Amendment pertaining to deductibility of expenditure incurred in relation to exempt income
Section 14A provides that no deduction of expenditure shall be allowed that is incurred in relation income that does not form part of the total income.
It has been proposed to provide Section 14A with the overriding effect over the other contradictory sections of the act by substituting the words “For the purposes of” with “Notwithstanding anything to the contrary contained in this Act, for the purposes of”.
By virtue of the proposed explanation, several judgement have been overruled. The explanation provide that where any expense is done for earning any exempt income, no expenditure shall be allowed if no exempt income accrued during that year.
Clarification regarding treatment of cess and surcharge
Section 40 of the Act specifies the amounts which shall not be deducted in computing the income chargeable under PGBP.
Any sum paid on account of any rate or tax levied on the profits or gains of any business or profession shall not be allowed to be deducted.
It has been clarified that the term ‘tax:’ shall also include and deemed to have always included the cess and surcharge, by whatever name called. Hence, the surcharge and cess shall not be allowed as an expense while calculating business income.
Scientific Business Expenditure
It is proposed to amend Section 35(1A) of the Act to provide that the deduction claimed by the donor with respect to the donation given to any research association, university, college or other specified institution or specified company shall be disallowed unless such research association, university, college or other institution or company files the statement of donations.
This amendment will take effect retrospectively from 1st April, 2021.
Amendment and clarifications on allowability of expenditure under section 37
Section 37 of the Act provides for the allowability of revenue and non-personal expenditure laid out or expended wholly and exclusively for the purposes of business or profession.
By virtue of Explanation 1 to section 37(1), expenditure incurred for any purpose which is an offence or which is prohibited by law shall be disallowed.
A new clarificatory explanation has been inserted to provide that expenditure incurred for any purpose which is an offence or which is prohibited under any law being in force, in India or outside India, shall not be allowed as a business expense. It shall also include expenditure for compounding any offence under any law being in force in India or outside India. Hence, for example, the compounding fee paid to RBI for compounding of any contravention under the Foreign Exchange Management Act, 1999 shall not be allowed as an expense.
Cash credits under section 68 of the Act
Section 68 of the Act provides that where any sum is found to be credited in the books of a taxpayer maintained for any PY, and he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
It is proposed to amend the provisions of section 68 of the Act so as to provide that the nature and source of any sum, whether in form of 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 lender and AO founds the same to be satisfactory.
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.
Clarification regarding deduction on payment of interest only on actual payment
Section 43B of the Act provides for certain deductions to be allowed only on actual payment.
Explanation 3C, 3CA and 3D of this section provides that a deduction of any interest payable on loan or borrowing from specified financial institution/NBFC/scheduled bank or a co- operative bank shall be allowed if such interest has been actually paid and any interest which has been converted into a loan or borrowing or advance shall not be deemed to have been actually paid.
It is proposed to amend these explanations to provide that conversion of interest payable into debenture or any other instrument by which liability to pay is deferred to a future date, shall also not be deemed to have been actually paid and deduction shall not be allowed.
This amendment has the effect of the negating the judgements of several courts where a contrary stand has been taken.
Reduction of Goodwill from block of assets to be considered as transfer
From the AY 2021-2022, goodwill of a business or profession is not considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation.
In case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the AY 2021-22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill.
It has been clarified that for the purposes of section 50 of the Act, reduction of the amount of goodwill of a business or profession, from the block of asset shall be deemed to be transfer w.e.f 01st April 2021 and Capital Gains tax shall be levied on such transfer. However, no such rules have been prescribed till date for taxability of capital gains on transfer of goodwill from block of assets.
Tax on Dividend from Foreign Companies
Dividend declared, distributed or paid by a foreign company and to an Indian company in which the Indian company holds at least 26% of the equity share capital is subject to tax in the hands of said Indian company at the rate of 15% under section 115BBD of the Act.
The benefit available has been withdrawn from 01st April 2023 and the such dividend would be subject to tax at the normal rates in the hands of the company receiving such dividend from the foreign company.
However, the benefit of Double Taxation Avoidance Agreement, can be availed wherever available.
Facilitating strategic disinvestment of public sector companies (Section 79)
Section 79 of the Act provides for carrying forward and set-off of losses in the case of certain companies.
Section 79(1) provides that where a change in shareholding has taken place during the previous year in the case of erstwhile public sector undertaking, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, unless ultimate holding company of such company, immediately after the completion of strategic disinvestment, continues to hold, directly or through its subsidiary or subsidiaries, at least fifty-one percent. of the voting power of such public sector company in aggregate.
This amendment will take effect from 1st day April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.
Set off of loss in search cases: Section 79A
It has been proposed to insert a new section 79A in the Income-tax Act w.e.f. 01st April 2022 to provide that where total income of any previous year of an assessee includes any undisclosed income, no set-off, against such undisclosed income, of any loss, whether brought forward or otherwise or unabsorbed depreciation shall be allowed to the assessee under any provision of this Act in computing his total income for such previous year.
For the purpose of the provision of this section, undisclosed income shall mean:
- that is found in the course of a search under section 132 or a requisition under section 132A or a survey under section 133A, other than under sub-section (2A) of that section, or
- that is represented, either wholly or partly, by any entry in the books of account in respect of an expense 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.
Other Corporate Tax Proposal
Provisions pertaining to bonus stripping and dividend stripping to be made applicable to securities and units – Amendment of Section 94
- It is proposed to amend provisions pertaining to bonus and dividend stripping by amending subsection 8 of section 94 that such provisions of bonus stripping would also apply in case of securities as well to units of Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) or Alternative Investment Funds (AIFs) to prevent tax evasion.
- Further, is is also proposed to amend the explanation of subsection 7 of section 94 related to dividend stripping to include unites of InvITs, REITs and AIFs.
- This amendment will take effect from 1st April 2023 and hence, will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
To amend the title of the section 179 to “Liability of directors of private company- Amendment of Section 179 of the Act
- It has been clarified that the liability of directors of a private company under this section is not conditional upon the company being in liquidation and the section makes no reference to the liquidation.
- Thus, as per Section 179, Income tax authorities can recover the tax due from its directors, where such tax dues cannot be recovered from the company itself.
- Hence, it is proposed to amend the title of the section to “Liability of directors of private company rather than liability of the director of private company in Further as per explanation to the section clarifies that the expression “tax due” in the section includes penalty, interest, fees of any other sum payable under the Act.
- Further, to avoid any unnecessary litigation and to provide further clarity, it is also proposed to insert word “fees” in the scope of expression tax due.
- This amendment will take effect from 1st April 2022.