Representation on the Finance Bill, 2006

REPRESENTATION ON THE FINANCE BILL, 2006

EXECUTIVE SUMMARY

Definition Of Income - Section 2 (24) Clause 3(i)(B)

To avoid any ambiguity in the matter it is suggested that the term ‘Co-operative Bank’ be used instead of the term ‘Co-operative Society’ to be consistent with the usage of the term ‘Co-operative Bank’ in Section 80-P as proposed.

Waiver Of Interest For All Retrospective Amendments

In case of amendments made with retrospective effect, the assessments may be reopened. Over and above the tax liability the assessee will be forced to pay the interest under various sections of the Act till the date of completion of the assessment. This will result in heavy financial burden on the assessees. It is suggested that in order to avoid hardship to the assessees, specific provision should be made that no interest shall be payable in the case of any demand arising due to retrospective operation of any amendment.

Taxing Voluntary Contributions As Income – Section 2(24)(iia) Clause 3(i)

It is suggested that the amendment should be made prospectively from Assessment Year 2007-08, and not retrospectively.

Strictly in the alternative, such trusts and institutions may be asked to spend the amount by – say, 31 March 2008 if the exemption is to be protected.

Removal Of Exemption For Income From Investment In Infrastructure AndOther Projects – Section 10(23G) Clause 4 (f)

One of the thrust areas of this year’s budget proposal has been infrastructure development. In view of the same it seems inappropriate and a contradiction to delete this exemption at this point in time.

The argument advanced in the Memorandum explaining the Budget provisions that long term capital gains on sale of shares is anyway exempt u/s 10(38) is only partially valid. Withdrawal of the exemption will only result in increase in the interest rates, wherever there is a possibility of renegotiating the terms of lending.

Even if this section is to be deleted, it should be withdrawn only for loans made to and investments made in eligible business after 1st April 2006. This would also logically fit with the scheme of the section as, when it was introduced, the exemption was made applicable only prospectively to investments made after 1st of June 1998.

Taxation Of Anonymous Donations – Sections 10(23C), 13(7), 115BBC Clauses 4(d), 6 and 22

Many charities organize fund-raising programmes or road processions to assist people affected by floods, storms, etc. where funds are collected from a large number of people who contribute spontaneously. Even charities for assistance of needy members of the Armed Forces raise funds on certain days from a large number of people by passing around boxes for collection. All these collections may now be treated as anonymous donations, and taxed at 30%. This does not appear to be the intention. The intention appears to be to tax only donations received by trusts from unaccounted money for a university, educational institution, hospital or medical institution.

All voluntary contributions received by wholly charitable trusts/institutions should be on the same footing as religious cum charitable trusts such that, in all cases, donations which carry no specific direction for university, educational institution, hospital or medical institution run by such trust/institution may remain exempt from tax in similar manner without any discrimination.

Application For Exemption – Section 10(23C) Clause 4(d)

It is suggested that sufficient time be given to create awareness among such institutions by allowing time upto 31.3.07 in relation to earlier years. Further, on lines of power contained in section 12A of the Act, the authority should be empowered to condone any delay in making of such applications, where there is a reasonable cause for such delay.

Deduction Of Interest Converted Into Loan Not Allowable On Conversion –Section 43B Clause 12

The denial of deduction in respect of conversion of interest payable into loan or borrowing or advance will cause great injustice and undue hardship to the assessees. Generally, interest payable is converted into loan in case of assessees who are referred to the Board for Industrial and Financial Reconstruction (BIFR) or those who have opted for financial restructuring. Further, the institutions and banks who have permitted such conversion would have already accrued the said interest and offered the same to tax under section 43D. It is accordingly, submitted that making the aforesaid amendments retrospective is not called for and may not even be justified.

Exemption Of Long Term Capital Gains- Section 54EC Clause 13

This would cause great hardship to assessees who have already invested out of capital gains arising during the previous year ended 31st March, 2006 in long term specified asset as defined at the time of making the investment. This amendment should therefore be prospective with effect from AY 2007-08.

Minimum Alternate Tax (Mat) – Section 115JB Clauses 4 and 24

When STT was introduced, it was represented by the Finance Minister that it is a trade off against the capital gains tax exemption / concession. Levy of minimum alternative tax is tantamount to breach of that assurance and is, therefore, unjust.
With the levy of this tax, the level playing field between the FIIs and the Indian Companies is injured too.

Amendments to Fringe Benefit Tax (“FBT”) – Sections 115WB and 115WC Clause - 28 and 29
In our detailed representation last year, we have recorded our multiple objections to this levy. All those objections are still valid today. Without prejudice thereto, herein, we have restricted ourselves only to the proposals contained in the current Finance Bill.

10.2At the outset, it would be desirable that all the amendments in Chapter XII-H are carried out with effect from April 1, 2006 so that there is no different treatment for certain items for A.Y. 2006-07 as compared to subsequent years.

In principle, like free samples distributed by pharmaceutical companies, the cost of distribution of free samples by all others should also be exempt from the levy of FBT.

10.3While the valuation in respect of expenses on all “tours and travel (including foreign travel)” is reduced to 5% from 20% in this Finance Bill, the valuation in respect of the expenses on tours and travel in relation to conferences is retained at 20%. It is therefore suggested that valuation in respect of tours and travel expenses even for conferences should be reduced to 5%.

10.4However, taxing Superannuation contributions even in such cases would be a clear case of double taxation since the employee is fully taxed on the amount of pension he receives from month to month.

Deduction Of MAT Credit And Other Credit While Computing Interest –Sections 140A, 234A, 234B and 234C Clauses 34, 48, 49 and 50

These proposals are welcome and they recognize the relief rightfully due to the assessees. The amendment gives effect to the judicial view and should hence be made applicable from a retrospective date or with a clear signal that the intention is to clarify the law on the subject.

Time Limit For Issue Of Notice : Section 142(1) Clause 35

It is suggested that a time limit of six months from the end of the assessment year should be provided to issue a notice beyond which such notice cannot be issued.

It is strongly submitted that the Finance Bill should not be used to rectify procedural lapses. It is therefore suggested that the said proviso should be deleted.

Revision Of Time Limits For Completion Of Assessment – Sections 153 /153BC Clauses 37, 38 and 57

The intention of reducing the time limit is to collect the demand raised during the financial year in the same year itself. This amendment will cause great difficulty and will put a lot of pressure on the assessees and the representatives, particularly in the months of October to December as they will be busy with the finalisation of tax audit, VAT Audit, etc. as well as festivals like Diwali and Christmas.

Receipt of money without consideration – Gift – Taxability under Section 56

The Taxation Laws (Amendment) Bill, 2005 (Bill No. 74 of 2005)presented before the Parliament had proposed to insert sub-clause (e), (f) and (g) to the Proviso to section 56 of the Income tax Act, 1961 to provide that sum of money (gift) or gift, donation or grant received from any trust or institution registered under Section 12AA or covered by provision of Section 10(23) or from a local authority, i.e., panchayat, municipality, district board and cantonment board etc.shall not be chargeable to tax u/s. 56 effective from assessment year 2005-06. The Bill was shelved with an assurance that the effect will be given as part of the Finance Bill. It is therefore fair to expect that the proposals are inserted in the Finance Act with retrospective effect.

I N D E X

Para No. / Subject / Page No.
Definition Of Income - Section 2 (24) - Clause 3(i)(B) / 1
Waiver Of Interest For All Retrospective Amendments / 1
Taxing Voluntary Contributions As Income – Section 2(24)(iia) – Clause 3(i) / 1
Removal Of Exemption For Income From Investment In Infrastructure And Other Projects – Section 10(23G) –Clause 4 (f) / 2
Taxation Of Anonymous Donations – Sections 10(23C), 13(7), 115BBC –Clauses 4(d), 6 and 22 / 3
Application For Exemption – Section 10(23C) – Clause 4(d) / 5
Deduction Of Interest Converted Into Loan Not Allowable On Conversion – Section 43B – Clause 12 / 5
Exemption Of Long Term Capital Gains- Section 54EC – Clause 13 / 7
Minimum Alternate Tax (MAT) – Section 115JB – Clauses 4 and 24 / 7
Amendments to Fringe Benefit Tax (“FBT”) – Sections 115WB and 115WC – Clause - 28 and 29 / 8
Deduction Of MAT Credit And Other Credit While Computing Interest – Sections 140A, 234A, 234B and 234C – Clauses 34, 48, 49 and 50 / 10
Time Limit For Issue Of Notice : Section 142(1) – Clause 35 / 11
Revision Of Time Limits For Completion Of Assessment – Sections 153 / 153BC – Clauses 37, 38 and 57 / 12
Receipt of money without consideration – Gift – Taxability under Section 56 / 12

BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY

REPRESENTATION ON THE FINANCE BILL, 2006

Definition Of Income - Section 2 (24) Clause 3(i)(B)

A new sub clause (vii) is proposed to be added so as to include in the definition of income, the profits & gains of any business carried on by a co-operative society with its members. It appears that the term co-operative society is used inadvertently instead of co-operative bank. To avoid any ambiguity in the matter it is suggested that the term ‘Co-operative Bank’ be used instead of the term ‘Co-operative Society’ to be consistent with the usage of the term ‘Co-operative Bank’ in Section 80-P as proposed.

Waiver Of Interest For All Retrospective Amendments

Taxing Voluntary Contributions As Income – Section 2(24)(iia) Clause 3(i)

It is proposed to retrospectively amend the definition of income with effect from Assessment Year 1999-2000, to extend the treatment of voluntary contributions as income to universities, hospitals, institutions covered by clauses (vi) and (via) of section 10(23C). Many such institutions may have complied with condition of spending 85% of income as per the definition of income understood earlier. On account of retrospective amendment, such institutions will forfeit the benefit of exemption in absence of spending such income during relevant year, and will end up paying tax together with interest on such income for no fault of theirs. This would be unfair drain on charity. It would be wrong to presume all of them to be clandestine. It is therefore suggested that the amendment should be made prospectively from Assessment Year 2007-08, and not retrospectively.

Strictly in the alternative, such trusts and institutions may be asked to spend the amount by – say, 31 March 2008 if the exemption is to be protected.

Removal Of Exemption For Income From Investment In Infrastructure AndOther Projects – Section 10(23G) Clause 4 (f)

The Bill seeks to delete the above section and consequentially, the income of infrastructure capital fund or infrastructure capital company or co-operative bank from existing as well as future investments by way of shares or long-term finance in eligible business will now be made taxable.

The argument advanced in the Memorandum explaining the Budget provisions that long term capital gains on sale of shares is anyway exempt u/s 10(38) is only partially valid. Most investments in eligible businesses are in newly established unlisted companies often with a buy back option. The sale of such shares would not be eligible for the above exemption as the transaction would not be routed through the stock exchange and as such would not be subjected to STT. Besides long term capital gains on sale of equity shares will now be considered as part of the book profit and will therefore be liable to the minimum alternate tax u/s 115JB.

Hence in large number of cases long term gains on sale of shares would now become taxable on account of the withdrawal of this section and its consequential reference in Section 11JB.

Since the investment in equity capital would be in order to support infrastructure projects and initiatives during its nascent stage, this exemption needs to be retained.

Similarly, the argument in the Memorandum that the interest rate for borrowing funds has come down is misguided. The fact that interest from long-term finance in eligible business was exempt resulted in reduction in the cost of such funding. Withdrawal of the exemption will only result in increase in the interest rates, wherever there is a possibility of re negotiating the terms of lending.

Besides, the withdrawal of the exemption does effectively have retrospective effect as it will alter the financial parameters of investment decision implemented in the past. Therefore, even if this section is to be deleted, it should be withdrawn only for loans made to and investments made in eligible business after 1st April 2006. This would also logically fit with the scheme of the section as, when it was introduced, the exemption was made applicable only prospectively to investments made after 1st of June 1998.

Taxation Of Anonymous Donations – Sections 10(23C), 13(7), 115BBC Clauses 4(d), 6 and 22

It is proposed to tax anonymous voluntary contributions received by charitable trusts/institutions as income of the trust/institution, be taxed at the rate of 30%. Relaxation is provided if voluntary contributions have been received by a religious trusts/institution. In cases of voluntary contributions received by a trust/institution created for both religious and charitable purposes, anonymous contributions received with specific directions for university, educational institution, hospital or medical institution run by such trust/institution are meant to be taxed @30%.

Serious doubt can arise for many trusts/institutions, which are purely for charitable purposes. They raise funds through public appeals, where a large number of people contribute, and it is not practicable to maintain the identity of donors. For example charities for destitute children raise funds through tie-ups with airlines for collection from passengers who drop small amounts of money into a box, charities for aid of needy patients have boxes placed at hospitals for collection of funds to assist needy patients, many charities organize fund-raising programmes or road processions to assist people affected by floods, storms, etc. where funds are collected from a large number of people who contribute spontaneously. Even charities for assistance of needy members of the Armed Forces raise funds on certain days from a large number of people by passing around boxes for collection. All these collections may now be treated as anonymous donations, and taxed at 30%. This does not appear to be the intention. The intention appears to be to tax only donations received by trusts from unaccounted money for a university, educational institution, hospital or medical institution.

As an alternative, it is suggested that, in case of a wholly charitable trust, such donations should be treated as income only if such amounts are not spent for revenue purposes under its objects by the recipient trust/institution within the same financial year in which such donations are received or in the immediately succeeding financial year.

Application For Exemption – Section 10(23C) Clause 4(d)

It is proposed to insert a twelfth proviso to section 10(23C), to provide that any fund, trust, institution, university, educational institution, hospital or medical institution seeking grant of exemption under this section on or after 1st June 2006 should make the application for grant of exemption or renewal thereof during the financial year immediately preceding the assessment year from which the exemption is sought.

Since all such institutions may not become aware of such changed time limit for making of the application by 1st June 2006, it is suggested that sufficient time be given to create awareness among such institutions by allowing time upto 31.3.07 in relation to earlier years. Further, on lines of power contained in section 12A of the Act, the authority should be empowered to condone any delay in making of such applications, where there is a reasonable cause for such delay.

It is noticed that, very often, applications for renewal are often filed late because the earlier approval is received late – at times, after a period of more than 3 years from the date of application. It is therefore suggested that a time limit of 12 months from the date of application should be laid down for disposal of the application as was recommended in Clause 3(b) of Taxation Laws (Amendment) Bill 2005. Failing this, the exemption should be deemed by the statute to have been granted.