Making a retrospective amendment to the Income-tax Act from 2005-06, the Budget clarified that cess and surcharge will not be allowed to be claimed as deductions in the form of expenditure. The Budget has also made changes to the I-T law making space for questioning by the tax department to explain the source of funds at the hands of the creditor.
Citing some court rulings over the years that had given benefit to taxpayers in claiming cess as expenditure and not tax, the tax department said the retrospective amendment is being done to correct the anomaly. “This amendment will take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years,” the Budget documents stated. The change is being brought from AY 2005-06 as education cess was brought in for the first time by the Finance Act, 2004.
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Rakesh Nangia, chairman, Nangia Andersen said the court rulings differentiated between income tax and education cess on income tax and in absence of a specific disallowance for ‘education cess’, courts had taken a view beneficial for taxpayers. “In order to nullify the effect of such Court rulings and consider such rulings against the intention of law, a clarificatory amendment has been introduced in income tax law, providing that any surcharge or education cess on income tax shall not be allowed as business expenditure,” he said.
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In another legislative change, a provision has been introduced stating that the source of funding for loan and borrowings for a recipient will be treated as explained only if the source of funds is also explained in the hands of the creditor. This could have an impact on funding of businesses, especially startups, if the creditor is not a venture capital fund, a venture capital company registered with Sebi.
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“Earlier, if any company used to have bogus entries, the taxpayer would just provide details such as PAN and other financial details of the creditor and that was enough for the tax department. Now, it’s upon the recipient to prove that it’s the right source of income and they had right net worth to provide this amount. So, earlier that was the interpretation and what several court rulings had held, now they are saying the onus is on the taxpayer. Earlier, it was only for equity, now it’s for debt also,” Amit Maheshwari, tax partner, AKM Global, said.
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The Budget has also clarified that gifts and freebies to doctors shall not be treated as business expenditure under section 37 of the Income-tax Act.Citing various court rulings, the Budget said the legal position is clear that the claim of “any expense incurred in providing various benefits in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section sub-section (1) of section 37 of Act being an expense prohibited by the law”.
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