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Chandravijay
Shah
Chartered Accountant
The Finance Bill, 2005 ("Bill") presented
in Parliament on February 28, 2005 proposes far reaching
amendments relating to the head of "Profits & Gains Of Business
Or Profession", few of which are discussed in this write up.
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Clause 8: Section 32(1)(iia):
Initial Depreciation
Clause (iia) of section 32(1) of the
Income Tax Act, 1961 ("Act") was inserted by the Finance
Act, 2002 with effect from A.Y. 2003-2004, whereby any new
Plant and Machinery purchased to manufacture or produce any
article or thing was entitled to Initial Depreciation @
15% of its cost, besides normal Depreciation at the applicable
rate.
The said Initial Depreciation is
presently available, provided (a) in case of an
existing industrial undertaking, such purchase of new
Plant and Machinery results into increase in the installed
capacity by atleast 25% (10% with effect from A. Y.
2005-2006) and such purchase was made on
or after 1-4-2002, (b) in case of a new
industrial undertaking, it begins to manufacture or
produce on or after 1-4-2002, even if such purchase was
made prior to 1-4-2002, (c) such Plant and
Machinery must not have been used within or outside
India, (d) such Plant and Machinery is not installed
in an office premise, (e) Form No. 3AA
containing the details of such purchase of new Plant and
Machinery and increase in the installed capacity duly
certified by a Chartered Accountant is furnished with the
Return of Income.
Clause 8(a) of the Bill seeks to
substitute the said Clause (iia) of section 32(1).
Accordingly, the Initial Depreciation will be available
@ 20%, instead of present rate of 15%, of cost of new Plant
and Machinery acquired and installed
on or after 1-4-2005. All present conditions remain
same, except that:
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An existing industrial undertaking
need not satisfy the condition of such purchase of new
Plant and Machinery resulting into increase in its
installed capacity by at least 25% (10% with effect from
A. Y. 2005-2006). In other words, any new Plant and
Machinery purchased by either an existing industrial
undertaking or a new industrial undertaking will qualify for
Initial Depreciation @ 20% of cost, the present
condition of substantial expansion in case of an existing
industrial undertaking having been given a go-bye.
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Form No. 3AA containing the
details of such purchase of new Plant and Machinery and
increase in the installed capacity duly certified by a
Chartered Accountant to be furnished with the Return of
Income will no longer be necessary.
This amendment is effective from A.Y.
2006-2007.
Though not part of this Bill, it may be
relevant to take note of following some important changes
in Rates of Depreciation notified vide Notification
No. 67 / 2005 dated
28-2-2005 whereby whole Appendix I to Income Tax Rules
is substituted with effect from A. Y. 2006-2007:
| Sr. |
Asset |
Rates of
Depreciation (%) |
| |
|
From
A. Y.
2006-2007 |
Up to
A. Y.
2005-2006 |
| 1 |
Plant and Machinery
(General) |
15 |
25 |
| 2 |
Furniture & Fixtures,
including
Electrical Fittings |
10 |
15 |
| 3 |
Motor Car (Other than
running on hire) |
15 |
20 |
| 4 |
Motor Car (Running
on hire)
|
30 |
40 |
| 5 |
Moulds used in Rubber
and
Plastic Goods
Factories |
30 |
40 |
| 6 |
Gas Cylinders, including
valves
and regulators |
60 |
80 |
| 7 |
Glass Manufacturing
Concerns:
Direct Fire
Glass Melting Furnaces |
60 |
80 |
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Clause 9: Section 33AC(iv):
Utilisation Of Reserve For Shipping Business
Section 33AC says that 50% of profits have
to be credited to Reserve Account which has to be utilised
within next 8 years of creation thereof for
purchase of a new Ship and such new Ship must be retained for
at least 3 years.
Further, section 33AC(4) at present
provides that where new ship is transferred after
lock-in-period of 3 years and the sale proceeds are not
utilised within 1 year for purchase of a new ship, the
sale proceeds shall be deemed to be profits of the year
of such transfer.
Clause 9 of the Bill seeks to amend
said sub-section (4). Accordingly, what will be taxed is
not the amount of sale proceeds, but the amount of Reserve
which was earlier utilised within 8 years of creation thereof
for purchase of a new Ship.
The factual position as regards
taxability in the event of transfer after lock-in-period
of 3 years and not utilising the sale proceeds within 1 year
for purchase of a new Ship remains unchanged,
only the basis of amount to be taxed in the said event
is proposed to be modified. Accordingly, instead of sale
proceeds per se, the amount of Reserve which was not
taxed due its utilisation in accordance with the provisions
will be taxed.
The said proposed change is rational and
effective retrospectively from A.Y. 2004-2005, i.e., the year
with effect from which the said sub-section (4) was inserted.
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Clause 10: Section 35(2AB)(5):
Weighted Deduction Of 150% For Expenditure On Scientific
Research
Section 35(2AB)(5) provides for
deduction of 1.5 times of the expenditure incurred on
approved in-house Research and Development facility by
a company which is engaged in the business of Bio-technology
or in the business of manufacture of Drugs, Pharmaceuticals,
Electronics Equipments, Computers, Telecommunication
Equipments, Chemicals and any other notified article or thing.
At present, such weighted deduction of
150% is available, if such expenditure on in-house Research
and Development facility is incurred upto 31-3-2005.
Clause 10 of the Bill proposes to
extend the said time limit by 2 years. Accordingly, such
weighted deduction of 150% will be available, if such
expenditure on in-house Research and Development
facility is incurred up to 31-3-2007.
This amendment is effective from A.Y.
2006-2007.
Clause 11: Section 35DDA(1):
Amortisation Of Payment Under Voluntary Retirement Scheme:
As per present section 35DDDA(1), where
an assessee incurs any expenditure in any previous year by way
of payment of any sum to an employee "at the time of"
his voluntary retirement under any scheme of voluntary
retirement framed in accordance with the guidelines prescribed
under section 10(10C), 1/5th of the amount so paid is
allowable as deduction in computing the Profits & Gains of
Business for that previous year and the balance is to be
deducted in equal instalments in 4 succeeding years.
Clause 11 of the Bill seeks to amend
the aforesaid sub-section (1) to provide for amortisation of
the amount of payment "in connection with" the
voluntary retirement of the employees. Thus, payments made to
employees even after the retirement will also be eligible for
amortisation.
This amendment is effective retrospectively
from A.Y. 2004-2005 and rightly so.
The said amendment will be in line with
the amendment that was brought in section 10(10C) vide
the Finance Act, 2003 with effect from A. Y. 2004-2005. The
said amendment in section 10(10C) was made in order to exempt
the amount received as well as receivable in connection
with voluntary retirement. The amendment that should have
been made in section 35DDA(1) simultaneously with the
amendment of section 10(10C) is proposed now, though
retrospectively, and rightly so.
Clause 12(b): Insertion Of Clause (xiii)
In Section 36(1): Deduction Of Banking Cash
Transaction Tax
Clauses 93 to 112 of the Bill have
introduced new Chapter, namely, Chapter VII.
This new Chapter proposes new tax, namely, Banking Cash
Transaction Tax ("BCTT") which will come into force
from 1-6-2005. Some specified Cash Transactions have been
proposed to be taxed, provided the same are in excess of Rs.
10,000 per day and the same are entered into with a
Scheduled Bank. BCTT will be levied @ 0.1% of the value
of Cash Transactions.
To compensate for said additional tax,
Clause 12(b) of the Bill seeks to insert new clause (xiii)
in sub-section (1) of section 36. Accordingly, BCTT will be an
allowable expense under section 36(1)(xiii).
This amendment is effective from A.Y.
2006-2007.
Clause 13: Insertion Of Sub-Clause (ic)
In Section 40(a): Non-Deduction Of Fringe Benefit Tax:
Clause 37 of the Bill proposes to
insert new Chapter XII-H (Sections 115W to 115WL)
whereby Fringe Benefits provided by the Employer to
Employees will be taxed.
In order to avoid any controversy,
Clause 13 of the Bill seeks to insert sub-clause (ic) In
section 40(a). Accordingly, Fringe Benefits Tax will not be
deductible as an expense.
This amendment is effective from A.Y.
2006-2007.
Clause 14: Insertion Of Clause (d) In
Section 43(5): Trading In Derivatives Not A Speculative
Transaction:
Section 43(5) defines speculative
transaction to mean a transaction in which a contract for
purchase and sales is settled otherwise than by actual
delivery. It also excludes certain transactions which are not
deemed to be speculative transactions.
Clause 14 of the Bill seeks to
insert clause (d) in section 43(5). Accordingly, an
eligible transaction in respect of trading in derivatives
carried out in a recognised stock exchange through a stock
broker or sub-broker or such other Intermediary registered
under section 12 of the SEBI Act, 1992 would not to be deemed
to be a speculative transaction.
As a result, the loss incurred in
respect of trading in stock or index futures or options would
not be regarded as loss of a speculative nature. Hence,
the same can be set off against other
income in the year in which such loss is incurred.
The important conditions for
exclusion of such transactions from the definition of
speculative transactions are that the same are carried out
electronically on screen based systems and are supported by a
time stamped contract note issued by the broker,
sub-broker or SEBI registered Intermediary indicating the PAN
and the Unique Client Identity Number of the trader (MAPIN/UCC)
allotted under the SEBI Act, Securities Contracts (Regulation)
Act or Depositories Act.
In the absence of corresponding amendment
in section 73, the benefit of said amendment in section 43(5)
may not be available under Explanation to section 73.
This amendment is effective from A.Y.
2006-2007.
Clause 35: Insertion Of Sub-section (1A)
In Section 115JAA: MAT Credit Reintroduced:
At present, credit for MAT (Minimum
Alternate Tax) paid on Book Profit under section 115JB is not
allowed against future tax liability. The said tax credit was
available for MAT paid under section 115JA till A. Y.
2000-2001.
Now, clause 35 of the Bill proposes
to insert sub-section (1A) in section 115JAA with effect from
A. Y. 2006-2007. Accordingly, if MAT is paid under section
115JB by the company, tax credit equivalent to the excess of
such tax paid over tax payable under normal provisions would
be allowed to be set off in a subsequent year when tax becomes
payable under the normal provisions of the Act. The amount
of set off will be equivalent to the excess of tax payable
under normal provisions over tax payable under section 115JB.
The amount of tax credit shall be allowed
to be carried forward only for a period of 5 Assessment
Years succeeding the year in which credit is allowed.
No interest shall be payable on tax credit.
This amendment is effective from A.Y.
2006-2007.
Tax Credit under section 115JAA will not be
available for MAT paid between A. Y. 2001-2002 and A. Y.
2005-2006.
Clause 36: Omission Of Clause (vii) From
Section 115VD: Special Tonnage Tax Scheme Applicable To
Shipping Companies:
Chapter XII-G of the Act deals with
Special Tonnage Tax Scheme applicable to the Shipping
Companies. Among them, section 115VD lists down the types
of ships which qualify and do not qualify for the Special
Tonnage Tax Scheme under the said Chapter. At present,
Dredgers are in the negative list.
Clause 36 of the Bill proposes to take
out the Dredgers from the negative list. In other words, the
said amendment seeks to put the Dredgers in the list
qualifying for the said Special Tonnage Tax Scheme.
This amendment is effective from A.Y.
2006-2007.
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