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FINAL COURSE
SUPPLEMENTARY STUDY PAPER - 2015
DIRECT TAX LAWS AND INDIRECT TAX LAWS
[A discussion on amendments made by the Finance

Act, 2015, Significant Notifications/Circulars issued
between 1st May, 2014 and 30th April, 2015 and New
Foreign Trade Policy 2015 – 2020]
(Relevant for May, 2016 and November, 2016 Examinations)
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
© The Institute of Chartered Accountants of India

This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of
the Institute of Chartered Accountants of India. Permission of the Council of the Institute is
essential for reproduction of any portion of this paper. Views expressed herein are not
necessarily the views of the Institute.
This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of
the Institute of Chartered Accountants of India with a view to assist the students in their
education. While due care has been taken in preparing this Supplementary Study Paper, if
any errors or omissions are noticed, the same may be brought to the attention of the Director
of Studies. The Council of the Institute is not responsible in any way for the correctness or
otherwise of the amendments published herein.
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ii

A WORD ABOUT SUPPLEMENTARY
Direct Tax Laws and Indirect Tax Laws are amongst the extremely dynamic subjects of the
Chartered Accountancy Course. The level of knowledge prescribed at the Final Level for the
subjects is ‘advanced knowledge’. For attaining such a level of knowledge, the students not
only have to be thorough with the basic provisions of the relevant laws, but also need to
constantly update their knowledge of statutory and judicial developments.
The Board of Studies has been instrumental in imparting theoretical education to the students of
Chartered Accountancy Course. The distinctive characteristic of the course i.e., distance
education, emphasizes the need for bridging the gap between the students and the Institute and for
this purpose, Board of Studies provides a variety of educational inputs for the students.
One of the important inputs of the Board on taxation is the Supplementary Study Paper in
Direct and Indirect Tax Laws for the Final students. The Supplementary Study Papers are
annual publications and contain a discussion on the amendments made by the Annual Finance
Acts and Notifications/Circulars in income-tax, excise, service tax and customs. They are
very important to the students for updating their knowledge regarding the latest statutory
developments in the respective areas mentioned above. A lot of emphasis is being placed on
these latest amendments in the Final examinations.
The amendments made by the Finance Act, 2015, significant Notifications/Circulars issued
between 1st May, 2014 and 30th April, 2015 and the significant provisions of new Foreign
Trade Policy 2015 – 2020 (effective from April 1, 2015) have been incorporated in this
Supplementary Study Paper – 2015, which is relevant for students appearing in May, 2016
and November, 2016 examinations. Students may note that the Finance Act, 2015 has
abolished the levy of wealth-tax under the Wealth-tax Act, 1957 with effect from A.Y.2016-17.
Therefore, the Wealth-tax Act, 1957 and Rules thereunder would not be applicable from May
2016 examination and onwards.
The Supplementary Study Paper – 2015 has been divided into chapters to facilitate co-relation with
the Study Material. The chapter reference given in the Supplementary Study Paper corresponds to
the parallel chapter number of the Study Material. The related sections, however, have been
grouped together and explained in the same chapter of the Supplementary Study Paper to facilitate
interlinking and reading of interconnected provisions. Illustrations have been given, wherever
possible, to aid better understanding of the amendments.
The amendments made by way of notifications/circulars issued after 30th April, 2015 and which
are relevant for May, 2016 and November, 2016 examinations will be given in the Revision
Test Paper (RTP) for May, 2016 and November, 2016 examinations, respectively. In case you
need any further clarification/guidance with regard to this publication, please send your
queries relating to direct tax laws at [email protected] and queries relating to indirect tax laws at
[email protected].
Happy Reading and Best Wishes for the forthcoming examinations!
iii

DIRECT TAX LAWS

DIRECT TAX LAWS
AMENDMENTS AT A GLANCE – FINANCE ACT, 2015
S.No. Particulars Section
Income-tax
A. Basic Concepts
1. Rates of income-tax
2. Government grants, other than grants considered for 2(24)
determination of “actual cost”, included in the definition of
“Income”
B. Residential Status and Scope of Total Income
3. CBDT to prescribe the manner of computation of period of 6(1)
stay for an Indian citizen, being a member of the crew of a
foreign bound ship leaving India
4. Residential status of a company to be determined on the basis 6(3)
of “Place of Effective Management”
5. Value of Indian assets to determine whether the share or 9(1)(i), 285A,
interest of a foreign company or entity is deemed to derive its 271GA & 273B
value substantially from the assets located in India
6. Taxability of interest payment to a non-resident, being a 9(1)(v)
person engaged in the business of banking, by its
Permanent Establishment (PE) in India
7. Presence of eligible fund manager in India not to constitute 9A, 271FAB &
business connection in India of such eligible investment 273B
fund on behalf of which he undertakes fund management
activity
C. Incomes which do not form part of total income
8. Exemption of specified income of Core Settlement 10(23EE)
Guarantee Fund (SGF) set up by a recognized Clearing
Corporation
9. “Yoga” included as a specific category in the definition of 2(15)
“charitable purpose”
10. Conditions to be satisfied for “advancement of any other 2(15)
object of general public utility” to constitute a “charitable
purpose”
11. Time limit for filing of Form 10 by a trust or institution for 11(2)
accumulation of income

D. Profits and gains of business or profession
12. Balance 50% of additional depreciation to be allowed in the 32(1)
subsequent year, where the plant and machinery is put to
use for less than 180 days during the previous year of
acquisition and installation
13. Manufacturing industries set up in the notified backward 32AD
areas of specified States to be eligible for a deduction
@15% of the actual cost of new plant and machinery
acquired and installed during the previous year
14. Additional depreciation @35% to be allowed to assessees 32(1)(iia)
setting up manufacturing units in notified backward areas
of specified States and acquiring and installing new plant
and machinery
15. Prescribed conditions relating to maintenance of accounts, 35(2AB) &
audit, etc. to be fulfilled by the approved in-house R&D 35(2AA)
facility [Section 35(2AB)]; Prescribed Authority may also
submit Report to Chief Commissioner or Commissioner
16. Interest paid in respect of capital borrowed for acquisition of 36(1)(iii)
an asset, for the period upto the date on which the asset is
first put to use to be capitalized, even if the acquisition of the
asset is not for extension of existing business or profession
17. Amount of debt taken into account in computing the income 36(1)(vii)
of the assessee on the basis of notified ICDSs to be
allowed as deduction in the previous year in which such
debt or part thereof becomes irrecoverable
18. Amount of expenditure incurred by a co-operative society for 36(1)(xvii)
purchase of sugarcane at price fixed by the Government
allowable as deduction
E. Capital Gains
19. Any transfer of capital asset, being share of a foreign 47(viab), 47(vicc)
company, referred in Explanation 5 to section 9(i), deriving & 49
its value substantially from the shares in an Indian
company, in a scheme of amalgamation/demerger not to be
regarded as transfer under section 47, where the
amalgamating/demerged and amalgamated/resulting
companies are foreign companies
20. Transfer of units by unit holders in consolidation scheme of 47(xviii), 2(42A)
mutual funds not to be regarded as transfer & 49(2AD)
21. Cost of acquisition of the capital asset acquired in the scheme 49(1)(iii)(e)
of demerger referred to in section 47(vib) in the hands of
resulting company

22. Cost of acquisition and period of holding of shares acquired 49(2ABB) &
on redemption of Global Depository Receipts (GDRs) by a 2(42A)
non-resident assessee
F. Deductions from Gross Total Income
23. Deduction under section 80C to be available in respect of 80C & 10(11A)
deposit in Sukanya Samriddhi Account Scheme for the
welfare of girl child
24. Increase in the limit of deduction in respect of contribution 80CCC
to certain pension funds under section 80CCC
25. Additional deduction in respect of contribution to NPS of 80CCD(1B) &
Central Government under section 80CCD(1B) and 80CCD(1)
enhancement of limit of deduction under section 80CCD(1)
26. Enhancement of the limit of deduction under section 80D 80D
and allowability of deduction for incurring medical
expenditure in respect of very senior citizen
27. Increase in the limit of deduction under section 80DD and 80DD & 80U
80U in respect of persons with disability and severe
disability
28. Enhanced limit of deduction for expenditure incurred in 80DDB
respect of medical treatment of very senior citizen
29. Scope of section 80G expanded to allow 100% deduction in 80G
respect of donation to Swachh Bharat Kosh, Clean Ganga
Fund and National Fund for Control of Drug Abuse
Exemption of income of Swachh Bharat Fund & Clean
Ganga Fund 10(23C)
30. Deduction for employment of new regular workmen 80JJAA
extended to all assessees deriving profits and gains from
manufacture of goods in a factory
G. Assessment of various entities
31. Scheme of taxation of Investment Funds 115UB,
10(23FB), 115U,
139 & 194LBB
32. Special Taxation Regime for Business Trusts 115UA,
10(23FCA), 10(38),
111A, 194LBA(3) &
194-I
33. Notional gains/loss on transfer of shares of SPV to a 115JB
business trust in exchange of units allotted by the business
trust & Notional gains/loss on change in carrying amount of
such units to be excluded from book profit for levy of MAT

34. Decrease in rate of tax on royalty income and fees for 115A
technical services in case of non-residents
35. Share of member of an AOP/BOI in the income of the 115JB
AOP/BOI to be reduced from net profit for computing book
profit for levy of MAT
36. Income accruing or arising to a foreign company from 115JB
capital gains arising on transactions in securities or
interest, royalty and fees for technical services chargeable
to tax at the rate or rates specified in Chapter XII to be
excluded from levy of MAT
37. Definition of Global Depository Receipts (GDRs) amended to 115ACA
restrict the benefit under section 115ACA to only such GDRs
as defined in the earlier depository scheme
H. Transfer Pricing and Other Provisions to check
avoidance of tax
38. Increase in threshold for specified domestic transaction 92BA
I. Assessment Procedure
39. Approval regime for issue of notice for re-assessment 151
simplified
40. Beneficial Owner / Beneficiary of any asset located outside 139(1)
India required to file return of income in the prescribed form
and manner
41. Assessment of income of a person other than the person in 153C
whose case search has been initiated or books of account,
other documents or assets have been requisitioned
42. Procedure for appeal by revenue when an identical 158AA
question of law is pending before Supreme Court
J. Settlement Commission
43. Deemed date of commencement of settlement proceedings 245A
44. Time limit for amending an order to rectify a mistake 245D(6B)
apparent from the record
45. Settlement Commission to record reasons in writing while 245H(1)
granting immunity to any person from prosecution
46. Date of abatement where the Settlement Commission has 245HA(1)
passed an order without providing the terms of settlement
47. Restriction of not approaching the Settlement Commission 245K
more than once to apply to related persons also

48. Asset seized under section 132 or requisitioned under 132B
section 132A to be allowed to be adjusted against the
amount of liability arising on an application made before
the Settlement Commission under section 245C(1)
K. Advance Ruling
49. Qualification for appointment as a law member of AAR 245-O(3)
L. Appeals and Revision
50. Orders appealable before the Appellate Tribunal to include 253(1)
orders passed by the prescribed authority under section
10(23C)(vi) & (via)
51. Raising the total income limit of the cases that may be 255(3)
decided by single member bench of Appellate Tribunal
52. Circumstances when an order passed by the Assessing 263(1)
Officer shall be deemed to be erroneous in so far as it is
prejudicial to the interests of the revenue
M. Penalties
53. Manner of determination of “amount of tax sought to be 271(1)(iii)
evaded” for levy of penalty for concealment of income
under section 271(1)(iii)
N. Miscellaneous Provisions
54. Acceptance of “Specified sum” and repayment of “Specified 269SS, 269T,
advance” in relation to immovable property transactions to 271D & 271E
be effected through specified modes
55. CBDT empowered to notify rules for giving foreign tax credit 295(2)
56. Definition of “accountant” amended to exclude specified 288
related persons
O. Deduction, Collection & Recovery of Tax
57. Person responsible for paying income chargeable under 192(2D)
the head “Salaries” to obtain proof or evidence or
particulars of prescribed deductions/exemptions/set-off of
losses claimed by the assessee
58. Tax to be deducted@10% on premature taxable withdrawal 192A & 197A
from employees provident fund
59. Co-operative banks to deduct tax at source on interest on 194A
time deposits credited or paid to its members
60. Interest on recurring deposits to be subject to tax deduction 194A
at source under section 194A
61. Threshold limit to be reckoned with reference to the 194A(3)
aggregate interest credited or paid by all branches of a

banking company/co-operative bank/public company which
has adopted core banking solutions
62. Tax deduction from interest on compensation awarded by 194A
the Motor Accidents Claims Tribunal to be made at the time
of payment, where the interest or aggregate interest paid
exceeds Rs.50,000
63. Exemption from applicability of TDS provisions under 194C(6)
section 194C to be available only in respect of payments to
transport operators owning ten or less goods carriages at
any time during the previous year, on furnishing of PAN
64. Extension of eligible period of concessional tax rate@5% 194LD
under section 194LD
65. Person responsible for paying any sum, whether or not 195(6)
chargeable to tax, to a non-corporate non-resident or to a
foreign company, to furnish the information relating to payment
of such sum in the prescribed form and prescribed manner
66. Facilitating filing of Form 15G/15H for payments made 197A
under life insurance policy
67. Notified deductors or collectors not required to obtain and 203A
quote TAN
68. Enabling provision for computation of fee payable under 200A & 206CB
section 234E at the time of processing TDS/TCS statements
69. Enabling provision for filing of TCS correction statement 206C(3B)
70. Processing of statements of tax collected at source 206CB
71. Pay and Accounts Officer/Treasury Officer/Cheque Drawing 200(2A)
and Disbursing Officer to furnish statement in prescribed form 206C(3A) & 272A
to the prescribed authority, where tax deducted/collected has
been paid without production of challan
72. Intimation generated after processing of TCS statement - 154, 156, 246A &
deemed as notice of demand; appealable and subject to 220
rectification
73. Interest under section 234B payable from 1st April next following 234B
the financial year, in a case where the total income is increased
on reassessment under section 147 or section 153A
74. Period for which interest under section 234B is to be charged 234B
where an application is filed under section 245C(1)
Note - In addition, significant notifications and circulars issued between the period 1.5.2014 and
30.4.2015 have been included under the respective chapters. Income computation and disclosure
standards have been notified by the CBDT w.e.f. A.Y.2016-17. The salient features, text of
standards and impact have been discussed in “Chapter 6 : Profits and gains of business or
profession”.

1
BASIC CONCEPTS
AMENDMENTS BY THE FINANCE ACT, 2015
RATES OF TAX
Section 2 of the Finance Act, 2015 read with Part I of the First Schedule to the Finance Act,
2015, seeks to specify the rates at which income-tax is to be levied on income chargeable to tax
for the assessment year 2015-16. Part II lays down the rate at which tax is to be deducted at
source during the financial year 2015-16 from income subject to such deduction under the
Income-tax Act, 1961; Part III lays down the rates for charging income-tax in certain cases, rates
for deducting income-tax from income chargeable under the head "salaries" and the rates for
computing advance tax for the financial year 2015-16 i.e., A.Y.2016-17. Part III of the First
Schedule to the Finance Act, 2015 will become Part I of the First Schedule to the Finance Act,
2016 and so on.
Rates for deduction of tax at source for the F.Y.2015-16 from certain income
Part II of the First Schedule to the Act specifies the rates at which income-tax is to be deducted at
source under sections 193, 194, 194A, 194B, 194BB, 194D and 195 during the financial year 2015-
16. These rates of tax deduction at source are the same as were applicable for the F.Y.2014-15.
However, the rate of tax deduction at source has been decreased from 25% to 10% in respect of
specified royalty and fees for technical services payable by Government or an Indian concern, in
pursuance of an agreement made by it with the Government or the Indian concern, to a non-
corporate non-resident or a foreign company.
Surcharge would be levied on income-tax deducted at source in case of non-corporate non-
residents and foreign companies. If the recipient is a non-corporate non-resident,
surcharge@12% would be levied on such income-tax if the income or aggregate of income
paid or likely to be paid and subject to deduction exceeds ` 1 crore. If the recipient is a
foreign company, surcharge@ –
(i) 2% would be levied on such income-tax, where the income or aggregate of such incomes
paid or likely to be paid and subject to deduction exceeds ` 1 crore but does not exceed
` 10 crore; and
(ii) 5% would be levied on such income-tax, where the income or aggregate of such incomes
paid or likely to be paid and subject to deduction exceeds ` 10 crore.
Surcharge would not be levied on deductions in all other cases. Also, education cess and

secondary and higher education cess would not be added to tax deducted or collected at
source in the case of a domestic company or a resident non-corporate assessee. However,
education cess @2% and secondary and higher education cess @1% on income-tax plus
surcharge, wherever applicable, would be added to tax deducted at source in cases of non-
corporate non-residents and foreign companies.
Rates for deduction of tax at source from "salaries", computation of "advance tax" and
charging of income-tax in certain cases during the financial year 2015-16
Part III of the First Schedule to the Act specifies the rate at which income-tax is to be
deducted at source from "salaries" and also the rate at which "advance tax" is to be computed
and income-tax is to be calculated or charged in certain cases for the financial year 2015-16
i.e., A.Y. 2016-17.
It may be noted that education cess @2% and secondary and higher education cess @1%
would continue to apply on tax deducted at source in respect of salary payments.
The general basic exemption limit for individuals/HUFs/AOPs/BOIs and artificial juridical persons
remains unchanged i.e. (` 2,50,000). The basic exemption limit of ` 3,00,000 for senior citizens,
being resident individuals of the age of 60 years or more but less than 80 years at any time
during the previous year also remains the same. Resident individuals of the age of 80 years or
more at any time during the previous year would continue to be eligible for the higher basic
exemption limit of ` 5,00,000. The tax slabs are shown hereunder -
(i) (a) Individual/ HUF/ AOP / BOI and every artificial juridical person
Level of total income Rate of income-tax
Where the total income does not exceed Nil
` 2,50,000
Where the total income exceeds 10% of the amount by which the
` 2,50,000 but does not exceed total income exceeds ` 2,50,000
` 5,00,000
Where the total income exceeds ` 25,000 plus 20% of the
` 5,00,000 but does not exceed amount by which the total
` 10,00,000 income exceeds ` 5,00,000
Where the total income exceeds ` 1,25,000 plus 30% of the
` 10,00,000 amount by which the total
income exceeds ` 10,00,000
(b) For resident individuals of the age of 60 years or more but less than 80 years
at any time during the previous year
` 3,00,000

Where the total income exceeds 10% of the amount by which the
` 3,00,000 but does not exceed total income exceeds ` 3,00,000
` 5,00,000
Where the total income exceeds ` 20,000 plus 20% of the amount
` 5,00,000 but does not exceed by which the total income exceeds
` 10,00,000 ` 5,00,000
Where the total income exceeds ` 1,20,000 plus 30% of the amount
` 10,00,000 by which the total income exceeds
` 10,00,000
(c) For resident individuals of the age of 80 years or more at any time during the
previous year
` 5,00,000
Where the total income exceeds 20% of the amount by which the total
` 5,00,000 but does not exceed income exceeds ` 5,00,000
` 10,00,000
Where the total income exceeds ` 1,00,000 plus 30% of the amount
` 10,00,000 by which the total income exceeds
` 10,00,000
(ii) Co-operative society
There is no change in the rate structure as compared to A.Y.2015-16.
(1) Where the total income does not 10% of the total income
exceed ` 10,000
(2) Where the total income exceeds ` 1,000 plus 20% of the amount by
` 10,000 but does not exceed which the total income exceeds
` 20,000 ` 10,000
(3) Where the total income exceeds ` 3,000 plus 30% of the amount by
` 20,000 which the total income exceeds
` 20,000
(iii) Firm/Limited Liability Partnership (LLP)
The rate of tax for a firm for A.Y.2016-17 is the same as that for A.Y.2015-16 i.e., 30% on the
whole of the total income of the firm. This rate would apply to an LLP also.
(iv) Local authority
The rate of tax for a local authority for A.Y.2016-17 is the same as that for A.Y.2015-16
i.e. 30% on the whole of the total income of the local authority.

(v) Company
The rates of tax for A.Y.2016-17 are the same as that for A.Y.2015-16.
(1) In the case of a domestic 30% of the total income
company
(2) In the case of a company 40% of the total income
other than a domestic
However, specified royalties and fees for
company
rendering technical services (FTS) received from
Government or an Indian concern in pursuance of
an approved agreement made by the company
with the Government or Indian concern between
1.4.1961 and 31.3.1976 (in case of royalties) and
between 1.3.1964 and 31.3.1976 (in case of FTS)
would be chargeable to tax @50%.
Surcharge
The rates of surcharge applicable for A.Y.2016-17 are as follows -
(i) Individual/HUF/AOP/BOI/Artificial juridical person/Co-operative societies/Local
Authorities/Firms/LLPs
Where the total income exceeds `1 crore, surcharge is payable at the rate of 12% of
income-tax computed in accordance with the provisions of para (i)/(ii)/(iii)/(iv) above or
section 111A or section 112.
Marginal relief is available in case of such persons having a total income exceeding `1 crore
i.e., the additional amount of income-tax payable (together with surcharge) on the excess of
income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore.
(ii) Domestic company
(a) In case of a domestic company, whose total income is > ` 1 crore but ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,
surcharge is payable at the rate of 7% of income-tax computed in accordance with
the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is
available in case of such companies i.e. the additional amount of income-tax
payable (together with surcharge) on the excess of income over ` 1 crore should
not be more than the amount of income exceeding ` 1 crore.
Example
Compute the tax liability of X Ltd., a domestic company, assuming that the total
income of X Ltd. is ` 1,01,00,000 and the total income does not include any income
in the nature of capital gains.
Answer
The tax payable on total income of ` 1,01,00,000 of X Ltd. computed@ 32.1%
(including surcharge@7%) is ` 32,42,100. However, the tax cannot exceed
` 31,00,000 (i.e., the tax of ` 30,00,000 payable on total income of ` 1 crore plus
10

` 1,00,000, being the amount of total income exceeding ` 1 crore). Therefore, the
tax payable on ` 1,01,00,000 would be ` 31,00,000. The marginal relief is
` 1,42,100 (i.e., ` 32,42,100 - ` 31,00,000).
(b) In case of a domestic company, whose total income is > `10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 12%
of income-tax computed in accordance with the provisions of para (v)(1) above or
Marginal relief is available in case of such companies i.e., the additional amount of
income-tax payable (together with surcharge) on the excess of income over ` 10
crore should not be more than the amount of income exceeding ` 10 crore.
Example
Compute the tax liability of X Ltd., a domestic company, assuming that the total
income of X Ltd. is ` 10,01,00,000 and the total income does not include any
income in the nature of capital gains.
Answer
The tax payable on total income of ` 10,01,00,000 of X Ltd. computed@ 33.6%
(including surcharge@12%) is ` 3,36,33,600. However, the tax cannot exceed
` 3,22,00,000 [i.e., the tax of ` 3,21,00,000 (32.1% of ` 10 crore) payable on total
income of ` 10 crore plus ` 1,00,000, being the amount of total income exceeding
` 10 crore]. Therefore, the tax payable on ` 10,01,00,000 would be ` 3,22,00,000.
The marginal relief is ` 14,33,600 (i.e., ` 3,36,33,600 - ` 3,22,00,000).
(iii) Foreign company

(a) In case of a foreign company, whose total income is > ` 1 crore but ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,
surcharge is payable at the rate of 2% of income-tax computed in accordance with
the provisions of paragraph (v)(2) above or section 111A or section 112. Marginal
relief is available in case of such companies i.e., the additional amount of income-
tax payable (together with surcharge) on the excess of income over ` 1 crore
should not be more than the amount of income exceeding ` 1 crore.
(b) In case of a foreign company, whose total income is > `10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 5%
of income-tax computed in accordance with the provisions of para (v)(2) above or
Marginal relief is available in case of such companies i.e., the additional amount of
income-tax payable (together with surcharge) on the excess of income over ` 10
crore should not be more than the amount of income exceeding ` 10 crore.
Note – Marginal relief would also be available to those companies which are subject to
minimum alternate tax under section 115JB, in cases where the book profit (i.e. deemed
total income) exceeds ` 1 crore and ` 10 crore, respectively.
11

Education cess / Secondary and higher education cess on income-tax
The amount of income-tax as increased by the union surcharge, if applicable, should further
be increased by an “Education cess on income-tax”, calculated at the rate of 2% of such
income-tax plus surcharge, wherever applicable. Further, “Secondary and higher education
cess on income-tax” (SHEC) @1% of income-tax and surcharge, wherever applicable, is
leviable to fulfill the commitment of the Government to provide and finance secondary and
higher education. Education cess, including SHEC, is leviable in the case of all assessees
i.e., individuals, HUFs, AOP/BOIs, artificial juridical persons, co-operative societies, firms,
LLPs, local authorities and companies. No marginal relief would be available in respect of
such cess.
Applicability of surcharge and cess on distribution tax
Surcharge@12% would be leviable on distribution tax levied under sections 115-O, 115-QA,
115R and 115TA. Further, education cess@2% and secondary and higher education
cess@1% would be leviable on the distribution tax inclusive of surcharge.
Rate Effective
Section Particulars of tax rate of tax
115-O Tax on distributed income of domestic companies by 15% 17.304%
way of dividend
115QA Tax on distributed income of domestic company for 20% 23.072%
buyback of shares
115R Tax on distributed income of mutual funds
 Distribution by debt funds to individuals and HUFs 25% 28.84%
 Distribution by debt funds to other persons 30% 34.608%
 Distribution by infrastructure debt funds to non- 5% 5.768%
corporate non-residents and foreign companies
115TA Tax on income distributed by securitization trusts
 Distribution to persons exempt from tax Nil Nil
 Distribution to individuals and HUFs 25% 28.84%
 Distribution to other persons 30% 34.608%
Note – The dividend and income referred to in section 115-O and 115R, respectively, have to
be first grossed up by applying the rates of tax mentioned in column (3) above. Thereafter, the
effective rates of tax under section 115-O and 115R mentioned in column (4) above have to
be applied on gross dividend/income to compute the additional income-tax payable by
domestic companies and mutual funds, respectively, under section 115-O and 115R.
12

Capital Receipts vs. Revenue Receipts
Government grants, other than grants considered for determination of “actual cost”,
included in the definition of “Income” [Section 2(24)]
Effective from: A.Y.2016-17
(i) The Supreme Court in, CIT v Ponni Sugar Mills (2008) 306 ITR 392, observed that it is
the object for which the subsidy/assistance is given which determines the nature of the
incentive subsidy. If the object of the subsidy scheme was to enable the assessee to run
the business more profitably, then, the receipt was on revenue account. On the other
hand, if the object of the assistance under the subsidy scheme was to enable the
assessee to set up a new unit or to expand an existing unit, then, the receipt of the
subsidy was on capital account. The rationale of the Supreme Court ruling has been
applied in many cases and accordingly, grants given with a view to develop backward
area or to enable industries to trade over financial crisis or to generate employment in a
State have been regarded as being capital in nature. For instance, in CIT v. Rasoi Ltd.
(2011) 335 ITR 438 (Cal.), it was held that subsidy received by the assessee from the
Government of West Bengal under the scheme of industrial promotion for expansion of
its capacities, modernization and improving its marketing capabilities was a capital
receipt, not chargeable to tax. In CIT v. Kisan Sahkari Chini Mills Ltd. (2010) 328 ITR 27
(All.), it was held that incentive received under the scheme formulated by the Central
Government for recoupment of capital employed and repayment of loans taken for setting
up/expansion of a sugar factory was a capital receipt.
(ii) The Central Government has, vide Notification dated 31.3.2015, in exercise of the
powers conferred under section 145(2), notified ten income computation and disclosure
standards (ICDSs) to be followed by all assessees, following the mercantile system of
accounting, for the purposes of computation of income chargeable to income-tax under
the head “Profit and gains of business or profession” or “Income from other sources”.
This notification shall come into force with effect from 1st April, 2015, and shall
accordingly apply to the A.Y. 2016-17 and subsequent assessment years.
(iii) ICDS VII deals with the treatment of government grants. It recognizes that government
grants are sometimes called by other names such as subsidies, cash incentives, duty
drawbacks etc.
(1) This ICDS requires Government grants relatable to depreciable fixed assets to be
reduced from actual cost/WDV.
(2) Where the Government grant is not directly relatable to the asset acquired, then, a
pro-rata reduction of the amount of grant should be made in the same proportion as
such asset bears to all assets with reference to which the Government grant is so
received.
13

(3) Grants relating to non-depreciable fixed assets have to be recognized as income
over the same period over which the cost of meeting such obligations is charged to
income.
(4) Government grants receivable as compensation for expenses or losses incurred in a
previous financial year or for the purpose of giving immediate financial support to
the person with no further related costs to be recognized as income of the period in
which it is receivable.
(5) All other Government Grants have to be recognized as income over the periods
necessary to match them with the related costs which they are intended to
compensate.
(iv) Thus, except in case of government grant relating to a depreciable fixed asset, which has
to be reduced from written down value or actual cost, all other grants have to be
recognized as upfront income or as income over the periods necessary to match them
with the related costs which they are intended to compensate.
(v) Thus, the requirement in ICDS VII to treat Government Grants as upfront or deferred
income marks a significant deviation from the settled judicial precedents.
(vi) Further, in line with the requirement in ICDS VII, sub-clause (xviii) has been
included in the definition of income under section 2(24). Accordingly, assistance
in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement, by whatever name called, by the Central
Government or a State Government or any authority or body or agency in cash or
kind to the assessee is included in the definition of income. The only exclusion is
the subsidy or grant or reimbursement which has been taken into account for
determination of the actual cost of the asset in accordance with Explanation 10 to
section 43(1).
14

2
RESIDENCE AND SCOPE OF TOTAL INCOME
(a) CBDT to prescribe the manner of computation of period of stay for an Indian citizen,
being a member of the crew of a foreign bound ship leaving India [Section 6(1)]
Effective from: A.Y. 2015-16
(i) Under section 6(1), the conditions to be satisfied by an individual to be a resident in
India are provided. The residential status is determined on the basis of the number of
days of his stay in India during a previous year.
(ii) However, in case of foreign bound ships where the destination of the voyage is outside
India, there is uncertainty regarding the manner and the basis of determining the period
of stay in India for an Indian citizen, being a crew member.
(iii) To remove this uncertainty, Explanation 2 has been inserted to section 6(1) to provide
that in the case of an Individual, being a citizen of India and a member of the crew of a
foreign bound ship leaving India, the period or periods of stay in India shall, in respect of
such voyage, be determined in the prescribed manner and subject to the prescribed
conditions.
(b) Residential status of a company to be determined on the basis of “Place of Effective
Management” [Section 6(3)]
(i) Under section 6(3), conditions to be satisfied by a company, to be a resident in India for
a previous year are provided.
(ii) A company is said to be resident in India in any previous year, if-
(a) it is an Indian company; or
(b) during that year, the control and management of its affairs is situated wholly in
India.
(iii) Since the condition for a company to be resident was that the whole of control and
management should be situated in India and that too for whole of the year, a company
could easily avoid becoming a resident by simply holding a board meeting outside India.
The existing provision gave scope for creation of shell companies which were
incorporated outside but controlled from India.
15

(iv) 'Place of effective management' (POEM) is a globally recognized concept for
determination of residence of a company incorporated in a foreign jurisdiction. The
concept of 'place of effective management' for determination of residence of a company
as a tie-breaker rule for avoidance of double taxation is recognised by many of the tax
treaties entered into by India. The Organisation of Economic Cooperation and
Development (OECD) also recognises the principle of POEM.
The place of effective management has been defined in the OECD commentary on
model convention to mean a place where key management and commercial decisions
that are necessary for the conduct of the entity's business as a whole, are, in substance,
made.
Incorporation of the concept of POEM in the Income-tax Act, 1961 to determine the
residence of a company is in line with international standards. It also helps in aligning
the provisions of the Act with the Double Taxation Avoidance Agreements (DTAAs)
entered into by India with other countries.
This requirement would also discourage the creation of shell companies outside India
but being controlled and managed from India.
(v) Accordingly, section 6(3) has been substituted to provide that a company would be
resident in India in any previous year, if-
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India .
Explanation to section 6(3) defines “place of effective management” to mean a place
where key management and commercial decisions that are necessary for the conduct of
the business of an entity as a whole are, in substance made.
Determination of residential status of a company
Is the company an No Whether POEM of The company is

No
Indian company? the company is in a non-resident
India in the relevant for the relevant
P.Y P.Y.
Yes Yes
The company is
a resident in
India for the
relevant P.Y.
16

(vi) A set of principles to be followed in determination of POEM would be issued for the
guidance of the taxpayers as well as, tax administration.
(c) Value of Indian assets to determine whether the share or interest of a foreign company
or entity is deemed to derive its value substantially from the assets located in India
[Section 9(1)(i)]
Related amendment in sections: 285A, 271GA & 273B
(i) Section 9(1) is a deeming provision specifying the incomes which shall be deemed to
accrue or arise in India.
(ii) As per section 9(1)(i), all income accruing or arising, whether directly or indirectly,
through or from any business connection in India, or through or from any property in
India, or through or from any asset or source of income in India, or through the transfer
of a capital asset situated in India shall be deemed to accrue or arise in India.
(iii) The Finance Act, 2012 had inserted Explanation 5 in section 9(1)(i) w.r.e.f. 1.04.1962 to
clarify that an asset or capital asset, being any share or interest in a company or entity
registered or incorporated outside India shall be deemed to be and shall always be
deemed to have been situated in India, if the share or interest derives, directly or
indirectly, its value substantially from the assets located in India.
(iv) Taking into account the concerns raised by various stakeholders regarding the
scope and impact of the amendments made by Finance Act, 2012, including inter
alia Explanation 5 to section 9(1)(i), an Expert Committee under the Chairmanship
of Dr. Parthasarathi Shome was constituted by the Government. On the basis of
recommendations of the Expert Committee, the Finance Act, 2015 has inserted
Explanations 6 & 7 to clarify the provisions of Explanation 5 to section 9(1)(i).
(v) Explanation 6 provides that the share or interest in a company or entity registered or
incorporated outside India, shall be deemed to derive its value substantially from the
assets (whether tangible or intangible) located in India, if on the specified date, the value
of Indian assets,-
(a) exceeds the amount of ` 10 crore; and
(b) represents at least 50% of the value of all the assets owned by the company or
entity, as the case may be;
(vi) Meaning of certain terms:
Term Meaning
Value of an asset The fair market value as on the specified date, of such
asset without reduction of liabilities, if any, in respect of
the asset, determined in prescribed manner
Specified date The date on which the accounting period of the company
or, as the case may be, the entity ends preceding the date
17

of transfer of a share or an interest.
However, the date of transfer shall be the specified date of
valuation, in a case where the book value of the assets of
the company or entity on the date of transfer exceeds by at
least 15%, the book value of the assets as on the last
balance sheet date preceding the date of transfer.
Accounting Each period of twelve months ending with 31st March.
period However, where a company or an entity, referred to in
Explanation 5, regularly adopts a period of twelve months
ending on a day other than 31st March for the purpose of—
(a) complying with the provisions of the tax laws of the
territory, of which it is a resident, for tax purposes; or
(b) reporting to persons holding the share or interest,
then, the period of twelve months ending with the other day
shall be the accounting period of the company or, as the
case may be, the entity:
First Accounting First accounting period of the company or, as the case may
Period be, the entity shall begin from the date of its registration
or incorporation and end with the 31st March or such
other day, as the case may be, following the date of such
registration or incorporation.
Later Later accounting period shall be the successive periods
accounting of twelve months
period
Accounting If the company or the entity ceases to exist before the end
period of an of accounting period, as aforesaid, then, the accounting
entity which period shall end immediately before the company or, as the
ceases to exist case may be, the entity, ceases to exist.
(vii) Explanation 7 to section 9(1)(i) provides that no income shall be deemed to
accrue or arise to a non-resident from transfer, outside India, of any share of, or
interest in, a company or an entity, registered or incorporated outside India, in the
following cases:
(1) Foreign AND the transferor (whether individually or along
company or with its associated enterprises), at any time in
entity directly the twelve months preceding the date of transfer,
owns the assets does not hold
situated in India
 the right of management or control in relation
to foreign company or entity; or
 the voting power or share capital or interest
18

exceeding 5% of the total voting power or total
share capital or total interest, as the case may
be, of the foreign company or entity; or
(2) Foreign AND the transferor (whether individually or along
company or with its associated enterprises), at any time in
entity indirectly the twelve months preceding the date of transfer,
owns the assets does not hold
situated in India
 the right of management or control in
relation to foreign company or entity; or
 any right in, or in relation to, foreign
company or entity which would entitle him to
the right of management or control in the
company or entity that directly owns the
assets situated in India; or
 such percentage of voting power or share
capital or interest in foreign company or
entity which results in holding of (either
individually or along with associated
enterprises) a voting power or share capital
or interest exceeding 5% of the total voting
power or total share capital or total interest,
as the case may be, of the company or entity
that directly owns the assets situated in
India;
In effect, the exemption shall be available to the transferor of a share of, or interest
in, a foreign entity if he along with its associated enterprises, -
(a) neither holds the right of control or management,
(b) nor holds voting power or share capital or interest exceeding 5% of the total voting
power or total share capital,
in the foreign company or entity directly holding the Indian assets (direct holding
company).
In case the transfer is of shares or interest in a foreign entity which does not hold
the Indian assets directly then the exemption shall be available to the transferor if
he along with its associated enterprises,-
(a) neither holds the right of management or control in relation to such company or the
entity,
(b) nor holds any rights in such company which would entitle it to either exercise
control or management of the direct holding company or entity or entitle it to voting
power exceeding 5% in the direct holding company or entity.
19

(viii) Further, where all the assets owned, directly or indirectly, by a company or, as the
case may be, an entity registered or incorporated outside India, are not located in
India, the income of the non-resident transferor, from transfer outside India of a
share of, or interest in the foreign company or entity, deemed to accrue or arise in
India under this clause, shall be only such part of the income as is reasonably
attributable to assets located in India and determined in the prescribed manner.
(ix) “Associated enterprise”, in relation to another enterprise, means an enterprise—
(a) which participates, directly or indirectly, or through one or more intermediaries,
in the management or control or capital of the other enterprise; or
(b) in respect of which one or more persons who participate, directly or indirectly,
or through one or more intermediaries, in its management or control or capital,
are the same persons who participate, directly or indirectly, or through one or
more intermediaries, in the management or control or capital of the other
enterprise.
(x) Furnishing of information or documents by an Indian concern [Section 285A]:
There shall be a reporting obligation on the Indian concern through or in which the
Indian assets are held by the foreign company or the entity.
For the purposes of determination of any income accruing or arising in India under
section 9(1)(i), an Indian concern has to furnish, within the prescribed period to the
prescribed income-tax authority, the information or documents, in prescribed
manner, if -
- any share of, or interest in, a company or an entity registered or incorporated
outside India derives, directly or indirectly, its value substantially from the assets
located in India, as referred to in Explanation 5 to section 9(1)(i), and
- such company or, entity, holds, directly or indirectly, such assets in India through, or
in, the Indian concern.
(xi) Penalty for failure to furnish the information or document under section 285A
[Section 271GA]
In case of any failure on the part of Indian concern to furnish the information or
document as required under section 285A, then penalty would be leviable under
section 271GA as follows -
(a) a sum equal to 2% of the value of the transaction in respect of which such
failure has taken place, in a case where such transaction had the effect of
directly or indirectly transferring the right of management or control in relation
to the Indian concern;
(b) a sum of ` 5,00,000, in any other case.
However, no penalty is imposable under section 271GA if it is proved that there is
reasonable cause for such failure [Section 273B].
20

(d) Taxability of interest payment to a non-resident, being a person engaged in the
business of banking, by its Permanent Establishment (PE) in India [Section 9(1)(v)]
(i) As per section 5(2), the total income of a non-resident would include all income
received or deemed to be received in India in the relevant previous year and all
income which accrues or arises or is deemed to accrue or arise to him in India in
that year.
(ii) The taxability of income in the hands of non-resident in India is determined on the
basis of source rule, under which certain categories of income are deemed to
accrue or arise in India.
(iii) Section 9(1)(v) lays down the circumstances under which the interest income is
deemed to accrue or arise in India.
(iv) Under section 9(1)(v), income by way of interest is deemed to accrue or arise in
India, if it is payable by—
(a) the Government ; or
(b) a person who is a resident, except where the interest is payable in respect of
any debt incurred, or moneys borrowed and used, for the purposes of a
business or profession carried on by such person outside India or for the
purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the interest is payable in respect of any
debt incurred, or moneys borrowed and used, for the purposes of a business or
profession carried on by such person in India.
(v) In order to provide clarity and certainty, on the issue of taxability of interest payable
by the PE of a non-resident engaged in banking business to the head office, an
Explanation has been inserted in section 9(1)(v). Accordingly, in the case of a non-
resident, being a person engaged in the business of banking, any interest
payable by the PE in India of such non-resident to the head office or any PE or
any other part of such non-resident outside India, shall be deemed to accrue or
arise in India.
(vi) Such interest shall be chargeable to tax in addition to any income attributable to the
PE in India.
(vii) Further, the PE in India shall be deemed to be a person separate and independent
of the non-resident person of which it is a PE and the provisions of the Act relating
to computation of total income, determination of tax and collection and recovery
would apply accordingly.
(viii) Further, the PE in India has to deduct tax at source on any interest payable to either
the head office or any other branch or PE, etc. of the non-resident outside India.
Non-deduction would result in disallowance of interest claimed as expenditure by
21

the PE and may also attract levy of interest and penalty in accordance with relevant
provisions of the Act.
(ix) Permanent establishment includes a fixed place of business through which the
business of the enterprise is wholly or partly carried on.
(e) Presence of eligible fund manager in India not to constitute business connection in
India of such eligible investment fund on behalf of which he undertakes fund
management activity [Section 9A]
Related amendments in sections: 271FAB & 273B
(i) Under section 9(1)(i), income would be deemed to accrue or arise in India in the
hands of non-resident, if it arises from a business connection in India.
Consequently, income attributable to the activities constituting business connection
in India would be taxable in India.
(ii) As per Double Taxation Avoidance Agreements (DTAAs), the source country
assumes taxation rights on certain incomes, if the non-resident has a Permanent
Establishment (PE) in that country.
(iii) Under section 6, the residential status of a person other than individual is
determined based upon the location of its “control and management”. As per the
existing provisions of law, in case of off-shore funds, the presence of a fund
manager in India may create sufficient nexus of the off-shore fund with India and
may constitute a business connection in India inspite of the fund manager being an
independent person.
Likewise, if the fund manager located in India undertakes fund management activity
in respect of investments outside India for an off-shore fund, the profits made by the
fund from such investments may be liable to tax in India due to the location of fund
manager in India and attribution of such profits to the activity of the fund manager
undertaken on behalf of the off-shore fund.
(iv) Further, presence of the fund manager under certain circumstances may lead to the
off shore fund being held to be resident in India on the basis of its control and
management being in India.
(v) On account of the fund management activity undertaken in, and from India
constituting a business connection –
(a) the fees received by the fund manager for fund management activity gets
taxed in India; and
(b) income of off-shore fund from investments made in countries outside India may
also get taxed in India.
Due to the above tax consequences in respect of income from the investments of
offshore funds made in other jurisdictions, many fund managers who are of Indian
22

origin, are managing the investment of offshore funds in other countries without
locating in India.
(vi) With a view to facilitate location of fund managers of off-shore funds in India,
section 9A has been inserted to provide for a specific regime in the Act in line
with global best practices with the aim that, subject to fulfillment of certain
conditions by the fund and the fund manager,-
(a) the tax liability in respect of income arising to the Fund from investment in
India would be neutral to the fact as to whether the investment is made directly
by the fund or through engagement of Fund manager located in India; and
(b) that income of the fund from the investments outside India would not be
taxable in India solely on the basis that the Fund management activity in
respect of such investments have been undertaken through a fund manager
located in India.
(vii) Fund Management Activity through an eligible fund manager not to constitute
business connection: In the case of an eligible investment fund, the fund
management activity carried out through an eligible fund manager acting on behalf
of such fund shall not constitute business connection in India of the said fund,
subject to fulfillment of certain conditions.
(viii) Location of Fund Manager in India not to affect residential status of an eligible
investment fund: An eligible investment fund shall not be said to be resident in
India merely because the eligible fund manager undertaking fund management
activities on its behalf is located in India.
(ix) Conditions to be fulfilled by an Eligible Investment Fund: The eligible
investment fund means a fund established or incorporated or registered outside
India, which collects funds from its members for investing it for their benefit. Further,
it should fulfill the following conditions:
(a) the fund should not be a person resident in India;
(b) the fund should be a resident of a country or a specified territory with which an
agreement referred to in section 90(1) or section 90A(1) has been entered into;
(c) the aggregate participation or investment in the fund, directly or indirectly, by
persons being resident in India should not exceed 5% of the corpus of the
fund;
(d) the fund and its activities should be subject to applicable investor protection
regulations in the country or specified territory where it is established or
incorporated or is a resident;
(e) the fund should have a minimum of 25 members who are, directly or indirectly,
not connected persons;
(f) any member of the fund along with connected persons shall not have any
participation interest, directly or indirectly, in the fund exceeding 10%;
23

(g) the aggregate participation interest, directly or indirectly, of ten or less
members along with their connected persons in the fund, shall be less than
50%;
(h) the investment by the fund in any entity shall not exceed 20% of the corpus of
the fund;
(i) no investment shall be made by the fund in its associate entity;
(j) the monthly average of the corpus of the fund shall not be less than
` 100 crore. If the fund has been established or incorporated in the previous
year, the corpus of fund shall not be less than ` 100 crore rupees at the end
of such previous year;
(k) the fund shall not carry on or control and manage, directly or indirectly, any
business in India or from India;
(l) the fund should neither be engaged in any activity which constitutes a business
connection in India nor should have any person acting on its behalf whose
activities constitute a business connection in India other than the activities
undertaken by the eligible fund manager on its behalf.
(m) the remuneration paid by the fund to an eligible fund manager in respect of
fund management activity undertaken on its behalf should not be less than the
arm’s length price of such activity.
(x) Certain conditions not to apply to investment fund set up by the Government
or the Central Bank of a foreign State or a Sovereign Fund
The following conditions would, however, not be applicable in case of an investment
fund set up by the Government or the Central Bank of a foreign State or a sovereign
fund or such other fund notified by the Central Government:
(i) the fund should have a minimum of 25 members who are, directly or indirectly,
not connected persons;
(ii) any member of the fund along with connected persons shall not have any
participation interest, directly or indirectly, in the fund exceeding 10%;
(iii) the aggregate participation interest, directly or indirectly, of ten or less
members along with their connected persons in the fund, shall be less than
50%.
(xi) Eligible Fund Manager [Section 9A(4)]: The eligible fund manager, in respect of
an eligible investment fund, means any person who is engaged in the activity of
fund management and fulfills the following conditions:
(a) the person should not be an employee of the eligible investment fund or a
connected person of the fund;
(b) the person should be registered as a fund manager or investment advisor in
accordance with the specified regulations;
24

(c) the person should be acting in the ordinary course of his business as a fund
manager;
(d) the person along with his connected persons shall not be entitled, directly or
indirectly, to more than 20% of the profits accruing or arising to the eligible
investment fund from the transactions carried out by the fund through such
fund manager.
(xii) Furnishing of Statement in prescribed form [Section 9A(5)]: Every eligible
investment fund shall, in respect of its activities in a financial year, furnish within 90 days
from the end of the financial year, a statement in the prescribed form to the prescribed
income-tax authority. The statement should contain information relating to –
(1) the fulfillment of the above conditions; and
(2) such other relevant information or document which may be prescribed.
(xiii) Penalty for non-furnishing of statement [Section 271FAB]: Section 271FAB has
been inserted to provide for imposition of penalty of ` 5 lakh on the fund for non-
furnishing of the prescribed information or document or statement as required under
section 9A(5) within the prescribed time.
However, no penalty shall be imposable for such failure if it is proved that there was
reasonable cause for such failure [Section 273B].
(xiv) Non-applicability of special taxation regime under section 9A: This special
taxation regime would not have any impact on taxability of any income of the eligible
investment fund which would have been chargeable to tax irrespective of whether
the activity of the eligible fund manager constituted business connection in India of
such fund or not.
Further, the said regime shall not have any effect on the scope of total income or
determination of total income in the case of the eligible fund manager.
(xv) CBDT to prescribe guidelines for the manner of application of the provisions of this
section.
(xvi) Meaning of certain terms:
Term Meaning
Associate An entity in which a director or a trustee or a partner or a
member or a fund manager of the investment fund or a director
or a trustee or a partner or a member of the fund manager of
such fund, holds, either individually or collectively, share or
interest, being more than 15% of its share capital or interest, as
the case may be.
Corpus The total amount of funds raised for the purpose of investment
by the eligible investment fund as on a particular date.
Connected Any person who is connected directly or indirectly to another
person person and includes,—
25

(a) any relative of the person, if such person is an individual;
(b) any director of the company or any relative of such director, if
the person is a company;
(c) any partner or member of a firm or association of persons or
body of individuals or any relative of such partner or member,
if the person is a firm or association of persons or body of
individuals;
(d) any member of the Hindu undivided family or any relative of
such member, if the person is a Hindu undivided family;
(e) any individual who has a substantial interest in the business
of the person or any relative of such individual;
(f) a company, firm or an association of persons or a body of
individuals, whether incorporated or not, or a Hindu undivided
family having a substantial interest in the business of the
person or any director, partner, or member of the company,
firm or association of persons or body of individuals or family,
or any relative of such director, partner or member;
(g) a company, firm or association of persons or body of
individuals, whether incorporated or not, or a Hindu undivided
family, whose director, partner, or member has a substantial
interest in the business of the person, or family or any relative
of such director, partner or member;
(h) any other person who carries on a business, if -
(i) the person being an individual, or any relative of such
person, has a substantial interest in the business of that
other person; or
(ii) the person being a company, firm, association of
persons, body of individuals, whether incorporated or
not, or a Hindu undivided family, or any director, partner
or member of such company, firm or association of
persons or body of individuals or family, or any relative
of such director, partner or member, has a substantial
interest in the business of that other person;
Entity An entity in which an eligible investment fund makes an
investment.
Specified  The Securities and Exchange Board of India (Portfolio
regulations Managers) Regulations, 1993; or
 The Securities and Exchange Board of India (Investment
Advisers) Regulations, 2013; or
 Such other regulations made under the Securities and
Exchange Board of India Act, 1992 which may be notified by
the Central Government.
26

SIGNIFICANT NOTIFICATIONS/CIRCULARS
(1) Clarification regarding applicability of Explanation 5 to section 9(1)(i) to dividend

declared and paid by a foreign company outside India in respect of shares which
derive its value substantially from the assets located in India [Circular No. 4/2015,
dated 26-03-2015]
Section 9 provides for incomes which are deemed to accrue or arise in India. As per
section 9(1)(i), all income accruing or arising, whether directly or indirectly, through or
from any business connection in India, or through or from any property in India, or through
or from any asset or source of income in India, or through the transfer of a capital asset
situated in India is deemed to accrue or arise in India.
Explanation 5 to section 9(1)(i) was inserted by the Finance Act, 2012 to clarify that an
asset or a capital asset being any share or interest in a company or entity registered or
incorporated outside India shall be deemed to be and shall always be deemed to have
been situated in India, if the share or interest derives, directly or indirectly, its value
substantially from the assets located in India.
The Explanatory Memorandum to the Finance Bill, 2012 clearly provides that the
amendment of section 9(1)(i) was to reiterate the legislative intent in respect of taxability
of gains having economic nexus with India irrespective of the mode of realisation of such
gains. Thus, the amendment sought to clarify the source rule of taxation in respect of
income arising from indirect transfer of assets situated in India as explicitly mentioned in
the Explanatory Memorandum.
Accordingly, Explanation 5 would be applicable in relation to deeming any income arising
outside India from any transaction in respect of any share or interest in a foreign company
or entity, which has the effect of transferring, directly or indirectly, the underlying assets
located in lndia, as income accruing or arising in India.
Declaration of dividend by a foreign company outside India does not have the effect of
transfer of any underlying assets located in India. This circular, therefore, clarifies that the
dividends declared and paid by a foreign company outside India in respect of
shares which derive their value substantially from assets situated in India would
NOT be deemed to be income accruing or arising in India by virtue of the provisions
of Explanation 5 to section 9(1)(i).
27

3
INCOMES WHICH DO NOT FORM PART OF
TOTAL INCOME
(a) Exemption of specified income of Core Settlement Guarantee Fund (SGF) set up by
a recognized Clearing Corporation [Section 10(23EE)]
(i) The Clearing Corporations are required, under the provisions of Securities
Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations,
2012 notified by SEBI, to establish a fund, called Core Settlement Guarantee Fund
(Core SGF) for each segment of each recognized stock exchange to guarantee the
settlement of trades executed in respective segments of the exchange.
(ii) Under sections 10(23EA), 10(23EC) and 10(23ED), income by way of contributions
received from recognized stock exchanges or commodity exchanges and the
members thereof or depositories of Investor Protection Fund set up by such
recognised stock exchanges in India, or by commodity exchanges in India or by
such depository, respectively, as the Central Government may notify in this behalf,
are exempt from taxation.
(iii) On parallel lines, clause (23EE) has been inserted in section 10 to exempt any specified
income of such Core SGF set up by a recognized clearing corporation in accordance
with the regulations, notified by the Central Government in the Official Gazette.
(iv) However, where any amount standing to the credit of the Fund and not charged to
income-tax during any previous year is shared, either wholly or in part with the
specified person, the whole of the amount so shared shall be deemed to be the
income of the previous year in which such amount is shared, and shall accordingly
be chargeable to income-tax.
(v) Meaning of certain terms:
Terms Meaning
(i) Recognised Meaning assigned as per Regulation 2(1)(o) of the Securities
clearing Contracts (Regulation) (Stock Exchanges and Clearing
corporation Corporations) Regulations, 2012 made under the SEBI Act,
28

1992 and Securities Contracts (Regulation) Act, 1956 i.e.,
"Recognised clearing corporation" means a clearing
corporation which is recognised by the SEBI under section 4
read with section 8A of the SEBI Act, 1992;
(ii) Regulations Securities Contracts (Regulation) (Stock Exchanges and
Clearing Corporations) Regulations, 2012 made under the SEBI
Act, 1992 and Securities Contracts (Regulation) Act, 1956.
(iii) Specified (a) the income by way of contribution received from
Income specified persons;
(b) the income by way of penalties imposed by the
recognised clearing corporation and credited to the
Core Settlement Guarantee Fund; or
(c) the income from investment made by the Fund.
(iv) Specified (a) any recognised clearing corporation which establishes
person and maintains the Core Settlement Guarantee Fund;
(b) any recognised stock exchange being shareholder in
such recognised clearing corporation or a contributor to
Core Settlement Guarantee Fund; and
(c) any clearing member contributing to the Core
Settlement Guarantee Fund.
(b) “Yoga” included as a specific category in the definition of “charitable purpose”
[Section 2(15)]
(i) Under section 11, a trust or institution is eligible for exemption provided the income
derived from property held under trust is applied for charitable purposes in India.
This, in fact, is the main condition for grant of exemption.
(ii) Section 2(15) defines ‘charitable purpose’ to include relief of the poor, education,
medical relief, preservation of environment (including watersheds, forests and
wildlife) and preservation of monuments or places or objects of artistic or historic
interest and the advancement of any other object of general public utility.
(iii) Advancement of any other object of general public utility shall, however, not be a
charitable purpose, if it involves the carrying on of any activity in the nature of trade,
commerce or business, or any activity of rendering any service in relation to any
trade, commerce or business, for a cess or fee or any other consideration,
irrespective of the nature of use or application, or retention, of the income from such
activity. However, this restriction shall not apply if the aggregate value of the
receipts from the activities referred above is ` 25 lakh or less in the previous year.
(iv) The above restriction applies only if the object of the charitable institution falls under
the residual category, namely, “advancement of any other object of general public
29

utility”. It does not apply institutions having any other charitable purpose like relief
of poor, education and medical relief etc.
(v) Institutions, which, as part of genuine charitable activities, undertake activities like
publishing books or holding program on yoga or other programs as part of actual
carrying out of the objects which are of charitable nature are being put to hardship
due to the above restriction, since they fall under the residual clause “advancement
of object of general public utility”
(vi) Since the activity of yoga is one of the present focus areas, which has been granted
international recognition by the United Nations, 'yoga' has now been included as a
specific category in the definition of charitable purpose. Hence, institutions having
“yoga” as its main object would not be subject to the restrictions [mentioned in (iii)
above] applicable to institutions having the object of “advancement of any other
object of general public utility”.
(c) Conditions to be satisfied for “advancement of any other object of general public
utility” to constitute a “charitable purpose” [Section 2(15)]
(i) The definition of “charitable purpose” under section 2(15) has been amended to
provide that the advancement of any other object of general public utility shall not
be a charitable purpose, if it involves the carrying on of any activity in the nature of
trade, commerce or business, or any activity of rendering any service in relation to
any trade, commerce or business, for a cess or fee or any other consideration,
irrespective of the nature of use or application, or retention, of the income from such
activity, unless,-
(1) such activity is undertaken in the course of actual carrying out of such
advancement of any other object of general public utility; and
(2) the aggregate receipts from such activity or activities, during the previous year,
does not exceed 20% of the total receipts, of the trust or institution
undertaking such activity or activities, for the previous year .
(ii) In effect, an additional condition has been inserted that such activity has to be
undertaken in the course of actual carrying out of such advancement of any other
object of general public utility. Further, in the place of an absolute limit of ` 25
lakhs, a limit based on percentage of total receipts has been specified upto which
receipts from an activity in the nature of trade, commerce or business is permissible
without affecting the “charitable status” of the trust or institution.
(d) Time limit for filing of Form 10 by a trust or institution for accumulation of income
[Section 11(2)]
Related amendment in section: 13
(i) As per section 11, application of income derived from property held under trust for
charitable purposes in India is the main condition for grant of exemption to trust or
30

institution in respect of income derived from property held under such trust. In case
such income cannot be applied during the previous year, the same can be
accumulated and applied for such purposes, subject to satisfaction of the conditions
provided therein.
(ii) Section 11 permits accumulation of 15% of the income indefinitely by the trust or
institution. However, 85% of income can only be accumulated for a period not
exceeding 5 years subject to the conditions that such person submits the prescribed
form i.e., Form 10 to the Assessing Officer and the money so accumulated or set
apart is invested or deposited in the specified forms or modes.
If the accumulated income is not applied for charitable purposes or ceases to be
accumulated or set apart for accumulation or ceases to remain invested or
deposited in specified modes, then, such income is deemed to be taxable income of
the trust or institution.
(iii) For the purpose of clarifying the period within which the assessee is required to file
Form 10, and to ensure due compliance of the above conditions within time, section
11(2) has been amended to provide that -
(1) such person should furnish a statement in the prescribed form and in the
prescribed manner to the Assessing Officer, stating the purpose for which the
income is being accumulated or set apart and the period for which the income
is being accumulated or set apart, which shall, in no case, exceed five years.
In computing the period of five years, the period during which the income could
not be applied for the purpose for which it is so accumulated or set apart, due
to an order or injunction of any court, shall be excluded.
(2) the money so accumulated or set apart should be invested or deposited in the
modes specified in section 11(5).
(3) the statement in Form 10 should be filed on or before the due date of filing
return of income specified under section 139(1).
(iv) In case the statement in Form 10 is not submitted on or before this date, then, the
benefit of accumulation would not be available and such income would be taxable at
the applicable rate. Further, the benefit of accumulation would also not be available
if return of income is not furnished on or before the due date of filing return of
income specified in section 139(1). This is provided in new sub-section (9) of
section 13.
(1) Commissioner of Income-tax (Exemptions) to act as “prescribed authority” for the

purposes of section 10(23C)(iv)/(v)/(vi)/(via)
(i) Notification No. 75/2014, dated 01-12-2014
For the purposes of claiming exemption under section 10(23C)(iv) and (v), a fund or
institution established for charitable purposes and/or a trust or institution wholly for
31

public religious purposes or wholly for public religious and charitable purposes,
requires approval of the “prescribed authority”.
Accordingly, the CBDT has, through this notification, authorized the Commissioner
of Income-tax (Exemptions) to act as “prescribed authority” for the purpose of
section 10(23C)(iv)/(v) w.e.f. 15th November, 2014.
(ii) Notification No. 76/2014, dated 01-12-2014
For the purposes of claiming exemption under section 10(23C)(vi) and (via), any university
or other educational institution, existing solely for educational purposes and not for
purposes of profit, any hospital or other institution, existing solely for philanthropic
purposes and not for profit motive, requires approval of the “prescribed authority”.
Accordingly, the CBDT has, through this notification, authorized the Commissioner
of Income-tax (Exemptions) to act as “prescribed authority” for the purpose of
10(23C)(vi) and (via) section w.e.f. 15th November, 2014.
(2) Percentage of Government grant for determining whether a university or other
educational institution, hospital or other institution referred under section
10(23C)(iiiab)/(iiiac) is substantially financed by the Government prescribed
[Notification No. 79/2014, dated 12-12-2014]
Income of certain educational institutions, universities and hospitals which exist solely for
educational purposes or solely for philanthropic purposes, and not for purposes of profit
and which are wholly or substantially financed by the Government are exempt under
section 10(23C).
The Finance (No. 2), Act, 2014 inserted an Explanation after section 10(23C)(iiiac) to
clarify that if the government grant to a university or other educational institution, hospital
or other institution during the relevant previous year exceeds a prescribed percentage
of the total receipts (including any voluntary contributions), of such university or other
educational institution, hospital or other institution, as the case may be, then, such
university or other educational institution, hospital or other institution shall be considered
as being substantially financed by the Government for that previous year.
Accordingly, in exercise of the powers conferred by section 295 read with section
10(23C)(iiiab)/(iiiac), the CBDT has notified Rule 2BBB to provide that any university or
other educational institution referred under section 10(23C)(iiiab) and hospital or other
institution referred under section 10(23C)(iiiac) shall be considered as being substantially
financed by the Government for any previous year, if the Government grant to such
university or other educational institution, hospital or other institution exceeds 50% of the
total receipts including any voluntary contributions, of such university or other
educational institution, hospital or other institution, as the case may be, during the
relevant previous year.
(3) Increase in the maximum limit for exemption of transport allowance [Notification
No. 39/2015, dated 13-04-2015]
The CBDT has, in exercise of the powers conferred by section 295 read with section
10(14), amended Rule 2BB which inter alia provides the limit of exemption of up to ` 800
32

p.m., in respect of transport allowance granted to an employee. Exemption of up to
` 1,600 p.m. is available for an employee, who is blind or orthopaedically handicapped,
with disability of lower extremities.
Consequent to the amendment made vide this notification, the maximum limit upto which
transport allowance can be claimed as an exemption by an employee to meet his
expenditure for the purpose of commuting between the place of his residence and the
place of his duty has been increased from ` 800 p.m. to ` 1,600 p.m. In case of a blind
or orthopaedically handicapped employee with disability of lower extremities, the
maximum limit has been revised from ` 1,600 p.m. to ` 3,200 p.m.
This notification comes into force on 1st April, 2015.
(4) Allowability of deduction under section 10AA on transfer of technical manpower in
the case of software industry [Circular No. 14/2014, dated 8-10-2014]
The CBDT had earlier clarified vide Circular No.12/2014 dated 18th July, 2014 that mere
transfer or re-deployment of existing technical manpower from an existing unit to a new
SEZ unit in the first year of commencement of business will not be construed as splitting
up or reconstruction of an existing business, provided the number of technical manpower
so transferred does not exceed 20% of the total technical manpower actually engaged in
developing software at any point of time in the given year in the new unit.
The limit of 20% was considered inadequate and restrictive and it impacted the
competitiveness of Indian Software Industry in global market. Consequently, the matter
was re-examined by the CBDT, and in supersession of Circular No.12/2014 dated 18th
July, 2014, it has now been decided that the transfer or re-deployment of technical
manpower from existing unit to a new unit located in SEZ, in the first year of
commencement of business, shall not be construed as splitting up or reconstruction of an
existing business, provided the number of technical manpower so transferred as at the
end of the financial year should not exceed 50% of the total technical manpower actually
engaged in development of software or IT enabled products in the new unit. Alternatively,
if the assessee-enterprise is able to demonstrate that the net addition of the new
technical manpower in all units of the assessee-enterprise is at least equal to the number
that represents 50% of the total technical manpower of the new SEZ unit during such
previous year, deduction under section 10AA would not be denied provided the other
prescribed conditions are also satisfied. The assessee-enterprise will have the choice of
complying with any one of the two alternatives given above to avail the benefit of
deduction under section 10AA.
The Circular also clarifies that:
(a) it shall be applicable only in the case of assessees engaged in the development of
software or in providing IT enabled services in SEZ units eligible for deduction
under section 10AA. .
(b) it shall not apply to the assessments which have already been completed. Further,
no appeal shall be filed by the Department in cases where the issue is decided by
an appellate authority in consonance with this circular.
33

6
PROFITS AND GAINS OF BUSINESS OR
PROFESSION
(a) Balance 50% of additional depreciation to be allowed in the subsequent year,

where the plant and machinery is put to use for less than 180 days during the
previous year of acquisition and installation [Sections 32(1)]
Effective from : A.Y. 2016-17
(i) In order to encourage investment in new plant or machinery by the manufacturing
and power sector, section 32(1)(iia) provides for deduction of additional depreciation
@20% of the cost of new plant or machinery acquired and installed in addition to
the normal depreciation allowable under section 32(1)(ii).
(ii) As in the case of normal depreciation, the second proviso to section 32(1) inter alia
provides that additional depreciation would be restricted to 50% if the new plant or
machinery acquired and installed by the assessee, is put to use for the purposes of
business or profession for a period of less than 180 days in the previous year of
acquisition and installation.
(iii) Non-availability of 100% of additional depreciation for new plant or machinery
acquired and installed in the second half of the year may have the effect of deferral
of such investment to the next year for availing full 100% of additional depreciation
in the next year.
(iv) To remove the discrimination in the matter of allowing additional depreciation on
plant or machinery used for less than 180 days vis-a-vis used for 180 days or more,
third proviso to section 32(1)(ii) has been inserted to provide that the balance
50% of the additional depreciation on new plant or machinery acquired and used for
less than 180 days which has not been allowed in the year of acquisition and
installation of such plant or machinery, shall be allowed in the immediately
succeeding previous year.
Example:
XYZ Ltd., a manufacturing concern, furnishes the following particulars:
34

Particulars `
(1) Opening WDV of plant and machinery as on 1.4.2015 30,00,000
(2) New plant and machinery purchased and put to use on 08.06.2015 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2015 8,00,000
(4) Computer acquired and installed in the office premises on 2.1.2016 3,00,000
Compute the amount of depreciation and additional depreciation as per the Income-
tax Act, 1961 for the A.Y. 2016-17
Answer
Computation of depreciation and additional depreciation for A.Y. 2016-17
Particulars Plant & Computer
Machinery (60%)
(15%)
Normal depreciation
 @ 15% on ` 50,00,000 [See Working Notes 1 & 2] 7,50,000 -
 @ 7.5% (50% of 15%, since put to use for less than 180 60,000 -
days) on ` 8,00,000
 @ 30% (50% of 60%, since put to use for less than 180 - 90,000
days) on ` 3,00,000
Additional Depreciation
 @ 20% on ` 20,00,000 (new plant and machinery put to 4,00,000 -
use for more than 180 days)
 @10% (50% of 20%, since put to use for less than 180
days) on ` 8,00,000 80,000 -
Total depreciation 12,90,000 90,000
Working Notes:
(1) Computation of written down value of Plant & Machinery as on 31.03.2016
Plant & Computer
Machinery
Written down value as on 1.4.2015 30,00,000 -
Add: Plant & Machinery purchased on 08.6.2015 20,00,000 -
Add: Plant & Machinery acquired on 15.12.2015 8,00,000 -
Computer acquired and installed in the office premises - 3,00,000
Written down value as on 31.03.2016 58,00,000 3,00,000
35

(2) Composition of plant and machinery included in the WDV as on 31.3.2016
Plant & Computer
Machinery (` )
Particulars
(` )
Plant and machinery put to use for 180 days or more 50,00,000
[` 30,00,000 (Opening WDV) + ` 20,00,000
(purchased on 8.6.2015)]
Plant and machinery put to use for less than 180 days 8,00,000
Computers put to use for less than 180 days ________ 3,00,000
58,00,000 3,00,000
Notes:
(1) As per the second proviso to section 32(1)(ii), where an asset acquired during
the previous year is put to use for less than 180 days in that previous year, the
amount of deduction allowable as normal depreciation and additional
depreciation would be restricted to 50% of amount computed in accordance with
the prescribed percentage.
Therefore, normal depreciation on plant and machinery acquired and put to
use on 15.12.2015 and computer acquired and installed on 02.01.2016, is
restricted to 50% of 15% and 60%, respectively. The additional depreciation on
the said plant and machinery is restricted to ` 80,000, being 10% (i.e., 50% of
20%) of ` 8 lakh
(2) As per third proviso to section 32(1)(ii), the balance additional depreciation of
` 80,000 being 50% of ` 1,60,000 (20% of ` 8,00,000) would be allowed as
deduction in the A.Y.2017-18.
(3) As per section 32(1)(iia), additional depreciation is allowable in the case of any
new machinery or plant acquired and installed after 31.3.2005 by an assessee
engaged, inter alia, in the business of manufacture or production of any article or
thing, @20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, any
machinery or plant installed in office premises, residential accommodation or in
any guest house.
Accordingly, additional depreciation is not allowable on computer installed in the
office premises.
(b) Manufacturing industries set up in the notified backward areas of specified States
to be eligible for a deduction @15% of the actual cost of new plant & machinery
acquired and installed during the previous year [Section 32AD]
(i) In order to encourage the setting up of industrial undertakings in the backward
areas of the States of Andhra Pradesh, Bihar, Telangana and West Bengal, new
36

section 32AD has been inserted to provide for a deduction of an amount equal to
15% of the actual cost of new plant and machinery acquired and installed in the
assessment year relevant to the previous year in which such plant and machinery is
installed, if the following conditions are satisfied by the assessee -
(a) The assessee sets up an undertaking or enterprise for manufacture or
production of any article or thing on or after 1st April, 2015 in any backward
area notified by the Central Government in the State of Andhra Pradesh or
Bihar or Telangana or West Bengal; and
(b) the assessee acquires and installs new plant and machinery for the purposes
of the said undertaking or enterprise during the period between 1st April, 2015
and 31st March, 2020 in the said backward areas.
(ii) Where the assessee is a company, deduction under section 32AD would be
available over and above the existing deduction available under section 32AC,
subject to the satisfaction of conditions thereunder.
Accordingly, if an undertaking is set up in the notified backward areas in the States
of Andhra Pradesh or Bihar or Telangana or West Bengal by a company, it shall be
eligible to claim deduction under section 32AC as well as under section 32AD, if it
fulfills the conditions specified in section 32AC and the conditions specified under
section 32AD.
(iii) For the purposes of this section, “New plant and machinery” does not include—
(a) any ship or aircraft;
(b) any plant or machinery, which before its installation by the assessee, was used
either within or outside India by any other person;
(c) any plant or machinery installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest house;
(d) any office appliances including computers or computer software;
(e) any vehicle;
(f) any plant or machinery, the whole of the actual cost of which is allowed as
deduction (whether by way of depreciation or otherwise) in computing the
income chargeable under the head “Profits and gains of business or
profession” of any previous year.
(iv) In order to ensure that the manufacturing units which are set up by availing this
incentive actually contribute to economic growth of these backward areas by
carrying out the activity of manufacturing for a substantial period of time, a suitable
safeguard restricting the transfer of new plant and machinery for a period of 5 years
has been provided.
Accordingly, section 32AD(2) provides that if any new plant and machinery acquired
and installed by the assessee is sold or otherwise transferred except in connection
with the amalgamation or demerger or re-organisation of business, within a period
of 5 years from the date of its installation, the amount allowed as deduction in
37

respect of such new plant and machinery shall be deemed to be the income
chargeable under the head “Profits and gains from business or profession” of the
previous year in which such new plant and machinery is sold or transferred, in
addition to taxability of gains, arising on account of transfer of such new plant and
machinery.
(v) However, this restriction shall not apply to the amalgamating or demerged company
or the predecessor in a case of amalgamation or demerger or business
reorganization referred to in section 47(xiii), 47(xiiib) and 47(xiv), within a period of
five years from the date of its installation, but shall continue to apply to the
amalgamated company or resulting company or successor, as the case may be.
(c) Additional depreciation @35% to be allowed to assessees setting up
manufacturing units in notified backward areas of specified States and acquiring
and installing new plant & machinery [Proviso to section 32(1)(iia)]
(i) Under section 32(1)(iia), to encourage investment in new plant or machinery,
additional depreciation of 20% of the actual cost of plant or machinery acquired and
installed is allowed. Such additional depreciation under section 32(1)(iia) is allowed
over and above the normal depreciation under section 32(1)(ii).
(ii) In order to encourage acquisition and installation of plant and machinery for setting
up of manufacturing units in the notified backward areas of the States of Andhra
Pradesh, Bihar, Telangana and West Bengal, a proviso has been inserted to section
32(1)(iia) to allow higher additional depreciation at the rate of 35% (instead of 20%)
in respect of the actual cost of new machinery or plant (other than a ship and
aircraft) acquired and installed during the period between 1st April, 2015 and 31st
March, 2020 by a manufacturing undertaking or enterprise which is set up in the
notified backward areas of these specified States on or after 1st April, 2015.
(iii) Such additional depreciation shall be restricted to 17.5% (i.e., 50% of 35%), if the
new plant and machinery acquired is put to use for the purpose of business for less
than 180 days in the year of acquisition and installation.
(iv) The balance 50% of additional depreciation (i.e., 50% of 35%) would, however, be
allowed in the immediately succeeding financial year.
Example
X Ltd. set up a manufacturing unit in notified backward area in the state of Telangana on
01.06.2015. It invested ` 30 crore in new plant and machinery on 1.6.2015. Further, it
invested ` 25 crore in the plant and machinery on 01.11.2015, out of which ` 5 crore was
second hand plant and machinery. Compute the depreciation allowable under section 32.
Is X Ltd. entitled for any other benefit in respect of such investment? If so, what is the
benefit available?
Would your answer change where such manufacturing unit is set up by a firm, say, X &
Co., instead of X Ltd.?
38

Solution
(i) Computation of depreciation under section 32 for X Ltd. for A.Y. 2016-17
Particulars ` (in
crores)
Plant and machinery acquired on 01.06.2015 30.000
Plant and machinery acquired on 01.11.2015 25.000
WDV as on 31.03.2016 55.000
Less: Depreciation @ 15% on ` 30 crore 4.500
Depreciation @ 7.5% (50% of 15%) on ` 25 crore 1.875
Additional Depreciation@35% on ` 30 crore 10.500
Additional [email protected]% (50% of 35%) on ` 20
crore _3.500 20.375
WDV as on 01.04.2016 34.625
Computation of deduction under section 32AC & 32AD for X Ltd. for A.Y. 2016-17
Particulars ` (in
crores)
Deduction under section 32AC(1A) @ 15% on ` 50 crore (since investment 7.50
in new plant and machinery acquired and installed in the previous year
2015-16 by X Ltd., a manufacturing company, exceeds ` 25 crore)
Deduction under section 32AD @ 15% on ` 50 crore _7.50
Total benefit 15.00
(ii) Yes, the answer would be different, where the manufacturing unit is set up by a firm.
The deduction under section 32AC is available only to corporate assesses, and
therefore, the deduction of ` 7.50 crore under section 32AC would not be available
if the manufacturing unit is set up by X & Co., a firm. However, it would be eligible
for deduction of ` 7.50 crore under section 32AD.
Notes:
(1) As per the second proviso to section 32(1)(ii), where an asset acquired during the
previous year is put to use for less than 180 days in that previous year, the amount
deduction allowable as normal depreciation and additional depreciation would be
restricted to 50% of amount computed in accordance with the prescribed
percentage.
Therefore, normal depreciation on plant and machinery acquired and put to use on
1.11.2015 is restricted to 7.5% (being 50% of 15%) and additional depreciation is
restricted to 17.5% (being 50% of 35%).
39

(2) As per third proviso to section 32(1)(ii), the balance additional depreciation of ` 3.5
crore, being 50% of ` 7 crore (35% of ` 20 crore) would be allowed as deduction in
the A.Y.2017-18.
(3) As per section 32(1)(iia), additional depreciation is allowable in the case of any new
machinery or plant acquired and installed after 31.3.2005 by an assessee engaged,
inter alia, in the business of manufacture or production of any article or thing. In this
case, since new plant and machinery acquired was installed by a manufacturing unit
set up in a notified backward area in the State of Telengana, the rate of additional
depreciation is 35% of actual cost of new plant and machinery. Since plant and
machinery of ` 20 crore was put to use for less than 180 days, additional
[email protected]% (50% of 35%) is allowable as deduction. However, additional
depreciation shall not be allowed in respect of second hand plant and machinery of
` 5 crore.
Likewise, the benefit available under sections 32AC and 32AD would not be allowed
in respect of second hand plant and machinery.
Accordingly, additional depreciation and investment allowance under sections 32AC
and 32AD have not been provided on ` 5 crore, being the actual cost of second
hand plant and machinery acquired and installed in the previous year.
(d) Prescribed conditions relating to maintenance of accounts, audit, etc. to be
fulfilled by the approved in-house R&D facility [Section 35(2AB)]; Prescribed
Authority may also submit Report to Chief Commissioner or Commissioner
[Sections 35(2AB) & 35(2AA)]
(i) Section 35(2AB) provides for weighted deduction of 200% to a company engaged in
the business of biotechnology or manufacturing of goods (except items specified in
Schedule-XI) for the expenditure (not being expenditure in the nature of cost of any
land or building) incurred on scientific research carried out in an in-house research
and development facility approved by the prescribed authority.
(ii) For availing this weighted deduction, the company is required to enter into an
agreement with the prescribed authority, namely the Secretary, Department of
Scientific and Industrial Research (DSIR).
The Secretary, DSIR is required to send the report regarding approval to DGIT
(Exemption) in prescribed Form. The DGIT (Exemption) generally does not have
jurisdiction over the assessee company.
(iii) Further, the company is required to maintain separate books of account for
approved R&D facility and is also required to get the accounts audited. However,
the copy of audit report is required to be submitted to the DSIR only.
(iv) The Comptroller and Auditor General of India in its report on performance audit of
pharmaceuticals sector recommended for rationalisation of the provision relating to
monitoring of this weighted deduction.
40

(v) Accordingly, to facilitate a meaningful monitoring mechanism, section 35(2AB) has
been amended to provide that deduction thereunder shall be allowed if the company
enters into an agreement with the prescribed authority for co-operation in such
research and development facility and fulfills prescribed conditions with regard to
maintenance and audit of accounts and also furnishes prescribed reports.
(vi) Section 35(2AB)(4) providing that the prescribed authority shall submit its report in
relation to the approval of research and development facility to the Principal Director
General or Director General, has been amended to provide that the prescribed authority
can now submit its report to Principal Chief Commissioner or Chief Commissioner or
Principal Director General or Director General in the prescribed form.
(vii) Section 35(2AA) provides for a weighted deduction 200% of the sum paid by an
assessee to a National Laboratory or a University or an Indian Institute of
Technology or a specified person with a specific direction that the said sum shall be
used for scientific research undertaken under a programme approved in this
behalf by the prescribed authority.
(viii) The prescribed authority before granting approval has to satisfy itself about the
feasibility of carrying out the scientific research and shall submit its report to the
Principal Director General or Director General in the prescribed form.
The prescribed authority can now submit its report in the prescribed form to the
Principal Chief Commissioner or Chief Commissioner or Principal Director General
or Director General having jurisdiction over the company claiming the weighted
deduction under the said section.
(e) Interest paid in respect of capital borrowed for acquisition of an asset, for the
period upto the date on which the asset is first put to use to be capitalized, even if
the acquisition of the asset is not for extension of existing business or profession
[Section 36(1)(iii)]
(i) Under section 36(1)(iii), interest paid in respect of capital borrowed for the purposes
of the business or profession is allowable as deduction.
(ii) However, interest paid in respect of capital borrowed for acquisition of an asset for
extension of existing business or profession (whether capitalized in the books of
account of not) for the period beginning from the date on which capital was
borrowed for acquisition of the asset till the date on which such asset was first put
to use shall not be allowed as deduction as per the proviso to section 36(1)(iii).
(iii) The Central Government has, vide Notification dated 31.3.2015, in exercise of the
powers conferred under section 145(2), notified ten income computation and
disclosure standards (ICDSs) to be followed by all assessees, following the
mercantile system of accounting, for the purposes of computation of income
chargeable to income-tax under the head “Profit and gains of business or
profession” or “Income from other sources”. This notification shall come into force
with effect from 1st April, 2015, and shall accordingly apply to the A.Y. 2016-17 and
subsequent assessment years.
41

(iv) ICDS IX on Borrowing Costs deals with the treatment of borrowing costs.
(1) It requires borrowing costs which are directly attributable to the acquisition,
construction or production of a qualifying asset to be capitalized as part of the
cost of that asset.
(2) Qualifying asset has been defined to mean –
o land, building, machinery, plant or furniture, being tangible assets;
o know‐how, patents, copyrights, trade marks, licences, franchises or any
other business or commercial rights of similar nature, being intangible
assets;
o inventories that require a period of twelve months or more to bring them
to a saleable condition.
(3) This ICDS requires capitalization of specific borrowing costs (in respect of
funds borrowed specifically for the purpose of acquisition, construction or
production of a qualifying asset) and general borrowing costs. It provides the
formula for capitalization of borrowing costs when funds are borrowed
generally and used for the purpose of acquisition, construction or production of
a qualifying asset.
(4) In case of qualifying assets being tangible and intangible assets, the
capitalization shall commence from the date on which funds were borrowed
and cease when such asset is first put to use.
(v) The requirement in ICDS IX to capitalize borrowing costs incurred for acquisition of
tangible and intangible assets, upto the date the asset is first put to use, was not in
line with the requirement under the proviso to section 36(1)(iii) to capitalize interest
paid in respect of capital borrowed for acquisition of an asset upto the date the
asset is first put to use only where such acquisition is for extension of existing
business or profession.
(vi) Therefore, in order to remove the inconsistency between the requirement under the
Income-tax Act, 1961 and the requirement under ICDS IX, the proviso to section
36(1)(iii) has been amended to remove the condition that the acquisition
should have been for extension of existing business or profession for
capitalization of interest borrowed for acquisition of asset upto the date the asset is
first put to use.
(f) Amount of debt taken into account in computing the income of the assessee on the
basis of notified ICDSs to be allowed as deduction in the previous year in which
such debt or part thereof becomes irrecoverable [Section 36(1)(vii)]
(i) Under section 36(1)(vii), deduction is allowed in respect of the amount of any bad
debt or part thereof which is written off as irrecoverable in the accounts of the
assessee for the previous year.
42

(ii) Therefore, write off in the books of account is an essential condition for claim of bad
debts under section 36(1)(vii).
(iii) The Central Government has, vide Notification dated 31.3.2015, in exercise of the
powers conferred under section 145(2), notified ten income computation and
disclosure standards (ICDSs) to be followed by all assessees, following the
mercantile system of accounting, for the purposes of computation of income
chargeable to income-tax under the head “Profit and gains of business or
profession” or “Income from other sources”. This notification shall come into force
(iv) There are significant deviations between the notified ICDSs and Accounting Standards
which are likely to have the effect of advancing the recognition of income or gains or
postponing the recognition of expenditure or losses under tax laws and consequently,
impacting the computation of tax liability under the Income-tax Act, 1961.
(v) Due to early recognition of income under tax laws, it is possible that in certain cases,
income-tax is paid on income which may not be realized in future. In such cases,
there would also be no possibility of claiming bad debts since the income would not
have been recognized in the books of account as per the Accounting Standards and
consequently, cannot be written off as bad debts in books of account.
(vi) For example, ICDS IV requires revenue from sale of goods to be recognized when
there is reasonable certainty of its ultimate collection. However, “reasonable
certainty for ultimate collection” is not a criterion for recognition of revenue from
rendering of services or use by others of person’s resources yielding interest,
royalties or dividends. By implication, revenue recognition cannot be postponed in
case of significant uncertainty regarding collectability of consideration to be derived
from rendering of services or use by others of person’s resources yielding interest,
dividend or royalty.
Consequently, interest on sticky loans or interest on overdue payments as
mentioned in invoice may have to be recognized even though there may be
uncertainty regarding their collection. In case of non-realisation of such interest in
future, it would not also be possible to claim bad debts since such interest, which
would not have been recognized in the books of account as per AS 9, cannot be
written off. Write off of bad debts in the books of account is an essential condition
for claiming deduction under section 36(1)(vii).
(vii) In order to overcome this difficulty arising out of the notified ICDSs, a second
proviso has now been inserted in section 36(1)(vii).
43

Where the amount
a of succh debt or partt thereof has been
b taken intto account in
computinng the income of the assesssee (on the basis of ICDSss without
recorrding the sam me in the acco ounts)
of the previouus year in whicch such or
o of an earlier previouus year
debt has beccome irrecoverrable
Such debt orr part thereof shall

s be allowed in the prevvious year in
n which such
debt or part
p thereof becomes
b irreccoverable
annd
It shall be deemed
d that such debt orr part thereof has been wrritten off as
irrrecoverable in
i the accounnts
(viii) Coonsequently, if a debt, whiich has not been recognizzed in the boooks of accounnt as
per the requirem ment of the accounting
a staandards but has
h been takeen into accouunt in
thee computationn of income as a per the nootified ICDSs, has becomee irrecoverabble, it
can still be claimed as bad debts under section 36(1)(vii) since it shall be deeemed
thaat the debt haas been writteen off as irreccoverable in the books of account by virtue
v
of the second proviso
p to secction 36(1)(vii)).
(g) Amountt of expenditure incurred by a co-operrative societyy for purchasee of sugarcan
ne at
price fixxed by the Go
overnment alllowable as deduction [Seection 36(1)(xxvii)]
Effectivve from: A.Y..2016-17
New claause (xvii) hass been inserted in section 36 to providee for deductioon of:
Enggaged in the
B a Co-operrative
By buusiness of
Expendituure incurred society mannufacture of
sugar
Suuch price shoould be

≤ price fixedd or for purchase of
approved byy the sugarccane at a pricce
Governmennt.
44

(1) Clarification regarding disallowance of ‘other sum chargeable’ under section

40(a)(i) [Circular No. 3/2015, dated 12-02-2015]
If there has been a failure in deduction or in payment of tax deducted in respect of any
interest, royalty, fees for technical services or other sum chargeable under the Act either
payable in India to non-corporate non-resident or a foreign company or payable outside
India, then, disallowance of the related expenditure/ payment is attracted under section
40(a)(i) while computing income chargeable under the head “Profits and gains of
business or profession”.
The interpretation of the term ‘other sum chargeable’ in section 195 has been clarified in
this circular i.e. whether this term refers to the whole sum being remitted or only the
portion representing the sum chargeable to income-tax under the Act.
In its Instruction No. 2/2014, dated 26.02.2014, the CBDT has clarified that the
Assessing Officer shall determine the appropriate portion of the sum chargeable to tax as
mentioned in section 195(1), to ascertain the tax liability on which the deductor shall be
deemed to be an assessee in default under section 201, in cases where no application is
filed by the deductor for determining the sum so chargeable under section 195(2).
In this circular, the CBDT has, in exercise of its powers under section 119, clarified that
for the purpose of making disallowance of ‘other sum chargeable’ under section 40(a)(i),
the appropriate portion of the sum which is chargeable to tax shall form the basis of
disallowance. Further, the appropriate portion shall be the same as determined by the
Assessing Officer having jurisdiction for the purpose of section 195(1). Also, where the
determination of ‘other sum chargeable’ has been made under sub-section (2), (3) or (7)
of section 195 of the Act, such a determination will form the basis for disallowance, if
any, under section 40(a)(i).
(2) Rate of depreciation in respect of windmills installed on or after 01.04.2014
[Notification No. 43/2014, dated 16-9-2014]
The CBDT has, vide this notification amended the rate of depreciation on certain renewable
energy devices. Accordingly, the following renewable energy devices would be eligible for
depreciation @80% from A.Y. 2015-16, if they are installed on or after 1st April 2014 –
(a) Wind mills and any specially designed devices which run on wind mills;
(b) Any special devices including electric generators and pumps running on wind
energy
This implies that if the aforesaid renewable energy devices were installed on or before 31st
March 2014, they would be eligible for depreciation @ 15% from A.Y. 2015-16.
The applicable rate of depreciation for A.Y. 2014-15 and A.Y. 2015-16, based on date of
installation of such renewable energy devices, have been tabulated hereunder for a better
understanding of the amendment made vide this notification.
45

Date of installation Rate of depreciation
A.Y. 2014-15 A.Y. 2015-16
On or before 31.03.2012 80% 15%
Between 1.04.2012 to 31.03.2014 15% 15%
On or after 01.04.2014 N.A 80%
(3) Notification of the income computation and disclosure standards [Notification No.
32/2015, dated 31-03-2015]
Under section 145(1), income chargeable under the heads “Profits and gains of business
or profession” or “Income from other sources” shall be computed in accordance with
either the cash or mercantile system of accounting regularly employed by the assessee.
Section 145(2) empowers the Central Government to notify in the Official Gazette from
time to time, income computation and disclosure standards to be followed by any
class of assessees or in respect of any class of income. Accordingly, the Central
Government has, in exercise of the powers conferred under section 145(2), notified ten
income computation and disclosure standards (ICDSs) to be followed by all assessees,
following the mercantile system of accounting, for the purposes of computation of
income chargeable to income-tax under the head “Profit and gains of business or
profession” or “ Income from other sources”. This notification shall come into force
All the notified ICDSs are applicable for computation of income chargeable under the
head “Profits and gains of business or profession” or “Income from other sources” and
not for the purpose of maintenance of books of accounts. In the case of conflict between
the provisions of the Income‐tax Act, 1961 and the notified ICDSs, the provisions of the
Act shall prevail to that extent.
For a better understanding of ICDSs and their impact, the following are given hereunder –
I. Salient features
II. Text of ICDSs
III. ICDSs vis-à-vis AS and ICDSs vis-à-vis Judicial Rulings: Significant deviations
impacting computation of taxable income
I. Salient Features of ICDSs
 ICDS I: Accounting Policies

► This ICDS deals with significant accounting policies.
► While it recognizes the fundamental accounting assumptions of going
concern, consistency and accrual, it does not recognize the concepts of
“materiality” and “prudence” in selection of accounting policies.
► Treatment and presentation of transactions have to be governed by their
46

substance and not form.
► Marked to market loss or an expected loss is not to be recognized unless
recognition of such loss is in accordance with the provisions of any other
ICDS.
 ICDS II :Valuation of Inventories
► “Inventories” has been defined to mean assets held for –
o sale in the ordinary course of business;
o in the process of production for such sale;
o in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
► This ICDS requires inventory to be valued at cost or net realizable value,
whichever is lower.
► This ICDS requires disclosure of the accounting policies adopted in
measuring inventories including the cost formulae used and the total
carrying amount of inventories and its classification appropriate to a
person.
 ICDS III: Construction Contracts
► This ICDS is required to be applied in determination of income for a
construction contract of a contractor.
► It recognizes percentage of completion method (POCM) for recognizing
contract revenue and contract costs associated with a construction
contract.
► This ICDS also contains certain disclosure requirements, like the amount
of contract revenue recognized as revenue in the period, the methods
used to determine the stage of completion of contracts in progress etc.
 ICDS IV: Revenue Recognition
► This ICDS deals with the bases for recognition of revenue arising in the
course of the ordinary activities of a person from –
o the sale of goods;
o the rendering of services;
o the use by others of the person’s resources yielding interest,
royalties or dividends.
► It does not, however, deal with the aspects of revenue recognition which
are dealt with by other ICDSs.
► “Revenue” is the gross inflow of cash, receivables or other consideration
arising in the course of the ordinary activities of a person from the sale of
47

goods, from the rendering of services, or from the use by others of the
person’s resources yielding interest, royalties or dividends. In an agency
relationship, the revenue is the amount of commission and not the gross
inflow of cash, receivables or other consideration.
► This ICDS also contains a provision wherein the revenue from sale of
goods could be recognized when there is reasonable certainty of its
ultimate collection.
► However, “reasonable certainty for ultimate collection” is not a criterion for
recognition of revenue from rendering of services or use by others of
person’s resources yielding interest, royalties or dividends.
► This ICDS contains certain disclosure requirements, like the amount of
revenue from service transactions recognized as revenue during the
previous year, the method used to determine the stage of completion of
service transactions in progress, information relating to service
transactions in progress at the end of the previous year etc.
 ICDS V: Tangible Fixed Assets

► This ICDS deals with the treatment of tangible fixed assets.
► It contains the definition of tangible fixed assets which also provides the
criteria for determining whether an item is to be classified as a tangible
fixed asset.
► “Tangible fixed asset” is an asset being land, building, machinery, plant or
furniture held with the intention of being used for the purpose of producing
or providing goods or services and is not held for sale in the normal
course of business.
► This ICDS provides the components of actual cost of such assets and
valuation of such assets in special cases.
► The fair value of a tangible fixed asset acquired in exchange for shares or
other securities or another asset shall be its actual cost.
► The ICDS also provides that depreciation on such assets and income
arising on transfer of such assets shall be computed in accordance with
the provisions of the Income-tax Act, 1961.
► The ICDS also contains disclosure requirements in respect of such assets,
like the description of asset or block of assets, rate of depreciation, actual
cost or written down value, as the case may be, etc.
 ICDS VI: The Effects of changes in foreign exchange rates

► This ICDS deals with treatment of transactions in foreign currencies,
translating the financial statements of foreign operations and treatment of
foreign currency transactions in the nature of forward exchange contracts.
► This ICDS requires exchange differences arising on settlement of
monetary items or conversion thereof at last day of the previous year to be
48

recognized as income or as expense in that previous year.
► In respect of non-monetary items, exchange differences arising on
conversion thereof as at the last day of the previous year shall not be
recognized as income or as expense in that previous year.
► The ICDS contains provisions for initial recognition, conversion at the last
date of the previous year and recognition of exchange differences. These
provisions shall be subject to the provisions of section 43A of the Income-
tax Act, 1961 and Rule 115 of the Income-tax Rules, 1962.
► The ICDS requires classification of a foreign operation as an integral
foreign operation or a non-integral foreign operation.
 ICDS VII: Government Grants

► This ICDS deals with the treatment of government grants. It recognizes
that government grants are sometimes called by other names such as
subsidies, cash incentives, duty drawbacks etc.
► This ICDS does not deal with Government assistance other than in the
form of Government grants and Government participation in the ownership
of the enterprise.
► It requires recognition of Government Grants when there is a reasonable
assurance that the person shall comply with the conditions attached to
them and the grants shall be received. However, it also states that
recognition of Government grant shall not be postponed beyond the date
of actual receipt.
► This ICDS requires Government grants relatable to depreciable fixed
assets to be reduced from actual cost/WDV. It further provides that where
the Government grant is not directly relatable to the asset acquired, then a
pro-rata reduction of the amount of grant should be made in the same
proportion as such asset bears to all assets with reference to which the
Government grant is so received.
► The standard requires grants relating to non-depreciable fixed assets to
be recognized as income over the same period over which the cost of
meeting such obligations is charged to income.
► The standard also requires Government grants receivable as
compensation for expenses or losses incurred in a previous financial year
or for the purpose of giving immediate financial support to the person will
no further related costs to be recognized as income of the period in which
it is receivable.
► All other Government Grants have to be recognized as income over the
periods necessary to match them with the related costs which they are
intended to compensate.
► The standard contains certain disclosure requirements, like nature and
extent of Government grants recognized during the previous year as
49

income, nature and extent of Government grants not recognized during
the previous year as income and reasons thereof etc.
 ICDS VIII: Securities

► This ICDS deals with securities held as stock-in-trade.
► It requires securities to be recognized at actual cost on acquisition, which
shall comprise of its purchase price and include acquisition charges like
brokerage, fees, tax, duty or cess.
► The actual cost of a security acquired in exchange for other securities or
another asset shall be the fair value of the security so acquired.
► Subsequently, at the end of any previous year, securities held as stock-in-
trade have to be valued at actual cost initially recognized or net realizable
value at the end of that previous year, whichever is lower.
► It goes on to provide that such comparison of actual cost initially
recognized and net realizable value has to be done category-wise and not
for each individual security.
 ICDS IX: Borrowing Costs

► This ICDS deals with the treatment of borrowing costs. It does not deal
with the actual or imputed cost of owners’ equity and preference share
capital.
► It requires borrowing costs which are directly attributable to the
acquisition, construction or production of a qualifying asset to be
capitalized as part of the cost of that asset. Other borrowing costs have to
be recognized in accordance with the provisions of the Act.
► Qualifying asset has been defined to mean –
o land, building, machinery, plant or furniture, being tangible assets;
o know‐how, patents, copyrights, trade marks, licences, franchises or
any other business or commercial rights of similar nature, being
intangible assets;
o inventories that require a period of twelve months or more to bring
them to a saleable condition.
► This ICDS requires capitalization of specific borrowing costs and general
borrowing costs.
► This ICDS provides the formula for capitalization of borrowing costs when
funds are borrowed generally and used for the purpose of acquisition,
construction or production of a qualifying asset.
► It also provides as to when capitalization of borrowing costs would
commence and cease.
► It requires disclosure of the accounting policy adopted for borrowing costs
and the amount of borrowing costs capitalized during the year.
50

 ICDS X: Provisions, Contingent Liabilities and Contingent Assets
► This ICDS deals with Provisions, Contingent Liabilities and Contingent
Assets. However, it does not deal with provisions, contingent liabilities
and contingent assets –
o resulting from financial instruments,
o resulting from executory contracts,
o arising in insurance business from contracts with policyholders and
o covered by another ICDS.
It also does not deal with recognition of revenue dealt with by ICDS on
Revenue Recognition.
► The ICDS specifies the conditions for recognition of a provision, namely,
existence of a present obligation as a result of a past event, reasonable
certainty that outflow of resources embodying economic benefits will be
required to settle the obligation and making a reliable estimate of the
amount of the obligation.
► It provides that a person shall not recognize a contingent liability or a
contingent asset. However, it requires contingent assets to be assessed
continually. When it becomes reasonably certain that inflow of economic
benefit will arise, the asset and related income have to be recognized in
the previous year in which the change occurs.
► It contains provisions for measurement and review of a provision and
asset and related income.
► It also provides that a provision shall be used only for expenditures for
which the provision was originally recognized.
► The ICDS also contains specific disclosure requirements in respect of
each class of provision, asset and related income recognized.
II. Text of ICDSs

ICDS I – Accounting Policies
Content Para Content
heading
Scope 1 This ICDS deals with significant accounting policies.
Fundamental 2 “Going concern” refers to the assumption that the person
Accounting has neither the intention nor the necessity of liquidation or of
Assumptions curtailing materially the scale of the business, profession or
vocation and intends to continue his business, profession or
vocation for the foreseeable future.
“Consistency” refers to the assumption that accounting
policies are consistent from one period to another;
“Accrual” refers to the assumption that revenues and costs
51

are accrued, that is, recognised as they are earned or
incurred (and not as money is received or paid) and recorded
in the previous year to which they relate.
Accounting 3 The accounting policies refer to the specific accounting
Policies principles and the methods of applying those principles
adopted by a person.
Considerations 4 Accounting policies adopted by a person shall be such so as
in the to represent a true and fair view of the state of affairs and
Selection and income of the business, profession or vocation.
Change of For this purpose,
Accounting (i) the treatment and presentation of transactions and
Policies events shall be governed by their substance and not
merely by the legal form; and
(ii) marked to market loss or an expected loss shall not
be recognised unless the recognition of such loss is
in accordance with the provisions of any other
Income Computation and Disclosure Standard.
5 An accounting policy shall not be changed without
reasonable cause.
Disclosure of 6 All significant accounting policies adopted by a person shall
Accounting be disclosed.
Policies 7 Any change in an accounting policy which has a material effect
shall be disclosed. The amount by which any item is affected
by such change shall also be disclosed to the extent
ascertainable. Where such amount is not ascertainable, wholly
or in part, the fact shall be indicated. If a change is made in the
accounting policies which has no material effect for the current
previous year but which is reasonably expected to have a
material effect in later previous years, the fact of such change
shall be appropriately disclosed in the previous year in which
the change is adopted and also in the previous year in which
such change has material effect for the first time.
8 Disclosure of accounting policies or of changes therein cannot
remedy a wrong or inappropriate treatment of the item.
9 If the fundamental accounting assumptions of Going
Concern, Consistency and Accrual are followed, specific
disclosure is not required.
If a fundamental accounting assumption is not followed, the
fact shall be disclosed.
Transitional 10 All contract or transaction existing on 1st April, 2015 or
Provisions
entered into on or after the 1st April, 2015 shall be dealt
52

with in accordance with the provisions of this standard
after taking into account the income, expense or loss, if
any, recognised in respect of the said contract or
transaction for the previous year ending on or before the
31st March, 2015.
ICDS II – Valuation of Inventories

heading
Scope 1 This ICDS shall be applied for valuation of inventories, except:
(a) Work‐in‐progress arising under ‘construction contract’
including directly related service contract which is dealt
with by the ICDS on construction contracts;
(b) Work‐in‐progress which is dealt with by other ICDS;
(c) Shares, debentures and other financial instruments held
as stock‐in‐trade which are dealt with by the ICDS on
securities;
(d) Producers’ inventories of livestock, agriculture and
forest products, mineral oils, ores and gases to the
extent that they are measured at net realisable value;
(e) Machinery spares, which can be used only in connection
with a tangible fixed asset and their use is expected to
be irregular, shall be dealt with in accordance with the
ICDS on tangible fixed assets.
Definitions 2(1)(a) “Inventories” are assets:
(i) held for sale in the ordinary course of business;
(ii) in the process of production for such sale;
(iii) in the form of materials or supplies to be consumed in
the production process or in the rendering of services.
2(1)(b) “Net realisable value” is the estimated selling price in the
ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
2(2) Words and expressions used and not defined in this ICDS but
defined in the Act shall have the meanings assigned to them
in that Act.
Measurement 3 Inventories shall be valued at cost, or net realisable value,
whichever is lower.
4 Cost of inventories shall comprise of all costs of purchase, costs
Cost of
of services, costs of conversion and other costs incurred in
Inventories
bringing the inventories to their present location and condition.
53

5 The costs of purchase shall consist of purchase price
including duties and taxes, freight inwards and other
Costs of
expenditure directly attributable to the acquisition. Trade
Purchase
discounts, rebates and other similar items shall be deducted
in determining the costs of purchase.
6 The costs of services in the case of a service provider shall
Costs of consist of labour and other costs of personnel directly
Services engaged in providing the service including supervisory
personnel and attributable overheads.
7 The costs of conversion of inventories shall include costs
directly related to the units of production and a systematic
allocation of fixed and variable production overheads that are
incurred in converting materials into finished goods. Fixed
production overheads shall be those indirect costs of
production that remain relatively constant regardless of the
volume of production. Variable production overheads shall be
those indirect costs of production that vary directly or nearly
directly, with the volume of production.
8 The allocation of fixed production overheads for the purpose of
their inclusion in the costs of conversion shall be based on the
normal capacity of the production facilities. Normal capacity
shall be the production expected to be achieved on an average
over a number of periods or seasons under normal
circumstances, taking into account the loss of capacity
resulting from planned maintenance. The actual level of
Costs of production shall be used when it approximates to normal
Conversion capacity. The amount of fixed production overheads allocated
to each unit of production shall not be increased as a
consequence of low production or idle plant. Unallocated
overheads shall be recognised as an expense in the period in
which they are incurred. In periods of abnormally high
production, the amount of fixed production overheads allocated
to each unit of production is decreased so that inventories are
not measured above the cost. Variable production overheads
shall be assigned to each unit of production on the basis of the
actual use of the production facilities.
9 Where a production process results in more than one product
being produced simultaneously and the costs of conversion of
each product are not separately identifiable, the costs shall be
allocated between the products on a rational and consistent
basis. Where by‐products, scrap or waste material are
immaterial, they shall be measured at net realisable value and
this value shall be deducted from the cost of the main product.
54

10 Other costs shall be included in the cost of inventories only to
the extent that they are incurred in bringing the inventories to
their present location and condition.
Other Costs
11 Interest and other borrowing costs shall not be included in the
costs of inventories, unless they meet the criteria for
recognition of interest as a component of the cost as
specified in the ICDS IX on borrowing costs.
12 In determining the cost of inventories in accordance with
paragraphs 4 to paragraphs 11, the following costs shall be
excluded and recognised as expenses of the period in which
they are incurred, namely:—
Exclusions (a) Abnormal amounts of wasted materials, labour, or other
from the production costs;
Cost of (b) Storage costs, unless those costs are necessary in the
Inventories production process prior to a further production stage;
(c) Administrative overheads that do not contribute to
bringing the inventories to their present location and
condition;
(d) Selling costs.
13 The Cost of inventories of items
(i) that are not ordinarily interchangeable; and
(ii) goods or services produced and segregated for specific
projects
Cost shall be assigned by specific identification of their individual
Formulae costs.
14 ‘Specific identification of cost’ means specific costs are
attributed to identified items of inventory.
15 Where there are a large numbers of items of inventory which
are ordinarily interchangeable, specific identification of costs
shall not be made.
16 Cost of inventories, other than the inventory dealt with in
paragraph 13, shall be assigned by using the First‐in First‐out
(FIFO), or weighted average cost formula. The formula used
First‐in First‐ shall reflect the fairest possible approximation to the
out and cost incurred in bringing the items of inventory to their
Weighted present location and condition.
Average Cost 17 The FIFO formula assumes that the items of inventory which
Formula were purchased or produced first are consumed or sold first,
and consequently the items remaining in inventory at the end
of the period are those most recently purchased or produced.
Under the weighted average cost formula, the cost of each
55

item is determined from the weighted average of the cost of
similar items at the beginning of a period and the cost of similar
items purchased or produced during the period. The average
shall be calculated on a periodic basis, or as each additional
shipment is received, depending upon the circumstances.
Retail 18 Where it is impracticable to use the costing methods referred
Method to in paragraph 16, the retail method can be used in the retail
trade for measuring inventories of large number of rapidly
changing items that have similar margins. The cost of the
inventory is determined by reducing from the sales value of
the inventory, the appropriate percentage gross margin. The
percentage used takes into consideration inventory, which
has been marked down to below its original selling price.
19 Inventories shall be written down to net realisable value on an
item‐by‐item basis. Where ‘items of inventory' relating to the
same product line having similar purposes or end uses and
are produced and marketed in the same geographical area
and cannot be practicably evaluated separately from other
items in that product line, such inventories shall be grouped
together and written down to net realisable value on an
aggregate basis.
20 Net realisable value shall be based on the most reliable
evidence available at the time of valuation. The estimates of
net realisable value shall also take into consideration the
Net purpose for which the inventory is held. The estimates shall
Realisable take into consideration fluctuations of price or cost directly
Value relating to events occurring after the end of previous year to
the extent that such events confirm the conditions existing on
the last day of the previous year.
21 Materials and other supplies held for use in the production of
inventories shall not be written down below the cost, where
the finished products in which they shall be incorporated are
expected to be sold at or above the cost. Where there has
been a decline in the price of materials and it is estimated
that the cost of finished products will exceed the net
realisable value, the value of materials shall be written down
to net realisable value which shall be the replacement cost of
such materials.
22 The value of the inventory as on the beginning of the previous
Value of year shall be -
Opening (i) the cost of inventory available, if any, on the day of the
Inventory commencement of the business when the business has
commenced during the previous year; and
56

(ii) the value of the inventory as on the close of the immediately
preceding previous year, in any other case.
Change of 23 The method of valuation of inventories once adopted by a
Method of person in any previous year shall not be changed without
Valuation of reasonable cause.
Inventory
Valuation of 24 In case of dissolution of a partnership firm or association of
Inventory in person or body of individuals, notwithstanding whether
case of business is discontinued or not, the inventory on the date
certain of dissolution shall be valued at the net realisable value.
dissolutions
25 Interest and other borrowing costs, which do not meet the
criteria for recognition of interest as a component of the cost
as per para 11, but included in the cost of the opening
inventory as on the 1st April, 2015, shall be taken into
Transitional account for determining cost of such inventory for valuation
Provisions
as on the close of the previous year beginning on or after 1st
April, 2015 if such inventory continue to remain part of
inventory as on the close of the previous year beginning on or
after 1st April, 2015.
Disclosure 26 The following aspects shall be disclosed, namely:—
(a) the accounting policies adopted in measuring
inventories including the cost formulae used; and
(b) the total carrying amount of inventories and its
classification appropriate to a person.
ICDS III – Construction Contracts

heading
Scope 1 This ICDS should be applied in determination of income for a
construction contract of a contractor.
2(1) (a) “Construction contract” is a contract specifically negotiated
for the construction of an asset or a combination of
Definitions assets that are closely interrelated or interdependent
in terms of their design, technology and function or
their ultimate purpose or use and includes :
(i) contract for the rendering of services which are
directly related to the construction of the asset, for
example, those for the services of project managers
and architects;
57

(ii) contract for destruction or restoration of assets, and
the restoration of the environment following the
demolition of assets.
(b) “Fixed price contract” is a construction contract in which
the contractor agrees to a fixed contract price, or a fixed
rate per unit of output, which may be subject to cost
escalation clauses.
(c) “Cost plus contract” is a construction contract in which the
contractor is reimbursed for allowable or otherwise defined
costs, plus a mark up on these costs or a fixed fee.
(d) “Retentions” are amounts of progress billings which are
not paid until the satisfaction of conditions specified in the
contract for the payment of such amounts or until defects
have been rectified.
(e) “Progress billings” are amounts billed for work performed
on a contract whether or not they have been paid by the
customer.
(f) “Advances” are amounts received by the contractor before
the related work is performed.
defined in the Act shall have the meaning respectively
assigned to them in the Act.
3 A construction contract may be negotiated for the construction
of a single asset. A construction contract may also deal with the
construction of a number of assets which are closely interrelated
or interdependent in terms of their design, technology and
function or their ultimate purpose or use.
4 Construction contracts are formulated in a number of ways
which, for the purposes of this ICDS, are classified as fixed
price contracts and cost plus contracts. Some construction
contracts may contain characteristics of both a fixed price
contract and a cost plus contract, for example, in the case of a
cost plus contract with an agreed maximum price.
5 The requirements of this ICDS shall be applied separately to
each construction contract except as provided for in paragraphs
Combining 6, 7 and 8 herein. For reflecting the substance of a contract or a
and group of contracts, where it is necessary, the ICDS should be
Segmenting applied to the separately identifiable components of a single
Construction contract or to a group of contracts together.
Contracts
6 Where a contract covers a number of assets, the construction
of each asset should be treated as a separate construction
58

contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and
the contractor and customer have been able to accept or
reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
7 A group of contracts, whether with a single customer or with
several customers, should be treated as a single construction
contract when:
(a) the group of contracts is negotiated as a single package;
(b) the contracts are so closely interrelated that they are, in
effect, part of a single project with an overall profit
margin; and
(c) the contracts are performed concurrently or in a
continuous sequence.
8 Where a contract provides for the construction of an additional
asset at the option of the customer or is amended to include
the construction of an additional asset, the construction of the
additional asset should be treated as a separate construction
contract when:
(a) the asset differs significantly in design, technology or
function from the asset or assets covered by the original
contract; or
(b) the price of the asset is negotiated without having regard
to the original contract price.
Contract 9 Contract revenue shall be recognised when there is
Revenue reasonable certainty of its ultimate collection.
10 Contract revenue shall comprise of:
(a) the initial amount of revenue agreed in the contract,
including retentions; and
(b) variations in contract work, claims and incentive
payments:
(i) to the extent that it is probable that they will result in
revenue; and
(ii) they are capable of being reliably measured.
11 Where contract revenue already recognised as income is
subsequently written off in the books of accounts as
uncollectible, the same shall be recognised as an expense and
not as an adjustment of the amount of contract revenue.
Contract 12 Contract costs shall comprise of :
Costs (a) costs that relate directly to the specific contract;
59

(b) costs that are attributable to contract activity in general
and can be allocated to the contract;
(c) such other costs as are specifically chargeable to the
customer under the terms of the contract; and
(d) allocated borrowing costs in accordance with the ICDS on
Borrowing Costs.
These costs shall be reduced by any incidental income, not
being in the nature of interest, dividends or capital gains, that
is not included in contract revenue.
13 Costs that cannot be attributed to any contract activity or
cannot be allocated to a contract shall be excluded from the
costs of a construction contract.
14 Contract costs include the costs attributable to a contract for
the period from the date of securing the contract to the final
completion of the contract. Costs that are incurred in securing
the contract are also included as part of the contract costs,
provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.
When costs incurred in securing a contract are recognised as
an expense in the period in which they are incurred, they are
not included in contract costs when the contract is obtained in
a subsequent period.
15 Contract costs that relate to future activity on the contract are
recognised as an asset. Such costs represent an amount due
from the customer and are classified as contract work in
progress.
16 Contract revenue and contract costs associated with the
construction contract should be recognised as revenue and
expenses respectively by reference to the stage of completion
of the contract activity at the reporting date.
17 The recognition of revenue and expenses by reference to the
stage of completion of a contract is referred to as the
Recognition
percentage of completion method. Under this method,
of Contract
contract revenue is matched with the contract costs incurred in
Revenue and
reaching the stage of completion, resulting in the reporting of
Expenses
revenue, expenses and profit which can be attributed to the
proportion of work completed.
18 The stage of completion of a contract shall be determined with
reference to:
(a) the proportion that contract costs incurred for work
performed upto the reporting date bear to the estimated
60

total contract costs; or
(b) surveys of work performed; or
(c) completion of a physical proportion of the contract work.
Progress payments and advances received from customers
are not determinative of the stage of completion of a contract.
19 When the stage of completion is determined by reference to
the contract costs incurred up to the reporting date, only those
contract costs that reflect work performed are included in costs
incurred up to the reporting date. Contract costs which are
excluded are:
(a) contract costs that relate to future activity on the contract;
and
(b) payments made to sub-contractors in advance of work
performed under the subcontract.
20 During the early stages of a contract, where the outcome of
the contract cannot be estimated reliably contract revenue is
recognised only to the extent of costs incurred. The early
stage of a contract shall not extend beyond 25 % of the stage
of completion.
Changes in 21 The percentage of completion method is applied on a cumulative
Estimates basis in each previous year to the current estimates of
contract revenue and contract costs. Where there is change in
estimates, the changed estimates shall be used in determination
of the amount of revenue and expenses in the period in which the
change is made and in subsequent periods.
Transitional 22 Contract revenue and contract costs associated with the
Provisions st
construction contract, which commenced on or before 31 March,
2015 but not completed by the said date, shall be recognised as
revenue and costs respectively in accordance with the provisions
of this standard. The amount of contract revenue, contract costs
or expected loss, if any, recognised for the said contract for any
previous year commencing on or before 1st April, 2014 shall be
taken into account for recognising revenue and costs of the said
contract for the previous year commencing on the 1st April, 2015
and subsequent previous years.
Disclosure 23 A person shall disclose:
(a) the amount of contract revenue recognised as revenue in
the period; and
(b) the methods used to determine the stage of
completion of contracts in progress.
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24 A person shall disclose the following for contracts in progress
at the reporting date, namely:—
(a) amount of costs incurred and recognised profits (less
recognised losses) upto the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
ICDS IV- Revenue recognition

heading
Scope 1(1) This ICDS deals with the bases for recognition of revenue
arising in the course of the ordinary activities of a person from
(i) the sale of goods;
(ii) the rendering of services;
(iii) the use by others of the person’s resources yielding
interest, royalties or dividends.
1(2) This ICDS does not deal with the aspects of revenue
recognition which are dealt with by other Income Computation
and Disclosure Standards.
2(1) “Revenue” is the gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of
a person from the sale of goods, from the rendering of
services, or from the use by others of the person’s resources
yielding interest, royalties or dividends. In an agency
Definitions relationship, the revenue is the amount of commission and not
the gross inflow of cash, receivables or other consideration
2(2) Words and expressions used and not defined in this Income
Computation and Disclosure Standard but defined in the Act
shall have the meanings assigned to them in that Act.
3 In a transaction involving the sale of goods, the revenue shall be
recognised when the seller of goods has transferred to the buyer
the property in the goods for a price or all significant risks and
rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a
Sale of degree usually associated with ownership. In a situation, where
Goods transfer of property in goods does not coincide with the transfer of
significant risks and rewards of ownership, revenue in such a
situation shall be recognised at the time of transfer of significant
risks and rewards of ownership to the buyer.
4 Revenue shall be recognised when there is reasonable
certainty of its ultimate collection
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5 Where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim
for escalation of price and export incentives, revenue
recognition in respect of such claim shall be postponed
to the extent of uncertainty involved.
6 Revenue from service transactions shall be recognized by the
percentage completion method. Under this method, revenue
from service transactions is matched with the service
transactions costs incurred in reaching the stage of
completion, resulting in the determination of revenue,
Rendering
expenses and profit which can be attributed to the proportion
of Services
of work completed,. Income Computation and Disclosure
Standard on construction contract also requires the recognition
of revenue on this basis. The requirements of that Standard
shall mutantis mutandis apply to the recognition of revenue
and the associated expenses for a service transaction.
7 Interest shall accrue on the time basis determined by the
amount outstanding and the rate applicable. Discount or
The Use of premium on debt securities held is treated as though it were
Resources accruing over the period to maturity.
by Others 8 Royalties shall accrue in accordance with the terms of the
Yielding relevant agreement and shall be recognised on that basis
Interest, unless, having regard to the substance of the transaction, it is
Royalties or more appropriate to recognise revenue on some other
Dividends systematic and rational basis.
9 Dividends are recognised in accordance with the provisions of
the Act.
10 The transitional provisions of ICDS on construction contract
shall mutatis mutandis apply to the recognition of revenue and
the associated costs for a service transaction undertaken on or
before the 31st March, 2015 but not completed by the said date.
11 Revenue for a transaction, other than a service transaction
referred to in Para 10, undertaken on or before the 31st
Transitional March, 2015 but not completed by the said date shall be
Provisions recognised in accordance with the provisions of this standard
for the previous year commencing on the 1st April, 2015 and
subsequent previous year. The amount of revenue, if any,
recognised for the said transaction for any previous year
commencing on or before the 1st April, 2014 shall be taken
into account for recognising revenue for the said transaction
for the previous year commencing on the 1st April, 2015 and
subsequent previous years.
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12 Following disclosures shall be made in respect of revenue
recognition, namely-
(a) in a transaction involving sale of good, total amount not
recognised as revenue during the previous year due to
lack of reasonably certainty of its ultimate collection along
with nature of uncertainty
(b) the amount of revenue from service transactions
recognised as revenue during the previous year;
Disclosure
(c) the method used to determine the stage of completion of
service transactions in progress; and
(d) for service transactions in progress at the end of previous
year:
(i) amount of costs incurred and recognised profits
(less recognised losses) upto end of previous year;
(ii) the amount of advances received; and
(iii) the amount of retentions.
ICDS-V : Tangible fixed assets

heading
Scope 1 This ICDS deals with the treatment of tangible fixed assets.
Definitions 2 (1) (a) “Tangible fixed asset” is an asset being land,
building, machinery, plant or furniture held with the
intention of being used for the purpose of producing or
providing goods or services and is not held for sale in
the normal course of business.
(b) “Fair value” of an asset is the amount for which that
asset could be exchanged between knowledgeable,
willing parties in an arm’s length transaction.
shall have the meanings assigned to them in that Act.
Identification 3 The definition in clause (a) of sub‐paragraph (1) of
of Tangible paragraph 2 provides criteria for determining whether an
Fixed Assets item is to be classified as a tangible fixed asset.
4 Stand‐by equipment and servicing equipment are to be
capitalised. Machinery spares shall be charged to the revenue
as and when consumed. When such spares can be used only
in connection with an item of tangible fixed asset and their use
is expected to be irregular, they shall be capitalised.
64

5 The actual cost of an acquired tangible fixed asset shall
comprise its purchase price, import duties and other taxes,
excluding those subsequently recoverable, and any directly
attributable expenditure on making the asset ready for its
intended use. Any trade discounts and rebates shall be
deducted in arriving at the actual cost.
6 The cost of a tangible fixed asset may undergo changes
subsequent to its acquisition or construction on account of
(i) Price adjustment, changes in duties or similar factors; or
(ii) exchange fluctuation as specified in Income
Computation and Disclosure Standard on the effects of
Components changes in foreign exchange rates.
of Actual 7 Administration and other general overhead expenses are to
Cost be excluded from the cost of tangible fixed assets if they do
not relate to a specific tangible fixed asset. Expenses which
are specifically attributable to construction of a project or to
the acquisition of a tangible fixed asset or bringing it to its
working condition, shall be included as a part of the cost of
the project or as a part of the cost of the tangible fixed asset
8 The expenditure incurred on start‐up and commissioning of
the project, including the expenditure incurred on test runs
and experimental production, shall be capitalised. The
expenditure incurred after the plant has begun commercial
production, that is, production intended for sale or captive
consumption, shall be treated as revenue expenditure
Self‐ 9 In arriving at the actual cost of self‐constructed tangible
constructed fixed assets, the same principles shall apply as those
Tangible described in paragraphs 5 to 8. Cost of construction that
Fixed relate directly to the specific tangible fixed asset and costs
Assets that are attributable to the construction activity in general
and can be allocated to the specific tangible fixed asset shall
be included in actual cost. Any internal profits shall be
eliminated in arriving at such costs.
10 When a tangible fixed asset is acquired in exchange for
another asset, the fair value of the tangible fixed asset so
Non Monetary acquired shall be its actual cost.
Consideration 11 When a tangible fixed asset is acquired in exchange for
shares or other securities, the fair value of the tangible fixed
asset so acquired shall be its actual cost.
12 An expenditure that increases the future benefits from the
Improvements
existing asset beyond its previously assessed standard of
and Repairs
performance is added to the actual cost.
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13 The cost of an addition or extension to an existing tangible
fixed asset which is of a capital nature and which becomes
an integral part of the existing tangible fixed asset is to be
added to its actual cost. Any addition or extension, which
has a separate identity and is capable of being used after
the existing tangible fixed asset is disposed of, shall be
treated as separate asset.
14 Where a person owns tangible fixed assets jointly with
others, the proportion in the actual cost, accumulated
Valuation of depreciation and written down value is grouped together
Tangible with similar fully owned tangible fixed assets. Details of such
Fixed Assets jointly owned tangible fixed assets shall be indicated
in Special separately in the tangible fixed assets register.
Cases 15 Where several assets are purchased for a consolidated
price, the consideration shall be apportioned to the various
assets on a fair basis.
Transactional 16 The actual cost of tangible fixed assets, acquisition or
Provisions construction of which commenced on or before the 31st March,
2015 but not completed by the said date, shall be recognised in
accordance with the provisions of this standard. The amount of
actual cost, if any, recognised for the said assets for any
previous year commencing on or before the 1st April, 2014
shall be taken into account for recognising actual cost of the
said assets for the previous year commencing on the 1st April,
2015 and subsequent previous years.
Depreciation 17 Depreciation on a tangible fixed asset shall be computed in
accordance with the provisions of the Act.
Transfers 18 Income arising on transfer of a tangible fixed asset shall be
computed in accordance with the provisions of the Act.
Disclosures 19 Following disclosure shall be made in respect of tangible
fixed assets, namely:-
(a) description of asset or block of assets;
(b) rate of depreciation;
(c) actual cost or written down value, as the case may be:
(d) addition or deductions during the year with dates; in the
case of any addition of an assets, date put to use;
including adjustments on account of-
(i) Central Value Added Tax credit claimed and
allowed under the CENVAT Credit Rules, 2004;
(ii) Change in rate of exchange of currency;
(iii) Subsidy or grant or reimbursement, by whatever
66

name called;
(e) depreciation allowable ; and
(f) written down value at the end of year;
ICDS-VI : Effects of changes in foreign exchange rates

heading
Scope 1 This ICDS deals with:
(a) treatment of transactions in foreign currencies;
(b) translating the financial statements of foreign
operations;
(c) treatment of foreign currency transactions in the nature
of forward exchange contracts
Definitions 2(1) (a) “Average rate” is the mean of the exchange rates in
force during a period.
(b) “Closing rate” is the exchange rate at the last day of
the previous year
(c) “Exchange difference” is the difference resulting from
reporting the same number of units of a foreign
currency in the reporting currency of a person at
different exchange rates.
(d) “Exchange rate” is the ratio for exchange of two
currencies.
(e) “Foreign currency” is a currency other than the
reporting currency of a person.
(f) “Foreign operations of a person” is a branch, by
whatever name called, of that person, the activities of
which are based or conducted in a country other than
India.
(g) “Foreign currency transaction” is a transaction
which is denominated in or requires settlement in a
foreign currency, including transactions arising when a
person:—
(i) buys or sells goods or services whose price is
denominated in a foreign currency; or
(ii) borrows or lends funds when the amounts payable
or receivable are denominated in a foreign
currency; or
(iii) becomes a party to an unperformed forward
exchange contract; or
(iv) otherwise acquires or disposes of assets, or
67

incurs or settles liabilities, denominated in a
foreign currency:
(h) “Forward exchange contract” means an agreement
to exchange different currencies at a forward rate, and
includes a foreign currency option contract or another
financial instrument of a similar nature;
(i) “Forward rate” is the specified exchange rate for
exchange of two currencies at a specified future date;
(j) “Indian currency” shall have the meaning as assigned
to it in section 2 of the Foreign Exchange Management
Act, 1999;
(k) “Integral foreign operation” is a foreign operation,
the activities of which are an integral part of the
operation of the person;
(l) “Monetary items” are money held and assets to be
received or liabilities to be paid in fixed or determinable
amounts of money. Cash, receivables, and payables
are examples of monetary items;
(m) “Non-integral foreign operation” is a foreign
operation that is not an integral foreign operation;
(n) “Non-monetary items” are assets and liabilities other
than monetary items. Fixed assets, inventories, and
investments in equity shares are examples of
non‐monetary items;
(o) “Reporting currency” means Indian currency except for
foreign operations where it shall mean currency of the
country where the operations are carried out.
defined in the Act shall have the meaning assigned to them in
the Act.
Foreign Currency Transactions
3(1) A foreign currency transaction shall be recorded, on initial
recognition in the reporting currency, by applying to the
foreign currency amount the exchange rate between the
reporting currency and the foreign currency at the date of
the transaction.
Initial
Recognition 3(2) An average rate for a week or a month that approximates
the actual rate at the date of the transaction may be used for
all transaction in each foreign currency occurring during that
period. If the exchange rate fluctuates significantly, the
actual rate at the date of the transaction shall be used.
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Conversion at 4 At last day of each previous year:-
Last Date of (a) foreign currency monetary items shall be converted into
Previous Year reporting currency by applying the closing rate;
(b) where the closing rate does not reflect with reasonable
accuracy, the amount in reporting currency that is
likely to be realised from or required to disburse, a
foreign currency monetary item owing to restriction on
remittances or the closing rate being unrealistic and it
is not possible to effect an exchange of currencies at
that rate, then the relevant monetary item shall be
reported in the reporting currency at the amount which
is likely to be realised from or required to disburse such
item at the last date of the previous year; and
(c) non‐monetary items in a foreign currency shall be
converted into reporting currency by using the
exchange rate at the date of the transaction
Recognition 5 (i) In respect of monetary items, exchange differences
of Exchange arising on the settlement thereof or on conversion thereof
Differences at last day of the previous year shall be recognised as
income or as expense in that previous year.
(ii) In respect of non‐monetary items, exchange
differences arising on conversion thereof at the last day
of the previous year shall not be recognised as income
or as expense in that previous year.
Exception to 6 Notwithstanding anything contained in paragraph 3, 4 and 5;
Paragraphs initial recognition, conversion and recognition of exchange
3,4, and 5 difference shall be subject to provisions of section 43A of
the Act or Rule 115 of Income‐tax Rules, 1962, as the case
may be.
Financial Statements of Foreign Operations
7(1) The method used to translate the financial statements of
a foreign operation depends on the way in which it is financed
and operates in relation to a person. For this purpose, foreign
operations are classified as either “integral foreign operations”
Classification or “non‐integral foreign operations”.
of Foreign 7(2) The following are indications that a foreign operation is a
Operations non‐integral foreign operation rather than an integral foreign
operation:—
(a) while the person may control the foreign operation, the
activities of the foreign operation are carried out with a
significant degree of autonomy from the activities of the
person;
69

(b) transactions with the person are not a high proportion
of the foreign operation’s activities;
(c) the activities of the foreign operation are financed
mainly from its own operations or local borrowings;
(d) costs of labour, material and other components of the
foreign operation’s products or services are primarily
paid or settled in the local currency;
(e) the foreign operation’s sales are mainly in currencies
other than Indian currency;
(f) cash flows of the person are insulated from the
day‐to‐day activities of the foreign operation;
(g) sales prices for the foreign operation’s products or
services are not primarily responsive on a short‐term
basis to changes in exchange rates but are determined
more by local competition or local government regulation
(h) there is an active local sales market for the foreign
operation’s products or services, although there also
might be significant amounts of exports.
Integral 8 The financial statements of an integral foreign operation
Foreign shall be translated using the principles and procedures in
Operations paragraphs 3 to 6 as if the transactions of the foreign
operation had been those of the person himself.
9(1) In translating the financial statements of a non‐integral
foreign operation for a previous year, the person shall
apply the following, namely:—
(a) the assets and liabilities both monetary and
non‐monetary, of the non‐integral foreign operation
shall be translated at the closing rate;
(b) income and expense items of the non‐integral foreign
Non‐integral
operation shall be translated at exchange rates at the
Foreign
dates of the transactions; and
Operations
(c) all resulting exchange differences shall be recognised
as income or as expenses in that previous year.
9(2) Notwithstanding anything stated in sub‐paragraph 1, translation
and recognition of exchange difference in cases referred to in
section 43A of the Act or Rule 115 of Income‐tax Rules, 1962
shall be carried out in accordance with the provisions contained
in that section or that rule, as the case may be.
Change in the 10(1) When there is a change in the classification of a foreign
Classification operation, the translation procedures applicable to the
of a Foreign revised classification should be applied from the date of the
Operation change in the classification.
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10(2) The consistency principle requires that foreign operation
once classified as integral or non‐integral is continued to be
so classified. However, a change in the way in which a
foreign operation is financed and operates in relation to the
person may lead to a change in the classification of that
foreign operation.
11(1) Any premium or discount arising at the inception of a forward
exchange contract shall be amortised as expense or income
over the life of the contract. Exchange differences on such a
contract shall be recognised as income or as expense in the
previous year in which the exchange rates change. Any profit
or loss arising on cancellation or renewal shall be recognised
as income or as expense for the previous year.
11(2) The provisions of sub‐para 1 shall apply provided that the
contract -
(a) is not intended for trading or speculation purposes; and
(b) is entered into to establish the amount of the reporting
currency required or available at the settlement date of the
transaction.
11(3) The provisions of sub‐para 1 shall not apply to the contract
that is entered into to hedge the foreign currency risk of a
firm commitment or a highly probable forecast transaction.
Forward For this purpose, firm commitment, shall not include assets
Exchange and liabilities existing at the end of the previous year
Contracts
11(4) The premium or discount that arises on the contract is
measured by the difference between the exchange rate
at the date of the inception of the contract and the
forward rate specified in the contract. Exchange difference
on the contract is the difference between:
(a) the foreign currency amount of the contract translated
at the exchange rate at the last day of the previous
year, or the settlement date where the transaction is
settled during the previous year; and
(b) the same foreign currency amount translated at the
date of inception of the contract or the last day of the
immediately preceding previous year, whichever is
later.
11(5) Premium, discount or exchange difference on contracts that
are intended for trading or speculation purposes, or that are
entered into to hedge the foreign currency risk of a firm
commitment or a highly probable forecast transaction shall
be recognised at the time of settlement.
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12(1) All foreign currency transactions undertaken on or after 1st
April, 2015 shall be recognised in accordance with the
provisions of this standard.
12(2) Exchange differences arising in respect of monetary items or
non‐monetary items, on the settlement thereof during the
previous year commencing on the 1st April, 2015 or on
conversion thereof at the last day of the previous year
st
commencing on the 1 April, 2015, shall be recognised in
accordance with the provisions of this standard after taking
into account the amount recognised on the last day of the
previous year ending on the 31st March,2015 for an item, if
any, which is carried forward from said previous year
Transitional
Provisions 12(3) The financial statements of foreign operations for the
previous year commencing on the 1st April, 2015 shall be
translated using the principles and procedures specified in
this standard after taking into account the amount
recognised on the last day of the previous year ending on
the 31st March, 2015 for an item, if any, which is carried
forward from said previous year
12(4) All forward exchange contracts existing on the 1st April,
2015 or entered on or after 1st April, 2015 shall be dealt with
in accordance with the provisions of this standard after
taking into account the income or expenses, if any,
recognised in respect of said contracts for the previous year
ending on or before the 31st March, 2015.
ICDS-VII : Government grants

heading
1 This ICDS deals with the treatment of Government grants.
The Government grants are sometimes called by other
names such as subsidies, cash incentives, duty drawbacks,
waiver, concessions, reimbursements, etc.
2 This ICDS does not deal with:—
Scope
(a) Government assistance other than in the form of
Government grants; and
(b) Government participation in the ownership of the
enterprise
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3(1) (a) “Government” refers to the Central Government, State
Governments, agencies and similar bodies, whether
local, national or international.
(b) “Government grants” are assistance by Government in
cash or kind to a person for past or future compliance
with certain conditions. They exclude those forms of
Definitions
Government assistance which cannot have a value
placed upon them and the transactions with
Government which cannot be distinguished from the
normal trading transactions of the person.
shall have the meaning assigned to them in the Act.
4(1) Government grants should not be recognised until there is
Recognition reasonable assurance that (i) the person shall comply with the
of conditions attached to them, and (ii) the grants shall be
Government received.
Grants 4(2) Recognition of Government grant shall not be postponed
beyond the date of actual receipt.
5 Where the Government grant relates to a depreciable fixed
asset or assets of a person, the grant shall be deducted
from the actual cost of the asset or assets concerned or
from the written down value of block of assets to which
concerned asset or assets belonged to.
6 Where the Government grant relates to a non‐depreciable
asset or assets of a person requiring fulfillment of certain
obligations, the grant shall be recognised as income over
the same period over which the cost of meeting such
obligations is charged to income
Treatment of 7 Where the Government grant is of such a nature that it
Government cannot be directly relatable to the asset acquired, so much
Grants of the amount which bears to the total Government grant,
the same proportion as such asset bears to all the assets in
respect of or with reference to which the Government grant
is so received, shall be deducted from the actual cost of the
asset or shall be reduced from the written down value of
block of assets to which the asset or assets belonged to.
8 The Government grant that is receivable as compensation for
expenses or losses incurred in a previous financial year or for
the purpose of giving immediate financial support to the
person with no further related costs, shall be recognised as
income of the period in which it is receivable.
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9 The Government grants other than covered by paragraph 5,
6, 7, and 8 shall be recognised as income over the periods
necessary to match them with the related costs which they
are intended to compensate.
10 The Government grants in the form of non‐monetary
assets, given at a concessional rate, shall be accounted for
on the basis of their acquisition cost
11 The amount refundable in respect of a Government grant
referred to in paragraphs 6, 8 and 9 shall be applied first
against any unamortised deferred credit remaining in
respect of the Government grant. To the extent that the
amount refundable exceeds any such deferred credit, or
where no deferred credit exists, the amount shall be
Refund of charged to profit and loss statement.
Government
Grants 12 The amount refundable in respect of a Government grant
related to a depreciable fixed asset or assets shall be
recorded by increasing the actual cost or written down
value of block of assets by the amount refundable. Where
the actual cost of the asset is increased, depreciation on
the revised actual cost or written down value shall be
provided prospectively at the prescribed rate
Transitional 13 All the Government grants which meet the recognition
Provisions criteria of para 4 on or after 1st April, 2015 shall be
recognised for the previous year commencing on or after
1st April, 2015 in accordance with the provisions of this
standard after taking into account the amount, if any, of the
said Government grant recognised for any previous year
ending on or before 31st March, 2015.
Disclosures 14 Following disclosure shall be made in respect of
Government grants, namely :-
(a) nature and extent of Government grants recognised
during the previous year by way of deduction from the
actual cost of the asset or assets or from the written
down value of block of assets during the previous
year;
(b) nature and extent of Government grants recognised
during the previous year as income;
(c) nature and extent of Government grants not
recognised during the previous year by way of
deduction from the actual cost of the asset or assets
or from the written down value of block of assets and
reasons thereof; and
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(d) nature and extent of Government grants not
recognised during the previous year as income and
reasons thereof.
ICDS VIII – Securities

heading
Scope 1 This ICDS deals with securities held as stock‐in‐trade.
2 This ICDS does not deal with:

(a) the bases for recognition of interest and dividends on
securities which are covered by the Income Computation
and Disclosure Standard on revenue recognition;
(b) securities held by a person engaged in the business of
insurance;
(c) securities held by mutual funds, venture capital funds,
banks and public financial institutions formed under a
Central or a State Act or so declared under the
Companies Act, 1956 or the Companies Act, 2013.
Definitions 3(1) (a) “Fair value” is the amount for which an asset could be
exchanged between a knowledgeable, willing buyer and a
knowledgeable, willing seller in an arm’s length
transaction.
(b) “Securities” shall have the meaning assigned to it in
clause (h) of Section 2 of the Securities Contract
(Regulation) Act, 1956 (42 of 1956), other than
Derivatives referred to in sub‐clause (1a) of that clause.
3(2) Words and expressions used and not defined in this
Income Computation and Disclosure Standard but defined in
the Act shall have the meaning respectively assigned to them
in the Act.
Recognition 4 A security on acquisition shall be recognised at actual cost.
and Initial
Measure- 5 The actual cost of a security shall comprise of its purchase
ment of price and include acquisition charges such as brokerage, fees,
Securities tax, duty or cess.
6 Where a security is acquired in exchange for other securities,
the fair value of the security so acquired shall be its actual cost.
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7 Where a security is acquired in exchange for another asset, the
fair value of the security so acquired shall be its actual cost.
8 Where unpaid interest has accrued before the acquisition of an
interest bearing security and is included in the price paid for
the security, the subsequent receipt of interest is allocated
between pre acquisition and post acquisition periods; the
pre acquisition portion of the interest is deducted from the
actual cost.
9 At the end of any previous year, securities held as
stock‐in‐trade shall be valued at actual cost initially
recognised or net realisable value at the end of that previous
year, whichever is lower.
10 For the purpose of para 9, the comparison of actual cost
initially recognised and net realisable value shall be done
categorywise and not for each individual security.
For this purpose, securities shall be classified into the
following categories, namely:‐
(a) shares;
(b) debt securities;
(c) convertible securities; and
(d) any other securities not covered above.
Subsequent
Measure- 11 The value of securities held as stock‐in‐trade of a business as
ment of on the beginning of the previous year shall be:
Securities (a) the cost of securities available, if any, on the day of the
commencement of the business when the business has
commenced during the previous year; and
(b) the value of the securities of the business as on the close
of the immediately preceding previous year, in any other
case.
12 Notwithstanding anything contained in para 9, 10 and 11, at
the end of any previous year, securities not listed on a
recognised stock exchange; or listed but not quoted on a
recognised stock exchange with regularity from time to time,
shall be valued at actual cost initially recognised.
13 For the purposes of para 9, 10 and 11 where the actual cost
initially recognised cannot be ascertained by reference to
specific identification, the cost of such security shall be
determined on the basis of first‐in‐first‐out method.
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ICDS IX – Borrowing Costs
heading
1(1) This ICDS deals with treatment of borrowing costs.
Scope 1(2) This ICDS does not deal with the actual or imputed cost of
owners’ equity and preference share capital.
2(1) (a) “Borrowing costs” are interest and other costs incurred
by a person in connection with the borrowing of funds and
include:
(i) commitment charges on borrowings;
(ii) amortised amount of discounts or premiums relating to
borrowings;
(iii) amortised amount of ancillary costs incurred in
connection with the arrangement of borrowings;
(iv) finance charges in respect of assets acquired under
finance leases or under other similar arrangements.
Definitions (b) “Qualifying asset” means:
(i) land, building, machinery, plant or furniture, being
tangible assets;
(ii) know‐how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights
of similar nature, being intangible assets;
(iii) inventories that require a period of twelve months or
more to bring them to a saleable condition.
defined in the Act shall have the meaning assigned to them in the
Act.
3 Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset shall be
capitalised as part of the cost of that asset. The amount of
borrowing costs eligible for capitalisation shall be determined in
Recogniti accordance with this ICDS. Other borrowing costs shall be
on recognised in accordance with the provisions of the Act.
4 For the purposes of this ICDS, “capitalisation” in the context of
inventory referred to in item (iii) of clause (b) of sub‐paragraph (1)
of paragraph 2 means addition of borrowing cost to the cost of
inventory.
Borrowing 5 To the extent the funds are borrowed specifically for the
Costs purposes of acquisition, construction or production of a qualifying
eligible asset, the amount of borrowing costs to be capitalised on that
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for asset shall be the actual borrowing costs incurred during the
Capital- period on the funds so borrowed.
isation 6 To the extent the funds are borrowed generally and utilised for
the purposes of acquisition, construction or production of a qualifying
asset, the amount of borrowing costs to be capitalised shall be
computed in accordance with the following formula, namely :—
A x B/C
Where
A= borrowing costs incurred during the previous year except
on borrowings directly relatable to specific purposes;
B= (i) The average of costs of qualifying asset as
appearing in the balance sheet of a person on the
first day and the last day of the previous year;
(ii) In case the qualifying asset does not appear in the
balance sheet of a person on the first day or both on
the first day and the last day of the previous year,
half of the cost of the qualifying asset;
(iii) In case the qualifying asset does not appear in the
balance sheet of a person on the last day of previous year,
the average of the costs of qualifying asset as appearing
in the balance sheet of a person on the first day of the
previous year and on the date of put to use or completion,
as the case may be, other than those qualifying assets
which are directly funded out of specific borrowings; or
C= the average of the amount of total assets as appearing in
the balance sheet of a person on the first day and the last
day of the previous year, other than those assets which are
directly funded out of specific borrowings;
Commence 7 The capitalisation of borrowing costs shall commence:
ment of (a) in a case referred to in paragraph 5, from the date on which
Capitalisa- funds were borrowed;
tion (b) in a case referred to in paragraph 6, from the date on which
funds were utilised.
8 Capitalisation of borrowing costs shall cease:
(a) in case of a qualifying asset referred to in item (i) and (ii) of
Cessation clause (b) of sub‐paragraph (1) of paragraph 2, when such
of asset is first put to use;
Capitalisa- (b) in case of inventory referred to in item (iii) of clause (b) of
tion sub‐paragraph (1) of paragraph 2, when substantially all the
activities necessary to prepare such inventory for its
intended sale are complete.
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9 When the construction of a qualifying asset is completed in parts
and a completed part is capable of being used while construction
continues for the other parts, capitalisation of borrowing costs in
relation to a part shall cease:—
(a) in case of part of a qualifying asset referred to in item (i) and
(ii) of clause (b) of sub‐paragraph (1) of paragraph 2, when
such part of a qualifying asset is first put to use;
(b) in case of part of inventory referred to in item (iii) of clause
(b) of sub‐paragraph (1) of paragraph 2, when substantially
all the activities necessary to prepare such part of inventory
for its intended sale are complete.
Transi- 10 All the borrowing costs incurred on or after 1st April, 2015 shall
tional be capitalised for the previous year commencing on or after 1st
Provisions April, 2015 in accordance with the provisions of this standard after
taking into account the amount of borrowing costs capitalised, if
any, for the same borrowing for any previous year ending on or
before 31st March, 2015.
Disclosure 11 The following disclosure shall be made in respect of borrowing
costs, namely:—
(a) the accounting policy adopted for borrowing costs; and
(b) the amount of borrowing costs capitalised during the
previous year.
ICDS X - Provisions, contingent liabilities and contingent assets

heading
1 This ICDS deals with provisions, contingent liabilities and
contingent assets, except those:
(a) resulting from financial instruments;
(b) resulting from executory contracts
(c) arising in insurance business from contracts with
policyholders; and
Scope
(d) covered by another ICDS
2 This ICDS does not deal with the recognition of revenue which
is dealt with by ICDS Revenue Recognition.
3 The term ‘provision’ is also used in the context of items such as
depreciation, impairment of assets and doubtful debts which are
adjustments to the carrying amounts of assets and are not
addressed in this ICDS.
Definitions 4(1) (a) “Provision” is a liability which can be measured only by
using a substantial degree of estimation.
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(b) “Liability” is a present obligation of the person arising from
past events, the settlement of which is expected to result in
an outflow from the person of resources embodying
economic benefits.
(c) “Obligating event” is an event that creates an obligation
that results in a person having no realistic alternative to
settling that obligation.
(d) “Contingent liability is”-
(i) a possible obligation that arises from past events and
the existence of which will be confirmed only by the
occurrence or nonoccurrence of one or more uncertain
future events not wholly within the control of the
person; or
(ii) a present obligation that arises from past events but is
not recognised because
(A) it is not reasonably certain that an outflow of
resources embodying economic benefits will be
required to settle the obligation; or
(B) a reliable estimate of the amount of the obligation
cannot be made.
(e) “Contingent asset” is a possible asset that arises from
past events the existence of which will be confirmed only by
the occurrence or nonoccurrence of one or more uncertain
future events not wholly within the control of the person.
(f) “Executory contracts” are contracts under which neither
party has performed any of its obligations or both parties have
partially performed their obligations to an equal extent.
(g) “Present obligation” is an obligation if, based on the
evidence available, its existence at the end of the previous
year is considered reasonably certain.
Computation and disclosure Standard but defined in the Act shall
have the meaning respectively assigned to them in the Act.
Recognition
5 A provision shall be recognised when
(a) a person has a present obligation as a result of a past
event
Provisions (b) it is reasonably certain that an outflow of resources
embodying economic benefits will be required to settle the
obligation; and
(c) a reliable estimate can be made of the amount of the
obligation.
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If these conditions are not met, no provision shall be recognized
6 No provision shall be recognised for costs that need to be
incurred to operate in the future.
7 It is only those obligations arising from past events existing
independently of a person’s future actions, that is the future
conduct of its business, that are recognised as provisions
8 Where details of a proposed new law have yet to be finalised, an
obligation arises only when the legislation is enacted.
Contingent 9 A person shall not recognise a contingent liability
Liabilities
10 A person shall not recognise a contingent asset.
Contingent 11 Contingent assets are assessed continually and when it

Assets becomes reasonably certain that inflow of economic benefit will
arise, the asset and related income are recognised in the
previous year in which the change occurs.
Measurement
Best 12 The amount recognised as a provision shall be the best estimate
Estimate of the expenditure required to settle the present obligation at the
end of the previous year. The amount of a provision shall not be
discounted to its present value.
13 The amount recognised as asset and related income shall be the
best estimate of the value of economic benefit arising at the end
of the previous year. The amount and related income shall not
be discounted to its present value.
14 Where some or all of the expenditure required to settle a
provision is expected to be reimbursed by another party, the
reimbursement shall be recognised when it is reasonably certain
that reimbursement will be received if the person settles
the obligation. The amount recognised for the reimbursement
Reimburs shall not exceed the amount of the provision.
ements
15 Where a person is not liable for payment of costs in case the third
party fails to pay, no provision shall be made for those costs.
16 An obligation, for which a person is jointly and severally liable, is
a contingent liability to the extent that it is expected that the
obligation will be settled by the other parties.
17 Provisions shall be reviewed at the end of each previous year
Review and adjusted to reflect the current best estimate. If it is no longer
reasonably certain that an outflow of resources embodying
economic benefits will be required to settle the obligation, the
provision should be reversed.
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18 An asset and related income recognised as provided in para 11
shall be reviewed at the end of each previous year and adjusted
to reflect the current best estimate. If it is no longer reasonably
certain that an inflow of economic benefits will arise, the asset
and related income shall be reversed.
Use of 19 A provision shall be used only for expenditures for which
Provisions the provision was originally recognised.
Transitional 20 All the provisions or assets and related income shall be recognised
Provisions for the previous year commencing on or after 1st April, 2015 in
accordance with the provisions of this standard after taking into
account the amount recognised, if any, for the same for any
previous year ending on or before 31st March, 2015.
Disclosure 21(1)) Following disclosure shall be made in respect of each class of
provision, namely:-
(a) a brief description of the nature of the obligation;
(b) the carrying amount at the beginning and end of the
previous year;
(c) additional provisions made during the previous year,
including increases to existing provisions;
(d) amounts used, that is incurred and charged against the
provisions, during the previous year;
(e) unused amounts reversed during the previous year; and
(f) the amount of any expected reimbursement, stating the
amount of any asset that has been recognized for that
expected reimbursement.
21(2) Following disclosure shall be made in respect of each class of
asset and related income recognized as provided in para 11,
namely:-
(a) a brief description of the nature of the asset and related
income;
(b) the carrying amount of asset at the beginning and end of
the previous year;
(c) addition amount of asset and related income recognized
during the year; including increased to assets and related
income already recognized: and
(d) amount of asset and related income reversed during the
previous year.
III. ICDSs vis-à-vis AS and ICDSs vis-à-vis Judicial Rulings: Significant deviations
impacting computation of taxable income
There are significant deviations between the notified ICDSs and Accounting Standards
which are likely to have the effect of advancing the recognition of income or gains or
82

postponing the recognition of expenditure or losses under tax laws and consequently,
impacting the computation of tax liability under the Income-tax Act, 1961. These
deviations would also increase the timing differences between taxable income and
accounting income. Further, the ICDSs, at many places, differ significantly from decisions
pronounced by the Supreme Court and High Courts. Some of the deviations are
highlighted hereunder:
ICDS I : Accounting Policies
(1) Non-consideration of the concepts of Prudence and Materiality
ICDS I on Accounting Policies, while recognizing the fundamental accounting
assumptions of going concern, consistency and accrual, does not recognize the
concepts of “materiality” and “prudence” in selection and application of accounting
policies.
The concept of prudence requires that provisions should be made for all known
liabilities and losses even though the amount cannot be determined with certainty
and represents only a best estimate in the light of available information. Non-
consideration of prudence in selection and application of accounting policies may
have the impact of earlier recognition of income and gains or later recognition of
expenses or losses for tax computation.
Examples of non-consideration of prudence in the ICDSs:
(i) The requirement in ICDS VII on Government Grants that recognition of a
Government grant shall not be postponed beyond the date of actual receipt,
even if conditions attached to the grant are not fulfilled.
(ii) Absence of requirement of “reasonable certainty of ultimate collection” for
recognition of revenue from service transactions and use of resources by
others yielding interest, royalties and dividends in ICDS IV on Revenue
Recognition.
(iii) Non-recognition of expected losses on construction contracts and contract
costs, recovery of which is not probable, as an expense immediately, in ICDS
III on Construction Contracts.
(iv) Non-recognition of provision for loss on onerous contracts.
(2) Requirement of “reasonable cause” for change in accounting policy
AS 5 vis-à-vis ICDS I
AS 5 which deals with changes in accounting policies, permits change in accounting
policies if adoption of different accounting policies is required by -
(a) statute; or
(b) for the purpose of compliance with an accounting standard; or
(c) if such change results in a more appropriate presentation of financial statements.
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ICDS I, however, states that an accounting policy should not be changed without
any ‘reasonable cause’.
The term “reasonable cause” has not been defined and would involve exercise of
judgment by management and tax authorities. A clarification as to the meaning and
scope of “reasonable cause” would help avoid litigation.
ICDS II : Valuation of Inventories
(1) Standard cost method not recognized for measurement of cost of inventories
AS 2 vis-à-vis ICDS II
The cost of inventories of items that are not ordinarily interchangeable and goods or
services produced and segregated for specific projects should be assigned by specific
identification of their individual costs. Further, cost of inventories, other than such
inventories, should be assigned using the First-in First-out or weighted average cost
formula. The formula should reflect the fairest possible approximation to the cost
incurred in bringing the items of inventory to their present location and condition. These
requirements are the same in AS 2 and ICDS II on Valuation of Inventories.
However, whereas AS 2 permits standard cost method as one of the techniques for
the measurement of the cost of inventories, for convenience if the results
approximate the actual cost, there is no enabling clause or para in ICDS II
permitting adoption of standard cost as a technique for measurement of the cost of
inventories.
(2) Valuation of inventory on the date of dissolution of a firm, where the business
is continued by a partner(s)
In case of dissolution of a partnership firm or association of persons or body of
individuals, Paragraph 24 of ICDS II on Valuation of Inventories requires the
inventory on the date of dissolution to be valued at the net realisable value,
notwithstanding whether business is discontinued or not.
This requirement in ICDS II is in deviation from the Supreme Court ruling in Shakti
Trading Co. vs. CIT (2001) 250 ITR 871, where it was held that if the firm is
dissolved due to death of a partner and the surviving partners reconstitute the firm
and continue the business as before, the firm is entitled to adopt cost or market
price, whichever is lower.
ICDS III: Construction Contracts
(1) Point in time of recognition of expected loss on construction contracts
AS 7 vis-à-vis ICDS III:
AS 7 permits recognition of expected loss on construction contract as well as
contract costs, recovery of which is not probable, as an expense immediately. It
also permits recognition of expected loss immediately as an expense, when it is
probable that total contract costs will exceed total contract revenue.
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The absence of specific requirement in ICDS III to recognize such expected losses
on construction contracts immediately as expense represents a significant deviation
from AS 7 as well as judicial rulings permitting immediate recognition of such losses
as long as the same are in accordance with the accounting standard or justified by
the principle of prudence or by the nature and circumstances of the contract.
By implication, such losses are also to be recognized on Percentage of Completion
Method as per ICDS III. Consequently, recognition of losses for tax purposes is
postponed.
(2) Treatment of penalties arising from delays caused by the contractor in
completion of the contract
Paragraph 11 of AS 7 permits decrease in contract revenue as a result of penalties
arising from delays caused by the contractor in the completion of the contract.
However, ICDS III does not permit such reduction in contract revenue.
Non-recognition of decrease in contract revenue as a result of such penalties would
have the effect of inflating the taxable income and consequent tax liability.
(3) Point in time of recognition of retention money
ICDS III requires retention money to be treated as part of contract revenue and
recognized on percentage of completion method. As per paragraph 10 of ICDS III,
“Contract Revenue” shall comprise of the initial amount of revenue agreed in the
contract, including retentions. However, as per paragraph 10 of AS 7, contract
revenue should comprise the initial amount of revenue agreed in the contract.
While there is a specific requirement in paragraph 10 of ICDS III to include
retentions, there is no such requirement in paragraph 10 of AS 7.
Deviation from judicial precedents:
In CIT v. Associated Cables (P) Ltd. (2006) 286 ITR 596 (Bom.) and CIT v.
Ignifluid Boilers (I) Ltd. (2006) 283 ITR 295 (Mad), it was held that the payment of
retention money in the case of contract is dependent on satisfactory completion of
contract work. The right to receive the retention money accrues only after the
obligations under the contract are fulfilled and, therefore, it would not amount to
income of the assessee in the year in which the amount is retained.
The requirement in ICDS III to recognize retention money on percentage of
completion method marks a significant deviation from the decisions pronounced by
the Courts.
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ICDS IV: Revenue Recognition
(1) Revenue recognition in case of rendering of services and use by others of
person’s resources yielding interest, dividend or royalty, where there is
significant uncertainty as to collectability
AS 9 vis-à-vis ICDS IV:
AS 9 requires recognition of revenue only if no significant uncertainty exists
regarding the amount of consideration that will be derived from sale of goods,
rendering of services or use by others of enterprise resources yielding interest,
royalties and dividends.
ICDS IV also requires revenue from sale of goods to be recognized when there is
reasonable certainty of its ultimate collection. However, “reasonable certainty for
ultimate collection” is not a criterion for recognition of revenue from rendering of
services or use by others of person’s resources yielding interest, royalties or
dividends. By implication, revenue recognition cannot be postponed in case of
uncertainty regarding collectability of consideration to be derived from rendering of
services or use by others of person’s resources yielding interest, dividend or royalty.
In this regard, ICDS IV is also in deviation with the Supreme Court ruling in UCO
Bank v. CIT (1999) 237 ITR 889, where it was held that interest on sticky loans
would not accrue if the same was not recoverable and the Delhi High Court ruling in
DIT v. Brahmaputra Capital Financial Services Ltd. (2011) 335 ITR 182 (Del.),
where it was held that interest on non-performing assets which is not received with
no possibility of recovery may not be recognized.
(2) Recognition of revenue from service transactions
AS 9 vis-à-vis ICDS IV:
AS 9 permits revenue from service transactions to be recognised as the service is
performed, either by the proportionate completion method or by the completed
service contract method, whichever relates the revenue to the work accomplished.
ICDS IV requires revenue from service transactions to be recognised only on the
basis of percentage completion method, which may, however, not be appropriate in
case of all service transactions. For example, in case of courier services, revenue
is recognized only when the goods are delivered at the specified destination.
Deviation from judicial precedent:
This requirement in ICDS IV is also not in line with the Madras High Court ruling in
CIT v. Coral Electronics P Ltd. (2005) 274 ITR 336, where it was held that the
amount received as service charges for services to be rendered in future could not
be considered as an income and was not exigible to tax. It is only when the service
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is done, does the assessee have a right over the amount that was deposited. Till
then, he has no right over the same. Hence, it cannot be considered as income of
the assessee.
ICDS VI: Effects of changes in Foreign Exchange Rates
(1) Treatment of exchange differences in translation of financial statements of
non-integral foreign operations
AS 11 vis-à-vis ICDS VI:
AS 11 requires the resulting exchange differences in translating the financial
statements of a non-integral foreign operation to be accumulated in a foreign
currency translation reserve until the disposal of the net investment.
ICDS VI on the other hand requires such exchange differences to be recognized as
income or as expenses in that previous year.
It is noteworthy that the requirements in AS 11 and ICDS VI as regards translation
of assets and liabilities and income and expenses items of the non-integral foreign
operation in the financial statements are aligned. However, the treatment of
resultant exchange differences are different. The requirement as per ICDS VI to
recognize such exchange differences as income or expenses would result in
volatility in tax liability due to currency fluctuations.
ICDS VII: Government Grants
(1) Recognition of Government Grants
AS 12 vis-à-vis ICDS VII:
AS 12 provides that Government Grants should not be recognized until there is a
reasonable assurance that the enterprise will comply with the conditions attached to
them and the grants will be received.
Paragraph 4(1) of ICDS VII also provides that Government Grants should not be
recognized until there is a reasonable assurance that the enterprise will comply with
the conditions attached to them and the grants will be received. This requirement is
in line with AS 12. However, Paragraph 4(2) of ICDS VII goes on to provide that
recognition of government grant shall not be postponed beyond the date of actual
receipt.
Therefore, as per ICDS VII, initial recognition of government grants cannot be
postponed beyond the date of actual receipt even in a case where all the
recognition conditions in accordance with AS 12 are not met.
(2) Treatment of Government Grants of capital nature and Government Grants in
the nature of promoter’s contribution
AS 12 vis-à-vis ICDS VII:
AS 12 permits government grants in the nature of promoters’ contribution, i.e.,
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grants given with reference to the total investment in an undertaking or by way of
contribution towards its total capital outlay (for example, central investment subsidy
scheme) to be treated as capital reserve which can neither be distributed as
dividend nor considered as deferred income.
ICDS VII, however, does not contain specific requirement to capitalize government
grants in the nature of promoter’s contribution. Except in case of government grant
relating to a depreciable fixed asset, which has to be reduced from written down
value or actual cost, all other grants have to be recognized as upfront income or as
income over the periods necessary to match them with the related costs which they
are intended to compensate.
Deviation from judicial precedent:
The requirement in ICDS VII to recognize such grants as upfront or deferred income
is not in line with the rationale of the Supreme Court that the purpose of the grant
would ultimately determine its nature. The Supreme Court in, CIT v Ponni Sugar
Mills (2008) 306 ITR 392, observed that it is the object for which the
subsidy/assistance is given which determines the nature of the incentive subsidy. If
the object of the subsidy scheme was to enable the assessee to run the business
more profitably then the receipt is on revenue account. On the other hand, if the
object of the assistance under the subsidy scheme was to enable the assessee to
set up a new unit or to expand the existing unit then the receipt of the subsidy was
on capital account.
In line with the requirement in ICDS VII, new sub-cluase (xviii) has been inserted in
the definition of income under section 2(24) to provide that assistance in the form of
a subsidy or grant or cash incentive or duty drawback or waiver or concession or
reimbursement, by whatever name called, by the Central Government or a State
Government or any authority or body or agency in cash or kind to the assessee
would be considered as income. It is only the subsidy or grant or reimbursement
which has been taken into account for determination of the actual cost of the asset
in accordance with Explanation 10 to section 43(1) which would not be considered
as income.
ICDS VIII: Securities
(1) Manner of comparison of cost and NRV for valuation of securities held as
stock-in-trade
ICDS VIII requires securities held as stock-in-trade to be valued at lower of actual
cost initially recognized or net realizable value at the end of the year, whichever is
lower. Further, such comparison has to be done category-wise and not for each
individual security.
This requirement in the ICDS deviates from the judicial position that anticipated
profit should not be taken into consideration for valuation of stock-in-trade. The
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Supreme Court, in the case of UCO Bank Ltd. v CIT 240 ITR 355, observed that it
is not proper to take into account anticipated profit in the shape of appreciated value
of closing stock, as no prudent trader would show increased profit before actual
realization. This is the theory underlying the valuation of closing stock at the lower
of cost or market price.
The requirement in ICDS VIII to compare the actual cost and net realizable value
category-wise, in effect, results in recognition of anticipated profits since rise in
value of some securities will absorb the decrease in value of the remaining
securities in the same category.
(2) Valuation of unlisted or irregularly traded securities at actual cost initially
recognized.
ICDS VIII requires valuation of the following securities at actual cost initially
recognized –
(i) Securities not listed on a recognized stock exchange; or
(ii) Securities listed but not quoted on a recognized stock exchange with regularity
from time to time.
This requirement in ICDS VIII to value such securities at cost would also impact
computation of taxable income and consequent tax liability.
ICDS IX: Borrowing Costs
(1) Minimum period for classification of an asset as a qualifying asset
AS 16 vis-à-vis ICDS IX:
As per AS 16, “qualifying asset” has been defined to mean an asset that necessarily
takes a substantial period of time to get ready for its intended use or sale. AS 16
clarifies that ordinarily a period of 12 months is considered as substantial period of
time unless a shorter or longer period can be justified on the basis of facts and
circumstances of the case.
ICDS IX, however, does not provide any minimum period for treating an asset as a
qualifying asset (except in the case of inventories). Consequently, borrowing costs
in respect of assets have to be capitalized even if the asset, say, land or building or
plant or machinery, does not take a substantial period of time to get ready for
intended use.
(2) Treatment of income earned from temporary investment of borrowed funds
Paragraph 11 of AS 16 permits income earned on temporary investment of
borrowed funds pending their expenditure on the qualifying asset to be deducted
from borrowing costs incurred. ICDS IX however, does not permit such reduction
from borrowing costs.
This deviation between AS 16 and ICDS IX would result in increase in taxable income.
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(3) Suspension of capitalization of borrowing costs
Paragraph 17 of AS 16 permits suspension of capitalization of borrowing costs
during extended periods in which active development is interrupted. ICDS IX does
not permit suspension of capitalization of borrowing costs in such cases.
This deviation between AS 16 and ICDS IX would result in increase in taxable income.
ICDS X: Provisions, Contingent Liabilities & Contingent Assets
(1) Condition for recognition of Provision
AS 29 vis-à-vis ICDS X:
AS 29 requires recognition of a provision when it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation.
ICDS X requires recognition of a provision only when it is reasonably certain that
an outflow of resources embodying economic benefits will be required to settle the
obligation.
The requirement of “reasonable certainty” in ICDS X to recognize a provision is
more stringent as compared to the requirement of “probability” in AS 29. This will
have the effect of postponing the recognition of provision for tax purposes and
consequently, result in earlier payment of taxes.
(2) Condition for recognition of Contingent Asset
AS 29 vis-à-vis ICDS X:
Both AS 29 and ICDS X provide that a contingent asset should not be recognized.
Further, both AS 29 and ICDS X require contingent assets to be assessed continually.
Thereafter, recognition of contingent assets and related income is required in –
AS 29, if inflow of economic benefits is “virtually certain”;
ICDS X, if inflow of economic benefits is “reasonably certain”.
The requirement of “reasonable certainty” in ICDS X to recognize a contingent asset
and the related income is more stringent as compared to the requirement of “virtual
certainty” in AS 29. This deviation between AS 29 and ICDS X would have the effect
of advancing recognition of income for tax purposes and consequently, result in
earlier payment of taxes.
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7
CAPITAL GAINS
(a) Any transfer of capital asset, being share of a foreign company, referred in
Explanation 5 to section 9(i), deriving its value substantially from the shares in an
Indian company, in a scheme of amalgamation/demerger not to be regarded as
transfer under section 47, where the amalgamating/demerged and
amalgamated/resulting companies are foreign companies [Section 47(viab) &
47(vicc)]
(i) In order to give effect to the recommendation made by Expert Committee under the
Chairmanship of Dr. Parthasarathi Shome on the various aspects relating to the
amendments made in section 9(1)(i) by the Finance Act, 2012, clause (viab) and
(vicc) have been inserted to section 47.
(ii) Section 47(viab) provides that any transfer, in a scheme of amalgamation, of a
capital asset, being a share of a foreign company referred to in Explanation 5 to
section 9(1)(i), which derives, directly or indirectly, its value substantially from the
share or shares of an Indian company, held by the amalgamating foreign company
to the amalgamated foreign company would be exempt, if the following conditions
are satisfied:
(A) at least 25% of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign company; and
(B) such transfer does not attract tax on capital gains in the country in which the
amalgamating company is incorporated.
(iii) Section 47(vicc) provides that any transfer in case of a demerger of a capital asset,
being a share of a foreign company, referred to in Explanation 5 to section 9(1)(i),
which derives, directly or indirectly, its value substantially from the share or shares
of an Indian company, held by the demerged foreign company to the resulting
foreign company shall be exempt, if the following conditions are satisfied:
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(a) the shareholders, holding not less than three-fourths in value of the shares of
the demerged foreign company, continue to remain shareholders of the
resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country in which the
demerged foreign company is incorporated:
However, the provisions of sections 391 to 394 of the Companies Act, 1956 shall
not apply in case of such demergers.
(iv) As per section 49(1)(iii)(e), the cost of acquisition in the hands of amalgamated
foreign company/resulting foreign company where such capital asset (i.e., share in a
foreign company deriving its value substantially from the share or shares of an
Indian company) is transferred in a scheme of amalgamation/demerger is:
Mode of Acquisition of Cost of acquisition for computing capital gains
capital asset
In the scheme of The cost of acquisition of the
amalgamation referred capital asset in the hands of amalgamated foreign
to under section company would be deemed to be the cost for which
47(viab), where both the the amalgamating foreign company acquired the
amalgamated and capital asset as increased by the cost of improvement
amalgamating of the assets incurred or borne by the amalgamating
companies are foreign foreign company or the amalgamated foreign
companies company, as the case may be.
In the scheme of The cost of acquisition of the
demerger referred capital asset in the hands of resulting foreign
under section 47(vicc), company would be deemed to be the cost for which
where both the the demerged foreign company acquired the capital
demerged and resulting asset as increased by the cost of improvement of the
companies are foreign assets incurred or borne by the demerged foreign
companies company or the resulting foreign company, as the
case may be.
(v) Accordingly, the period of holding of such asset in the hands of the amalgamated
and resulting foreign company would include the period for which the amalgamating
and demerged foreign company, as the case may be, held the asset.
(b) Transfer of units by unit holders in consolidation scheme of mutual funds not to be
regarded as transfer [Section 47(xviii)]
Related amendments in sections: Section 2(42A) & 49(2AD)
(i) With a view to have simple and fewer numbers of schemes, the Securities and
Exchange Board of India (SEBI) has been encouraging mutual funds to consolidate
its various schemes having like features.
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However, such mergers/consolidations are being treated as transfer of units in the
hands of unit-holders, thus attracting “capital gains” tax liability in their hands.
(ii) Exemption of transfer of units in the scheme of consolidation of Mutual Fund:
For the purpose of aiding consolidation of such schemes of mutual funds in the
interest of the investors and to provide tax neutrality to unit holders upon
consolidation or merger of mutual fund schemes, clause (xviii) has been inserted
under section 47.
Accordingly, any transfer by a unit holder of a capital asset, being a unit or units,
held by him in the consolidating scheme of a mutual fund, made in consideration of
the allotment to him of a capital asset, being a unit or units, in the consolidated
scheme of the mutual fund would not be considered as transfer, and hence, would
not be chargeable to tax.
However, this exemption would be available only if, the consolidation takes place of
two or more schemes of equity oriented fund or of two or more schemes of a fund
other than equity oriented fund.
(iii) Period of holding: Section 2(42A) has been consequently amended to provide that the
period of holding of such units acquired in the consolidated scheme of mutual fund
shall include the period for which the units in consolidating schemes were held by
the assessee.
(iv) Cost of acquisition of units in consolidated scheme of mutual fund: Further,
sub-section (2AD) has been inserted in section 49 to provide that cost of acquisition
of the units acquired by the assessee in consolidated scheme of mutual fund in
consideration of transfer referred in section 47(xviii) shall be deemed to be the cost
of acquisition to him of the units in the consolidating scheme of mutual fund.
(v) Meaning of the following terms:
Term Meaning
Consolidating The scheme of a mutual fund which merges under the process
scheme of consolidation of the schemes of mutual fund in accordance
with the SEBI (Mutual Funds) Regulations, 1996 made under
SEBI Act, 1992.
Consolidated The scheme with which the consolidating scheme merges or
scheme which is formed as a result of such merger.
Equity Meaning as assigned under section 10(38), i.e.,
Oriented Fund A fund—
(i) where the investible funds are invested by way of equity
shares in domestic companies to the extent of more than
65% of the total proceeds of such fund; and
(ii) which has been set up under a scheme of a Mutual Fund
specified under section 10(23D).
The percentage of equity shareholding of the fund shall be
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computed with reference to the annual average of the monthly
averages of the opening and closing figures;
Mutual Fund A mutual fund specified under section 10(23D), i.e.,
(i) a Mutual Fund registered under the SEBI Act, 1992 or
regulations made thereunder;
(ii) such other Mutual Fund set up by a public sector bank or a
public financial institution or authorised by the Reserve
Bank of India and subject to conditions notified by the
Central Government.
(c) Cost of acquisition of the capital asset acquired in the scheme of demerger referred to
in section 47(vib) in the hands of resulting company [Section 49(1)(iii)(e)]
(i) Under section 47(vib), transfer of a capital asset by the demerged company to the
resulting company in a scheme of demerger would not be regarded as a transfer, if
the resulting company is an Indian company.
Under the existing provisions of the Income-tax Act, there is no express provision
regarding what would be the cost of such asset in the hands of the resulting
company and the period of holding.
(ii) Accordingly, section 49(1)(iii)(e) has been amended to provide for the cost of
acquisition of such asset.
Mode of Acquisition Cost of acquisition for computing capital gains
of capital asset
In the scheme of The cost of acquisition of the capital asset in the
demerger referred to in hands of resulting company shall be the cost for
under section 47(vib), which the demerged company acquired the capital
where the resulting asset as increased by the cost of improvement
company is an Indian incurred or borne by the demerged company or the
company resulting company, as the case may be.
(iii) Accordingly, the period of holding of such asset in the hands of resulting company
would include the period for which the demerged company held the asset.
(d) Cost of acquisition and period of holding of shares acquired on redemption of
Global Depository Receipts (GDRs) by a non-resident assessee [Sections 49(2ABB)
& 2(42A)]
(i) Cost of acquisition of shares acquired on redemption of GDRs [Section 49(2ABB)]
Sub-section (2ABB) has been inserted in section 49, to provide that the cost of
acquisition of the capital asset, being share or shares of a company acquired by a
non-resident assessee, consequent to redemption of GDRs [referred to in section
94

115AC(1)(b)] held by him would be the price of such share or shares prevailing on
any recognized stock exchange on the date on which a request for such redemption
was made.
(ii) Period of holding of shares acquired on redemption of GDRs [Section 2(42A)]
Sub-clause (he) has been inserted in clause (i) in Explanation 1 to section 2(42A) to
provide that the period of holding of a capital asset, being share or shares of a
company, acquired by a non-resident assessee on redemption of GDRs [referred
to in section 115AC(1)(b)] would be reckoned from the date on which a request for
such redemption was made.
(e) Rise in Consumer Price Index (Urban) to be the basis for notification of CII [Section 48]
(i) Section 48 prescribes the mode of computation of income chargeable under the
head “Capital gains”. Indexation benefit is available for computing cost of
acquisition and cost of improvement, where the capital gains are long-term in
nature.
(ii) Clause (v) of the Explanation to section 48 defines “Cost Inflation Index” (CII) in
relation to a previous year, to mean such index as may be notified by the
Government having regard to 75% of average rise in the Consumer Price Index
(CPI) for urban non-manual employees (UNME) for the immediately preceding
previous year to such previous year.
(iii) Since the release of CPI for UNME has been discontinued, accordingly, clause (v)
of the Explanation to section 48 has been amended by Finance (No.2) Act,
2014 to provide that “Cost Inflation Index” in relation to a previous year shall mean
such index as may be notified by the Central Government having regard to 75% of
average rise in the Consumer Price Index (Urban) for the immediately preceding
previous year to such previous year.
(1) Applicability of tax on capital gains in the hands of the unit holders where the term
of the units of Mutual Funds under the Fixed Maturity Plans has been extended
[Circular No. 6/2015, dated 09-04-2015]
Fixed Maturity Plans (FMPs) are closed ended funds having a fixed maturity date
wherein the duration of investment is decided upfront. Prior to amendment by the
Finance (No. 2) Act, 2014, units of a mutual fund under the FMPs held for a period of
more than twelve months qualified as long term capital asset. The amendment in sub-
section (42A) of section 2 by the Finance (No. 2) Act, 2014 required the period of holding
in case of unlisted shares and units of a mutual fund [other than an equity oriented
(fund)] to be more than thirty-six months to qualify as long term capital asset.
As a result, gains arising out of any investment in the units of FMPs made earlier and
sold/ redeemed after 10.07.2014 would be taxed as short term capital gains if the unit
was held for a period of thirty-six months or less. To enable the FMPs to qualify as a long
95

term capital asset, some Asset Management Companies (AMCs) administering mutual
funds have offered extension of the duration of the FMPs to a date beyond thirty-six
months from the date of the original investment by providing to the investor an option of
roll-over of FMPs in accordance with the provisions of Regulation 33(4) of the SEBI
(Mutual Funds) Regulation, 1996.
The CBDT has, vide this Circular, clarified that the roll over in accordance with the
aforesaid regulation will not amount to transfer as the scheme remains the same.
Accordingly, no capital gains will arise at the time of exercise of the option by the
investor to continue in the same scheme. The capital gains will, however, arise at the
time of redemption of the units or opting out of the scheme, as the case may be.
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11
DEDUCTIONS FROM GROSS TOTAL
INCOME
(a) Deduction under section 80C to be available in respect of deposit in Sukanya

Samriddhi Account Scheme for the welfare of girl child
Related amendment in section: 10(11A)
(i) A special small savings instrument for the welfare of the girl child was announced in
the Union Budget in July 2014. To give effect to this announcement, Sukanya
Samriddhi Account Rules, 2014 have been introduced.
(ii) The following are the tax benefits envisaged in the Sukanya Samriddhi Account
scheme:-
(a) The investments made in the Scheme will be eligible for deduction under
section 80C.
(b) The interest accruing on deposits in such account will be exempt from income
tax.
(c) The withdrawal from the said scheme in accordance with the rules of the said
scheme will be exempt from tax.
(iii) Clause (viii) of section 80C(2), provides that in computing the total income of an
assessee, being an individual or a Hindu undivided family, a deduction is allowed with
respect to sums paid or deposited in the previous year as a subscription to any such
security of the Central Government or any deposit scheme notified by the Central
Government.
(iv) Accordingly, the Sukanya Samriddhi Account Scheme has been notified under
clause (viii) of section 80C(2) vide Notification No. 9/2015, dated 21.01.2015.
(v) In order to allow deduction under section 80C to the parent or legal guardian of the
girl child, clause (viii) of section 80C(2) has been amended to provide that deduction
would be allowed thereunder in respect of amount deposited in the said Scheme in
the name of any person specified in section 80C(4). Accordingly, clause (ba) has
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been inserted in section 80C(4) so as to provide that any sum paid or deposited
during the previous year in the said Scheme, by an individual in the name of -
(a) the individual himself or herself;
(b) any girl child of the individual; or
(c) any girl child for whom such individual is the legal guardian,
would be eligible for deduction under section 80C.
(vi) Further, new clause (11A) has been inserted in section 10 to provide that any
payment from an account opened in accordance with the Sukanya Samriddhi
Account Rules, 2014, made under the Government Savings Bank Act, 1873, shall
not be included in the total income of the assessee.
Accordingly, the interest accruing on deposits in, and withdrawals from any account
under the said scheme would be exempt.
(b) Increase in the limit of deduction in respect of contribution to certain pension
funds under section 80CCC
(i) Under section 80CCC(1), an assessee, being an individual is allowed a deduction
upto ` 1 lakh in the computation of his total income, of an amount paid or deposited
by him to effect or keep in force a contract for any annuity plan of Life Insurance
Corporation of India or any other insurer for receiving pension from a fund set up
under a pension scheme.
(ii) With a view to increase social security, section 80CCC(1) has been amended to
raise the limit of deduction thereunder from ` 1 lakh to ` 1.50 lakh. However, this
limit would be subject to the overall limit of ` 1.50 lakh provided in section 80CCE in
respect of section 80C, 80CCC & 80CCD(1).
(c) Additional deduction in respect of contribution to NPS of Central Government
under section 80CCD(1B) and enhancement of limit of deduction under section
80CCD(1)
Effective from: A.Y 2016-17
(i) As per section 80CCD(1), if an individual, employed by the Central Government on
or after 1st January, 2004, or being an individual employed by any other employer,
or any other assessee, being an individual, has paid or deposited any amount in a
previous year in his account under a notified pension scheme, a deduction of such
amount not exceeding 10% of his salary, in the case of an employee, and 10% of
the gross total income, in case of any other individual, is allowed.
(ii) Similarly, the contribution made by the Central Government or any other employer
to the said account of the individual under the pension scheme is also allowed as
deduction under section 80CCD(2), to the extent it does not exceed 10% of the
salary of the individual in the previous year.
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(iii) Section 80CCD(1A) provides that the amount of deduction under 80CCD(1) shall
not exceed ` 1,00,000.
(iv) In order to encourage contribution towards NPS, sub-section (1A) of section 80CCD
restricting the deduction under section 80CCD(1) to ` 1 lakh, has been omitted.
Thus, deduction under section 80CCD(1) would only be subject to the limitation of
10% of salary or gross total income (GTI), as the case may be. However, it would
continue to be subject to the overall limit of ` 1.50 lakh under section 80CCE.
(v) In addition to the enhancement of the limit under section 80CCD(1), new sub-
section (1B) has been inserted in section 80CCD to provide for an additional
deduction of up to ` 50,000 in respect of the whole of the amount paid or deposited
by an individual assessee under NPS in the previous year, whether or not any
deduction is allowed under section 80CCD(1).
(vi) The deduction of upto ` 50,000 under section 80CCD(1B) is in addition to the overall
limit of ` 1.50 lakh provided under section 80CCE.
(vii) The following table summarizes the ceiling limit under these sections w.e.f. A.Y.2016-17 –
Section Particulars Ceiling limit (` )
80C Investment in specified instruments 1,50,000
80CCC Contribution to certain pension funds 1,50,000
80CCD(1) Contribution to NPS of Government 10% of salary or
10% of GTI, as
the case may be.
80CCE Aggregate deduction under sections 80C, 80CCC & 1,50,000
80CCD(1)
80CCD(1B) Contribution to NPS notified by the Central 50,000
Government (outside the limit of ` 1,50,000 under
section 80CCE)
Example
The following are the particulars of investments and payments made by Mr. A, employed with
ABC Ltd., during the previous year 2015-16:
- Deposited ` 1,20,000 in public provident fund
- Paid life insurance premium of ` 15,000 on the policy taken on 1.5.2012 to insure his life
(Sum assured – ` 1,20,000).
- Deposited ` 30,000 in a five year term deposit with bank.
- Contributed ` 1,80,000, being 15% of his salary, to the NPS of the Central Government.
A matching contribution was made by ABC Ltd.
(i) Compute the deduction available to Mr. A under Chapter VI-A for A.Y.2016-17.
(ii) Would your answer be different, if Mr. A contributed ` 1,20,000 (being, 10% of his
salary) towards NPS of the Central Government ?
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Answer
(i) Deduction available to Mr. A under Chapter VI-A for A.Y.2016-17
Section Particulars ` `
80C Deposit in public provident fund 1,20,000
Life insurance premium paid ` 15,000 12,000
(deduction restricted to ` 12,000, being 10%
of ` 1,20,000, being sum assured, since the
policy was taken after 31.3.2012)
Five year term deposit with bank 30,000
1,62,000
Restricted to 1,50,000
80CCD(1) Contribution to NPS of the Central

Government, ` 1,30,000[` 1,80,000 –
` 50,000, being deduction under section 1,20,000
80CCD(1B)], restricted to 10% of salary
[` 1,80,000 x 10/15] [See Note 1]
2,70,000
80CCE Aggregate deduction under section 80C and
80CCD(1), ` 2,70,000, but restricted to 1,50,000
80CCD(1B) ` 50,000 would be eligible for deduction in
respect of contribution to NPS of the Central 50,000
Government
80CCD(2) Employer contribution to NPS, restricted to
10% of salary [See Note 2] 1,20,000
Deduction under Chapter VI-A 3,20,000
Notes:
(1) The deduction under section 80CCD(1B) would not be subject to overall limit of
` 1.50 lakh under section 80CCE. Therefore, it is more beneficial for Mr. A to
claim deduction under section 80CCD(1B) first in respect of contribution to
NPS. Thereafter, the remaining amount of ` 1,30,000 can be claimed as
deduction under section 80CCD(1), subject to a maximum of 10% of salary.
(2) The entire employer’s contribution to notified pension scheme has to be first
included under the head “Salaries” while computing gross total income and
thereafter, deduction under section 80CCD(2) would be allowed, subject to a
maximum of 10% of salary.
(ii) If the contribution towards NPS is ` 1,20,000, here again, it is beneficial for Mr. A to
first claim deduction of ` 50,000 under section 80CCD(1B) and the balance of
` 70,000 can be claimed under section 80CCD(1), since the deduction available
100

under section 80CCD(1B) is over and above the aggregate limit of ` 1,50,000 under
section 80CCE. In any case, the aggregate deduction of ` 2,20,000 [i.e.,
` 1,50,000 under section 80C and ` 70,000 under section 80CCD(1)] cannot
exceed the overall limit of ` 1,50,000 under section 80CCE. The total deduction
under Chapter VIA would remain the same i.e., ` 3,20,000.
(d) Enhancement of the limit of deduction under section 80D and allowability of
deduction for incurring medical expenditure in respect of very senior citizen
(i) Section 80D, inter alia, provides for deduction of
(a) upto ` 15,000 to an assessee, being an individual in respect of –
(1) health insurance premia, paid by any mode, other than cash, to effect or
to keep in force an insurance on the health of the assessee or his
family;
(2) any contribution made to the Central Government Health Scheme or any
other notified scheme; and
(3) any payment made on account of preventive health check up of the
assessee or his family; and
(b) an additional deduction of ` 15,000 is provided to an individual to effect or to
keep in force insurance on the health of his or her parent or parents.
(ii) A similar deduction is also available to a Hindu undivided family (HUF) in respect of
health insurance premia, paid by any mode, other than cash, to effect or to keep in
force insurance on the health of any member of the HUF.
(iii) If the sum specified in (a) & (b) of (i) above is paid to effect or keep in force an
insurance of a person who is a senior citizen, being a resident individual of the age
of 60 years or more at any time during the previous year, the limit specified would
be ` 20,000 instead of ` 15,000.
(iv) The Finance Act, 2008 had raised the quantum of deduction allowable under section
80D to individuals and HUF in respect of premium paid for health insurance to
` 15,000 and in the case of senior citizens, to ` 20,000.
(v) On account of the continuous rise in the cost of medical expenditure, the limit of
deduction under section 80D has now been increased from ` 15,000 to ` 25,000.
Further, the limit of deduction in respect of amount paid to effect or keep in force an
insurance of a person who is a senior citizen, being a resident individual of the age
of 60 years or more, has also been raised from ` 20,000 to ` 30,000.
(vi) As a welfare measure towards very senior citizens i.e. person of the age of 80 years
or more and resident in India, who are unable to get health insurance coverage,
section 80D has been amended to provide that deduction of upto ` 30,000 would be
allowed in respect of any payment made on account of medical expenditure in
101

respect of a very senior citizen, if no payment has been made to keep in force an
insurance on the health of such person.
(vii) The aggregate deduction available to any individual in respect of health insurance
premia and the medical expenditure incurred would, however, be limited to ` 30,000.
Similarly, aggregate deduction for health insurance premia and medical expenditure
incurred in respect of parents would be limited to ` 30,000.
(viii) ‘Very senior citizen’ to mean an individual resident in India who is of the age of
eighty years or more at any time during the relevant previous year.
The following table summarizes the provisions of section 80D –
S. Nature of Expenditure on behalf of Deductio Deduction
No. payment/ n for A.Y. for A.Y.
expenditure 2015-16 2016-17
I (i) Any premium In case of Self, spouse
paid, otherwise individual and
than by way of dependent ` 15,000 ` 25,000
cash, to keep in children
force an In case of Family
insurance on the HUF member
health
(ii) Contribution to
Central Govern- In case any of the above
ment Health persons is of the age of ` 20,000 ` 30,000
Scheme (CGHS) 60 years or more +
(iii) Preventive resident in India
health check up
expenditure
II (i) Any premium For Parents ` 15,000 ` 25,000
paid, otherwise
than by way of
cash, to keep in In case either or both the
parents is of the age of 60 ` 20,000 ` 30,000
force an
years or more + Resident in
insurance on the
India
health
(ii) Preventive
health check up
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Maximum ` 5,000 allowed as deduction for aggregate of
preventive health check up expenditure mentioned in I and II
(Subject to overall limit of ` 25,000 or ` 30,000, as the case
may be)
III Amount paid on For self/ spouse/ parents

account of medical + who is of the age of 80 NA ` 30,000
expenditure
years or more + Resident
in India + no payment has
been made to keep in force
an insurance on the health
of such person
Note:
In case the individual or any of his family members is a senior citizen or very senior
citizen, the aggregate of deduction, in respect of payment of premium, contribution to
CGHS and medical expenditure incurred, as specified in (I) & (III) above, cannot exceed
` 30,000.
In case one of the parents is a senior citizen and another is a very senior citizen or both
of them are very senior citizens, the aggregate of deduction, in respect of payment of
medical insurance premium and medical expenditure incurred, as specified in (II) & (III)
above, cannot exceed ` 30,000.
Example:
Mr. Arjun (52 years old) furnishes the following particulars in respect of the following
payments:
S. No. Particulars Amount (` )
1. Premium paid for insuring the health of -
 Self 10,000
 spouse 8,000
 dependant son 4,000
 mother 18,000
2. Paid for Preventive Health Check up of
 himself 2,000
 spouse 1,500
 mother 4,000
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3. Incurred medical expenditure of ` 25,000 and ` 15,000
for his mother, aged 80 years and father, aged 85 years.
Both mother and father are resident in India.
Compute the deduction available to Mr. Arjun under section 80D for the A.Y. 2016-17.
Solution
Computation of deduction under section 80D for the A.Y. 2016-17
S. No. Particulars Amount (` )
1. I. In respect of premium paid for insuring the
health of -
 Self 10,000
 spouse 8,000
 dependant son 4,000
22,000
II. In respect of expenditure on preventive
health check up of -
 Self 2,000
 spouse 1,500
3,500
Restricted to [` 25,000 – ` 22,000, since 3,000
maximum deduction is ` 25,000]
Aggregate of deduction (I+II) under (1)
restricted to 25,000
2. I. In respect of payment towards health
insurance premium for his mother 18,000
II. In respect of preventive health check up of
his mother [` 4,000, restricted to ` 2,000,
(` 5,000 – ` 3,000), since maximum 2,000
deduction for preventive health check up
under section 80D is ` 5,000]
III. Medical expenditure for father would only
be eligible for deduction [See Note below] 15,000
35,000
Amount of deduction under (2) restricted to 30,000
Total deduction under section 80D [(1) + (2)] 55,000
Note: Irrespective of the fact that the mother of Arjun is a very senior citizen the
deduction under section 80D would not available to him in respect of the medical
expenditure incurred for his mother, since Mr. Arjun has taken an health insurance policy
for his mother.
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(e) Increase in the limit of deduction under section 80DD and 80U in respect of
persons with disability and severe disability
(i) Section 80DD, inter alia, provides for a deduction of ` 50,000, to an individual or
HUF, who is a resident in India, who has incurred—
(a) expenditure for the medical treatment (including nursing), training and
rehabilitation of a dependant, being a person with disability or
(b) paid any amount to LIC or any other insurer in respect of a scheme for the
maintenance of a disabled dependant.
If the dependent is suffering from severe disability, the deduction under section
80DD is ` 1,00,000.
(ii) Section 80U, inter alia, provides for a deduction of ` 50,000, to an individual, being
a resident, who, at any time during the previous year, is certified by the medical
authority to be a person with disability. If the person is suffering from severe
disability, deduction under section 80U is ` 1,00,000.
(iii) The limit of ` 50,000 under sections 80DD and 80U in respect of a person with
disability were fixed by the Finance Act, 2003. The Finance (No.2) Act, 2009, had
raised the limit under section 80DD and section 80U in respect of a person with
severe disability from ` 75,000 to ` 1 lakh.
(iv) Taking into account the increasing cost of medical care and special needs of
disabled persons, sections 80DD and 80U have been amended so as to increase
the amount of deduction thereunder in respect of a person with disability from
` 50,000 to ` 75,000.
Correspondingly, the limit of deduction in respect of a person with severe disability
has also been increased from ` 1 lakh to ` 1.25 lakh.
Deduction under section 80DD
Maintenance and medical treatment of: A.Y.2015-16 A.Y.2016-17
Persons with disability 50,000 75,000
Persons with severe disability 1,00,000 1,25,000
Deduction under section 80U
A.Y.2015-16 A.Y.2016-17
Persons with disability 50,000 75,000
Persons with severe disability 1,00,000 1,25,000
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(f) Enhanced limit of deduction for expenditure incurred in respect of medical
treatment of very senior citizen [Section 80DDB]
(i) Section 80DDB provides that an assessee, being a resident in India is allowed a
deduction of a sum not exceeding ` 40,000, being the amount actually paid, for the
medical treatment of certain chronic and protracted diseases such as Cancer, full
blown AIDS, Thalassaemia, etc.
(ii) A higher deduction of upto ` 60,000 is allowed, where the expenditure is in respect
of a senior citizen i.e. a resident individual who is of the age of 60 years or more at
any time during the relevant previous year.
(iii) The above deduction is available to an individual for medical expenditure incurred
on himself or a dependant. It is also available to a Hindu undivided family (HUF) for
such expenditure incurred on any of its members.
(iv) Meaning of “Dependant”:
Assessee Dependent
(1) Individual the spouse, children, parents, brother or sister of the
individual or any of them, wholly or mainly dependent on such
individual for his support and maintenance.
(2) HUF a member of the HUF, wholly or mainly dependant on such
HUF for his support and maintenance.
(v) For claiming this deduction, a certificate in the prescribed form, from a neurologist,
an oncologist, a urologist, a haematologist, an immunologist or such other
specialist, as may be prescribed, working in a Government hospital is required.
The requirement of obtaining a certificate from a doctor working in a Government
hospital has been causing undue hardship to the persons intending to claim such
deduction. Moreover, Government hospitals, at many places, do not have doctors
specializing in the above branches of medicine. Therefore, it may be difficult for the
taxpayer to obtain a certificate from a Government hospital.
(vi) In order to overcome this hardship, section 80DDB has been amended to provide
that the assessee will be required to obtain a prescription for such medical
treatment from a specialist doctor for the purpose of availing this deduction. The
requirement that such specialist should be working in a Government hospital has
been removed.
(vii) Further, section 80DDB has been amended to provide for a higher limit of
deduction of upto ` 80,000, for the expenditure incurred in respect of the
medical treatment of himself or a dependent, being a “very senior citizen”.
(viii) A “very senior citizen” is as an individual resident in India who is of the age of eighty
years or more at any time during the relevant previous year.
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(ix) The maximum limit of deduction under section 80DDB for the various categories of
dependent are summarized hereunder:
Dependent Maximum limit (` )
(1) A very senior citizen, being a resident individual 80,000
(2) A senior citizen, being a resident individual 60,000
(3) Dependent, other than mentioned in (1) & (2) above 40,000
(g) Scope of section 80G expanded to allow 100% deduction in respect of donation to
Swachh Bharat Kosh, Clean Ganga Fund and National Fund for Control of Drug
Abuse [Section 80G]
Related amendment in section: 10(23C)
(i) Under section 80G, an assessee is allowed a deduction in respect of donations
made by him to certain funds and charitable institutions from the gross total
income.
The deduction is allowed at 100% of the amount of donations made to certain
funds and institutions formed for a social purpose of national importance, like the
Prime Ministers’ National Relief Fund, National Foundation for Communal
Harmony, National Children Fund etc.
The Finance Act, 2015 has extended the benefit of deduction under section 80G,
at the rate 100% in respect of donations made to the National Fund for Control of
Drug Abuse, Swachh Bharat Kosh and Clean Ganga Fund.
(ii) National Fund for Control of Drug Abuse
Eligible All assessees
assessee
Purpose of Fund created by the Government of India in the year 1989,
fund under the Narcotic Drugs and Psychotropic Substances Act,
1985, to control drug abuse.
Deduction Since National Fund for Control of Drug Abuse is also a Fund
of national importance, 100% deduction would be allowable in
respect of donations made to the said fund.
(iii) Swachh Bharat Kosh
Eligible All assessees
assessee
Purpose of Set up by the Central Government to mobilize resources for
fund improving sanitation facilities in rural and urban areas and school
premises through the Swachh Bharat Abhiyan.
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Purpose of To encourage and enhance people’s participation in the national
deduction effort to improve sanitation facilities.
Amount of 100% of the amount donated to such fund
deduction
Restriction Any sum spent in pursuance of Corporate Social Responsibility
under section 135(5) of the Companies Act, 2013, will not be
eligible for deduction.
(iv) Clean Ganga Fund

Eligible Resident assessees
assessee
Purpose of Established by the Central Government to attract voluntary
fund contributions to rejuvenate river Ganga.
Purpose of To encourage and enhance people’s participation in the national
Deduction effort to improve rejuvenation of river Ganga.
Amount of 100% of the amount donated to Clean Ganga fund
deduction
Restriction Any sum spent in pursuance of Corporate Social Responsibility
under section 135(5) of the Companies Act, 2013, will not be
eligible for deduction.
(v) Exemption of income of Swachh Bharat Fund & Clean Ganga Fund [Section
10(23C)]
Section 10(23C) provides for exemption from tax in respect of the income of
certain charitable funds or institutions like the Prime Minister’s National Relief
Fund, the Prime Minister’s Fund (Promotion of Folk Art), the Prime Minister's Aid
to Students Fund and the National Foundation for Communal Harmony.
Taking into consideration, the importance of Swachh Bharat Kosh and Clean
Ganga Fund, the scope of section 10(23C) has been expanded to exempt the
income of Swachh Bharat Kosh and Clean Ganga Fund, set up by the Central
Government, from income-tax.
(h) Deduction for employment of new regular workmen extended to all assessees
deriving profits and gains from manufacture of goods in a factory [Section 80JJAA]
(i) Section 80JJAA(1) provides for deduction to an Indian company, deriving profits from
manufacture of goods in a factory. The quantum of deduction allowed is equal to 30%
of additional wages paid to the new regular workmen employed by the assessee in
108

such factory, in the previous year, for three assessment years including the
assessment year relevant to the previous year in which such employment is provided.
(ii) Section 80JJAA(2)(a), inter alia, provides that no deduction under sub-section (1) shall
be allowed if the factory is hived off or transferred from another existing entity or
acquired by the assessee company as a result of amalgamation with another company.
(iii) For the purpose of encouraging generation of employment, section 80JJAA(1) has
been amended to extend the benefit so far available only to corporate
assessees to all assessees whose gross total income includes profits and
gains derived from manufacture of goods in a factory.
(iv) Consequently, section 80JJAA(2)(a) has been amended to provide that no
deduction would be allowed if the factory is acquired by the assessee by way of
transfer from any other person or as a result of any business reorganization.
(v) Clause (i) of the Explanation to this section defines “Additional wages” to mean the
wages paid to the new regular workmen in excess of 100 workmen employed during
the previous year.
(vi) In order to enable the smaller units to claim the benefit of deduction under this
section, clause (i) of the Explanation has been amended to provide that “additional
wages” shall mean the wages paid to the new regular workmen in excess of 50
workmen employed during the previous year.
(vii) In effect, the benefit of deduction under this section has been extended to smaller
units employing more than 50 new regular workmen.
Example
Mr. A has commenced the operations of manufacture of goods in a factory on 1.4.2015.
He employed 125 new workmen during the P.Y.2015-16, which included –
(i) 15 casual workmen;
(ii) 15 workmen employed through contract labour;
(iii) 25 regular workmen employed on 1.4.2015;
(iv) 55 regular workmen employed on 1.5.2015; and
(v) 15 regular workmen employed on 1.7.2015
Compute the deduction, if any, available to Mr.A for A.Y.2016-17, if wages@` 5,000 per
month is paid to each workman and the profits and gains derived from manufacture of
goods in the factory for the A.Y.2016-17 is ` 4.75 lakhs.
Answer
Mr. A is eligible for deduction under section 80JJAA since his gross total income includes
profits and gains derived from the manufacture of goods in a factory and he has
employed more than 50 new regular workmen in his factory.
Additional wages = ` 5,000 × 30 [See Working Note below] = ` 1,50,000
Deduction under section 80JJAA = 30% of ` 1,50,000 = ` 45,000.
109

Working Note:
Number of new regular workmen
Particulars No. of workmen
Total number of workmen employed during the year 125
Less: Casual workmen employed during the year 15
Workmen employed through contract labour 15
Workmen employed for a period of less than 300 days
during the P.Y.2015-16 (workmen employed on
1.7.2015) _15 _45
Total number of new regular workmen _80
Number of new regular workmen in excess of 50 = 80 - 50 30
Note – “Regular workman” does not include a casual workman or a workman employed
through contract labour or any other workman employed for a period of less than 300
days during the previous year.
(1) Increase in ceiling limit for investment in Public Provident Fund [Notification No.
G.S.R. 588 (E), dated 13-8-2014]
In exercise of the powers conferred by Section 3(4) of the Public Provident Fund Act,
1968, the Central Government has increased annual ceiling limit for deposit in PPF A/c
from ` 1 lakh to ` 1.50 lakhs by amending the Public Provident Fund Scheme, 1968.
(2) Increase in limit for investment in bank term deposit [Notification No. 63/2014,
dated 13-11-2014]
Under section 80C(2)(xxi), a deduction is allowed in computing the total income of an
assessee, being an individual or a HUF, with respect to sums paid or deposited in the
previous year as a term deposit;
- for a fixed period of not less than 5 years with a scheduled bank and
- which is in accordance with the scheme framed and notified by the Central
Government.
Accordingly, the Central Government had notified Bank Term Deposit Scheme, 2006. As
per Para 3 of the said scheme, the maximum amount an assessee can invest in the term
deposit of a scheduled bank is ` 1,00,000, in a year.
The Finance (No.2) Act, 2014 had increased the maximum limit of deduction under
section 80C from ` 1 lakh to ` 1.50 lakh w.e.f. A.Y. 2015-16.
Consequently, the Central Government, has vide this notification, increased the
maximum limit of investment in of term deposit of a specified bank from ` 1,00,000 to
` 1,50,000 in a year, which would qualify for deduction under section 80C.
110

(3) Eligibility of deduction under section 80-IA for unexpired period, in case of an
undertaking or enterprise developing an infrastructure facility, industrial park, SEZ and
transferring the same to another enterprise or undertaking for operation and
maintenance [Circular No. 10/2014 dated 06-05-2014]
Under section 80-IA, deduction is available in respect of profits & gains derived by an
undertaking or enterprise engaged in developing, operating and maintaining any
infrastructure facility, industrial park etc. The undertakings or enterprises eligible for
availing deduction under this section have been specified under sub-section (4) of
section 80-IA and can broadly be classified as under:
(i) enterprise carrying on the business of developing or operating & maintaining or
developing, operating & maintaining infrastructure facilities [80-IA(4)(i)];
(ii) undertaking providing basic or cellular telecommunication services [80-IA(4)(ii)];
(iii) undertaking which develops, develops & operates or maintains & operates an
industrial park or SEZ [80-IA(4)(iii)];
(iv) undertaking set up for generation / generation & distribution of power or laying of
network / renovation or modernization of network of transmission / distribution lines
[80-IA(4)(iv)] or
(v) set up for reconstruction or revival of power generation plant [80-IA(4)(v)].
The provisions of section 80-IA also contain the conditions to be satisfied for being
eligible for deduction. As per section 80-IA(3), undertakings mentioned in (ii) and (iv)
above should not be formed by splitting up or reconstruction of an existing
business.
The proviso to clause (i) and clause (iii) of sub-section (4) of section 80-IA deal with the
situation where operation and maintenance of infrastructure facility or operation and
maintenance of industrial park / SEZ, respectively, is transferred to another enterprise in
the manner provided therein and the transferee undertaking can avail deduction for
the unexpired period.
Section 80-IA(12A) provides that where the enterprise or undertaking of an Indian
Company entitled to the deduction under the said section is transferred on or after
01.04.2007 in a scheme of amalgamation or demerger, no deduction shall be available to
the amalgamated or the resulting company.
The vital factor in determining the eligibility criteria for availing deduction u/s 80-IA would
be verification of factual issues so as to ascertain whether
(a) there has been splitting up or reconstruction of a business already in existence,
(b) transfer is in accordance with the proviso to clause (i) or clause (iii) of sub-section
(4) of section 80-IA, or
(c) transfer of an enterprise or undertaking is in a scheme of amalgamation or
demerger.
111

The CBDT has, through this circular, clarified that if –
(i) an enterprise or undertaking develops an infrastructure facility, industrial park or
special economic zone, as the case may be; and
(ii) transfers it to another enterprise or undertaking for operation and maintenance in
accordance with the proviso to clause (i) or clause (iii) of sub-section (4) of section
80-IA; and
(iii) this transfer is not by way of amalgamation or demerger,
(iv) the transferee shall be eligible for the deduction for the unexpired period.
The profit for the purposes of deduction in the case of transferee shall be computed in
accordance with sub-sections (5) to (10) of section 80-IA.
112

13
ASSESSMENT OF VARIOUS ENTITIES
(a) Special Taxation Regime for Investment Funds [Sections 115UB & 10(23FB)]
Related amendment in sections: 115U, 139 & 194LBB
(i) Section 10(23FB) exempts any income of a Venture Capital Company (VCC) or
Venture Capital Fund (VCF) from investment in a Venture Capital Undertaking
(VCU). Further, as per section 115U, income accruing or arising or received by a
person out of investment made in a VCC or VCF shall be taxable in the like manner
as if the person had made direct investment in the VCU.
(ii) In effect, under sections 10(23FB) and 115U, a tax pass through status (i.e. income
is taxable in the hands of investors instead of VCF/VCC) is available to such funds
which satisfy the investment and other conditions as are provided in SEBI (Venture
Capital Funds) Regulations, 1996. Further, these sections provide a “pass through
status” only in respect of income which arises to the fund from investment in VCU,
being a company which satisfies the conditions provided in SEBI (Venture Capital
Fund) Regulations, 1996.
(iii) The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF regulations) have
replaced the SEBI (Venture Capital Fund) Regulations, 1996 (VCF regulations) from
21st May, 2012. Therefore, the AIF Regulations now regulate all privately pooled
investment vehicles which collect funds from investors for investments in
accordance with a predefined investment policy for the benefit of its investors AIF
can be a fund established or incorporated in the form of a trust, company, LLP or
body corporate. The AIF Regulations cover a much wider ambit of funds and
categorize them into broadly three categories:
Category I AIF comprises of funds which invest in start-up or early stage ventures
or social ventures or SMEs or infrastructure or other sectors or areas which the
government or regulators consider as socially or economically desirable.
Category I AIF presently has 4 sub-categories, namely, venture capital funds, SME
Funds, social venture funds and infrastructure funds. Investment norms have been
prescribed for each of the sub-categories to ensure that the fund allocates
substantial majority of its capital to the target focus. The stated intent of Category I
AIF is to cover AIFs that are generally perceived to have positive spillover effects on
113

economy and for which the SEBI/ Government/ other regulators might consider
providing incentives or concessions.
Category II AIF is a residual category and covers AIFs for which no specific incentives
or concessions are given by the Government/other regulators. Category II AIF will cover
classic private equity funds and debt funds. Such funds do not undertake leverage or
borrowing other than to meet day-to-day operational requirements.
Category III AIFs are AIFs which employ diverse or complex trading strategies and
may employ leverage including through investment in listed or unlisted derivatives.
Category III AIF will cover hedge funds or funds which trade with a view to make
short term returns or such other funds which are open ended. As in the case of
Category II AIFs, no specific incentives or concessions are given by the
Government/other regulators.
(iv) The Finance Act, 2013 had granted “pass through status” to only the Venture
Capital Fund, being a sub-category of Category I AIFs, with a corresponding direct
tax charge on the investors. The benefit was available to only such AIFs which are
established as a trust or a company. Further, the Income-tax Act, 1961 required
compliance of three conditions by such AIFs, in order to be covered within the ambit
of exemption under section 10(23FB).
(v) The tax implications on account of the amendment by the Finance Act, 2013 were
as follows -
(1) VCCs/VCFs registered prior to 21st May 2012 under SEBI (VCF) Regulations,
1996 (VCF regulations), will not be affected by the amendment and will
continue to be eligible for “pass through status” under section 10(23FB) read
with section 115U.
(2) The impact on AIFs registered on or after 21st May, 2012 under AIF
Regulations are summarized as follows :-
Cate- Sub- Tax status in the event AIF is registered on or
gory categories after 21 May 2012
I VCF, being Would qualify as VCC/VCF under section 10(23FB)
trust & VCC but, subject to compliance of three conditions viz.,
1. Shares of company/units of trust set up as an
AIF are not listed on a recognized stock
exchange.
2. Has invested not less than 2/3rd of its investible
funds in unlisted equity shares/equity linked
instruments of VCUs
3. Has not invested in associate VCUs.
I SME Fund Will not qualify as VCC/VCF under section 10(23FB)
Social and consequently will not be eligible for “pass
Venture through status” despite being identified as socially
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Cate- Sub- Tax status in the event AIF is registered on or
gory categories after 21 May 2012
Fund desirable having positive spillover effects on the
Infrastructure economy and eligible for other concessions from
Fund Government/SEBI.
Will be governed by normal provisions of taxation as
applicable to relevant nature of entity.
II Generally
includes
private equity
and debt
funds Will not qualify as VCC/VCF under section 10(23FB)
III Generally
includes
hedge funds
(vi) In order to rationalize the taxation of Category-I and Category-II AIFs (hereafter
referred to as investment fund) the Finance Act, 2015 has now provided a special
tax regime. Chapter XII-F comprising section 115U, containing the special
provisions relating to tax on income received from venture capital companies and
venture capital funds would not apply in respect of income of a previous year
relevant to A.Y.2016-17, accruing or arising to, or received by, a person from
investments made in a venture capital company or venture capital fund, being an
investment fund.
Accordingly, the taxation of income of such investment fund and their investors shall
be in accordance with the special tax regime under new Chapter XII-FB which is
applicable to such funds irrespective of whether they are set up as a trust,
company, or limited liability partnership etc.
Special Taxation Regime for Investment Funds [New Chapter XII-FB]
(1) Any income accruing or arising to, or received by, a person, being a unit holder
of an investment fund, out of investments made in the investment fund shall be
chargeable to income-tax in the same manner as if it were the income accruing
or arising to, or received by, such person had the investments, made by the
investment fund, been made directly by him. This is provided in new section
115UB(1).
(2) The Scheme provides for exemption under section 10(23FBA) of income, other
than income from profits and gains of business, in the hands of investment
fund. The income in the nature of profits and gains of business or profession
shall be taxable in the hands of the investment fund.
(3) Income accruing or arising to, or received by, a unit holder of an investment
fund, being that proportion of income which is of the same nature as income
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chargeable under the head “Profits and gains of business and profession” at
investment fund level, shall be exempt under section 10(23FBB).
(4) With effect from 1st June, 2015, tax has to be deducted@10% on any income
(other than the proportion of income which is of the same nature as income
chargeable under the head “Profits and gains of business or profession” which
is taxable at investment fund level) payable by the investment fund to a unit
holder. Such tax has to be deducted at the time of credit of such income to the
account of the payee or at the time of payment, whichever is earlier [Section
194LBB].
For this purpose, any such income credited to any account, whether called
“suspense account” or by any other name, in the books of account of the
person liable to pay such income, such crediting shall be deemed to be the
credit of such income to the account of the payee, and the provisions of
section 194LBB shall apply accordingly.
(5) If in any year there is a loss at the fund level, either current loss or the loss which
remained to be set off, such loss shall not be allowed to be passed through to
the investors but has to be carried over at fund level to be set off against income
of the next year in accordance with the provisions of Chapter VI [Section
115UB(2)].
(6) The income paid or credited by the investment fund shall be deemed to be of
the same nature and in the same proportion in the hands of the unit holder as
if it had been received by, or had accrued or arisen to, the investment fund
[Section 115UB(3)].
(7) As per section 115UB(4), the total income of the investment fund is chargeable
to tax as follows:
Investment Fund Rate of tax
A company or a firm Rate or rates specified in the Finance Act
of the relevant year (30% for A.Y.2016-17)
Other than a company or a firm Maximum marginal rate
(8) Income paid by an investment fund to its unit holders would not be subject to
dividend distribution tax under Chapter XII-D or tax on distributed income
under Chapter XII-E [Section 115UB(5)].
(9) If the income accruing or arising to, or received by, an investment fund, during
a previous year is not paid or credited to the unit-holders, it shall be deemed to
have been credited to the account of the unit-holder on the last day of the
previous year in the same proportion in which such person would have been
entitled to receive the income had it been paid in the previous year [Section
115UB(6)].
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(10) The following table gives a summary of the above provisions:
Particulars Investment Fund Unit holder
(i) Income under the head Taxable Exempt
“Profits and gains of
business or profession”
of the Investment Fund
(ii) Income, other than Exempt. Taxable, as if
profits and gains of Tax to be he had directly
business or profession deducted@10% on made the
such income investment.
distributed to unit-
holders.
(iii) Any loss incurred by the To be carried forward Not passed on
investment fund for set-off as per to investors
Chapter VI at the
Fund level
(iv) Dividend distribution tax Chapter XII-D and XII- -
and tax on distributed E not to apply to
income income paid to unit
holders.
(11) The person responsible for crediting or making payment of the income on
behalf of an investment fund and the investment fund are required to furnish,
within the prescribed time, to the person who is liable to tax in respect of such
income and to the prescribed income-tax authority a statement in the
prescribed form and verified in the prescribed manner. Such statement should
give details of the nature of the income paid or credited during the previous
year and such other relevant details as may be prescribed [Section 115UA(7)].
(12) TDS provisions would not be attracted in respect of the income received by the
investment fund. This would be provided by issue of appropriate notification
under section 197A(1F) subsequently.
(13) Every investment fund has to compulsorily file its return of income or loss
under section 139(4F), if it is not required to do so under any other provision of
section 139. The provisions of the Act would apply as if such return of income
or loss were a return required to be furnished under section 139(1).
(14) Further, the existing pass through regime would continue to apply to VCF/VCC
which had been registered under SEBI (VCF) Regulations, 1996. The other
VCFs, being part of Category-I AIFs, shall be subject to the new pass through
regime.
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(15) It has been clarified that any income which has been included in the total
income of the unit holder of an investment fund in a previous year, on account
of it having accrued or arisen in the said previous year, would not be included
in his total income in the previous year in which such income is actually paid to
him by the investment fund.
(16) Meaning of certain terms:
Term Meaning
(a) Investment Any fund established or incorporated in India in the
fund form of a trust or a company or a limited liability
partnership or a body corporate which has been
granted a certificate of registration as a Category I or a
Category II Alternative Investment Fund and is
regulated under the Securities and Exchange Board of
India (Alternative Investment Fund) Regulations, 2012,
made under the Securities and Exchange Board of
India Act, 1992;
(b) Trust A trust established under the Indian Trusts Act, 1882 or
under any other law for the time being in force.
(c) Unit Beneficial interest of an investor in the investment fund
or a scheme of the investment fund and shall include
shares or partnership interests.
Example
The following are the particulars of income of three investment funds for P.Y.2015-16:
Particulars A B C
` in lakh
Business Income 2 (2)
Capital Gains 16 14 (6)
Income from other sources 4 4 8
Compute the total income of the investment funds and unit-holders for A.Y.2016-17,
assuming that:
(i) each investment fund has 20 unit holders each having one unit; and
(ii) income from investment in the investment fund is the only income of the unit-
holder.
If Investment Fund C has the following income components for A.Y.2017-18, what would
be the total income of the fund for that year?
Business Income ` 2 lakh
Capital Gains ` 9 lakh
Income from other source ` 8 lakh
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Answer
Computation of total income of the investment fund for A.Y.2016-17

A B C
Particulars
`
Business Income Nil 2,00,000 Nil
Total Income Nil 2,00,000 Nil
Computation of total income of a unit holder of the following
investment funds for A.Y.2016-17
A B C
Particulars
`
Capital Gains 80,000 70,000 -
Income from other sources 20,000 20,000 30,000
Total Income 1,00,000 90,000 30,000
Notes:
(i) The total income of Investment Fund B would be chargeable to tax@30% if the
fund is a company or firm and at the maximum marginal rate, in any other case.
(ii) In case of Investment Fund C, the business loss of ` 2 lakh is set-off against
income from other sources of ` 8 lakh. Loss of ` 6 lakh under the head capital
gains cannot be set-off. The same has to be carried forward by the Investment
Fund for set-off in the subsequent years.
(iii) For A.Y.2017-18, the brought forward capital loss of ` 6 lakh can be set-off against
capital gains of ` 9 lakh. Business income of ` 2 lakh would be taxable in the
hands of the Investment Fund. Capital gains of ` 3 lakh (` 9 lakh – ` 6 lakh) and
Income from other sources of ` 8 lakh would be taxable in the hands of the unit-
holders. The total income of each unit holder for A.Y.2017-18 would be ` 55,000,
comprising of –
Capital gains = ` 15,000 [i.e., ` 3 lakh/20]
Income from other sources = ` 40,000 [i.e., ` 8 lakh / 20]
(b) Special Taxation Regime for business trusts [Section 115UA]
Related amendment in sections: 10(23FCA), 10(38), 111A, 194LBA(3) & 194-I
(i) The Finance (No.2) Act, 2014 had inserted Chapter XII-FA providing for a special
taxation regime in respect of business trusts.
(ii) Section 2(13A) was inserted to define a business trust as including a Real Estate
investment Trust (REIT) or an Infrastructure Investment Trust (InviT) which is
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registered under regulations framed by Securities and Exchange Board of India
(SEBI) and notified by the Central Government.
(iii) Existing Tax Regime for Business Trust
The existing tax regime for the business trust and their investors as contained in
different sections of the Income-tax Act, 1961 inter alia, provides that:-
(1) The listed units of a business trust, when traded on a recognised stock
exchange, are liable to securities transaction tax (STT), and consequently, the
long term capital gains is exempt under section 10(38) and the short term
capital gains is taxable at the rate of 15% under section 111A.
(2) In case of capital gains arising to the sponsor at the time of exchange of
shares in Special Purpose Vehicle (SPV), being the unlisted company through
which income generating assets are held indirectly by the business trusts, with
units of the business trust, the taxation is deferred.
(3) The tax on such capital gains is leviable at the time of sale of units by the sponsor.
(4) However, the preferential capital gains regime (consequent to levy of STT)
available to other unit holders of business trust, is not available to the sponsor
in respect of these units at the time of their transfer i.e., the LTCG is not
exempt under section 10(38) and the STCG is not taxable under section 111A.
(5) For the purpose of computing capital gain, the cost of these units would be the
cost of the shares to the sponsor. The holding period of shares is also
included in computing the holding period of such units.
(6) Income by way of interest received by the business trust from SPV enjoys a
pass through status, i.e., there is no taxation of such interest income in the
hands of the trust and no withholding tax at the level of SPV.
(7) Since such interest is subject to tax in the hands of the unit holders, the
business trust has to deduct at the rate of 5% in case of payment of interest
component of income distributed to non-resident unit holders, and at the rate
of 10% in respect of payment of interest component of distributed income to a
resident unit holder.
(8) The dividend received by the trust is subject to dividend distribution tax at the
level of SPV and is exempt in the hands of the trust, and the dividend component
of the income distributed by the trust to the unit holders is also exempt.
(iv) The sponsor suffers tax liability consequent to postponement of capital gains arising
on transfer of shares of SPV in exchange for units of business trust. Hence, he is
placed at a disadvantageous tax position vis-a-vis direct listing of the shares of the
SPV. In case the sponsor holding the shares of the SPV decides to exit through the
Initial Public Offer (IPO) route, then the benefit of concessional tax regime relating to
capital gains arising on transfer of shares subject to levy of STT is available to him.
The tax on short term capital gains (STCG) in such cases is levied @15% and the
long term capital gain (LTCG) is exempt under section 10(38) of the Act. However,
the benefit of concessional regime is not available to the sponsor at the time it
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offloads units of business trust acquired in exchange of its shareholding in the SPV
through Initial offer, at the time of listing of business trust on stock exchange.
(v) Tax treatment on capital gains on sale of units of business trust by sponsor
The Finance Act, 2015 has made the following amendments to ensure parity in tax
treatment in both cases mentioned above. Accordingly,
(1) the sponsor would get the same tax treatment on offloading of units under an
Initial offer on listing of units as it would have been available had he offloaded
the underlying shareholding through an IPO.
(2) STT shall be levied on sale of such units of business trust which are acquired
in lieu of shares of SPV, under an initial offer at the time of listing of units of
business trust in the like manner as in the case of sale of unlisted equity
shares under an IPO.
(3) the benefit of concessional tax regime of tax @15% on STCG and exemption
of LTCG under section 10(38) shall be available to the sponsor on sale of
units received in lieu of shares of SPV subject to levy of STT. For this
purpose, the second proviso to section 10(38) and the second proviso to
section 111A have been omitted with effect from A.Y.2016-17.
(vi) Tax treatment of rental income arising to REIT from real estate property
directly held by it
(1) In the case of REITs, the income is mainly in the nature of rental income. This
rental income arises from the assets held directly by REIT or held by it through
an SPV.
(2) Whereas the rental income received at the level of SPV gets passed through
by way of interest or dividend to the REIT, the rental income directly received
by the REIT is taxable at REIT level and does not get pass through benefit.
(3) In order to provide pass through to the rental income arising to REIT from real
estate property directly held by it, the following amendments have been made
by the Finance Act, 2015:-
Section Particulars Tax treatment
10(23FCA) Rental income of REIT from directly
(Effective owned real estate asset
from Any income of a business trust, being a Exempt in the hands
A.Y.2016-17) REIT, by way of renting or leasing or of REIT
letting out any real estate asset owned
directly by such business trust
115UA(3) Distributed income received by unit
(Effective holder
from The distributed income or any part Deemed income of
A.Y.2016-17) thereof, received by a unit holder from unit holder
the REIT, which is in the nature of
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income by way of renting or leasing or
letting out any real estate asset owned
directly by such REIT
194LBA Distribution by REIT to unit holders TDS@10% in case of
(Effective of rental income from real estate distribution to a
from assets directly owned by it resident unit holder.
1.6.2015) TDS at rates in force
in case of distribution
to a non-resident unit
holder.
194-I Rental income received or credited to
(Effective a REIT
from Where the income by way of rent is Tax is not deductible
1.6.2015) credited or paid to a business trust, at source
being a REIT, in respect of any real
estate asset, owned directly by such
business trust.
Example
A business trust, registered under SEBI (Real Estate Investment Trusts) Regulations,
2014, gives particulars of its income for the P.Y.2014-15:
(1) Interest income from Beta Ltd. – ` 4 crore;
(2) Dividend income from Beta Ltd. – ` 2 crore;
(3) Short-term capital gains on sale of listed shares of Beta Ltd. – ` 1.5 crore;
(4) Short-term capital gains on sale of developmental properties – ` 1 crore
(5) Interest received from investments in unlisted debentures of real estate companies
– ` 10 lakh;
(6) Rental income from directly owned real estate assets – ` 2.50 crore
Beta Ltd. is an Indian company in which the business trust holds controlling interest. The
business trust holds 70% of the shareholding of Beta Ltd.
Discuss the tax consequences of the above income earned by the business trust in the
hands of the business trust and the unit holders, assuming that the business trust has
distributed ` 10 crore to the unit holders in the P.Y.2015-16.
Answer
Tax consequences in the hands of the business trust and its unit holders
(1) Interest income of ` 4 crore from Beta Ltd.: There would be no tax liability in the
hands of business trust due to pass-through status enjoyed by it under section
10(23FC) in respect of interest income from Beta Ltd., being the special purpose
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vehicle [See Notes 2 & 3 below]. Therefore, Beta Ltd. is not required to deduct tax
at source on interest payment to the business trust.
However, the business trust has to deduct tax at source under section 194LBA –
 @10%, on interest component of income distributed to resident unit holders; and
 @5%, on interest component of income distributed to non-corporate non-
resident unit holders and foreign companies.
Interest component of income distributed to unit holders is taxable in the hands of
the unit holders – @5%, in case of unit holders, being non-corporate non-residents
or foreign companies; and at normal rates of tax, in case of resident unit holders.
The interest component of income received from the business trust in the hands of
each unit-holder would be determined in the proportion of 4/11.1, by virtue of
section 115UA(1) [See Notes 1 & 4 below].
(2) Dividend income of ` 2 crore from Beta Ltd.: There would be no tax liability in
the hands of the business trust since dividend is subject to dividend distribution tax
under section 115-O in the hands of Beta Ltd; Hence, the dividend income is
exempt under section 10(34) in the hands of the business trust.
Any distributed income referred to in section 115UA, to the extent it does not
comprise of interest referred to in section 10(23FC) received by unit holders, is
exempt in their hands under section 10(23FD). Therefore, by virtue of section
10(23FD), there would be no tax liability on the dividend component of income
distributed to unit holders in their hands.
(3) Short-term capital gains of ` 1.50 crore on sale of listed shares of Beta Ltd.:
As per section 115UA(2), the business trust is liable to pay tax@15% under section
111A in respect of short-term capital gains on sale of listed shares of special
purpose vehicle [See Note 6]. There would, however, be no tax liability on the
capital gain component of income distributed to unit holders, by virtue of the
exemption contained in section 10(23FD) [See Note 5].
(4) Short-term capital gains of ` 1 crore on sale of developmental properties: It is
taxable at maximum marginal rate of 33.99% in the hands of the business trust as
per section 115UA(2) [See Note 6]. There would be no tax liability in the hands of
the unit holders on the capital gain component of income distributed to them, by
virtue of the exemption contained in section 10(23FD) [See Note 5].
(5) Interest of ` 10 lakh received in respect of investment in unlisted debentures
of real estate companies: Such interest is [email protected]%, being the maximum
marginal rate, in the hands of the business trust, as per section 115UA(2) [See
Note 6]. However, there would be no tax liability in the hands of the unit holders on
the interest component of income distributed to them, by virtue of section 10(23FD)
[See Note 5].
(6) Rental income of ` 2.50 crore from directly owned real estate assets: Any
income of a business trust, being a REIT, by way of renting or leasing or letting out
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any real estate asset owned directly by such business trust is exempt in the hands
of the trust as per section 10(23FCA).
Where the income by way of rent is credited or paid to a business trust, being a
REIT, in respect of any real estate asset held directly by such REIT, no tax is
deductible at source under section 194-I.
The distributed income or any part thereof, received by a unit holder from the REIT,
which is in the nature of income by way of renting or leasing or letting out any real
estate asset owned directly by such REIT is deemed income of the unit holder as
per section 115UA(3). The business trust has to deduct tax at source@10% under
section 194LBA in case of distribution to a resident unit holder and at rates in force
in case of distribution to a non-resident unit holder.
Notes:
(1) New Chapter XII-FA, containing the special provisions relating to business trusts, has
been inserted w.e.f. A.Y.2015-16. Section 115UA(1) provides that any income
distributed by a business trust to its unit holders shall be deemed to be of the same
nature and in the same proportion in the hands of the unit holder, as it had been
received by, or accrued to the business trust.
(2) Section 10(23FC) exempts any income of a business trust by way of interest received or
receivable from a Special Purpose Vehicle (SPV). Thus, the business trust enjoys a
pass-through status in respect of interest received or receivable from a SPV.
(3) SPV means any company or LLP in which the business trust holds controlling interest
and any specified percentage of shareholding or interest, as may be required by the
regulations under which such trust is granted registration [not less than 50% as per the
current SEBI (Real Estate Investment Trusts) Regulations, 2014]. Since Beta Ltd. is an
Indian company in which the business trust holds controlling interest and 70% of
shareholding, it is a special purpose vehicle. It is presumed that Beta Ltd. fulfills the
other conditions specified in the regulations to qualify as an SPV.
(4) The distributed income of the business trust, to the extent it comprises of interest
referred to in section 10(23FC) and rental income referred to in section 10(23FCA), is
deemed to be the income of the unit holder in the previous year of distribution and
subject to tax in the hands of the unit holder in that year. Accordingly, the business trust
is required to deduct tax at source on the interest component and rental component of
income distributed to its unit holders.
(5) Any distributed income referred to in section 115UA, to the extent it does not comprise
of interest referred to in section 10(23FC) and rental income referred to in section
10(23FCA), received by unit holders is exempt in their hands under section 10(23FD).
(6) Section 115UA(2) provides that subject to the provisions of sections 111A and 112,
the total income of a business trust shall be chargeable to tax at the maximum
marginal rate.
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(vii) Notional gains/loss on transfer of shares of SPV to a business trust in exchange of
units allotted by the business trust & Notional gains/loss on change in carrying
amount of such units to be excluded from book profit for levy of MAT
To be reduced for computing To be added for computing
book profit, if the same has book profit, if the same has
been credited to P & L A/c been debited to P & L A/c
Notional gain on transfer of a capital Notional loss on transfer of a capital

asset, being share of a SPV, to a asset, being share of a SPV, to a
business trust in exchange of units business trust in exchange of units
allotted by the business trust to the allotted by the business trust to the
transferor transferor
Notional gain resulting from change in Notional loss resulting from change in
carrying amount of the units of carrying amount of the units of
business trust allotted in exchange of business trust allotted in exchnage of
shares of an SPV shares of an SPV
Gain on transfer of units of business Loss on transfer of units of business trust,

trust, which have been allotted in which have been allotted in exchange of
exchange of shares of SPV shares of SPV
(viii) Further, the amount of loss/gain on transfer of units of the business trust (which were allotted
in exchange of shares of SPV) has to be deducted/added to compute book profit for levy of
MAT.
The amount of loss/gain has to be determined taking into consideration -
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In a case where the The cost of the shares
shares are carried exchanged with the units of
at cost business trust
In a case where the

shares are carried The carrying amount of shares
at a value other at the time of exchange
than the cost
through P&L A/c
(ix) In effect, the gain on transfer of units of business trust allotted in exchange of
shares of SPV, has to be first reduced, if the same has been credited to profit and
loss account. Thereafter, the gain computed in the manner given in (viii) above has
to be added back to compute book profit for levy of MAT.
Likewise, the loss on transfer of units of business trust allotted in exchange of
shares of SPV, has to be first added back while computing book profit, if the same
has been debited to profit and loss account. Thereafter, the loss computed in the
manner given in (viii) above has to be deducted to compute book profit for levy of
MAT.
(x) As regards notional loss or notional gain on transfer of share of SPV to a business
trust in exchange of units allotted by the business trust as well as notional loss or
notional gain resulting from change in the carrying amount of such units, the same
have to be excluded from computation of book profit for levy of MAT, if such
notional loss has been debited to profit and loss account or such notional gain has
been credited to profit and loss account.
(b) Decrease in rate of tax on royalty income and fees for technical services in case of
non-residents [Section 115A]
(i) Under section 115A, in case of a non-resident taxpayer -
 where the total income includes any income by way of Royalty and Fees for
technical services (FTS) received by such non-resident from Government or an
Indian concern after 31.03.1976, and
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 which is not effectively connected with permanent establishment, if any, of the
non-resident in India,
tax is leviable at the rate of 25% on the gross amount of such income.
(ii) The rate of tax of such royalty and fees for technical services was increased from
10% to 25% by the Finance Act, 2013. The increase in the rate of tax caused
hardship to small entities.
(iii) Consequently, to reduce such hardship faced by small entities on account of the
high rate of tax, section 115A has been amended to reduce the rate of tax on
payment of royalty and fees for technical services made to non-residents from 25%
to 10% with effect from A.Y.2016-17.
Rate of tax on royalty and fees for technical services
25%
A.Y.2015-16
10%
A.Y.2016-17
(c) Share of member of an AOP/BOI in the income of the AOP/BOI to be reduced from
net profit for computing book profit for levy of MAT [Section 115JB]
(i) Under section 115JB, in the case of a company, if the tax payable on the total
income computed as per the normal provisions of the Income-tax Act, 1961 is less
than 18.5% of its book profit, such book profit shall be deemed to be the total
income of the company and the tax payable for the relevant previous year shall be
18.5% of its book profit.
(ii) Explanation 1 below sub-section (2) of section 115JB provides that the expression
“book profit” means net profit as shown in the profit and loss account prepared in
accordance with the provisions of the Companies Act or in accordance with the
provisions of the relevant statute governing a company, as increased or reduced by
certain adjustments, as specified thereunder.
(iii) Under section 86, no income-tax is payable on the share of a member of an
AOP/BOI in the income of the AOP/BOI in certain circumstances. A company which
127

is a member of an AOP is also not required to pay tax in respect of its share in the
income of the AOP in such cases. However, under section 115JB, a company
which is a member of an AOP is liable to MAT on such share also, since such
income is not excluded from the book profit while computing the MAT liability of the
member. It may be noted that in a similar situation, in the case of a partner of a firm,
the share in the profits of the firm is exempt in the hands of the partner as per
section 10(2A) and no MAT is payable by the partner on such profits, since income
to which any provision of section 10 [other than section 10(38)] applies, has to be
reduced for computing book profit.
(iv) In order to ensure equity, clause (iic) has been inserted in Explanation 1 to section
115JB to provide that the share of a member of an AOP or BOI, in the income of the
AOP or BOI, on which no income-tax is payable in accordance with the provisions of
section 86, should be reduced while computing book profit for levy of MAT under
115JB, if any such amount is credited to profit and loss account. Consequently,
clause (fa) has been inserted in Explanation 1 to add back the expenditures, if any,
debited to the profit and loss account, corresponding to such income, while
computing book profit for levy of MAT.
(d) Income accruing or arising to a foreign company from capital gains arising on
transactions in securities or interest, royalty and fees for technical services
chargeable to tax at the rate or rates specified in Chapter XII to be excluded from
levy of MAT [Section 115JB]
(i) In order to exclude certain income of foreign companies from levy of MAT, clause
(iid) has been inserted in Explanation 1 to section 115JB so as to reduce from the
net profit, the amount of income accruing or arising to an assessee, being a foreign
company, from-
(1) capital gains arising on transactions in securities; and
(2) interest, royalty or fees for technical services chargeable to tax at the rate or
rates specified in Chapter XII
if such income is credited to profit and loss account and income-tax payable thereon in
accordance with the provisions of the Act, other than the provisions of Chapter XII-B, is
at a rate less than 18.5%, being the rate specified in section 115JB(1).
(ii) The expenditure, if any, debited to the profit and loss account, relatable to such
income of a foreign company, has to be added back for computation of book profit
for levy of MAT.
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(e) Definition of Global Depository Receipts (GDRs) amended to restrict the benefit under
section 115ACA to only such GDRs as defined in the earlier depository scheme
(i) The Depository Receipts Scheme, 2014, notified by the Department of Economic
Affairs (DEA) vide Notification dated 21st October, 2014, has replaced the “Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through depository
receipt mechanism) Scheme, 1993”.
(ii) Section 115ACA provides for a concessional tax regime in respect of income from
GDRs purchased in foreign currency or capital gains arising from their transfer. The
provisions of section 115ACA are in alignment with the earlier scheme which was
limited to issue of Depository Receipts based on the underlying shares of the
company issued for this purpose (i.e., sponsored GDR) or foreign currency
convertible bonds (FCCB) of the issuing company and where the company was
either a listed company or was to list simultaneously. Further, only non-residents
were holders of such Depository Receipts.
(iii) However, as per the Depository Receipts Scheme, 2014, Depository Receipts can
be issued against the securities of listed, unlisted or private or public companies
against underlying securities which can be debt instruments, shares or units etc.
Besides, the new scheme permits sponsored issues as well as unsponsored
deposits and acquisitions. Also, under the new scheme, Depository Receipts can be
freely held and transferred by both residents and non-residents.
(iv) Since the legislative intent was to provide the tax benefit under section 115ACA only in
respect of sponsored GDRs and listed companies, the definition of Global Depository
Receipts in clause (a) of Explanation below section 115ACA(3) has been amended to
continue the tax benefits only in respect of such GDRs as defined in the earlier
depository scheme.
(v) Accordingly, “Global Depository Receipts” is now defined to mean any instrument
in the form of a depository receipt or certificate (by whatever name called) created
by the Overseas Depository Bank outside India and issued to investors against
the issue of, -
(a) ordinary shares of issuing company, being a company listed on a
recognized stock exchange in India; or
(b) foreign currency convertible bonds of issuing company.
129

Global Depository Receipts (GDRs)
Depository Receipt Certificate
Created by the Overseas Depository Bank outside India
Issued to investors against the issue of
Ordinary shares of issuing company FCCBs of issuing company
In this case, the issuing company should

be a company listed on a recognised stock
exchange in India.
(1) Form, manner and time limit for furnishing of a Statement under section 115UA(4)
prescribed [Notification No. 3/2015, dated 19-01-2015]
The Finance (No. 2) Act, 2014 inserted new chapter XII-FA containing the special
provisions relating to business trusts. Section 115UA provides for tax on income of unit
holder and business trust. Section 115UA(4) provides that any person responsible for
making payment of the income distributed on behalf of a business trust to a unit holder
shall furnish a statement to the unit holder and to the prescribed authority, within
such time and in such form and manner as may be prescribed, giving the details of the
nature of the income paid during the previous year and other prescribed details.
Accordingly, in exercise of the powers conferred by section 295 read with section
115UA(4), the CBDT has, vide this notification, inserted Rule 12CA to prescribe the
form, manner and time limit for furnishing such statement by the business trust:
Particulars Mode of Form Due date
furnishing/verified No.
by
Statement of income Duly verified by the 64B 30th June of the financial
distributed, to be furnished person distributing year following the
130

to the unit holders the income on previous year in which
behalf of the income is distributed
business trust
Statement of income Electronically under 64A 30th November of the
distributed furnished to the digital signature, financial year following
unit holders to be duly verified by an the previous year during
furnished to the Principal Accountant which such income is
Commissioner or distributed
Commissioner of
Income-tax
The Director General of Income-tax (Systems) to specify the procedure for filing of Form
No.64A. He would also be responsible for evolving and implementing appropriate security,
archival and retrieval policies in relation to the statements so furnished.
131

16
TRANSFER PRICING AND OTHER PROVISIONS
TO CHECK AVOIDANCE OF TAX
AMENDMENT BY THE FINANCE ACT, 2015
Increase in threshold for specified domestic transaction [Section 92BA]

(i) Under section 92BA, “specified domestic transaction” in case of an assessee has been
defined to mean any of the transactions specified thereunder, not being an international
transaction, where the aggregate of such transactions entered into by the assessee in
the previous year exceeds a sum of ` 5 crore.
(ii) Since the low threshold of ` 5 crore has unduly increased the compliance cost in case of
small businesses, section 92BA has been amended to increase the threshold from ` 5
crore to ` 20 crore.
(iii) Accordingly, the aggregate of specified transactions entered into by the assessee in the
previous year should exceed a sum of ` 20 crore, for any such transaction mentioned in
section 92BA to be treated as ‘specified domestic transaction’.
(1) Safe Harbour Rules notified for Specified Domestic Transactions in respect of a
Government company engaged in business of generation, transmission or
distribution of electricity [Notification No. 11/2015, dated 4-2-2015]
Section 92CB(1) provides that the determination of arm’s length price under section 92C
or section 92CA shall be subject to safe harbour rules. Section 92CB(2) empowers the
CBDT to prescribe safe harbour rules.
Safe harbour means circumstances in which the income tax authorities shall
accept the transfer price declared by the assessee.
Accordingly, in exercise of the powers conferred by section 92CB read with section 295
of the Income‐tax Act, 1961, the CBDT had, vide Notification No. 73/2013, dated
18.09.2013, prescribed safe harbour rules in respect of international transactions.
132

The CBDT has, vide this notification, in exercise of the powers conferred by section
92CB and 92D, read with section 295, inserted Rules 10TH, 10THA, 10THB, 10THC &
10THD providing the safe harbour rules for specified domestic transactions.
Rule Rule Particulars
heading
10TH Definitions:
Appropriate Meaning assigned to it in section 2(4) of the Electricity
Commission Act, 2003.
Appropriate Commission means the Central Regulatory
Commission referred to in sub-section (1) of section 76
or the State Regulatory Commission referred to in
section 82 or the Joint Commission referred to in section
83, as the case may be.
Government
Meaning assigned to it in section 2(45) of the Companies
Company
Act, 2013.
Government company means any company in which not
less than 51% of the paid-up share capital is held by the
Central Government, or by any State Government or
Governments, or partly by the Central Government and
partly by one or more State Governments, and includes a
company which is a subsidiary company of such a
Government company.
10THA Eligible  A person who has exercised a valid option for
assessee application of safe harbour Rules in accordance with
the provisions of Rule 10THC, AND
 is a Government company engaged in the business of
generation, transmission or distribution of electricity.
10THB Eligible A specified domestic transaction undertaken by an
Specified eligible asseessee and which comprises of:
Domestic (i) supply of electricity by a generating company; or
Transaction (ii) transmission of electricity; or
(iii) wheeling of electricity.
10THC Safe (1) Where an eligible assessee has entered into an
harbour eligible specified domestic transaction in any previous
year relevant to an assessment year and the option
exercised by the said assessee is treated to be validly
exercised under Rule 10THD, the transfer price
declared by the assessee in respect of such
transaction for that assessment year shall be accepted
by the income-tax authorities, if it is in accordance with
the circumstances specified in Rule 10THC(2).
133

(2) The following are the circumstances in respect of
the eligible specified domestic transaction.
S.No. Eligible Circumstances
specified
domestic
Transaction
1 Supply of The tariff in respect of
electricity, supply of electricity,
transmission transmission of electricity,
of electricity, wheeling of electricity, as
wheeling of the case may be, is
electricity determined by the
Appropriate Commission
in accordance with the
provisions of the
Electricity Act, 2003.
(3) No comparability adjustment and allowance under
the second proviso to section 92C(2) shall be made
to the transfer price declared by the eligible
assessee and accepted by the income-tax authority.
(4) The provisions of sections 92D relating to
maintenance and keeping of information and
document and section 92E for submission of report
from an accountant in respect of a specified
domestic transaction shall apply irrespective of the
fact that the assessee exercises his option for safe
harbour in respect of such transaction.
10THD Procedure Furnishing of Form 3CEFB
The assessee shall furnish a Form 3CEFB, complete in
all respects, to the Assessing Officer on or before the
due date for furnishing the return of income for the
relevant assessment year specified in Explanation 2 to
section 139(1), for exercising the option of safe harbour.
The return of income should be furnished on or before
the date of submitting the Form 3CEFB.
However, in respect of eligible specified domestic
transactions undertaken during the previous year
relevant to the assessment year 2013-14 or 2014-15,
Form 3CEFB can be furnished by the assessee on or
before 31st March, 2015.
Order by Assessing Officer
The Assessing Officer shall pass the order declaring the
option exercised by the assessee as invalid within a
134

period of 3 months from the end of the month in which
Form 3CEFB is received by him.
No order can be passed declaring the option exercised
by the assessee invalid unless an opportunity of being
heard is given to him.
Filling of objections against the order of Assessing
Officer by the assessee
If the assessee objects to the order of the Assessing
Officer declaring the option to be invalid, he may file his
objections with the Principal Commissioner or the
Commissioner or the Principal Director or the Director, as
the case may be, to whom the Assessing Officer is
subordinate, within 15 days of receipt of the order of
the Assessing Officer.
The Principal Commissioner or Commissioner or
Principal Director or Director, as the case may be, shall,
after providing an opportunity of being heard to the
assessee, pass appropriate order, within a period of 2
months from the end of the month in which the
objection filed by the assessee is received by him, in
respect of the validity or otherwise of the option
exercised by the assesee.
If the Assessing Officer or the Principal Commissioner or
the Commissioner or the Principal Director or the
Director, as the case may be, does not pass an order
within the specified time, then the option for safe harbour
exercised by the assessee shall be treated as valid.
Information and documents to be maintained under section 92D in respect of
eligible specified domestic transaction [Rule 10D(2A)]
Section 92D provides that every person who has entered into an international transaction
or specified domestic transaction shall keep and maintain prescribed information and
document.
Rule 10D(1) provides for information and documents to be maintained under section 92D.
Sub-rule (2A) has been inserted in Rule 10D to provide that nothing contained in Rule
10D(1) in so far as it relates to specified domestic transaction referred to in Rule 10THB,
shall apply in the case of an eligible assessee referred to in Rule 10THA.
The information and documents to be maintained by an eligible assessee referred to in
Rule 10THA relating to an eligible specified domestic transaction referred to in Rule
10THB are given in Rule 10D(2A) as follows:
(i) a description of the ownership structure of the assessee enterprise with details of
shares or other ownership interest held therein by other enterprises;
135

(ii) a broad description of the business of the assessee and the industry in which the
assessee operates, and of the business of the associated enterprises with whom
the assessee has transacted;
(iii) the nature and terms (including prices) of specified domestic transactions entered
into with each associated enterprise and the quantum and the value of each such
transaction or class of such transaction;
(iv) a record of proceedings if any before the regulatory commission and orders of such
commission relating to the specified domestic transaction;
(v) a record of the actual working carried out for determining the transfer price of the
specified domestic transaction;
(vi) the assumptions, policies and price negotiations, if any, which have critically
affected the determination of the transfer price;
(vii) any other information, data or document, including information or data relating to the
associated enterprise, which may be relevant for determination of the transfer price
(2) Rules for rollback of an Advance Pricing Agreement notified [Notification No.
23/2015, dated 14-03-2015]
Section 92CC empowers the CBDT to enter into an advance pricing agreement with any
person, determining the arm’s length price or specifying the manner in which arm’s length
price is to be determined in relation to an international transaction to be entered into by
that person.
The CBDT can do so with the approval of the Central Government. Section 92CC(9)
empowers the CBDT to prescribe a scheme specifying therein the manner, form and
procedure in respect of such advance pricing agreement. Further, to reduce current
pending as well as future litigation in respect of the transfer pricing matters, section
92CC(9A) provides a roll back mechanism in the advance pricing agreement scheme.
Accordingly, the advance pricing agreement may, subject to such prescribed conditions,
procedure and manner, provide for determining the arm’s length price or for specifying
the manner in which arm’s length price is to be determined in relation to an international
transaction entered into by a person during any period not exceeding four previous
years preceding the first of the previous years specified in the agreement and the
arms length price of such international transaction shall be determined in accordance
with the said agreement.
The CBDT has, vide this notification, in exercise of the powers conferred by section
92CC(9) and 92CC(9A) read with section 295, prescribed the following conditions,
procedure and manner for determining the arm’s length price or for specifying the
manner in which arm’s length price is to be determined in relation to an international
transaction:
Rule Particulars Amendment
10F(ba) Definition of A person who has made an application.
Applicant
136

10F(ha) Definition of Any previous year, falling within the period not exceeding
Rollback four previous years, preceding the first of the five
year consecutive previous years referred to in section 92CC(4).
10H(1) Pre-filing Any person proposing to enter into an agreement under
consultation these rules may, by an application in writing, make a request
for a pre-filing consultation.
Making a request for a pre-filing consultation has, therefore,
become optional.
As per Rule 10H(5), the pre-filing consultation shall, among
other things, -
(i) determine the scope of the agreement
(ii) identify transfer pricing issues
(iii) determine the suitability of international transaction for
the agreement.
(iii) discuss broad terms of the agreement
10-I Application Earlier, any person who has entered into a pre-filing
for advance consultation as referred to in Rule 10H was eligible to file an
pricing application for advance pricing agreement.
agreement. This rule has now been amended to provide that any person
referred to in Rule 10G i.e. any person who has undertaken
an international transaction or is contemplating to undertake
an international transaction will be eligible to make an
application for advance pricing agreement.
Therefore, an application requesting for pre-filing
consultation is not mandatory for making an application for
advance pricing agreement.
10M Terms of the Rule 10M provides for the terms of the advance pricing
agreement agreement. Rule 10M(1) provides that an agreement may
among other things, include, the international transactions
covered by the agreement, the agreed transfer pricing
methodology, if any, the determination of ALP, if any etc..
Clause (va) has now been inserted in Rule 10MA(1) to
include rollback provision referred to in Rule 10MA.
10MA Roll back of The said rule provides the following:

the 1. the agreement may provide for determining the arm’s
agreement length price or specify the manner in which arm’s length
price shall be determined in relation to the international
transaction entered into by the person during the rollback
year (hereinafter referred as “rollback provision”).
137

2. Conditions for applying for rollback provisions:
The agreement shall contain rollback provision in
respect of an international transaction subject to the
following, namely:-
(i) the international transaction is same as the
international transaction to which the agreement
(other than the rollback provision) applies;
(ii) the return of income for the relevant rollback year
has been or is furnished by the applicant before
the due date as specified in Explanation 2 of
section 139(1).
(iii) the report in respect of the international
transaction had been furnished in accordance with
section 92E;
(iv) the applicability of rollback provision, in respect of
an international transaction, has been requested
by the applicant for all the rollback years in which
the said international transaction has been
undertaken by the applicant; and
(v) the applicant has made an application seeking
rollback in Form 3CEDA in accordance with sub-
rule (5);
3. Non-applicability of Rollback provision: Rollback
provision shall not be provided in respect of an
international transaction for a rollback year, if,-
(i) The determination of arm’s length price of the said
international transaction for the said year has
been subject matter of an appeal before the
Appellate Tribunal and the Appellate Tribunal has
passed an order disposing of such appeal at any
time before signing of the agreement; or
(ii) the application of rollback provision has the effect
of reducing the total income or increasing the loss,
as the case may be, of the applicant as declared
in the return of income of the said year.
4. Manner for determining arm length price to be the
same for rollback years and other previous years:
Where the rollback provision specifies the manner in
which arm’s length price shall be determined in relation
to an international transaction undertaken in any
rollback year then such manner shall be the same as
the manner which has been agreed to be provided for
138

determination of arm’s length price of the same
international transaction to be undertaken in any
previous year to which the agreement applies, not
being a rollback year.
5. Time limit for filling application for rollback
provision: The applicant may furnish along with the
application for advance pricing agreement, the request
for rollback provision in Form No. 3CEDA with proof of
payment of an additional fee of ` 5 lakh at any time –
(i) before the first day of the previous year relevant
to the first assessment year for which the
application for advance pricing agreement is
made, in respect of transactions which are
of a continuing nature from dealings that are
already occurring; or
(ii) before undertaking the transaction in respect
of remaining transactions.
[However, where an application has been filed before
31.03.2015, application for rollback provision along with
the proof of payment of additional fee may be filed at
any time on or before the 30.6.2015 or the date of
entering into the agreement, whichever is earlier.
Further, where an agreement has been entered into on or
before 31.03.2015, application for rollback provision along
with the proof of payment of additional fee may be filed at
any time on or before 30.06.2015 and such agreement
may be revised to provide for the rollback provision
notwithstanding anything contained in Rule 10Q (which
provides for revision of advance pricing agreement)]1.
10RA Procedure Rule 10RA has been inserted to provide the “Procedure for
for giving giving effect to rollback provision of an Agreement” as
effect to follows:
rollback (i) The applicant shall furnish modified return of income
provision of referred to in section 92CD in respect of a rollback year
an to which the agreement applies along with the proof of
Agreement payment of any additional tax arising as a consequence
of and computed in accordance with the rollback
provision.
(ii) The modified return in respect of rollback year shall be
furnished along with the modified return to be furnished
1 As amended by Notification No.33/2015, dated 01.04.2015
139

in respect of first of the previous years for which the
agreement has been requested for in the application.
(iii) If any appeal filed by the applicant is pending before
the Commissioner (Appeals), Appellate Tribunal or the
High Court for a rollback year, on the issue which is the
subject matter of the rollback provision for that year, the
said appeal to the extent of the subject covered under
the agreement shall be withdrawn by the applicant
before furnishing the modified return for the said year.
(iv) If any appeal filed by the Assessing Officer or the
Principal Commissioner or Commissioner is pending
before the Appellate Tribunal or the High Court for a
rollback year, on the issue which is subject matter of
the rollback provision for that year, the said appeal to
the extent of the subject covered under the agreement,
shall be withdrawn by the Assessing Officer or the
Principal Commissioner or the Commissioner, as the
case may be, within three months of filing of modified
return by the applicant.
(v) The applicant, the Assessing Officer or the Principal
Commissioner or the Commissioner, shall inform the
Dispute Resolution Panel or the Commissioner
(Appeals) or the Appellate Tribunal or the High Court,
as the case may be, the fact of an agreement
containing rollback provision having been entered into
along with a copy of the same as soon as it is
practicable to do so.
(vi) In case effect cannot be given to the rollback provision of
an agreement in accordance with this rule, for any rollback
year to which it applies, on account of failure on the part of
applicant, the agreement shall be cancelled.
Consequently, clause (iv) of Rule 10R(1) providing for
cancellation of agreement, has been amended to provide
that the CBDT shall cancel an agreement if it is to be
cancelled under Rule 10RA.
140

21
ASSESSMENT PROCEDURE
(a) Approval regime for issue of notice for re-assessment simplified [Section 151]
Effective from: 1st June, 2015
(i) Section 151 requires the Assessing Officer to obtain sanction from certain authorities
before issue of notice for reassessment of income under section 148, under certain
specified circumstances.
(ii) Under section 151, the sanctioning authorities are specified on the basis of –
(1) whether scrutiny under section 143(3) or section 147 has been made earlier or not,
(2) whether notice is proposed to be issued within or after four years from the end of
relevant assessment year, and
(3) the rank of the Assessing Officer proposing to issue notice.
(iii) In order to simplify the approval regime for issue of notice for reassessment, section 151
has been substituted.
Time limit Issue of Notice Competent authority who has to be
(from the under section satisfied on the reasons recorded by
end of the 148 by the A.O., that it is a fit case for the
relevant issue of such notice
A.Y.)
(1) Upto 4 years Assessing Officer Joint Commissioner
below the rank of
Joint
Commissioner
(2) After 4 years Assessing Officer Principal Chief Commissioner/ Chief
Commissioner/Principal Commissioner/
Commissioner
141

Issue of
o
notice u/s
u
148
Upto fourr Beyond

years four yeaars
By an AO, if the
By an AO below
B Principal Chief
C
the rank of the
t Commissioneer / Chief
JC, if the JCC is C
Commissioner/ / Principal
s
satisfied that it is Commissiooner/
Commissioner is
a fit case foor satisfied that it is a fit
issue of notiice case for issue of notice.
(iv) It iss further clariffied that in thee above cases, the Principal Chief Commissioner or Chief
C
Coommissioner or the Prinncipal Comm missioner or Commissioner or the Joint
Coommissioner, as a the case may m be, has too be satisfied on the reasonns recorded by the
Assessing Officeer about fitneess of a casee for the issue of notice uunder section 148.
Hoowever, these authorities aree not requiredd to issue the notice
n themseelves.
(b) Beneficcial Owner / Beneficiary of any asseet located outside
o Indiaa required to
o file
o income in the prescrib
return of bed form andd manner [Seection 139(1))]
Effectivve from: A.Y..2016-17
(i) Thhe fourth provviso to section 139(1) requuires a persoon, being a reesident other than
not ordinarily reesident in Indiia, having –
(1)) any asset (including financial interesst in any entitty) located ouutside India orr
(2)) signing auuthority in anyy account locaated outside India
I
to file a return of
o income in the
t prescribed form compulsorily, whetther or not hee has
inccome chargeaable to tax. The
T return of income should be verified in the prescrribed
m be prescribed.
maanner and proovide such paarticulars as may
(ii) Thhe fourth provviso to sectionn 139(1) has been substituuted with effect from A.Y.22016-
17. It now reqquires filing ofo return of inncome or loss for the preevious year inn the
preescribed form
m and verified in the prescrribed mannerr on or beforee the due datee, by
every person, being
b a resident other thaan not ordinarrily resident in India withinn the
meeaning of secction 6(6), whoo is not required to furnishh a return undder section 1339(1)
if such
s person, at any time during
d the previous year, -
(a)) holds, as a beneficial owner or othherwise, any asset (includding any finaancial
interest in any entity) located outsidde India or has
h a signingg authority in any
account loccated outside India; or
142

(b) is a beneficiary of any asset (including any financial interest in any entity) located
outside India.
(iii) However, an individual being a beneficiary of any asset (including any financial
interest in any entity) located outside India would not be required to file return of
income under the fourth proviso to section 139(1), where, income, if any, arising
from such asset is includible in the income of the person referred to in ii(a) above in
accordance with the provisions of the Income-tax Act, 1961.
Requirement of filing of return of income as per the new fourth and fifth proviso to
section 139(1)
A resident other than not ordinarily

resident within the meaning of section
6(6)
Who is not required to furnish

a return of income u/s 139/(1)
AND
Who at any time during the

P.Y.
OR
A B
is a beneficiary of any
holds, as beneficial has a signing asset (including
owner or otherwise, authority in any financial interest in
any asset (including OR account located any entity) located
financial interest in outside India outside India
any entity) located
outside India
However, where any income arising from such asset is includible in the hands of the
person specified in (A) in accordance with the provisions of the Act, an individual, being
a beneficiary of such asset, is not required to file return of income.
143

(iv) Consequential amendment has been made in section 139(6) to provide that in the
prescribed cases, the assessee shall be required to furnish the particulars of the assets
of the prescribed nature and value, held by him as a beneficial owner or otherwise or in
which he is a beneficiary, in the prescribed form of the returns referred to in sections
139(1)/139(3) and in section 142(1).
Meaning of “beneficial owner” and “beneficiary” in respect of an asset for the purpose
of section 139:
An individual who has provided,

Beneficial Owner directly or indirectly,
consideration for the asset for
the immediate or future benefit,
direct or indirect, of himself or
any other person.
An individual who derives benefit

from the asset during the
Beneficiary previous year and the
consideration for such asset has
been provided by any person,
other than such beneficiary.
(c) Assessment of income of a person other than the person in whose case search has
been initiated or books of account, other documents or assets have been
requisitioned [Section 153C]
(i) Section 153C relates to assessment of income of any other person.
(ii) As per section 153C(1), where the Assessing Officer is satisfied that any money,
bullion, jewellery or other valuable article or thing or books of account or documents
seized or requisitioned belong to any person, other than the person referred to in
section 153A, then, the books of account or documents or assets seized or
requisitioned shall be handed over to the Assessing Officer having jurisdiction over
such other person and that Assessing Officer shall proceed against each such other
person and issue such other person notice and assess or reassess income of such
other person in accordance with the provisions of section 153A, if he is satisfied that
the books of account or documents or assets seized or requisitioned have a bearing
144

on the determination of the total income of such other person for the relevant
assessment year or years referred to in section 153A(1).
(iii) The words “belongs to” in respect of a document may lead to different
interpretations as, for instance, when a given document seized from a person is a
copy of the original document, whether the copy can be considered to “belong” to
the other person.
(iv) In order to resolve this issue, section 153C has been amended to provide that,
notwithstanding anything contained in section 139, section 147, section 148, section
149, section 151 and section 153, where the Assessing Officer is satisfied that -
(1) any money, bullion, jewellery or other valuable article or thing seized or
requisitioned belongs to ; or
(2) any books of account or documents seized or requisitioned pertain to; or
(3) any information contained therein, relates to,
any person, other than the person referred to in section 153A, then, the books of
account or documents or assets, seized or requisitioned shall be handed over to the
Assessing Officer having jurisdiction over such other person and that Assessing
Officer shall proceed against each such other person and issue such other person
notice and assess or reassess income of such other person in accordance with the
provisions of section 153A, if he is satisfied that the books of account or documents
or assets seized or requisitioned have a bearing on the determination of the total
income of such other person for the relevant assessment year or years referred to
in section 153A(1).
(d) Procedure for appeal by revenue when an identical question of law is pending
before Supreme Court [New Section 158AA]
(i) Section 158A enables an assessee, during pendency of proceedings in his case for
an assessment year, to submit a claim before the Assessing Officer or any appellate
authority that -
(1) a question of law arising in the instant case for the assessment year under
consideration is identical with the question of law already pending in his own
case before the High Court or Supreme Court for another assessment year; and
(2) if the Assessing Officer or any appellate authority agrees to apply the final
decision on the question of law in that earlier year to the present year, he will
not agitate the same question of law once again for the present year before
higher appellate authorities.
(ii) The Assessing Officer or any appellate authority before whom his case is pending
can admit the claim of the assessee and as and when the decision on the question
145

of law becomes final, the ratio of the decision of the High Court or Supreme Court
for that earlier case would be applied to the relevant year’s case also.
(iii) So far, there is no corresponding provision for revenue to not file appeal for
subsequent years where the Department is in appeal on the same question of law
for an earlier year. Consequently, appeals are filed by the revenue year after year
on the same question of law until it is finally decided by the Supreme Court. This
increases the pending litigation.
(iv) Accordingly, new section 158AA has been inserted to provide that notwithstanding
anything contained in the Act, where any question of law arising in the case of an
assessee for any assessment year is identical with a question of law arising in his
case for another assessment year which is pending before the Supreme Court, in
an appeal or in a special leave petition under Article 136 of the Constitution filed by
the revenue, against the order of the High Court in favour of the assessee, the
Commissioner or Principal Commissioner may, instead of directing the Assessing
Officer to appeal to the Appellate Tribunal under section 253(2) or section 253(2A),
direct the Assessing Officer to make an application to the Appellate Tribunal in the
prescribed form within sixty days from the date of receipt of order of the
Commissioner (Appeals) stating that an appeal on the question of law arising in the
relevant case may be filed when the decision on the question of law becomes final
in the earlier case.
(v) The Commissioner or Principal Commissioner shall direct the Assessing Officer to
make an application under section 158AA(1), only if an acceptance is received from
the assessee to the effect that the question of law in the other case is identical to
that arising in the relevant case. However, in case no such acceptance is received,
the Commissioner or Principal Commissioner shall proceed in accordance with the
provisions contained in section 253(2) or section 253(2A). Accordingly, the
Commissioner or Principal Commissioner may, if he objects to the order passed by
the Commissioner (Appeals), direct the Assessing Officer to appeal to the Appellate
Tribunal.
(vi) Where the order of the Commissioner (Appeals) is not in conformity with the final
decision on the question of law in the other case (if the Supreme Court decides the
earlier case in favour of the Department), the Commissioner or Principal
Commissioner may direct the Assessing Officer to appeal to the Appellate Tribunal
against such order within 60 days from the date on which the order of the Supreme
Court is communicated to the Commissioner or Principal Commissioner.
(vii) Unless otherwise provided in section 158AA, all other provisions of Part B of Chapter
XX “Appeals to Appellate Tribunal” shall apply accordingly.
146

22
SETTLEMENT COMMISSION
(a) Deemed date of commencement of settlement proceedings [Explanation to section 245A]

(i) Section 245A(b) defines a “case” for the purpose of Chapter XIX-A to mean any
proceeding for assessment under the Income-tax Act, 1961, of any person in respect
of any assessment year or assessment years which may be pending before an
Assessing Officer on the date on which an application under section 245C(1) is made.
(ii) The Explanation to section 245A(b) provides for deemed date of commencement of
a proceeding under different situations. Clauses (i) and (iv) of the said Explanation
have been amended.
Section Erstwhile Amended provision (from 1.6.2015)
provision
(up to 31.5.2015)
Clause (i) of A proceeding for Where a notice under section 148 is issued
Explanation assessment or for any assessment year, a proceeding under
to section reassessment or section 147 shall be deemed to have
245A(b) recomputation commenced on the date of issue of such
under section notice and the assessee can approach the
147 is deemed to Settlement Commission for other assessment
have commenced years as well, even if notice under section
from the date of 148 for such other assessment years has not
issue of notice been issued but could have been issued on
under section that date.
148. However, a return of income for such other
assessment years should have been
furnished under section 139 or in response to
notice under section 142.
Need for amendment - Generally, the issue relating to escapement of income
arises in relation to more than one assessment year. In such a case, the assessee
becomes eligible to approach the Settlement Commission only for the assessment
year for which notice under section 148 has been issued. In respect of other
147

assessment years where there is escapement of income, the assessee would
become eligible to approach the Settlement Commission only after notice under
section 148 has been issued for all such assessment years.
In order to obviate the need for issue of notice for all such assessment years for
commencement of proceeding, clause (i) of the said Explanation has been
amended.
Section Erstwhile Amended provision (from 1.6.2015)
provision
(up to 31.5.2015)
Clause (iv) A proceeding for A proceeding for assessment for any
of assessment for assessment year, other than the
Explanation any assessment proceedings of assessment or
to section year, other than reassessment referred to in clause (i) or
245A(b) the proceedings of clause (iii) or clause (iiia), shall be deemed
assessment or to have commenced from –
reassessment the date on which the return of income
referred to in for that assessment year is furnished
clause (i) or under section 139 or in response to a
clause (iii) or notice served under section 142
clause (iiia), shall
be deemed to and
have commenced concluded on -
from –
In a case In a case where no
1st day of the where assessment is made
assessment year assessment
and is made
concluded on - the date on on the expiry of two
which the years from the end of
the date on
assessment the relevant assessment
which the
is made year
assessment is
made.
(b) Rationalisation of provisions relating to Settlement Commission

Section Erstwhile Amended provision (from 1.6.2015) Need for
provision amendment
(up to
31.5.2015)
245D(6B) The Settlement The Settlement Commission may, with In order to
Commission a view to rectifying any mistake provide for
may, at any time apparent from the record, amend any additional time
148

within a period order passed by it under section where the
of six months 245D(4), at any time within a period of assessee or
from the date of six months from the end of month in the
the order, with a which - Commissioner
view to files an
(a) the order was passed; or
rectifying any application for
mistake (b) an application for rectification rectification
apparent from has been made by the Principal towards the
the record, Commissioner or Commissioner end of the
amend any or the applicant, as the case may limitation
order passed by be. period, section
it under section 245D(6B) has
245D(4) However, no application for rectification
can be made by the Principal been
Commissioner or the Commissioner or amended.
the applicant after the expiry of 6
months from the end of the month in
which an order under section 245D(4) is
passed by the Settlement Commission.
245H(1) The Settlement Section 245H(1) has been amended This
Commission to provide that the Settlement requirement
may, if it is Commission while granting immunity has been
satisfied that to any person from prosecution shall added since
any person who record the reasons in writing in the immunity is
made the order passed by it. provided from
application for prosecution
settlement by the
under section Settlement
245C has co- Commission.
operated with
the Settlement
Commission in
the proceedings
before it and
has made a full
and true
disclosure of his
income and the
manner in which
such income
has been
derived, grant to
such person,
subject to such
149

conditions as it
may think fit to
impose,
immunity from
prosecution.
Section Section New clause (iiia) has been inserted in This amend-
245HA(1) 245HA(1) section 245HA(1) to provide that ment has
provides for where in respect of any application been made
abatement of made under section 245C, an order with a view to
proceedings in under section 245D(4) has been provide for the
certain passed without providing the terms date of
situations. of settlement, the proceedings abatement
before the Settlement Commission where the
shall abate on the day on which Settlement
such order under section 245D(4) Commission
was passed. has passed
the order
without
providing the
terms of
settlement.
245K Section 245K(2) Any person related to the person who The restriction
provides that has already approached the of not
where an Settlement Commission once, also approaching
application of a cannot approach the Settlement the Settlement
person has Commission subsequently. Commission
been allowed to The related person with respect to a again was so
be proceeded person means,- far applicable
with under Person Related person only to the
section 245D(1), concerned
Individual  any company in which
then, such person.
such person holds Therefore, an
person shall not more than 50% of the
be subsequently individual who
shares or voting rights has approach-
entitled to make at any time; or
an application ed the
 any firm or AOP or Settlement
before BOI in which such Commission
Settlement person is entitled to once can
Commission. more than 50% of the subsequently
Section 245K(1) profits at any time; or approach
provides certain
 any HUF in which again through
situations when an entity
such person is a
the person shall karta controlled by
not be entitled him. This
to apply for
150

settlement Company  any individual who defeats the
before held more than 50% purpose of
Settlement of the shares or restricting the
Commission voting rights in such opportunity of
company at any time approaching
before the date of the Settlement
application before the Commission
Settlement only once for
Commission by such any person.
person Therefore,
Firm or  any individual who section 245K
AOP or was entitled to more has been
BOI than 50% of the amended to
profits in such firm, apply the
AOP or BOI, at any restriction to
time before the date the related
of application before persons as
the Settlement well.
Commission by such
person
HUF  The karta of that
HUF
132B The asset The asset seized under section 132 or
seized under requisitioned under section 132A may
section 132 or also be adjusted against the amount
requisitioned of liability arising on an application
under section made before the Settlement
132A may be Commission under section 245C(1).
adjusted against
the amount of
existing liability
under the
Income-tax Act,
the Wealth-tax
Act, 1957 etc.
and the amount
of liability
determined on
completion of
assessment.
151

23
ADVANCE RULINGS
Qualification for appointment as a law member of AAR [Section 245-O(3)]

Effective from: 1st April, 2015
(i) As per section 245-O(2), the Authority for Advance Rulings shall consist of a Chairman and
such number of Vice-chairmen, revenue Members and law Members as the Central
Government, may, by notification, appoint.
(ii) Section 245-O(3)(d) provides that a person shall be qualified for appointment as a law Member
from the Indian Legal Service, who is an Additional Secretary to the Government of India.
(iii) This section has been amended to provide that a person shall be qualified for appointment as
a law Member from the Indian Legal Service, who is, or is qualified to be, an Additional
Secretary to the Government of India.
(1) Notification of class of persons, for determination of tax liability by Authority for
Advance Ruling (AAR) in relation to the tax liability of a resident applicant falling
within such class [Notification No. 73/2014, dated 28-11-2014]
Sub-clause (iia) has been inserted in Section 245N(a) defining “advance ruling” by the
Finance (No.2) Act, 2014, to include a determination by the AAR in relation to the tax
liability of a resident applicant, arising out of a transaction which has been undertaken or
is proposed to be undertaken by such applicant. Further, sub-clause (iia) has been
inserted in section 245N(b) defining an “applicant” to include thereunder, any person who
is a resident referred to section 245N(a)(iia) falling within such class or category of
persons as the Central Government may specify by notification.
Accordingly, the Central Government has, vide this notification, in exercise of the powers
conferred by section 245N(b)(iia), specified such class of persons, so that a resident
falling within such class of persons would qualify as an “applicant” under section
245N(b). Accordingly, a resident, in relation to his tax liability arising out of one or more
transactions valuing ` 100 crore or more in total which has been undertaken or
proposed to be undertaken, would be an “applicant” for the purposes of Chapter XIX-B of
the Income-tax Act, 1961.
152

(2) Notification prescribing the application form and fees payable along with the
application form for obtaining an advance ruling [Notification No.74/2014, dated 28-11-
2014]
Section 245Q(1), provides that an applicant desirous of obtaining an advance ruling may
make an application in the prescribed form and in the prescribed manner. As per section
245Q(2), the application shall be accompanied by a fee of ` 10,000 or such fee as may be
prescribed, whichever is higher.
Rule 44E of the Income-tax Rules, 1962 prescribes the form of application for obtaining
an advance ruling.
The Finance (No. 2) Act, 2014 has inserted sub-clause (iia) in section 245N(a) to provide for
determination of the tax liability of a resident applicant by the AAR in relation to the
transaction which has been undertaken or is proposed to be undertaken by such applicant.
Accordingly, in exercise of the powers conferred by section 245Q, read with section 295
the CBDT has vide this notification, amended Rule 44E to prescribe the form for a
resident applicant and fees payable along with the application.
Rule Particulars Amendment
44E(1) Application An application for obtaining an advance ruling under section
Form 245Q(1) shall be made in quadruplicate in the prescribed form
as indicated hereunder, and verified in the manner indicated
therein–
Category of applicant Form
No.
Non-resident applicant referred to section 34C
245N(a)(i)
Resident applicant referred to in section 34D
245N(a)(ii) seeking advance ruling in relation to a
transaction undertaken or proposed to be
undertaken by him with a non-resident; and
Resident applicant referred to in section 34DA
245N(a)(iia) falling within any such class or
category of person as notified by the Central
Government in exercise of the powers
conferred by section 245N(b)(iia)
Resident falling within any such class or category of 34E
person as notified by the Central Government in
exercise of the powers conferred by section
245N(b)(iii)
An applicant referred to in section 245N(b)(iiia) 34EA
153

44E(3) Proof of Every application under Rule 44E shall be accompanied by the
payment of proof of payment of fees.
fees
44E(4) Fees The fee payable along with application for advance ruling is as
payable under-
along with
Applicant Amount of one or more Fee
the transaction, entered into or (` )
application
proposed to be undertaken,
for
in respect of which Ruling
advance is sought (` )
ruling
Does not exceed ` 100 crore 2 lakhs
Applicant
Exceeds ` 100 crore but 5 lakhs
referred in
does not exceed ` 300 crore
section
245N(b)(i)/(ii)/(iia) Exceeds ` 300 crore 10
lakhs
Other Applicants In all cases 10,000
154

24
APPEALS & REVISION
(a) Orders appealable before the Appellate Tribunal to include orders passed by the
prescribed authority under section 10(23C)(vi) & (via) [Section 253(1)]
(i) Section 10(23C)(vi) exempts any income received by any person on behalf of any
university or other educational institution existing solely for educational purposes and
not for purpose of profit and which may be approved by the prescribed authority.
(ii) Likewise, section 10(23C)(via) exempts any income received by a person on behalf
of any hospital or other institution for treatment of persons suffering from illness or
mental defectiveness or treatment of persons during convalescence or persons
requiring medical attention or rehabilitation, existing solely for philanthropic
purposes and not for the purpose of profit, if such hospital or institution is approved
by the prescribed authority.
(iii) Section 253(1) enlists the orders that are appealable before the Appellate Tribunal.
(iv) So far, an order passed by the prescribed authority refusing approval under section
10(23C)(vi)/(via) was not included amongst the list of orders that are appealable
before the Appellate Tribunal.
(v) Section 253(1) has now been amended to provide that an assessee aggrieved by
the order passed by the prescribed authority refusing approval under section
10(23C)(vi)/(via) may appeal to the Appellate Tribunal against such order.
(vi) This amendment has been effected due to the following reasons:
(1) The decision of the prescribed authority to refuse to grant approval may have
considerable implications for the educational or medical institution under the
Income-tax Act, 1961; and
(2) An order passed under section 12AA refusing to register a charitable trust is a
comparable provision under the Income-tax Act, 1961, against which an appeal
can be made to the Appellate Tribunal.
155

(b) Raising the total income limit of the cases that may be decided by single member
bench of Appellate Tribunal [Section 255(3)]
(i) Section 255(1) provides that the powers and functions of the Appellate Tribunal may
be exercised and discharged by Benches constituted by the President of the
Appellate Tribunal among the members thereof.
(ii) As per section 255(2), a Bench should normally consist of one judicial member and
one accountant member.
(iii) However, section 255(3) provides for constitution of a single member bench and a
Special Bench.
(iv) Section 255(3) provides that a single member bench may dispose of any case which
pertains to an assessee whose total income as computed by the Assessing Officer
in the said case does not exceed ` 5 lakh.
(v) The limit for a single member bench was last revised in 1998, when it was raised
from ` 1 lakh to ` 5 lakh.
(vi) Now, after a period of seventeen years, the limit has been revisited and
consequently, section 255(3) has been amended to provide that a bench comprising
of a single member may dispose of a case where the total income as computed by
the Assessing Officer in the said case does not exceed ` 15 lakh.
(c) Circumstances when an order passed by the Assessing Officer shall be deemed to
be erroneous in so far as it is prejudicial to the interests of the revenue [Section
263(1)]
(i) Under section 263(1), if the Principal Commissioner or Commissioner considers that
any order passed by the Assessing Officer is erroneous in so far as it is prejudicial
to the interests of the Revenue, he may, after giving the assessee an opportunity of
being heard and after making an enquiry, pass an order modifying the assessment
made by the Assessing Officer or cancelling the assessment and directing fresh
assessment.
(ii) The expression “erroneous in so far as it is prejudicial to the interests of the
Revenue” has been subject to varying interpretations.
(iii) Hence, in order to ensure clarity, Explanation 2 has been inserted with effect from
1st June, 2015 to provide that an order passed by the Assessing Officer shall be
deemed to be erroneous in so far as it is prejudicial to the interests of the Revenue,
if, in the opinion of the Principal Commissioner or Commissioner,—
156

the order has not been
the order is passed
passed in accordance
without making
with any decision,
inquiries or
prejudicial to the
verification which,
assessee, of the High
should have been
Court or Supreme
made
Court
the order has not

been made in
accordance with any the order is passed
order, direction or allowing any relief
instruction issued by without inquiring into
the Board under the claim
section 119
157

25
PENALTIES
Manner of determination of “amount of tax sought to be evaded” for levy of penalty for
concealment of income under section 271(1)(iii)
(i) Under section 271(1)(c), penalty for concealment of income or furnishing inaccurate
particulars of income is levied on the “amount of tax sought to be evaded”, which has
been defined, inter alia, as the difference between the tax due on the income assessed
and the tax which would have been chargeable had such total income been reduced by
the amount of concealed income.
(ii) The computation of “amount of tax sought to be evaded” poses difficulty where the
concealment of income or furnishing inaccurate particulars of income occurs in the
computation of income under provisions of section 115JB or 115JC and also under the
provisions other than the provisions of section 115JB or 115JC.
(iii) In this regard, some courts have ruled that penalty under section 271(1)(c) cannot be
levied in cases where the concealment of income occurs under the income computed
under general provisions and the tax is paid under the provisions of section 115JB or
115JC. However, this does not reflect the true legislative intent.
(iv) Credit for tax paid under the provisions of section 115JB or 115JC in excess of the tax
liability arising under general provisions is available for set off against future tax liability. If
total income and the tax liability thereon under general provisions are understated, it would
result in increased amount of such credit becoming available to the assessee for set off in
future years. Therefore, if there has been concealment of income under the general
provisions, penalty under section 271(1)(c) should be leviable even if the tax liability of the
assessee for the year has been determined under provisions of section 115JB or 115JC.
(v) Therefore, Explanation 4 has been inserted in section 271(1) to reflect the true legislative
intent.
158

Tax sought too
be evaded
under the
general
provisions
Amoount of
tax sought
s
too be
evaaded
Tax sought too
be evaded u/ss
115JB / 115JCC
(vi) The amount of tax soought to be evvaded = (A-B

B) + (C-D), whhere
• amount
a of taax on total income asseessed as per the generaal
A p
provisions (i.e., provisions other
o than section 115JB annd 115JC)
• amount
a of tax that would haave been charrgeable had thhe total income
a
assessed as per
p the generaal provisions been
b reduced by the amounnt
B o income in respect of whhich particulars have beenn concealed oor
of
inaccurate parrticulars have been furnisheed;
• amount
a of tax on the total inncome assesssed as per secction 115JB orr
C s
section 115JCC
• amount
a of tax that would haave been charrgeable had thhe total incomee
a
assessed as per the proovisions contaained in secttion 115JB oor
s
section 115JCC been reduceed by the amoount of incomee in respect oof
D w
which particulars have beeen concealedd or inaccuraate particularss
h
have been furnnished
Howeever, where the amount of

me in respect of whiich
incom
particculars have beeen concealed or
inaccurate particulars have beeen Ignore the portion (C-DD) in
furnisshed on any a issue is the formulla, where the
considered both under section provisions of
o section 1115JB
115JB B/115JC and under general or section 115JC are not
provissions, such amount shall not
n applicable.
be reduced
r from
m total incom me
assesssed while determining
d t
the
amouunt under item D
159

(vii) In a case where the amount of income in respect of which particulars have been
concealed or inaccurate particulars have been furnished has the effect of reducing the
loss declared in the return or converting that loss into income,
Amount of tax sought to be evaded =
The amount of tax that would have been chargeable on the income in
respect of which particulars have been concealed or inaccurate (+) (C - D)
particulars have been furnished had such income been the total income
(viii) where in any case to which Explanation 3 applies,

Amount of tax sought to be evaded =
Advance tax
Tax on total TDS
(-)
income assessed TCS
Self-assessment tax paid before issue of notice u/s 148
Note – As per Explanation 3 to section 271(1), failure to furnish return of income, without
reasonable cause, required to be furnished under section 139 in respect of any assessment
year within the period specified in section 153(1), would be deemed as concealment of
particulars of income in respect of such assessment year where –
(i) no notice has been issued under section 142(1)(i) or section 148 until the expiry of the
period specified in section 153(1); and
(ii) the Assessing Officer or Commissioner (Appeals) is satisfied that in respect of such
assessment year, such person has taxable income.
The person would be deemed to have concealed the particulars of income in respect of such
assessment year, notwithstanding that such person furnishes a return of his income at any
time after the expiry of the period specified in section 153(1) in pursuance of a notice under
section 148.
160

27
MISCELLANEOUS PROVISIONS
(a) Acceptance of “Specified sum” and repayment of “Specified advance” in relation

to immovable property transactions to be effected through specified modes
[Section 269SS & 269T]
Related amendment in sections: 271D & 271E
(i) Section 269SS provides that no person shall take from any person any loan or deposit
otherwise than by an account payee cheque or account payee bank draft or use of
electronic clearing system through a bank account if, inter alia, the amount of such
loan or deposit or the aggregate amount of loan or deposit is ` 20,000 or more.
(ii) Likewise, under section 269T, any loan or deposit shall not be repaid, otherwise
than by an account payee cheque or account payee bank draft or use of electronic
clearing system through a bank account, by the persons specified in the section if,
inter alia, the amount of loan or deposit together with interest, if any, payable
thereon is ` 20,000 or more.
(iii) In order to curb generation of black money by way of dealings in cash in immovable
property transactions, section 269SS has been amended to also provide that no
person shall accept from any person any specified sum otherwise than by an account
payee cheque or account payee bank draft or by use of electronic clearing system
through a bank account, if the amount of such specified sum is ` 20,000 or more or
the aggregate amount of loan, deposit and specified sum is ` 20,000 or more.
(iv) Section 269T has also been amended so as to provide that no person shall repay
any specified advance received by it, otherwise than by an account payee cheque
or account payee bank draft or by electronic clearing system through a bank
account, if the amount of specified advance, together with interest, if any, payable
thereon or the aggregate amount of the specified advances received by such person
either in his own name or jointly with any other person on the date of such
repayment together with interest, if any, payable on such specified advances is
` 20,000 or more.
161

(v) Meaning of “specified sum” and “specified advance”:
“Specified sum” for the purpose of “Specified advance” for the
section 269SS purpose of section 269T
Any sum of money receivable, Any sum of money in the nature of
whether as advance or otherwise, in advance, by whatever name called, in
relation to transfer of an immovable relation to transfer of an immovable
property, whether or not the transfer property, whether or not the transfer
takes place. takes place.
(vi) Consequently, if a person takes or accepts a specified sum in contravention of the

provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum
equal to the amount of specified sum so taken or accepted under section 271D.
(vii) Likewise, if a person repays any specified advance referred to in section 269T,
otherwise than in accordance with the provisions of that section, penalty under
section 271E equivalent to the amount of specified advance so repaid would be
attracted.
(viii) Penalty under section 271D and 271E is imposable by the Joint Commissioner.
(b) CBDT empowered to notify rules for giving foreign tax credit [Section 295(2)]
(i) Under section 91(1), relief is provided in respect of income-tax on the income which is
taxed in India as well as in the country with which there is no Double Taxation
Avoidance Agreement (DTAA). A person who is resident of India is entitled to a
deduction from the Indian income-tax payable by him, of a sum calculated on such
doubly taxed income, at the Indian rate of tax or the rate of tax of said country,
whichever is lower.
(ii) In respect of countries with which India has entered into a double taxation avoidance
agreement under section 90 or section 90A, relief in respect of income-tax on doubly
taxed income is available under the DTAAs with such countries.
(iii) There is, however, no provision under the Income-tax Act, 1961 providing for the
manner for granting credit of taxes paid in any country outside India.
(iv) Under section 295(1), the CBDT is, subject to the control of the Central Government,
empowered to make rules by notification in the Gazette of India, for carrying out the
purposes of the Income-tax Act, 1961. Further, section 295(2) enlists the specific matters
in respect of which the CBDT may make rules.
(v) Clause (ha) has been inserted in section 295(2) so as to provide that CBDT may make
rules to provide the procedure for granting relief or deduction, as the case may be, of
any income-tax paid in any country or specified territory outside India, under section 90,
or under section 90A, or under section 91, against the income-tax payable under the
Income-tax Act, 1961.
162

(c) Definition of “accountant” amended to exclude specified related persons [Section 288]
(i) Under the Income-tax Act, 1961, audit reports and certificates issued by an ‘accountant’
are required to be furnished under section 44AB, section 92E, section 115JB, etc. to
ensure correct reporting/computation of taxable income by the taxpayers.
(ii) The term ‘accountant’ has been defined in the Explanation below section 288(2) to
mean a chartered accountant within the meaning of Chartered Accountants Act, 1949
[including, in relation to any State, any person eligible to be appointed to act as auditor
of the companies registered under that State by virtue of section 226(2) of the
Companies Act, 1956].
(iii) The Comptroller and Auditor General of India (C&AG) published its report on
“Appreciation of Third Party (Chartered Accountant) Certification in Assessment
Proceedings”. In para 3.9 of the Report, it has been stated that the Chartered
Accountant Act, 1949 debars an auditor to express his opinion on the financial
statement of any business or any enterprise in which he, his relative, his firm or partner
in the firm, has substantial interest.
(iv) The purpose of audit/certification under the Income-tax Act, 1961 is to protect the
interests of revenue. Meaningful discharge of an auditor’s function of protecting the
interests of revenue would not be possible if the auditor is not independent. In this
regard, it may be noted that in order to ensure the independence of auditor, section
141(3) of the Companies Act, 2013 contains a list of certain persons who are not eligible
for appointment as auditor.
(v) Therefore, in order to incorporate similar disqualification under the Income-tax Act,
1961, Explanation below section 288(2) has been substituted to provide that an
accountant means a chartered accountant as defined in section 2(1)(b) of the Chartered
Accountants Act, 1949 who holds a valid certificate of practice under section 6(1) of that
Act. However, the following persons are not included in the definition of accountant -
Assessee Person
(i) Company A person who is not eligible for appointment as an auditor of
the said company under section 141(3) of the Companies
Act, 2013, namely,
(a) A body corporate other than a limited liability
partnership registered under the Limited Liability
Partnership Act, 2008;
(b) an officer or employee of the company
(c) a person who is a partner, or who is in the
employment, of an officer or employee of the company
(d) a person who, or his relative or partner –
163

(i) is holding any security of or interest in the
company or its subsidiary, or of its holding or
associate company or a subsidiary of such
holding company2
(ii) is indebted to the company, or its subsidiary, or
its holding or associate company or a subsidiary
of such holding company, in excess of ` 5 lakh.
(iii) has given a guarantee or provided any security
in connection with the indebtedness of any third
person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of
such holding company, in excess of ` 1 lakh.
(e) a person or a firm who, whether directly or indirectly,
has business relationship with the company, or its
subsidiary, or its holding or associate company or
subsidiary of such holding company or associate
company of such nature as may be prescribed.
(f) a person whose relative is a director or is in the
employment of the company as a director or key
managerial personnel
(g) a person who is in full time employment elsewhere or
a person or a partner of a firm holding appointment as
its auditor, if such persons or partner is at the date of
such appointment or reappointment holding
appointment as auditor of more than 20 companies
(h) a person who has been convicted by a court of an
offence involving fraud and a period of 10 years has
not elapsed from the date of such conviction
(i) any person whose subsidiary or associate company or
any other form of entity, is engaged as on the date of
appointment in consulting and specialised services as
provided in section 144 of the Companies Act, 2013.
(ii) Individual The assessee himself or his relative
(iii) Firm Partner of the firm or his relative
(iv) AOP Member of the AOP or his relative
(v) HUF Member of the HUF or his relative
2 However, the relative may hold security or interest in the company of face value not exceeding
` 1,000 or such sum as may be prescribed.
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(vi) Trust or (1) The author of the trust or founder of the institution or
Institution his relative
(2) Any person who has made a substantial contribution to
the trust or institution, i.e., any person whose total
contribution upto the end of the relevant previous year
exceeds ` 50,000, or his relative
(3) Where such author, founder or person is a HUF, a
member of the HUF or relative of such member
(4) Any trustee of the trust or manager of the institution, or
relative of the trustee or manager
(vii) Any other The person who is competent to verify the return under
person section 139 in accordance with the provisions of section 140
or his relative.
(viii) Any (1) An officer or employee of the assessee
assessee (2) An individual who is a partner, or who is in the
referred to in employment, of an officer or employee of the
(ii) to (vii) assessee.
(3) An individual who, or his relative or partner -
(I) is holding any security of, or interest in, the
assessee3.
(II) is indebted to the assessee4.
(III) has given a guarantee or provided any security
in connection with the indebtedness of any third
person to the assessee5.
(4) a person who, whether directly or indirectly, has
business relationship with the assessee of such nature
as may be prescribed.
(5) a person who has been convicted by a court of an
offence involving fraud and a period of ten years has
not elapsed from the date of such conviction.
(vi) However, the ineligibility for carrying out any audit or furnishing of any report/certificate
in respect of an assessee shall not make an accountant ineligible for attending income-
tax proceeding referred to in section 288(1) as authorised representative on behalf of
that assessee.
3 However, the relative may hold security or interest in the assessee of the face value not exceeding
` 1 lakh
4 However, the relative may be indebted to the assessee for an amount not exceeding ` 1 lakh
5 However, the relative may give guarantee or provide any security in connection with the indebtedness
of any third person to the assessee for an amount not exceeding ` 1 lakh
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(vii) Further, the person convicted by a court of an offence involving fraud shall not be
eligible to act as authorised representative for a period of 10 years from the date of such
conviction.
(viii) An Explanation has been inserted after section 288(7) to define the term “relative” for
the purpose of section 288.
(a)
Spouse
(g) (b)
Any lineal descendent of Brother/Sister
a brother or sister of the
individual or his spouse
Relative, in
relation to an
(f)
individual (c)
Spouse of the persons
Brother/Sister of
referred to in
spouse
(b)/(c)/(d)/(e)
(e) (d)
Any lineal ascendent/ Any lineal
descendent of the ascendent/
spouse descendent
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28
DEDUCTION, COLLECTION & RECOVERY OF TAX
(a) Person responsible for paying income chargeable under the head “Salaries” to
obtain proof or evidence or particulars of prescribed deductions/ exemptions/set-
off of losses claimed by the assessee [Section 192(2D)]
(i) As per section 192, the person responsible for paying (Drawing and Disbursing
Officer) income chargeable under the head “Salaries” can allow certain deductions,
exemptions or allowances or set-off of certain loss as per the provisions of the Act
while estimating the income of the assessee or computing the amount of the tax
deductible thereunder.
(ii) Since the proof for certain deductions, exemptions, set-off of losses claimed by the
employee such as rent receipt for claiming exemption of HRA, evidence of interest
payments for claiming loss from self-occupied house property etc. is generally not
available with the Drawing and Disbursing Officer, he has to depend upon the
evidence/particulars furnished, if any, by the employees in support of their claim of
deductions, exemptions, etc.
(iii) Since the Income-tax Act, 1961 does not contain specific provisions regarding
nature of evidence/documents to be obtained by the Drawing and Disbursing
Officer, their approach in this regard lacks uniformity.
(iv) For ensuring clarity and uniformity, sub-section (2D) has been inserted in section
192 to cast responsibility on the person responsible for paying any income
chargeable under the head “Salaries” to obtain from the assessee, the evidence or
proof or particulars of prescribed claims (including claim for set-off of loss) under
the provisions of the Act in the prescribed form and manner, for the purposes of –
(1) estimating income of the assessee; or
(2) computing tax deductible under section 192(1).
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(b) Tax to be deducted@10% on premature taxable withdrawal from employees provident
fund [Section 192A]
Related amendment in section: 197A
(i) Under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF &
MP Act, 1952), certain specified employers are required to comply with the Employees
Provident Fund Scheme, 1952 (EPFS). However, these employers are also permitted
to establish and manage their own private provident fund (PF) scheme subject to
fulfillment of certain conditions.
(ii) The provident funds established under a scheme framed under EPF & MP Act, 1952 or
Provident Fund exempted under section 17 of the said Act and recognised under the
Income-tax Act, 1961 are termed as Recognised Provident fund (RPF) under the Act.
(iii) Part A of the Fourth Schedule to the Income-tax Act, 1961 contains the provisions
relating to RPFs. Under the existing provisions of Rule 8 of Part A of the Fourth
Schedule, the withdrawal of accumulated balance by an employee from the RPF is
exempt from taxation.
(iv) For the purpose of discouraging pre-mature withdrawal and promoting long term
savings, if the employee makes withdrawal before continuous service of five years
(other than the cases of termination due to ill health, contraction or discontinuance of
business, cessation of employment etc.) and does not opt for transfer of accumulated
balance to new employer, the withdrawal would be subject to tax.
(v) Rule 9 of Part A of the Fourth Schedule provides the manner of computing the tax
liability of the employee in respect of such pre-mature withdrawal. In order to ensure
collection of tax in respect of such pre-mature withdrawals, Rule 10 of Part A of the
Fourth Schedule casts responsibility on the trustees of the RPF to deduct tax as
computed in Rule 9 at the time of payment.
(vi) Rule 9 provides that the tax on withdrawn amount is required to be calculated by re-
computing the tax liability of the years for which the contribution to RPF has been made
by treating the same as contribution to unrecognized provident fund. The trustees of
private provident fund schemes, are generally a part of the employer group and hence,
have access to or can easily obtain the information regarding taxability of the employee
making pre-mature withdrawal for the purposes of computation of the amount of tax
liability under Rule 9. However, it may not always be possible for the trustees of EPFS
to get the information regarding taxability of the employee such as year-wise amount of
taxable income and tax payable for the purposes of computation of the amount of tax
liability under Rule 9.
(vii) New section 192A has, therefore, been inserted to provide for deduction of tax@10% on
premature taxable withdrawal from employees provident fund scheme. Accordingly, in a
case where the accumulated balance due to an employee participating in a recognized
provident fund is includible in his total income owing to the provisions of Rule 8 of Part A
168

of the Fourth Schedule not being applicable, the trustees of the Employees Provident
Fund Scheme, 1952 or any person authorised under the scheme to make payment of
accumulated balance due to employees are required to deduct income-tax@10% at the
time of payment of accumulated balance due to the employee.
(viii) Tax deduction at source under this section has to be made only if the amount of such
payment or aggregate amount of such payment of the payee is ` 30,000 or more.
(ix) Further, any person entitled to receive any amount on which tax is deductible under this
section has to furnish his PAN to the person responsible for deducting such tax. In case
he fails to do so, tax would be deductible at the maximum marginal rate.
(x) In order to reduce the compliance burden of these employees, the facility of filing self-
declaration for non-deduction of tax under section 197A shall be extended to the
employees receiving pre-mature withdrawal i.e., an employee can give a declaration in
Form No. 15G to the effect that his total income including taxable pre-mature withdrawal
from employees provident fund scheme does not exceed the maximum amount not
chargeable to tax. When the employee furnishes such declaration, no tax will be
deducted by the trustee of Employees Provident Fund Scheme while making the
payment to such employee.
(xi) Likewise, facility of filing self-declaration in Form No. 15H for non-deduction of tax under
section 197A has also been extended to the employees of the age of 60 years or more
receiving pre-mature withdrawal.
(c) Rationalisation of the provisions of section 194A
Amendments in
section 194A
w.e.f. 1.6.2015
Co-operative Tax deduction from Threshold limit for

banks to deduct interest on non-deduction of tax
tax at source on TDS on interest on
recurring deposits compensation to be reckoned with
interest on time awarded by the
deposits reference to the
Motor Accident aggregate interest
credited/paid to its
Claims Tribunal to
members
be made at the time credited or paid by
of payment, where all branches of a
interest or bank/co-operative
aggregate interest bank/public
payment > company which has
`50,000 adopted CBS
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(1) Co-operative banks to deduct tax at source on interest on time deposits credited or
paid to its members [Section 194A]
(i) Section 194A(1) read with sections 194A(3)(i)(b) and 194A(3)(viia)(b) requires a co-
operative bank to deduct tax from interest payment on time deposits, if the amount of
such payment exceeds specified threshold of ` 10,000.
(ii) However, since section 194A(3)(v) exempts income credited or paid by a co-operative
society to a member thereof, there is a view that co-operative banks are also entitled to
exemption by making their depositors as members of different categories. However,
courts have taken a view that a specific provision of tax deduction provided under
section 194A(3)(i)(b) and 194A(3)(viia)(b) for co-operative banks override the general
exemption provided to all co-operative societies for non-deduction of tax from interest
payment to members under section 194A(3)(v).
(iii) In order to clarify the true intent of law, section 194A(3)(v) has been amended to
specifically provide that with effect from 1st June, 2015, the exemption thereunder from
deduction of tax at source from payment of interest to members by a co-operative
society shall not apply to the payment of interest by the co-operative banks to its
members.
(iv) However, the exemption available under section 194A(3)(viia)(a) to primary agricultural
credit society or a primary credit society or a co-operative land mortgage bank or a co-
operative land development bank from deduction of tax in respect of interest credited or
paid on deposits shall continue to apply. Therefore, these co-operative credit
societies/banks would not be required to deduct tax on interest credited or paid to
depositors consequent to amendment of section 194A(3)(v).
(v) Further, the exemption under section 194A(3)(v) from deduction of tax from interest paid
by a co-operative society to another co-operative society shall continue to apply to co-
operative banks and, therefore, a co-operative bank shall not be required to deduct tax
from the payment of interest on time deposit to a depositor, being a co-operative
society.
(2) Interest on recurring deposits to be subject to tax deduction at source under section
194A
(i) Under section 194A(1) read with section 194A(3)(i), tax is required to be deducted on
payment of interest (other than interest on securities) above a specified threshold, i.e., `
10,000 for interest payment by banks, co-operative society engaged in banking
business (co-operative bank) and post office and ` 5,000 for payment of interest by
other persons.
(ii) Section 194A providing for deduction of tax from payment of interest by banking
company or co-operative bank applies to the interest payment on time deposits made on
or after 1st July, 1995.
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(iii) The definition of “time deposits” under section 194A excludes “recurring deposit” from its
scope. Therefore, payment of interest on recurring deposits by banking company or co-
operative bank was not subject to TDS.
(iv) Since recurring deposit is also made for a fixed tenure and is, therefore, similar to
time deposit, the definition of ‘time deposits’ in section 194A has been amended to
include “recurring deposits” within its scope for the purposes of deduction of tax
under section 194A.
(v) It may be noted that the existing threshold limit of ` 10,000 for non-deduction of tax shall
also be applicable in case of interest payment on recurring deposits.
(3) Threshold limit to be reckoned with reference to the aggregate interest credited or paid
by all branches of a banking company/co-operative bank/public company which has
adopted core banking solutions [Section 194A(3)]
(i) As per the proviso to section 194A(3)(i), in the case of income credited or paid in respect
of time deposits with a banking company or a co-operative bank or a public company with
the main object of providing long-term finance for construction or purchase of houses in
India for residential purposes, the threshold limit for deduction of tax at source (i.e., `
10,000 or ` 5,000, as the case may be) shall be computed with reference to the income
credited or paid by a branch of the banking company or the co-operative society or the
public company.
(ii) A second proviso has been inserted in section 194A(3)(i) to provide that the threshold
limit will be reckoned with reference to the total interest credited or paid by the banking
company or the co-operative society or the public company, as the case may be, (and
not with reference to each branch), where such banking company or co-operative
society or public company has adopted core banking solutions.
(4) Tax deduction from interest on compensation awarded by the Motor Accidents Claims
Tribunal to be made at the time of payment, where the interest or aggregate interest
paid exceeds ` 50,000 [Section 194A]
(i) Section 194A requires deduction of tax at source from the income credited or paid by
way of interest on the compensation amount awarded by the Motor Accidents Claims
Tribunal where the amount of such income or, as the case may be, the aggregate
amount of such income credited or paid during a financial year exceeds ` 50,000.
(ii) Section 145A provides that interest received on compensation or enhanced
compensation shall be deemed to be the income of the year in which it is received.
Section 56(2)(viii) brings to tax such interest received under the head “Income from
other sources”, after allowing a deduction of 50% of such income under section 57(iv).
(iii) Section 194A, however, requires deduction of tax from interest on compensation, at the
time of credit of such income to the account of the payee or at the time of payment,
whichever is earlier. The requirement of deduction of tax on such interest on accrual
171

basis at the time of credit of such income, in case the same is earlier than the payment,
causes genuine hardship.
(iv) Consequently, section 194A has been amended to provide that deduction of tax
thereunder from interest on the compensation amount awarded by the Motor Accidents
Claims Tribunal shall be made only at the time of payment, and that too only if the
amount of interest payment or the aggregate amount of such interest payments during
the financial year exceeds ` 50,000.
(v) No tax is deductible at source on such income credited by way of interest on the
compensation amount awarded by the Motor Accidents Claims Tribunal.
Example
Examine the TDS implications under section 194A in the cases mentioned hereunder –
(i) On 1.10.2015, Mr. Harish made a six-month fixed deposit of ` 10 lakh@9% p.a. with
ABC Co-operative Bank. The fixed deposit matures on 31.3.2016.
(ii) On 1.6.2015, Mr. Ganesh made three nine month fixed deposits of ` 1 lakh each
carrying interest@9% with Dwarka Branch, Janakpuri Branch and Rohini Branches of
XYZ Bank, a bank which has adopted CBS. The fixed deposits mature on 28.2.2016.
(iii) On 1.4.2015, Mr. Rajesh started a 1 year recurring deposit of ` 20,000 per month@8%
p.a. with PQR Bank. The recurring deposit matures on 31.3.2016.
Answer
(i) ABC Co-operative Bank has to deduct tax at source@10% on the interest of ` 45,000
(9% × ` 10 lakh × ½) under section 194A. The tax deductible at source under section
194A from such interest is, therefore, ` 4,500.
(ii) XYZ Bank has to deduct tax at source@10% under section 194A, since the aggregate
interest on fixed deposit with the three branches of the bank is ` 20,250 [1,00,000 × 3 ×
9% × 9/12], which exceeds the threshold limit of ` 10,000. Since XYZ Bank has
adopted CBS, the aggregate interest credited/paid by all branches has to be considered.
Since the aggregate interest of ` 20,250 exceeds the threshold limit of ` 10,000, tax
has to be deducted@10% under section 194A.
(iii) Tax has to be deducted under section 194A by PQR Bank on the interest of ` 10,400
falling due on recurring deposit on 31.3.2015 to Mr. Rajesh, since –
(1) “recurring deposit” has been included in the definition of “time deposit”; and
(2) such interest exceeds the threshold limit of ` 10,000.
(d) Exemption from applicability of TDS provisions under section 194C to be available
only in respect of payments to transport operators owning ten or less goods carriages
at any time during the previous year, on furnishing of PAN [Section 194C(6)]
(i) Under section 194C, payment to contractors is subject to tax deduction at source (TDS)
at the rate of 1%, in case the payee is an individual or Hindu undivided family, and at the
172

rate of 2% in case of other payees, if such payment exceeds ` 30,000 or aggregate of
such payment in a financial year exceeds ` 75,000.
(ii) Prior to 1.10.2009, payment to an individual transporter who did not own more than two
goods carriages at any time during the previous year, was exempt from TDS under
section 194C. Thereafter, the Finance (No.2) Act, 2009 substituted section 194C, with
effect from 1.10.2009, which inter alia provided for non-deduction of tax from payments
made to the contractor during the course of plying, hiring and leasing goods carriage, if
the contractor furnishes his Permanent Account Number (PAN) to the payer.
(iii) Even though as per the Explanatory Memorandum explaining the provisions of Finance
(No.2) Bill, 2009, the intent of the amendment was to reduce the compliance burden on
the small transport operators, as defined in section 44AE by exempting them from TDS
under section 194C on furnishing of PAN, the language of section 194C(6) did not
convey the correct intention. Consequently, all transporters, irrespective of the number
of goods carriages owned by them, were claiming exemption from TDS under section
194C(6) by furnishing their PAN.
(iv) Accordingly, in order to convey the true intent of law, section 194C(6) has been
amended to clarify that the relaxation provided thereunder from the requirement to
deduct tax at source shall only be applicable to the payment in the nature of transport
charges (whether paid by a person engaged in the business of transport or otherwise)
made to a contractor, who fulfills the following three conditions cumulatively -
is engaged in the
business of plying,
hiring or leasing goods
carriages
owns ten or less has furnished a
goods carriages at any declaration to this
time during the effect along with his
previous year PAN
Exemption u/s
194C(6)
(e) Extension of eligible period of concessional tax rate@5% under section 194LD
(i) Under section 194LD, tax is required to be deducted at a concessional rate of 5% in
case of interest payable at any time during the period between 1st June, 2013 and
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31st May, 2015 to Foreign Institutional Investors (FIIs) and Qualified Foreign
Investors (QFIs) on their investments in Government securities and rupee
denominated bonds of an Indian company provided that the rate of interest does not
exceed the rate notified by the Central Government in this regard.
(ii) The Finance (No.2) Act, 2014 has extended the limitation date for availing benefit of
concessional rate of TDS@5% under section 194LC in respect of External
Commercial Borrowings (ECB) from 30th June, 2015 to 30th June, 2017.
(iii) In line with such extension, the benefit of concessional rate of TDS@5% under section
194LD has also been extended in respect of such interest payable to FIIs and QFIs up
to 30th June, 2017.
(f) Person responsible for paying any sum, whether or not chargeable to tax, to a non-
corporate non-resident or to a foreign company, to furnish the information relating
to payment of such sum in the prescribed form and prescribed manner [Section
195(6)]
Related amendment in section: 271-I & 273B
(i) Section 195(6) requires the person referred to in section 195(1) to furnish
prescribed information.
(ii) Section 195(1) casts responsibility on every person responsible for paying any
interest (other than interest referred to in sections 194LB or 194LC or 194LD) or any
sum chargeable to tax (not being in the nature of salary) to a non-corporate non-
resident or to a foreign company, to deduct tax at the rates in force.
(iii) The mechanism of obtaining information in respect of remittances is intended to
fulfill the objectives of -
(1) ensuring deduction of tax at the appropriate rate from taxable remittances; and
(2) identifying the remittances on which the tax was deductible but the payer has
failed to deduct the tax.
(iv) Obtaining of information only in respect of remittances which the remitter has
declared as taxable does not serve the objective of identifying the remittances on
which tax was deductible but was not deducted.
(v) Accordingly, sub-section (6) of section 195 has been substituted to provide that the
person responsible for paying any sum, whether or not chargeable to tax, to a non-
corporate non-resident or to a foreign company, shall be required to furnish the
information relating to payment of such sum in the prescribed form and prescribed
manner.
(vi) In order to ensure submission of accurate information in respect of remittance to
non-residents, new section 271-I has been inserted providing for penalty for failure
to furnish information under section 195(6) or for furnishing inaccurate information
thereunder. If a person who is required to furnish information under section 195(6),
174

fails to furnish such information or furnishes inaccurate information, the Assessing
Officer may direct such person to pay a penalty of ` 1 lakh.
(vii) Section 273B providing that no penalty shall be imposable on a person if it is proved
that there was reasonable cause for failure has been amended to include reference
to section 271-I. Accordingly, no penalty shall be imposed for non-furnishing of
information under section 195(6) or incorrect furnishing of information thereunder, if
the person proves that there was reasonable cause for doing so.
(g) Facilitating filing of Form 15G/15H for payments made under life insurance policy
[Section 197A]
(i) The Finance (No.2) Act, 2014 had inserted section 194DA, with effect from 1.10.2014,
to provide for deduction of tax at source@ 2% from payments made under life insurance
policy, which are not exempt under section 10(10D), and exceeds the threshold of ` 1
lakh thereunder.
(ii) In spite of providing a higher threshold of ` 1 lakh for deduction of tax under this section,
there may be cases where the tax payable on recipient’s total income, including the
payment made under life insurance, will be Nil.
(iii) Section 197A, inter alia, 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.
(iv) Section 197A has been amended for making the recipients of payments referred to in
section 194DA also eligible for filing self-declaration in Form No.15G/15H for non-
deduction of tax at source in accordance with the provisions of section 197A.
(h) Notified deductors or collectors not required to obtain and quote TAN [Section
203A]
(i) Section 203A requires every person deducting tax or collecting tax to obtain Tax
Deduction and Collection Account Number (TAN) and quote the same for reporting of
tax deduction/collection to the Income-tax Department.
(ii) An exception is provided under section 194-IA, requiring tax deduction for payment
above a specified threshold made for acquisition of immovable property (other than rural
agricultural land) from a resident transferor. As per the provisions of this section, the
deductor is not required to obtain and quote TAN and he is allowed to report the tax
deducted by quoting his Permanent Account Number (PAN).
(iii) In other cases, the requirement to obtain TAN creates a compliance burden for those
individuals and Hindu Undivided Family (HUFs) who are not liable for audit under
section 44AB.
(iv) The quoting of TAN for reporting of tax deducted at source is a matter of procedure.
The same purpose would be served by requiring mandatory quoting of PAN particularly
175

for the transactions which are likely to be one time transaction, for instance, a one-time
transaction of purchase of immovable property from non-resident by an individual or
HUF on which tax is deductible under section 195.
(v) Therefore, in order to alleviate the compliance burden of such deductors, section 203A
has been amended to provide that the requirement of obtaining and quoting of TAN
under section 203A shall not apply to such person, as may be notified by the Central
Government in this behalf.
(i) Enabling provision for computation of fee payable under section 234E at the time of
processing TDS/TCS statements [Section 200A & 206CB]
(i) Chapter XVII-B requires deduction of tax at source on certain specified payments at the
specified rate, if the payment exceeds the specified threshold. Likewise, Chapter XVII-
BB requires collection of tax at source on certain specified receipts at the specified
rates.
(ii) The person deducting tax is required to file a statement of tax deduction at source
containing the details of deduction of tax made during the prescribed period by the
prescribed due date. Similarly, the person collecting tax is also required to file a
statement of tax collection at source containing the details of collection of tax made
during the prescribed period by the prescribed due date.
(iii) Section 234E providing for levy of fee for late furnishing of TDS/TCS statement acts an
effective deterrent against delay in furnishing of such statements and has served as an
effective tool in ensuring timely submission of TDS/TCS statement by the deductor/
collector.
(iv) Section 200A providing for processing of TDS statements for determining the amount
payable or refundable to the deductor was inserted by the Finance (No.2) Act, 2009.
Thereafter, section 243E was inserted by the Finance Act, 2012. Section 234E,
therefore, came into the statute book three years after section 200A. Hence, section
200A did not provide for determination of fee payable under section 234E at the time of
processing of TDS statements.
(v) Section 200A has now been amended to enable computation of fee payable under
section 234E at the time of processing of TDS statement under section 200A.
(vi) New section 206CB inserted for facilitating processing of statements of TCS also
contains an enabling provision for computation of fee payable under section 234E at the
time of processing TCS statements.
(j) Enabling provision for filing of TCS correction statement [Section 206C(3B)]
(i) The proviso to section 200(3) enables the deductor to furnish TDS correction statement
and consequently, section 200A(1) permits processing of the TDS correction statement.
Since there is no parallel provision enabling a collector to file correction statement in
176

respect of TCS statement which has been furnished, sub-section (3B) has now been
inserted in section 206C so as to enable the collector to furnish TCS correction
statement.
(ii) Section 206C(3B) provides that the person collecting tax at source who is required
to prepare statements to be delivered to Director General of Income-tax(Systems)/
NSDL after paying the tax collected to the credit of the Central Government, may
also deliver to the said authority, a correction statement for rectification of any
mistake or to add, delete or update the information furnished in the statement so
delivered in the specified form and verified in the specified manner.
(k) Processing of statements of tax collected at source [Section 206CB]
(i) Enabling provision has been introduced for processing of TCS statements in the like
manner provided in section 200A for processing of TDS statements. Accordingly, new
section 206CB has been inserted for facilitating processing of statements of tax
collected at source.
(ii) The manner of processing a statement of tax collection at source or a correction
statement made by a person collecting any sum under section 206C, as provided in
section 206CB(1), is as follows -
(a) the sums collectible under Chapter XVII-BB shall be computed after making the
following adjustments, namely:—
(i) any arithmetical error in the statement;
(ii) an incorrect claim, apparent from any information in the statement (i.e., a
claim, on the basis of an entry, in the statement—
(1) of an item, which is inconsistent with another entry of the same or some
other item in such statement;
(2) in respect of rate of collection of tax at source, where such rate is not in
accordance with the provisions of the Income-tax Act, 1961).
(b) the interest, if any, shall be computed on the basis of the sums collectible as
computed in the statement;
(c) the fee, if any, shall be computed in accordance with the provisions of section
234E;
(d) the sum payable by, or the amount of refund due to, the collector, shall be
determined after adjustment of such interest and fee against any amount paid
under section 206C or section 234E and any amount paid otherwise by way of tax
or interest or fee;
(e) an intimation shall be prepared or generated and sent to the collector specifying
the sum determined to be payable by, or the amount of refund due to, him; and
177

(f) the amount of refund due to the collector in pursuance of such determination shall
be granted to the collector:
However, no intimation under section 206CB(1) shall be sent after the expiry of the
period of one year from the end of the financial year in which the statement is filed.
(iii) The CBDT is empowered to make a scheme for centralised processing of statements of
tax collected at source to expeditiously determine the tax payable by, or the refund due
to, the collector, as required under section 206CB(1).
(l) Pay and Accounts Officer/Treasury Officer/Cheque Drawing and Disbursing Officer
to furnish statement in prescribed form to the prescribed authority, where tax
deducted/collected has been paid without production of challan [Section 200(2A) &
206C(3A)]
Related amendment in section: 272A
(i) Government deductors/collectors are allowed to make payment of tax
deducted/collected by them without production of challan i.e., through book entry as
per the present scheme of payment of TDS and TCS.
(ii) For payment of tax deducted/collected through book entry, the Drawing and
Disbursing Officer (DDO) intimates the TDS/TCS amount to the Pay and Accounts
Officer or the Treasury Officer or the Cheque Drawing and Disbursing Officer
(PAO/TO/CDDO) who credits the TDS/TCS amount to the credit of Central
Government through book entry.
(iii) Rules 30 and 37CA have introduced a system of capturing information from
PAO/TO/CDDO with effect from 1.4.2010 in order to generate credit for TDS/TCS
paid through book entry by the Government deductors. The PAO/TO/CDDO is
required to file the details of payment of TDS/TCS made through book entry in the
prescribed Form 24G. Delay in furnishing of Form 24G leads to delay in furnishing
of the TDS/TCS statement by the DDO.
(iv) Therefore, for the purpose of improving the reporting of payment of TDS/TCS made
through book entry and to make existing mechanism enforceable, sub-section (2A)
has been inserted in section 200 and sub-section (3A) has been inserted in section
206C. Accordingly, where the tax deducted [including paid under section 192(1A)]
or tax collected has been paid without the production of a challan, the
PAO/TO/CDDO or any other person, by whatever name called, who is responsible
for crediting such sum to the credit of the Central Government, shall furnish within
the prescribed time a statement in the prescribed form for the prescribed period to
the prescribed income-tax authority or the person authorised by such authority by
verifying the same in the prescribed manner and setting forth prescribed particulars.
178

(v) For the purpose of ensuring compliance with the obligation of delivering the
prescribed statement within the time prescribed under section 200(2A) or section
206C(3A), section 272A has been amended to provide for a penalty of ` 100 for
each day of continuing default, subject to the limit of the amount of tax deductible or
collectible in respect of which the statement is to be furnished.
(m) Intimation generated after processing of TCS statement - deemed as notice of demand;
appealable and subject to rectification [Sections 154, 156 & 246A]
(i) Since the intimation generated after the processing of TCS statement shall be at par
with the intimation generated after processing of TDS statement, the intimation
generated after processing of TCS statement shall be—
(1) subject to rectification under section 154;
(2) appealable under section 246A; and
(3) deemed as notice of demand under section 156.
(ii) Since the intimation generated after processing of TCS statement shall be deemed
as a notice of demand under section 156, failure to pay the tax specified in the
intimation shall attract levy of interest as per the provisions of section 220(2).
Section 206C(7) also provides for levy of interest for non-payment of tax specified in
the intimation to be issued.
(iii) In order to remove the possibility of charging interest on the same amount for the
same period of default both under section 206C(7) and section 220(2), sub-section
(2C) has been inserted in section 220 to specifically provide that where interest is
charged for any period under section 206C(7) on the amount of tax specified
in the intimation issued under 206CB(1), no interest shall be charged under
section 220(2) on the same amount for the same period.
(n) Interest under section 234B payable from 1st April next following the financial year,
in a case where the total income is increased on reassessment under section 147
or section 153A
(i) As per section 234B(3), where the total income is increased on reassessment under
section 147 or section 153A, the assessee shall be liable for interest@1% for every
month or part of a month on the amount of the increase in tax on total income as a
consequence of reassessment or recomputation [Tax on total income determined on
the basis of reassessment or recomputation – Tax on total income determined
under section 143(1) or on the basis of regular assessment].
179

(ii) The period for which such interest is payable has undergone the following change
with effect from 1st June, 2015:
Period for which interest was payable (prior to amendment)
Period commencing from: Period ending on:
The day following the date of and the date of reassessment or
determination of total income recomputation under section 147 or
under section 143(1) or following section 153A
the date of regular assessment
Period for which interest is payable (post amendment)
the 1st April next following the and the date of reassessment or
financial year recomputation under section 147 or
section 153A.
(iii) The rationale of the amendment is that the amount of tax computed on the total
income determined under section 143(1) or on assessment or reassessment or total
income declared in a settlement application is the correct liability of the tax payer
right from the beginning and hence, it is with reference to that amount, the advance
tax should have been paid within the prescribed due date.
(o) Period for which interest under section 234B is to be charged where an application
is filed under section 245C(1) [Section 234B]
(i) Section 234B(4), inter alia, provides that where on an order of the Settlement
Commission under section 245D(4), the amount on which interest was payable
under section 234B(1) or section 234B(3) is increased or reduced, the interest shall
be increased or reduced accordingly.
(ii) However, in case an application is filed before the Settlement Commission under
section 245C declaring an additional amount of income-tax, there is no specific
provision in section 234B for charging interest on that additional amount.
(iii) Accordingly, new sub-section (2A) has been inserted in section 234B to provide that
where an application under section 245C(1) for any assessment year has been
made, the assessee shall be liable to pay simple interest at the rate of 1% for every
month or part of a month comprised in the following period:
and
the 1st April of such assessment the date of making such
year application
Amount on which interest is payable:
the additional amount of income-tax referred to in section 245C(1)
180

(iv) Further, where as a result of an order of the Settlement Commission under section
245D(4) for any assessment year, the amount of total income disclosed in the
application under section 245C(1) is increased, the assessee shall be liable to pay
simple interest at the rate of 1% for every month or part of a month comprised in the
following period -
the 1st April of such assessment year and the date of order under section
245D(4)
Amount on which interest is payable:
Tax on total income determined on the basis of order under section 245D(4)
minus
Tax on total income disclosed in the application filed under section 245C(1).
If, as a consequence of an order passed by the Settlement

Commission under section 245D(6B) to rectify a mistake
apparent from the record, the amount on which interest is
payable is increased or decreased, the interest shall be
increased or decreased accordingly.
(1) Approval of long-term bonds and rate of interest for the purpose of section 194LC
of the Income-tax Act, 1961 [Circular No. 15/2014, dated 17-10-2014]
Section 194LC, inserted by the Finance Act, 2012, provides for a concessional rate of
withholding tax @ 5% on interest payment by an Indian company to a non-corporate non-
resident or a foreign company. The concessional rate of tax and TDS was applicable if
the borrowing is made in foreign currency between 1.7.2012 and 30.6.2015, from a
source outside India, inter alia, by way of issue of long-term infrastructure bonds, as
approved by the Central Government in this behalf.
This year, the Finance (No.2) Act, 2014 has expanded the scope of deduction of tax at a
concessional rate of 5% under section 194LC to cover interest payable to a non-
corporate non-resident or a foreign company by an Indian company or a business trust
on money borrowed by it in foreign currency from a source outside India by issue of any
long-term bond, including long-term infrastructure bond, as approved by the
Central Government in this behalf, at any time between 1.10.2014 and 30.6.2017. It
may be noted that the concessional rate of tax deducted at source would continue to be
applicable in respect of long term infrastructure bonds issued during the period 1.7.2012
to 30.9.2014.
181

Considering the fact that a large number of bond issues have to be undertaken by Indian
companies, the Government is providing an approval mechanism to avoid approval for
each and every specific case, which would lead to avoidable compliance burden on the
borrower/issuer of bond. Accordingly, the CBDT conveys the approval of Central
Government for issue of long-term bonds including long-term infrastructure bonds by
Indian companies which satisfy the following conditions:
(a) The bond shall be issued at any time on or after 1st October, 2014 but before 1st
July, 2017.
(b) The bond issue shall comply the relevant provisions of Foreign Exchange
Management Act, 1999, read with relevant ECB regulations, either under automatic
route or approval route.
(c) The bond issue should have Loan Registration Number issued by Reserve Bank of
India.
(d) The term “long term” means that the bond to be issued should have original maturity
term of three years or more.
Further, the Central Government has also approved the interest rate for the purpose of
section 194LC in respect of borrowing by way of issue of long term bond including long
term infrastructure bond, as any rate of interest which is within the All-in-cost ceilings
specified by the RBI under ECB regulations as is applicable to the borrowing through a
long term bond issue having regard to the tenure thereof.
Any bond issue satisfying the above conditions would be treated as approved by the
Central Government for the purpose of section 194LC. Further, it has also been clarified
that consequent to the amendment to section 194LC, the approval of Central
Government contained in Circular No. 7/2012, in so far as they apply to borrowings by
way of a loan agreement, shall be valid for the borrowings made on or before 30/06/2017
instead of 30/06/2015 as mentioned in the said Circular.
(2) Interest under section 234A not chargeable on self assessment tax paid before the
due date of filing of return of income [Circular No. 2/2015, dated 10-2-2015]
Interest under section 234A is charged in case of default in furnishing return of income by
an assessee. The interest is charged at the specified rate on the amount of tax payable
on the total income, as reduced by the amount of advance tax, TDS/TCS, any relief of tax
allowed under section 90 and 90A, any deduction allowed under section 91 and any tax
credit allowed in accordance with section 115JAA and section 115JD. Since self-
assessment tax is not mentioned as a component of tax to be reduced from the amount
on which interest under section 234A is chargeable, interest is being charged on the
amount of self-assessment tax paid by the assessee even before the due date of filing of
return.
However, it has been held by Hon’ble Supreme Court in the case of CIT vs Prannoy Roy
(2009), 309 ITR 231 that interest under section 234A on default of furnishing return of
182

income shall be payable only on the amount of tax that has not been deposited before
the due date of filing of the Income-tax return for the relevant assessment year.
Accordingly, the CBDT reviewed the present practice of charging interest and decided
that no interest under section 234A shall be charged on self assessment tax paid
by the assessee on or before the due date of filing of return.
(3) Non-applicability of TDS provisions on payments made to Corporations whose
income is exempt under section 10(26BBB) [Circular No. 7/2015, dated 23-04-2015]
The CBDT had earlier issued Circular No. 4/2002 dated 16.07.2002 which laid down that
there would be no requirement for tax deduction at source in respect of payments made
to such entities, whose income is unconditionally exempt under section 10 of the Income-
tax Act, 1961 and who are statutorily not required to file return of income as per the
section 139. The said Circular also lists the entities which are unconditionally exempt
under section 10 and who are statutorily not required to file return of income as per
section 139.
Subsequently, section 10(26BBB) was inserted in the Income-tax Act, 1961 vide Finance
Act, 2003 w.e.f. 01.04.2004 to provide that any income of a corporation established by a
Central, State or Provincial Act for the welfare and economic upliftment of ex-service-
men being the citizens of India does not form part of the total income. The corporations
covered under section 10(26BBB) are also statutorily not required to file return of income
as per the section 139.
The corporations covered under section 10(26BBB) satisfy the two conditions of Circular
No. 4/2002 i.e., such corporations are statutorily not required to file return of income as
per section 139 and their income is also unconditionally exempt under section 10 of the
Income-tax Act, 1961. Accordingly, the CBDT has examined the matter and extended the
benefit of the said Circular to such corporations whose income is exempt under section
10(26BBB). Hence, there would be no requirement for tax deduction at source from the
payments made to such corporations, since their income is anyway exempt under the
Income-tax Act, 1961.
183

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FINAL COURSE

SUPPLEMENTARY STUDY PAPER - 2015

DIRECT TAX LAWS AND INDIRECT TAX LAWS

[A discussion on amendments made by the Finance

(Relevant for May, 2016 and November, 2016 Examinations)

© The Institute of Chartered Accountants of India

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Department/Committee : Board of Studies

Published by : The Publication Department on behalf of The Institute of

: Typeset and designed at Board of Studies.

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Happy Reading and Best Wishes for the forthcoming examinations!

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AMENDMENTS BY THE FINANCE ACT, 2015

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(iii) Foreign company

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AMENDMENTS BY THE FINANCE ACT, 2015

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Is the company an No Whether POEM of The company is

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(1) Clarification regarding applicability of Explanation 5 to section 9(1)(i) to dividend

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AMENDMENTS BY THE FINANCE ACT, 2015

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(1) Commissioner of Income-tax (Exemptions) to act as “prescribed authority” for the

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(a) Balance 50% of additional depreciation to be allowed in the subsequent year,

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