The issue of deductibility of Subsidies as profits derived from undertaking stands resolved by Supreme Court in its Landmark Judgment in Meghalya Steels on 09-03-2016
Exemption available under Chapter VI-A in respect of profits of industrial undertakings is available only in respect of income qualifying the litmus test of “profits or gain derived from undertaking”. The revenue and assessees have been locking their horns over the issue of Subsidies for years together as to whether or not they are covered by term ““profits or gain derived from undertaking”
In this article while an attempt has been made to construe real meaning of words “profit derived from”, it also deals with purpose test of subsidy and its relevance after recent amendments in Finance Act 2015 and Finance Bill 2016.
It will be relevant to look into the issue through a few court rulings:
- Cambay Electric Supply Industrial Company Limited v. Commissioner of Income Tax, Gujarat II, (1978) 2 SCC 644 (Supreme Court)
In this case Court had to construe Section 80-E of the Income Tax Act, which referred to “profits and gains attributable to the business” of generation or distribution of electricity. It was held that the expression “attributable to” is certainly wider in import than the expression “derived from”. Sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. Whenever the Legislature wanted to give a restricted meaning it has used the expression “derived from” to cover receipts from sources other than the actual conduct of the business.
- Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore, (1999) 4 SCC 98 (Supreme Court)
The issue is this case was whether income derived by the assessee undertaking engaged in export of processed sea food by sale of import entitlements was profit and gain derived from the industrial undertaking .This Court referred to its judgment in Cambay Electric Supply (supra) and emphasized the difference between the wider expression “attributable to” as contrasted with “derived from”. Supreme also stated the industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit. Hence the source of the import entitlements can not said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Govt. whereunder the export entitlements become available. There must be for the application of the words “derived from”, a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The assessee is entitled to import entitlements under export promotion scheme, which it can sell. The sale consideration therefrom cannot be held to constitute a profit and gain derived from the assessees’ industrial undertaking.
- Pandian Chemicals Limited v. Commissioner of Income Tax, 262 ITR 278(Supreme Court)
The question before the Court was as to whether interest earned on a deposit made with the Electricity Board for the supply of electricity to the appellant’s industrial undertaking should be treated as income derived from the industrial undertaking. Supreme Court held that although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with the Electricity Board could not be said to flow directly from the industrial undertaking itself.
- Liberty India v. Commissioner of Income Tax, (2009) 9 SCC 328(Supreme Court)
The question was whether DEPB credit or Duty drawback receipt could be said to be in respect of profits and gains derived from an eligible business. Again Supreme Court first made the distinction between “attributable to” and “derived from” stating that the latter expression is narrower in connotation as compared to the former. The court further went on to state that by using the expression “derived from” Parliament intended to cover sources not beyond the first degree. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from S. 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business.
- Calcutta High Court in Merino Ply & Chemicals Ltd. v. CIT, 209 ITR 508 [1994],
It was held that transport subsidies were inseparably connected with the business carried on by the assessee. Transport expenditure is an incidental expenditure of the assessee’s business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manner of doubt that the subsidies were inseparably connected with the profitable conduct of the business
In CIT v. Andaman Timber Industries Ltd., 242 ITR 204 [2000], however Calcutta High Court arrived at an opposite conclusion in considering whether a deduction was allowable under in respect of transport subsidy without noticing its own judgment in Merino Plywood(supra). A Division Bench of the Calcutta High Court in C.I.T. v. Cement Manufacturing Company Limited, by a judgment dated 15.1.2015, distinguished the judgment in CIT v. Andaman Timber Industries Ltd. and followed the impugned judgment of the Gauhati High Court in Meghalya Steels which is the subject matter of discussion in this Article.
- Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax, A.P. – I, Hyderabad, (1997) 7 SCC 764 (Supreme Court)
It was held by the apex Court on power subsidy that subsidy on power was confined to ‘power consumed for production’. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given.
On refund of sales tax it was held that Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the State by making the business of production and sale of goods in the State more profitable
- Delhi High Court in Dharampal Prem Chand 317 ITR 353
It was held by Delhi High Court that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80-IB of the Act. SLP of the department against this decisions has been dismissed by Supreme Court.
- Contrary Judgements of Himachal Pradesh High Court in Kiran Enterprises (2010) 327 ITR 520 and Supriya Gill [ITA 27 & 28/2010 dtd 16-6-2010]
The question was whether the freight subsidy is income derived from the business of the industrial undertaking and can be included in the profit eligible for deduction under section 80-IA. The Court held that the source of transport subsidy is not the business of the assessee but the scheme framed by the Central Government. Held that the subsidy received by the assessee was not a profit derived from the business since it was not an operational profit and that the source of the subsidy is not the business of the assessee but the scheme of the Government
- Adverse Judgement of Punjab and Haryana High Court in H.M. Steels Ltd. [ITA 352/2013 dated 04-08-2015]
P&H High Court expressed agreement with view taken by Himachal High Court and also held that sales tax rebate is not profit derived from eligible business and hence entitled for deduction.
- Purpose Test of Subsidy
- a)Ponni Sugars & Chemicals Ltd. [2008] 174 TAXMAN 87 (SC [16-09-2008](Supreme Court)
The assessee-company had received subsidy under the incentive subsidy scheme, 1980. The incentives conferred under the scheme were two fold; first, in nature of a higher free sale sugar quota and second, in allowing the manufacturer to collect excise duty on the sale price of the free sale sugar in excess of the normal quota, but to pay to the Government only the excise duty payable on the price of levy sugar. As per the scheme, the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by it for setting up new units/expansion of existing business.
Held by apex Court that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases one has to apply the ‘purpose test’. The point of time when the subsidy is paid is not relevant. The source is immaterial; the form of subsidy is also immaterial. The main eligibility condition in the scheme in the instant case was that the incentive must be utilized for repayment of loans taken by the assessee for setting up of new units or for substantial expansion of its existing units. If the object of the subsidy scheme was to enable the assessee to run the business more profitably, then the receipt was on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand its existing units, then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.
In the instant case also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by it for setting up of new units/expansion of its existing business.
- b)Jammu and Kashmir High Court in Shree Balaji Alloys
The assessee, pursuant to the New Industrial Policy announced for the State of J&K, received excise refund and interest subsidy, etc which it claimed to be a capital receipt. In the alternative, it was claimed that the same was eligible for deduction u/s 80-IB. The AO, CIT (A) and Tribunal rejected the claim and held the receipts to be revenue on the ground that the subsidy (i) was for established industry and not to set up a new one, (ii) it was available after commercial production, (iii) it was recurring in nature, (iv) it was not for purchasing capital assets and (v) it was for running the business profitably. On appeal by the assessee, HELD reversing the lower authorities:
If the object of the subsidy scheme is to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the subsidy scheme is to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. It is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy.The form or the mechanism through which the subsidy is given is irrelevant; Since the object of the subsidy scheme was (a) to accelerate industrial development in J&K and (b) generate employment in J&K. Such incentives, designed to achieve a public purpose, cannot, by any stretch of reasoning, be construed as production or operational incentives for the benefit of assesses alone. It cannot be construed as mere production and trade Incentives; The fact that the incentives were available only after commencement of commercial production cannot be viewed in isolation.
Question whether the subsidy receipts are eligible u/s 80-IB as being derived from industrial undertaking was not decided.
Purpose Test is no longer relevant
As per clause (xviii) inserted in section 2(24) by Finance Act 2015 wef AY 2016-17, definition of income includes:
assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee
other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43;
Finance Bill 2016 further excludes the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government from the scope of 2(24)(xviii)
Hence wef AY 2016-17, all subsidies except specifically excluded shall be revenue in nature and shall no longer retain capital character.
Hence the issue whether subsidy is derived from eligible business for determining its eligibility for deduction under Chapter VI-A becomes all the more important for assessee.
- Supreme Court in Meghalya Steels decided on 09-03-2016
In this case the issue before apex court was whether transport subsidy, interest subsidy and power subsidy can be said to be “ profits derived from industrial undertaking”
It was held by apex court confirming the decisions of Gauhati High Court that all these subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However Revenue stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the assessee, the element of directness is missing. However it was held by apex Court that So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The “profits and gains” spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains are derived from the business of the assessee, namely profits arrived at after deducting manufacturing cost and selling costs reimbursed to the assessee by the Government concerned.
Head of Income for Subsidies also decided by Supreme Court in Meghalya Steels decided on 09-03-2016
It is also held by Supreme Court in Meghalya Steels that Section 28(iii)(b) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head “profits and gains of business or profession”. If cash assistance received or receivable against exports schemes are included as being income under the head “profits and gains of business or profession”, it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head “profits and gains of business or profession”, and not under the head “income from other sources”.
Comments on Himachal Pradesh High Court Judgement [Supreme Court in Meghalya Steels decided on 09-03-2016]
The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods and Liberty India to arrive at the opposite conclusion, is held to be wrongly decided.
Comments on Delhi, Calcutta and Gauhati High Court Judgements:[Supreme Court in Meghalya Steels decided on 09-03-2016]
The Supreme Court in its concluding para has said that following judgements have correctly construed section 80-IB and Section 80-IC
- i)Delhi High Court in Dharam pal Prem Chand [Thus the isuue of excise subsidy also attains finality]
- ii)Calcutta High Court in Merino Ply and Chemicals [Transport Subsidy]
iii) Gauhati High Court in Meghalya Steels [Interest, Power, Transport Subsidy]
Conclusion: The Judgment of Supreme Court shall put to rest the long drawn controversy over reletability of subsidies to profits derived from eligible business. Since Finance Act 2015 has defied the purpose test of subsidies wef AY 2016-17, the judgement in author’s view is shot in the arm just before the commencement of AY 2016-17 before planning for last installment of AY 2016-17.
Issue of deduction of Housing Loan Interest in case of co-owners decided by Punjab and Haryana High Court in Priya Mahajan [ITA 384/2015 dtd 26-11-2015
Facts: Plot purchased in the name of four cowners. Also they were co-borrowers of housing loan for construction of house. The assessee solely repaid entire interest and principal since the date of borrowing. While assessee claimed 100% deduction on housing loan interest, the AO restricted it to 25% having regard to assessee’s share of ownership Section 45 of Transfer of Property Act 1882 on Joint transfer for consideration.— Where immoveable property is transferred for consideration to two or more persons and such consideration is paid out of a fund belonging to them in common, they are, in the absence of a contract to the contrary, respectively entitled to interests in such property identical, as nearly as may be, with the interests to which they were respectively entitled in the fund; and, where such consideration is paid out of separate funds belonging to them respectively, they are, in the absence of a contract to the contrary, respectively entitled to interests in such property in proportion to the shares of the consideration which they respectively advanced. In the absence of evidence as to the interests in the fund to which they were respectively entitled, or as to the shares which they respectively advanced, such persons shall be presumed to be equally interested in the property. Held that : In present case though assessee has claimed to have paid entire consideration for purchase of plot/construction, no evidence has been produced. In the sale deed since shares of individuals are not specified. Section 45 of Transfer of Property Act shall apply. In the case of Saiyed Abdullah v. Ahmad AIR 1929 All. 817, the Hon’ble Allahabad High Court held that ‘in the absence of specification of the shares purchased by two persons in the sale deed, it must be held that both purchased equal shares. In present case, since the individual shares were not specified in the sale deed, the logical conclusion is that everyone had equal share in the property. Hence allowance of 25% of Housing Loan to assessee borrower is correct even if the assessee solely repaid entire interest and principal since the date of borrowing.
Section 11(6) inserted by Finance Act 2014 wef AY 2015-16 disallowing deduction of depreciation of asset , the acquisition of which has been claimed as application is not retrospective in nature. Al- Ameen Charitable Fund Trust[2016] 67 taxmann.com 160 (Karnataka) FEBRUARY 22, 2016
Supreme Court in Kathiroor Service Cooperative Bank Ltd.[August 27, 2013.] on Scope of 133(6)
| The appellant-assessee is a Service Co-operative Rural Bank. The Income Tax Officer to the assessee under Section 133(6) of the Act calling for general information regarding details of all persons (whether resident or non-resident) who have made (a) cash transactions (remittance, transfer, etc.) of Rs. 1,00,000/- and above in any account and/or (b) time deposits (FDs, RDs, TDs, etc.) of Rs. 1,00,000/- or above for the period of three years between 01.04.2005 and 31.03.2008, dated 02.02.2009. It was expressly stated therein that failure to furnish the aforesaid information would attract penal consequences. The assessee objected to the said notice on grounds, inter alia, that such notice seeking for information which is unrelated to any existing or pending proceeding against the assessee could not be issued under the provisions of the Act and requested for withdrawal of the said notice
Section 133 provides for the power of authorities under the Act to call for information for the purposes prescribed therein. Sub Section (6) of Section 133 of the Act, as it stood originally, had provided for calling for information in relation to such points or matters which would be useful for or relevant to any proceeding under the Act from any person including a banking company or any officer thereof. It was settled law that unless a proceeding is pending, the powers under Section 133(6) could not be exercised by the Assessing Authorities. In such circumstances, an amendment was made by the Finance Act, 1995 (Act 22 of 1995), with effect from 01.07.1995, inserting the words “enquiry or” before “proceeding” in Section 133(6) and the second proviso to the said provision The addition of the word “enquiry” expanded the ambit of exercise of powers by the authorities under Section 133(6) to seek for information which would be useful for or relevant to any enquiry besides proceeding under the Act. The second proviso to Section 133(6), specified that the power in respect of an enquiry, in case where no proceeding is pending, shall not be exercised by any income tax authority below the rank of Director or Commissioner without the prior approval of the said authorities. The effect of the amendments made by the Finance Act (Act 22 of 1995) was explained by the CBDT in the Circular No. 717, dated 14th Aug., 1995 (See Taxmann ’s Direct Taxes Circulars, Vol. 4, 2002 Ed., p. 2.1759, 2.1782) as follows : At present the provisions of sub-section (6) of section 133 empower income-tax authorities to call for information which is useful for, or relevant to, any proceeding under the Act which means that these provisions can be invoked only in cases where the proceedings are pending and not otherwise. This acts as a limitation or a restraint on the capability of the Department to tackle evasion effectively. It is, therefore, thought necessary to have the power to gather information which after proper enquiry, will result in initiation of proceedings under the Act. 41.3 With a view to having a clear legal sanction, the existing provisions to call for information have been amended. Now the income-tax authorities have been empowered to requisition information which will be useful for or relevant to any enquiry or proceedings under the Income-tax Act in the case of any person. The Assessing Officer would, however, continue to have the power to requisition information in specific cases in respect of which any proceeding is pending as at present. However, an income-tax authority below the rank of Director or Commissioner can exercise this power in respect of an inquiry in a case where no proceeding is pending, only with the prior approval of the Director or the Commissioner. Since the language of the Section 133(6) is wholly unambiguous and clear, reliance on interpretation of statutes would not be necessary. Before the introduction of amendment to Section 133(6) in 1995, the Act only provided for issuance of notice in case of pending proceedings. As a consequence of the said amendment, the scope of Section 133(6) was expanded to include issuance of notice for the purposes of enquiry. The object of the amendment of section 133(6) by the Finance Act, 1995 (Act 22 of 1995) as explained by the CBDT in its circular shows that the legislative intention was to give wide powers to the officers, of course with the permission of the CIT or the Director of Investigation to gather general particulars in the nature of survey and store those details in the computer so that the data so collected can be made use of for checking evasion of tax effectively. The assessing authorities are now empowered to issue such notice calling for general information for the purposes of any enquiry in both cases: (a) where a proceeding is pending and (b) where proceeding is not pending against the assessee. However in the latter case, the assessing authority must obtain the prior approval of the Director or Commissioner, as the case maybe before issuance of such notice. The word “enquiry” would thus connote a request for information or questions to gather information either before the initiation of proceedings or during the pendency of proceedings; such information being useful for or relevant to the proceeding under the Act |
Powers u/s 131(1) can not be exercised without pendancy of proceedings
Powers regarding discovery, and production of evidence given to the IT authority under s. 131 are the same powers as vested in a Court under CPC while trying a suit—Existence of a suit or a proceeding is a sine qua non for exercise of such power under CPC—Therefore, power mentioned in sub-s. (1) of s. 131 can be exercised only if a proceeding is pending before the concerned officer and not otherwise—This interpretation is consistent with the scheme of the sub-s. (1A) of s. 131 according to which it is competent for Asstt. Director of Inspection to exercise powers under s. 131(1) under certain circumstances even in absence of any pending proceedings [JAMNADAS MADHAVJI & CO. & ANR. vs. J.B. PANCHAL, INCOME TAX OFFICER & ANR ) 162 ITR 0331 HIGH COURT OF BOMBAY]
Out of Pocket expenses seperately received in advance or otherwise shall not form part of turnover for audit purpose . Hence no penalty held levialble u/s 271B- Shashank Rakesh Aggarwal [ITAT Mumbai]
Reimbursement of Expenses not a part of gross receipts of the assessee for audit purpose-ITAT Pune
Whether reimbursement of actual expenditure on which the payer has deducted TDS ought to be considered by the assessee as a gross receipts or the assessee was under a bona fide impression that reimbursement of expenditure does not involve element of income and not required to be considered as a part of gross turnover. After perusing various invoices raised by the assessee on its clients which are placed in the paper-book, we are of the view that the assessee remained under a bona fide impression that the expenditure incurred on behalf of its clients regarding payment of customs duty, transportation/freight charges, forklift charges, etc. were not required to be retained by the assesse [Aasita International-ITAT Pune 19-011-2015]
Scheme of Taxation for Provident Funds, Approved Super Annuation Funds and New Pension Fund revisited after amendments proposed in Finance Bill 2016
Feb 2016 witnessed a few important changes for salaried class assessee enjoying their provident fund bounties. While vide Government Notification dated 10-02-2016 withdrawl of employer contributions till 58 years of age was prohibited, Finance Bill 2016 created mayhem over taxability on withdrawl of entire provident fund accumulations. The amendment was made to move to the regime of EET (i.e. Exempt, Exempt, Tax) from present regime of (Exempt, Exempt and Exempt). Although Finance Minister has announced the retraction of its proposal to tax provident fund withdrawl, there are other large number of other amendments also with regard to employee benefits, which have gone unnoticed in this buzz.
In this article an attempt has been made to discuss the taxability of provident funds, approved superannuation funds and new pension scheme after taking into account the amendments proposed by Finance Bill 2016. The taxability of each of these employee benefit scheme has been discussed with regard to employee contributions, employer contributions and treatment on maturity/withdrawl.
- Recognized Provident Funds
What is Recognised Provident Fund ?
As per Section 2(38) “recognised provident fund” means a provident fund which has been and continues to be recognised by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part A of the Fourth Schedule, and includes a provident fund established under a scheme framed under the Employees’ Provident Funds Act, 1952 (19 of 1952)
- a)Taxability of Employees Contribution to Recognized Provident Fund
- i)As per Rule 7 of Schedule IV-A
An employee participating in a recognised provident fund shall, in respect of his own contributions to his individual account in the fund in the previous year, be entitled to a deduction in the computation of his total income of an amount determined in accordance with section 80C
- ii)Under Section 80C(2)(vi), there is deduction for contribution by an employee to a recognised provident fund. Contributions by government employees under Provident Fund Act 1925 is eligible for deduction u/s 80C(2)(iv). Contribution to Public Provident Fund under PPF Act 1968 is eligible for deduction u/s 80C(2)(v) rws 80C(4) whether made in name of assessee or spouse or child. Deduction u/s 80C is available up to Rs. 150000. Hence no deduction for contributions exceeding Rs. 150000/-. No deduction u/s 80C is available for contribution to unrecognized provident fund.
- b)Taxability of Employer’s Contribution to Recognized Provident Fund
- i)As per Section 7 the annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule shall be deemed to be income received by employee
- ii)Extent of Employer’s annual contributions deemed to be income received by employee as per Rule 6 of Schedule IV-A
That portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund as consists of—
| (a) | contributions made by the employer in excess of twelve per cent of the salary of the employee [or Rs. 1,50,000 whichever is less was proposed to be inserted Wef AY 2017-18 has been rolled back],
Note : Finance Bill 2016 therefore proposed to tax employer’s contribution to recognized provident fund in excess of Rs. 1,50,000 . Hence employees whose salary exceeded Rs. 12,50,000 would have been effected by this amendment. [150000 x (12/100)=1250000]. However this proposal has also been rolled back . |
|
| (b) | interest credited on the balance to the credit of the employee in so far as it is allowed at a rate exceeding such rate as may be fixed by the Central Government in this behalf by notification in the Official Gazette,
[Rate fixed is 9.5% w.e.f. 1-9-2010 – Notification No. SO 1046(E), dated 13-5-2011.] |
shall be deemed to have been received by the employee in that previous year and shall be included in his total income for that previous year, and shall be liable to income-tax .
iii) Head of Income for taxability of Employers’ Contribution
The annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule shall be chargeable as salary as per Section 17(1)(vi)
- iv)In case of statutory provident funds and unrecognized provident funds, contribution of employer is not treated as income received.
- c)Taxability of Withdrawls of Accumulated Balance from Recognized Provident Fund
- i)As per section 10(12) the accumulated balance due and becoming payable to an employee participating in a recognized provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule is exempt
Amendment Proposed in Finance Bill 2016 but dropped by Finance Minister
Provided that nothing contained in this clause shall apply in respect of any amount of accumulated balance, attributable to any contributions made on or after the 1st day of April, 2016 by an employee other than an excluded employee, exceeding forty per cent. of such accumulated balance due and payable in accordance with provisions of rule 8 of Part A of the Fourth Schedule.
Explanation.—For the purposes of this clause, the term “excluded employee” means an employee whose monthly salary does not exceed such amount, as may be prescribed;’;
- ii)Extent of Withdrawl from recognized provident fund as per Rule 8 Schedule IV-A
The accumulated balance due and becoming payable to an employee participating in a recognized provident fund shall be excluded from the computation of his total income—
| (i) | if he has rendered continuous service with his employer for a period of five years or more, or | |
| (ii) | if, though he has not rendered such continuous service, the 63service has been terminated by reason of the employee’s ill-health, or by the contraction or discontinuance of the employer’s business or other cause beyond the control of the employee, 64[or] | |
| 64[(iii) | if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer. | |
| iv) | if the entire balance standing to the credit of the employee is transferred to his account under a pension scheme referred to in section 80CCD and notified by the Central Government (Inserted by Finance Bill wef AY 2017-18) |
Explanation.—Where the accumulated balance due and becoming payable to an employee participating in a recognised provident fund maintained by his employer includes any amount transferred from his individual account in any other recognised provident fund or funds maintained by his former employer or employers, then, in computing the period of continuous service for the purposes of clause (i) or clause (ii) the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall be included.]
iii) Calculation of Tax on premature withdrawl of accumulated balance.as per Rule 9 of Schedule IV-A
Where the accumulated balance due to an employee participating in a recognised provident fund is included in his total income owing to the provi-sions of rule 8 not being applicable, the Assessing Officer shallcalculate the total of the various sums of tax which would have been payable by the emp-loyee in respect of his total income for each of the years concerned if the fund had not been a recognised provident fund, and the amount by which such total exceeds the total of all sums paid by or on behalf of such employee by way of tax for such years shall be payable by the employee in addition to any other 66[tax] for which he may be liable for the previous year in which the accumulated balance due to him becomes payable.
Note: It means that tax shall be computed for respective years without giving effect to deduction for contribution to EPF under section 80C.
Iv )Deduction at source of tax payable on accumulated balance as per Rule 10 of Sch IV-A.
The trustees of a recognised provident fund, or any person authorised by the regulations of the fund to make payment of accumulated balances due to employees, shall, in cases where sub-rule (1) of rule 9 applies, at the time an accumulated balance due to an employee is paid, deduct therefrom the amount payable under that rule and all the provisions of Chapter XVII-B shall apply as if the accumulated balance were income chargeable under the head “Salaries”.
- v)TDS on Payment of accumulated balance due to an employee. As per Section 192A inserted wef 01-06-2015
Notwithstanding anything contained in this Act, the trustees of the Employees’ Provident Fund Scheme, 1952, framed under section 5 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952) or any person authorised under the scheme to make payment of accumulated balance due to employees, shall, in a case where the accumulated balance due to an employee participating in a recognised provident fund is includible in his total income owing to the provisions of rule 8 of Part A of the Fourth Schedule not being applicable, at the time of payment of the accumulated balance due to the employee, deduct income-tax thereon at the rate of ten per cent :
Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payment to the payee is less than thirty thousand rupees:
Provided further that any person entitled to receive any amount on which tax is deductible under this section shall furnish his Permanent Account Number to the person responsible for deducting such tax, failing which tax shall be deducted at the maximum marginal rate.
- vi)Facility of Form 15G/15H
However wef 01-06-2015, the assessee can file form 15G if total income including premature withdrawl of PF abalance does not exceed exemption limit. Senior Citizens can file Form 15H where tax payable is NIL even after inclusion of premature withdrawl of PF balance
vii) In case of Unrecognized provident Fund or WIthdrawl from provident fund with in five years as per Section 17(3)
Section 17(3) is applicable to payments other than covered by S.10(12). Section 10(12) applies to accumulated balance due or payable to employee participating in recognized provident fund to the extent provided in Rule 8 of Schecule IV-A. Hence section 17(3) shall apply to following situations:
1) Amount becoming due or payable from unrecognized provident fund
2) Amount from recognized provident fund not covered by Rule 8 of SCh-IV-A
As per Section 17(3) profits in lieu of salary” includes any payment (other than any payment referred to in clause(12) of Section 10) due to or received by an assessee from an employer or a former employer or from a provident or other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions
Note:
- On payment of employee’s own contribution, since it will be return of investment by employee without enjoying any deduction u/s 80C, there shall be no tax implication.
- Interest on employee’s contribution shall be taxable as Income from Other Sources.
- Employer’s Contribution as well as interest on employer’s contribution shall be taxable as profits in lieu of salary.
viii) Withdrawl from Stautory Provident Fund for Government Employees or Public Provident Fund
As per Section 10(11) any payment from provident Fund to which provident Fund Act 1925 applies [It applies to Government Employees] or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette i.e. Public Provident Fund under PPF Scheme 1968 is exempt from tax.
- Approved Superannuation Fund
What is Approved Super Annuation Fund:?
As per section 2(6) “approved superannuation fund” means a superannuation fund or any part of a superannuation fund which has been and continues to be approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part B of the Fourth Schedule
- a)Contribution by an employee to an approved superannuation fund
U/s 80C(2)(vii) deduction up to Rs. 150000 is available for contribution to approved superannuation fund.
- b)Taxability of Employer’s Contribution to approved superannuation Fund
As per Section 17(2) The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees is chargeable as perquisites
The Limit being enhanced to Rs.1.50 lacs wef AY 2017-18 to bring parity with section 80C.
- c)Withdrawl from approved Superannuation Fund
Section 10(13) exempts
| any payment from an approved superannuation fund made— |
| (i) | on the death of a beneficiary ; or | |
| (ii) | to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement ; or | |
| (iii) | by way of refund of contributions on the death of a beneficiary ; or | |
| (iv) | by way of refund of contributions to an employee on his leaving the service in connection with which the fund is established otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement, to the extent to which such payment does not exceed the contributions made prior to the commencement of this Act and any interest thereon |
Amendment Proposed wef AY 2017-18
Section 10(13) further proposes to exempt transfer to the account of the employee under a pension scheme referred to in section 80-CCD and notified by the Central Government
60% of Commuted annuity in respect contribution after 01-04-2016 made taxable by adding proviso
Provided that any payment in lieu of or in commutation of an annuitypurchased out of contributions made on or after the 1st day of April, 2016, where it exceeds forty per cent. of the annuity, shall be taken into account in computing the total income;
- New Pension Scheme u/s 80CCD:
- a)Employees Contribution
Section 80CCD(1)
Where an assessee, being an individual employed by the Central Government on or after the 1st day of January, 2004 or,
being an individual employed by any other employer,
or any other assessee, being an individual]
has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed,—
| (a) | in the case of an employee, ten per cent of his salary in the previous year; and | |
| (b) | in any other case, ten per cent of his gross total income in the previous year.] |
[(1A) The amount of deduction under sub-section (1) shall not exceed one hundred thousand rupees.]Omitted by Finance Act 2015
Following sub-section (1B) has been inserted after sub-section (1A) of section 80CCD by the Finance Act, 2015, w.e.f. 1-4-2016 :
(1B) An assessee referred to in sub-section (1), shall be allowed a deduction in computation of his total income, [whether or not any deduction is allowed under sub-section (1)], of the whole of the amount paid or deposited in the previous year in his account under a pension scheme notified or as may be notified by the Central Government, which shall not exceed fifty thousand rupees:
Provided that no deduction under this sub-section shall be allowed in respect of the amount on which a deduction has been claimed and allowed under sub-section (1).
- b)Employer’s Contribution
80CCD(2) Where, in the case of an assessee referred to in sub-section (1), the Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer as does not exceed ten per cent of his salary in the previous year.
Note: As per Section 7(iii) the contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD is deemed to be income received Further As per Section 17(1)(viii) salary includes the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD;
Hence Contributions by employer in excess of 10% shall become taxable.
- c) Taxability of Withdrawl/Maturity
80CCD(3) Where any amount standing to the credit of the assessee in his account referred to in sub-section (1) or sub-section (1B), in respect of which a deduction has been allowed under that sub-section or sub-section (2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year,—
| (a) | on account of closure or his opting out of the pension scheme referred to in sub-section (1) or sub-section (1B); or | |
| (b) | as pension received from the annuity plan purchased or taken on such closure or opting out, |
the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year.
Following proviso proposed to be inserted wef AY 2017-18
Provided that the amount received by the nominee, on the death of the assessee, under the circumstances referred to in clause (a), shall not be deemed to be the income of the nominee
Conversion into Annuity Plan
(5) For the purposes of this section, the assessee shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year.
40% Receipts from New Pension Scheme Exempted by inserting clause 10(12A) wef AY 2017-18 as under:
(12A) any payment from the National Pension System Trust to an employeeon closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent. of the total amount payable to him at the time of such closure or his opting out of the scheme;”;
Explanation.—For the purposes of this section, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
Conclusion: 60% of Withdrawl from recognized provident fund sought to be taxed by Finance Bill 2016 has been dropped and hence shall continue to enjoy tax exempt status. Employer’s contribution to recognized fund in excess of Rs. 150000 was also proposed to be taxed has also been rolled back. Employer’s Contribution to approved superannuation fund has been exempted till Rs. 150000 to bring it in parity with deduction for employees contribution. In investment in New Pension Scheme also still there is no cap for exemption in absolute terms of monetary limit except percentage limit of 10%. While conversion from new pension scheme to annuity was already tax exempt, the conversion from recognized provident fund and approved superannuation fund to new pension scheme has also been exempted. 40% of amount receivable under new pension scheme and commuted annuity is also proposed to be exempted from tax. Amount received by nominee under new pension scheme on death of the contributor has been provided albeit exemption. Contributors of New Pension scheme already enjoys the benefit of additional deduction of Rs. 50,000/- u/s 80CCD(1B) over and above normal aggregate deduction of Rs. 150000 u/s 80C and 80CCD(1).