Taxation - Income Tax

NOTIFICATION NO. 86/2008, DATED 13-8-2008

In exercise of the powers conferred by clause (v) of the Explanation to section 48 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to seventy-five per cent of the average rise in the Consumer Price Index for the Financial Year commencing from the 1st day of April, 2007 and ending on the 31st day of March, 2008 for the urban non-manual employees, hereby specifies the Cost Inflation Index for the Financial Year commencing from the 1st day of April, 2008 and ending on the 31st day of March, 2009 and for that purpose further makes the following amendment in the notification of the Government of India in the Ministry of Finance (Department of Revenue), Central Board of Direct Taxes number S.O.709(E), dated the 20th August, 1998, namely:-

In the said notification, in the Table, after serial number 27 and the entries relating, thereto, the following serial number and entries shall be inserted, namely :--

A bench headed by Justice S H Kapadia issued notice to PriceWaterhouseCoopers (PWC), being a non-resident firm, on an appeal filed by the Income Tax department seeking the apex court's interference on the issue whether other statutory provisions charging interest can be applied to the assessee which had failed to pay advance tax.

The department has challenged the sectoral tribunal's ruling which held that PWC was not liable to pay advance tax even if the entire payment made to it by its clients in India was subject to TDS under Section 195 of the Income Tax Act.

It had also sought the apex court's directions on whether an assessee like PWC whose entire taxable receipts were subject to TDS was liable to pay advance tax and if the same was paid then whether interest was chargeable on it under Section 234A, 234B and 234C of the Act.

The US-based accountancy and consultancy firm had disclosed consultancy fee aggregating to more than Rs 5.88 crore during 2001-02 arising from various services rendered to its clients in India.

PWC, a limited liability partnership firm, had filed return declaring total income of Rs 5.88 crore on which the tax was worked out to be more than Rs 2.02 crore.

In its computation of income filed along with income return, the assessee had adjusted the amount of TDS aggregating to more than Rs 1.47 crore and the shortfall of tax of Rs 66.64 lakh inclusive of interest was deposited under Section 140A.

The tribunal struck down an order of the income-tax department charging interest from Mr Bharat C Gandhi, an individual taxpayer, solely on the grounds that the assessment order did not mention the quantum of interest charged on him. There was a mention of the quantum of interest in the notice of demand sent to the assessees, but no mention of interest in the assessment order. The income-tax rules stipulate that assessment order should contain the quantum of interest, if interest has to be recovered from the taxpayer.

The rules specify that the quantum of interest should be mentioned in the body of the assessment order. In most cases the concerned officer computes the tax and interest in a separate paper and then mentions the figures of both at the bottom of the assessment order. However, in many cases, the officers mention the quantum of interest in the notice of demand, but not on the assessment order.

In this case, Mr Gandhi's counsel Jignesh R Shah argued that interest cannot be recovered from the taxpayer if there is no mention of the quantum of interest in the assessment order. There was a mention of interest charged under section 234 B (for delay in filing returns) and section 234 C (for non-payment or shortfall in payment of tax) of the Income-Tax Act but there was no mention of interest charged under section 234 D (arising from excess refunds). Mr Shah took a view that interest under section 234D of Income-Tax Act could not be recovered from his client because there was no mention of it on the body of the assessment order. The tribunal accepted Mr Shah's argument.

A brief excursion into the relevant tax rules would be in order first. Long term capital losses can be set off only against long term capital gains. However, short term capital losses can be set off against both short term and long term capital gains. In the context of listed shares and mutual funds (both debt and equity), a period of over one year is long term, and anything less than that is considered short term. The corresponding time period for real estate and gold is three years.

For easy reference, let us put down the currently prevailing short term and long term capital gains tax rates for each of these categories below:

The central theme of the idea is to use the equity market downturn to book short term capital losses. And then utilise these booked losses to set off long term or short term capital gains on gold, real estate or debt fund portfolios.

Let us look at this theme in more detail through an example. You may note that in this example, we have not taken any view on the portfolio allocation strategy per se. For instance, to determine whether you are over-weight on real estate or under-weight on equity, etc, a closer analysis of your individual portfolio is called for. Rather, we are only looking at a general strategy you can adopt to minimise tax liability within the boundaries dictated by your portfolio allocation strategy.

(i) no annexures, TDS/ TCS certificates are required to be annexed to the returns of income. Wherever documents are attached with the return, the receiving official is required to detach and return to the tax-payers all such annexures;

(ii) ITR-V verification form is in the nature of an acknowledgement, and therefore, the same should be received by giving a Return Receipt Number, as if it were a return. These ITR-V verification forms are to be received in separate counters to be set up for the purpose and these forms should be kept in safe custody

(iii) the credit for tax deducted at source (TDS)/tax collected at source (TCS) shall be allowed on the basis of details furnished in the relevant schedules of the return forms, subject to relevant instructions on verification of TDS claims;

(iv) no disallowance of claim for TDS/TCS shall be made by the assessing officer only on the ground that the TDS/TCS certificates have not been filed along with the return of income or Form ITR-V. The same procedure shall also apply in respect of challans relating to Advance Tax and Self Assessment Tax;

With a view to clarifying and facilitating such electronic payment of taxes by different categories of taxpayers, the CBDT has issued Circular No. 5 of 2008. The Circular clarifies that a taxpayer can make electronic payment of taxes from the account of any other person. However, the challan for making such payment must clearly indicate the Permanent Account Number (PAN) of the taxpayer on whose behalf the payment is to be made. It will not be necessary for the assessee to make payment of taxes from his own account in an authorized bank.

Further, it has also been clarified that for the purpose of the newly inserted rule 125 of the Income-tax Rules, 1962, the meaning of tax will include payment of tax deducted at source (TDS) or tax collected at source (TCS). Therefore, a company and such other taxpayers (other than a company), to whom provisions of section 44AB of the Income-tax Act, 1961 are applicable, are also required to mandatorily make such payment electronically.

``No annexures, TDS/TCS certificates are required to be annexed to the returns of income.'' an official statement said. A senior CBDT official said that all informations regarding TDS are recorded in the PAN (permanent account number) data of a tax payer.

He said the department collects data on TDS from various sources and keep it in the PAN data banks of tax payers. Therefore, he said, the tax payers should just provide the TDS informations in the specified column in the return form. If the figure provided in the return is not matched with the data collected in PAN, then the department would ask the tax payer to furnish the Form-16.

The credit for TDS and tax collected at source (TCS) will be allowed on the basis of details furnished in the relevant schedules of the return forms. Assessing officer will not disallow claim in this regard (return against excess tax paid) only on the ground that the TDS/TCS certificates have not been filed along with the return of income, the statement said.

Also, to enable tax-payers to file returns in the electronic mode, the new return forms have been made annexure-less, except ITR-7, which is the returns for trusts. The electronic return filed with electronic signature will be treated at par with a physical sign.

High inflation and the rising rate of interest have not dampened the spirits of the finance ministry. Taking advantage of the slump in the real estate sector, its income tax department -- which made a windfall direct tax collection of more than Rs 3,14,000 crore last fiscal -- is on a buying spree of high-end properties across the country.

It has already purchased an office in BCC Plaza at Pushp Vihar in Saket, situated in South Delhi at a cost of Rs 145 crore. Recently, it acquired three floors -- 8th, 28th and 29th -- at World Trade Centre at Cuffe Parade in Mumbai paying Rs 80 crore from its burgeoning kitty.

Deals have been struck for several prime plots of land and office space in many cities across the country worth crores of rupees. The emphasis is, however, on acquiring centrally air-conditioned buildings that are Wi-Fi enabled, fitted with state-of-theart security systems and plush reception with a lounge-kind of open space.

Sources said the I-T department is constructing a similar campus at Jalahalli in Bangalore which will be centrally air-conditioned with wifi and a surveillance system having access control method. The green campus would have solar street lighting and solar water heater for its hostel block and is estimated to cost the department a measly Rs 25 crore.

Now, even smaller cities like Guwahati and Cuttack would have state-of-the-art buildings. Centrally air-conditioned offices at Guwahati and Cuttack would come up at a cost of Rs 16 crore and Rs 10 crore, respectively. This year, the department had purchased 1.16 acres of land at Erode, under Chennai jurisdiction, for a sum of Rs 6.79 crore while 10 kanals in Jammu had come at a cost of Rs 6.37 crore.

Besides the new acquisition, the government has decided to be generous on improving the infrastructure at the existing range offices across the country. It has already has spent Rs 40 lakh per range at more than 600 range offices for upgradation of facilities, including modern furniture and well done up interiors. The taxmen have been duly rewarded for the windfall tax collection made in the last few years which have grown by more than 40%. All officers of the rank of ITO and above have been rewarded with a laptop. So far sanctions have come for 8,900 laptops and these will be delivered by August 31, 2008.

The department is eyeing tax deducted at source (TDS) as a major source of additional revenue in the current financial year.

The advance tax collections in the fiscal may fall as the manufacturing and petroleum sectors are likely to be impacted due to high interest rates and aftermath of an administered price regime.

Under the Income-Tax Act, 1961, firms and government departments have to deduct tax at source. The TDS rate varies between 1 per cent and 30 per cent depending on the kind of expenditure.

Though most companies that plan to set up a SEZ largely acquire land on their own, they also form a special purpose vehicles (SPVs) with state agencies or even acquire land through these bodies. Any such entity buying land has to deduct tax while making payment when the sale deed is registered. Besides, these project implementing authorities, public utilities implementing projects under fast-track
authorities will be under the watch in cases where implementation is not done directly by the state government.

LANDING IN TROUBLE
I-T dept surveys reveal no deduction of tax in several recent SEZ land transactions
TDS has to be deducted at the rate of 1% for payments exceeding Rs 15 lakh
Public utilities implementing projects under fast-track authorities will be under watch
Most cos largely acquire land on their own, but they also form a SPVs with state agencies

TDS on SEZ land acquisitions issue figured at the annual conference of chief commissioners and directors general of income tax. Officials have been instructed to specially watch out for such transactions for additional revenue mobilisation in the current fiscal, sources told ET.

The move comes close on the heels of the some state governments questioning the centre's stamp duty exemption for such land purchases through provisions in the SEZ Act. States like MP and Orissa have written to the Centre, seeking a clarification on the issue. There has been an increased focus on the TDS by the I-T department, which created a separate directorate to monitor collections under this head. The government's TDS collections grew by 51% in 2007-08 to Rs 1,06,700 crore from a mere 2.36% in 2004-05. The total tax collection in the fiscal stood at Rs 3,14,486 crore.

Realty deals whose value is more than eight times the gross income of the buyer could come under the scanner of the I-T department, going by the latest scrutiny norms circulated to officials. So, if your gross income is Rs 10 lakh per annum and you have bought a house for more than Rs 80 lakh, you could get a call from the department.

Gross income, for this purpose, shall be total income plus exempted income minus the total tax paid. This norm is being adopted to ensure that there is no evasion and people who enter into such transactions pay taxes honestly.

Cash deposit of Rs 10 lakh in your savings account could also bring you on the scrutiny radar. Individual assesses now have to report transactions which get captured in Annual Information Return (AIRs). Sale or purchase of house above Rs 30 lakh is reported, under AIR, by registrars to the department.

Scrutiny on these counts would be generated though Computer Assisted Scrutiny System (CASS) and not through manual intervention.

According to the criterion that were discussed at the recent annual conference of the chief commissioners and directors general of income-tax, capital gains of more than Rs 25 lakh could also attract scrutiny by the department in the current financial year.

Similarly, loss from house property of more than Rs 2.5 lakh would also invite the I-T department's scanner, sources told ET. The real estate sector, which is known to attract large quantum of black money, continues to draw the attention of tax department.

Real estate agents and builders having a turnover of more than Rs 5 crore could attract scrutiny. Professionals like doctors, architects whose gross receipts exceed Rs 40 lakh and those who report profit of less than 30% of the gross receipt, can also face scrutiny.

The assessee was engaged in the business of providing internet access to its subscribers. The main server, on the basis of which internet services were provided, was in the US. Out of the service charges collected by the assessee from the subscriber, it paid an amount to the US company.

The assessing officer held that the services rendered by the US company were in the nature of technical services as per provisions of section 9(1)(vii) of the Act and therefore, the assessee was liable to deduct TDS on such payment.

The High Court observed that there was no privity of contract between the customers and the US company. The assessee was merely paying for an internet bandwidth to the US firm and then selling it to its customers. Hence, the assessee had only purchased internet bandwidth.

The use of internet facility may require sophisticated equipment but that does not mean that technical services were rendered by the US firm to the assessee. Therefore, it held that the payment was not subject to TDS.

While the SEZ Act promises units operating in the zones a 100% tax exemption on profits in the first five years, a 50% tax exemption in the next five years, and a 50% tax exemption on re-invested profits in the following five years, the restrictions imposed by section 10AA(7) of the I-T Act could limit the exemptions.

According to section 10AA(7), only a proportion of profits, based on the proportion of export sales from the SEZ unit to the total turnover of the company, will be exempt. So, if a company's export sales from its SEZ unit is only a small percentage of its total turnover, the tax exemption that it will get on SEZ sale profits will be that small percentage value and not 100% as promised under the SEZ Act.

In a recent open house organised by the export promotion council for EoUs and SEZs in Mumbai, commerce secretary G K Pillai assured unit owners that the eGoM would look at the interpretation of the section and take an appropriate decision.

The issue of extending service tax exemption for authorised operations for services rendered outside SEZs will also be considered by the eGoM, the commerce secretary had said.