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The Finance Minister, Nirmala Sitharaman, presented Budget 2021 on 1^st February, 2021 in midst of the on-going Covid-19 pandemic.  Considering the fact that the Indian economy is contracting in 2020-21 for the first time after 1979-80, expectations were high on the Government to take measure which are need of the hour to bring the economy back to growth path. If capital market is considered as the barometer for determining whether the Government has meet expectations, then this Government has performed well. The key measure for achieve this was the high capital expenditure planned for FY 2021-21.

In respect of the direct tax proposals, this budget proposes to make least changes in tax liability of taxpayers in the recent history. But it has drastically changed the timelines and manner in which income-tax returns are to be filed, income is to be assessed and tax disputes are to be settled. All the Direct Tax proposals contained in the Finance Bill, 2021 are divided in following categories for better understanding:

Proposals dealing with –

A) Taxation of Individual

B) Taxation of Foreign entities

C) Taxation of Charitable Trusts/ Institutions

D) Taxation of Business or Professional Income

E) TDS, TCS & Advance Tax Liability

F) Procedural aspects of Return filing, tax audit and assessment

G) Mechanisms for Settlement of Tax Disputes:

A) Taxation of Individuals:

1. Cash allowance given by employer and utilised by employee for expenditure on good / services liable to GST allowed to be exempt from tax in the hands of employee for AY 2021-22 only. This allowance is in lieu of Leave Travel Concession allowed under section 10(5). The exemption is allowed maximum to the extent of Rs.36,000 or one third of amount of expenditure incurred whichever is less. Expenditure to be incurred between the period 12^th October, 2020 to 31^st March, 2021.

2. Deduction under section 80EEA with respect to interest payable on loan taken from financial institutions for affordable residential house property (i.e. stamp duty value not exceeding Rs.45 lakhs) has been extended to loan sanctioned during the period 1^st April, 2019 to 31^st March, 2022 (as against till 31^st March, 2021 earlier). Maximum deduction allowed is Rs.1.50 lakhs.

3. Resident Senior citizens having age of 75 years or more are exempted from filing income tax return, if he has only pension income and receives interest income from the bank in which he receives pension income. However, the senior citizen will have to give a declaration to the bank and the bank is required to compute the tax liability and deposit with the government. Further, the above relaxation is applicable only in case the account is in a specified bank to be notified by the government.

4. Timing of taxation deferred with respect to income derived by a resident person from retirement accounts opened in a country other than India while the person was a non-resident in India and a resident in such country. The said income will be taxed in India on receipt basis as against presently being taxed on accrual basis. This is subject to the condition that such country is notified by the government and the said income is taxed in that country at the time of withdrawal or redemption.

5. As per section 10(10D) of the Act, any sum received under a life insurance policy [including Unit Linked Insurance Policy (ULIP)], in respect of which the premium payable for any of the years does not exceed 10% of the actual capital sum assured, is exempt from tax. Now, it provided that the said exempt will not be available with respect to ULIP issued on or after 1^st February, 2021, if the amount of premium payable for any of the previous year during the term of the policy exceeds Rs.2,50,000. In case, a person has more than one ULIP issued on or after 1^st February, 2021, then exemption will be available only for those policies with respect to which aggregate premium payable in any year does not exceed Rs.2,50,000. However, any amount received on death of a person, will be exempt from tax.

6. ULIPs which are not eligible for the exemption under section 10(10D) of the Act (because of the reason that premium exceeds Rs.2,50,000) have been included in the definition of ‘capital asset’ under section 2(14) of the Act as well as in the definition of ‘equity-oriented fund’ under section 112A of the Act. Accordingly, such a ULIP will be considered to be a capital asset and the profit and gains arising on its sale / redemption will be taxed as capital gains arising on sale / redemption of a unit of equity-oriented fund. Therefore, short term capital gains will be taxed at the rate of 15% under section 111A of the Act and long-term capital gains will be taxed at the rate of 10% under section 112A of the Act.

7. Interest accrued or received on contributions made to Recognised Provident Fund and Employee Provident Fund will not be exempt from tax to the extent interest relates to contribution made over and above Rs.2,50,000 in the previous year. This will apply starting from contributions made in financial year 2021-22. Manner of computing the amount to be taxed will be prescribed.

B) Taxation of Foreign entities:

8. Sovereign Wealth Fund (SWF) and Pension Fund (PF) are allowed tax exemption under section 10(23FE) of the Act with respect to income in the nature of dividend, interest or long-term capital gains arising from an investment made by it in into infrastructure sector of India, subject to certain conditions prescribed. To remove difficulties faced by such funds, the following conditions have been partially relaxed:

• • Allowing Alternate Investment Fund (AIF) to invest up to 50% in non-eligible investments
  • Investment through holding company allowed
  • Investment in NBFC- IDF/IFC (non-banking finance company-infrastructure debt fund/Infrastructure finance company) allowed
  • Loan or borrowings by SWF/Pension Fund allowed
  • Commercial activity bar replaced with a condition to not participate in day-to-day operation of investee
  • Not considered as Liable to Tax if Funds are liable to tax in their country but are given exemption subsequently

9. Practical difficulty faced by the Foreign Institutional Investors (FIIs) in getting the benefit of Double Taxation Avoidance Agreement (DTAA) provisions/ rate at the time of receipt / credit of income has been removed. A new proviso has been inserted to section 196D of the Act (which presently mandates flat 20% rate of TDS) to provide that TDS on income of FII from securities as referred to in section 115AD(1)(a) of the Act (other than interest referred in section 194LD of the Act) shall be deducted at the rate of 20 percent or the rate provided in DTAA, whichever is lower. To avail this benefit, the FII is required to furnish Tax Residency Certificate.

10. Dividend income is now taxed in the hands of the shareholders and in case of foreign companies, being shareholder, it may be eligible for concessional tax rate on such income as per DTAA. However, as per the present provisions, the foreign companies cannot avail the benefit of such concessional rate while paying tax as per MAT provisions. Accordingly, MAT provisions have been amended to eliminate dividend income and related expenses while computing book profit of foreign companies eligible for concessional tax rate.

11. Provisions of Equalisation Levy contained in Chapter VIII of the Finance Act, 2016 have been amended to clarify the following:

• • Equalisation levy not to be levied on consideration which is taxable as royalty or fees for technical services in India under the Act read with the DTAA and consequently it will not be exempt under section 10(5)
  • for the purposes of defining e-commerce supply or service, “online sale of goods” and “online provision of services” includes 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
  • Consideration receivable from e-commerce supply or services includes –
  • consideration for sale of goods irrespective of whether the e-commerce operator owns the goods; and
  • consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.

C) Taxation of Charitable Trusts / Institutions:

12. Income received by any person on behalf of a university or educational institution referred under section 10(23C)(iiiad) or a hospital or institution as referred under section 10(23C)(iiiae) will be exempt from tax even if the annual receipts exceeds Rs. 1 crore but is less than Rs 5 crores.

13. To disallow claim of double deduction while calculating income of a charitable trust / institution, the following amendment have been proposed-

• • Voluntary contributions made with a specific direction that it shall form part of the Corpus is required to be invested / deposited in one of the modes specified in section 11(5) maintained specifically for such corpus.
  • Application out of corpus shall not be considered as application for charitable / religious purposes. However, it will be considered as application when any corpus amount applied is deposited / investment back in the mode specified in section 11(5) and maintained specifically for such corpus.
  • Similarly, application out of loans or borrowings corpus shall not be considered as application for charitable / religious purposes. However, when the loan or borrowing is repaid from income it will be considered as application in the year of such repayment.
  • For computation of income required to be applied or accumulated during the previous year, no set off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed

D) Taxation of Business or Professional Income:

14. It is explicitly clarified that the provisions of section 44ADA of the Act relating to computation of profits and gains of profession on presumptive basis is applicable only to individuals, HUF and partnership firm but not to Limited Liability Partnership (LLP) defined under section 2(1)(n) of the LLP Act, 2008.

15. Deduction for income derived from the business of developing and building affordable housing project under section 80-IBA allowed to projects approved by the competent authority after 31^st March 2021 but on or before 31^st March 2022 Additionally, the deduction will be allowed to rental housing project to be notified by the Central Government in the Official Gazette to help migrant labourers and to promote affordable rental.

16. In addition to the tax benefits provided in the last few years, additional benefits and relaxation of conditions for claiming such benefit to entities located in International Finance Services Centre (IFSC), GIFT City have been introduced. Please refer page no. 19-21 of the Memorandum explaining the Finance Bill provision.

17. Presently, as per the definition of ‘zero coupon bond’ in section 2(28) of the Act, only infrastructure capital company, infrastructure capital fund, public sector company or scheduled bank can issue zero coupon bond. Now, the same has been amended to allow infrastructure debt fund also to issue such bonds.

18. Provisions of tax neutral reorganisation among co-operative banks under section 44DB of the Act have been extended to conversion of primary co-operative bank (Urban Cooperative Bank) into Banking Company. Also, transfer of capital assets by the primary co-operative bank to the banking company and allotment of shares of the converted banking company to the shareholders of the predecessor primary co-operative bank as a result of conversion will not be treated as transfer under section 47 of the Act.

19. Conditions for tax exempt demerger contained in section 2(19AA) as well as for provisions for carry forward and set off of losses in case of amalgamation as per section 72A of the Act have been relaxed for public sector companies to facilitate their strategic disinvestment. Accordingly, reconstruction or splitting up of a public sector company into separate companies shall be deemed to be a demerger eligible for tax exemption and a public sector company engaged in any kind of business is eligible for relaxation provided under clause (c) and (d) to section 72A(1)(c) of the Act. Also, clause (d) has been inserted in section 72A(1) which allows carry forward and set off of losses of erstwhile public sector company in case of amalgamation with any company (i.e. even if it is not a public sector company) if the share purchase agreement restricts immediate amalgamation and the amalgamation is carried out within five year from the end of the previous year in which such restriction ends.

20. Applicability of provisions beneficial to Start-ups contained in section 80-IAC and 54GB of the Act have been extended to start-ups incorporated till 31^st March, 2022 and transfer of residential property from 31^st March 2021 to 31^st March 2022 respectively.

21. In order to boost the demand in the real-estate sector and to enable the real-estate developers to liquidate their unsold inventory at a lower rate to home buyers, the safe harbour threshold has been increased from existing 10% to 20% under section 43CA of the Act, if –

• • the residential unit is transferred in the period from 12^th November, 2020 to 30^th June, 2021
  • the transfer is by way of first-time allotment of the residential unit to any person
  • Consideration for transfer does not exceed Rs.2 crores

Consequential relief is provided to buyers of these residential units by increasing the safe harbour from 10% to 20% under section 56(2)(x) of the Act.

22. MAT provisions have also been amended to provide for an adjustment while computing book profit with respect to additional income of past years included in books of account of current year on account of secondary adjustment under section 92CE or on account of an Advance Pricing Agreement (APA) entered under section 92CC. On an application made by the assessee in this regard, the Assessing Officer will recompute the book profit of the past years and tax payable, if any, during the previous year. Further, the provision of section 154 of the Act shall apply so far as possible and the period of four years specified in section 154(7) shall be reckoned from the end of the financial year in which the said application is received by the Assessing Officer.

23. It is now clarified that the employer is not allowed to claim deduction under section 36(1)(va) or section 43B of the Act with respect to the employees’ contribution to any Provident Fund or superannuation fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of such employees, if the amount is not paid within the due date prescribed under the relevant law. Therefore, the amount which is deducted from employee’s salary for contribution in the above funds will be considered as the employer’s income, if the said amount is not paid within due date.

24. Definition of ‘slump sale’ in section 2(42C) of the Act has been amended to make it clear that transfer of an undertaking by any means (including exchange and not only as result of sale) for lump sum consideration without value being assigned to individual assets and liabilities will result in capital gains as per section 50B of the Act and thus be liable to tax.

25. Provisions relating to taxation of gains arising on distribution of asset by a partnership firm or other association of persons or body of individuals (not being a company or a co-operative society) on dissolution or otherwise have been rationalised by replacing the existing sub-section (4) to section 45 of the Act with a revised sub-section (4) and inserting a new sub-section (4A). Key features of the new provisions are:

• • firm or other association of persons or body of individuals (not being a company or a cooperative society) is referred to as “specified entity”. Accordingly, “specified person” is defined as a person who is partner or member of such specified entity in any previous year.
  • If the specified person receives any capital asset at the time of dissolution or reconstitution of the specified entity and such asset represents the balance in his capital account in the books of accounts of such specified entity, the profit or gain arising from such receipt will be taxed as ‘Capital Gains’ in the hands of the specified entity. For computation of such gain, Fair Market Value of capital asset on the date of receipt will be sale consideration and Cost of acquisition will be determined in accordance with the Capital Gains provisions.
  • If the specified person receives any money or other asset at the time of dissolution or reconstitution of the specified entity, which is in excess of the balance in his capital account in the books of accounts of such specified entity, then any profits or gains arising such receipt will be taxed as ‘Capital Gains’ in the hands of the specified entity. For computation of such gain, Fair Market Value of capital asset on the date of receipt will be sale consideration and Cost of acquisition will be the balance in the capital account of the specified person in the books of accounts of the specified entity.
  • In both the above scenarios, balance in the capital account of the specified person is to be calculated without taking into account increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset.

26. Section 2(11), 32, 50 and 55 of the Act have been amended to provide that goodwill of a business or profession will not be considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation. Accordingly, depreciation will not be allowed even where any consideration has been paid for acquisition of goodwill as a part of business reorganisation or any other mode.

27. The powers of the Assessing Officer to provisionally attached any property of the assessee (if necessary, in order to protect the interest of revenue) in case of assessment and reassessment proceedings Section 281B of the Act have also been extended to cases of imposition of penalty under section 271AAD where the penalty amount is likely to exceed Rs.2 crores. Penalty under section 271AAD is imposed on a person or a person who causes such person to make a false entry or omit an entry from his books of accounts.

E) TDS, TCS & Advance Tax liability:

28. TDS under section 194 of the Act is not required to be deducted on payment of dividend to Business Trust by a special purpose vehicle.

29. Section 194Q has been introduced for deducting TDS on purchase of goods. If a buyer had turnover, sales or gross receipt of Rs.10 crores or more in the immediately preceding financial year and makes an aggregate payment of Rs.50 lakhs or more during the year to any resident for purchase of goods, he will be liable to deduct TDS at the rate of 0.10% on the sum paid over and above Rs.50 lakhs to that resident. Further, if that resident does not provide Permanent Account Number (PAN), TDS is to be deducted at the rate of 5%.

The above provision is a mirror provision to the existing provision of TCS under section 206C(1H) which was introduced in the Act vide the Finance Act, 2020. As per section 206(1H), every seller is required to collect TCS at the rate of 0.10% on sale of goods to any buyer if the amount of receipt is greater than 50 Lakhs in a year. The said provision is applicable if the seller’s turnover, sales or gross receipt in the immediately preceding financial year was Rs.10 crores or more.

Where a transaction attracts both the above provisions of TDS on purchase of goods as well as TCS on sale of goods, the above TDS provision under section 194Q will prevail. However, the above TDS is not applicable to transaction on which TDS is deductible under any other provisions of the Act.

30. Higher TDS is required to be deducted in case of a deductee (other than non-resident not having PE in India) not filing income tax return, as per new section 206AB. The deductor will have to deduct TDS at the higher of the following rates, if the deductee has not filed income tax return for the previous two years even though he had TDS & TCS credit of Rs.50,000 or more:

• • twice the rate specified in the relevant provision of the Act; or
  • twice the rate or rates in force; or
  • the rate of 5%

If the provision of section 206AA (higher TDS rate if PAN is not furnished) is applicable, in addition to section 206AB, TDS is to be deducted at higher of the two rates provided in both the above sections.

31. Higher TCS is required to be collected in case of a payer (other than non-resident not having PE in India) not filing income tax return, as per new section 206CCA. The collector will have to collect TCS at the higher of the following rates, if the payer has not filed income tax return for the previous two years even though he had TDS & TCS credit of Rs.50,000 or more:

• • twice the rate specified in the relevant provision of the Act; or
  • the rate of 5%

If the provision of section 206CC (higher TCS rate if PAN is not furnished) is applicable, in addition to section 206CCA, TCS is to be collected at higher of the two rates provided in both the above sections.

32. Interest under section 234C of the Act will not be charged for any shortfall in advance tax payment arising from tax liability pertaining to dividend income, if the assessee has paid full taxes in subsequent advance tax instalments. This, however, is not applicable to deemed dividend under section 2(22)(e) of the Act.

F) Procedural aspects of Return filing, tax audit and assessment:

33. Due date for filing return of income has been extended to 31^st October in case of spouse of a partner of a firm whose accounts are required to be audited under this Act or under any other law for the time being in force, if the provisions of section 5A applies to them. Section 5A which deals with taxation of income of spouses governed by Portuguese Civil Code provides that any income earned by a partner (also being one of the spouse) of a firm whose accounts are required to be audited shall be apportioned between the such spouses and included in their total income.

34. Due date for filing return of income by a partner of a firm which is required to furnish Transfer Pricing report from an accountant for entering into international transaction or specified domestic transaction, as per section 92E of the Act is extended to 30^th November as against present due date of 31^st

35. Belated and revised return of income can now be filed only till three months before the end of the relevant assessment year (i.e. say 31^st December, 2021) or before the completion of the assessment, whichever is earlier. Presently, it is allowed to be filed the end of the assessment year (i.e. say 31^st March, 2022) or before the completion of the assessment whichever is earlier.

36. A proviso has been inserted to Explanation to section 139(9) of the Act empowering the CBDT to notify that any of the conditions mentioned for considering a return to be defective shall not apply for a class of assessee or shall apply with such modifications, as maybe specified in such notification.

37. Threshold for getting accounts audited has been increased for businesses having cash receipts and cash payment not more than 5% of total receipts and payments respectively. Such businesses are not required to get their books of account audited under section 44AB of the Act, if the turnover does not exceed 10 crore rupees (as against 5 crores earlier).

38. Now, a notice under section 142(1) of the Act asking to file return can also be issued by a prescribed income-tax authority alongwith the Assessing Officer (who was only person empowered to do so till now). The authority has not yet been prescribed / notified.

39. Now, the income tax department can make the following adjustments too while processing the return filed i.e. in the intimation under section 143(1) of the Act:

• • adjustment on account of increase in income indicated in the audit report but not taken into account in computing the total income;
  • Consequential effect of section 80AC i.e. disallowing deductions claimed under the heading “C—Deductions in respect of certain incomes” under Chapter VIA i.e from sections 80IA to 80RRB of the Act, if return is not filed within the due date mentioned in section 139(1)

40. Time limit for processing return of income and sending intimation under section 143(1) of the Act has been reduced from 1 year to 9 months from the end of the financial year in which the return was furnished.

41. Time limit within which the assessment should be initiated by issuing notice under section of section 143(2) of the Act has been reduced from 6 months to 3 months from the end of the financial year in which the return is furnished.

42. Time limit for completion of assessment proceedings has been reduced from 12 months to 9 months from the end of the assessment year. This is applicable for the assessment year 2021-22 and subsequent assessment years.

43. Time limit for reopening assessment for any year under section 147 of the Act has been reduced in most cases from 6 years to 3 years after the end of the relevant assessment year. Only in cases where the Assessing Officer possesses books of accounts or other documents or evidence which reveal that the income represented in the form of asset amounting to Rs 50 lakhs or more has escaped assessment, the case can be reopened beyond the 3 years but not beyond 10 years from the end of the relevant assessment year.

44. Further, the procedure of reopening an assessment under section 147 read with section 148, 149 and 151 has also been amended drastically and a new procedure has been introduced. The Salient features of the amendment and new procedure are as under:

• • Presently, the Assessing Officer can reopen an assessment if he has ‘reason to believe’ that income chargeable to tax has escaped assessment. Now, the concept of ‘reason to believe’ has been done away with in the new section 147.
  • Now a condition has been introduced in section 148 requiring issuing of notice for initiating reassessment proceeding which it to be satisfied before issue of such notice. Notice under section 148 can be issued only if there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment.
  • Further, the so called ‘information’ has been defined in Explanation 1 to section 148 to mean –
    • any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time
    • any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.
  • New section 148A has been introduced to lay down the procedure to be followed prior to issue of notice under section 148. Before issuance, the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering his reply, the Assessing Office shall decide, by passing an order, whether it is a fit case for issue of notice under section 148 and serve a copy of such order along with such notice on the assessee.
  • Further, for every step to be followed prior to issuance of notice under section 148, approval of specified authority is required which may be Pr.CIT / Pr.DIT / CIT / DIT or Pr.CCIT / Pr.DGIT / CCIT / DGIT, as the case may be.

45. A separate procedure for assessment presently applicable in the cases of search and survey under section 153A and 153C of the Act have been done away with for search and survey initiated after 31^st March, 2021. In a case where any search is initiated under 132 or books of account, other documents or any assets are requisitioned under section 132A or survey is conducted under section 133A, it will be deemed that the Assessing Officer has information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for three immediately preceding assessment years. Accordingly, the assessment will be reopened under new procedure contained in section 147 of the Act.

G) Mechanisms for Settlement of Tax Disputes:

46. A new Committee called Dispute Resolution Committee (DRC) has been constituted under section 245MA of the Act for preventing new disputes and settling the issue at the initial stage. Salient feature of the DRC are:

• • Assessees will have the option to opt for or not opt for the dispute resolution through DRC
  • Applicable only to those disputes where the returned income is Rs.50 lakhs or less (if there is a return) and the aggregate amount of variation proposed in order is Rs 10 lakhs or less
  • Not applicable in cases where the order is based on search, survey or information received from foreign country (section 90/ 90A)
  • Not applicable where the assessee is detained, prosecuted or convicted under the specified laws
  • DRC will have powers to reduce or waive any penalty imposable under this Act or grant immunity from prosecution for any offence under this Act
  • CBDT will notify further conditions and complete scheme in this regard

47. Authority for Advance Ruling (AAR) which constituted of retired Judges as Chairman and Vice Chairman has been substituted by Board for Advance Ruling (BAR) consisting of two members each of the rank of Chief Commissioner of Income-tax or above. All cases pending before the AAR will be transferred to the BAR from a date to be notified by the CBDT. Now, unlike the ruling of AAR, the ruling of BAR will not be binding on the applicant as well as the department and an appeal can be filed against such ruling before the High Court. Accordingly, amendments have been proposed in Chapter XIX-B of the Act. Further, the Government will notify a scheme for the purpose of giving advance ruling by BAR under these new provisions as well as for filing of appeal by the Assessing Officer against the ruling of BAR.

48. A new section 255 has been inserted in the Act empowering the Government to notify and introduce a Faceless scheme for ITAT proceedings on the same line as faceless appeal scheme for CIT(A) proceedings. Further details are awaited.

49. Settlement of cases through Income-tax Settlement Commission (ITSC) is discontinued and not new application from 1^st February, 2021 itself. An Interim Board will be constituted and notified by the Government for settlement of cases pending before ITSC.

50. The Direct Tax Vivad se Vishwas Act, 2020 (VsV) has been amended to clarify that cases where the assessee has approached the Income Tax Settlement Commission, whether they have attained finality or not, are not eligible to claim benefit under the VsV.

51. The Income Declaration Scheme, 2016 (the Scheme) contained in Chapter-IX of the Finance Act, 2016 has been amended to provide that the excess amount of tax, surcharge or penalty paid in pursuance of a declaration made under the Scheme shall be refunded without payment of any interest.