Budget amendments in Income-Tax Act: How plugging cess/surcharge loophole may bring legal clarity

The Union Budget brought in some amendments to the Income-tax Act that would be effective retrospectively. Making a retrospective amendment to the law from 2005-06, the Budget has clarified that cess and surcharge will not be allowed to be claimed as deductions in the form of expenditure — a practice that some companies and businesses were resorting to in the absence of legal clarity. It has also allowed exemption of the amount received for medical treatment and on account of death due to Covid-19 retrospectively from April 1, 2020.

The Budget has also made changes to the I-T law making space for the tax department to seek explanation for source of funds at the hands of the creditor.

Retrospective change about cess and surcharge

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.

Amendments on health, Covid-related expenditure

The Budget has allowed exemption of the amount received for medical treatment and on account of death due to Covid-19 retrospectively from April 1, 2020. It said, “Any sum of money received by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, in respect of any illness related to Covid-19 subject to such conditions, as may be notified by the Central Government in this behalf, shall not be the income of such a person.”

The Budget has also allowed exemption for amount received by a member of the family of a deceased person, from the employer of the deceased person (without limit), or from any other person or persons with such money not exceeding Rs 10 lakh, where the cause of death of such person is illness relating to Covid-19 and the payment is, received within twelve months from the date of death of such person. These amendments will be effective retrospectively from April 1, 2020.

Separately, gifts and freebies to doctors shall not be treated as business expenditure under Section 37 of the Income-tax Act.

Legislative change for questioning sources of funding for companies

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 markets regulator Sebi.
“Earlier, if any company used to have bogus entries, 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 it’s the right source of income and they had the right net worth to provide this amount,” Amit Maheshwari, tax partner, AKM Global, said.

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