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More amendments — more regulations and other provisions

What are the salient features of the Taxation Laws (Amendment) Act, 2006?

The Taxation Laws (Amendment) Act, 2006, has many regulatory provisions, some of which require the immediate attention of trade and industry. There are other provisions largely empowering the Income-tax Department to prevent abuse of various concessions under the statute. A Press Note dated July 14, 2006, reports enactment of this law `today', that is, July 14, 2006.

Account payee cheques substituted for crossed cheques: Amounts exceeding Rs. 20,000 paid for business expenses including purchases, which were hitherto required to be made by crossed cheque or crossed draft, will now be required to be paid by an account payee cheque or account payee bank draft to avoid disallowance of 20 per cent of such payment under Section 40A (3).

TDS — Sections 194I and 194J extended: Tax deduction at source will now be required for more items. Section 194-I, which covered only rent from immovable property or movables rented along with such immovable property, now extends to movables, even if hired independently, so as to cover rent or hire charges received for lease, sub-lease, tenancy or any other agreements not only for land, building and appurtenant land as now, but also for machinery, plant, equipments, furniture or fittings under Sec. 194-I.

Similarly, there is an extension of coverage under Sec. 194J requiring tax deduction from professional fees to include royalty as well as anti-compete fee. Royalty will have the same meaning as royalty paid to non-resident under Explanation 2 to Sec. 9(1)(vi), while anti-compete fee (and similar compensation) will be understood to have the same meaning as defined under Sec. 28(va).

These new provisions for tax deduction have come into immediate effect from July 14, 2006.

Disallowance for TDS defaulted payments: Sec. 40(a)(ia), which disallows deduction of amounts on which tax has not been deducted at source, where required, has also been consequentially amended to cover the new items to which TDS is extended by the Amendment Act. This amendment relating to disallowance has been made effective from April 1, 2006, that is, assessment year 2006-07, obviously an anomaly, since the deductions in respect of new requirements could not have been made during the relevant previous year. It is an obvious mistake occasioned by the failure to update the draft Bill, which became law after a year's delay.

Gift from non-relatives — more changes: The earlier lacuna was in not exempting liability on gifts from non-relatives from amounts received by way of assistance from charitable institutions registered under Sec. 12AA, scholarship amounts and medical assistance from institutions covered by Sec. 10(23C) and local Government as defined under Sec. 10(20). Such donations are now retrospectively exempted for gifts made on or after September 1, 2004, from which date the liability itself was imposed by law.

Non-relative gifts made on or after April 1, 2006, will be governed by new Sec. 56(vi). The only change is that an overall limit of Rs. 50,000 is placed on all non-relative gifts.

The present law supports the earlier inference that gifts received before April 1, 2006 will be subject to a ceiling of Rs. 25,000 for each gift with no overall ceiling.

The other controversies as to gifts, whether "any sum of money" would exclude gift of bonds, etc. have not been made clear, so that the possible loophole, as in cases where some of the money is converted into bonds before gift, will persist. Absence of a definition of `relative' of the Hindu Undivided Family is an omission that continues even after the amendment.

New guidelines for donations to research institutions: As regards contributions to a university, college or research institution eligible for weighted deduction under Sec. 35(1)(ii) and 35(1)(iii) of the Act, a proviso introduced under those clauses will now empower the Board to prescribe guidelines on the conditions for approval, which may mean that existing institutions will require fresh approval, since the amendment is made with effect from April 1, 2006, that is, assessment year 2006-07, which is ordinarily governed by law in force on April 1, 2005.

Concessions can be revoked before the expiry date: Power is given for the assessing officer to recommend withdrawal of concessions before the end of the period approved for research institutions under Sec. 35(1)(ii) and 35(1)(iii) after a show cause notice vide amendment to Sec. 143.

Any approval for exemption granted under Sec. 10(23C)(iv) and (v) will be limited to three years and the earlier notification will lapse on or after July 14, 2006, if three years have expired or on expiry of three years, if not expired. There is already such power in respect of other approvals and exemptions.

These amendments follow another spate of amendments made by the Finance Act, 2006. Such tinkering when a new law is expected in the near future serves no purpose except to benefit the professionals and the law publishers, while creating avoidable hardship for taxpayers in complying with the law and for officers in enforcing them.

S. RAJARATNAM

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