[2021] 

125 taxmann.com 376 (Article)

Date of Publishing: March 25, 2021

Analysis of changes made in the Finance Bill, 2021 as passed by the Lok
Sabha
EDITORIAL TEAM

The Lok Sabha has passed the Finance Bill, 2021 on March 23, 2021. The Bill presented originally in the
Lok Sabha on February 1, 2021 has not been passed in its original shape. More than 100 changes have
been made in the Finance Bill, 2021 as passed by the Lok Sabha [hereinafter referred to as Finance Bill
(Lok Sabha)]. New amendments have been proposed, some proposed amendments have been removed
or altered.

The Finance Bill (Lok Sabha) has also introduced various curative amendments. For instance, section
43(6)(c) has been amended by the Finance Bill (Lok Sabha) to reduce the WDV of the block of asset if
goodwill forms part of that block. Further, section 234F has been amended to withdraw the late-filing
fees of Rs. 10,000 as belated return cannot be filed on or after 1st January from the assessment year
2021-22.

A snippet of all changes made in the Finance Bill, 2021 as passed by the Lok Sabha viz-a-viz the
Finance Bill, 2021 is presented hereunder:

1. Tax on transfer of money or property by a firm/AOP/BOI to its partners or members

[Section 9B, Section 45(4) and Section 48]

[Assessment Year 2021-22]

Where any partner receives any amount or property on account of dissolution or reconstitution of the
firm, the income-tax implications in such cases in the hands of partner or the firm have always been a
controversial matter. Some of them are discussed below:

(a)   Whether the expression "dissolution of the firm or otherwise" includes

reconstitution of the firm?
(b)   Whether consideration (in money or in kind) received by a partner from the firm
could be said to be received on account of transfer of his interest in the partnership
firm?
(c)   Whether transfer of property (stock-in-trade and capital asset) by a firm to its
partners be treated as transfer for income-tax purposes? If yes, whether income
from such transfer be chargeable to tax in the hands of firm?
(d)   What shall be the mechanism to compute income in such cases?
(e)   Where a firm does the revaluation of the property or record self-generated asset in
the books of account and credit the corresponding gain to the capital accounts of the
partners, what should be the tax treatment of the amount received by partner in
excess of his capital contribution made on account of such revaluation or self-
generated asset?

The Finance Bill (Lok Sabha) has addressed the aforesaid issues by inserting Section 9B, substituting
Section 45(4) and inserting Section 48(iii). Before understanding the amendment, it is imperative to
understand that when a partner disassociates from the partnership firm in lieu of transfer of a property
by that firm to him, there will be two transactions. One, transfer of right by the partner and second,
transfer of property by the firm to the partner. The former transaction is dealt with under Section 45(4)
and the latter in Section 9B.

1.1. Meaning of certain terms

Section 9B defines the meaning of 'specified entity' and 'specified person' as under.

(a)   "Specified entity" means a firm or other Association of Persons (AOP) or Body of
Individuals (BOI) [not being a company or a co-operative society]. For simplicity,
hereinafter the 'specified entity' is just referred to as a 'firm'.
(b)   "Specified person" means a person who is a partner of a firm or member of other
AOP or BOI (not being a company or a co-operative society) in any previous year.
For simplicity, hereinafter the 'specified person' is just referred to as a 'partner'.

1.2. Income on receipt of capital asset or stock in trade by a partner from a firm
[Section 9B]

Section 9B provides that where a partner receives during the previous year any capital asset or stock-in-
trade or both from a firm in connection with the dissolution or reconstitution of such firm, then the
firm shall be deemed to have transferred such capital asset or stock-in-trade or both, as the case may
be, to the partner in the year in which such capital asset or stock in trade or both are received by that
partner.

Further, it provides that any profits and gains arising from such deemed transfer of capital asset or
stock in trade or both, as the case may be, by the firm shall be deemed to be the income of the firm of
the previous year in which stock or capital asset were received by the partner and chargeable to income-
tax under the head 'business or profession' or 'capital gain' in accordance with the provisions of the Act.

Furthermore, the fair market value of the capital asset or stock on the date of its receipt by the partner
shall be deemed to be the full value of consideration while computing profit and gains arising from
deemed transfer of such stock or capital asset by the firm.

Section 9B also defines the expression "reconstitution of specified entity". It means where:

(a)   One or more of its partners or members ceases to be partners or members;

(b)   One or more new partners or members are admitted. However, at least one existing
partner or member should continue to be partner or member of the specified entity
after admission of the new partner(s) or member(s); or
(c)   All the partners or members continue with change in their respective share or in
share of some of them.

Further, the CBDT is empowered to issue guidelines, with prior approval of the Central Government,
for removing difficulties arising in giving effect to the provisions of this section. Every such guidelines
shall be laid before each house of Parliament and shall be binding on the Income-tax authorities and
assessee.
Section 9B deals with the following three aspects.

1.2-1. Distribution of stock or capital asset by a firm to its partner is deemed as transfer

This provision creates a deeming fiction that the distribution of stock or capital asset by a firm to its
partner is a transfer. This is done to overrule various judicial rulings which held that the distribution,
division or allotment of assets by a partnership firm upon dissolution or reconstitution is nothing but a
mutual adjustment of rights between the partners.

The Apex Court in the case of Malabar Fisheries Co. v. CIT [1979] 2 Taxman 409/120 ITR 49 has held
that a partnership firm, under the Indian Partnership Act, 1932, is not a distinct legal entity, apart from
the partners constituting it. The firm, as such, has no separate rights of its own in the partnership assets
and when one talks of the firm's property or firm's assets, all that is meant is property or assets in which
all partners have a joint or common interest. If that be the position, it is difficult to accord the
contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm,
as such, has no separate rights of its own in the partnership assets but it is the partners who own jointly
in common its assets. Therefore, the consequence of the distribution, division or allotment of assets to
the partnership, which flows upon dissolution after discharge of liabilities, is nothing but a mutual
adjustment of rights between the partners and there is no question of any extinguishment of the firm's
rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47).

Now, Section 9B has created a deeming fiction for treating such flow of stock or capital asset at the time
of dissolution or reconstitution as transfer.

1.2-2. How to compute the gains arising from deemed transfer of stock-in-trade?

Sub-section (2) of Section 9B provides that any profit and gains arising from deemed transfer of stock-
in-trade shall be deemed to be income of the firm of the year in which such stock is received by the
partner and, accordingly, it shall be charged to tax under the head "Profit and gains from business or
profession".

For such computation, it provides that the fair market value of the stock on the date of its receipt by the
partner shall be deemed to be the full value of consideration while computing profit and gains arising
from deemed transfer of such stock by the firm. The income arising from the transfer of stock shall be
taxable as business income under Section 28. In simple words, the fair market value of stock transferred
to the partner shall be recorded as sale by the firm as the same shall form part of the business of the
firm.

1.2-3. How to compute the gains arising from deemed transfer of capital asset?

Sub-section (2) of Section 9B provides that any profit and gains arising from deemed transfer of capital
asset shall be deemed to be income of the firm of the year in which such capital asset is received by the
partner. It shall be charged to tax under the head "Capital Gains".

Further, it provides that fair market value of capital asset on the date of its receipt by the partner shall
be deemed to be the full value of consideration while computing capital gain arising from deemed
transfer of such capital asset by the firm.

Determination of income taxable under the head 'capital gains' depends upon various factors such as
nature of capital asset, period of holding, cost of acquisition, full value of consideration, etc. Section 48
prescribes the mode of computation of income taxable under the head 'capital gains'. As per said
section, the capital gain is computed by reducing the cost of acquisition, cost of improvement and
attributable expense from the full value of consideration of the capital asset.

Section 48 has also been amended by the Finance Bill (Lok Sabha) to mitigate the double taxation
arising due to introduction of section 9B and substitution of section 45(4). A new clause ( iii) is inserted
to provide that profit and gains chargeable to tax under section 45(4) which is attributable to capital
asset being transferred by the firm shall be reduced while computing capital gain in the hands of the
firm in respect of such capital asset. In other words, the amount of capital gain computed under section
45(4) which is attributable to capital asset being transferred by the firm shall be deducted while
computing capital gain in the hands of the firm in respect of such capital asset.

The computation of capital gain under section 9B read with section 48(iii) shall be as follows:

Particular Amount
Full value of consideration received or accrued (FMV of capital asset) xxx
Less: (xxx)
(a) Expenditure incurred wholly and exclusively in connection with transfer; (xxx)
(b) Cost of Acquisition/Indexed cost of acquisition; (xxx)
(c) Cost of improvement/Indexed cost of improvement; or (xxx)
(d) The amount chargeable to tax as income of firm under Section 45(4) which (xxx)
is attributable to capital asset being transferred by the firm
(e) Exemption under Sections 54 to 54GB to the extent of net result of above  
calculation
Income taxable under the head capital gains xxx

The rate at which such capital gain shall be charged to tax will be depend on the nature of capital asset
transferred and period for which such asset is held by the specified entity.

1.3. Tax on receipt of money or capital asset by partner in connection with

reconstitution of firm [Section 45(4)]

The Finance Bill (Lok Sabha) has substituted sub-section (4) as proposed to be substituted by the
Finance Bill, 2021. This provision provides thatwhere a partner receives during the previous year any
capital asset or money or both from a firm in connection with the reconstitution, then any profit and
gains arising from such receipt of money by specified person shall be deemed to be the income of the
specified entity under the head "Capital Gains' of the previous year in which such capital asset or money
or both were received by the specified person. Further, it also prescribes the formula to compute the
profit and gains arising to the partner from such receipt of money or capital asset from the firm.

The profit and gains shall be computed in accordance with the following formula:

A=B+C-D

A = Income chargeable to income-tax under this provision as income of the firm under the head 'capital
gains';

B = Value of money received by partner on the date of such receipt;

C = Fair market value of the capital asset received by the partner on the date of such receipt; and

D = Balance in the capital account (represented in any manner) of the partner in the books of account of
the firm at the time of reconstitution.

Where the value of A is negative, it shall be deemed to be nil.

While computing the balance in the capital account of partner in the books of account of firm, increase
in capital account due to the following shall not be taken into account:

(a)   Revaluation of any asset;

(b)   Self-generated goodwill (goodwill acquired without incurring any cost for purchase
or which has been generated during the course of business or profession);
(c)   Other self-generated assets.

Explanation2 to Section 45(4) clarifies that when a capital asset is received by the partner from a firm
in connection with the reconstitution, the provisions of the said section shall operate in addition to the
provisions of section 9B. Thus, the taxation under both the provisions shall be worked out
independently.

1.3-1. Analysis of section 45(4)

Section 45(4) provides for the computation of capital gain which arises to a partner on extinguishment
or relinquishment of his right in the firm in connection with reconstitution of the firm. Though the
income arises to partner but it is deemed as income of the firm. Thus, the firm would be assessed under
section 9B for its own income and under section 45(4) for income arising to partner thereof.

1.3-2. Section 45(4) v. Section 9B

Section 9B provides for taxability arising at the time of dissolution or reconstitution, whereas section
45(4) deals with the taxability at the time of reconstitution only. Where any asset or money is
transferred to partner or member at the time of dissolution, same amounts to extinguishment or
relinquishment of rights. Term "transfer" as defined under section 2(47) covers extinguishment or
relinquishment of rights within its ambit. However, since such rights are not extinguished or
relinquished in favour of another person in case of dissolution, no one derives any benefit from the
same. Thus, section 45(4) does not apply at the time of dissolution.

1.4. Mode of computation of capital gain [Section 48]

Section 9B deals with the taxability of the income arising to the firm on transfer of capital asset to a
partner in connection with dissolution or reconstitution. Section 45(4) deals with the income which
arises to the partner on receipt of a capital asset in connection with the reconstitution. However, tax in
respect of such receipt is charged in the hands of firm only. Thus, in case of reconstitution double
taxability will arise once under section 45(1) read with section 9B and second under section 45(4). To
remove the impact of such double taxation, Section 48 is amended. This section provides for reduction
of cost of acquisition, improvement and expenditure incurred in connection with transfer from full
value of consideration of capital asset while computing income chargeable under the head 'capital
gains'.

An additional deduction is allowed under Section 48(iii) in respect of the capital gains charged to tax
under section 45(4) which is attributable to capital asset being transferred by the firm. In other words, a
portion of the capital gains so taxed under Section 45(4) shall be reduced from the full value of
consideration of the capital asset being transferred by the firm. Such portion shall be attributable to
only that capital asset which is being transferred by the firm. This method of attribution shall be
prescribed by the CBDT.

2. Goodwill forming part of existing block of assets to be reduced from WDV

[Applicable from Assessment Year 2021-22]

2.1. Background

Depreciation is an allowance under the Income-tax Act which is computed as per the written-down
value (WDV) method on basis of the relevant block of assets. In other words, for the computation of the
depreciation, it is essential to identify the relevant block of asset and its written-down value.

'Block of assets' is a group of assets falling within a class of assets for which the same rate of
depreciation is prescribed. For example, all intangible assets are eligible for a 25% rate of depreciation.

Written-down value of a 'block of asset', as per Section 43(6)(c), means the aggregate of WDVs of all the
assets falling within that block of assets at the beginning of the previous year and:

(a)   increased by the actual cost of any asset falling within that block acquired during the
previous year;
(b)   reduced by the money payable in respect of any asset (falling within that block) which is
sold or discarded or demolished or destroyed during that previous year.
Particulars Amount
Opening WDV of block of assets xxx
Add: Actual cost of any asset acquired during the previous year under that block xxx
Less: Money payable in respect of any asset, sold, destroyed discarded, or demolished during the (xxx)
previous year together with the scrap value, if any
Closing WDV of block of assets xxx

2.2. Amendment Proposed by the Finance Bill, 2021

The Finance Bill, 2021 proposes to prohibit the depreciation on the goodwill. The following
amendments have been proposed to various provisions of the Act:

2.2-1. Amendment to Section 2(11)

It has been proposed that 'block of asset' as defined under section 2(11) shall not include the 'goodwill of
a business or profession'.

2.2-2. Amendment to Section 32(1)

Clause (ii) to section 32(1) has been proposed to be amended to provide that 'goodwill of a business or
profession' shall not be eligible for depreciation. Further, an amendment has been proposed to
Explanation 3 to Section 32(1) which defines the expression 'asset'. It has been proposed that 'goodwill
of a business or profession' shall not be treated as an 'intangible asset' for Section 32(1).

2.2-3. Amendment to Section 50

A new proviso has been proposed to be inserted to Section 50(2) that the CBDT may prescribe a
manner to determine the WDV of the block of asset and short-term capital gain if goodwill is forming
part of the block of asset and depreciation has been claimed on it.

2.2-4. Amendment to Section 55

Section 55 provides the meaning of various terms including 'cost of acquisition' for computation of
capital gains. The Finance Bill also proposes amendment to Section 55.

2.3. Ambiguity in the Bill

The Finance Bill, 2021 sought to amend above-referred four sections of the Income-tax Act but, it does
not propose any amendment to section 43 which defines the WDV of the block of assets.

Thus, the questions arose what would happen to the amount of goodwill which formed part of an
existing block of assets. Once an asset forms part of the 'block of assets', it loses its identity and
deprecation is allowed on the whole block of asset. So, if an assessee has a block of intangible assets and
in any previous year he has acquired the goodwill, which formed part of such block of assets, then how
the depreciation shall be allowed on such block of assets.

2.4. Clarity in the Finance Bill (Lok Sabha)

The Finance Bill, 2021 as passed by the Lok Sabha, makes the necessary amendments to Section 43(6)
(c) to provide that WDV of block of assets shall be reduced by the actual cost of goodwill falling within
such block of assets. However, the actual cost of goodwill shall be first decreased by the:

(a)   Amount of depreciation actually allowed to the assessee for such goodwill before the
Assessment Year 1988-89, and
(b)   Amount of depreciation that would have been allowable to the assessee from the
Assessment Year 1988-89 as if the goodwill was the only asset in the relevant block
of assets.

It should be noted that while computing the WDV for the assessment year 2021-22, if the depreciation
was claimed on the goodwill forming part of the block of assets in the immediately preceding previous
year, the amount of reduction calculated above shall not exceed the WDV of the block of assets.
Example, XYZ Limited is running a manufacturing business. On 10-4-2018, it acquired the following
intangible assets in an M&A transaction:

(a)   Goodwill worth Rs. 100 crores;

(b)   Trademarks worth Rs. 50 crores; and
(c)   Licenses and franchise agreement worth Rs. 50 crores.

Compute the WDV of the block of intangible assets of XYZ Ltd. as on March 31, 2021 in the following
two situations:

Situation 1 - In April 2019, XYZ Ltd. sold the trademarks in Rs. 40 crores.

Situation 2 - In April 2019, XYZ Ltd. sold the trademarks in Rs. 80 crores.

Computation of WDV as on 31-3-2021 (In Crores)

Particulars Situation Situation
1 2
Previous Year 2018-19
Intangible assets acquired on April 10, 2018
- Goodwill 100.00 100.00
- Trademarks 50.00 50.00
- Licenses & franchisees 50.00 50.00
Block of intangible assets [A] 200.00 200.00
Less: Depreciation [B = A * 25%] (50.00) (50.00)
WDV as on 31-03-2019 [C = A-B] 150.00 150.00

Previous Year 2019-20

Opening WDV [C] 150.00 150.00
Less: Intangible assets sold during year [D] (40.00) (80.00)
Less: Depreciation [E = (C - D) * 25%] (27.50) (17.50)
WDV as on 31-03-2020 [F = C – D – E] 82.50 52.50

Previous Year 2020-21

Opening WDV [F] 82.50 52.50
Adjustment on account of goodwill
Less: Actual cost of goodwill included in block of assets as reduced by the previous (56.25) (52.50)
years' depreciation [G] see note
Cost of Goodwill 100  
Less: Dep. allowed on goodwill:  
- Previous Year 2018-19 [100 * 25%] (25.00)    
- Previous Year 2019-20 [(100-25) * 25%] (18.75)    
56.25  
Less: Depreciation [H = (F - G) * 25%] (6.56) 0.00
WDV of block of intangible assets as on 31-03-2021 19.69 0.00

Note: If the goodwill forms part of block of assets on which deprecation is claimed in previous year
2019-20 then the 'amount of reduction' on account of such goodwill shall not exceed the WDV assuming
that the goodwill is the only asset in that block. As in the situation 2, the 'amount of reduction' is
calculated at Rs. 56.25 which exceeds the WDV of Rs. 52.50, the reduction of WDV on account of
goodwill shall be restricted to Rs. 52.50.

3. FMV of capital assets transferred under slump sale to be calculated in prescribed

manner
[Applicable from Assessment Year 2021-22]

3.1. Introduction

The term 'slump sale' has been defined under section 2(42C) to mean the transfer of one or more
undertakings as a result of sale for lump sum consideration without value being assigned to individual
assets and liabilities in such cases. Section 50B of the Income-tax Act provides for computation of
capital gains in case of slump sale.

As slump sale is defined to mean sale of undertaking for a lump sum consideration, some courts have
taken a view that transfer by way of exchange, relinquishment etc. shall not be considered as slump
sale. To provide clarity on this issue, Section 2(42C) is proposed to be amended by the Finance Bill,
2021 to provide that all types of 'transfer' as defined under section 2(47) shall be included within the
scope of slump sale. However, the Finance Bill, 2021 has not proposed any amendments to section 50B.

Section 50B(2) provides that where an undertaking or division is acquired, the net worth of such
undertaking or division is deemed as the cost of acquisition. Further, the benefit of indexation shall not
be available even if the undertaking transferred under the slump sale is deemed as long-term capital
asset. The mechanism for the computation of net worth has been provided in the Explanation 2 to
Section 50B. It provides that for computing net worth, depreciable assets are taken at written down
value and non-depreciable asset at book value. However, capital asset which are fully allowed as
deduction under Section 35AD are taken at nil value.

3.2. Amendment by the Finance Bill (Lok Sabha)

The existing Section 50B does not contain any provision for the computation of the full value of
consideration in relation to the transfer of the undertaking under a slump sale. The Finance Bill (Lok
Sabha) has amended Section 50B(2) to provide that the fair market value (FMV) of the capital assets
(being an undertaking or division transferred by way of slump sale) as on the date of transfer shall be
calculated in the prescribed manner. Such FMV shall be deemed to be full value of the consideration
received or accruing as a result of transfer of such capital asset.

Further, a new clause in Explanation 2 has been inserted to provide that the value of capital asset being
goodwill, which has not been acquired by the assessee by purchase from previous owner, shall be taken
as nil while computing net worth.

3.3. Impact of the Amendment

As per the amendments by the Finance Bill (Lok Sabha), FMV of the undertaking or division transferred
during slump sale shall be deemed to be the full value of the consideration as a result of such transfer.
This deeming fiction may give rise to following two situations:

(a)   Actual amount received by transferor (seller) from transferee (buyer) is higher than
such FMV; or
(b)   Actual amount received by seller from buyer is lower than such FMV.

3.3-1. Tax implications in hands of seller

Irrespective of the amount of the actual consideration, Section 50B(2)(ii) provides that the FMV of the
capital asset (being a unit or undertaking) shall be taken as full value of consideration for the
computation of the capital gain under Section 50B. However, such full value of consideration shall be
calculated in the prescribed manner. More clarity on this aspect will be provided when the Rules are
prescribed in this regard. Where the actual consideration is less than the FMV determined in the
prescribed manner, it would result in higher capital gain tax liability in hands of seller due to this
deeming fiction.

3.3-2. Tax implications in hands of buyer

As per Accounting Standard 14 - Accounting for Amalgamations, any excess of the sale consideration
over the value of the net assets of seller acquired by buyer should be recognized in the buyer's financial
statements as goodwill. If the amount of the consideration is lower than the value of the net assets
acquired, the difference should be recognized as Capital Reserve.

Thus, if the buyer has paid lower than FMV of undertaking transferred in slump sale, the difference
between the actual consideration and FMV shall be treated as capital reserve. Such capital reserve
should be treated as capital receipt not chargeable to tax. It may not be taxed under Section 56(2)( x)
either as the unit or undertaking covered under Section 50B cannot be regarded as a property as
defined in Section 56(2)(x).

However, if the buyer has paid consideration in excess of FMV, then such excess consideration shall be
recognised as goodwill in books of account of buyer. The Finance Bill, 2021 has sought to prohibit the
depreciation on the goodwill. However, the goodwill would be treated as capital assets and capital gain
shall arise on its subsequent transfer.

4. Tax on Interest earned on PF contribution exceeding Rs. 2.50 Lakhs or Rs. 5 Lakhs

As per the existing provision, interest on the contribution made by the employees to the statutory
provident fund, recognised provident fund and the public provident fund is exempt from tax.

The Finance Bill, 2021 has proposed that no exemption shall be available for the interest income
accrued during the previous year in the recognised and statutory provident fund to the extent it relates
to the contribution made by the employees over Rs. 2,50,000 in the previous year. This amendment is
applicable from the assessment year 2022-23. This amendment has been proposed as the Government
noticed that some employees have been contributing a huge amount to these funds and earning interest
free income. Thus, to curb this practice, the Government has proposed such amendment to Section
10(11) and Section 10(12).The amendment proposed that the taxable component shall be computed in
such manner as may be provided by Rules.

The Finance Bill (Lok Sabha) has added a second proviso to Section 10(11) and Section 10(12) that if an
employee is contributing to the fund but there is no contribution to such fund by the employer, then the
interest income accrued during the previous year shall be taxable to the extent it relates to the
contribution made by the employee to that fund in excess of Rs. 5,00,000 in a financial year.

The impact of this amendment can be understood with the help of the following example.
 Amount Contributed by Whether employer Whether interest How much interest of
assessee during Previous contributing to earned shall be employee's contribution
Year (INR) fund? taxable? shall be taxable?
2,00,000 Yes No -
4,00,000 Yes Yes Interest on contribution of
Rs. 1,50,000
6,00,000 Yes Yes Interest on contribution of
Rs. 3,50,000
2,00,000 No No -
4,00,000 No No -
6,00,000 No Yes Interest on contribution of
Rs. 1,00,000

The interest income shall be taxable under the head 'Income from other sources'. Such income should
be taxable as a residuary income as it is not accruing from a source emanating from an employer-
employee relationship. This interest income will become part of the total taxable income of the
taxpayer. There are no special rates for the taxability of this interest. Hence, such income shall be taxed
at the prevailing income tax rates.

Possibly, such interest component shall be subject to TDS under Section 194A by the EPFO.

5. Tax Audit: Transaction settled by way of a non-account payee cheque/draft is a cash

transaction

[Applicable from Assessment Year 2021-22]

Every person carrying on a business and maintaining books of account is required to get them audited
from a Chartered Accountant if total sales, turnover or gross receipt from the business during the
previous year exceeds Rs. 1 crore.

To reduce the compliance burden on small and medium enterprises, the Finance Act, 2020 has
increased such threshold limit of turnover, for a person carrying on business, from Rs. 1 crore to Rs. 5
crores. The higher threshold limit applies only if the cash receipt and payment made during the year
does not exceed 5% of total receipt and total payment respectively.

The Finance Bill, 2021 has proposed to further increase this threshold limit from Rs. 5 crores to Rs. 10
crores. The Finance Bill (Lok Sabha) inserts a new proviso that for computation of the threshold limit of
Rs. 10 crores, the payment or receipt settled through a non-account payee cheque or non-account payee
bank draft shall be deemed to be cash payment or cash receipt respectively. Thus, the same shall be
included while computing 5% cash transaction limit under section 44AB.

6. HUF is also not eligible for presumptive taxation scheme under section 44ADA

[Applicable from Assessment Year 2021-22]

Section 44ADA provides for computation of profit and gains of profession on a presumptive basis. It
applies to an assessee engaged in the specified profession. Under the presumptive taxation scheme, the
assessee computes the taxable income on a presumptive basis if gross receipts of the profession do not
exceed Rs. 50 lakhs during the year. The presumptive income shall be 50% of total receipts of the year
from such a profession.

The existing Section 44ADA only provides that the benefit of this provision is available to an assessee
being resident in India. It restricts an assessee on basis of residential status and not on basis of type of
assessee. In other words, there was no explicit or obvious prohibition on the Companies, LLP or the
HUF to compute the income under this presumptive scheme. The Finance Bill, 2021 has specifically
excluded an LLP from the scope of presumptive taxation under section 44ADA. Thus, the Finance Bill,
2021 first time proposed to expressly limit the provisions of Section 44ADA to a resident assessee being
an Individual, Hindu Undivided Family (HUF) or a partnership firm (other than an LLP). The Finance
Bill (Lok Sabha) has further restricted the scope of section 44ADA. Now an HUF shall also not be
eligible for presumptive taxation scheme under section 44ADA.

Consequently, w.e.f. Assessment Year 2021-22, only a resident Individual and a resident partnership
firm shall be eligible to compute the income under the said presumptive taxation scheme. An LLP,
HUF, Company, AOP, BOI, etc. shall not be eligible to claim the benefit of Section 44ADA.

7. Fee for default in furnishing return of income

The late filing fee under Section 234F is charged when a person fails to furnish a return of income by
the due date prescribed under section 139(1). The fees to be charged (Rs. 1,000 or Rs. 5,000 or Rs.
10,000) shall depend on the quantum of income and the date of filing of return of income.

The fee for default in furnishing return of income is levied at the following rates:

Amount of total income Date of filing of Income-tax return Fees (in

Rs.)
     
Not liable to file return Any time Nil
of income
Any amount of Income On or before the due date Nil
Up to Rs. 500,000 After the due date 1,000
Above Rs. 500,000 After the due date but on or before December 31 of the 5,000
relevant Assessment Year
Above Rs. 500,000 After the due date but between January 1 and March 31 10,000
of the relevant Assessment Year

The Finance Bill, 2021 has proposed to reduce the time-limit to file belated or revised returns of
income, as the case may be, by 3 months. Therefore, the last date to file the revised or belated return
shall be 31st December of the relevant Assessment Year.

As the last date cannot exceed 31st December, the higher late filing fees of Rs. 10,000 cannot be levied
in any situation. The Finance Bill (Lok Sabha) has made a consequential amendment to Section 234F
that the late-filing fee shall be Rs. 5,000. However, where the total income of a person does not exceed
Rs. 5 Lakhs, the fee payable shall not exceed Rs. 1,000.

After, the amendment, the late-filing fee shall be leviable in the following manner:
 Amount of total income Date of filing of Income-tax return Fees (in Rs.)
     
Not liable to file return of income Any time Nil
Any amount of Income On or before the due date Nil
Up to Rs. 500,000 After the due date 1,000
Above Rs. 500,000 After the due date 5,000

8. Fee for default in linking Aadhaar and PAN

As per Section 139AA, it is mandatory for every person, who is eligible to obtain Aadhaar, to quote the
Aadhaar Number (a 12-digit Unique Identification Number) in the Income-tax return and the
application for allotment of PAN.

Further, every person who has been allotted PAN as on July 1, 2017, and who is eligible to obtain
Aadhaar number, shall link his PAN with Aadhaar. In case, assessee fails to do so, the PAN allotted to
the person shall be made inoperative after the notified due date. The due date for such linking had been
extended on multiple occasions and the latest date is 31-03-2021.

The Finance Bill (Lok Sabha) has inserted a new Section 234H to levy a fee for default in intimating the
Aadhaar Number. If a person is required to intimate his Aadhaar under Section 139AA(2) and such
person fails to do so, he shall be liable to pay a fee, as may be prescribed, not exceeding Rs. 1,000 at the
time of making such intimation.

Therefore, if the person fails to link PAN-Aadhaar by 31-03-2021, he shall be liable to pay a fee,
maximum of Rs. 1,000. This fee shall be in addition to the other consequences the person has to face if
PAN becomes inoperative due to non-intimation of Aadhaar.

As per rule 114AAA, where a person is required to furnish, intimate or quote his PAN, and his PAN has
become inoperative, it shall be deemed that he has not furnished, intimated or quoted the PAN.
Consequently, he shall be liable for all the consequences for not furnishing, intimating or quoting the
PAN. Some of these consequences have been enumerated below:

(a)   The tax shall be deducted at a higher rate as per Section 206AA;
(b)   The tax shall be collected at a higher rate as per Section 206CC;
(c)   Taxpayers will not be able to file the return of income. Consequently, he shall be
liable for the consequences of non-filing of a return, inter alia, payment of late fee
under section 234F, interest under section 234A, forfeiture of current year's losses,
best judgment assessment, the penalty for concealment of income, prosecution for
failure to furnish return of income, so on and so forth;
(d)   A penalty under Section 272B shall be levied as such person shall not be able to
comply with the provisions of Section 139A requiring him to quote his PAN in
certain financial transactions, etc.

9. No re-computation of past year's book profit if MAT credit has been utilised

[Applicable from Assessment Year 2021-22]

To provide relief to the taxpayers affected due to the outcome of Advance Pricing Agreement (APA) and
Secondary Adjustment, the Finance Bill, 2021 has proposed to insert a new sub-section (2D) to Section
115JB. As per the proposed provision, the Assessing Officer, on an application by the assessee, shall re-
compute the book profit of the past years and tax payable thereon if assessee's current year's income
has increased due to APA or secondary adjustment. The CBDT may notify the manner for re-computing
the book profits of past years by the Assessing Officer.

The Finance Bill (Lok Sabha) has inserted two provisos to the proposed sub-section (2D) to Section
115JB. The first proviso provides that the benefit of re-computation of book profit under section
115(2D) shall be available only if the assessee has not utilised the MAT credit in any subsequent
Assessment Year. In other words, if such assessee has utilised the MAT credit for payment of tax
liability of any subsequent assessment year, he shall not be eligible to claim the benefit of Section
115(2D).

In the second proviso, it is provided that the assessee can make an application for re-computation of
book profit only for the past years beginning on or before Assessment Year 2020-21. Further, the
assessee shall not be eligible to claim the interest on the refund, if any, arising to him on account of
reduction in tax payable due to re-computation of profit of past years.

10. Tax on ULIPs

10.1. Introduction

Unit Linked Insurance Plan (ULIP) is a life insurance product, which provides risk cover for the
policyholder along with investment. In ULIP, a small amount of the premium paid by the individual
goes to secure life and the rest of the money is invested in qualified stocks, bonds or mutual funds.
Currently, the amount received under the ULIPs is exempt from tax.

Section 10(10D) provides for exemption with respect to any sum received under ULIP, including the
sum allocated by way of bonus on such policy. However, if the premium payable for any of the years
during the term of the policy exceeds 10% of the actual capital sum assured, then no exemption under
this section would be allowed with respect to the sum received under the policy. Such situation
hereinafter is referred to as 'excess premium'.

10.2. Amendment by the Finance Bill, 2021

Besides restricting the exemption under Section 10(10D) for payment of excess premium, the Finance
Bill, 2021 has proposed to insert Fourth and Fifth Proviso to Section 10(10D) that no exemption shall
be available under this provision in respect of ULIPs issued on or after the 01-02-2021, if the amount of
premium payable for any of the previous year during the term of the policy exceeds Rs. 2,50,000 ('high
premium ULIPs'). Further, if the premium is payable by a person for more than one ULIPs, the
exemption shall be available only for those policies whose aggregate premium does not exceed Rs.
2,50,000, for any of the previous years during the term of any of the policy.

The income arising from such high-premium ULIPs is proposed to be taxed under Section 112A.
Consequently, the Finance Bill, 2021 has proposed to amend the definition of 'equity-oriented fund' to
cover the high premium ULIPs. Thus, the equity-oriented fund to cover the ULIPs if such fund invests
minimum 90% (in case of investments in other units listed on a recognised stock exchange) or 65% (in
any other case) in equity shares of a domestic company.

10.3. Amendment by the Finance Bill (Lok Sabha)

The Finance Bill (Lok Sabha) has inserted second proviso to Section 112A that the minimum
requirement of 90% or 65%, as the case may be, is required to be satisfied throughout the term of such
insurance policy.

ULIPs are governed by the IRDAI (Investment) Regulations, 2016. As per Regulation 7, every insurer
shall invest and at all times keep invested its segregated funds of Unit linked business as per pattern of
investment offered to and subscribed to by the policy-holders where the units are linked to categories of
assets which are both marketable and readily realizable within the approved pattern as per the product
regulations. However, the investment in Approved Investments shall not be less than 75% of such
fund(s) in each such segregated fund. In other words, there are only two conditions an insurer has to
comply with. First, the investment shall be as per the pattern subscribed to by the investor, and second,
investment in approved mode shall not be less than 75%. Further, such investments shall be subject to
the exposure norms prescribed under Regulation 9. Thus, the Finance Bill (Lok Sabha) has introduced
the condition that the abovementioned limit of 90%/65% shall be complied with at all times.

11. Definition of 'Liable to tax' rephrased

The definition of 'liable to tax' has been proposed to be inserted by the Finance Bill, 2021 in Section
2(29A). The proposed definition provides that "liable to tax", in relation to a person, means that there is
a liability of tax on such person under any law for the time being in force in any country, and shall
include a case where subsequent to imposition of tax liability, an exemption has been provided.

The definition proposed by the Finance Bill, 2021 does not specify the nature of tax which shall be
considered for this purpose. In absence of specific reference to 'Income-tax', it could be concluded that
if a person is paying any tax he may be regarded as liable to tax in such country.

To remove this ambiguity, the Finance Bill (Lok Sabha) inserts a new definition of this term as under:

"Liable to tax", in relation to a person and with reference to a country, means that there is an
income-tax liability on such person under the law of that country for the time being in force and
shall include a person who has subsequently been exempted from such liability under the law of
that country.

Two major changes have been made in the Finance Bill (Lok Sabha) vis-à-vis Finance Bill, 2021. First,
the liability shall be with reference to a country and second, there should be an income-tax liability.

However, it has yet not been defined whether the comprehensive liability of tax in a country shall be
considered for the purpose of this definition or even in case of source-based taxability of any income,
such person shall be considered as liable to tax in such country.

12. No tax on income of 'DFI' and 'Institution' established for financing infrastructure
and development
[Applicable from Assessment Year 2022-23]

The Finance Minister, Smt. Nirmala Sitharaman, in her budget speech said that infrastructure needs
long-term debt financing. A professionally managed Developmental Financing Institution (DFI) is
necessary to act as a provider, enabler and catalyst for infrastructure financing. Accordingly, the FM
said that she shall introduce a Bill to set up a DFI.

A DFI is an institution promoted or assisted by the Government mainly to provide development finance
to one or more sectors or sub-sectors of the economy. The basic emphasis of a DFI is on long-term
finance and on assistance for activities or sectors of the economy where the risks may be higher than
that the ordinary financial system is willing to bear. The Finance Bill (Lok Sabha) has inserted two new
clauses (48D) and (48E) to Section 10 to provide exemption to such institutions.

12.1. Exemption to Financial Institution[Section 10(48D)]

Section 10(48D) has been inserted to grant exemption for any income accruing or arising to an
institution established for financing the infrastructure and development. The institution shall be set up
under an Act of Parliament and later would be notified by the Central Government. The exemption shall
be available for a period of 10 consecutive assessment years beginning from the assessment year
relevant to the previous year in which such institution is set up.

12.2. Exemption to DFI [Section 10(48E)]

Section 10(48E) is inserted to provide the exemption to any income accruing or arising to a DFI
licensed by the Reserve Bank of India. The exemption shall be available for 5 consecutive assessment
years beginning from the assessment year relevant to the previous year in which the DFI is set up.

However, the Central Government may extend the period of exemption of 5 years for a further period,
not exceeding 5 more consecutive assessment years, subject to fulfilment of such conditions as may be
specified.

13. Due date to file return of income by the spouse of a partner

If firm or LLP is required to get its accounts audited under Income-tax Act or any other law, the due
date to file the return of income by such firm or LLP shall be 31st October of the assessment year.
Similarly, the due date to file the return of income by the partner of such firm shall be 31st October.
However, no such extended time limit was available to the spouse of that partner who is covered under
Section 5A.

Section 5A requires equal apportionment of income (except salary income) between spouses governed
by the Portuguese Civil Code. Such provision is in the State of Goa and the Union Territories of Dadra &
Nagar Haveli and Daman & Diu.

Thus, the Finance Bill, 2021 proposed that the due date for the filing of original return of income shall
be extended to 31st October in case of spouse of a partner of a firm whose accounts are required to be
audited under the Income-tax Act or under any other law for the time being in force, if the provisions of
section 5A apply to them.

The Finance Bill, 2021 also proposed that the due date for filing of return of income by the partners of a
firm, which is required to furnish report under Section 92E, shall be 30th November of the assessment
year. Therefore, in case of a firm which is required to furnish a Transfer Pricing report in Form 3CEB,
the due date for filing of original return of income by the partner shall be 30th November of the
assessment year. There was no corresponding extension to the spouse of the partner governed by
Section 5A.

The Finance Bill (Lok Sabha) extends the due date for the filing of return of income by the spouse of the
partner of a firm, if governed by the provisions of section 5A, to 30th November where such firm is
required to furnish report under Section 92E. Therefore, after the proposed amendments, the due dates
in case of firm, its partners and spouse of partner governed by Portuguese Civil Code shall be as under:

Person Firm is not liable Firm is liable for Firm is liable for TP
for audit audit Audit
Firm 31st July 31st October 30th November
Partner of Firm 31st July 31st October 30th November
Spouse of Partner governed by 31st July 31st October 30th November
Portuguese Civil Code

14. Due date for filing of belated and revised ITR

If a return of income is not filed on or before the specified due date, it is regarded as a belated return.
Further, the taxpayer has an option to revise a return to correct any error or omission in the original
return. An assessee may file a revised or belated return for any previous year at any time before the
expiry of the relevant assessment year or before completion of the assessment, whichever is earlier.
Thus, as per the existing provisions, the last date to file the revised or belated return is 31st March of the
relevant Assessment Year.

The Finance Bill, 2021 proposed amendments to Section 139(4) and 139(5), with effect from the
assessment year 2021-22, to provide that the belated and revised return can be filed at any time within
three months prior to the end of the relevant assessment year or before completion of the assessment,
whichever is earlier.

The Finance Bill (Lok Sabha) has redrafted the wordings of the proposed amendment although the
intent remains the same. Now, it has been provided that the belated and revised return can be filed
before three months prior to the end of the relevant assessment year or before the completion of the
assessment, whichever is earlier.

Thus, pursuant to the amendment, a belated and revised return in respect of assessment year 2021-22
and subsequent assessment years can be filed up to 31st December of that assessment year.

15. New scheme of Re-assessment

15.1. Changes proposed by the Finance Bill, 2021

The Finance Bill, 2021 proposed a new re-assessment procedure for an income which has escaped the
assessment and in search and seizure cases. The Explanatory Memorandum stated that the new scheme
of assessment would result in less litigation and would provide ease of doing business to the taxpayers.
The Finance Bill substituted existing Sections 147, 148, 149 and 151 and inserted a new section 148A
making a complete change in the assessment proceedings relating to income escaping assessment and
search related cases. Consequential amendments have also been proposed to Sections 151A, 153A and
153C.

The new Section 147 provides that the Assessing Officer can make the re-assessment of an income
escaping assessment if the following conditions are satisfied:

(a)   Any income chargeable to tax has escaped assessment for any assessment year; and
(b)   The Assessing Officer follows the provisions of sections 148 to 153.

If the above conditions are satisfied, the Assessing Officer can assess or reassess such income or
recompute the loss or the depreciation allowance or any other allowance or deduction for such
assessment year. It is imperative to note that in view of Explanation to Section 147 the Assessing Officer
can assess or reassess all those incomes which have escaped assessment and which come to his notice
subsequently in the course of such proceeding notwithstanding that the procedure prescribed in section
148A was not followed before issuing such notice for such income.

15.2. Power to assess or reassess for assessment or reassessment or recomputation

The Finance Bill (Lok Sabha) has also covered 'recomputation' within the scope of the said Explanation
to Section 147. Thus, the Assessing Officer for the purpose of assessment or reassessment or
recomputation can assess or reassess all those incomes which have escaped assessment and which
come to his notice subsequently in the course of such proceeding notwithstanding that the procedure
prescribed in Section 148A was not followed before issuing such notice for such income.

15.3. Information suggests income escaping in case of Survey

The new scheme of reassessment proposes that the Assessing Officer can initiate the proceedings if he
has the information which suggests that some income has escaped the assessment. Explanations 1 and
2 of the proposed Section 148 define the situation in which an Assessing Officer shall be deemed to have
the information which suggests that the income chargeable to tax has escaped the assessment.

Explanation 2 applies in the case of search, survey or requisition of books, documents or other assets.
Explanation 1 applies in other cases.

In search, survey or requisition cases initiated or made or conducted, on or after 1-4-2021, it shall be
deemed that the Assessing Officer has information which suggests that the income chargeable to tax has
escaped assessment in the case of the assessee for the 3 assessment years immediately preceding the
assessment year relevant to the previous year in the following cases:

(a)   A search is initiated under Section 132 or books of account, other documents or any
assets are requisitioned under Section 132A, on or after 01-04-2021, in the case of
the assessee;
 (b)   A survey is conducted under section 133A in the case of the assessee;
(c)   The Assessing Officer is satisfied, with the prior approval of PCIT or CIT, that any
money, bullion, jewellery or other valuable article or thing, seized or requisitioned in
case of any other person on or after 01-04-2021, belongs to the assessee; or
(d)   The Assessing Officer is satisfied, with the prior approval of PCIT or CIT, that any
books of account or documents, seized or requisitioned in case of any other person
on or after 01-04-2021, pertains or pertain to, or any information contained therein,
relate to, the assessee.

The Finance Bill (Lok Sabha) has excluded the survey under Section 133A(2A) and Section 133A(5)
from the scope of this provision (point (b) mentioned above). Therefore, in the following surveys
conducted under Section 133A, it shall not be deemed that the Assessing Officer has information which
suggests that the income chargeable to tax has escaped assessment.

(a)   Survey for verifying that tax has been deducted or collected at source in accordance
with the provisions of sub-heading B of Chapter XVII or under sub-heading BB of
Chapter XVII.
(b)   Survey at any function, ceremony or event having regard to the nature and scale of
expenditure incurred by an assesse during that event.

In other words, the Assessing Officer cannot initiate re-assessment proceedings merely based on the
survey conducted in the above two cases.

15.4. Information suggesting escapement of income in case of Requisition

The Finance Bill, 2021 has proposed that it shall be deemed that the Assessing Officer has the
information which suggests that some income has escaped the assessment where the Assessing Officer
is satisfied, with the prior approval of PCIT or CIT, that any money, bullion, jewellery or other valuable
article or thing, seized or requisitioned in case of any other person on or after 01-04-2021, belongs to
the assessee.

The Finance Bill (Lok Sabha) has provided that this deeming fiction shall apply only in the case of
requisition under Section 132 or Section 132A. Therefore, in case of any unauthorized requisition, it
shall not be deemed that the Assessing Officer has the information which suggests that some income
has escaped the assessment.

15.5. Meaning of 'Asset' representing the income escaping assessment

The Finance Bill, 2021 proposes the following time-limit for issuance of notice under Section 148 for re-
assessment under Section 147.

Particulars Time Limit

In General
Where the Assessing Officer has evidence in
his possession which reveals that the income
escaping assessment, represented in the form
of asset, amounts to or is likely to amount to
Rs. 50 lakhs or more.
No notice shall be issued if 3 years have
elapsed from the end of the relevant
assessment year.
Notice can be issued beyond a period of 3
years but not beyond the period of 10 years
from the end of the relevant assessment year.
The Finance Bill (Lok Sabha) has inserted an Explanation to new Section 149(1) to define the meaning
of 'Asset'. For this purpose, the asset shall include the following:

(a)   Immovable property, being land or building or both;

(b)   Shares and Securities;
(c)   Loans and Advances;
(d)   Deposits in Bank Account.

Thus, the notice can be issued up to 10 years if the Assessing Officer has evidence in his possession
which reveals that the income escaping assessment, represented in the form of any asset, amounts to or
is likely to amount to Rs. 50 lakhs or more. The income escaping assessment may be represented by any
immovable property, shares, securities, loans, advances, bank balance, sundry debtors, jewellery, cash-
in-hand, stock-in-trade, paintings, other investments, etc.

15.6. Exclusion of Time limit for Completion of Assessment

While computing the period allowed for completion of assessment or reassessment, certain time
periods are excluded. Where assessee approaches the Authority for Advance Ruling, the period to be
excluded from the limitation period shall commence from the date on which an application is made
before the AAR and end with the date on which the order rejecting such application or the Advance
Ruling, as the case may be, is received by Principal CIT or CIT.

The Finance Bill, 2021 proposed that the Authority for Advance Rulings shall cease to operate with
effect from such date, as may be notified by the Central Government in the Official Gazette. The Central
Government has been empowered to constitute one or more Board for Advance Rulings for giving
advance rulings on and after the notified date.

The Finance Bill (Lok Sabha) has made consequential amendments to make the reference of Board for
Advance Rulings along with the Authority for Advance Rulings in Section 153. Therefore, while
computing the period of limitation, the period to be excluded from the limitation period shall
commence from the date on which an application is made before the AAR or Board for Advance Rulings
and end with the date on which the order rejecting such application or the Advance Ruling, as the case
may be, is received by Principal CIT or CIT. Similar amendments have been made to Section 153B
(time-limit for completion of assessment in search or requisition cases).

15.7. Time-limit for completion of assessment on withdrawal of application filed before

Settlement Commission

The Finance Bill, 2021 has proposed to discontinue the Income-tax Settlement Commission ('ITSC')
with effect from 01-02-2021. It has been proposed to constitute an Interim board for settlement of cases
pending with the Settlement Commission.

The assessee (who had filed an application with the Settlement Commission) has the option to
withdraw such application within 3 months from the date of commencement of the Finance Act, 2021.
If not withdrawn, the application will be deemed to be received by the Interim Board on the date on
which the application was allotted by the Board.
The Finance Bill (Lok Sabha) has inserted fourth proviso after Explanation 1 to Section 153 to provide
that if the assessee has exercised the option to withdraw the application filed before Settlement
Commission, the period of limitation available to the Assessing Officer for making an assessment,
reassessment or recomputation after the excluded time shall not be less than one year. If such period of
limitation is less than one year, it shall be deemed to have been extended to one year.

Similar amendments have been made to Section 153B (time-limit for completion of assessment in
search or requisition cases). In such cases, the period shall stand extended to a minimum one year
where assessee has exercised the option to withdraw the application filed before the Settlement
Commission.

This amendment shall also apply for determining the period of limitation in the following sections:

(a)   For determination of the period of limitation for issue of notice for re-assessment
under Section 149;
(b)   For filing of application for rectification of mistake apparent from record under
Section 154;
(c)   For other amendments as specified in Section 155;
(d)   For payment of interest on refund under Section 244A.

16. Pending Applications before AAR

The Finance Bill, 2021 has proposed that the Authority for Advance Rulings shall cease to operate with
effect from such date, as may be notified by the Central Government in the Official Gazette. The Central
Government has been empowered to constitute one or more Board for Advance Rulings for giving
advance rulings on and after the notified date. Every such Board shall consist of two members, each
being an officer not below the rank of Chief Commissioner.

The Finance Bill, 2021 also proposed to amend Section 245Q (which deals with filing of application)
that the application pending with the Authority, in respect of which order under section 245R(2) or
section 245R(4) has not been passed before the notified date, shall be transferred to the Board for
Advance Rulings along with all records, documents or material, by whatever name called and shall be
deemed to be the records before the Board for all purposes.

The Finance Bill (Lok Sabha) changed the reference from application filed under this Section to 'under
this Chapter'. Therefore, if any application is pending under Chapter XIX-B of the Income-tax Act in
respect of which order under section 245R(2) or section 245R(4) has not been passed before the
notified date, it shall be transferred to the Board for Advance Rulings.

17. Scope of investment extended for exemption under Section 10(23FE)

17.1. Introduction

To encourage investments by Sovereign Wealth Fund (SWF) and Pension Fund (PF) into infrastructure
sector of India, the Finance Act, 2020 has inserted clause (23FE) to Section 10 to provide an exemption
from the income in the nature of dividend, interest or long-term capital gains arising from an
investment made in India. This exemption was allowable subject to fulfilment of various conditions.
One of such conditions provide that the specified person should invest in a Category-I or Category-II
Alternative Investment Fund regulated under the SEBI (Alternative Investment Fund) Regulations,
2012 having 100% investment in one or more of the company or enterprise carrying on the business of
developing, or operating and maintaining, or developing, operating and maintaining any infrastructure
facility as defined in the Explanation to Section 80-IA(4)(i).

17.2. Amendment by Finance Bill, 2021

The Finance Bill, 2021 has proposed the following changes to section 10(23FE) with respect to types of
eligible investments by the specified persons for claiming exemption under such section:

(a)   Presently, SWF/PFs are not allowed to invest through holding company. It is
proposed to allow the same through a domestic holding company of an
infrastructure company if the prescribed conditions are fulfilled;
(b)   Presently, SWF/PFs are not allowed to invest in NBFC-IFC/IDF. It is proposed to
allow the same if the prescribed conditions are fulfilled.

Currently the exemption could be availed only if the investment is made in Category I or II AIF having
100% investment in the Infrastructure companies. The Finance Bill, 2021, has proposed to relax this
condition to reduce the holding limit for Category-I or Category-II AIFs from 100% to 50%. Further, it
is proposed to allow these AIFs to invest in an Infrastructure Investment Trust (InvIT) in addition to
these entities specified under Section 80-IA(4)(i) or notified entities.

17.3. Amendment by the Finance Bill (Lok Sabha)

The Finance Bill (Lok Sabha) has extended the relaxation with respect to further investment by the
Category I or II AIF in any of the following entities:

(a)   A domestic holding company registered on or after 01-04-2021 having a minimum

75% investments in one or more infrastructure companies; or
(b)   A NBFC-IDF/IFC having minimum 90% lending to one or more infrastructure
entities.

Further, the amendment has been made to provide that exemption under this clause shall be calculated
proportionately if the aggregate investment of holding company in Infrastructure Company or
companies or NBFC-IDF/IFC is less than 100%.

18. Income of a non-resident from leasing of aircraft to a unit of an IFSC [Section 10(4F)]

[Applicable from Assessment Year 2022-23]

The Finance Bill, 2021 has proposed to insert Section 10(4F) to provide exemption in respect of income
of a non-resident by way of royalty on account of leasing of an aircraft to a unit located in an
International Financial Services Centre (IFSC). The exemption is proposed to be allowed only when the
following conditions are satisfied:

(a)   The unit of IFSC should be eligible for deduction under Section 80LA for the
previous year in which aircraft is leased; and
(b)   The operations of the unit of IFSC must be commenced on or before 31-03-2024.
The Finance Bill (Lok Sabha) has made the following changes to the said section:

18.1. Exemption shall be available for both operating and finance lease charges

A lease is an agreement where by the lessor conveys the right to use an asset to the lessee for an agreed
period. For conveying such rights, the lessor may receive lump sum payment or series of payments from
lessee ('lease payment'). The nature of lease payment depends upon the lease agreement. It may be in
the form of royalty or rent. Further, in case of finance lease where the lessee acquires the economic
benefits of the use of the leased asset for the major part of its economic life, the lease payment may also
be in the form of interest charged on the fair value of asset.

Thus, considering the fact that the income from leasing may also be in the nature of interest, section
10(4F) is suitably amended to provide exemption in respect of interest income arising to a non-resident
on account of leasing of aircraft to a unit of an IFSC.

18.2. Condition of 'Unit of IFSC to be eligible for deduction under section 80LA' is
removed

The condition that the unit of IFSC should be eligible for deduction under Section 80LA for the
previous year in which aircraft is leased has been removed. Thus, a non-resident shall be able to claim
exemption under section 10(4F) even if the aircraft is leased to a unit of an IFSC which is not eligible for
deduction under Section 80LA.

18.3. Meaning of 'aircraft' is defined

An Explanation has been inserted to Section 10(4F) to define the meaning of aircraft. It provides that
the 'aircraft' means an aircraft or a helicopter, or an engine of an aircraft or a helicopter, or any part
thereof.

19. Exemption to be available to non-resident investors and Category-III AIF [Section

10(23FF)]

[Applicable from Assessment Year 2022-23]

The Finance Bill, 2021 proposes to insert two new clauses (viiac) and (viiad) to Section 47. Clause
(viiac) provides that any transfer of capital asset by a foreign investment fund ('original fund') to a fund
located in IFSC ('resultant fund') in pursuance of its relocation to such IFSC, is not regarded as transfer
for the purpose of computing capital gain. Similarly, clause (viiad) provides that transfer of shares, unit
or interest held by an investor in original fund in consideration of share, unit or interest in resultant
fund is also not regarded as transfer.

Section 56(2)(x) provides for the taxability under the head 'other sources' if any property is received by
any person without or for inadequate consideration. This provision has also been proposed to be
amended to exclude the transfer of property made in relation to relocation of foreign investment fund to
IFSC. Thus, no taxability shall arise even in the hands of resultant fund on receipt of capital asset from
the original fund.
The expressions "original Fund", "relocation" and "resultant fund" are defined under an Explanation to
clauses (viiac) and (viiad) of section 47.

Here, it is to be noted that the relocation of foreign investment fund to IFSC is treated as a tax neutral
transaction. However, when the resultant fund subsequently transfers the capital asset received from
the original fund, it shall be regarded as transfer unless provided otherwise and, accordingly, capital
gain arising from such transfer shall be chargeable to tax.

The resultant fund is required to be registered as Alternative Investment Fund (AIF) with SEBI. AIFs
(except Category-III AIF) are provided pass-through status under the Income-tax Act whereby they can
pass their income (except income chargeable under the head business or profession) to their investors
without paying tax thereon and, consequently, such income is chargeable to tax in the hands of the
investors.

As resultant fund is required to be incorporated and registered as AIF in India, its world-wide income is
taxable in India. Whereas the taxability of foreign investment fund in India depends upon various
factors such as its country of residence, nature of investment in India, place of business in India,
provisions of Double Taxation Avoidance Agreement (DTAA) etc. Thus, it is possible that the foreign
investment fund would not have been chargeable to tax in India if it had not been relocated to India.
Thus, to provide relief in such cases, a new section 10(23FF) is also proposed to be inserted to provide
exemption in respect of income in the nature of capital gains, arising or received by a non-resident,
which is on account of transfer of share of a company resident in India by the resultant fund and such
shares were transferred from the original fund to the resultant fund in relocation, if capital gains on
such shares were not chargeable to tax had that relocation not taken place.

The exemption under section 10(23FF) is proposed to be provided to non-resident investors of the
resultant fund and not to the resultant fund itself. Thus, where the resultant fund is registered as
Category-III AIF, the taxability may arise in its hands because Category-III AIF is not recognized as
pass-through entity under the Income-tax Act. Considering this fact, the Finance Bill (Lok Sabha) has
made changes to Section 10(23FF) to provide exemption to Category-III AIF as well. However,
Category-III AIF shall be entitled for the exemption only when it falls under the definition of 'specified
fund' as defined under clause (c) of the Explanation to section 10(4D). Further, the exemption shall be
available only to the extent of income attributable to units held by non-resident (not being a permanent
establishment of a non-resident in India) in such specified fund.

Further, it is provided that Section 10(23FF) shall apply even in cases the resultant fund received the
shares of a company resident in India from wholly owned special purpose vehicle of the original fund.
Consequential amendment is made to the definition of 'relocation' as defined under Explanation to
Clause (viiac) and Clause (viiad) of Section 47. The meaning of 'resultant fund' is also amended to
provide that it can also be regulated under the International Financial Services Centres Authority Act,
2019.

20. Taxation of Income from GDRs issued by Overseas Depository Bank situated outside
India or IFSC [Section 115ACA]

[Applicable from Assessment Year 2022-23]

Where an Indian company or its subsidiary, engaged in information technology, entertainment,
pharmaceutical or bio-technology industry, distributes dividend in respect of Global Depository
Receipts (GDRs) issued to its employees under an Employees' Stock Option Scheme, the dividend is
taxable at a concessional tax rate of 10% under Section 115ACA in the hands of the employee provided
he is a resident in India and GDRs are purchased by him in foreign currency. Further, the long-term
capital gain arising from transfer of such GDRs shall also be taxable at concessional rate of 10%.

The GDR for this purpose is defined under clause (a) of the Explanation to said section 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 recognised stock
exchange in India; or
(b)   foreign currency convertible bonds of issuing company.

The Finance Bill (Lok Sabha) has amended the definition of GDRs to provide that they can be created
by the Overseas Depository Bank in an International Financial Services Centre (IFSC) as well. Further,
GDRs can also be issued against the issue of ordinary shares of issuing company, being a company
incorporated outside India, if such depository receipt or certificate is listed and traded on any IFSC.

IFSC is also defined to provide that it shall have the same meaning as assigned to it in clause (q) of
section 2 of the Special Economic Zones Act, 2005.

21. Regulations applicable in case of Category-I and Category-II AIFs [Section 115UB]

[Applicable from Assessment Year 2022-23]

Category-I and Category-II Alternative Investment Funds (AIFs) are provided pass-through status
under the Income-tax Act as per Section 115UB read with Section 10(23FBA) and Section 10(23FBB).
The pass-through entities pass their income (except income chargeable under the head business or
profession) to their investors without paying tax thereon and, consequently, such income is chargeable
to tax in the hands of the investors. Currently, section 115UB provides that AIFs should be registered
with SEBI and regulated under the Securities and Exchange Board of India (Alternative Investment
Fund) Regulations, 2012.

However, where AIF is located in an International Financial Services Centre (IFSC), it is regulated
under the International Financial Services Centre Authority Act, 2019. Thus, considering the same, the
Finance Bill (Lok Sabha) has made an amendment to Section 115UB to provide that Category-I and
Category-II AIF shall also be regulated under the said Act.

22. Transaction not regarded as transfer

22.1. Transfer of capital asset by Indian Infra Finance Co. to an Institution established
for financing infrastructure and development [Section 47(viiae)]

The Finance Bill (Lok Sabha) has inserted a new clause (viiae) to Section 47 to provide that any transfer
of a capital asset by Indian Infrastructure Finance Company Limited to institution established for
financing infrastructure and development, set up under an Act of Parliament and notified by the Central
Government, shall not be regarded as transfer.

The consequential amendments have also been made to Section 49 to provide that the cost of a capital
asset in the hands of the transferee shall be the same as in the hands of the transferor. Further, Section
56(2)(x) is also amended to provide that this provision shall not apply in respect of transfer referred to
in Section 47(viiae).

22.2. Transfer of capital asset under a plan approved by Central government [(Section
47(viiaf)]

The Finance Bill (Lok Sabha) has inserted a new clause (viiaf) to Section 47 to provide that any transfer
of a capital asset by a public sector company to another notified public sector company, Central
Government or State Government shall not be regarded as transfer. Such transfer must be under a plan
approved by the Central Government.

The consequential amendments have also been made to Section 49 to provide that the cost of a capital
asset in the hands of the transferee shall be the same as in the hands of the transferor. Further, Section
56(2)(x) is also amended that this provision shall not apply in respect of transfer referred to in Section
47(viiaf).

23. Performance of functions of Verification Unit

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 inserted a
new Section 144B, to provide the manner in which faceless assessment under Section 143(3) and best
judgment assessment under Section 144 shall be conducted.

The CBDT has been authorised to set up the following centres and units by specifying their respective
jurisdiction :

(a)   National Faceless Assessment Centre (NFAC);

(b)   Regional Faceless Assessment Centres (RFAC);
(c)   Assessment Units (AU);
(d)   Verification Units (VU);
(e)   Technical Units (TU); and
(F)   Review Units (RU).

The Verification Unit shall perform the function of verification, which includes enquiry, cross
verification, examination of books of account, examination of witnesses and recording of statements,
and such other functions as may be required for the purposes of verification.

The Finance Bill (Lok Sabha) has provided that the function of verification unit under this section may
also be performed by a verification unit located in any other faceless centre set up under the provisions
of this Act or under any scheme notified under the provisions of this Act. The request for verification
may also be assigned by the National Faceless assessment centre to such verification unit.

24. Investment division of offshore banking unit to be registered as Category-I FPI and
not as Category-III AIF [Sections 10(4D) and 115AD]

[Applicable from Assessment Year 2022-23]

The Finance Bill, 2021 has proposed to amend the definition of 'specified fund' as provided under
section 10(4D) to extend the benefit of exemption of this section to the investment division of offshore
banking unit. The 'investment division of offshore banking unit' has been proposed to be defined as a
unit which has been:

(a)   granted a certificate of registration as a Category-III AIF and is regulated under the
SEBI (AIF) Regulations, 2012, made under the SEBI Act, 1992 or which has
commenced its operations on or before the 31-03-2024; and
(b)   fulfils such conditions including maintenance of separate accounts for its investment
division, as may be prescribed.

Corresponding amendment has also been proposed to Section 115AD for extending the benefit of
concessional tax rate prescribed under that section to investment division of offshore banking unit.
However, said unit was defined under Section 115AD as a unit registered as Category-III FPI under the
SEBI (FPI) Regulations, 2019 made under the SEBI Act, 1992.

Under the SEBI (FPI) Regulations, 2019, FPIs can be registered under 2 categories only - Category-I
FPIs and Category-II FPIs. Thus, reference of Category-III FPI under section 115AD was inadvertently
made.

Now, the Finance Bill (Lok Sabha) has amended the definition of 'investment division of offshore
banking unit' to provide that it should be granted registration as a Category-I Foreign Portfolio Investor
under the SEBI (FPI) Regulations, 2019. Thus, instead of taking registration as Category-III AIF under
SEBI (AIF) Regulations, 2012, it shall be required to take registration as Category-I FPI. This
amendment is made both to section 10(4D) and section 115AD.

Further, specified funds as defined under Section 10(4D) includes a fund established or incorporated in
India in the form of a trust or a company or a LLP or a body corporate:

(a)   Which has been granted a certificate of registration as a Category III AIF and is
regulated under the SEBI (AIF) Regulations, 2012, made under the SEBI Act, 1992;
(b)   Which is located in any International Financial Services Centre (IFSC);
(c)   Entire units of which are held by non-residents other than unit held by a sponsor or
manager.

The Finance Bill (Lok Sabha) has amended the aforesaid definition to provide that such fund can also
be regulated under International Financial Services Centre Authority Act, 2019.

25. Curative amendments under section 115AD

The Finance Bill, 2021 has proposed to amend the definition of 'specified fund' provided under Section
10(4D) to include Investment division of offshore banking unit within its ambit. Consequently, Section
115AD has also been proposed to be amended to extend the benefit of concessional tax rates prescribed
therein to such investment division of offshore banking unit. The proposed amendment has specifically
inserted words "investment division of an offshore banking unit" after specified fund, whereas such
investment units were already covered within the meaning of specified fund by virtue of amendment
proposed to Section 10(4D). To remove this error, the Finance Bill (Lok Sabha) has removed the
reference of the 'investment division of offshore banking unit' wherever provided before the expression
'specified fund' under 115AD.

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020
('Amendment Act, 2020') substituted clause (i) of section 115AD(1) which provides for concessional tax
rates on income from securities held by FPIs with effect from Assessment Year 2021-22 to provide tax
rate in case of specified fund as defined under Section 10(4D). Before the said amendment, clause (i) of
section 115AD(1) used to have a Proviso which provides for further concessional tax rate of 5% in
respect of securities covered under section 194LD. But, in the clause (i) (as substituted by the
Amendment Act, 2020), the said proviso was missing. Thus, there was no clarity whether such proviso
would continue to be applicable or not after substitution of clause (i).

To clarify this issue, the CBDT issued a press release dated 17-03-2021 and provided that such proviso
shall continue to be applicable. Consequentially, the Finance Bill (Lok Sabha) has now made necessary
amendment under the Amendment Act, 2020 and inserted the said proviso under the substituted
clause (i) itself with effect from Assessment Year 2021-22.

26. Changes to Indian Stamp Act

26.1. Introduction

As per the provisions contained under the Indian Stamp Act, 1899 stamp duty is payable on execution
of transaction or the instrument. Stamp duty is levied on specified transactions at the rates specified by
various Stamps Acts which include Central and State Acts.

26.2. Amendment by Finance Bill, 2021

The Finance Bill, 2021 has proposed to amend various sections to make the reconstruction or splitting
up of a public sector company into separate companies a tax neutral transaction. The Finance Bill, 2021
has also proposed that such splitting up or reconstruction shall be regarded as demerger under Section
2(19AA) provided various conditions are satisfied. In addition to this, set off and carry forward of losses
would be allowed if proposed conditions under section 72AA are complied with.

Indias Stamp Act, 1899 has also been proposed to be amended that stamp duty will not be levied if the
following conditions were satisfied:

(a)   There is an instrument for conveyance or transfer of a business or asset or right in

any immovable property;
(b)   Transfer is made from a Government company, its subsidiary, unit or joint venture,
to another Government company or to the Central Government or any State
Government;
(c)   Reconstruction was done by way of:
  Strategic sale;
  Disinvestment;
   Demerger; or
  Any other scheme of arrangement.

26.3. Amendment by the Finance Bill (Lok Sabha)

The Finance Bill (Lok Sabha) has amended the Indian Stamp Act, 1899 to extend the waiver of the
stamp duty even if transfer is made to the development financial institution established by any law
made by the Parliament.

Further, the Stamp duty will not be charged under the Act if the Government companies under the
following stages are transferred to another Government Company or to the Central Govt. or the State
Govt.:

(a)   Winding up;

(b)   Closing;
(c)   Striking-off;
(d)   Liquidation; or
(e)   Shut down.

27. No EL on consideration received for the sale of goods or provision of services owned
or provided by a resident or non-resident having a PE in India

The Finance Bill, 2021 proposes to amend Section 165A of the Finance Act, 2016, to provide an
inclusive definition of the 'consideration' received or receivable from e-commerce supply or services. As
per the proposed amendment it shall include:

(a)   The consideration for the sale of goods irrespective of whether the e-commerce
operator owns the goods; and
(b)   The consideration for the provision of services irrespective of whether service is
provided or facilitated by the e-commerce operator.

In other words, the consideration received or receivable for the sale of goods or the provision of services
shall be chargeable to equalisation levy even if such goods were owned or services were facilitated by
any other person.

The Finance Bill (Lok Sabha) has rephrased the inclusive definition of 'consideration' to exclude the
following transactions from the scope of this provision:

(a)   Consideration for sale of goods which are owned by a person resident in India or
Permanent Establishment (PE) of a non-resident person in India if such sale is
effectively connected with such PE; and
(b)   Consideration for provision of services which are provided by a person resident in
India or PE of a non-resident person in India if such provision of services is
effectively connected with such PE.

Accordingly, no equalisation levy will be charged where the consideration received or receivable by an
e-commerce operator is attributable to the sale of goods or provision of services owned or provided by
an Indian resident or a non-resident having a PE in India and such supply or provision is effectively
connected with such PE. It should be noted the transactions excluded from the scope of Equalisation
Levy shall be subject to TDS under Section 194-O.

27.1. Rationale behind such amendment

27.1-1. Sale of goods and provision of services by resident or PE are already taxable in India

Income-tax liability of an assessee is calculated on basis of his 'Total Income'. What is to be included in
the total income is greatly influenced by the residential status of the assessee in India. Section 5
provides that in case of ordinarily resident person, global income shall be charged to tax in India. In
case of not ordinarily resident person, entire income (other than income which accrues or arises outside
India from business controlled in or a profession set up outside India) shall be charged to tax in India.
Further, the DTAA allocates the rights to the source country to tax the business income of a non-
resident if it has a PE in India. As the income of a resident person and such non-resident is already
taxed in India, charging equalisation levy on the transactions done by such persons is not justified.

27.1-2. Such transactions are also subject to TDS under Section 194-O

The Finance Act, 2020, has introduced a Section 194-O to require every e-commerce operator,
facilitating the sale of goods or provision of services of an e-commerce participant through its digital or
electronic facility or platform, to deduct tax at source at the rate of 1%. Such section defines an e-
commerce participant as a person resident in India selling goods or providing services or both,
including digital products, through a digital or electronic facility or platform for electronic commerce.
Thus, the sale of goods or provision of services by a resident person through any e-commerce operator
(resident or non-resident) is already covered within the ambit of said provision.

27.2. Example

ABC.com a non-resident e-commerce operator makes or facilitates the following transactions:

Particulars Amount (in

lakh)
Sale of own goods 100
Supply of services through owned resources 250
Facilitating the sale of goods or services by the non-resident e-commerce 350
participants (not connected with PE in India)
Facilitating the sale of goods or services by the resident e-commerce 500
participants

Computation of equalisation levy

Particulars Amount (in Equalisation levy (B

lakh) (A) = A * 2%)
     
Sale of own goods 100 2
Services provided by it through owned resources 250 5
Facilitating the sale of goods or services by the non- 350 7
resident e-commerce participants (not connected with
PE in India)
Facilitating the sale of goods or services by the resident 500 -*
e-commerce participants
Total 24

*The Finance Act, 2021, has excluded the consideration received in respect of sale of goods or
provision of services owned or provided by resident person or a non-resident having a PE in India
from the scope of Equalisation levy.

Computation of TDS liability under Section 194-O

Particulars Amount (in Whether TDS deductible Amount of

lakh) (A) TDS (B = A *
1%)
       
Sale of own goods 100 No, as own goods are -
sold
Services provided by it 250 No, as services are -
provided through owned
resources
Facilitating the sale of goods or services 350 No, as e-commerce -
by the non-resident e-commerce participant is a non-
participants (not connected with PE in resident
India)
Facilitating the sale of goods or services 500 Yes, as e-commerce 5
by the resident e-commerce participant is resident
participants
Total   5
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