Introduction
The scope of this article is to highlight the amendments to the Income-tax Act, concerning 'Business Income', which have been made effective from the assessment year 2005-06 and will have to be borne in mind while preparing the Return of Income.

Every law is made with an intention. The intention of the legislature while making the law may be good. But the limitation of the human mind to express its intent in words and to foresee and visualize the innumerable implications of the words that go to form the law and the diverse real life situations in which these words will be applied creates ambiguities, confusion and chaos. While making the law the intention is emphasized. But once the law is made, its letter become more important as the courts state that their function is to interpret the law as it is expressed in words. If an interpretation is not in consonance with the intention the Courts give suggestions for change in the language as according to them it is the duty of the legislature to make the law. This entire process leads to a law, which ought to be objective, becoming very subjective at the enforcement or the implementation stage. I still have not been able to understand whether the letter of the law should govern the interpretation or the intention or the spirit of the law should be given more importance while interpreting the law.
 

Section 40 – Disallowance of expenses liable to TDS
The Finance Act, 2004 has inserted a new sub-clause (ia) in clause (a) of section 40 with effect from assessment year 2005-06 to provide that any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work, on which tax is deductible at source under Chapter XVII-B and such tax has either not been deducted, or after deduction, has not been paid during the previous year or in the subsequent year within the time prescribed under section 200(1), shall not be allowed as a deduction in computing the income under the head "Business Income".

In simple words if any of the specified payments namely commission, brokerage, professional fees, fees for technical services, payment to contractors and sub-contractors which have been claimed as an expenditure will be disallowed if either tax has not been deducted at source or after deduction tax has not been paid during the previous year or within the time allowed u/s 200(1).

A perusal of the above clause shows that if salary and rent paid without TDS they will not be subject to disallowance under this clause.

The lacuna in respect of rent payments not being covered by this clause has been noticed by the lawmakers and The Taxation (Amendment) Bill, 2005 which has been introduced in the Lok Sabha on 12th May, 2005 proposes to cover the rent payments also within the scope of this disallowance u/s 40 (a)(ia). It appears that salary payments have been consciously kept out of the scope of this clause. But it is difficult to understand why they have been left out.

It appears if TDS is paid during the previous year even if belatedly, the payments covered thereunder will not attract disallowance under this clause. Only the payments in respect of which either tax is not deducted at source or if deducted is paid in the subsequent year and after the expiry of time prescribed u/s 200 (1) will attract disallowance under this clause. But even such payments will be allowed as a deduction but in the subsequent year when the TDS is paid.

This small clause 40(a)(ia) has far reaching, serious and grave implications while computing income under the head "Business Income" of an assessee. Even if TDS of 2% in respect of payment to contractors and 1% in respect of payment to sub-contractors is not deducted the entire expenditure will be disallowed.
 

Section 71 – Business loss cannot be set off against salary income
Section 71 provides that loss computed in the year under one head of income, other than losses under the head "Capital Gains" can be set of against income under any other head. The Finance Act, 2004 has with effect from 1-4-2005 inserted a new sub-section (2A) in section 71 so as to provide that an assessee shall not be entitled to set-off any loss under the head "Business Income" against income under the head "Salaries".

The Memorandum explaining the provisions of the Finance Bill, 2004 puts this amendment under the head "Measures to Plug Revenue Leakages" and states that in order to prevent the abuse of the provisions of set-off of losses it is proposed to carry out the said amendment. It means that assessees who are earning salaries declare that they have a business loss and set off the said business loss against their salary income and claim refund of taxes deducted on their salary income. Is it so easy to declare that an assessee who is a salaried employee is also doing a business and has incurred a loss in it? But instead of catching such unscrupulous assessees and punishing them, the law makers provide for a blanket ban on such a set-off. This is how the law evolves in our country. Instead of catching the people who abuse the law, the law undergoes a blanket change causing loss of rightful benefits even to the honest assessees. Honest tax-payer always have to pay a price for being honest and bear the cost of the dishonest tax-payer, so as to prevent that the loss of Revenue due to the State.
 

Section 32 – Depreciation –Relaxation in condition for allowance of additional depreciation
Clause (iia) of sub-section (1) of section 32 inserted by the Finance Act, 2002 w.e.f. 1-4-2003 granted additional depreciation of 15 per cent, to an assessee, engaged in business of manufacture, in respect of plant or machinery acquired after 31st March, 2002 installed in new industrial undertaking, or a existing industrial undertaking if it resulted in increase in the installed capacity by at least 25%.
 
This condition of a minimum increase in the installed capacity of 25% has been reduced to 10% w.e.f. 1-4-2005.
 

New Chapter XIIG – Taxation of shipping companies – Tonnage tax
A new presumptive tax determining the taxable income on the basis of the tonnage of the ship has been introduced by inserting a whole new Chapter XIIG w.e.f. 1-4-2005. In this scheme the notional income is taxed at the normal corporate rate applicable for the year, even if there is a loss in an year. Once a company opts for the scheme there is a lock in period of ten years. Similarly is a company opts out, it is debarred from re-entry for ten years.

This new Chapter XII-G contains sections 115V to 115VZC and it is divided into seven parts A to G. Since these provisions have are applicable only to one specific sector these are not being discussed at length in this article.
 

Agro processing industry – Deduction u/s 80-IB
Under the provisions of sub-section (11A) of section 80-IB an undertaking deriving profit from the integrated business of handling storage and transportation of food grains shall be allowed 100% deduction of such profits for first five years and thereafter 25% (or 30% if the assessee is a company) for the next five years. With effect from assessment year 2005-06 this deduction is has also been granted to undertakings deriving profit from business of processing, preservation and packaging of fruits or vegetable.
 

Hospitals in rural areas – Deduction u/s 80-IB
A new sub-section (11B) has been inserted in section 80-IB to provide that profits derived by an undertaking from the business of operating and maintaining a hospital in a rural area shall be entitled to deduction of 100% of such profits for the first five years. However the hospital should have been constructed between 1-10-2004 and 31-3-2008, it should have at least 100 beds for patients and the construction of the hospital should be in accordance with the regulations of the local authority. To claim the deduction the assessee will have to submit along with the return of income, an audit report in the prescribed form certifying that the deduction has been correctly claimed.
 

Housing Projects – Deduction u/s 8O-IB
Sub-section 80-IB grants deduction of 100 % of the profits of an undertaking developing and building housing projects approved by the local authority. A time limit has been now provided for the completion of the housing project. Sub-section (10) of section 80-IB has been substituted w.e.f. 1-4-2005 extending the date of approving the housing projects has been extended from 31-3-2005 to 31-3-2007, subject to the conditions that :

1.  

   1. The undertaking has commenced or commences developing and building approved housing on or after 1-10-1998 and completes such construction, in a case where a housing project :

      1. has been approved before 1-4-2004, on or before 31-3-2008.

      2. has been or is approved on or after 1-4-2004, within four year from the end of the financial year in which the hosing project is approved by the local authority. 
          

   2. The project is on the size of a plot which has a minimum area of one acre.
      
      With a view to encourage the redevelopment of slum dwellings, the above conditions in (a) and (b) will not apply in case of a housing project carried out in accordance with a scheme framed by the Central Government or a state Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas under any law and such scheme is notified by the Board in this behalf.
       

2. The residential unit has a maximum built up area of 1000 square feet in case units situated in Mumbai and Delhi or within 25 kilometres from the municipal limits of these cities and 1500 square feet at any other place. Built up area defined in clause (a) of sub-section (14).
    

3. The built up area of shops and other commercial establishments included in the housing project does not exceed 5% of the aggregate built-up area of the housing project or 2000 square feet whichever is less.
   
   Where the approval of the housing project is obtained more than once, the first date of approval shall be relevant and the date of completion of the housing project shall be the date on which the completion certificate is issued by the local authority.
    

Power, Telecom Undertakings – Section 80-IA
Under clause (iv) sub-section (4) of section 80-IA, an undertaking or enterprise engaged in the generation or generation and distribution or the transmission or distribution of power which begins such generation or transmission before 1-4-2006, is allowed a 100% deduction of the profits for any ten out of the fifteen assessment years. In order to encourage investment in renovation and modernization of the transmi-ssion and distribution network, sub-clause (c ) has been inserted w.e.f. 1-4-2005 to extend the tax benefit under the section to an undertaking which undertakes substantial renovation and modernisation of the existing transmission or distribution lines. "Substantial renovation and modernization" has been defined to mean an increase by at least 50% of the book value of such plant and machinery as on 1-4-2004.

This deduction is available only to a new undertaking as sub-section (3) of section 80 (IA) provides that undertakings formed by way of reconstruction or splitting up or by transfer to a new business of more than 80% of old plant and machinery, shall not be eligible for deduction u/s 80-IA.

A new proviso has been inserted to sub-section (3) w.e.f . 1-4-2005 to provide that the above restrictions imposed on transfer of old plant and machinery and splitting up or reconstruction of an old business shall not apply in case of the splitting up, or reconstruction or re-organisation of State Electricity Boards.

To rationalize the provisions of this section sub-section (3) has been amended to provide that the above restrictions on transfer of old plant and reconstruction or splitting up of business shall apply to the telecom sector also.

An attempt has been made to cover most of the important amendments which have come into effect from the assessment year 2005-06. A sincere thanks to the Chamber for giving me this opportunity to update and refresh myself.