bombay chartered indian merchants’ accountants’ …

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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: [email protected]; Web :www.bcasonline.org

INDIAN MERCHANTS’

CHAMBER IMC Bldg., IMC Marg, Churchgate,

Mumbai - 400 020. Tel : 22046633 Fax : 22048508 / 22838281

E-Mail : [email protected]; 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

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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

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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.

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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.

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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

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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,

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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.

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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

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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.

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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

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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.

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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.

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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

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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-


23


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.


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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)


25


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)


26

ANNEXURE `3’:

MISTAKES OF AMBIGUITY IN NEW INCOME-TAX RETURN FORMS


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.


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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

bombay chartered indian merchants’ accountants’ …

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