The Union Budget 2022 proposes a number of clarifying changes to income tax legislation that will take precedent over several judicial rulings. While this explains the position of the IRS, it may present problems for taxpayers who have previously claimed benefits based on legal judgements.
Here’s a look at some of the proposals in Budget 2022 for tightening some income tax laws.
Even if there is no exempt income, Rule 8D requires that the spending be prohibited.
According to Section 14A of the Income-tax Act of 1961, no deduction will be allowed for expenditures related to tax-exempt income.
There have been debates throughout the years over whether an assessee can be rejected under section 14A of the Act if no exempt income accrued, arose, or was received during the fiscal year.
Budget proposal: In order to make the legislative intent clear and avoid any misunderstandings, the Budget proposes to clarify that Section 14A applies and is deemed to have always applied in cases where exempt income has not accrued, arisen, or been received during the financial year and expenditure has been incurred in relation to such exempt income. The amendment would take effect beginning in FY 2021-22.
Conversion of interest into a loan or debenture does not amount to payment under section 43B, and thus is not allowed.
Companies and other taxpayers claim a deduction under section 43B for converting interest payable on an existing loan into a debenture on the grounds that the conversion represents a constructive discharge of interest liability and so amounts to actual payment, which has been upheld by many courts.
Any expenditures that are prohibited by another law will also be prohibited. (e.g. Freebies to Doctors)
Certain taxpayers (such as pharmaceutical businesses) have been claiming deductions for expenses paid in providing certain benefits or perquisites to a person (such as a doctor) that are not permitted under this section (Section 37 of the IT Act – clause 12 Finance Bill 2022).
These benefits include, among other things, supporting a person’s travel, hospitality, and conference expenditures. Acceptance of such a benefit or perquisite by such a person in these instances is a breach of the applicable law, rule, regulation, or guidelines.
Education cess is a non-allowable expense.
Some courts have ruled that the education cess is an authorised expenditure, despite the fact that such rulings are contrary to the legislature’s objective.
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