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BOMBAY CHARTERED
ACCOUNTANTS’ SOCIETYJolly Bhavan 2, 7,New Marine Lines,
Churchgate, Mumbai-400020. Tel. :- 66595601/2/3/4/5 Fax :- 66595606
Email: bca@bcasonline.org; Web :www.bcasonline.org
INDIAN MERCHANTS’
CHAMBER IMC Bldg., IMC Marg, Churchgate,
Mumbai - 400 020. Tel : 22046633 Fax : 22048508 / 22838281
E-Mail : imc@imcnet.org; Web : http://www.imcnet.org
To, July 13, 2007
Mr. P. Chidambaram The Hon’ble Finance Minister Government of India North Block, Secretariat, New Delhi – 110 001.
Respected Sir,
Please find our representation on the Income Tax Return Forms 1 to 4 introduced vide. The Income Tax (Fourth Amendment) Rules, 2007 with effect from 14th day of May 2007.
We appreciate and support the objective of making the tax laws simple and to ensure description of Return Forms which are comprehensible to laymen. In keeping with that objective, it is absolutely essential that forms ITR 1 to ITR 4 are made far simpler, as they have mass application and they affect a very large proportion of the tax paying community (including the salaried class).
We have reason to believe that the hopes have belied. We apprehend that the newly prescribed forms are bound to cause greater hardship apart from consuming the time and energy of the worthy citizens of the country.
The representation needs immediate and sympathetic consideration realising that the returns of income for affected class of tax payers are due on 31.7.2007.
As imminent immediate step, the time limit for submission of returns should be suspended or the applicability of new forms should be made optional for all the tax payers for the current year.
We say it with all seriousness that a group of experienced professionals had to spend good amount of time to understand and interprete the format of the retrun forms - a factor which may enlighten the plight of small tax payers. Our representation on the other prescribed forms will follow soon.
Thanking you.
We remain,
Yours truly,
Sd/ Sd/- Sd/- Sd/- Rajesh Kothari Pinakin Desai Niraj Bajaj Kishor Karia President Chairman-Taxation Comt. President Chairman-Direct Taxation Comt. Bombay Chartered Accountants’ Society Indian Merchants’ Chamber
1
Representation on New Income Tax Return Forms
Para No. Contant Page No
1. Introduction........................................................................................................1
2. Preamble.............................................................................................................1
3. Structure / Design of Forms ...............................................................................2
4. Certain Instructions in Form Override Rule 12...................................................3
4.1. Illustrations of Instructions overriding the Rules [Form ITR 1] ................3
4.2. Illustrations of Instructions overriding the Rules [Form ITR 2 & ITR 3]…6
5. Applicability coverage of [Form ITR 4]...............................................................8
6. Ambiguities and Errors in the Formats and Contents of Return Forms…………….9
7. Content of Forms ................................................................................................9
8. Information relating to Annual Information Return (AIR)……………………..…11
9. Profit and Loss Account and Balance Sheet ………………………..…………………17
10. Prayer……………………………………………….………………………..…………………19
11. Need To Strengthen Government’s Machinery / System…………………………..21
Annexures
Annexure `1’: Mistakes of Principles in New Income-Tax Return Forms………………..22
Annexure `2’: Formating Errors in New Income-Tax Return Forms………………………24
Annexure `3’: Mistakes of Ambiguity in New Income-Tax Return Forms……………….26
1
Representation on New Income Tax Return Forms
1.00 Introduction:
1.01 Vide Notification No. S.O. 762(E) dated 14.5.2007, Government has
notified new Income tax return forms [Eight in numbers] for A.Y. 2007-08.
1.02 In this communication, representations are made on Forms 1 to 3 and
Form 4 & 5 to the extent they apply to non-tax audit assessees as listed
below for whom due date of filing return is 31.07.07.
Representations on Form no. 5 [for tax audit firms], Form no. 4 [for other
non-corporate tax audities], Form 6 to 8 will be made separately in due
course.
Form No.
Class of assessees covered as per CBDT perception
Size of Form (No. of
pages)* 1 Salary class individuals having salary and interest
income.
4
2 Individual or HUF who does not have business
income.
12
3 Individual or HUF who is partner of a firm. 14
4 Individual or HUF who carries on proprietary
business.
30
5 Assessee which is a Partnership Firm. 32
* Inclusive of instructions
2.00 Preamble:
2.01 The assessees to whom new return forms apply are generally either (i)
salaried employees and pensioners; and (ii) small businessmen. These are
2
assessees who are all from unorganized sector and not adequately
equipped in terms of manpower and infrastructure. In terms of number
and sympathy, this class is the largest class of assessees on Income tax
record. These new forms would thus have mass application. And, it is in
this background that our following representations ought to be
considered.
3.00 Structure / Design of Forms:
3.01 Hitherto, Form 2D applied to almost all classes of non-corporate assessees
regardless of income criteria. This was a simple return of two pages and
even a layman could fill this return with ease. Form 2D was, in real
sense, “Saral”.
3.02 As against Form 2D, newly prescribed forms are too many in number and,
what is more, they are clustered with number of conditions attached to
selection of the Form making it difficult even to identify correct new form
as discussed at para 4.1 to 4.2 herein. Apart from creating confusion and
causing worry to diligent tax payers, this is prone to risk of an assessee
submitting a return which is eventually considered invalid or defective on
the ground that return was submitted in wrong form giving rise to
unwarranted proceedings involving time and energy of tax payers and
assessing officers.
3.03 Except Form ITR 1 [which applies to a very small section of designated
category of salary class assessees], each of the other forms is lengthy,
complicated and cumbersome. Forms run into 4 to 32 pages after taking
into account pages of plethora of instructions attached to it. This, we do
say, with reasonable confidence, is in direct conflict with the pronounced
claim of having simple tax returns that can be filled in by a layman
without the help of tax advisors.
3
4.00 Certain Instructions in Form Override Rule 12 :
Perusal of Rule 12 bears out that the instructions appended in Income tax
Forms No. ITR 1, ITR 2 and ITR 3 do, at places, override certain
provisions contained in the Rules. The instructions appear to place
conditions or restrictions on applicability of forms which are beyond the
scope of what has been prescribed in Rule 12. (See some illustrations at
paras 4.1 & 4.2 below).
As can be seen from illustrations given at paras 4.1 & 4.2 below, the
literal interpretation of instructions give overriding results or create
confusion.
4.1 Illustrations of Instructions overriding the Rules [Form ITR 1]
Rule 12(1)(a) prescribes Form ITR 1 by prescribing criteria of persons who
can use Form ITR 1. Following are the extracts from Rule 12(1)(a) and as
stated in instructions on Form ITR 1.
Relevant extracts from Rule 12(1)(a) regarding Form 1 :
“12. Return of income and return and fringe benefits – (1) The
return of income required to be furnished
………………………………………………relating to the assessment year
commencing on the 1st day of April, 2007 or any subsequent
assessment year shall,--
(a) in the case of a person being an individual where the total
income includes income chargeable to income tax under the head
“salaries” or income in the nature of family pension as defined in
the Explanation to clause (iia) of section 57 but does not include
any income except income by way of interest chargeable to
income-tax under the head “income from other sources”, be in the
Form No. ITR-1 and be verified in the manner indicated therein;”
4
Thus, as per the Rule, the Form can be used by an assessee whose
income composition is limited to (i) salary income; and/or (ii) interest
income chargeable under the head “Income from other sources”. There
are no other conditions or restrictions attached by Rule to use of
Form ITR 1.
In contrast, instruction no. 3 of Form ITR 1 provides as under :
“3. Who can use this Form
This Form can be used by an individual whose total income during
the previous year i.e., financial year 2006-07 includes income
chargeable to income-tax under the head “salaries” or income in
the nature of family pension as defined in the Explanation to clause
(iia) of section 57 but does not include any other income except
income by way of interest chargeable to income tax under the head
“Income from other sources.” 1There should not be any exempt
income other than agriculture income and interest income.
….. Further the person in whose income the income of
other person like his/her spouse, minor child, etc. is to be
clubbed is also not entitled to use this form.”
Evidently, the instruction (Refer highlighted portion) curtails the
scope of this simple form in situations such as the following:
(a) Salaried assessee who has claimed income exemption under
section 10(13A) for housing rent allowance or gratuity under
section 10(10) etc. cannot use form ITR 1 – though, he may have
no other income.
(b) Salaried assessee who has minor child having small interest
income, say, Rs.2000, which is required to be clubbed in terms of
1 Highlighted portion represents additional qualifications prescribed by Instructions.
5
section 64(1A), cannot use Form ITR 1 even if income which is
clubbed is interest income.
(c) Salaried assessee who has income only by way of salary still cannot
use Form ITR 1 if he has exempt dividend income of, say, Rs. 100
from shares of domestic company or from a mutual fund.
This will effectively curtail the scope for use of Form ITR 1 by a large class
of salaried employees and will leave only a very miniscule portion of tax
payers who will be able to file their returns in Form ITR 1.
While we appreciate that the very first instruction in every ITR form does
provide that a tax payer can ignore an instruction which is in conflict with
the Rules, we do strongly feel that the approach is wholly tax payer
unfriendly. The contents of instruction should be such that, while
avoiding overriding of Rules, they should provide answers to the questions
that a layman would have. The contents should proceed on the basis that
a layman neither knows the rules nor is expected by the CBDT to know
the rules; and that, the CBDT Form protects his interest by eliminating
chances of the law being overridden.
The compass of Form ITR 1 is so narrow that a person having small rental
income, exempt or non-exempt capital gains income from listed shares,
having NIL income from SOP under house property chapter or attracting
house property chapter with interest deduction as the loss from SOP will
also not be able to use Form ITR 1.
We submit that it may be to the mutual convenience of the tax payers and
the department if greater and greater number of assessees are covered
by the usage of a simple Form like ITR 1.
We also suggest that applicability of Form ITR 1 should be extended to all
the assessees who do not have business income – it being immaterial that
6
they earn income which is in the nature of salary, exempt income, capital
gains, rent income, interest income, etc. If need be, a few more columns
may be added to this form to collect information about items claimed as
exempt under section 10, etc.
4.2 Illustrations of Instructions overriding the Rules [Form ITR 2 and ITR 3]:
Form ITR 2 applies to an individual and HUF provided total income does
not include income chargeable under the head “profits and gains of
business and profession”. Rule 12(1)(b) reads as under:
“In the case of a person being an individual [not being an individual
to whom clause (a) applies] or a Hindu Undivided family where the
total income does not include any income chargeable to income-tax
under the head “profits or gains of business or profession”, be in
Form No. ITR-2 and be verified in the manner indicated therein”.
The only condition which the Rule prescribes on the applicability
of Form ITR 2 is that the individual or the HUF should not have
chargeable business income. There is no other condition or
restriction prescribed in the Rule.
Form ITR 3 applies to an individual or HUF who is partner of the firm and
who receives interest, remuneration, etc. from firm which is chargeable
under the head “profits and gains of the business or profession”. Rule
12(1)(c) reads as under:
“In the case of a person being an individual or a Hindu undivided
family who is a partner in a firm and where income chargeable to
income-tax under the head “Profits and gains of business or
profession” does not include any income except the income by way
of any interest, salary, bonus, commission or remuneration, by
whatever name called, due to, or received by him from such firm,
7
be in Form No. ITR-3 and be verified in the manner indicated
therein;”
Thus, Form ITR 3 applies to an individual or HUF who derives chargeable
business income from a Partnership Firm.
An individual or HUF who does not draw interest, remuneration, etc. from
any Partnership Firm [and thereby, does not fit into requirements
prescribed under Rule 12(1)(c)] but who derives merely share of profit
from the firm which is exempt should, by virtue of language of Rule
12(1)(b) read with Rule 12(1)(c), submit his return of income in ITR Form
2.
As against that, instruction no.3 attached to Form ITR 2 states as
under:
“Who can use this Form?
This Form can be used by an individual or a Hindu Undivided
Family whose total income does not include any income chargeable
to income-tax under the head “Profits or gains of business or
profession”. It may please be noted that a person who is entitled to
use Form ITR 1 shall not use this form. Further, a person who is
partner in a firm is required to use Form ITR 3. 2In case a
partner in the firm does not have any income from the firm
by way of interest, salary, etc. and has only exempt income
by way of share in the profit of the firm shall not use
Form ITR 2.”
The above instruction in Form ITR 2 is corroborated by Instruction no.3
attached to Form ITR 3 which reads as under :
Who can use this Form?
2 Highlighted portion represents additional qualifications prescribed by Instruction.
8
This Form can be used by a person being an individual or a Hindu
Undivided family who is a partner in a firm and where income
chargeable to income-tax under the head “profits or gains of
business or profession” does not include any income except the
income by way of any interest, salary, bonus, commission or
remuneration, by whatever name called, due to, or received by him
from such firm. 3In case a partner in the firm does not have
any income from the firm by way of interest, salary, etc.
and has only exempt income by way of share in the profit
of the firm shall use this form only and not Form ITR-2.
The highlighted portion of instructions on each of the Form ITR-2 and
ITR- 3 clearly are in excess of what has been provided by Rule 12(1)(b)
and 12(1)(c).
5.00 Applicability coverage of [Form ITR 4] :
5.01 Form ITR 4 applies to an individual or HUF who derives income from
proprietary business or profession.
5.02 Form ITR 4 applies to Individual and HUF deriving income from
proprietary business or profession. The expression “proprietary business”
has not been defined. There could be an issue where person – though,
has business income, it is not derived from carrying on “proprietary
business” – at least, in the perception of a layman. For example, take a
case of life insurance agent who derives income only by way of renewal
commission, a person who has business income by virtue of section 41(1)
or 41(4) after closure of business, or a person who merely has an
adventure in the nature of trade, or a retired person who often engages
himself as an assistant for collecting post office or bank deposits, etc. will
not consider himself as a person in proprietary business during the year.
3 Highlighted portion represents additional qualifications prescribed by Instruction.
9
Such person also may not have any other income. It is likely that ITR 4 is
not the correct form for him – and, if that be so, no other form can apply
to him.
6.00 Ambiguities and Errors in the Formats and Contents of Return
Forms
6.01 There appear to be some errors – in the nature of formatting error or
errors of principle, which it is submitted, may be perused and corrected.
Annexure 1 to the representation contains list of the errors of principles in
the contents of different forms.
Annexure 2 is a list of errors in the nature of formatting errors.
Annexure 3 is a list of certain ambiguities.
While the formatting errors may, at the first blush, appear to be cosmetic
in nature, they are prone to some startling results if they remain
unattended.
7.00 Content of Forms :
7.01 Each of the Form ITR 2 to ITR 4 calls for a host of minute details; many of
which are clearly duplication of efforts. Some of these are :
(a) Feeding details of all TDS transactions in the format given by
“Schedule TDS 2”.
(b) Reporting of Annual Information Return related transaction.
In this connection, kindly refer illustrative examples at paras 7.02 to 7.05
and para 8.00.
7.02 Each of the Forms [with the exception of salary TDS] requires details of
tax deducted at source in Form 16A to be fed in tabular form of “Schedule
TDS 2”. The “Schedule TDS2” requires details of each tax deduction. In
10
case a TDS certificate gives break up of number of TDS payments, details
will need to be incorporated on a transaction to transaction basis. In many
cases, TDS certificates themselves run into several pages. This would
certainly be a burdensome exercise especially in an unorganized sector –
comprised also of people who are illiterate.
Take for example, firstly, a Pensioner who has bank Fixed Deposits of
different denominations – maturing on different dates - say with five
banks. Each bank deducts tax from interest paid by it the fixed deposit -
say on a quarterly basis. As per pre-amended law, assessee would have
merely enclosed TDS certificates (one each issued by each of five banks).
As against that, such person will now have to feed entrywise details in
form “Schedule TDS2” which would mean there could be as many as 20
transactions to be fed manually. This can certainly be burdensome for
pensioners and other such assessees.
7.03 Similar difficulties and inconvenience would be faced by a host of
assessees in service industries which is most vulnerable to TDS cases. For
example, a Labour Contractor with a turnover of 10 lakhs may have 25
transactions of TDS if we assume that there are 25 contracts each
exceeding Rs. 20,000 liable to TDS. The number of TDS transactions
could be much more if the number of principals is lesser than 25. Such
labour contractor would need to incorporate details of all 25 to 50
deductions in the designated form. Simiarly, commission earners would
be facing tax deduction virtually on a daily basis and for such tax payers,
filling up the TDS details in the ITR forms would require Herculean efforts.
7.04 The tax payers, particularly the small ones, may face severe hardship and
confusion if the particulars required to be filled in the return are not
adequately available on the TDS certificates received by them. It is normal
experience that the TDS certificates issued by banks, post offices and local
authorities are incomplete in one or the other respects.
11
7.05 The various illustrations given above are all in respect of small assessees
from unorganized sector who are not equipped with manpower and
infrastructure. For them, the requirement of filling in the TDS details
would be a burdensome and tedious job. Insistence on the part of the
Government on such assessees to cope with such burdensome and
tedious exercise would result into hardship to this class of assessees. That
apart, manual feeding of details is prone to mistakes and omissions. This
may add to process of corrections and rectifications involving time of the
assessees and also Assessing Officers. We suggest that the present
procedure of enclosing TDS certificates may continue until there is
implementation of OLTAS [On Line Tax Accounting System] whereunder
the department would gather information online from tax deduction while
dispensing the deductor from submission of TDS data and by which time,
the procedure of issuing Form 26AS would be in place.
8.0 Information relating to Annual Information Return (AIR).
8.01 Each of the new forms ITR 1 to ITR 4 requires a tax payer to furnish
details of certain transactions under the “schedule AIR” (Information
relating to Annual Information Return). Judged by the setting, the
purpose seems to be to gather information which could be matched with
the information supplied by various reporting agencies pursuant to the
mandate of section 285BA of the Act read with Rule 114E – though
surprisingly, there is no reference to this section or rule in the return Form
or in the instructions.
8.02 While the objective of cross checking the transactions needs to be
supported, the mode and manner adopted for the same is highly
questionable. As the paragraphs hereunder would show, to our
perception, not only are there inconsistencies between the format of the
return form as compared to the requirements of section 285BA, but there
are also certain questions and doubts which we, as professionals (let apart
12
the illiterate or ordinary tax payers), have not been able to answer with
uniformity..
8.03 If the purpose behind collection of information is to match the same with
the information collected under section 285BA of the Act, it is absolutely
essential that the tax payer is also aware of the data which he is required
to furnish as part of his return form ITR 1 to ITR 4.
It is well known that in the context of section 285BA, the CBDT or SEBI
had to come out with different clarifications in order to educate highly well
informed and professionally managed institutions about the mode and
manner in which the information will need to be furnished by them to
comply with the provisions of section 285BA of the Act.
In this background, the plight of ordinary tax payers can be well imagined.
8.04 We do seriously apprehend that the mass of data furnished to the tax
department without there being any uniformity on the part of tax payers
in reporting the transactions will result in mis-matches galore and will, in
turn, drive the tax department and the tax payers to spend a considerable
amount of time in trying to reconcile the allegedly unreconciled figures –
howsoever, bonafide the differences may be.
8.05 As part of Code 001 of Schedule AIR in ITR return Form, a tax payer is
required to furnish information about cash deposits in a savings bank
account. It is very likely that a tax payer may not consider two different
savings accounts with a single banking institution on an aggregate basis;
he may merely report transactions with a particular branch or in a
particular account where cash deposits have exceeded Rs. 10 lakhs in a
year. On the other hand, it is quite likely that a number of tax payers may
consolidate their cash deposits into all their savings accounts, including in
co-operative or unscheduled banks. These kinds of differing
13
interpretations would only result in a mis-match of information as reported
by the tax payer and as reported by the reporting bank(s).
8.06 With regard to payments for purchase of units of mutual funds (code 003
of Schedule AIR in the ITR return Form), there are bound to be divergent
disclosures by the tax payers. There is likely to be confusion on reporting
aspect as to whether the threshold of Rs. 2 Lac is qua aggregate
investment in all schemes of all mutual funds taken together during the
year or whether it should be qua each mutual fund or qua each scheme of
each mutual fund or qua each investment, etc. Similarly, it is not clear
whether a switch out from one scheme and switch into another scheme of
the same mutual fund needs to be reported under this clause or not since
such a transaction does not, technically, involve any payment on the part
of the investor.
8.07 Though the contents of certain requirements may be clear to a
professional who is aware of relevant provisions of section 285BA of the
Act, a layman is likely to get confused by terminology such as “purchase”
or “acquiring” of an asset used in codes for Schedule titled “AIR”. There is
no mention in the schedule that a tax payer has to furnish information
only when payment is made to a mutual fund or to a company towards
acquisition of units or shares from the company directly (i.e. in respect of
a primary market transaction). However, literally read, the requirement
called for in the return of income extends to all payments which have
been made “for acquiring shares” viz. even if acquisition is from secondary
market. The shares acquired from secondary market are also, after all,
shares which are issued by a company.
8.08 In the context of acquisition of shares, section 285BA is limited in its
application to application money received in respect of IPO or fresh issues
by a listed company. Such, however, is not the purport of the return of
income.
14
At the stage of application made by a tax payer to a company, there is no
share which is “issued” by a company, nor is there an allotment. It is,
therefore, quite possible that a tax payer may make disclosure, on a
bonafide basis, in respect of the value of effective investment which he
has made in the acquisition of shares of a company instead of reporting
the full amount of application money.
8.09 The wording in the income tax return is not clear enough to guide a tax
payer whether he needs to aggregate all his payments to various
companies – or, whether, he should make a disclosure only if payment
made to an individual company towards purchase of shares or bonds
exceeds a sum of Rs. 1 Lac or Rs. 5 Lac as the case may be.
8.10 Unlike section 285BA of the Act, the return of income calls literally for
information about the investment made in shares of unlisted companies
also.
8.11 With regard to purchase / sale of immoveable properties, there are
several probabilities of the tax payer making bonafide errors. The
information would be received under section 285BA of the Act at the stage
of final registration, from the tax payer’s point of view, the purchase is
effected when he enters into an agreement to purchase while the
registration may take place much later.
8.12 We submit that the relevant question is, as to how each layman would
look at the form when he reads the contents of the form. Hence, the
confusion and probable loss of time and energy of the nation should be
judged with reference to public perception – rather than from the
perspective of a well informed professional or tax official.
8.13 It may be recalled that recognizing practical difficulties, the Government,
in November 2006, withdrew similar requirements sought to be introduced
in return of income by way of furnishing “Cash Flow Statement” by a
15
salaried tax payer. Based on the recommendations of the Standing
Committee on Finance of the 14th Lok Sabha, the Government withdrew
requirement of “Cash Flow Statement” by observing as under:
“32. The Committee are aware that the concern of the public is focussed
on the inclusion of ‘Cash Flow Statement‘ in the new Forms,
particularly 2F. The Government‘s justification for the introduction
of the Cash Flow Statement is that huge volume of information is
gathered through the Annual Information Report (AIR)
necessitating verification of this information. To avoid issuing of
large number of letters to such taxpayers whose expenditures have
come to be known though the AIR and thus imposing additional
compliance burden on all persons receiving the verification letters,
the Government have introduced the provision of ‘Cash Flow
Statement’ in the Returns. The Department have also taken the
stand that this “Risk Management Strategy” in the form of
obtaining the information through the Cash Flow Statement would
enable them to first undertake a preliminary verification of the AIR
information and take up only such cases for intensive investigation
where the probability of detection is extremely high. However, the
Committee note that at the same time the Government have also
admitted that the salaried class are the most honest taxpayers and
that only 2% of the total returns filed in this category are taken up
for scrutiny by the Department.
33. The Committee observe that though the Government have sought
to allay the apprehensions expressed by them by taking the stand
that furnishing of the Statement would protect the salaried
taxpayers from any kind of intrusive investigation, the assessee
need not furnish detailed information regarding the expenditure
and to maintain any kind of accounts in this regard, it still does not
16
sound convincing. However, the Committee are of the opinion that
the details called for in the statement would surely require the
assessee to maintain some kind of accounts.
34. While the Committee appreciate the efforts of the Government to
continuously improve the format of the return forms on the basis of
feedback received as well as difficulties faced both by the taxpayers
and the Department, they are of the view that producing a Cash
Flow Statement has, in general, created confusion and
apprehension among the assessees, thus requiring a re-look at the
same. This requirement has also created doubts in the minds of
assessees about the records that are needed to be maintained
without which the account of the cash transactions will not be easy
to tally. This can prove to be difficult because an individual may
incur expenditure on several items at different places and keeping
track record of all such transactions can be quite cumbersome and
tough. Besides it has created apprehensions in the minds of
taxpayers that once the requisite information is furnished, more
intrusive investigation will follow and more problems will accrue.
Further, the Committee are not convinced by the argument put
forth by the Department that internal instructions, proposed to be
issued to the filed formations, that notices to the taxpayers seeking
explanation for any mismatch can be issued only with the prior
approval of the CIT, are enough to allay the fears in the mind of
taxpayers as in the opinion of the Committee, these are ultimately
going to be treated as routine instructions. Moreover, in the light of
the fact that only 2 per cent of the returns filed are subject to
scrutiny assessment and the Department is supposed to accept the
disclosures made by the taxpayers in balance 98 percent of the
returns, the Committee find it absolutely unnecessary to include
17
Cash Flow Statement in the Return Forms. Last, but not least, the
Committee are of the opinion that once the income is taxed,
utilisation of taxed income by the assessee should not be the
concern of the Income Tax Department. Therefore they
recommend that the Government must do away with the provision
of Cash Flow Statement in Form Nos. 2F and 3 altogether.”
8.14 In most cases, there would be overlap of amounts reported in different
columns of Schedule AIR. Unless read in proper perspective, the figures as
reported may be prone to ballooning impact. For example, a tax payer
with a corpus of Rs. 10 Lac may have many rotations involving different
items prescribed in Scheduled AIR. The corpus deposited by way of cash
in the savings bank account may have been, for a part of the year, used
in purchase of shares; the shares may have been sold out; the proceeds
may have been used for purchase of property, etc. Depending on the
number of rotations, the abstract reading of the information may reflect
as if a person has a net worth much greater than, what in reality, it
actually is.
9.0 Profit and Loss Account and Balance Sheet.
9.01 There are a number of issues arising out of the format and requirements
under the caption of profit and loss account and balance sheet as
prescribed in Form ITR 4.
9.02 The columns under this caption have been structured and designed
keeping in view the requirements of Schedule VI of the Companies Act.
Quite a few of the items do not apparently apply to a proprietary concern.
For example, the requirements related to reserves and surplus,
classification of reserves into different categories; or items such as
deferred tax liability, deferred tax asset, miscellaneous expenditure not
18
written off or adjusted, etc. would not conventionally or statutorily apply
to proprietary concerns.
9.03 If a person is owner of more than one proprietary concern, the data
collected in the return of income would be on a consolidated basis. Now,
the two businesses may be comprised of wholly different activities; the
method of accounting may also be different. At times, such consolidation
would be misleading – take the example where one proprietary concern is
dealing in steel, where the quantity is in tonnes, and the other proprietary
concern is dealing in televisions, where the quantity is in numbers. To add
tonnes to numbers to arrive at quantity of purchases or sales is
meaningless and misleading. The furnishing of consolidated information
does not appear to serve any useful purpose – given that at the time of
scrutiny, he would in any case, be required to furnish information about
each proprietary concern separately.
9.04 There is no clear guidance available in the return as to whether the
information should be restricted to business dealings of a proprietary
concern – given that many of the proprietors do often prepare a
consolidated balance sheet which includes personal transactions as also
the business transactions.
9.05 The purpose behind insisting upon break up of purchase price of goods
and services into different components at column 7 & 8 of Part A – P & L
is not very clear. It is customary to account for the gross amount as an
amount of expenditure even under the provisions of the Companies Act
while preparing the profit and loss account. In fact, if an item like say,
professional fee payment or transport payment, or payments of
commission/ brokerage, interest, etc. payment is broken up into net
component and tax component, there may be mis-match between the
figures as reported in the TDS return as compared to the figure as
reported in the return of income.
19
9.06 Even assuming that the CBDT were to insist upon certain of the
disclosures as part of the return of income, still, we would believe that the
requirements may be made applicable on a prospective basis. Most
diligent assessees would have, by now, completed their accounts as per
conventional methodology without anticipating the depth of break up to
be reported in the return of income. Each such assessee may now be
driven to duplicate the effort by culling out, from each sales or purchase
or expense invoice, the precise break up of tax component.
9.07 Similarly, we are not quite clear about the purpose which will be served by
calling for information about components of capital gains income by
aggregating workings of different capital assets dealt in during the year.
There may be no uniformity between different assets. The nature of asset,
the profitability margin, the indexed cost factor – all these may be wholly
uneven.
10.0 Prayer :
10.01 The Finance Ministry has announced that new Direct Tax Code will be
tabled in the monsoon session of Parliament. It would be in the fitness of
things to incorporate new forms, as duly reviewed and simplified, as part
of the code itself – so that, not only are the forms in line with the code,
but, the tax payers also have advance notice of duly corrected versions.
Hence, it is most desirable for a tax friendly administration that the
applicability of new forms is kept in abeyance for prospective application
and be suspended for Assessment Year 2007-08. This prayer may be read
in light of the fact that just last year i.e. for A.Y. 2006-07, a completely
new and revised format of IT return form (Form 1) was prescribed for
corporate tax payers and now, for A.Y. 2007-08, once again, a new format
of return form has been prescribed. Thus, in a span of only 12 months,
corporate tax payers are being made to cope with far reaching and drastic
changes in the return forms for the second time.
20
10.02 It may be further noted that the due date for filing return of income for
the assessees other than corporates and assessees whose accounts are
required to be tax audited under section 44AB of the Income Tax Act, is
31st July, 2007. The new forms were prescribed only on 15th May 2007
which after printing were available to the tax payer only in the month of
June 2007. In fact, we have been informed that in some parts of the
country the said forms are not yet available in the Income-tax offices and,
in some places, even though they are available, there is a huge shortage
of the same. Further, there was inadequate publicity made of the new
forms. Most of the tax payers are not aware about the new forms and its
requirements. Ironically, they have, till date, known only of the grievances
and the weaknesses through the press. The Government would also
require time to carry out corrections of mistakes and errors in the income
tax returns. No software of authentic credence is available for the
assessees who want to opt for e-filing. The procedure for submitting a
bar-coded return in paper form, which is one of the modes in which a
return can be filed, has not yet been prescribed. It may be noted that
even the advertisement given in the Times of India on 6th July, 2007
creates confusion as to the applicability of the return form and
acknowledgement. The professionals are not equipped to cope up, in
terms of time requirement, with the work load of filling in all minute
details in the paperless return. Considering all these difficulties, it would
be practically impossible for a large number of assessees to file their
returns of income by the due date of 31st July, 2007.
10.03 It is our humble suggestion to restore Form No. 2D to the class of
assessees covered by ITR 1 to ITR 4. The Form 2D has worked well in
the past and there is no reason to disturb it atleast for the class of
assessees which are addressed in this representation. In the least, the
21
scope of applicability of ITR 1 should be broadened as much as possible
on the lines of the suggestions made in the earlier paragraphs.
10.04 As next alternative, Form 2D may be modified to include certain selective
details such as information relating to Annual Information Return with
clear guidance and clarification as suggested in different paragraphs of
this representations.
10.05 As next alternative, the present Form ITR 2 to ITR 4 need to be
substantially redesigned and made simple by eliminating the irritants.
11.0 Need to Strengthen Government’s Machinery / System:
Experience indicates that Government is still in process of streamlining
online processes. The Government is also not yet fully equipped to
administratively cope up with e-filing and other procedure. The Economic
Times Report dated 9th July, 2007 indicates that on account of technical
difficulties, Assessing Officers of corporate assessees have not been able
to process e-returns filed by companies online for A.Y. 2006-07. As a
result thereof, huge refunds aggregating to more than Rs. 15000 Cr. are
stuck up increasing the interest outgo burden on the Government with
each passing day. When such is the chaotic situation when the data
collection is in e-Form, we wonder whether it would be wise to gather
voluminous data in paper form from thousands of tax payers.
Annexure to Representation on new ITR Forms
22
ANNEXURE TO REPRESENTATIONS
ANNEXURE `1’:
MISTAKES OF PRINCIPLES IN NEW INCOME-TAX RETURN FORMS
APPLICABLE TO ITR - PARTICULARS 1 2 3 4 5
A Form ITR - 2 1 Schedule S - (a) Break-up of Allowances into exempt and not
exempt required by ITR 2 but, not available in Form 16 (TDS Certificate)
(b) No space to enter deduction under section
16(iii): Re. Profession Tax
2 Clubbing of Income No specific place provided for excluding Rs.1500/-
exempt
3 Schedule CG - Capital Gains
(a) Expenditure on Transfer in A 2 biii, B 2 biii and B 3 biii should be deducted from full value of consideration and not shown as part of costs.
(b) Item B 3 - Proviso to 112(1) applicable - Computation of Capital Gains should be
done with indexation - Should be similar to Short-term Capital
Gains.
4 Schedule BFLA No brought forward loss under salaries permitted. Hence 2i should be shaded.
5 Schedule CFL
(a) Instructions state losses from other sources (other than losses from race horses) allowed to be carried forward for 8 years – this being contrary to law, See also similar error in separate column provided in Schedule CFL.
(b) Column for loss from speculative business is
shown in shaded for period from A.Y.1999-
Annexure to Representation on new ITR Forms
23
APPLICABLE TO ITR - PARTICULARS 1 2 3 4 5
00 to A.Y.2002-03 thereby indicating that assessee cannot carry forward loss incurred in those years. The amendment limiting right to carry forward from 8 years to 4 years was made by the Finance Act – 2005 w.e.f. 1.4.2006. It is an open issue as to whether assessee should be entitled to carry forward losses of period from A.Y.1999-00 to A.Y.2002-03 on the principles of vested rights.
B Form ITR - 4 6 Part A-BS
(a) Item 1b relating to reserve and surplus does not
apply to proprietary concern. (b) Item 3 – Deferred tax liability is not applicable to
proprietary concern. (c) Item 4 – miscellaneous expenditure not written
off or adjusted and item of deferred tax assets are not applicable to the proprietary concern.
7 Profit and Loss account (a) Items 47, 48 and 49 being items requiring
adjustment for amount brought forward from previous year or amount transferred to reserve and surplus etc. are not applicable to proprietary concern.
8 Schedule DPM (a) Reduction of consideration on transfer of assets
from respective lot of assets from opening written down value, from additions for a period more than 180 days or additions for a period less than 180 days on 1 to 1 basis is contrary to the law provisions contained in section 50 read with section 43(6)(c).
9 Schedule DOA Kindly refer issues indicated at schedule DPM above.
Annexure to Representation on new ITR Forms
24
ANNEXURE `2’ :
FORMATING ERRORS IN NEW INCOME-TAX RETURN FORMS
APPLICABLE TO ITR - PARTICULARS
1 2 3 4 5 A Common Acknowledgement 1 Item 8 – Tax Payable (6-7d)
Should be (6-7e)
B Form ITR – V 1 Item 7d – Self Assessment Tax 7e
Code should be 7d
2 Item 8 - Tax Payable (6-7d) Should be (6-7e) C Form ITR - 2 1 Schedule CG - Capital Gains (a) Item A 2b(iv) - Total (i + ii + ii)
should be (i + ii + iii)
(b) Item A2c - Balance (3a - biv) should be (2a - biv)
(c) Item A2f - Short term capital gains (2c - 2d - 2e) - Loss if any to be ignored under sections 94(7) and 94(8) should be added. Accordingly, item 2f should be (2c + 2d - 2e)
(d) Item A 4 - Total Short Term Capital Gains (1+2f+3+4) should be (1+2f+3) Code against the said item i.e. 4 should be A4
(e) Item A 6 - (4-5) should be (A4-A5)
2 Schedule OS
Item 5 - Income chargeable under the head “Income from other sources” - (1g +2 + 3 + 4c) should be (3 + 4c)
Annexure to Representation on new ITR Forms
25
APPLICABLE TO ITR - PARTICULARS 1 2 3 4 5
D Form ITR - 3 1 Schedule TI –Computation of Total Income Item
4a(iii) - Total Short-term (3ai + 3aii) should be (4ai + 4aii)
Item 4c - Total capital gains (3aiii + 3b) should be (4aiii + 4b)
E Form ITR – 4 4 Part A - BS
Application of Funds Item 3(c) - Total of current assets, loans and advances (av +bv) should be (av + biv)
5 Part A - P & L (a) Item No. 40 - Profit before interest,
depreciation and taxes, instead of 15l should be 15k
6 Schedule DPM (a) Item 7 & 8 which provides for additions made
in the later half of the year sale consideration of the assets acquired in the later half of the year. There is no back up formatting arrangements providing for adjustments for excess of sale realization over cost of the assets. Nor such adjustment is contemplated in item 6 of the schedule DPM.
7 Schedule DOA Kindly refer issues indicated at schedule DPM above.
8 Part B - TI Item 4a(iii) - Total Short-term (3ai + 3aii) should be (4ai + 4aii)
Annexure to Representation on new ITR Forms
26
ANNEXURE `3’:
MISTAKES OF AMBIGUITY IN NEW INCOME-TAX RETURN FORMS
APPLICABLE TO ITR - PARTICULARS 1 2 3 4 5
B Form ITR – 4
1 Proprietor who is also a partner in a firm and also getting salary from the firm - where to show such salary received? It is specifically provided in form 3.
2 Part A - P & L (a) Item 9 - Freight - Normally included with
purchases of raw materials as per AS - 2 - Accounting for Inventories - Separate figure may not be easily available
(b) Item 15(j), 16(a), and 17- How to bifurcate
between them i.e. any other benefit to employees in respect of which an expenditure has been incurred, medical and life insurance and workmen and staff welfare expenses. The details required to be given in these items may be overlapping.
3
Schedule IF The schedule calls for information of partnership firm in which tax payer is partner. In case of sleeping partner who is not drawing salary and remuneration from tax audit firm, due date of filing of return of income is 31st July whereas tax audit partnership firm’s due date is 31st October. It would be difficult for partner to fill column relating to “Capital balance as on 31st March in the firm” pending the finalization of accounts and audit of the partnership firm.
Annexure to Representation on new ITR Forms
27
Suggested format for Long Term Capital Gains :
PARTICULARS AMOUNT
B Long term capital gain 1 Asset in case of non-resident to which
first proviso to section 48 applicable 1
2 Other assets (a) (i) Full value of consideration 2a (ii) Expenditure on transfer 2b (iii) Net consideration [2a-2b] 2c (b) Deductions under section 48 (i) Cost of acquisition after
indexation bi
(ii) Cost of improvement after indexation
bii
(iii) Total [bi+bii] biii (c) Balance ( 2c - 2b iii ) 2c (d) Deduction under sections
54/54B/54D/54EC/ 54F 2d
(e) Net Balance [2c - 2d] 2e 3 Amount deemed to be long term capital
gains under sections 54/54B/54D/54EC/ 54F
3
4 Total long term capital gain (1 + 2e +
3)
5 LTCG where proviso to section 112(1)
is applicable included in 4
6 LTCG in 5 above computed without
indexation
Recommended