[Summary] of the Amendments made by the Finance Act 2023

6. Non-Banking Financial Company (NBFC) Categorization [Secs. 43B and 43D]

Section 43B provides, inter alia, that any sum payable by an assessee as interest on any loan or borrowing from a Deposit taking Non-Banking Financial Company and Systemically Important Non-Deposit taking Non-Banking Financial Company shall be allowed as deduction on payment basis. It can be allowed on accrual basis if it is actually paid on or before the due date of furnishing the return of income of the relevant previous year.

Section 43D provides, inter alia, for special provision in case of income of deposit-taking Non-Banking Financial Company and Systemically Important Non-Deposit taking Non-Banking Financial Company. Interest income in relation to certain categories of bad or doubtful debts received by such deposit-taking Non-Banking Financial Company and Systemically Important Non-Deposit taking Non-Banking Financial Company, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account for that year or actually received, whichever is earlier.

6.1 Amendment

Section 43B and section 43D currently use two erstwhile categories of NBFC (namely, Deposit taking Non-Banking Financial Company and Systemically Important Non-Deposit taking Non-Banking Financial Company). Such classification for non-banking financial companies is no longer followed by RBI for the purpose of asset classification.

In view of the above, sections 43B and 43D have been amended (with effect from the assessment year 2024-25) to substitute the words, “a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company”, for the words “such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf”.

7. Increasing Threshold Limits for Presumptive Taxation Schemes [Secs. 44AB, 44AD and 44ADA]

Sections 44AD and 44ADA provide for a presumptive income scheme for small businesses and small professionals as given below –

In the aforesaid cases, if assessee has claimed to have earned higher sum than 8 per cent or 6 per cent ¹ or 50 per cent, then that higher sum is taxable.

7.1 Tax Audit Under Section 44AB

Every person carrying on business/profession is required to get his accounts audited, if his total sales, turnover or gross receipts exceeds Rs. 1 crore (in the case of business) or Rs. 50 lakh (in the case of profession) in any previous year. By an amendment made by the Finance Act, 2021, the limit of Rs. 1 crore was raised to Rs. 10 crore where at least 95 per cent of receipts/payments are in non-cash mode.

7.2 Amendment to Sections 44AD and 44ADA

In order to ease compliance and to promote non-cash transactions, the threshold limits under sections 44AD and 44ADA has been enhanced (with effect from the assessment year 2024-25) as follows –

7.2.1 Section 44AD

Where in the case of an eligible business, the amount (or aggregate of the amounts) received during the previous year, in cash, does not exceed 5 per cent of the total turnover or gross receipts, the threshold limit of Rs. 3 crore will apply.

7.2.2 Section 44ADA

Where in the case of an eligible profession, the amount (or aggregate of the amounts) received during the previous year, in cash, does not exceed 5 per cent of the total gross receipts, the threshold limit of Rs. 75 lakh will apply.

In the aforesaid cases, the receipt by a cheque/draft, which is not account payee, shall be deemed to be the receipt in cash.

7.3 Amendment to Section 44AB

Section 44AB has been amended (with effect from the assessment year 2024-25). After the amendment, the provisions of section 44AB shall not apply to the person, who declares profits and gains for the previous year in accordance with the provisions of section 44AD(1)/44ADA(1).

8. Averting Misuse of Presumptive Schemes Under Section 44BB/44BBB

Section 44BB provides for presumptive scheme in the case of a non-resident who is engaged in the business of providing services or facilities in connection with or supplying plant and machinery on hire used (or to be used) in the prospecting for (or extraction or production of) mineral oils. Under the scheme, a sum equal to 10 per cent of the aggregate of the amounts [as narrated in section 44BB(2)] is deemed to be business income.

Section 44BBB provides for presumptive scheme in the case of a non-resident foreign company who is engaged in the business of civil construction (or the business of erection of plant or machinery or testing or commissioning thereof), in connection with a turnkey power project approved by the Central Government. Under this scheme, a sum equal to 10 per cent of the amount paid or payable (whether in or out of India) to the said assessee on account of the aforesaid business shall be deemed to be business income.

Under the aforesaid sections, an assessee can declare lower profit than the amount specified above. In such a case –

a. the assessee will have to maintain books of account under section 44AA(2);

b. the assessee will get his books of account audited under section 44AB (irrespective of turnover); and

c. the Assessing Officer will complete the assessment under section 143(3).

8.1 Misuse of Presumptive Schemes

As there is no check, a taxpayer can opt in and opt out of presumptive scheme in order to avail benefit of both presumptive scheme income and non-presumptive income. In a year when the assessee has loss, it can claim actual loss as per the books of account and carry it forward. In a year when it has higher profits, it can use presumptive scheme to restrict the profit to 10 per cent and set off the brought forward losses from earlier years. Logically, there is no justification for setting off of losses (computed as per books of account) with income computed on presumptive basis.

8.2 Amendment

To avoid such misuse, sections 44BB and 44BBB have been amended (with effect from the assessment year 2024-25) to provide that [notwithstanding anything contained in section 32(2)/72(1)] where an assessee declares profits and gains of business for any previous year in accordance with the provisions of presumptive taxation, no set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year.

9. Amendment to Section 45(5A)

Section 45(5A), inter alia, provide that capital gain arising to an individual/HUF from the transfer of land/building under a joint development agreement (JDA), shall be chargeable to tax in the year in which the certificate of completion for the whole or part of the project is issued by the competent authority. Further, for computing capital gain, the full value of consideration shall be taken as the stamp duty value of his share, as increased by the consideration received in “cash”.

9.1 When Consideration is Payable by Cheque/Draft

One can infer that any amount of consideration which is received in a mode other than cash (i.e., cheque/draft, or electronic payment) would not be included in the consideration for the purpose of computing capital gains chargeable to tax under section 45(5A). It appears that it is not intention of law as is evident from the provisions of section 194-IC. Under Section 194-IC, TDS is required [in cases covered by section 45(5A)] regardless of the fact whether consideration payable is in cash or by way of issue of a cheque or draft or any other mode.

9.2 Amendment

Section 45(5A) has been amended (with effect from the assessment year 2024-25) to provide that the full value of consideration shall be taken as the stamp duty value of his share (i.e., the share of transferor under joint development agreement) as increased by any consideration received in cash or by a cheque or draft or by any other mode.

10. Amendment to Section 47

The following amendments have been made in the scheme of section 47 (relating to transactions not regarded as transfers for the purpose of calculating capital gain under section 45) –

10.1 Relocation

Explanation (b) to section 47(viiad) defines the term “relocation” as transfer of assets of the original fund (or of its wholly owned special purpose vehicle) to a resultant fund on or before March 31, 2023, where consideration for such transfer is discharged in the form of share (or unit or interest) in the resulting fund in the manner specified therein.

10.2 Amendments

The following amendments have been made with effect from the assessment year 2023-24 –

1. The definition of “original fund” has been amended to include within its purview –

• • • An investment vehicle, in which Abu Dhabi Investment Authority is the direct or indirect sole shareholder or unitholder or beneficiary or interest holder and such investment vehicle is wholly owned and controlled, directly or indirectly, by the Abu Dhabi Investment Authority or the Government of Abu Dhabi.
    • A fund notified by the Central Government.

2. The date for transfer of assets of the original fund (or of its wholly owned special purpose vehicle) to a resultant fund in case of relocation has been extended from March 31, 2023 to March 31, 2025.

3. Further, the Explanation (c)(i) to section 47(viiad) has been amended to give reference of the International Financial Services Centres Authority (Fund Management) Regulations, 2022 in the definition of “resultant fund”.

10.3 Conversion of Gold Into Electronic Gold Receipt

Any person desirous of creating Electronic Gold Receipt (EGR) shall place a request for the deposit of gold with the Vault Manager ². The Vault Manager upon receipt of request and physical gold shall record the relevant information and create EGR. While creating EGR, the Vault Manager shall ensure that no EGR is created without the presence of physical gold. Upon creation of EGR, the depository shall make necessary arrangement for the trading of it on the stock exchange.

10.3.1 Amendments

In order to promote the concept of electronic gold, the following amendments have been made (with effect from the assessment year 2024-25) in the scheme of sections 2(42A), 47 and 49-

10.3.2 How to compute period of holding of EGR

Under section 2(424), the period of holding of EGR shall be determined as follows-

10.3.3 Conversion of gold into EGR (or vice versa)

Clause (viid) has been inserted in section 47 to provide that conversion into EGR or EGR into gold shall not be regarded as transfer for the purpose of computing capital gains.

10.3.4 Cost of acquisition of gold or EGR

Cost of acquisition of gold or EGR shall be determined as follows [as per newly inserted sub-section (10) to section 49] –

10.4 Transfer of Interest in a Joint Venture [Sec. 47(xx)]

Clause (xx) has been inserted in section 47 (with effect from the assessment year 2024-25). By virtue of this amendment, any transfer of a capital asset (being an interest in a joint venture held by a public sector company) in exchange of shares in a company incorporated outside India by a foreign Government, will not be treated as “transfer” for the purpose of computation of capital gain under section 45. “Joint venture” shall mean a business entity, as may be notified by the Central Government.

10.4.1 Cost of Acquisition of Aforesaid Shares [Sec. 49(2AI)]

Section 49(2AI) has been inserted (with effect from the assessment year 2023-24). It provides that where the capital asset [being shares as referred to in section 47(xx)] became the property of the assessee, the cost of acquisition of such asset shall be deemed to be the cost of acquisition to the assessee of the interest in the joint venture.

11. Interest on Borrowed Capital – Not to Be Part of Cost of Acquisition in Certain Cases [Sec. 48]

Section 48, inter alia, provides that the income chargeable under the head “Capital gains” shall be computed, by deducting the cost of acquisition/cost of improvement from the full value of the consideration received or accruing as a result of the transfer of the capital asset. Interest on capital borrowed for the purpose of financing acquisition, construction/reconstruction/renewal of house property is deductible under section 24(b).

One can have double deduction of interest paid on borrowed capital for acquiring (or renewing or reconstructing, etc.) a property. Firstly, it is claimed in the form of deduction under section 24(b) from the income from house property. Secondly, while computing capital gains on transfer of such property the same interest also forms a part of cost of acquisition/cost of improvement under section 48 – CIT v. C. Ramabrahmam [2012] 27 taxmann.com 104 (Chennai).

11.1 Amendment

In order to prevent this double deduction, a proviso has been inserted in section 48(ii) (with effect from the assessment year 2024-25) to provide that the cost of acquisition or the cost of improvement shall not include the amount of interest claimed as deduction under section 24 or Chapter VIA.

12. Cost of Acquisition of a Unit of Business Trust [Explanations 1 and 2 to Section 48(ii)]

Section 48(ii) has been amended (with effect from the assessment year 2024-25) to clarify that the cost of acquisition of a unit of a business trust shall be reduced by any sum received by a unitholder from the business trust with respect to such unit and which is not in the nature of income as referred to in section 10(23FC)/(23FCA) and which is not chargeable to tax under section 56(2)(xii)/115UA(2).

Where transaction of transfer of a unit is not considered as transfer under section 47 and cost of acquisition of such unit is determined under section 49, sum received with respect to such unit (before such transaction as well as after such transaction) shall be reduced from the cost of acquisition as stated above.

1. 6 per cent is applicable in respect of total turnover (or gross receipts) received by the assessee by an account payee cheque/draft or received through prescribed electronic mode on or before the due date of submission of return of income under section 139(1).
2. “Vault Manager” means any person who carries on or intends to carry on the business of providing vaulting services [Regulation 2(1)(l) of SEBI (Vault Managers) Regulations, 2021.