Set-off and Carry Forward of Losses

1. Accumulated losses and unabsorbed depreciation of amalgamating banking company : (Section – 72AA)

   Clause 15 of the Bill seeks to amend section 47 by inserting a new sub-clause (viaa) to provide that any transfer of a capital asset by a banking company to a banking institution in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government under sec. 45(7) of the Banking Regulation Act, 1949 shall not be regarded as transfer. Consequently, no capital gains tax will be attracted on transfer of capital assets under such scheme of amalgamation.

   Clause 16 of the Finance Bill proposes to amend section 49 so as to provide that cost of acquisition of the capital asset transferred under such scheme of amalgamation shall be the cost at which the banking company had acquired it.

   Clause 8 of the Finance Bill also seeks to make consequential amendment in clause (2) of Explanation to section 32(1)(iii) of the Act pertaining to depreciation in case of such amalgamation.

   Clause 19 of the Finance Bill seeks to insert new section 72AA relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in such scheme. In such scheme of amalgamation, the accumulated loss and unabsorbed depreciation allowance of the amalgamating banking company shall be deemed to be the loss or the depreciation allowance of such amalgamated banking institution for the previous year in which the scheme of amalgamation is brought into force and all the provisions contained in the Income-tax Act relating to set off and carry forward of loss and unabsorbed depreciation shall apply accordingly.

   The Explanation provides the following definitions for this section : –

   1. "Accumulated loss" – means so much of loss of the amalgamating banking company under the head "Profits and gains of business or profession" (not being loss sustained in a speculation business) which such amalgamating banking company would have been entitled to carry forward and set off under provisions of section 72, if the amalgamation had not taken place.

   2. "Banking company" – shall have the same meaning as assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949.

   3. "Banking institution" – shall have the same meaning as assigned to under section 45(15) of the Banking Regulation Act, 1949.

   4. "Unabsorbed depreciation" – means so much of the depreciation allowance of the amalgamating banking company, which remains to be allowed and which would have been allowed to such banking company, if the amalgamation had not taken place.

   Effective date

   This amendment shall take effect retrospectively from 1st April, 2005 and shall accordingly apply for assessment year 2005-06 and subsequent years.
    

   Carry forward of losses relating to speculation business – Sec. 73(4)

   Under the existing provisions contained in section 73(4) of the Income-tax Act, speculation loss is allowed to be carried forward up to eight assessment years immediately succeeding the assessment year for which the loss was first computed.

   Proposed amendment

   Clause 20 of the Finance Bill seeks to amend the said sub-section (4) so as to curtail the period of carry forward of unabsorbed speculation loss from 8 assessment years to 4 assessment years.

   An issue may arise as to whether the amendment will effect the existing carried forward speculation losses. Since earlier it was allowed to be carried forward for eight years but now with this provision it may be curtailed for four years.

   Effective date

   This amendment is effective from assessment year 2006-07 and onwards.
    

Rebates and deductions

1. Section 80-C vis a vis section 88

   Tax rebate u/s. 88 is allowed for contribution made to savings scheme like life insurance premium, PPF, NSC etc. up to Rs. 70,000/- and additional contribution is allowed up to Rs. 30,000/- for infrastructure bonds. It is proposed to discontinue this rebate with effect from 1-4-2006; i.e., A.Y. 2006-07.

   In addition to above, u/s. 80CCC, a deduction from income upto Rs. 10,000/- is allowed towards annuity plan of an insurance company for receiving pension and u/s. 80CCD, a similar deduction is available to Central Government employee joining after 1-1-2004, making contribution to pension scheme of the Central Government.

   Incidentally, prior to insertion of section 88, sec. 80C prescribed for similar deductions was there on statute upto 31-3-1991.

   Proposed amendment

   Clause 21 of the Finance Bill, 2005 proposes to insert sec. 80C to provide that an individual or HUF will be allowed a deduction from income up to a sum of Rs. 1,00,000/-. The investments eligible for deduction are same as those were entitled for tax rebate u/s. 88.

   However, the new provision has some salient features as under :
    

   1. Rebate u/s. 88 was not allowed to person having gross total income exceeding Rs. 5,00,000/-. The deduction u/s. 80C is allowed to all individuals or HUFs, irrespective of their income.

   2. To get deduction u/s. 80C, the assessee must pay or deposit the amount out of his income chargeable to tax, whereas there was no such condition u/s. 88. Interestingly, erstwhile section 80C had provided for similar condition earlier.

   3. U/s. 88 there were several caps as under :

      1. Tuition fees in respect of a child was allowed up to Rs. 12,000/- subject to maximum of 2 children.

      2.  Repayment of amount borrowed for purchase of a house was allowed up to Rs. 20,000/-

      3.  Subscription to any units of mutual fund or units of UTI was allowed up to Rs. 10,000/-.
      1. Tuition fees in respect of a child was allowed up to Rs. 12,000/- subject to maximum of 2 children.2. Repayment of amount borrowed for purchase of a house was allowed up to Rs. 20,000/- 3. Subscription to any units of mutual fund or units of UTI was allowed up to Rs. 10,000/-.

      There is no such sectoral cap in the proposed sec. 80C.
       

   4. All other terms and conditions stipulated in sec. 88 also have been incorporated in sec. 80C.

      Consequential amendments have also been proposed in sec. 10, sec. 54EC, sec. 54ED, sec. 80CCC, sec. 80CCD and sec.295 which also specifies that an assessee cannot claim double deduction of same amount .

      Insertion of sec. 80C is a step towards moving from the regime of EEE (Exempt, Exempt & Exempt) to EET (Exempt, Exempt & Tax) system and to provide homogeneous treatment to the taxation of financial savings. In EEE method savings, accumulation and withdrawals all are exempt. But in EET (Exempt, Exempt, Tax) method, contributions to specified savings is exempt from tax (E), the accumulations thereto are also exempt (E), but the withdrawal or redemption, benefits from the savings are taxed (T). There is an apprehension that under this new regime of such taxing savings withdrawal or redumption including PPF may be made taxable in future.

      Effective date

      The proposed amendment will be effective from A.Y. 2006-07.
       

2. Seciton 80CCE

   Limit on deductions u/ss. 80C, 80CCC and 80CCD

   As a consequence to discontinuance of rebate u/s. 88, incentive for saving in specified areas is provided by introducing a new section 80C providing for deduction of an amount up to Rs. 1,00,000/-. Under this section, an individual or HUF will be allowed a deduction from income of an amount not exceeding rupees one lakh, with respect to sums paid or deposited in the previous year out of income chargeable to tax in specified schemes. The eligible investments under the section are the same as those entitled for rebate u/s. 88 which has been discontinued. These include LIP, contribution to PF, PPF scheme for deferred annuities, purchase of infrastructure bonds, payment of tuition fees, repayment of housing loan, etc.

   Unlike section 88 which had sectoral cap of Rs. 70,000/- and Rs. 30,000/- for savings in certain areas, the assessee is now free to invest in any one or more of the eligible schemes or instruments within the overall ceiling.

   There is another provision in section 80CCC which allows deduction from income of an amount of Rs. 10,000/- deposited by an individual towards any annuity plan of LIC or any other insurer for receiving pension. There is also seciton 80CCD which provides a similar treatment to the contribution to pension scheme of the Central Government for all new entrants to Central Government service after 1-1-2004. Under both the provisions amount received by way of withdrawal or pension are subject to tax.

   The Finance Minister has said that the deduction u/s. 80C will be a consolidated amount of Rs. 1,00,000/- invested in specified schemes will be allowed as deduction from gross total income. But the provision in section 80CCC and sec. 80CCD remains uncharged wherein the overall limit remains the same of Rs. 10,000/- and withdrawal in both the cases are taxable. This requires amendments in these sections to make it a consolidated figure of Rs. 100,000/-. Clarification is required about this contradictory parallel different taxability on withdrawal in the same section.

   This new scheme of deduction u/s. 80C is unjust to lower income group of assesses. Under the old scheme of rebate u/s. 88 the lower middle class assessees were getting more benefit than the high income assessees. With this change in the system now the assessees who are having higher income will benefit more than the low income assesses. One more unjust and objectionable change of renewal of section 80-L. Since in section 80-L there was no need of any investment and the income per say was exempted upto Rs. 15,000/-. But now to get the exemption u/s. 80-C the assessees have to invest in the specified schemes. Even to this extent middle income group assessees will suffer.

   The provision will be effective from assessment year 2006-07.
    

3. Section. 88B

   A rebate of tax of an amount up to Rs. 20,000/- is allowed to resident senior citizens; i.e, persons of the age of 65 years and above.The Bill seeks to remove the rebate allowed u/s. 88-B and replace the concessional treatment by higher exemption limit of Rs. 1,50,000/- to such persons. But due to this change the senior citizens will pay more taxes because the tax rebate of Rs. 20,000/- was covering the income up to Rs. 1,52,030/- and now there will be no tax upto Rs. 1,50,000/- Moreover the section 80L is also deleted.
    

4. Section 88C

   A rebate of tax of an amount up to Rs. 5,000/- is allowed to resident women assesses who are below the age of 65 years. The Bill seeks to remove the rebate allowed u/s. 88C and replaces the concessional treatment by higher exemption limit of Rs. 1,25,000/-. In this case also women assessees have to pay more tax. Moreover removal of standard deduction and section 80L the employee women assessees are more hit by these proposals.

   The Finance Minister in his speech said that he is doubly blessed by senior citizens and women assessees. But the fact is that both kind of assessees are cursing him for these amendments.
    

5. Section 88D

   The provision allowing the rebate of tax to persons whose total income does not exceed Rs. 1,00,000/- is proposed to be omitted as it ceases to be irrelevant after the raising of exemption limit to Rs. 1 lakh. It is important to note that this provision was introduced last year and was there on statute only for one year.

   The discontinuance of rebate provisions u/s. 88, 88B, 88C and 88D will be effective from Assessment Year 2006-07.
    

6. Section 80E

   Deduction for interest paid on loan taken for higher education

   Existing provision

   An individual is allowed deduction of Rs. 40,000/- in respect to repayment of loan out of his income chargeable to tax taken from any bank, financial institution or approved charitable institution for the purpose of pursuing his higher education, The deduction allowance is towards repayment of loan or interest on such loan. The upper limit is Rs. 40,000/- per year. The deduction is not allowable to parent or guardian of the assessee but to the assessee himself when he starts repaying the loan.

   Proposed amendment

   It is proposed to substitute the entire section. As per the proposal, the entire amount of interest paid on such loan will be allowed as deduction. In other words, the upper limit of Rs. 40,000/- is removed.

   However, as per the proposed amendment, now the deduction will be allowed only for interest payment and not for repayment of principal amount.

   The time limit for deduction will continue the same; i.e., for initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest is paid by the assessee in full, whichever is earlier.

   The initial assessment year defined as the assessment year relevant to the previous year in which the assessee starts paying the interest on the loan. The section also defines other expressions of "Approved Charitable Institution", "Financial Institution" and "Higher Education".

   Effective date

   The proposed amendment will be effective from A.Y. 2006-07.
    

7. Section 80L

   Deduction in respect of income of interest on deposit with banks, National Saving Certificates etc. from gross total income up to Rs. 12,000/- and additional deduction up to Rs. 3000/- in respect of Government securities is allowed u/s.80L is now omitted with effect from A.Y. 2006-07.