Key Amendments
Tax & Accounting19-03-2021 00:00:00

Key Amendments Relating to Victory through D/L(Duckworth/Lewis) Method

Government uses master stoke and brings down all tax planning which have been declared as valid by various High Courts and Supreme Courts and ensures that law is applied in the right spirit. Government wins through Duckworth/Lewis. It is a clear message to all that the law if applied and interpreted against the intention to defraud the revenue, then even the best planning can be brought down to earth in seconds. The panning of claiming depreciation on goodwill, escaping tax in slump sale transactions, receiving amounts in excess of capital balances at the time of change in constitution of a firm though declared valid by the courts have been proposed to be bought down to earth. The Finance Bill has also tried to ensure that the advantages meant small people are not misapplied by the rich.
CA Jignesh Parikh

Clause (11) of the section 2 defines “block of assets” to mean a group of assets falling within a class of assets comprising, tangible assets, being buildings, machinery, plant or furniture and intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.

Position Settled through Judicial Pronouncements

The question whether goodwill of a business is an asset within the meaning of section 32 of the Act and whether depreciation on goodwill is allowable under the said section, is an issue which came up before Hon‘ble Supreme Court in the case Smiff Securities Limited [(2012)348 ITR 302 (SC)]. Hon‘ble Supreme Court answered the question in affirmative.

Proposed Amendment

It has been proposed to amend

a. clause (11) of section 2 of the Act to provide that “block of asset‘ shall not include goodwill of a business or profession;

b. amend clause (ii) of sub-section (1) of section 32 of the Act to provide that goodwill of a business or profession shall not be considered as an asset for the purpose of the said clause and therefore not eligible for depreciation. Further, it is also proposed to amend Explanation 3 to sub-section (1) of the said section to provide that goodwill of a business or profession shall not be considered as an asset for the said sub-section;

c. amend section 50 of the Act to provide that in a case where goodwill of a business or profession formed part of a block of asset for the assessment year beginning on the 1st April, 2020 and depreciation has been obtained by the assessee under the Act, the written down value of that block of asset and short term capital gain, if any, shall be determined in the manner as may be prescribed;

d. amend section 55 of the Act by substituting clause (a) of subsection (2) to provide that in relation to a capital asset, being goodwill of a business or profession, or a trade mark or brand name associated with a business or profession, or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours,—

i. in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and

ii. in the case falling under sub-clause (i) to (iv) of sub-section (1) of section 49 and where such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and

iii. in any other case, shall be taken to be nil

e. provide that in case of goodwill of business or profession acquired by the assessee by way of purchase from a previous owner (either directly or through modes specified under sub-clause (i) to (iv) of sub-section (1) of section 49) and any deduction on account of depreciation under section 32 of the Act has been obtained by the assessee in any previous year preceding the previous year relevant to the assessment year commencing on or after the 1st April, 2021, then the cost of acquisition will be the purchase price as reduced by the depreciation so obtained by the assessee before the previous year relevant to assessment year commencing on 1st April, 2021

Effective Date

These amendments will take effect from 1 st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

Issues

1. Depreciation allowed u/s 32 is calculated by applying prescribed rate of percentage on the written down value of block of assets. The Term written down value in respect of block of assets is defined u/s 43(6)(c) of the Income Tax Act, 1961. Ideally there should be a consequential amendment in said section otherwise one may take a view, once asset is entered in the block it loses its independent identity and in absence of mechanism for computation of depreciated value of block of asset as on 1st April, 2020, goodwill which has already been included in the block of asset cannot be removed or separated as intended by the proposed amendment.

2. Even if it is assumed that, issued as discussed in above para is resolved, the another issue that would arise is how to compute capital gain on sale of such depreciated goodwill. How to compute period of holding and what shall be the cost of acquisition of the same.

3. The propose amendment restricts the assessee from claiming the depreciation from goodwill but upon business reorganization how to justify the value of business as apportioned various other intangible assets such as “Customers Contracts” “Trademark” and Goodwill since now assessee would prefer to claim depreciation on other intangible assets where there is no prohibition.

Sub section (4) and (4A) of Section 45 and Section 48 Rationalisation of provision of transfer of capital asset to partner on dissolution or reconstitution

Existing Scenario

Under the current scenario , as per provisions of section 45(4), any profits and gains from the transfer of capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise to a partner is chargeable to the firm or other association of persons or body of individuals under the head capital gains. The transaction will be taxable in the previous year in which the transfer takes place. Further, for the purpose of computation of capital gains, the fair market value of the asset transferred shall be considered as the full value of consideration.

Position Settled through Judicial Pronouncements

The provisions of section 45(4) use the expression "dissolution or otherwise". The Honourable Bombay high Court in the case of CIT v. A.N. Naik Associates [2004] 136 Taxman 107 (Bom.) has held that the word 'otherwise' used in section 45(4) takes into its sweep not only the cases of dissolution but also the cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner.

Further the Honourable Kerala High Court has in the case of CIT v. Kunnamkulam Mill Board [2002] 125 Taxman 802 (Ker.) held that when a partnership is reconstituted by adding a new partner, there is no transfer of assets within the meaning of section 45(4). Similar view has also been taken in the case of Kunnamkulam Mill Board [2002] 125 Taxman 802 (Ker.)

Thus under the existing scenario it is more or less settled position of law that amounts received by partners on account of retirement from the partnership firm were neither subjected to income tax, in the hands of the partner nor in the hands of the firm as the provisions of section 45(4) as they are, are applicable only in case of transfer of capital assets.

Proposed Amendment

The Finance Bill has proposed to replace the existing sub section 4 of Section 45 with new sub sections 4 and 4A of Section 45. Both these new sections have overriding effect over Section 45(1).

New proposed sub-section (4) of section 45 of the Act applies in a case where all following conditions are satisfied;

a. a specified person who receives during the previous year any capital asset at the time of dissolution or reconstitution of the specified entity; and

b. the capital asset represents the balance in the capital account of such specified person in the books of the specified entity at the time of its dissolution or reconstitution.

In this situation, the profit and gains arising from the receipt of such capital asset by the specified person shall be chargeable to income-tax as income of the specified entity under the head “capital gains” and shall be deemed to be the income of such specified entity of the previous year in which the capital asset was received by the specified person.

For the purposes of section 48 of the Act, the fair market value of the capital asset on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. The balance in the capital account of the specified person in the books of account of the specified entity is to be calculated without taking into account increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset.

The cost of acquisition of the asset transferred by the firm (AOP/ BOI) will be determined in the usual manner, under the provisions of section 48.

The terms "specified entity", "self-generated goodwill" or self-generated asset" and "specified person" are defined by way of Explanation to the proposed section as under:

"specified entity" means a firm or other association of persons or body of individuals (not being a company or a cooperative society;

"self-generated goodwill" and "self-generated asset" mean goodwill or asset, as the case may be, which has been acquired without incurring any cost for purchase or which has been generated during the course of the business or profession;

"specified person" means a person who is partner of a firm or member of other association of persons or body of individuals (not being a company or a cooperative society), in any previous year.

New proposed sub-section (4A) of section 45 of the Act applies in a case where all following conditions are satisfied;

a. a specified person receives during the previous year any money or other asset at the time of dissolution or reconstitution of the specified entity; and

b. which is in excess of the balance in his capital account in the books of accounts of such specified entity at the time of its dissolution or reconstitution

then any profits or gains arising from receipt of such money or other asset by the specified person shall be chargeable to income-tax as income of such specified entity under the head "Capital gains" and shall be deemed to be the income of such specified entity of the previous year in which such money or other asset was received by the specified person.

Notwithstanding anything to the contrary contained in this Act, for the purposes of section 48,

a. value of any money or the fair market value of other asset on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset; and

b. the balance in the capital account of the specified person(to be calculated without taking into account increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset) in the books of accounts of the specified entity at the time of its dissolution or reconstitution shall be deemed to be the cost of acquisition:

Consequential Amendment to Section 48

Consequential amendment is also proposed in section 48 of the Act to provide that in case of specified entity, the amount included in the total income of such specified entity under sub-section (4A) of section 45 which is attributable to the capital asset being transferred, shall be reduced from the full value of the consideration to compute income charged under the head “capital gains”. This is to be calculated in the manner to be prescribed later.

This is to mitigate the double taxation which may have happened but for this provision in a situation where an asset which was revalued and for which income under the proposed sub-section (4A) of section 45 of the Act was brought to tax is transferred subsequently by the specified entity.

Effective Date

These amendments will be effective from the 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

Issues

The proposed amendment are aiming to tax on the gains arising to the partners on excess of fair market value of capital asset, money and other assets over balance in capital account( ignoring revaluation). However the way the sections has been drafted, they are leading towards following issues;

a. Will the specified entity be taxed on the excess of fair market value of capital asset over cost / indexed cost of acquisition of asset as is charged under existing provisions of section 45(4) ?

b. Can there be capital gain on transfer of money and other assets (assets other than capital asset)?

c. What should be cost of acquisition in case os subsequent transfer of the Capital Asset / Other by the Specified Entity / Specified person as the case may be ?

Probably the authorities have envisaged these issues and hence they have mentioned in the memorandum explaining the provisions of finance bill that manner of computation of capital gain will be prescribed later.

Sub-section (42C) of section 2 and Section 50B Rationalisation of the provision of slump sale

Existing Scenario

Sub-section (42C) of section 2 of the Act defines “slump sale” to mean the transfer of one or more undertakings as a result of sale for lump sum consideration without value being assigned to individual assets and liabilities in such cases.

Section 50B is a special provision for computation of capital gains in case of slump sale. In terms of this provision, any profits or gains arising from slump sale shall be chargeable to income tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place.

Position Settled through Judicial Pronouncements

The honourable Madras High Court in a recent decision in the case of Areva T & D India Ltd [2020] 119 taxmann.com 171 (Madras) has held that transfer of assessee's non-transmission and distribution business in exchange of issuance and allotment of equity shares under a scheme of arrangement approved by High Court is not a slump sale exigible to capital gains tax under section 50.

The honourable Madras High Court in a recent decision in the case of Areva T & D India Ltd [2020] 119 taxmann.com 171 (Madras) has held that transfer of assessee's non-transmission and distribution business in exchange of issuance and allotment of equity shares under a scheme of arrangement approved by High Court is not a slump sale exigible to capital gains tax under section 50.

Thus in the above referred case, the Honourable high Court has interpreted that other means of transfer listed in sub-section (47) of section 2 of the Act, in relation to definition of the word “transfer” in relation to capital asset like exchange, relinquishment etc, are excluded. This interpretation is rightly against the intent of the section which has resulted in to the poposed amendment.

Proposed Amendment

In order to make the intention clear, it is proposed to amend the scope of the definition of the term “slump sale” by amending the provision of clause (42C) of section 2 of the Act so that all types of “transfer” as defined in clause (47) of section 2 of the Act are included within its scope.

Effective Date

This amendment will take effect from the 1st April, 2021 and shall accordingly apply to the assessment year 2021-22 and subsequent assessment years.

Section 10(10D), 2(14), Taxation of proceeds of high premium unit linked insurance policy (ULIP)

Existing Scenario

Clause (10D) of section 10 of the Act provides for the exemption for the sum received under a life insurance policy, including the sum allocated by way of bonus on such policy in respect of which the premium payable for any of the years during the terms of the policy does not exceed ten percent of the actual capital sum assured.

Issue Leading towards Proposed Amendment

Under the existing provisions of the Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in ULIP with huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause. The intention was to provide benefit to small and genuine cases of life insurance.

Proposed Amendment

It is proposed to provide for the followings:

a. Insert Explanation 3 to the clause (10D) of section 10 of the Act to define ULIP as a life insurance policy which has components of both investment and insurance and is linked to a unit as defined in clause (ee) of regulation (3) of the Insurance Regulatory and Development Authority of India (Unit Linked Insurance Products) Regulations, 2019 dated the 8th day of July, 2019

b. Insert fourth proviso to clause (10D) of section 10 of the Act to provide that the exemption under this clause shall not apply with respect to any ULIP issued on or after the 1st February, 2021, if the amount of premium payable for any of the previous year during the term of the policy exceeds two lakh and fifty thousand rupees.

c. Insert fifth proviso to this clause to provide that, if premium is payable by a person for more than one ULIPs, issued on or after the 1st February, 2021, exemption under this clause shall be available only with respect to such policies aggregate premium whereof does not exceed the amount of two lakh fifty thousand rupees, for any of the previous years during the term of any of the policy.

d. Insert sixth proviso to this clause providing that the provisions of fourth and fifth provisos shall not apply to any sum received on the death of a person

e. Insert seventh proviso to this clause to enable CBDT to issue guidelines with the approval of Central Government for the purpose of removing the difficulty and to lay every guideline issued by the Board before each House of Parliament and to make it binding on the income-tax authorities and the assessee.

f. Provide that a ULIP to which exemption under clause (10D) of section 10 of the Act does not apply on account of the applicability of the fourth and fifth proviso] is a capital asset under clause (14) of section 2 of the Act.

g. Provide for the deemed taxation of profit and gains from the redemption of ULIP [to which exemption under clause (10D) of section 10 of the Act does not apply on account of the applicability of the fourth and fifth proviso] as capital gains by inserting new sub-section (1B) in section 45 and to take power to prescribe rules for calculation of such capital gains.

h. Include such ULIPs [to which exemption under clause (10D) of section 10 of the Act does not apply on account of the applicability of the fourth and fifth proviso] in the definition of equity oriented fund in section 112A so as to provide them same treatment as unit of equity oriented fund. Thus provisions of section 111A and 112A would apply on sale/redemption of such ULIPs.

i. Consequential amendment has also been proposed in Finance (No 2) Act, 2004 to make security transaction tax applicable on maturity or partial withdrawal with respect to unit linked insurance policy issued by insurance company on or after the 1 st February, 2021 [to which exemption under clause (10D) of section 10 of the Act does not apply on account of the applicability of the fourth and fifth proviso]. This amendment is effective from 1st February, 2021.

Effective Date

These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

Section 10 Clause (11) and Clause (12) Taxability of Interest on various funds where income is exempt

Existing Scenario

Clause (11) of section 10 of the Act provides for exemption with respect to any payment from a provident fund to which the Provident Funds Act, 1925 (19 of 1925) applies or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette. Similarly, Clause (12) of this section provides for exemption with respect to the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule.

Rational for Amendment

It is proposed to insert proviso to clause(11) and clause (12) of section 10 of the Act, providing that the provisions of these clauses shall not apply to the interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of contribution made by the person exceeding two lakh and fifty thousand rupees in a previous year in that fund, on or after 1st April, 2021, computed in such manner as may be prescribed.

Effective Date

These amendments will take effect from 1st April, 2022 and shall apply to the assessment year 2022-23 and subsequent assessment years.

Section 36 and Section 43B Payment by employer of employee contribution to a fund on or before due date

Existing Scenario

As per Clause (va) of the sub-section (1) to Section 36 any sum received by the assessee from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of such employees i.e Employees’ Contribution to PF / SSIC/ Superannuation Fund/ Any Other Fund shall be allowed as deduction only if deposited by the due date prescribed under respective act. If the same is deposited after the due date as prescribed under respective date, the same is taxable as income by virtue of clause (24) of section 2.

Rational for Amendment

The Honorable Gujarat High Court in the case of Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100 (Gujarat) had confirmed this view. However various other High Courts have taken a view that if employees’ share of contribution is deposited by the due date of return of income as specified u/s 139(1), then assessee is entitled to claim deduction.

Proposed Amendment

In order to provide certainty, it is proposed to –

a. amend clause (va) of sub-section (1) of section 36 of the Act by inserting another explanation to the said clause to clarify that the provision of section 43B does not apply and deemed to never have been applied for the purposes of determining the ―due date‖ under this clause; and

b. amend section 43B of the Act by inserting Explanation 5 to the said section to clarify that the provisions of the said section do not apply and deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 applies.

Effective Date

These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

Section 44ADA Rationalisation of the provision of presumptive taxation for professionals

Existing Scenario

Unlike section 44AD of the Act applicable only to 'eligible assessee' being an individual, Hindu undivided family or a partnership firm (other than limited liability partnerships), who is a resident and has not claimed any of 'Chapter III deductions' and 'Chapter VI-A deductions' specified in 'C—Deductions in respect of certain incomes', in the relevant assessment year, section 44ADA is applicable to any resident assessee. Thus, apart from individual, HUF and firm, even an LLP, a company, an AOP or BOI or a local authority or every artificial juridical person are eligible to opt for presumptive tax scheme for Profession ('the scheme').

Proposed Amendment

It is proposed to amend sub-section (1) of section 44ADA of the Act to provide that the provision of this section shall apply to an assessee, being an individual, HUF or partnership firm, not being an LLP as defined under clause (n) of sub-section (1) of section 2 of Limited Liability Partnership Act, 2008.

Effective Date

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.

Section 281B Provisional attachment in Fake Invoice cases

Existing Scenario

Section 281B of the Act contains provisions which provide that in cases of assessment or reassessment the Assessing Officer may provisionally attach any property of the assessee, if necessary, in order to protect the interest of revenue. This can be done only with prior approval of Pr. Chief Commissioner or Pr Director General or Chief Commissioner or Director General or Principal Commissioner or Principal Director or Commissioner or Director, of Income-tax. Such provisional attachment is valid for a period of 6 months. Further, the said section allows the assessee to furnish a bank guarantee of the value of the property so attached for revocation of the provisional attachment. The above bank guarantee shall be invoked if the assessee fails to pay his tax demand on time. The powers under this section can only be exercised by the Assessing Officer.

Proposed Amendment

In order to protect the interest of revenue, it is proposed to amend the provision of section 281B of the Act to enable the Assessing Officer to exercise the powers under this section during the pendency of proceedings for imposition of penalty under section 271AAD of the Act, if the amount or aggregate of amounts of penalty imposable is likely to exceed two crore rupees.

Effective Date

This amendment will take effect from 1st April, 2021.

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