Budget 2006 an Analysis by Laws 4 India.com

I. Rates of income-tax for the assessment year 2008-09 are the same as in A.Y. 2007-08 while the basic exemption has been raised as under:-

Individual, Hindu Undivided Family, Association Of Persons, body of individuals, artificial juridical person

Basic exemption	Rs.1,10,000/-
Tax Rate
Between 1,10,001/- and 1,50,000/-	10%
Between 1,50,001/- and 2,50,000/-	20%
Above 2,50,000/-	30%
Women resident
Basic exemption	Rs.1,45,000/-
Tax Rate
Between 1,45,001/- and 1,50,000/-	10%
Between 1,50,001/- and 2,50,000/-	20%
Above 2,50,000/-	30%
Senior Citizen (Above 65 years)
Basic exemption	Rs.1,95,000 /-
Tax Rate
Between 1,95,001/- and 2,50,000/-	20%
Above 2,50,000/-	30%

Individuals, Hindu undivided families, association of persons and body of individuals having total income exceeding Rs.10,00,000/- as reduced by the amount of rebate of income tax under Part-A of Chap-VIII are liable to pay a surcharge at the rate of ten per cent, which is subject to marginal relief.

The rates of income-tax are the same as for assessment year 2007-2008. No surcharge shall be levied.

The rate of income tax is the same as for assessment year 2007-2008. A surcharge shall be levied at the rate of ten percent in respect of firms having total income exceeding Rs.One Crore. Marginal relief will be available. Surcharge shall be levied at the existing rates on tax on fringe benefits irrespective of amount of fringe benefit.

The rate of income tax is the same as for assessment year 2007-2008. No surcharge shall be levied.

The rates of income tax are the same as for the assessment year 2007-08. A surcharge shall be levied at 10% in the case of domestic companies having total income exceeding Rs.One Crore and at 2½% in the case of Companies other than domestic Companies having total income exceeding Rs.One Crore. Marginal relief will be available. Surcharge shall be levied at the existing rates on tax on fringe benefits irrespective of amount of fringe benefit.

Education Cess shall continue to be levied at 2% of income tax and surcharge in all cases. In addition to that, Secondary and High Education Cess will be levied at 1% on income tax and Surcharge in all cases.

According to the existing provisions certain personal effects held by an assessee and his dependent family members do not fall within the ambit of the definition of Capital asset. At present the only asset which is personal asset but is included in the definition of capital asset is Jewellery. It is proposed to widen the definition of the term Capital asset to include in it the following which are in the nature of personal effects.

According to the existing provisions, income from interest, royalty or fees for technical services received from a resident payer would be deemed to accrue or arise in India unless they are relatable to a business carried on by the resident payer outside India. In order to overcome certain Judicial opinion it is proposed to add an Explanation u/s.9(2) to clarify that such income shall be included in the total income of the nonresident whether or not the nonresident has a residence or place of business or business connection in India.

According to existing provisions, compensation received by an assessee on account of Bhopal Gas Disaster is exempt. It is proposed to extend the exemption to compensation received by an individual or his legal heir on account of any specified disaster.

According to existing provisions, deduction in phased manner is available to units in SEZ which begin to manufacture or produce articles or things or provide Services after 01-04-2006.

In order to ensure that SEZ promote only new industry and new investment and not facilitate migration of existing industries, it is proposed to introduce the condition that the unit should not be formed by splitting up or reconstruction of existing business or by transfer of machine or plant previously used for any purpose.

According to the existing provisions, a Charitable Trust is required to file prescribed application to the CIT to claim exemption u/s. 11 & 12 within one year from the date of creation and in case of delay with a request for condonation of such delay. Exemption in such cases will be granted with effect from the date of creation.

It is proposed to amend the provisions to provide that it is no longer compulsory for the Trust / Institution to file any application within one year from the date of creation. The power of CIT for condoning the delay in filing the application is proposed to be removed. Accordingly in respect of applications filed after 01-06-2007, the exemption will be available from the assessment year relevant to the Financial Year in which application is made.

According to existing provisions, value of any rent free accommodation or any concession in rent in respect of accommodation provided by the employer to employee is deemed to be perquisite. It is proposed to provide by means of Explanation under section 17(2) (ii) that value of such concession in the matter of rent in respect of unfurnished accommodation owned by the employer will be the amount by which specified percentage of salary exceeds the rent recoverable from the employee. In cases where said accommodation is not owned but taken on lease by the employer, the value of perquisite will be computed on the basis of difference between lease rent or specified percentage of salary whichever is lower and the rent receivable from employee.

The proposed amendment also provides computation of value of perquisites in following cases:

Where furnished accommodation is provided by employer and where furniture is owned / taken on hire by him.

Where hotel accommodation is provided by the employer (excepting where the accommodation provided on transfer does not exceed 15 days).

Parts of the amendment takes effect retrospectively from 01-04-2002 and with effect from 01-04-2006.

Weighted deduction u/s. 35 (2AB) (1) is at present available upto 31-03-2007 to a Company engaged in biotechnologies or in manufacturing of pharmaceuticals, drugs, etc. notified by the Board.

In order to extend fiscal support to research, the weighted deduction will be available upto 31-03-2012.

Existing provisions provide for disallowance of 20% of expenditure exceeding Rs.20,000/- incurred otherwise than by Account Payee Bank Cheque / Draft. It was felt that disallowance of only 20% is not proving to be antievasion measure. It is proposed to amend the Section to provide for disallowance of entire expenditure exceeding Rs.20,000/- incurred otherwise than by Account Payee Cheque. Further where an allowance had been made in one year towards liability and in any subsequent years assessee discharges the said liability by making actual payment otherwise than by account payee cheque / draft, the payment so made if it exceeds Rs.20,000/- shall be deemed to be profit and gains of business of that year.

It is also provided that the above disallowance / addition will not made if prescribed conditions exist regarding banking facilities, business, expediency, etc.

It is proposed to introduce new Sub Sec. (2AB). In the case of transfer of specified Security / Sweat equity shares whose value had been taken into account for computing value of fringe benefit u/s. 115 WC(1)(ba) their cost of acquisition will be the value adopted u/s. 115 WC for computing Capital Gains.

According to existing provisions, capital gains arising on transfer of long term capital asset is exempt if invested on specified bonds within 6 months of transfer. It is proposed to limit the investment for an assessee to Rs.50 Lacs for one financial year with effect from 01-04-2007.

Bonds issued by National Highway Authority and Rural Electrification Corpn. Ltd. are notified for this purpose for investment with effect from 01-04-2006 upto 31-03-2007.

It is proposed to introduce Sub-Section 72-A (1) as substitution of old one providing for carry forward of accumulated loss unabsorbed depreciation of amalgamating Company in the hands of amalgamated company where there has been an amalgamation of—

(a) a company owning an industrial undertaking or a ship or a hotel with another company; or

(b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 with a specified bank; or

(c) one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business,

According to existing provisions, no deduction is allowable for A.Y. 2006-07 onwards under section 80IA or 80 IAB or 80 IB or 80 IC unless return of income is filed within time prescribed under section 139(1).

Proposed amendment will extend the (BAR) bar on allowing deduction under section 80-ID unless return of income is filed within the time allowed under section 139(1).

At present, the amount paid by cheque by an Individual or HUF to keep in force an insurance on the health of self / family members is allowed as deduction upto Rs.10,000/-

It is proposed to allow the payment by electronic mode, credit card, etc. other than by cash and the deduction allowable is Rs.20,000/- for Senior Citizen and Rs.15,000/- for others.

The benefit of deduction of interest on loan taken for the purpose of assessee’s higher education is extended to the loan taken for his relatives viz. spouse & children. The deduction is available for 8 assessment years from the assessment year in which assessee starts paying interest.

As per existing provisions, 10 years tax benefit is available to an undertaking engaged in development of infrastructure facilities.

It is proposed to amend sub-section (2) to provide that an assessee may also claim deduction for ten out of fifteen years beginning from the year in which an undertaking lays and begins to operate a cross-country natural gas distribution network.

An undertaking formed by way of reconstruction or splitting up or by transfer to a new business of old plant and machinery shall not be eligible for deduction under the said section.

Clause (v) of said sub-section (4), inter alia, provides that an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant is eligible for ten years tax benefit if it begins to generate or transmit or distribute power before the 31st March, 2007.

It is proposed to amend sub-clause (b) of clause (v) of the said sub-section (4) so as to extend the date to begin generation, transmission or distribution of power from 31-03-2007 by one more year i.e., before 31st March, 2008.

(4) of section 80-IA so as to provide that any undertaking carrying on the business of laying and operating a cross-country natural gas distribution network, including pipelines and storage facilities being an integral part of the network, shall be eligible for deduction under the said section if it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation established or constituted under any Central or State Act; has been approved by the Petroleum and Natural Gas Regulatory Board established under sub-section (1) of section 3 of the Petroleum and Natural Gas Regulatory Board Act, 2006 and notified by the Central Government in the Official Gazette; one-third of its total pipeline capacity is available for use on common carrier basis by any person other than the assessee or an associated person; it has started or starts functioning on or after 1st April, 2007 and fulfils any other condition which may be prescribed.

Explanation to clause (i) of sub-section (4) of the said section defines the expression "infrastructure facility" to mean a road including toll road, a bridge, a rail system, a highway project including housing or other activities being an integral part of the highway project, a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system, a port, airport, inland waterway or inland port.

Considering the fact that navigational channels in the sea is a high risk project (involving huge capital investment) and also has long gestation period, it is proposed to expand the scope of the expression "infrastructure facility" so as to include a navigational channel in the sea within its ambit for the purposes of ten year tax benefit under section 80-IA.

This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009

It is proposed to clarify that the benefit will not be available to a person who executes the work contract entered into with the undertaking but to the person who makes the investment and himself executed the civil construction work.

According to Sec.80IA(12) where any undertaking of an Indian company entitled to the deduction is transferred before the expiry of the period specified therein, to another Indian company in a scheme of amalgamation or demerger, the provisions of the said section 80-IA shall apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.

It is proposed to insert a new sub-section (12A) in section 80-IA so as to provide that the provisions of sub-section (12) shall not apply to any undertaking or enterprise which is transferred in a scheme of amalgamation or demerger after 31.3.2007.

It is propose to introduce this new Subsection to provide for 100% deduction for five consecutive years of the profit derived from

(ii) Building / owning / operating convention centre in same area for same period subject to following conditions:-

the eligible business is not formed by the splitting up, or the reconstruction, of a business already in existence;

the eligible business is not formed by the transfer to a new business of a building previously used as a hotel or a convention centre, as the case may be;

(iii) the eligible business is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

(iv) "specified area" means the National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad.'.

New Sub-section (3A) is proposed to be introduced under section 92(A) to provide that an order u/s. 92CA(3) shall be made by the Transfer Pricing Officer for determination of arm’s length price of international transactions shall be made at least 2 months before the period of limitation u/s. 153/153B.

In order to enable the Transfer Pricing Officer to have adequate time to attend to the matter involving international transaction referred to him by the A.O. in respect of arms length price, the time limit prescribed in Section 153/153B for completion of assessment/reassessment in such cases is proposed to be extended by one year.

The amendment will be effective from 01-06-2007 and will also cover cases where reference to Transfer Pricing Officer was made prior to 01-07-2007 but no order has been passed under section 92CA (3).

According to existing provisions in the case of a Company where tax payable under the Income Tax Act is less than 10% of book profit, such book profit shall be deemed to be total income and the tax payable shall be 10% thereof. The present provisions provide that the book profit shall be increased by the amount of expenditure relatable to any income referred to in section 10A or section 10B if such amount is debited to the profit and loss account and it shall be reduced by the amount of income referred to in sections 10A and 10B, if any such amount is credited to the profit and loss account.

It is proposed to amend clause (f) of the Explanation under section 115JB (2) to provide that the book profit shall not be increased by the amount of expenditure relatable to any income to which section 10A or section 10B applies and to provide that the amount of income to which any of the provisions of section 10A or section 10B apply, shall not be reduced from the book profit. These amendments will take effect from 1st April, 2008.

At present any amount of income distributed by the specified company or mutual fund is liable to tax at 12½ % in the case of Individual and HUF and at 20% in the case of others.

It is proposed that where the income is distributed by money market, mutual fund or licenced fund, additional income tax at 25% will be payable.

1. Section 115WB defines fringe benefits and deemed fringe benefits. Under sub-section (1) of section 115WB the expression ‘fringe benefits’ has been defined, which, inter-alia, means any privilege, service, facility or amenity, directly or indirectly, provided by an employer to his employees, any contribution by the employer to an approved superannuation fund for the employees, etc.

With a view to bring Employees’ Stock Option Plan within the purview of fringe benefit tax, it is proposed to insert a new clause

(d) in sub-section (1) of section 115WB so as to include any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), within the ambit of "fringe benefits".

It is proposed to insert a new clause (ba) in sub-section (1) of the said section 115WC so as to provide that the fair market value of the specified security or sweat equity shares, on the date of exercise of the option by the employee as reduced by the amount actually paid by, or recovered from the employee in respect of such security or shares, shall be the value of fringe benefits referred to in the proposed clause (d) of sub-section (1) of section 115WB.

Consequent to insertion of clause (ba) in sub-section (1) of section 115WC providing for the value of fringe benefits referred to in clause (d) of sub-section (1) of section 115WB, it is also proposed to insert a new sub-section (2AB) in section 49 so as to provide that for the purposes of said sub-section (2AB) of section 49, the cost of acquisition of specified security or sweat equity shares shall be the value under the proposed clause (ba) of sub-section (1) of section 115WC if such value has been taken into account for the purposes of levy of fringe benefit tax.

2. It is further proposed to amend clause (v) of the proviso to clause (D) of Section 115 WB(2) and to substitute clause (vii) of the proviso to clause (D) of sub-section (2) of section 115WB so as to provide that the expenditure on display of products and on distribution of samples of any item either free of cost or at concessional rate to any person including doctors, shall not be included in ‘sales promotion including publicity’ for valuation of fringe benefits.

3. It is proposed to provide that the amount of advance tax on the current fringe benefits shall be payable by all the companies, who are liable to pay the same, in four installments during each financial year. The companies shall pay not less than fifteen per cent of such advance tax on or before 15th June; forty-five per cent as reduced by the amount paid in earlier installment on or before 15th September; seventy-five per cent as reduced by the amount paid in earlier installment (s) on or before 15th December; and the whole amount as reduced by any amount paid in earlier installment(s) on or before 15th March of the financial year. All assessees (other than companies), who are liable to pay the advance tax on current fringe benefits shall pay the same in three installments during each financial year. Such assessees shall pay not less than thirty per cent of such advance tax on or before 15th September; sixty per cent as reduced by the amount paid in earlier installment on or before 15^th December; and the whole amount as reduced by any amount paid in earlier installment(s) on or before 15th March of the financial year.

These amendments will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.

Section 139 C—To provide that the Board may make rules providing for a class of assesses who may not be required to furnish documents / statements / audited reports, etc. with the return. They will be required to be provided before A.O. only on demand.

Section 139-D - To provide that the Board may make rules providing for a class of assesses required to furnish the return in electronic form. The documents may be furnished with the electronic form but may be produced before A.O. on demand.

According to the existing provisions having regard to the nature of complexity of the accounts of the assessee, in the interest of revenue A.O. may direct the assessee with the approval of CIT to get the accounts audited.

The Supreme Court had held that the directions under section 142(2A) are quasi judicial orders and an opportunity should be afforded to the assessee. With due respect to the above decision it is proposed to amend the provisions to give opportunity to the assessee before passing order under section 142(2A) for special audit. The expenses of such special audit including remuneration to the Accountant shall be determined by the CIT and be paid by Central Government.

As a result of the provision requiring the A.O. to refer the case to the Transfer Pricing Officer for determining the arm’s length price, problems arise in completing the assessment/reassessment within the time prescribed u/s. 153. Such a requirement does not leave adequate time to the T.P.O. to determine the price and to the A.O. to complete the assessment thereafter.

Similarly ‘Search and Seizure’ cases are to be completed within the time prescribed u/s.153 B. The aforesaid problem arises in such cases also.

In order to remove the difficulty, it has been proposed to extend the permitted time by 12 months. Further, the T.P.O. is required to determine the arm’s length price atleast two months before the expiry of new time limit.

The extended time limit will be applicable also in cases where reference to T.P.O. has been made before 1^st June, 2007.

While Section 172 provides for filing of return by non-resident shipping companies, there is no time limit prescribed for completion of assessment.

The amendment seeks to provide that assessment in such cases should be completed within 9 months from the end of the financial year in which the return is furnished.

Where, however, the return was furnished before 1-4-2007, the order may be made at any time before 31-12-2008.

Sec. 193 – 8% Savings (Taxable) Bonds 2003 are subject to TDS inspite of their being Central Govt. Securities. Tax is deductible if the amount exceeds Rs.10,000/- during financial year.

Sec. 194A – The monetary limit upto which tax is not deductible from interest other than interest on Securities is Rs.5,000/- under the existing provisions. The same is proposed to be raised to Rs.10,000/- if the interest is payable by a banking company or a co-operative bank or a Post office.

Sec. 194C – At present tax is not deductible if the payment to contractor is made by individual or HUF. The amendment seeks to bring individuals / HUF also within the category of payers obliged to deduct tax at source provided their turnover / gross receipts is such which obliges them to get their accounts audited u/s. 44AB. Such limit is Rs.40 lakhs for business and Rs.10 lakhs for profession. The amendment will not apply in respect of payment made by individual/HUF in respect of payments exclusively for personal purposes.

Sec. 194H – Payments made by BSNL and MTNL to their public call office franchisees in respect of commission or brokerage does not require tax to be deducted at source. In other cases, rate of TDS is proposed to be raised from 5% to 10%.

Sec. 194I – The rate of TDS on payment by way of rent of machinery, plant and equipment which is 15% (if payee is individual) and 20% (in other cases). The same is proposed to be reduced to 10% irrespective of who the payee is. Other payments will continue to be subject to the rate of 15% & 20%.

Sec. 194J – The rate of tax deduction under this provision is proposed to be raised from 5% to 10% in respect of payment by way of fees for professional services or fees for technical services or royalty or any sum referred to the Clause (va) of Section 28.

Drastic changes have been proposed in the scheme of settlement of cases as contained in Chapter XIX A of the Act. These are summarised below :-

		Existing	Proposed revised
a) Stage at which application can be made
	Application can be made at any stage of proceedings pending before the I.T. authorities		Only during pendency of proceedings before the A.O. but not during following proceedings :- i) Proceedings u/s. 148 (commencing on the date of issue of notice) ii) Proceedings for assessment of Search and Seizure (commencing on the date on which search was initiated or requisition u/s. 132 A was made) iii) Proceedings of fresh assessment consequent to original assess-ment having been set aside by the ITAT in appeal or by the Commissioner in revision u/s. 263/264 (commencing from the date of passing of set aside order)
b) Qualifying limit of additional tax on income disclosed
		Rs. One Lakh	Rs. Three Lakhs
c) Time for payment of tax on disclosed income
	Only tax is to be paid after the application is admitted (within 35 days of the receipt of admission order)		Tax as well as applicable interest is to be paid on or before the date of making the application. The proof of payment has to has to be attached to the application.
d) Information to the CIT
	A copy of application is sent by the ITSC to commission for report		The applicant assesses will send a copy of application to the CIT simultaneously with filing of application in the commission

a) Calling for a report from the commissioner
	I.T.S.C. calls for a report from the Commissioner before deciding whether to admit or not	No report needs to be called
b) Proceeding before passing order of admission
	Decision is taken on the basis of facts stated in the application and the CIT’s report. In appropriate cases hearing is provided	- A notice is to go to the applicant to explain why the case should be admitted (within 7 days of the receipt of application). - The order admitting or rejecting the application is to be passed within 14 days of receipt of the application.
c) Consequences of not passing order within statutory time
	No time limit laid down. Hence not relevant.	In case of failure to pass order within statutory time of 14 days, application will be deemed to have been admitted.
d) Deemed rejection/admission
	-------	Application made before 1-6-2007 and pending on that date will be - deemed to have been accepted if tax and interest on disclosed income paid before 31-07-2007 - If not paid by 31-07-2007 it will be deemed to have been rejected
	-------	- In respect of applications admitted before 01-06 -2007 in which settlement was pending tax and interest to be paid before 31-07-2007 even if extension / instalment is granted by the commission. - If not paid application will be deemed to be rejected and proceedings before commission shall abate.

a) Notice to the commissioner calling for report
		No time limit	- where application made on or after 01-06-2007 - Notice to the Commissioner within 30 days of the receipt of application
		------	- where application made before 01-06-2007 and tax/ interest paid within statutory time - Notice to the Commissioner on or before 07-08-2007
b) Report by the commissioner
		------	CIT to submit report within 30 days of the receipt of communication from the Commission. Failure to make the report will empower the commission to decide without report.
c) Hearing for settlement
	No time		Hearing to take place within 15 days from the date of receipt of the report of the CIT
d) Investigation by the CIT
	If ordered by the commission u/s. 245D(3) (No time limit for submission of report)		If ordered by commission report to be submitted within 90 days from the date of receipt of communication
e) Invalid application
	Invalidity examined during admission proceedings		If found invalid during settlement proceedings an order to that effect is to be passed and copy sent to applicant and CIT. In that case proceeding before the commission shall abate. The I.T. authority before whom the proceedings were pending at the time of application will resume jurisdiction and complete the proceedings.

a) Time limit for passing the Order
No time limit		- Order to be passed within 9 months from the end of the month in which application was received. - In case of applications received before 01-06-2007, Order must be passed by 31-03-2008
b) Reopening of completed proceedings
Commission can reopen completed proceeding [see 245E]		Commission cannot reopen completed proceedings when application was filed on or after 01-06-2007
c) Immunity from prosecution under Central Acts
Commission is empowered to grant immunity under IPC or any other Central Act		Can grant immunity from prosecution only under I.T. and W.T. Act.
d) Consequence of not passing the settlement order within time
No consequence		The proceedings before the Commissioner abate and A.O. or other I.T. Authority before whom proceedings were pending at the time of application will reassume jurisdiction and complete the proceedings as if no application was made.
e) Completion of proceedings before the I.T. Authorities
------		Credit for taxes and interest paid is allowed by the I. T. Authority
		The time from making the application to the date on which proceedings before the Commission abated is to be excluded.

These amendments will mutatis mutandis apply to settlement under the Wealth Tax Act and will be effective from 1^st June, 2007

(1) An Order u/s. 206C (6A) deeming a person responsible for collecting tax as ‘assessee in default’ is proposed to be made appealable before the C.I.T. (Appeal) [see 246(1B)]

(2) Where the tax deductible on any income, other than interest, u/s. 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the government, claims that no tax was required to be deducted, he may appeal to the CIT (Appeal) for a declaration that no tax was deductible on such income. [see 248]

(3) Section 249(2)(a) provide that where the appeal relates to any tax deducted u/s. 195(1), thirty days for filing the appeal shall be counted from the date of payment of the tax. The amendment in Section 248 seeks to provide for an appeal by a person, who has paid the tax deducted on income of the non-resident under ‘net of tax’ arrangement and who is denying that any tax was deductible. As a consequential measure it is provided that where the appeal is u/s. 248, the prescribed time shall be counted from the date of payment of tax. [see 248]

(4) Presently, no appeal lies to the ITAT against the order of rejection of approval by the CIT u/s. 80G(5)(vi). The amendment seeks to provide an appeal against such orders before the ITAT.

(5) The ITAT is presently empowered to grant a stay of demand in appropriate cases for a period of 180 days. If the appeal is not decided within the period of stay, the stay granted stands vacated.

The amendment seeks to provide a further stay by the ITAT on an application made by the assessee in appropriate cases. The total period of stay granted originally and subsequently should not exceed 365 days. In case, the appeal is not decided within 365 days, the stay will stand vacated. [see 254]

Following amendments are proposed in relation of imposition of penalty for concealment of income:

(1) In case of failure to submit the return of income within the period specified in Section 153(1), concealment of income is deemed and a penalty is leviable based on the amount of tax sought to be evaded. The proposed amendment provides that for this purpose the tax sought to be evaded shall mean the tax on the assessed total income as reduced by the amount of advance tax, TDS, TCS and self assessment paid before the issue of notice under section 148. The amendment will take effect from 01-04-2003 and will apply in relation to assessment year 2003-04 and subsequent years.

(2) Explanation 5 to Section 271(1) deems certain income represented by money, bullion, jewellery or other valuable articles found during the search in certain circumstances even when such income is declared by him in the return of income furnished on or after the date of search. An escape route is provided from imposition of penalty in respect of such deemed concealment on fulfillment of certain conditions.

The provision is proposed to be made inoperative in respect of searches initiated on or after 01-06-2007.

(i) where in the course of the search initiated on or after 01-06-2007 the assessee is found to be the owner of money, bullion, jewellery or other valuable article or any income based on any entry in the books of accounts or other documents, and

(ii) claims that such asset or entry in the books represents his income for any previous year which has ended before the date of search, and

(iii) the due date for filing the return of income of such financial year has expired, and

He shall be deemed to have concealed the income even if he declares such income in any return furnished on or after the date of search.

This amendment will take effect from 01-06-2007 and will be applicable to cases where search is initiated on or after 01-06-2007.

4. A very important amendment is proposed to be made by insertion of a new section 271 AAA providing for payment of sum equal to 10% of the undisclosed income by way of penalty in cases where searches are initiated u/s. 132 on or after 01-06-2007.

The provision substitutes the normal provison contained in Section 271(1) (c) as it makes Section 271(1) (c) inapplicable in cases covered by the aforesaid proposed explanation.

(i) income of the specified previous year represented by money, bullion, jewellery or other valuable articles or entry in books of accounts or documents which has not been recorded in the regular books of accounts on or before the date of search

(ii) such income has otherwise not been disclosed to the Chief Commissioner or the Commissioner before the date of search.

(iii) Income of the specified year represented by any entry in respect of an expense which is recorded in regular books but which is found to be false as a result of the search.

which has ended before the date of search but the due date of the return for that year has not expired before the date of search and the assessee has not furnished the return of income for that year.

The section is effective from 01-04-2007 and will apply in relation to searches initiated on or after 01-06-2007.

The combined effect of the sunset clause in Explanation 5 to Section 271(1), insertion of new explanation 5A and introduction of new section 271 AAA is broadly as under:-

(i) The escape route provided in existing explanation 5 will not be available with the result that in cases where the due date of filing the return of the relevant year has expired on the date of search, concealment will be deemed for the purpose of Section 271(1).

(ii) where the due date of filing the return has not expired and assessee has not furnished the return of the year, payment of penalty equal to 10% of the undisclosed income will be the end of the matter. The same can be avoided by satisfying the prescribed conditions.