Weekly Round-up on Tax and Corporate Laws | 14th to 19th August 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from August 14^th to 19^th, 2023, namely:

(a) CBDT notifies Rule 11UACA to compute taxable income in respect of sum received under life insurance policies;

(b) CBDT issues clarifications on the applicability of Section 10(10D) exemption on life insurance policies;

(c) CBDT revises Rule 3 to lower rates of rent-free accommodation valuation and introduces an inflation-linked cap;

(d) Proper officer can’t seize currency and other valuable assets during search: Delhi HC;

(e) Investigation initiated by CGST Authority against supplier of petitioner can’t have any bearing on action taken by SGST Authority against it: HC;

(f) Understanding the impact of RBI’s New Rules on your EMIs and Loan Eligibility;

(g) RBI’s vision for Fairness: Guidelines on penal charges to foster responsible lending;  and

(h) Classification of advance payment made towards Way Leave Charges.

1. CBDT notifies Rule 11UACA to compute taxable income in respect of sum received under life insurance policies

The Finance Act 2023 inserted a new clause (xiii) to section 56(2). This new clause provides for the taxability of any sum received under a life insurance policy [other than Unit Linked Insurance Policy (ULIP) and Keyman Insurance Policy], to which exemption under Section 10(10D) does not apply. Any income arising from such receipt shall be taxable under the head ‘Income from Other Sources’.

Pursuant to such amendment, the Central Board of Direct Taxes (CBDT) has notified Rule 11UACA prescribing the manner of computation of income for section 56(2)(xiii). Income arising from the sum received from such policies is calculated in the following manner:

1. Sum received under the Life Insurance Policy for the first time

If the assessee has received the sum from such Life Insurance policy for the first time, then the income shall be the amount received, including the amount allocated by way of bonus, as reduced by the aggregate of premium paid during the term of such policy, till the date of receipt of such sum.

2. Sum received under the Life Insurance policy for second and subsequent times

Where the assessee has received any sum from such Life Insurance policy not for the first time, the income shall be the amount received during the subsequent previous year, as reduced by the amount of premium paid during the term of such policy until the date of receipt of such sum. However, the premiums already considered while computing income in earlier years shall not be considered.

Note: If a deduction has been claimed under any other provision of the Act in respect of premium, the amount of such premium shall not be considered while computing the income.

Read the Notification

2. CBDT issues clarifications on the applicability of Section 10(10D) exemption on life insurance policies

Section 10(10D) provides an exemption with respect to any sum received under the life insurance policy. However, no exemption is allowed if the premium payable for any of the years during the policy term exceeds 10% of the actual capital sum assured (‘excess premium policy’).

With effect from Assessment Year 2024-25, Section 10(10D) is amended to provide an additional restriction that no exemption with respect to any sum received under any life insurance policy, other than Unit Linked Insurance Policy (ULIP), issued on or after 01-04-2023 shall be allowed if the amount of premium payable for any of the previous years during the term of the policy exceeds Rs. 5,00,000.

Thus, exemption under section 10(10D) in respect of life insurance policies issued on or after 01-04-2023 shall be allowed only when the premium payable for any of the years during the term of the policy does not exceed Rs. 5,00,000, and the premium should not exceed 10% of the sum assured.

Further, where the premium is payable by a person for more than one life insurance policy issued on or after 01-04-2023, the aggregate premium of all such life insurance policies should not exceed Rs. 5,00,000 during the term of any of those policies. Where the aggregate premium of such life insurance policies exceeds Rs. 5,00,000 in any year during the term of such policies, the exemption shall be allowed only for those life insurance policies, the aggregate of which does not exceed the threshold of Rs. 5,00,000. This condition is specified in the seventh proviso.

To clarify these amendments, the CBDT has issued a circular to provide guidelines on different situations that may arise while looking for exemption for life insurance policies issued on or after 01-04-2023 (‘eligible life insurance policies’).

Situation 1: Where no consideration is received, or no exemption is claimed

Where the assessee receives no consideration on eligible life insurance policies during any previous year preceding the current previous year or consideration has been received on such eligible life insurance policies but has not been claimed as exempt. The exemption under section 10(10D) shall be determined as under:

(a) If consideration is received from one life insurance policy, the exemption shall be available to the assessee only if the premium payable on such eligible life insurance policy doesn’t exceed Rs. 5,00,000.

(b) If consideration is received from more than one eligible insurance policy and the aggregate of the amount of premium payable on such eligible life insurance policies exceeds Rs 5,00,000 for any previous year during the term of such policies. In that case, the exemption shall be available only for those life insurance policies where the aggregate amount of the premium payable does not exceed Rs 5,00,000.

Situation 2: Exemption claimed for consideration received for eligible Life insurance Policy in any previous year

Where the assessee has received consideration in respect of eligible life insurance policies in any previous year preceding the current year, and it has been claimed to be exempt under Section 10(10D) (‘old eligible life insurance policies’). In such a situation, the exemption for the remaining policies whose term coincides with the old eligible life insurance policies shall be determined as under:

(a) If consideration is received from one or more than one eligible life insurance policies, the exemption shall be available only if the aggregate amount of premium payable on such eligible life insurance policies and old eligible life insurance policies does not exceed Rs 5,00,000 for any of the previous years during the term of such eligible life insurance policies.

(b) If the aggregate of premium payable on eligible life insurance policies and old eligible life insurance policies exceeds Rs. 5,00,000, the exemption shall be available only for those eligible life insurance policies where the aggregate amount of premium along with the aggregate amount of premium of old life insurance policies does not exceed Rs. 5,00,000 for any of the previous years during the term of any of such eligible life insurance policies.

Further, it is clarified that the premium payable or aggregate premium payable for a life insurance policy shall be exclusive of the amount of the Goods and Service Tax payable on such premium.

In addition, it is clarified that these provisions shall not be applicable on term life insurance policies, i.e., where the sum under a life insurance policy is only paid to the nominee in case of the death of the person insured during the term of the policy, and no amount is paid to anyone if the insured person survives the policy tenure.

Read the Circular

3. CBDT revises Rule 3 to lower rates of rent-free accommodation valuation and introduces an inflation-linked cap

By virtue of Section 17(2) of the Income Tax Act, 1961, the value of rent-free accommodation provided by an employer to the employee is treated as a perquisite. The valuation of such perquisite is made as per the valuation method prescribed under Rule 3 of the Income Tax Rules, 1962.

The Finance Act 2023 amended section 17(2) to rationalize the provisions relating to the valuation of such accommodation. Now, the Central Board of Direct Taxes (CBDT) has amended Rule 3, providing the revised method for valuing rent-free accommodation.

Significant changes with respect to the valuation method have been prescribed in cases where the accommodation is provided by an employer (other than Central Government or State Government) to its employees. The changes are as follows:

1. In cases where the accommodation is owned by the employer

If the population of the city as per the 2011 census-

• Above 40,00,000 – The valuation rate is reduced to 10% (from 15%) of the salary.
• 25,00,000 to 40,00,000 – The valuation rate is reduced to 7.5% (from 15%) of the salary.
• 15,00,000 to 24,99,999 – The valuation rate is reduced to 7.5% (from 10%) of the salary.
• 10,00,000 to 14,99,999 – The valuation rate is reduced to 5% (from 10%) of the salary.
• Below 10,00,000 – The valuation rate is reduced to 5% (from 7.5%) of the salary.

2. In cases where the accommodation is taken on lease or rent by the employer,

The amount of perquisite shall be lower of the actual amount of lease rental or 10% (reduced from 15%) of the salary.

3. In case same accommodation is provided for more than one year

Where the same accommodation is continued to be provided to the same employee for more than one year, the valuation in subsequent years will not exceed the first year’s valuation adjusted by the Cost Inflation Index. In this context, the “first year” means the financial year 2023-2024 or the financial year in which the accommodation was provided to the employee, whichever is later.

Thus, the perquisite value of rent-free accommodation in the subsequent year shall be lower of the following:

• Perquisite value computed as per the above rules; or
• First year’s perquisite value as adjusted by the Cost Inflation Index (CII).

The adjusted first year’s perquisite value shall be computed as per the following formula:

Adjusted first year’s perquisite value = First year’s perquisite value * CII of the subsequent year/ CII of the first year

It is to be noted that the above changes in Rule 3 shall be effective from 01-09-2023. Therefore, valuation for the period before 01-09-2023 shall continue to be made as per existing rules.

Read the Notification

4. Proper officer can’t seize currency and other valuable assets during search: Delhi HC

The Honorable Delhi High Court has recently held that search and seizure operations under Section 67 are not to seize unaccounted income or assets, and proper officers can’t seize currency and other valuable assets during search proceedings.

Facts

The petitioner was engaged in the business of trading in non-ferrous metals. The officers of the GST department searched the petitioner’s residence, and two silver bars & currency were seized from the ground floor of the petitioner’s residence. The petitioner filed a writ petition and prayed that the search of his residential premises and seizure would be declared illegal.

High Court

The Honorable High Court noted that the purpose of Section 67 is not recovery of tax but to empower authorities to unearth tax evasion and ensure that taxable supplies are brought to tax. The Court further noted that search and seizure operations under Section 67 are not to seize unaccounted income or assets.

Even if the proper officer had seized the currency and other valuable assets, the same should be returned if these assets were not relied upon in the notice issued subsequently. However, in the present case, the notice did not rely on any items seized during the search operations. Therefore, the Court directed the department to release the currency and other valuable assets seized from the petitioner during the search proceedings conducted.

Read the Ruling

5. Investigation initiated by CGST Authority against supplier of petitioner can’t have any bearing on action taken by SGST Authority against petitioner: HC

The Honorable Patna High Court has recently held that the investigation initiated against the supplier of the petitioner by CGST Authorities could not have any bearing on action taken by State Authority for relevant periods against the petitioner, being distinct from each other and against two separate assesses.

Facts

In the present case, the petitioner challenged the summons issued by Central Tax Officer and contended that State Tax Authority also initiated proceedings on the very same transaction. It was also submitted that CBEC had restrained State Authority from initiating any proceeding with respect to which Central Authority initiates a proceeding.

High Court

The Honorable High Court noted that there is no prohibition in the State Tax Authority initiating an action where the Central Tax Authority is seized of the matter. However, on very same transaction, obviously, only one assessment can be made, and it is proper that the authority, who initiated the action first, continues with it. The other authority restrains itself from so proceeding.

In the instant case, proceeding initiated by Central Authority and State Authority were against different assesses. The summons by the Central authority required the petitioner to produce details of purchases made from its supplier. The proceeding initiated by State Tax Authority was with respect to input tax credit claimed on purchases made from the said supplier who was engaged in availing of and passing of irregular/inadmissible input tax credit to many entities.

Therefore, the Court held that the investigation initiated against the supplier of the petitioner could not have any bearing on the action taken by State Authority for relevant periods, being distinct from each other and against two separate assesses. Thus, the Court dismissed the writ petition.

Read the Story

6. Understanding the impact of RBI’s New Rules on your EMIs and Loan Eligibility

The RBI has just dropped game-changing guidelines vide Circular No. RBI/2023-24/55 DOR.MCS.REC.32/01.01.003/2023-24, Dated 18.08.2023. Now, borrowers with floating-rate personal loans will have a new option – they can switch to a fixed interest rate as per the board-approved policy. These guidelines apply to existing and new loans and are effective from 31.12.2023.

And here’s the cherry on top – if there’s any increase in EMI, tenure or both, borrowers know immediately! The lender will communicate promptly through the appropriate channels.

But wait, there’s more! Borrowers can choose between increasing the EMI, extending the loan tenure, or combining both! Flexibility at its finest.

And for those who love the idea of financial freedom, one can make partial or full prepayments at any point during the loan tenure. It’s all about making the financial journey more manageable!

The key highlights of the RBI’s guidelines are as follows:

(a) Mandatory assessment of borrower’s repayment capacity promoting responsible lending by banks/FIs

The RBI now requires Regulated Entities (REs) to assess borrowers’ repayment capacity. This ensures enough room for extending loan tenure or raising EMIs if external benchmark rates increase during the loan period.

(b) Ensuring clear communication for changes in EMI-based floating rate personal loans

When granting personal loans based on EMI with a floating interest rate, REs must communicate to the borrowers the potential impacts of fluctuations in the benchmark interest rate on the loan.

(c) Empowering borrowers with the option to switch to fixed interest rates

When adjusting interest rates, REs must offer borrowers the chance to switch to a fixed interest rate, as per the guidelines set by their board-approved policies. These policies may specify the frequency of this option during the loan’s term.

(d) Transparent disclosure of charges for loan switching

All charges associated with switching loans from floating to fixed rates, along with any other service charges or administrative costs, must be disclosed in the sanction letter and also at the time of any revision of such charges/costs by REs.

Read the Story

7. RBI’s vision for Fairness: Guidelines on penal charges to foster responsible lending

The RBI has observed that many Regulated Entities (REs) apply additional interest charges, beyond the standard rates, for instances of defaults or non-compliance by the borrower. In view of the above, the RBI has issued instructions to REs stating that penalties for default in repayment of loans must be treated as penal charges rather than a penal rate of interest. These instructions are effective from 01.01.2024. The key highlights of the RBI’s instructions are as follows:

(a) RBI Introduces Clear Distinction: ‘Penal Charges’ and ‘Penal Interest’

The RBI has instituted a provision whereby penalties imposed for the violation of material terms and conditions of a loan contract by the borrower must be categorized as ‘penal charges’. These charges should not be treated as ‘penal interest’, i.e. they should not be added to the rate of interest charged on the advances. Further, there shall be no capitalization of penal charges.

(b) REs are restricted from introducing additional components to the rate of interest

REs shall not introduce any additional component to the rate of interest and ensure compliance with these guidelines in both letter and spirit. Further, the REs shall formulate a Board approved policy on penal charges or similar charges on loans.

(c) RBI brings uniformity in the quantum of charges for different loan categories

RBI mandates reasonable and fair penal charges for loan contract violations, avoiding discrimination within loan categories. Penalties for personal loans must match those for business loans in similar non-compliance cases.

(d) Transparent Disclosure of Penal Charges and Communication Protocols

Loan agreements and Key Fact Statements from Responsible Entities (REs) must transparently state penal charge amounts and reasons. This data must be on the REs’ website’s “Interest Rates and Service Charges” section. Penalties for non-compliance reminders must include applicable charges.

Read the Story

8. Classification of advance payment made towards Way Leave Charges

The company, engaged in city gas distribution, undertakes way leave agreements (i.e. an arrangement where the grantor provides rights for the grantee to access their land to carry out specified activities) with the Indian Railways as part of its city gas distribution network operations. These arrangements involve charging way leave fees by the Indian Railways for granting limited land use for specific purposes, such as passage, access, and laying underground pipelines. Under these arrangements, the company pays upfront for a 10-year period to use the railway land for pipeline laying while legal ownership remains with the Railways. Here, the company’s right pertains to laying pipelines, not owning the land physically.

The challenge in these arrangements revolves around deciding whether to categorize the entitlement to utilize the underground space as an ‘Intangible Asset’ as per Ind AS 38 or as ‘Right-to-Use Assets,’ in accordance with Ind AS 116.

The Expert Advisory Committee (EAC) of ICAI has addressed this matter by clarifying that a contract qualifies as a lease if it grants control over an identified asset for a substantial period in exchange for consideration. To ascertain the existence of control over an asset, the company must evaluate whether it possesses the ability to reap substantial economic advantages from the asset’s utilization and has the authority to direct its use.

It further stated that since the agreements explicitly define the permission to use the underground space, specifying dimensions and distinguishing it from the remaining land, thus, it can be inferred that such entitlement to utilize the underground space is an identified asset.

Furthermore, the Railways have substitution rights contingent on specific events; these rights are not deemed substantive as they lack practical enforceability throughout the usage period. Hence, the company exclusively utilizes the specified underground space, ensuring the substantial economic benefits of its use.

It was therefore opined by EAC that granting railways with limited rights, such as access and inspection, are considered protective measures rather than impeding the company’s right to direct asset use. Consequently, the arrangement is classified as a lease under Ind AS 116, necessitating the company to account for prepayments made for way leave charges according to the standard’s guidelines. In this context, applying other standards, such as Ind AS 38, is deemed unnecessary.

Read the Story