UNION BUDGET 2006-07 CHARITABLE TRUSTS

ANYNYMOUS MAGNANIMITY FAILS TO IMPRESS THE FM :PROPOSED S. 115BBB
By proposing to put to tax at maximum marginal rate the anonymous or pseudonymous donations given to charitable institutions, the Finance Minister plans to plug a misuse of the Income Tax provisions. However, the proposal is likely to cause hardship in genuine cases.
The proposed amendment
In chapter XII of the Income Tax Act, after section 115BBB the following section 115BBC is proposed to be inserted with effect from the 1st April, 2007.
‘115BBC (1) Where the total income of an assessee, being a person in receipt of income on Anonymous behalf of any University or other educational institution referred to in sub-clause (iiiad) or sub-clause donations to (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred’ to in sub-clause (v) of clause (23c) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of-
(i) the amount of income-tax calculated on the income by way of any anonymous donation, at the rate of thirty per cent; and
(ii) the amount of income tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause(1)
(2) The provisions of sub-section (1) shall not apply to any anonymous donation received by-
a) any trust or institution created or established wholly for religious purposes;
b) any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.
3. For the purposes of this section, “ anonymous donation” means any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.
Clause 6 has proposed to amend section 13 by inserting the following sub section 7:-
“ Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof, any anonymous donation referred to in section 115BBC on which tax is payable in accordance with the provisions of that section”
ANALYSIS
Definition of ‘Anonymous donation”; The proposed amendment defines anonymous donation to mean any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.
The proposed amendment applies to the following categories of assessees:-
a. any university or other educational institution existing solely for educational purposes an not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed or
b. any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority
c. any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, if the aggregate annual receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed,
d. any hospital or other institution for the reception an treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, other than those mentioned in sub-clause(iiiac) or sub-clause (iiiae) and which may be approved by the prescribed authority.
e. any other fund or institution established for charitable purposes which may be notified by the Central Government in the Official Gazette, having regard to the objects of the fund or institution and its importance throughout India or throughout any State of States;
f. any trust including any other legal obligation or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be notified by the Central Government in the Official Gazette, having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof;
g. any trust or institution referred to in section 11 of the Act.
TAX CALCULATION
If an institution referred to in the above paragraph is in receipt of an income which includes an anonymous donation, the income tax payable shall be calculated as follows
i. The amount of Income Tax on the amount of anonymous donation shall be calculated @ 30%.
ii. The amount arrived at after reducing the amount which has been charged @ 30% shall be chargable to Tax at the normal rate.
EXCLUSION
The provisions of sub section (1) shall not apply to the following institutions
i. Anonymous donation received by a wholly religious trust
ii. Anonymous donation received by a trust created wholly for religious and charitable purposes. This will however, not include donations made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.
Thus donations to partly religious and partly charitable trusts are proposed to be taxed only if the donation is specifically for an educational or medical purpose. One fails to understand the logic that would have gone into concluding that donations meant for educational or medical purpose are prone to misuse while donations not given specifically for medical or educational purpose are better quality donations.
Obviously the Finance Minister did not want to invite the wrath of religious bodies by proposing a maximum marginal tax on donations made to religious trusts and so decided to stay away from it.
The definition of anonymous donation is ambiguous and is likely to cause confusion and hardship in genuine cases. The proposed definition casts a responsibility on the part of the person receiving the donations to maintain the record of the identity indicating the name and address of the person making the contribution and such other particulars as may be prescribed. From a plain reading of the definition it seems that if the person making the contribution gives false particulars or fails to give proper particular, the trust would be penalized, such income being charged to tax at maximum marginal rate.
Section 13 provides for cases where section 11 shall not apply . Proposed sub section (7) of section 13 provides that nothing contained in section 11 or section 12 shall have an effect of excluding from the total income of the previous year, any anonymous donation referred to in section 115BBC on which tax is payable in accordance with the provisions of that section. It seems this amendment has been proposed as a measure of abundant precaution, lest any provision in section 11 or 12 should operate against the provisions of the proposes section 115BBC. This amendment will take effect from 1st April 2007 and will accordingly apply in relation to the assessment year 2007-08 and subsequent years.

UNION BUDGET 2006-07 TDS AND TCS

PROPOSED AMENDMENTS PERTAINING TO TDS & TCS
The existing provisions
Under the provisions of section 201(1A) if the person responsible for deduction of tax at source does not do so, or after deducting fails to pay the tax to the government, he is liable to pay simple interest @ of 12% per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Similarly section 206 C (7) provides that if the seller does not collect the tax or after collecting the tax fails to pay it as required under this section, he shall be liable to pay simple interest at the rate of one percent per month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which the tax was actually paid.
THE AMENDMENT
Clause 42 seeks to insert in sub section (1A) after the words” such tax is actually paid”, occurring at the end, the words, brackets and figures “ and such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section(3) of section 200”, with effect from 1st June, 2006. Similarly clause 47 seeks to amend sub section 7 of section 206C as under:-
After the words “ tax was actually paid:, occurring at the end, the words, brackets and figure and such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section (3) shall be inserted with effect from the 1st day of June, 2006.
INTERPRETATION
The proposed amendments mandate payment of interest on delayed payment on self assessment basis. It shall be obligatory on the part of the person deducting or collecting taxes to pay interest on default amount before furnishing the quarterly statement for each quarter in accordance with the provisions of section 200(3) and section 206C (7).
For the word “ seller” the words “ person responsible for collecting tax” is proposed to be substituted with effect from 1st April, 2007 in section 206C.
ANNUAL TDS AND TCS RETURNS NOT TO BE FURNISHED

Section 206 provides that every person responsible for deducting tax at source shall within the prescribed time after the end of each financial year prepared and delivered to the prescribed Income Tax Authority, such returns as may be prescribed. Section 206C contains a similar provision in respect of tax collected at source.
It is proposed in the Finance Bill to do away the requirement of furnishing the annual returns of TDS and TCS in respect of tax deducted or collected on or after 1st April,2005. Consequential amendment has been proposed in the penal provision of section 272A. failure to furnish the annual return for tax collection or deduction before 1st April, 2005 shall continue to attract penalty U/s 272A.
With the amendments proposed in section 139A, 272A, 206, 206C & 203A, it is proposed to fully replace the existing system of filing of annual return by the system of furnishing of quarterly returns. It is proposed by way of an amendment to section 272A that the penalty leviable for failure to deliver the statements shall not exceed the amount of tax collectible or deductible as the case may be.
Under the existing provisions contained in the said section under the existing provisions contained in the said section, failure to furnish a return in due time under section 206 or section 206C renders the person, who fails to furnish the return, liable for penalty of a sum of one hundred rupees for every day during which the failure continues.
This amendment will take effect retrospectively from 1st April 2006 and will accordingly apply in relation to the assessment year 2006-07 and subsequent years.
It is proposed to insert a new sub section (6A) so as to deem any person responsible for collecting tax in accordance with the provisions of the said section as assessee in default if such person does not collect the whole or any part of the tax or fails to pay such tax after having collected the tax.
It is further proposed to provide that no penalty shall be charged U/s 221 from such person unless the Assessing Officers is satisfied that the person has without good and sufficient reasons failed to collect or pay the tax.
QUOTING OF PAN AND TAN ON QUARTERLY STATEMENTS TO BE MANDATORY
The existing section 139A (5B) provides that where any tax has been deducted, every person deducting the tax shall quote the PAN of the person to whom the amount has been paid in annual return of TDS furnished U/s 206. Sub section 5D provides for a similar quoting of PAN of every buyer in respect of tax collected U/s 206C, in the annual return of TCS. With the proposed doing away of the annual returns of TDS and TCS, clause 32 of the Finance Bill 2006 proposes to amend the said sub sections 5B & 5D to provide for compulsory quoting of PAN and TAN in all quarterly statements prepared and delivered in accordance with the provisions of section 200(3) or the provisions of section 206C(3).
While the amendments relating to dispensing with the annual returns of TDS and TCS are proposed to be effected from 1st April, 2006, the amendments in sections 139A & 272A shall be effected from 1st June, 2006.

DEMAT TDS & TCS DEFERRED
The existing provisions
Section 203 provides for issue of certificate by the deductor to the person in respect of whose income such payment of tax has been made, specifying the amount so paid the rate at which the tax has paid and such other particulars as may be prescribed. Sub section 3 provides that where tax has been deducted on or after 1st April, 2006, there shall be no requirement to furnish such certificate. This provision intended to create a paperless regime by dematerialising the TDS & TCS certificate. These provisions were to come in-force with effect from 1st April, 2005 but Finance Act 2005 deferred the enforcement by one year and provisions were to come in force in respect of TDS and TCS collected or paid on or after 1st April, 2006.
As a consequence of this amendment sub-section (3) was inserted in section 199 to provide that where any deduction is made in accordance with the foregoing provisions of this chapter on or after the 1st day of April, 2006 and paid to the central Government, the amount of tax deducted and specified in the statement referred to in section 203AA shall be treated as tax paid on behalf of the persons referred to in sub-section(1) or, as the case may be, sub-section (2) and credit shall be given to him for the amount so deducted in the assessment made under this Act for the assessment year for which such income is assessable without the production of certificate.
Consequently section 139(9) was amended to provide that the return of income shall not be deemed to be defective if it was not accompanied by proof of tax deducted.
THE AMENDMENT
It is proposed to defer the commencement of dematerialisation provisions by two years and make such provisions applicable for tax deducted or paid U/s 203(3) or collected U/s 206C on or after 1st April, 2008. Clause 41, 43, 45 & 47 have proposed amendment in sections 199(3), 203(3), 203AA & 206C respectively, and clause 31 proposes an amendment to section 139, to give effect to this deferment.
FAILURE TO PUSH THE TECHNOLOGY THROUGH
The provisions of dematerialisation were introduced with great enthusiasm in 2005. The avowed objective of such amendment was to make the life of the taxpayer easy by introducing certificates in DEMAT format, so that the credit for taxes could be given not on the basis of documentary evidence procured by the assessee with great difficulty, but on the basis of an electronic entry in the data base which could be easily verified and cross checked by the click of a button. The On Line Tax Accounting system (OLTAS) was supposed to handle this mundane task with the help of PAN and TAN. However, it seems the Department has not been able to overcome the love for paper work, and is not yet able to create a reliable and robust data base which would obviate the need of documentary compliance.
The shift to dematerialized system shall not be possible unless a system to verify the data including PAN and TAN is in place. The financial Minister confesses that in many places quoting of falls TAN or PAN have resulted in getting the taxes deducted or collected or paid getting credited to the suspense account. Unless all transactions are matched in the OLTAS, and complete information is populated in the deductees’ or collectees’ accounts dematerialisation shall remain a far cry.

UNION BUDGET 2006-07 MAT

PROVISION PERTAINING TO MINIMUM ALTERNATE TAX (MAT)

Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
The existing provisions
The existing provisions of section 115 JB provides that in case of a Company, if the Income Tax payable on the total income as competent under this Act in respect of any previous year relevant to the assessment year commencing on or after 01,04,2001 is less than 7.5% of its book profits, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee for such previous year shall be 7.5% of such book profit
The Explanation to sub section (2) of section 115 JB defines ‘book profit’ to mean the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with parts II and III of schedule VI to the Companies Act 1956 and as increased or reduced by certain adjustments as specified in the said Explanation.
Sub section 1 of section 115 JAA provides that where any tax is paid under section 115 JA by a Company for any assessment year the credit in respect of the tax so paid shall be allowed in accordance with the provisions of the said section 115JAA. Sub-section (1A) of section 115JAA provides for a similar provision with regard to any amount of tax paid under section 115JB for the assessment year commencing on 1st April, 2006 and any subsequent year. Sub section (2) of section 115JAA provides that the tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment year under section 115JA of section 115JB, as the case may be, and the amount of tax payable under the normal provisions of the Income –tax Act. Sub- section (3) of section 115JAA provides that the amount of credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-sections (4) and (5) of the said section, but such carry forward shall not be allowed beyond the fifth assessment year immediately succeeding the assessment year in which the tax credit become allowable under sub-section (1) of the said section.
THE PROPOSED AMENDMENT
a. Sub section (1) of section 115JB is proposed to be amended by clause 24 to substitute the words 10% in place of 7.5%, with the result that if the Income Tax payable on the total income as computed under the Income Tax Act in respect of any previous year relevant to the assessment year 2007-08 is less than 10% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the relevant previous year shall be 10% of such book profit.
b. The definition of book profit as provided in Explanation to sub section (2), under clause (f) of the Explanation, provided for adjustment relating to amount of expenditure relatable, inter alia, to section 10(23G). Clause 24 of the Budget proposes to omit the reference to ‘other than the provisions contained in clause (23G) thereof ‘ from clause (f) and clause II of the Explanation to section 115 JB. This proposed amendment is consequential to proposed omission of clause (23G) of section 10, by clause 4 of the finance bill.
c. DEPRECIATION
Clause 24 proposes to amend the definition of ‘book profit’ has provided an Explanation to section 115 JB by insertion of a new clause (g) which provides that for the purpose of this section book profit shall be increased by the amount of depreciation debited to the profit and loss account. Further, it is proposed to insert a new clause (iia) in the Explanation so as to provide that the amount of depreciation claimed in the books of account, excluding the claim of depreciation arising on account of revaluation of assets, shall be reduced from the book profit. Read together, the implication of these two proposals is to allow depreciation incurred in the normal course of business, and exclude depreciation arising out of revaluation of assets. It is also proposed by way of insertion of a new clause (ii b) in the said Explanation to provide that the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets, shall be reduced from the book profit. This last amendment is proposed with a view to avoiding double taxation on this account.
d ENHANCED PERIOD FOR CARRY FORWARD OF MAT CREDIT
Clause 23 of the Finance Bill proposes to amend section 115 JAA to provide that the amount of Tax credit for MAT paid under section 115JB for the assessment year 2006-07 and later shall be allowed to be carried forward and set off for seven assessment years immediately succeeding the assessment year in which the Tax credit becomes allowable under the said section
The amendments pertaining to section 115JAA and section 115JB shall take effect from 1st April 2007 and accordingly shall apply in relation to assessment year 2007-08 and subsequent years.


PROPOSED AMENDMENT IN PROVISION PERTAINING TO SELF ASSESSMENT AND INTEREST
The Existing provisions
The existing provisions of section 140A provides that where any tax is payable on the basis of any return required to be furnished under section 115WD or section 115WH or section 139 or section 142 or section 148 or section 153A or as the case may be section 158B after taking into account the amount of tax, if any already paid under any provision of this Act the assessee shall be liable to pay such tax together with interest payable under any provision of this Act for any delay in furnishing the return or any default or delay in payment of advance tax, before furnishing the return and the return shall be accompanied by proof of payment of such tax and interest.
Sub section (1A) of section 140A provides that for the purpose of sub section (1 )interest payable under section 234A shall be computed on the amount of the tax on the total income as declared in the return as reduced by the advance tax, if any paid and any tax deducted or collected at source.
THE PROPOSED AMENDMENT
The Finance Bill 2006 seeks to provide a relief to the assessee in the form of credit for MAT and Tax paid in a country or specified territory outside India for the purpose of calculating interest under section 140A. It seeks to amend sub section (1) as under after taking into account:-
i. the amount of tax, if any, already paid under any provision of this Act.
ii any tax deducted or collected as source;
iii any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India;
iv any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section; and
v any tax credit claimed to be set off in accordance with the provisions of section 115JAA;
Similarly in sub section (1A) the following clause is proposed to be substituted under section 234 shall be computed on the amount of the tax on the total income as declared in the return as reduced by the amount of:-
a. advance tax, if any, paid;
b. any tax deducted or collected at source;
c. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India;
d. any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section; and
e. any tax credit claimed to be set off in accordance with the provisions of section 115JAA;
The Explanation to section 140A is also proposed to be amended, to define ‘Assessed Tax’ as tax on total income as reduced by the amount of TDS, TCS, relief of Tax or deduction claimed under section 90, 91 or 90A, and MAT and section 115JAA
INTERPRETATION
This proposed amendment comes as a major relief to the assesses paying MAT or taxes of a foreign country. The proposal recognizes that such taxes are no different from taxes deducted at source, collected at source or paid in advance, and hence should receive similar treatment for the purpose of levy of interest. The Finance Minister seems to have adopted a pragmatic approach while proposing this concession.

CREDIT FOR MAT AND FOREIGN TAXES FOR THE PURPOSE OF INTEREST U/Ss 234A, 234B & 234C
Similar amendments have been proposed in sections 234A, 234B & 234C, to provide for reduction of Tax credit allowed to be set off under section 115JAA from the tax on total income, and reduction the amount of relief of tax allowed under sections 90 & 90A and deductions from Indian Income Tax allowed under section 91, from the tax on total income, for the purpose of levy of interest for defaults in furnishing return of income (section 234A), interest for defaults in payment of advance tax (234B), and interest for deferment of advance tax(234C).
As said in the case of propose amendment in section 140A, the inclusion of MAT and foreign taxes for the purpose of sections 234A, 234B and 234C would also come as a major relief to the taxpayers.
These amendments will take effect from 1st April 2007 and will accordingly apply in relation to the assessment year 2007-08 and subsequent years.

Budget 2006-07

A Good Budget
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com


INTRODUCTION
The Budget was good because it was not bad. The speech of the Finance Minister was over abruptly, and he left the viewers wondering about what was in store for them. Since the Budget did not give any news, did not levy any new taxes, it was good news. There was a marked difference between this Budget and the last year’s budget in that last year the Finance Minister had introduced measures like FBT which had far reaching effect.

The Finance Minister P. Chidambaram decided to adopt a minimalist approach while proposing changes pertaining to Direct Taxes. Correctly so, because when the engines of the economy are running in full steam fiddling with Tax Provisions just for the sake of changes is certainly not the right approach. The Finance Minister followed the American adage, ‘ When it ain’t broke, why mend it?’ Even a cursory look at the report card of the economy proves that just maintaining the status quo in a momentum driven vibrant economy is enough to generate higher revenue. For example the economy grew at an impressive rate of 7.5%, with the manufacturing sector growing at whopping 8.1%. More importantly at current market prices, gross domestic saving increased to 29.1% of GDP and rate of gross capital formation was as high as 30.1% of GDP.
On reading the provisions pertaining to Direct Taxes one finds that most of the amendments proposed aim at including the structure of the law and removing anomalies and ambiguities rather than raising more revenue. The Finance Minister knows it well by now that since the economy is buoyant and vibrant, it makes no sense to fiddle with the structure which has been delivering impressive results. The Finance Minister did not even touch the provision of section 80C, on which he had spent a considerable amount of time in his previous budget speech, where he had tried to impress the need for introduction of an EET Tax regime in respect of investments.