Key Provisions of Personal and Corporate taxation in Finance Bill, 2021

Relief to Senior Citizens from Return Filing Requirement (Section 194P)

In order to provide relief to resident senior citizens (aged of 75 year or above) having only pension and interest income accruing to them, an exemption has been proposed from filing the return of income. However, a declaration will have to be filed with specified bank in this regard and bank would be required to compute the income after giving effect to applicable deductions/ rebates and deduct income tax at rates in force.

‘Liable to Tax’ Defined – Section 2(29A)

It is proposed to insert a new clause (29A) to section 2 so as to define the expression “liable to tax”, in relation to a person, which 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 amendment is in line with judicial pronouncements wherein it has been held that liable to tax does not necessarily imply that taxes are paid in the other contracting state, it is sufficient that contracting state has right to levy taxes. The concept is also relevant to determine if an individual is deemed to be resident under section 6.

Exemption of Cash Allowance in Lieu of LTC – Section 10(5)

Considering outbreak of Covid-19 and travelling possibilities being hindered, Section 10(5) is proposed to be amended to provide tax exemption of cash allowance in the hands of individuals, if any value or assistance is received by or due to such individual in lieu of any travel concession subject to fulfilment of conditions as may be prescribed. Proposed amendment to be made effective from AY 2021-22.

Taxation of Excess PF Contribution Interest – Section 10(11) and 10(12)

Payment from provident fund is exempt under Section 10(11) and receipt of accumulated balances from employee recognised provident fund is exempt under section 10(12). It is proposed to provide that such exemption shall not apply to interest income accrued to the extent it relates to the amount or aggregate of the amounts of contribution to such funds made on or after 01st April 2021 in excess of INR 2.5 lakhs in the previous year. This amendment would affect taxpayers contributing huge sum to these funds as exemption would be denied to the extent of interest income on the excess sum contributed.

Relief with Respect to Income from Overseas Retirement Funds – Section 89A

New section 89A is proposed to be inserted to address mismatch in taxation of income from specified overseas retirement accounts maintained by specified person in a notified country. Specified person is a person resident in India who has opened a retirement benefit account in a notified country while being a non-resident in India and a resident in that country. Said income shall be taxed in such manner and in such year as may be prescribed.

It is proposed to shift the taxation of such retirement benefit from accrual basis to receipt basis in India. The aforesaid relief will mainly benefit the NRIs returning to India.

Proceeds from Unit Linked Insurance Plan (ULIP) – Section 10(10D)

Any proceeds received under ULIP issued on or after 01st February 2021 shall not be eligible for exemption if annual premium exceeds INR 2.5 Lakhs.

Such ULIP shall be treated as capital asset (equity oriented unit) and proceeds shall be taxable as capital gains. Rules for computation of capital gains shall be prescribed. This amendment intends to put a cap on the total premium paid under ULIPs majority affecting High Net Worth Individuals.

Employee Contribution to Welfare Funds – Section 36(1)(va) and Section 43B

There have been numerous judicial pronouncements in favour and against taxpayer, on the issue whether contribution toward employee’s provident fund made by an employer after the due date prescribed under labour welfare laws but before the due date of the filing return of income shall be allowed as deduction or not? To address this, it is proposed to insert explanation in section 36(1)(va) and section 43B to clarify that provisions of 43B shall not apply to employees contribution to welfare funds accordingly, deduction shall be allowed under section 36 only if the deposit is made within the due dates prescribed under the relevant labour laws. This will now ensure stricter compliance adherence in the hands of taxpayers.

Complete Carve-Out of Depreciation on Goodwill

i. The long-drawn dispute of whether depreciation can be claimed on goodwill for the purpose of business and profession has been put to rest by the amendments proposed, by specifically carving out goodwill on business and profession as a depreciable asset for income tax purposes.

ii. It is further proposed to prescribe a specific computation mechanism to determine the written down value and short-term capital gains in case where depreciation on goodwill has already been claimed by the assessee.

This amendment clamps down on depreciation on goodwill which was being claimed by the corporate taxpayers all along relying on the Apex court judgement. It would impact depreciation even on concluded transactions.

“The long-drawn dispute of whether depreciation can be claimed on goodwill for the purpose of business and profession has been put to rest by the amendments proposed, by specifically carving out goodwill on business and profession as a depreciable asset for income tax purposes.”

Safe Harbour Limit Enhanced to 20% – Section 43CA and Section 56(2)(x)

It is proposed to increase the safe harbour limit under section 43CA from 10% to 20% in case of transfer of residential unit subject to following conditions:

• Transfer takes place between 12th November 2020 to 30th June 2021
• Transfer is by way of first time allotment to any person
• Consideration does not exceed INR 2 crore

Consequential relief is proposed to be provided under section 56(2)(x) for buyer of the property by increasing the safe harbour from 10% to 20%. These amendments would benefit real estate developers and give fillip to real estate sector.

Tax Audit Threshold Increased to INR 10 Crore – Section 44AB

It is proposed to increase the threshold limit for tax audit to 10 crores from existing 5 crores to incentivise digital transaction and reduce compliance burden, provided that (i) aggregate amount received for sales/turnover in cash and (ii) aggregate payment (expenditure) in cash does not exceed 5% of said respective amounts. Amendment is effective from AY 2021-22.

Section 44ADA Non-Applicability to LLPs

Provisions of presumptive taxation is not applicable to LLP since LLPs are required to maintain books of accounts under LLP Act and benefit of non maintenance of books of accounts under 44ADA cannot be availed. It is proposed to explicitly mention non applicability of section 44ADA to LLPs.

Capital Gains on Reconstitution or Dissolution of Firms – Section 45(4) and Section 45(4A)

It is proposed to substitute section 45(4) and insert 45(4A) to compute tax in the hands of firms on capital gains arising from dissolution or reconstitution of firms as follows:

For the purpose of both the Sections, balance in capital account is to be calculated without taking into account increase in capital due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset. Self-generated goodwill and self-generated asset are defined to mean goodwill or asset that has been acquired without incurring any cost for purchase or which has been generated during the course of business or profession.

It is pertinent to note that, it is explicitly provided that applicability of this section is not just restricted at the time of dissolution but also covers cases of reconstitution, thereby encompassing even cases of admission or retirement of partners, conversion of firm etc. Further, this amendment seeks to reverse various judicial pronouncements which had advocated that what the partner receives at the time of retirement is his own share of interest in the firm, and thus not taxable.

Expanding the Scope of Slump Sale (Section 2(42C))

It is proposed to expand the scope of ‘slump sale’ to include transfer of “undertaking, by any means,” thereby including all types of transfers within the ambit of ‘slump sale’. It is pertinent to note that this amendment would overturn the Bombay High Court judgement in the case of Bharat Bijlee wherein taxability of slump exchange was denied in absence of monetary consideration (in this case consideration was in nature of shares). In substance, transfer in the form of exchange shall also be covered under slump sale (provided other conditions are satisfied).

Extension of Time Limits for Expiry of Deduction/ Tax Benefit

In order to provide an added advantage to the tax payers, it is proposed to extend the due date of claiming deductions under the aforesaid sections:

Particulars	Proposed amendment
Filing of the belated and revised return u/s. 139(4) and 139(5)	3 months before the end of the relevant AY (i.e., 31st December) or before the completion of the assessment whichever, is earlier.
Due date for the filing of original return of income in case of spouse of a partner of a firm whose accounts are required to be audited if the provisions of section 5A applies to them.	31st October of the Assessment Year
Issue of intimation u/s. 143(1)	9 months from end of the financial year in which return is made. It is also proposed to provide for adjustment on account of increase in income indicated in the audit report but not taken into account in computing the total income.
Issue of notice initiating assessment u/s. 143(2)	3 months from end of the financial year in which return is furnished
Completion of assessment u/s. 143(3)	9 months from end of the relevant assessment year
Issue of notice for reopening assessment	3 years from the end of relevant assessment year, or 10 years from the end of relevant assessment year where the Assessing officer has possession of evidence that income escaping assessment is INR 50 Lakh or more

Section 142 Notice Powers Centralized

It is proposed to empower prescribed income tax authority to issues notices under section 142 (1) besides assessing officer. This is in line with policy on faceless assessment to enable centralised issuance of notices.

Revamping of Reassessment Proceedings – Section 147, 148 & Section 148A

Unlike the erstwhile reassessment provisions where emphasis was on “reasons to believe”, substituted provisions focus on “information with the Assessing officer” i.e., information flagged in accordance with the risk management strategy formulated by the Board from time to time (or) any objection raised by C&AG. It may be noted that considering ‘flagged information based on risk management strategy’ as an ‘information’ so as to warrant assumption of jurisdiction under section 147/148 in all cases shall tantamount to giving unfettered powers to the assessing authorities for reopening assessment.

Section 148A has been inserted to provide that before issuance of notice under Section 148, the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering reply, the Assessing Officer shall decide, by passing an order, whether it is a fit case for issue of notice under Section 148. Giving opportunity of being heard before initiating reassessment proceedings is a welcome step.

Further, it is proposed to subsume provisions of section 153A/153C of the block assessments in the newly substituted section 148.

Faceless ITAT

With an aim to reduce human interface and cost of compliance it is proposed to introduce faceless proceedings before the ITAT. While creating a faceless ITAT is pathbreaking being one more step towards digitisation, its implementation and practical challenges should be closely examined.

MAT Provisions – Section 115JB

115JB is proposed to be amended to provide that dividend income earned by foreign companies shall be reduced from the book profit and related expenditure added back where such income is taxed at lower that MAT rate due to DTAA.

Further, where past year income is included in books of accounts, on account of Advance Pricing Agreement or secondary adjustment, Assessing Officer shall on application made to him recompute the book profits of past years.

Equalisation Levy and Section 10(50) Alignment

Equalisation Levy was introduced by India in 2016, on the lines of the recommendations of the OECD BEPS Action Plan aiming to tax revenues generated by e commerce supply or services made which would not fall under the tax net applying the conventional tax norms.

E-commerce supply or services is defined to mean “online sale of goods” and “online provision of services”. Definition of term “online sale of goods” and “online provision of services” is now expended to include one or more of the following activities taking place online:

• Acceptance of offer for sale;
• Placing the purchase order;
• Acceptance of the Purchase order;
• Payment of consideration; or
• Supply of goods or provision of services, partly or wholly.

Further, it is clarified that Equalisation levy is applicable on e-commerce supply or services irrespective of whether the e-commerce operator owns the goods or provides / facilitates the services.

Income from any specified service on which equalisation levy is applicable shall be exempt as per section 10(50). Explanation 1 is proposed to be inserted to clarify that the income referred to in this clause shall not include and shall be deemed to have never included income which is chargeable to tax as royalty or Fee for technical service in India under the Income tax Act or DTAA.

“Income from any specified service on which equalisation levy is applicable shall be exempt.”