Circular No. 05 /2010
Circular No. 5/2010, dated 03-06-2010 was issued by the Central Board of Direct Taxes on 3 June 2010. Its subject is Circular No. 05 /2010.
These are the Board’s explanatory notes to a Finance Act. They are the department’s account of what the amendments were meant to do, and they are cited constantly — but the words of the Act govern where the two part.
The Board's explanatory notes on the amendments made by the Finance (No. 2) Act, 2009, a 63-page commentary opening with the amendments-at-a-glance table that keys each provision to the paragraph explaining it. The ground covered, on that table, includes the rate structure, the widened definition of charitable purpose in section 2(15), the taxation of limited liability partnerships, the definition of manufacture, zero coupon bonds, compensation on voluntary retirement, the extended time for applications under section 10(23C), other public sector banks under section 10(23D), the extended sunset for units under sections 10A and 10B, the computation of exempt profits of special economic zone units under section 10AA, electoral trusts, the aligned definition of block of assets, weighted deduction for in-house research and development, the new investment-linked incentive in section 35AD with its consequential changes in sections 28, 43, 50B and 73A, section 36(1)(viii) for the National Housing Bank, remuneration to partners under section 40, the higher cash payment limit for transporters, written down value under section 43(6), the recast presumptive scheme in section 44AD and the new presumptive income for truck owners in section 44AE, deemed valuation under section 50C, the taxation of receipts without or for inadequate consideration under sections 56 and 57, the anti-abuse amendment in section 80A, the New Pension System, sections 80DD, 80E, 80G, 80GGB, 80GGC, 80-IA, 80-IB and 80U, agreements with specified non-sovereign territories under section 90, the arm's length price in section 92C and the new safe harbour power in section 92CB, anonymous donations under section 115BBC, the add-back of provision for diminution in the value of an asset in book profits, minimum alternate tax credit, fringe benefit tax, section 132, centralised processing of returns under section 143, the new alternate dispute resolution mechanism in section 144C, interest on delayed or enhanced compensation under section 145A, reassessment under section 147, and the tax deduction provisions in sections 194A, 194C and 194-I.
The Board's practice of explaining, after each Finance Act, what the amendments do and from when they take effect.
CIRCULAR NO. 05 /2010
F.No.142/13/2010-SO (TPL)
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Direct Taxes)
***
Dated, the 3rd June, 2010
EXPLANATORY
NOTES TO THE
PROVISIONS OF THE
FINANCE (NO.2) ACT,
2009
Explanatory Circular for Finance (No.2) Act, 2009
Page 2 of 63
CIRCULAR
INCOME-TAX ACT
Finance (No.2) Act, 2009 – Explanatory Notes to the Provisions of Finance (No.2) Act, 2009
CIRCULAR NO. 05/2010, DATED 3rd JUNE, 2010AMENDMENTS AT A GLANCE
Section / Schedule Particulars/Paragraph number
Finance Act
First Schedule Rate structure, 3.1-3.3.12
Income-tax Act
2(15) Amendment to include certain activities within the ambit of provisions
relating to 'charitable purpose' in the Income Tax Act, 4.1-4.3
2(23), 140, 167C Taxation of Limited Liability Partnership (LLP), 5.1-5.7
2(29BA) Definition of the term "manufacture", 6.1-6.2
2(48), 36, 194A Power to issue Zero Coupon Bonds, 7.1-7.4
10(10C), 89 Compensation received on voluntary retirement or termination of
service under a scheme of voluntary separation, 8.1-8.5
10(23C) Extension of time limit for filing applications for tax exemption under
section 10(23C), 9.1-9.3
10(23D) Amendment to section 10(23D) of the Income Tax Act, 1961-
Incorporating "Other Public Sector Banks" under the expression
"Public Sector Bank", 10.1-10.4
10A, 10B Extension of sunset clause for units in free trade zone under section
10A and for export oriented undertakings under section 10B, 11.1-11.3
10AA Clarification regarding computation of exempted profits in the case of
units in Special Economic Zones (SEZs), 12.1-12.3
13B, 2(22AAA),
2(24)
Special provisions relating to voluntary contributions received by
electoral trust, 13.1-13.3
32 Aligning the definition of "block of asset", 14.1-14.2
35 Weighted deduction for in-house research and development, 15.1-15.3
35AD, 28, 43, 50B,
73A
Investment-linked tax incentive for specified business, 16.1-16.6
36(1) Special deduction under section 36(1) (viii) to National Housing Bank
(NHB), 17.1-17.4
40 Remuneration to partners in a firm, 18.1-18.3
40A Enhancement of limit for disallowance of expenditure made in the case
of transporters, 19.1-19.4
43 Definition of written down value under section 43(6), 20.1-20.8
44AD, 44AA,
44AB, 44AE,
Special provision for computing profits and gains of business on
presumptive basis, 21.1-21.3
Explanatory Circular for Finance (No.2) Act, 2009
Page 3 of 63
44AF
44AE Presumptive income for truck owners under section 44AE, 22.1-22.5
50C Provisions for deemed valuation in certain cases of transfer, 23.1-23.4
56, 57 Taxation of certain transactions without consideration or for an
inadequate consideration as income from other sources, 24.1-24.6
80A Amendment in Chapter VI-A to prevent abuse of tax incentives, 25.1-
25.8
80CCD, 10(44),
197A, 115-O
Tax benefits for New Pension System, 26.1-26.5
80DD Deduction for medical treatment of a dependant suffering from
disability, 27.1-27.4
80E Deduction in respect of Interest on loan taken for higher education,
28.1-28.4
80G Donations to Certain Funds, Charitable Institutions, etc., 29.1-29.7
80GGB, 80GGC Deduction in respect of contributions to political parties, 30.1-30.4
80-IA Extension of sunset clause for tax holiday under section 80-IA, 31.1-
31.6
80-IB(9) Deduction in respect of profits and gains from undertakings engaged in
commercial production of mineral oil and natural gas, 32.1-32.7
80-IB(10) Rationalising the provisions of deduction, 33.1-33.6
80-IB(11A) Deduction in case of an undertaking deriving profit from the business of
processing, preservation and packaging of meat and meat products or
poultry or marine or dairy products, 34.1-34.4
80U Deduction in case of a person with disability, 35.1-35.3
90 Empowering Central Government to enter into agreement with
specified non-sovereign territories, 36.1-36.4
92C Determination of arm's length price in cases of international
transactions, 37.1-37.5
92CB Power of Board to make Safe Harbour Rules, 38.1-38.3
115BBC Tax relief on anonymous donations in certain cases, 39.1-39.3
115JA, 115JB Clarification regarding add back of 'provision for diminution in the
value of asset', while computing book profits, 40.1-40.4
115JAA Minimum Alternate Tax, 41.1-41.4
115WE, 115WM,
17, 49
Fringe Benefit Tax, 42.1-42.5
132, 132A Clarificatory amendment in section 132, 43.1-43.9
143 Centralized Processing of Returns, 44.1-44.3
144C, 131, 143,
246A, 253
Provision for constitution of alternate dispute resolution mechanism,
45.1-45.4
145A Rationalizing the provisions for taxation of interest received on delayed
compensation or on enhanced compensation, 46.1-46.4
Explanatory Circular for Finance (No.2) Act, 2009
Page 4 of 63
147 Clarificatory amendment in respect of reassessment proceeding under
section 147, 47.1-47.4
194A Interest other than "interest on securities", 48.1-48.2
194C, 194-I Rationalisation of provisions relating to Tax Deduction at Source
(TDS), 49.1-49.4
200, 203A, 206A,
206C, 272A, 139A
Filing of TDS and TCS statements, 49.5
200A Processing of statements of tax deducted at source, 49.6
201 Providing time limits for passing of orders u/s 201(1) holding a person
to be an assessee in default, 50.1-50.4
206AA Improving compliance with provisions of quoting PAN through the
TDS regime, 51.1-51.5
208 Enhancement of the limit for payment of advance tax, 52.1.-52.2
271 Rationalization of provisions relating to penalty for concealment of
income, 53.1-53.3
281B Rationalization of provision relating to provisional attachment of asset,
54.1-54.3
282 Service of notice, 55.1-55.4
282B Introduction of Document Identification Number, 56.1-56.3
293C Power to withdraw approvals, 57.1-57.3
1st Schedule Taxation of investment income/loss of Non life insurance business,
58.1-58.4
4th Schedule Recognition to Provident funds – Extension of time limit for obtaining
exemption from EPFO, 59.1-59.4
13th Schedule Amendment in Part B of the Thirteenth Schedule to the Income Tax
Act, 1961, 60.1-60.4
Wealth-tax Act
3 Enhancement of the limit for payment of wealth tax, 61.1-61.2
44A Empowering Central Government to enter into agreement with
specified non-sovereign territories, 36.1-36.4
Finance Act, 2008
Chapter VII section
104
Abolition of Commodity Transaction Tax, 62.1-62.5
Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002
13(1) Extension of income-tax exemption to Special Undertaking of Unit
Trust of India (SUUTI), 63.1-63.3
Explanatory Circular for Finance (No.2) Act, 2009
Page 5 of 63
1. Introduction
1.1 The Finance (No.2) Act, 2009 (hereafter referred to as the Act) as passed by the
Parliament, received the assent of the President on the 19th day of August, 2009 and has
been enacted as Act No. 33 of 2009. This circular explains the substance of the
provisions of the Act relating to direct taxes.
2. Changes made by the Act
2.1 The Act has,
(i) specified the rates of income-tax for the assessment year 2009-10 and the rates of
income-ax on the basis of which tax has to be deducted at source and advance tax
has to be paid during financial year 2009-10.
(ii) amended sections 2, 10, 10A, 10AA, 10B, 13B, 17, 28, 32, 35, 35AD, 36, 40,
40A, 43, 44AA, 44AB, 44AD, 44AE, 44AF, 49, 50B, 50C, 56, 57, 73A, 80A,
80CCD, 80DD, 80E, 80G, 80GGB, 80GGC, 80-IA, 80-IB, 80U, 89, 90, 92C,
92CB, 115BBC, 115JA, 115JAA, 115JB, 115-O, 115WE, 115WM, 131, 132,
132A, 139A, 140, 143, 144C, 145A, 147, 167C, 194A, 194C, 194-I, 197A, 200,
200A, 201, 203A, 206A, 206AA, 206C, 208, 246A, 253, 271, 272A, 281B, 282,
282B and 293C of the Income-tax Act, 1961;
(iii) inserted new sections 13B, 35AD, 73A, 92CB, 115WM, 144C, 167C, 200A,
206AA, 282B and 293C of the Income-tax Act, 1961;
(iv) amended rules 5 of Part B of the First Schedule, rule 3 of Part A of the Fourth
Schedule and Part B of Thirteenth Schedule of the Income-tax Act, 1961;
(v) amended sections 3 and 44A of Wealth-tax Act, 1957;
(vi) inserted new section 121A in Chapter VII of Finance Act, 2008;
(vii) amended section 13(1) of Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002.
Explanatory Circular for Finance (No.2) Act, 2009
Page 6 of 63
3. Rate structure
3.1 Rates of income-tax in respect of incomes liable to tax for the assessment year
2009-10
3.1-1 In respect of income of all categories of taxpayers liable to tax for the assessment
year 2009-10, the rates of income-tax have been specified in Part I of the First Schedule
to the Act. These rates are the same as those laid down in Part III of the First Schedule to
the Finance Act, 2008 for the purposes of computation of advance tax, deduction of tax at
source from Salaries and charging of tax payable in certain cases during the financial year
2008-09.
The major features of the rates specified in the said Part I are as follows:
3.1-2 INDIVIDUAL, HINDU UNDIVIDED FAMILY, ASSOCIATION OF PERSONS,
BODY OF INDIVIDUALS OR ARTIFICIAL JURIDICAL PERSON. - Paragraph A of
Part I of the First Schedule specifies the rates of income-tax in the case of every
individual, Hindu undivided family, association of persons, body of individuals or
artificial juridical person (other than a co-operative society, firm, local authority and
company) as under :-
Income Rate of income-tax
chargeable to
tax
Individual (other than
individual woman resident in
India and senior citizen
resident in India), HUF,
association of persons, body of
individuals and artificial
juridical person
Individual
woman,
resident
in India and
below the age
of sixty-five
years
Individual senior
citizen, resident in
India, who is of the
age of sixty- five
years or more
Up to Rs.
1,50,000
Nil
Rs. 1,50,001 -
Rs. 1,80,000
Nil
Rs. 1,80,001 -
Rs. 2,25,000
10%
10%
Rs. 2,25,001 -
Rs. 3,00,000 10% 10%
Nil
10%
Rs. 3,00,000-
Rs.5,00,000 20% 20% 20%
Rs.5,00,000 and
above 30% 30% 30%
Explanatory Circular for Finance (No.2) Act, 2009
Page 7 of 63
In the case of every individual, Hindu undivided family, association of persons or body of
individuals, surcharge shall be levied only where the total income exceeds ten lakh
rupees. The income-tax shall be enhanced by a surcharge for the purposes of the Union at
the rate of ten per cent of income-tax. Marginal relief shall be provided to ensure that the
additional amount of income-tax payable, including surcharge, on the excess of income
over Rs. 10,00,000 is limited to the amount by which the income is more than Rs.
10,00,000. For instance, the amount of income-tax and surcharge on a total income of Rs.
10,20,000 calculated at the rates specified would have been Rs. 2,32,100 i.e., income-tax
of Rs. 2,11,000 and surcharge of Rs. 21,100. The additional tax liability incurred thereon
as compared to a person having a total income of Rs. 10, 00,000 is Rs. 27,100. However,
additional income as compared to a person having a total income of Rs. 10,00,000 is only
Rs. 20,000. Therefore, marginal relief to the extent of Rs. 7,100 will be available in this
case as the additional tax liability cannot be more than the additional income. The total
tax liability will, therefore, be Rs. 2, 25,000 instead of Rs. 2, 32,100. In the case of
artificial juridical person, surcharge shall be levied at the rate of ten per cent of the
income-tax payable on all levels of income.
An additional surcharge called the Education Cess on income-tax shall continue to be
levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge,
if any, in all cases. For instance, if the income-tax computed is Rs. 1,00,000 and the
surcharge is Rs. 10,000, then the education cess of two per cent is to be computed on Rs.
1,10,000 which works out to Rs. 2,200. In addition, the amount of tax computed and
surcharge shall also be increased by an additional surcharge called Secondary and Higher
Education Cess on income-tax at the rate of one per cent of such income-tax and
surcharge. No marginal relief shall be available in respect of Education Cess.
3.1-3 CO-OPERATIVE SOCIETIES - In the case of every co-operative society, the rates
of income-tax have been specified in Paragraph B of Part I of the First Schedule to the
Act. The rates are as follows-
Income chargeable to tax Rate
Up to Rs. 10,000 10%
Rs. 10,001 - Rs. 20,000 20%
Exceeding Rs. 20,000 30%
No surcharge shall be levied. Education Cess on income-tax and Secondary and Higher
Education Cess on income-tax shall be levied at the rate of two per cent and one per cent
respectively of the amount of tax computed. No marginal relief shall be available in
respect of Education Cess.
3.1-4 FIRMS - In the case of every firm, the rate of income-tax of thirty per cent has been
specified in Paragraph C of Part I of the First Schedule to the Act. Surcharge at the rate of
ten per cent shall be levied only in cases where the firm has total income exceeding one
crore rupees. However, marginal relief shall be allowed to ensure that the additional
Explanatory Circular for Finance (No.2) Act, 2009
Page 8 of 63
amount of income-tax payable, including surcharge, on the excess of income over one
crore rupees is limited to the amount by which the income is more than one crore rupees.
In respect of fringe benefits chargeable to tax under section 115WA of the Income-tax
Act, surcharge shall be levied at the rate of ten per cent of the amount of tax irrespective
of the amount of fringe benefits.
Additional surcharge called the Education Cess on Income-tax shall continue to be levied
at the rate of two per cent on the amount of tax computed, inclusive of surcharge, in all
cases. In addition, such amount of tax and surcharge shall be further increased by an
additional surcharge called Secondary and Higher Education Cess on income-tax
computed at the rate of one per cent on the amount of tax, inclusive of surcharge, in all
cases. No marginal relief shall be available in respect of Education Cess.
3.1-5 LOCAL AUTHORITIES - In the case of every local authority, the rate of incometax has been specified at thirty per cent in Paragraph D of Part I of the First Schedule to
the Act. No surcharge shall be levied. However, Education Cess on Income-tax and
Secondary and Higher Education Cess on income-tax shall be levied at the rate of two per
cent and one per cent respectively of the amount of tax computed. No marginal relief
shall be available in respect of Education Cess.
3.1-6 COMPANIES - In the case of a company, the rate of income-tax has been specified
in Paragraph E of Part I of the First Schedule to the Act.
In case of a domestic company, the rate of income-tax is thirty per cent of the total
income. The tax computed shall be enhanced by a surcharge of ten per cent only where
such domestic company has total income exceeding one crore rupees.
In the case of a company other than a domestic company, royalties received from
Government or Indian concern under an approved agreement made after 31-3-1961, but
before 1-4-1976 shall be taxed at fifty per cent. Similarly, in the case of fees for technical
services received by such company from Government or Indian concern under an
approved agreement made after 29-2-1964, but before 1-4-1976, shall be taxed at fifty
per cent. On the balance of the total income of such company, the tax rate shall be forty
per cent. The tax computed shall be enhanced by a surcharge of two and one-half per cent
only where such company has total income exceeding one crore rupees.
However, marginal relief shall be allowed in the case of every company to ensure that the
additional amount of income-tax payable, including surcharge, on the excess of income
over one crore rupees is limited to the amount by which the income is more than one
crore rupees. Also, in the case of every company having total income chargeable to tax
under section 115JB of the Income-tax Act and where such income exceeds one crore
rupees, marginal relief shall be provided.
In respect of fringe benefits, in the case of a domestic company, surcharge shall be levied
at the rate of ten per cent of the amount of tax, irrespective of the amount of fringe
benefits. In the case of a company other than a domestic company, in respect of fringe
benefits, surcharge shall be levied at the rate of two and one-half per cent of the amount
of tax, irrespective of the amount of fringe benefits.
Education Cess on income-tax shall continue to be levied at the rate of two per cent on
the amount of tax computed, inclusive of surcharge in the case of every company. Also,
such amount of tax and surcharge shall be further increased by an additional surcharge
called Secondary and Higher Education Cess on income-tax at the rate of one per cent of
the amount of tax computed, inclusive of surcharge.
3.2 Rates for deduction of income-tax at source from certain incomes during the
financial year 2008-09
3.2-1 In every case in which tax is to be deducted at the rates in force under the
provisions of sections 193, 194, 194A, 194B, 194BB, 194D and 195 of the Income-tax
Act, the rates for deduction of income-tax at source during the financial year 2009-10
have been specified in Part II of the First Schedule to the Act. The rates for deduction of
income-tax at source during the financial year 2009-10 will continue to be the same as
those specified in Part II of the First Schedule to the Finance Act, 2008 except for the
following changes:-
• In the case of a person resident in India, other than company, on any other
income the rates have been changed to 10% from 20%.
• In the case of a domestic company on the income by way of interest other
than interest on security, and on any other income the rates have been changed to
10% from 20%.
3.2-2 SURCHARGE - The tax deducted at source in each case shall be increased by a
surcharge for purposes of the Union as follows:-
(i) In the case of every individual, Hindu undivided family, association of persons and
body of individuals, no surcharge shall be levied.
(ii) In the case of every artificial juridical person, no surcharge shall be levied.
(iii) No surcharge shall be levied on the amount of income-tax deducted in the case of a
co-operative society and local authority
(iv) In the case of every firm and domestic company, no surcharge shall be levied.
(v) The surcharge on TDS shall be levied only on payments made to foreign companies.
The rate of surcharge in such cases is 2.5 per cent.
3.2-3 EDUCATION CESS - The additional surcharge, called the Education Cess on
income-tax shall continue to be levied for the purposes of the Union at the rate of two per
cent of income-tax and surcharge, if any, in the case of salary payments to residents and
in the case of all payments to non-residents. For instance, if such tax is Rs. 1,00,000 and
the surcharge is Rs. 10,000, then the education cess of two per cent is to be computed on
Rs. 1,10,000 which works out to be Rs. 2,200.
In addition, the amount of tax deducted and surcharge shall be further increased by an
additional surcharge called Secondary and Higher Education Cess on income-tax at the
rate of one per cent in all such cases. Thus in the earlier illustration, where the amount of
tax deducted is Rs. 1,00,000, the surcharge is Rs. 10,000, the Education Cess of two per
cent is Rs. 2,200, the said Secondary and Higher Education Cess will be computed on Rs.
1,10,000 which works out to be Rs. 1,100. The total cess in this case will amount to Rs.
3,300 (i.e., Rs. 2,200 + Rs. 1,100).
3.3 Rates for computation of advance tax, deduction of income-tax at source from
Salaries and charging of income-tax in certain cases during the financial year 2009-
10.
3.3-1 The rates for deducting income-tax at source from Salaries and computing advance
tax during the financial year 2009-10 have been specified in Part III of the First Schedule
to the Act. These rates are also applicable for charging income-tax during the financial
year 2009-10 on current incomes in cases where accelerated assessments have to be
made, e.g., provisional assessment of shipping profits arising in India to non-residents,
assessment of persons leaving India for good during that financial year, assessment of
persons who are likely to transfer property to avoid tax, assessment of bodies formed for
short duration, etc. The rates are as follows:-
3.3-2 INDIVIDUAL, HINDU UNDIVIDED FAMILY, ASSOCIATION OF PERSONS,
BODY OF INDIVIDUALS OR ARTIFICIAL JURIDICAL PERSON - Paragraph A of
Part III of the First Schedule specifies the rates of income-tax in the case of every
individual. Hindu undivided family, association of persons, body of individuals or
artificial juridical person (other than a co-operative society, firm, local authority and
company). In the case of individuals, the basic exemption limit has been enhanced from
Rs. 1,50,000 to Rs. 1,60,000. The exemption limit for every woman resident in India and
below the age of 65 years of age has been enhanced from Rs. 1,80,000 to Rs. 1,90,000.
Further, the exemption limit for every individual resident in India and of the age of 65
years or more at any time during the previous year has been raised from Rs. 2,25,000 to
Rs. 2,40,000.
The rates of tax during the financial year 2009-10 in the case of persons mentioned above
are as follows:-
Income Rate of income-tax
chargeable to
tax
Individual (other than
individual woman resident
in India and senior citizen
resident in India), HUF,
association of persons,
body of individuals and
artificial juridical person
Individual woman,
resident in India
and below the age
of sixty-five years
Individual senior
citizen, resident in
India, who is of the
age of sixty- five
years or more
Up to Rs.
1,60,000
Nil Nil Nil
Explanatory Circular for Finance (No.2) Act, 2009
Page 11 of 63
Rs. 1,60,001 -
Rs. 1,90,000
Rs. 1,90,001 -
Rs. 2,40,000
Rs. 2,40,001 -
Rs. 3,00,000
10%
10% 10%
Rs. 3,00,001 -
Rs. 5,00,000
20% 20% 20%
Exceeding
Rs. 5,00,000
30% 30% 30%
No surcharge shall be levied in such cases.
The Education Cess on income-tax shall continue to be levied at the rate of two per cent
on the amount of tax computed. In addition, the amount of tax computed shall also be
increased by an additional cess called Secondary and Higher Education Cess on incometax at the rate of one per cent of such income-tax. No marginal relief shall be available in
respect of Education Cess.
3.3-3 CO-OPERATIVE SOCIETIES - In the case of every co-operative society, the rates
of income-tax have been specified in Paragraph B of Part III of the First Schedule to the
Act. The rates are as followsIncome chargeable to tax Rate
Up to Rs. 10,000 10%
Rs. 10,001 - Rs. 20,000 20%
Exceeding Rs. 20,000 30%
No surcharge shall be levied. Education Cess on income-tax and Secondary and Higher
Education Cess on income-tax shall be levied at the rate of two per cent and one per cent
respectively of the amount of tax computed. No marginal relief shall be available in
respect of Education Cess.
3.3-4 FIRMS - In the case of every firm, the rate of income-tax of thirty per cent has been
specified in Paragraph C of Part III of the First Schedule to the Act. No Surcharge shall
be levied. The Education Cess on Income-tax shall continue to be levied at the rate of
two per cent on the amount of tax computed. In addition, such amount of tax shall be
further increased by an additional cess called Secondary and Higher Education Cess on
income-tax computed at the rate of one per cent on the amount of tax, in all cases. No
marginal relief shall be available in respect of Education Cess.
3.3-5 LOCAL AUTHORITIES - In the case of every local authority, the rate of incometax has been specified at thirty per cent in Paragraph D of Part III of the First Schedule to
the Act. No surcharge shall be levied. However, Education Cess on Income-tax and
Secondary and Higher Education Cess on income-tax shall be levied at the rate of two per
cent and one per cent respectively of the amount of tax computed. No marginal relief
shall be available in respect of Education Cess.
3.3-6 COMPANIES - In the case of a company, the rate of income-tax has been specified
in Paragraph E of Part III of the First Schedule to the Act.
In case of a domestic company, the rate of income-tax is thirty per cent of the total
income. The tax computed shall be enhanced by a surcharge of ten per cent only where
such domestic company has total income exceeding one crore rupees.
In the case of a company other than a domestic company, royalties received from
Government or Indian concern under an approved agreement made after 31-3-1961, but
before 1-4-1976 shall be taxed at fifty per cent. Similarly, in the case of fees for technical
services received by such company from Government or Indian concern under an
approved agreement made after 29-2-1964, but before 1-4-1976, shall be taxed at fifty
per cent. On the balance of the total income of such company, the tax rate shall be forty
per cent. The tax computed shall be enhanced by a surcharge of two and one-half per cent
only where such company has total income exceeding one crore rupees. However,
marginal relief shall be allowed in the case of every company to ensure that the additional
amount of income-tax payable, including surcharge, on the excess of income over one
crore rupees is limited to the amount by which the income is more than one crore rupees.
Education Cess on income-tax shall continue to be levied at the rate of two per cent on
the amount of tax computed, inclusive of surcharge in the case of every company. Also,
such amount of tax and surcharge shall be further increased by an additional surcharge
called Secondary and Higher Education Cess on income-tax at the rate of one per cent of
the amount of tax computed, inclusive of surcharge.
4. Amendment to include certain activities within the ambit of provisions
relating to 'charitable purpose' in the Income Tax Act
4.1 For the purposes of the Income-tax Act, "charitable purpose" has been defined in
section 2(15) of the Income–tax Act and it includes -
(a) relief of the poor,
(b) education,
(c) medical relief and,
(d) the advancement of any other object of general public utility.
However, as per proviso to the section, the "advancement of any other object of general
public utility" shall not be a charitable purpose, if it involves the carrying on of any
activity in the nature of trade, commerce or business, or any activity of rendering any
service in relation to any trade, commerce or business, for a cess or fee or any other
consideration, irrespective of the nature of use or application, or retention, of the income
from such activity.
4.2 Clause 15 of section 2 has been amended so as to provide that the preservation of
environment (including watersheds, forests and wildlife) and preservation of monuments
or places or objects of artistic or historic interest would be excluded from the
applicability of the aforesaid proviso which is applicable to the "advancement of any
other object of general public utility".
4.3 Applicability - These amendments have been made applicable with effect from 1st
April, 2009 and will accordingly apply for assessment year 2009-10 and subsequent
assessment years.
5. Taxation of Limited Liability Partnership (LLP)
5.1 The Limited Liability Partnership Act, 2008 has come into effect in 2009. LLP
Rules (except some rules dealing with conversion) and forms have been notified w.e.f. 1st
April, 2009.
5.2 The Income tax Act has been amended to incorporate the taxation scheme of LLPs
in the Income Tax Act on the same lines as the taxation scheme currently prevalent for
general partnerships, i.e. taxation in the hands of the entity and exemption from tax in the
hands of its partners. A "limited liability partnership" and a general partnership will be
accorded the same tax treatment.
5.3 It is provided that the word 'partner' shall include within its meaning a partner of a
limited liability partnership, the word 'firm' shall include within its meaning a limited
liability partnership and the word 'partnership' shall include within its meaning a limited
liability partnership as these terms have been defined in the Limited Liability Partnership
Act, 2008.
5.4 The LLP Act provides for nomination of "designated partners" who have been
given greater responsibility. It is provided that the designated partner shall sign the
income tax return of an LLP, or, where, for any unavoidable reason such designated
partner is not able to sign the return or where there is no designated partner as such, any
partner shall sign the return.
5.5 It is also provided that in case of liquidation of an LLP, every partner will be
jointly and severally liable for payment of tax unless he proves that non-recovery cannot
be attributed to any gross neglect, misfeasance or breach of duty on his part.
5.6 As an LLP and a general partnership is being treated as equivalent (except for
recovery purposes) in the Act, the conversion from a general partnership firm to an LLP
will have no tax implications if the rights and obligations of the partners remain the same
Explanatory Circular for Finance (No.2) Act, 2009
Page 14 of 63
after conversion and if there is no transfer of any asset or liability after conversion. If
there is a violation of these conditions, the provisions of section 45 shall apply.
5.7 Applicability - This amendment has been made applicable with effect from 1st
April, 2010 and will accordingly apply in relation to assessment year 2010-2011 and
subsequent assessment years.
6. Definition of the term "manufacture"
6.1 A number of tax concessions under the Income-tax Act are provided for
encouraging manufacture of articles or things. However, the term "manufacture" was
earlier not been defined in the statute. Therefore, it has been the subject matter of dispute
and resultant judicial review in a number of cases. In order to remove any kind of
ambiguity which may still persist in this regard, a new clause (29BA) has been inserted in
section 2 so as to provide that 'manufacture', with all its grammatical variations, shall
mean a change in a non-living physical object or article or thing,—
(a) resulting in transformation of the object or article or thing into a new and
distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new object or article or thing with a different
chemical composition or integral structure.
6.2 Applicability - This amendment has been made applicable with retrospective effect
from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10
and subsequent years.
7. Power to issue Zero Coupon Bonds
7.1 Under the existing provision of clause (48) of section 2, only infrastructure capital
company or infrastructure capital fund or public sector company are empowered to issue
zero coupon bonds when they are authorized to do so.
7.2 With a view to empower the scheduled banks including nationalized banks to issue
zero coupon bonds to source their long term funds, the Act has been amended so as to
include the scheduled banks as an eligible person to issue zero coupon bonds.
7.3 Further, consequential amendments also were made in Explanation to clause (iiia)
of sub-section (1) of section 36 and in clause (x) of sub-section (3) of section 194A of the
Income-tax Act.
7.4 Applicability - These amendments has been made applicable with retrospective
effect from 1st April, 2009 and will accordingly apply in relation to the assessment year
2009-10 and subsequent assessment years.
8. Compensation received on voluntary retirement or termination of service
under a scheme of voluntary separation8.1 Very often, a person receives arrears or advance of salary due to him. Since arrears
and advance salary is liable to tax, the total income (including such arrears and advance)
is assessed at a rate higher than that at which it would otherwise have been assessed if the
total income did not include arrears and advance of salary. In other words, arrears and
advance salary result in bracket creeping and higher tax burden. With the view to
mitigating this excess burden, the provisions of section 89 of the Income-tax Act provide
for backward spread of the arrears and forward spread of the advance. Under the
voluntary retirement scheme, the retiree employee receives lump-sum amount in respect
of his balance period of service. Such amount is in the nature of advance salary.
8.2 Clause (10C) of section 10 provides for an exemption of Rs. 5 lakhs in respect of
such amount. This exemption is provided to mitigate the hardship on account of bracket
creeping as a result of the receipt of the amount in lump-sum upon voluntary retirement.
However, some tax payers have claimed both the benefit under clause (10C) of section 10
and section 89. The courts have also upheld their claims.
8.3 With the view to preventing the claim of double benefit, a proviso to section 89
has been inserted to provide that no relief shall be granted in respect of any amount
received or receivable by an assessee on his voluntary retirement or termination of his
service, in accordance with any scheme or schemes of voluntary retirement or in case of a
public sector company referred to in sub-clause (i) of clause (10C) of section 10, a
scheme of voluntary separation, if an exemption in respect of such voluntary retirement
or termination of his service or voluntary separation has been claimed by the assessee
under clause (10C) of section 10 in respect of such, or any other, assessment year.
8.4 Correspondingly, a third proviso has also been inserted to clause (10C) of section
10 to provide that where any relief has been allowed to any assessee under section 89 for
any assessment year in respect of any amount received or receivable on his voluntary
retirement or termination of service or voluntary separation, no exemption under clause
(10C) of section 10 shall be allowed to him in relation to such, or any other, assessment
year.
8.5 Applicability - These amendments have been made applicable with effect from 1st
April, 2010 and will accordingly apply in relation to assessment year 2010-11 and
subsequent years.
9. Extension of time limit for filing applications for tax exemption u/s 10(23C)
9.1 Clause (23C) of section 10 provides that income of institutions specified under the
various sub-clauses of the section shall be exempt from income-tax. In certain cases,
approvals are required to be taken from prescribed authorities, in the prescribed manner,
to become eligible for claiming exemption. Under the previous provisions, any institution
(having receipts of more than rupees one crore) had to make an application for seeking
exemption at any time during the financial year for which the exemption is sought to be
taken.
9.2 In practice, under the previous regime, an eligible institution has to anticipate its
annual receipts to decide whether the application for exemption is required to be filed or
not. This has often led to avoidable hardship. In order to mitigate this hardship the above
clause has been amended and the time limit for filing such application has been fixed as
the 30th September in the succeeding financial year. It may also be noted that this is the
time limit to complete the audit of such institution as well. For example , where the gross
receipts of a trust or institution exceeds rupees one crore in the financial year 2008-09, it
can file the application for exemption till 30th September, 2009 in respect of income of
financial year 2008-09.
9.3 Applicability - These amendments have been made applicable with effect from 1st
April, 2009 and will accordingly apply for assessment year 2009-10 and subsequent
assessment years.
10. Amendment to section 10(23D) of the Income Tax Act, 1961- Incorporating
"Other Public Sector Banks" under the expression "Public Sector Bank"
10.1 Section 10(23D) of the Income –tax Act, 1961 provides exemption from taxation
to income arising to certain categories of mutual funds registered under SEBI Act, 1992
or set up by a public sector bank/public finance institution .
10.2 The expression "public sector banks" has been defined in the explanation to
section 10(23D). Reserve Bank of India has categorized a new sub-group called "other
public sector banks". The Central Government holds more than 51% shareholding in
IDBI Bank Limited which has been categorized under "other public sector banks" by
RBI.
10.3 Since "other public sector banks", has not been included in the expression "public
sector banks" as defined in the Explanation to section 10(23D) they were not eligible for
the exemption available under section. In view of the above, section 10(23D) has been
amended to include "other public sector banks" as categorized by Reserve Bank of India
in the expression "public sector banks".
10.4 Applicability - These amendments have been made applicable with effect from 1st
April, 2010 and will accordingly apply for assessment year 2010-11 and subsequent
assessment years.
11. Extension of sunset clause for units in free trade zone under section 10A and
for export oriented undertakings under section 10B
11.1 Under the existing provisions, the deductions under section 10A and section 10B
of the Income Tax Act were available only upto the assessment year 2010-11.
11.2 Sections 10A and 10B have been amended to extend the tax benefit under both
these sections by one year i.e., the deduction will be available upto assessment year 2011-
12.
11.3 Applicability - These amendments have been made applicable with effect from 1st
April, 2009 and will accordingly apply for assessment year 2009-10 and subsequent
assessment years.
12. Clarification regarding computation of exempted profits in the case of units
in Special Economic Zones (SEZs)
12.1 Under sub-section (7) of section 10AA of the Income-tax Act, the exempted profit
of a SEZ unit is the profit derived from the export of articles or things or services and
same is required to be calculated as under:
"the profit derived from the export of articles or things or services (including
computer software) shall be the amount which bears to the profits of the
business of the undertaking, being the Unit, the same proportion as the export
turnover in respect of such articles or things or services bears to the total
turnover of the business carried on by the assessee."
Simply stated, it means that the exempted profit of the SEZ unit is equal to:
Profits of the business of the unit X Export turnover of the unit
Total turnover of the business carried on by the assessee
12.2 This method of computation of the profits of business with reference to the total
turnover of the assessee is perceived to be discriminatory in so far as those assesses are
concerned who were having multiple units in both the SEZ and the domestic tariff area
(DTA) vis-à-vis those assesses who were having units in only the SEZ. With a view to
removing the anomaly, the provisions of sub-section (7) of section 10AA of the Income
Tax Act were amended so as to provide that the deduction under section 10AA shall be
computed with reference to the total turnover of the undertaking.
12.3 Applicability - This amendment will take effect from 1st April, 2010 and will
accordingly apply to assessment year 2010-11 and subsequent assessment years.
13. Special provisions relating to voluntary contributions received by an electoral
trust
13.1 With a view to reforming the system of funding of political parties, sections
80GGB and 80GGC of the Income-tax Act have been amended to provide that voluntary
contributions to an electoral trust shall be allowed as a hundred percent deduction in the
computation of the income of the donor. Further, "electoral trust" has been defined in the
new clause (22AAA) of section 2 as a trust so approved by the Board in accordance with
the scheme made in this regard by the Central Government. Also, sub-clause (iia) of
clause (24) of section 2 of the Income-tax Act has been amended to provide that
voluntary contributions received by an electoral trust shall be treated as income of the
trusts. However, a new section 13B has been inserted to provide that voluntary
contributions received by an electoral trust shall not be included in the total income of the
previous year of such electoral trust, if:-
(a) the electoral trust distributes to any political party, registered under section
29A of the Representation of the People Act, 1951, during previous year 95
percent of the aggregate donations received by it during the said previous year
along with the surplus, if any, brought forward from any earlier previous years;
and
b) the electoral trust functions in accordance with the rules made in this regard
by the Central Government.
13.2 Applicability - These amendments have taken effect from 1st April, 2010 and will
accordingly apply in relation to assessment year 2010-11 and subsequent years
14. Aligning the definition of "block of asset"
14.1 The term "block of assets" has been defined in clause (11) of section 2 and in
Explanation 3 to sub-section (1) of section 32 of the Income-tax Act. However, these
definitions are not identical and therefore they are subject to misuse. Hence the word
"block of assets" has been deleted from the Explanation 3 of sub-section (1) of Section
32 of the Income-tax Act so that the word "block of assets" will derive its meaning only
from clause (11) of section 2.
14.2 Applicability - This amendment has been made applicable with effect from 1st
April, 2010 and will accordingly apply in relation to the assessment year 2010-11 and
subsequent assessment years.15. Weighted deduction for in-house research and development
15.1 Under the existing provisions of the Income-tax Act, under sub-section (2AB) of
section 35, weighted deduction of 150 per cent is allowed to a company engaged in the
business of biotechnology or in the business of manufacture or production of drugs,
pharmaceuticals, electronic equipments, computers, telecommunication equipments,
chemicals or any other article or thing notified by the Board and which has incurred
expenditure (excepting on land and building) on in-house scientific research and
development facility approved by the prescribed authority.
15.2 With a view to promoting research and development in all sectors of the economy,
the Act has been amended to extend the benefit of weighted deduction to companies
engaged in the business of manufacture or production of an article or thing except those
specified in the Eleventh Schedule of the Income-tax Act.
15.3 Applicability - This amendment has been made applicable with effect from 1st
April, 2010 and will accordingly apply in relation to the assessment year 2010-11 and
subsequent assessment years.
16. Investment-linked tax incentive for specified business
16.1 The Income-tax Act provides for a number of profit-linked
exemptions/deductions. Such benefits are inefficient, inequitable, impose higher
compliance and administrative burden, result in revenue loss, increase litigations and lead
to competitive demand for similar tax benefits. Further, these benefits also encourage
diversion of profits from the taxed sector to the exempt/untaxed sector. However,
investment-linked incentives are relatively less distortionary in their impact.
16.2 With a view to creating rural infrastructure and environment friendly alternate
means of transportation for bulk goods, provide investment-linked tax incentive has been
provided by inserting a new section 35AD in the Income-tax Act for the following
businesses:—
(a) setting up and operating cold chain facilities for specified products;
(b) setting up and operating warehousing facilities for storage of agricultural
produce;
(c) laying and operating a cross-country natural gas or crude or petroleum oil
pipeline network for distribution, including storage facilities being an integral part
of such network.
16.3 The salient features of the new regime of investment-linked tax incentives are the
following:—
(i) Hundred per cent deduction would be allowed in respect of the whole of any
expenditure of capital nature incurred, wholly and exclusively, for the purposes of the
specified business carried on during the previous year in which such expenditure is
incurred.
(ii) Capital expenditure incurred prior to the commencement of operations of the
specified business and capitalised in the books of account of the assessee on the date of
commencement of operations is also eligible for the deduction.
(iii) The expenditure of capital nature shall not include any expenditure incurred on
acquisition of any land or goodwill or financial instrument.
(iv) The benefit is available—
(a) in a case where the business relates to laying and operating a cross country
natural gas pipeline network for distribution, if such business commences its
operations on or after 1st April, 2007; and
(b) in any other case, if such business commences its operation on or after the 1st
April, 2009.
(v) The assessee shall not be allowed any deduction in respect of the specified business
under the provisions of Chapter VIA;
(vi) No deduction in respect of the expenditure in respect of which deduction has been
claimed shall be allowed to the assessee under any other provisions of the Income-tax
Act.
(vii) Any sum received or receivable on account of any capital asset, in respect of which
deduction has been allowed under section 35AD, being demolished, destroyed, discarded
or transferred shall be treated as income of the assessee and chargeable to income tax
under the head "Profits and gains of business or profession".
(viii) Any loss computed in respect of the specified business shall not be set off except
against profits and gains, if any, of any other specified business. To the extent the loss is
unabsorbed the same will be carried forward for set off against profits and gains from any
specified business in the following assessment year and so on.
16.4 Further, profit-linked deduction provided under section 80-IA to the business of
laying and operating a cross country natural gas distribution network will be
discontinued. As a result, any person availing of this incentive can avail of the benefit
under the proposed section 35AD. All capital expenditure (other than on land, goodwill
and financial instrument), to the extent capitalized in the books as on 1st April, 2009 will
be fully allowed as a deduction in the computation of total income of the said business for
the previous year 2009-10. This is available in addition to any other capital expenditure
(excluding land, goodwill and financial instrument) incurred during such previous year.
16.5 The provisions of section 28, section 43 and section 50B of the Income-tax Act
have also been amended to make consequential changes. Thus, any sum, whether
received or receivable, in cash or kind, on account of any capital asset (other than land or
goodwill or financial instrument) being demolished, destroyed, discarded or transferred,
if the whole of the expenditure on such capital asset has been allowed as a deduction
under section 35AD, shall be treated as taxable under section 28. Further, the actual cost
of any capital asset on which deduction has been allowed or is allowable to the assessee
under section 35AD, shall be treated as 'nil' under section 43 in the case of such assessee
and in any other case if the capital asset is acquired or received - (i) by way of gift or will
or an irrevocable trust; (ii) on any distribution on liquidation of the company; and (iii) by
such mode of transfer as is referred to in clauses (i), (iv), (v), (vi), (vib), (xiii) and (xiv) of
section 47. Also, while computing capital gains in case of slump sale under section 50B,
the aggregate value of total assets for computing the net worth in the case of capital assets
in respect of which the whole of the expenditure has been allowed or is allowable as a
deduction under section 35AD shall be treated as nil.
16.6 A new section 73A has also been inserted to give effect to the consequential
provisions introduced in section 35AD. Thus, any loss computed in respect of any
specified business referred to in section 35AD shall not be set off except against profits
and gains, if any, of any other specified business. Further, where for any assessment year
any loss computed in respect of the specified business has not been wholly set off against
profits and gains of another specified business, so much of the loss as is not so set off or
the whole loss where the assessee has no income from any other specified business shall
be carried forward to the following assessment year, subject to the other provisions of
Chapter VI and - (i) it shall be set off against the profits and gains, if any, of any
specified business carried on by him assessable for that assessment year; and (ii) if the
loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward
to the following assessment year and so on.
16.7 Applicability - These amendments will be effective from 1st April, 2010 and will
accordingly apply in respect of assessment year 2010-11 and subsequent assessment
years.
17. Special deduction under section 36(1) (viii) to National Housing Bank (NHB)
17.1 Clause (viii) of sub-section (1) of Section 36 [section 36(1)(viii)] provides special
deduction to financial corporations and banking companies of an amount not exceeding
20% of the profits subject to creation of a reserve.
17.2 National Housing Bank (NHB) is wholly owned by Reserve Bank of India and is
engaged in promotion and regulation of housing finance institutions in the country. It
provides re-financing support to housing finance institutions, banks, ARDBs, RRBs etc.,
for the development of housing in India. It also undertakes financing of slum projects,
rural housing projects, housing projects for EWS and LIG categories etc. NHB is also a
notified financial corporation under section 4A of the Companies Act.
17.3 A view has been expressed that NHB is not entitled to the benefits of section 36(1)
(viii) on the ground that it is not engaged in the long-term financing for construction or
purchase of houses in India for residential purpose. Hence the Act has been amended to
provide that corporations engaged in providing long-term finance (including refinancing) for development of housing in India will be eligible for the benefit under
section 36(1)(viii).
17.4 Applicability - These amendments will be effective from the 1st April, 2010 and
will accordingly apply in respect of assessment year 2010-11 and subsequent assessment
years.
18. Remuneration to partners in a firm
18.1 Under the existing provisions of the Income-tax Act, the payment of salary, bonus,
commission or remuneration (hereinafter referred to as "remuneration") to a working
partner of a partnership firm is allowed as deduction if it is authorised by the partnership
deed and subject to the overall ceiling of monetary limits prescribed under sub-clause (v)
of clause (b) of section 40. The existing limits are as under:
(1) in case of a firm carrying on a profession—
(a) on the first Rs. 1,00,000 of the book-profit or Rs. 50,000 or at the rate of 90 per cent of the
in case of a loss book-profit, whichever is more;
(b) on the next Rs. 1,00,000 of the book-profit at the rate of 60 per cent;
(c) on the balance of the book-profit at the rate of 40 per cent;
(2) in the case of any other firm—
(a) on the first Rs. 75,000 of the book-profit, or Rs. 50,000 or at the rate of 90 per cent of the
in case of a loss book-profit, whichever is more;
(b) on the next Rs. 75,000 of the book-profit at the rate of 60 per cent;
(c) on the balance of the book-profit at the rate of 40 per cent:
18.2 The Act has been amended to make upward revision of the existing limits of the
remuneration and also to prescribe uniform limits for both professional and non
professional firms for simplicity and administrative ease.
The revised limits as under:
(a) on the first Rs. 3,00,000 of the book-profit or Rs. 1,50,000 or at the rate of 90 per cent of the
in case of a loss book-profit, whichever is more;
(b) on the balance of the book-profit at the rate of 60 per cent;
18.3 Applicability - This amendment has been made applicable with effect from 1st
April, 2010 and will accordingly apply in relation to the assessment year 2010-2011 and
subsequent assessment years.
In an assessment or appeal for assessment year 2010-11 turning on when an amendment took effect, and wherever the Board's stated intention behind a Finance (No. 2) Act, 2009 change is relied on.
Rules it names. Rule 3 of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
It mentions. Circular No. 05/2010
← Circular No. 5 [F.No.SW/3/31/2005/01-DIT(S)/2799-2800] · Circular No. 402/92/2006-MC (27 of 2010) →
Source: the Income Tax Department’s own published text — its page for this instrument.