriction as above on the entities exempt under sub-clauses (iv), (v), (vi) or (via) of said clause in respect of any amount credited or paid out of their income.

As per the existing provisions of the Act, donations made by a trust to any other trust or institution registered under section 12AA or to 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, except those made out of accumulated income, is considered as application of income for the purposes of its objects.

Similarly, donations made by entities exempted under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 to any trust or institution registered under section 12AA, except those made out of accumulated income, is also considered as application of income for the purposes of its objects.

However, donation given by these exempt entities to another exempt entity, with specific direction that it shall form part of corpus, is though considered application of income in the hands of donor trust but is not considered as income of the recipient trust.

These amendments will take effect from previous year 2017-18 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

Cost of Acquisition of capital assets of entities in case of levy of tax on accreted income under section 115TD which related with special provisions relating to tax on accreted income of certain trusts and institutions.

Fair market value shall be deemed to be cost of Acquisition of capital assets in case of accreted income arises on conversion, merger, and dissolution under specified conditions of trust and institution registered under section 12AA.

The existing provisions of the section 49 of the Act provides for computation of cost with reference to certain modes of acquisition of capital asset.

Budget 2017 proposed to amend said section so as to provide that where the capital gain arises from the transfer of an asset, being the asset held by a trust or an institution in respect of which accreted income has been computed, and the tax has been paid thereon in accordance with the provisions of Chapter XII-EB (special provisions relating to tax onaccreted income of certain trusts and institutions), the cost of acquisition of such asset shall be deemed to be the fair market value of the asset which has been taken into account for computation of accreted income as on the specified date referred to in sub-section (2) of section 115TD.

The proposed amendment is consequential in nature.

This amendment will take effect retrospectively from 1st June, 2016 and will, accordingly, apply in relation to the assessment year  2016-17 and subsequent years.

Now the trust or entities required to apply for fresh registration under section 12AA where there is subsequent adoption or change in the objects.

Ø Requirement of fresh registration

Budget 2017 proposed to amend section 12A so as to provide that where a trust or an institution has been granted registration under section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996] and, subsequently, it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, it shall be required to obtain fresh registration by making an application within a period of thirty days from the date of such adoption or modifications of the objects in the prescribed form and manner.

The existing provisions of section 12A of the Act provide for conditions for applicability of sections 11 and 12 in relation to the benefit of exemption in respect of income of any trust or institution.

Further, the provisions of section 12AA of the Act provide for registration of the trust or institution which entitles them to the benefit of sections 11 and 12. It also provides the circumstances under which registration can be cancelled, one such circumstance being satisfaction of the Principal Commissioner or Commissioner that its activities are not genuine or are not being carried out in accordance with its objects subsequent to grant of registration.

However, at present there is no explicit provision in the Act which mandates said trust or institution to approach for fresh registration in the event of adoption or undertaking modifications of the objects after the registration has been granted.

Ø Time -limit of submission of return of income

Budget 2017 proposed to further amend section 12A so as to provide for further condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Act.

As per the existing provisions of said section, the entities registered under section 12AA are required to file return of income under sub-section (4A) of section 139, if the total income without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax. However, there is no clarity as to whether the said return of income is to be filed within time allowed u/s 139 of the Act or otherwise.

These amendments are clarificatory in nature.

These amendments will take effect from the previous year 2017-18 and will, accordingly, apply in relation to assessment year 2018-19 and subsequent years.

Individuals Earning upto Rs. 3 lakh will attract nil tax– Budget 2017

Budget 2017, rationalized the rebate allowable under section 87A which will provide the tax benefit of over additional Rs. 50000.

In view of proposed rationalisation of tax rates( 5% instead of 10%) for individuals in the income slab of Rs. 2,50,000 to Rs.5,00,000,it is proposed to amend section 87A so as to reduce the maximum amount of rebate available under this section from existing Rs. 5000 to Rs. 2500.

It is also proposed to provide that this rebate shall be available to only resident individuals whose total income does not exceed Rs. 3,00,000.

This can be understand more clearly with help of following example :

In case of individual earning upto Rs. 3 lakh ,

taxable income becomes Rs. 50,000 (Tax rate 5% for tax slab of 2.5 to 5 lakh)

on which his gross liability of tax comes Rs. 2500 and

he will get rebate under section 87A of Rs. 2500.

Thus his net tax liability will come nil.

The existing provisions of section 87A provide for a rebate up to Rs. 5000 from the income-tax payable to a resident individual if this total income does not exceed Rs. 5,00,000.

This amendment will take effect from the previous year 2017-2018.

Budget 2017 extend the period for start-ups to avail tax benefit.

As per the current provision under section 80-IAC, an eligible start-up shall be allowed a deduction of an amount equal to one hundred percent of the profit and gains derived from eligible business for three consecutive assessment years out of five years beginning from the year in which such eligible start-up is incorporated.

Budget 2017, proposed to provide that deduction under section 80-IAC can be claimed by an eligible start-up for any three consecutive assessment years out of seven years beginning from the year in which such eligible start-up is incorporated.

This amendment will take effect from the previous year 2017-18 and will accordingly, apply in relation to assessment year 2018-19 and subsequent years.

TDS rate reduced from 10% to 2% on Call Centre Business Income –Budget 2017.

Budget 2017, proposed to amend section 194J to reduce the rate of deduction of tax at source to 2% to from 10%, in case of payments received or credited to a payee, being a person engaged only in the business of operation of call centre.

Section 194J provides that a specified person is required to deduct an amount equal to ten per cent. of any sum payable or paid ( whichever is earlier) to a resident by way of fees for professional services or fees for technical services provided such sum paid/payable or aggregate of sum paid/payable exceeds thirty thousand rupees to a person in a financial year.

This will be effective from 1^st June 2017.

No TDS deducted on compensation received that are exempt under RFCTLAAR Act, 2013 (Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013) –Budget 2017.

Budget 2017, proposed to amend the section 194LA to provide that no deduction shall be made under this section where such payment is made in respect of any award or agreement which has been exempted from levy of income-tax under section 96 (except those made under section 46) of RFCTLARR Act.

Section 194LA, provides that any person paying compensation shall deduct tax at source at the rate of ten per cent. on the compensation or enhanced compensation or consideration on account of compulsory acquisition of any immovable property (other than agricultural land) under any law for the time being in force subject to certain conditions specified therein.

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, ('RFCTLARR Act') came into force on 1st January, 2014.

Section 96 of the RFCTLARR Act, provides that income-tax shall not be levied on award or agreement made subject to limitations mentioned in section 46 of the said Act. Therefore, compensation received for compulsory acquisition of land under the RFCTLARR Act (except those made under section 46 of RFTCLARR Act), is exempted from the levy of income-tax.

The CBDT has issued Circular number 36/2016 dated 25th October, 2016 clarifying that compensation received in respect of any award or agreement which has been exempted from the levy of income-tax vide section 96 of the RFCTLARR Act shall not be taxable under the provisions of the Act, even if there is no specific provision of exemption for such compensation under the Act.

However, the circular addressed only the matter pertaining to taxability of compensation received on compulsory acquisition of and not tax deduction at source under section 194LA of the Act.

This amendment will applicable from 1^st April 2017.

Now the Form 15G/15H for non-deduction of TDS can be filled for insurance commission – Budget 2017.

Budget 2017, proposed to amend section 197A so as to make them eligible for filing self-declaration in Form.No.15G/15H for non-deduction of tax at source in respect insurance commission referred to in section 194D

Section 194 D of the act provides for tax deduction at source (TDS) at the rate of 5% for payments in the nature of insurance commission beyond threshold limit of Rs.50,000 per financial year.

Section 197A of the Act provides that tax shall not be deducted, if the recipient of certain payments on which tax is deductible furnishes to the payer a self- declaration in prescribed Form.No.15G/15H declaring that the tax on his estimated total income of the relevant previous year would be nil.

Presently, the payment in the nature of income referred to in section 194D is not covered by provisions of section 197A.

This will be applicable from 1^st June 2017.

Real Estate Developers - House property held as stock in trade – No Notional income (Section 23(5)) –Budget 2017

Section 23 of the Act provides for the manner of determination of annual value of house property.

Considering the business exigencies in case of real estate developers , it is proposed to amend the said section so as to provide that where the house property consisting of any building and land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period upto one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.

New subsection (5) under section 23 is proposed to be inserted.

The amendment will be effective from the previous year 2017-18 and subsequent years.

Capital Gain Exemption under section 54EC (Investment in certain Bonds) - Budget 2017

Budget proposed investment in any bond redeemable (Notified by central government) after three year shall also eligible for deduction section 54EC.

Earlier, only the investments in bond issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited are eligible for exemption under this section.

Section 54EC provides that capital gain to the extent of Rs. 50 lakhs arising from the transfer of a long term capital asset shall be exempt if the assesse invests the whole or any part of capital gains in certain specified bonds, within specified time.

It is proposed to amend section 54EC so as to provide that investment in any bond redeemable after three years which has been notified by the Central Government in this behalf shall also be eligible for exemption.

The amendment will be applicable for previous year 2017-18 and subsequent years.

Real estate Sector (Promote affordable Housing), Rationalisation of provisions in respect of deductions of profits and gains from housing projects (Section 80-IBA) –Budget 2017.

Budget 2017, proposed to amend section 80-IBA so as to provide the following relaxation:-

Ø The size of residential unit shall be measured by taking into account the "carpet area" as defined in Real Estate (Regulation and Development) Act, 2016 and not the "built-up area".

Ø The restriction of 30 square meters on the size of residential units shall not apply to the place located within a distance of 25 kms from the municipal limits of the Chennai, Delhi, Kolkata or Mumbai.

Ø The condition of period of completion of project for claiming deduction under this section shall be increased from existing three years to five years.

The above amendment will apply for the previous year 2017-18 and subsequent years.

The existing provisions of section 80-IBA provides for 100% deduction in respect of the profits and gains derived from developing and building certain housing projects subject to specified conditions include :

Ø The limit of 30 square meters for the built-up area of residential unit in respect of project located in the Chennai, Delhi, Kolkata and Mumbai or within 25 kms from the municipal limits of these four cities.

Ø In order to be eligible to claim deductions, the project shall be completed within a period of three years.

Long term capital gain – period of holding reduced from 36 months to 24 months.

Period of holding in case of land or building or both is reduced from 36 months to 24 months, to qualify as long term capital asset.

It is good for individuals for tax saving purpose as taxation under long term capital gain calculated at 20% after indexation as against short term capital where tax treatment is done on marginal income tax rate.

Budget 2017 amend section 2(42A) of the Act so as to reduce the period of holding from the existing 36 months (3 years) to 24 months (2 years) in case of immovable property, being land or building or both, to qualify as long term capital asset.

This amendment will be effective for all transaction occurred on or after 1^st April 2017.

Mandatory quoting of PAN under Tax collection at source (TCS) – New Section 206CC inserted – Budget 2017.

New Section 206CC is proposed to be inserted to provide the following:-

Ø Non- furnish PAN number under TCS (Tax collection at source) by collectee to collector will attract a higher rate of tax at the twice the rate mentioned in the relevant section or at the rate of five percent whichever is higher.

Ø Mandatory quoting of PAN number in declaration filed under section 206C(1A)(Section 206: Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc) (Declaration filed by resident of india that the specified goods are to be utilized for purposes of manufacturing, processing or producing articles or things or for the purposes of generation of power and not for trading purposes, for exemption from tax collected at source ). In case of invalid declaration, the collector shall collect the tax at source at higher rate at the twice the rate mentioned in the relevant section or at the rate of five percent whichever is higher.

Ø Certificate for collection of tax at lower at (Section 206C(9)) shall not be granted unless it contains the permanent Account number of the applicant.

Ø the collector knows about the correct PAN of the collectee it is also proposed to provide for mandatory quoting of PAN of the collectee by both the collector and the collectee in all correspondence, bills and vouchers exchanged between them.

Ø that the collectee shall furnish his Permanent Account Number to the collector who shall indicate the same in all its correspondence, bills, vouchers and other documents which are sent to collectee.

Ø where the Permanent Account Number provided by the collectee is invalid or it does not belong to the collectee, then it shall be deemed that Permanent Account Number has not been furnished to the collector.

Ø to exempt the non-resident who does not have permanent establishment in India from the provisions of this proposed section 206CC of the Act.

It will be applicable form 1^st April,2017.

Deduction under section 80CCG (Investment in Rajiv Ghandi Equity saving scheme) to be discontinued From A.Y 2018-19 – Budget 2017

Under the existing provisions of section 80CCG, deduction for three consecutive assessment years is allowed upto Rs. 25,000 to a resident individual for investment made in listed equity shares or listed units of an equity oriented fund subject to fulfilment of certain conditions. This deduction was introduced vide Finance Act, 2012.

However considering the fact that limited number of individuals availed this deduction and also to rationalize the multiplicity of deductions available under Chapter VI-A of the Act, it is proposed to phase out this deduction by providing that no deduction under section 80CCG shall be allowed from assessment year 2018-19.

However, an assessee who has claimed deduction under this section for assessment year 2017-18 and earlier assessment years shall be allowed deduction under this section till the assessment year 2019-20 if he is otherwise eligible to claim the deduction as per the provisions of this section.

This amendment will apply from 1^st April 2017 and apply in relation to previous year 2017-18.

New exemption to Chief Minister and LG relief funds –Budget 2017

Budget 2017 proposed a new exemption under section 10(23C) to Chief Minister and LG relief funds.

Presently under section 10 (23C), exemption is provided in respect of income of certain funds which include the Prime Minister’s National Relief Fund.

The Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund (Section 80G (a)(iiihf)), which is of same nature at the level of state or the Union Territory as is Prime Minister’s National relief fund at the national level, is not exempted under the said clause.

In the absence of such exemption, these funds are required to obtain registration under section 12A of the Act in order to avail exemption of its income under section 11 and 12 of the said Act and are required to fulfil certain conditions.

Therefore, Budget 2017 proposed to amend said clause so as to provide the benefit of exemption to the Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund also.

This amendment will take effect retrospectively from the 1st April, 1998, the date on which sub-clause (iihf) of clause (a) of sub-section (2) of section 80G relating to deduction in any sum paid to the Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund came into force, and will, accordingly, apply in relation to assessment year 1998-99 and subsequent years.