Section 10 (20A) of the Income Tax Act, 1961 has been withdrawn by Finance Act, 2002 w.e.f. 1.4.2003. This Section which was earlier inserted by Finance Act, 1970 with retrospective effect from 1.4.1962 provides exemption from income tax of income of authorities constituted in India either for purpose of dealing with an satisfying the needs for housing accomodation or for the purpose of planning, development or improvement of cities, towns or villages. This Amendment has brought gthese entities within the ambit of the income tax. Now these entities have to comply with various provisions of the Income tAX Act as applicable. Now they have to prepare themselves for TDS, Advance Tax and filing of returns, etc.

Section 145 (1) of the Income Tax Act 1961 contemplates that profit and loss of business shall be computed in accordance with cash or mercantile basis of accounting consistently being followed by the assesseee. It is also important to maintain accounts on double entry basis, since there is enabling provision in Section 145 (3) which gives power to assessing Officer may make best judgement assessment in the manner provided in Section 144. Therefore, in view of inherent defects in Single Entry System of Accounting and to enable the assessing office to properly compute the taxable income, it is advisable to maintain accounts on Doubel Entry System of Accounting and to enable the assessing officer to properly compute the taxable income, it is advisable to maintain accounts on Double Entry System of Accounting.

INTRODUCTION

India of 21st century is moving towards more accountability,. more transparency and good governance. Governments has already started the second phase of reforms in which effors are being made to switcherover from panned economy to market economoy. Also sincere steps are being taken to ensure that the public money is optimally utilized and there is more transparency and accountability in the State controlled agencies. One such step in this direction is withdrawal of Section 10 (20A) of the Income Tax Act, 1961

One of the major implications of this amendment is that all entities covered under the erstwhile Section 10(20A) will be required not only to pay Income Tax but also to file returns, be subject to tax audit u/s 44AB and to maintain proper books of accounts as stipulated in Section 44AA. The implications arising thereof are discussed in detail in this article:

Even though the responsibility to comply with implications of the withdrawal of section 10 (20A) of the Income Tax Act is on the entities themselves, the professional accountants also have to bring themselves up to share this responsibility. Now since all the development authorities and boards all ove the India, which were earlier, covered under Section 10 (20A) are now in the Income Tax net, the professional accountants and consultants will have to gear themselves to help these entitites to prepare them for compliance of all the provision of Income-Tax Act, 1961. To take a brief glimpase of the areas in which the professional accountans and consultants may help, following is the illustrative list:

1. To help these entities in maintenance of proper books of accounts as per Section 44AA of the Income Tax Act, 1961
   
   

2. Classification, valuation and treatement of fixed assets for depreciation purpose as per Income Tax Act, 1961.
   
   

3. To prepare necessary information to enable these companies estimate their total income for the assessment year 2003-04 and pay the advance tax whose first installment is due by 15th September 2002.
   
   

4. To prepare these entities for TDS compliance.
   
   

5. To install proper control and MIS system in these entities
   
   

6. To estimate, compute and deposit of income tax of these entities.
   
   

7. To estimate, compute and deposit of income tax of these tntities.
   
   

8. Filling of returns of these entities
   
   

9. Tax audit of these entities under Section 44 AB
   
   

BACKGROUND

Section 10 (20A) of the Income Tax Act 1961 was inserted by Finance Act, 1970 with retrospective effect from 1st April, 1962. Thi section provides exemption in respect of:

"any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accomodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both"

To have a better understanding of the scope of this xsection and the discussion ahead let's take a look at, what was the intent of the legislature while enacting the above provision.

Following is the text of explanation stated by the then Finance Minister while introducing section 10 (20A) in 1970:

".....Several States have set up statutory Boards for the framing and execution of housing and other development schemes. These Boards are autonomous organizations and they play an important role in implementing the housing programmes of Government for the common good. As these boards are serving an important public purpose and do not exist for private profit, the Finance Act, 1970 has made a specific provision in a new clause (20A) of section 10 exempting the income of such Boards from tax altogether. This provision exempts from tax any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both. This provision has been made with effect from 1-4-1962 that being the date of commencement of the Income-tax Act".

AMENDMENT BY FINANCE ACT, 2002

The Finance Act, 2002 has witthdrawn the clause (20A) of the Section 10 of the Income-tax Act 1962. The result of omission of this Section is that the income accruing w.e.f. 1.4.2002 of all such authorities, like Delhi Development Authority (DDA) in Delhi, Haryana Urban Development Authority (HUDA) in Haryana, Pubjan Urban Development Authority (PUDA) in Pubjab, etc. which satisfy needs for housing accomodation, planning & development of cities, towns or villages shall be taxable and such authorities shall be required to file income tax return for Assessment Year 2003-04

IMPLICATIONS OF WITHDRAWAL OF SECTION 10 (20A)

The amendment by Finance Act, 2002 has not only raised issues in field of taxation but also in accounting and management field of the entities which were provided exemption under the erstwhile Section 10 (20A) of the Income-tax Act, 1961.

As most of these entities are at least four to five decades old and were exempted from income tax, some of them were not making their accounts on accrual basis / matching concept / double entry book keeping basis. Lets examine the implication of withdrawal of Section 10 (20A) on these entitites both taxation wise and accounting wise.

Taxation issues

The amendment in the Income Tax Act, 1961 by Finance Act, 2002 has brought total income of these entities covered in under erstwhile Section 10(20A), as defined under section 2 (45) read with section 5&14 of Income Tax Act, 1961, in tax net. Section 5 defined the scope of Total Income and Section 5 defined the Scope of Total Income and Section 14 of the IT Act 1961 specifies the various heads of Total Income, which are as under:

(a) Salaries
(b) Income from House Property
(c) Profits & Gains from Business or Profession
(d) Capital Gains
(e) Income from Other Sources

The income of such entities from different sources will fall under any of the aforesaid heads and the profts & Gains from business will be computed as per provisions of Section 30 to 43D of the Income Tax Act, 1961.

The following basic issues need to be addressed before analyzing further relevant issues:

Category under which such entities are to be assessed: The category of person depends upon the Statute incorporating the authority. However, such authorities are mainly, like DDA, formed as body corporate having perpetual succession and a common seal, with the power to acquire, hold & dispose or property, both movable & immovable and to contract and shall by the said name sue and be sued. Thus, such authorities wold be juristic person and would be covered by the expression artifical juridical person which finds support from the Judgement of Allahabad High Court reported at 143 ITR 584 (All) in the case of Bar Council of Uttar Pradesh

Rate of Tax: In view of foregoing discussion it can be understood that the liability on income of such authorities for Assessment Year 2003-04 will be determined as per rates of Income Tax which are applicable to individual or Hindu Undivided Family or Association of Persons or Body of Individual, whether incorporated or not, or every artifical judical person referred to in Section 2(31) (vii)

After determining above two things it is worthwhile to mention few items which may require special attention consequent to the withdrawl of Secion 10 (20A) of the Income-tax Act, 1961.

Tax Audit under Section 44 AB: Section 44AB provides that every person carrying on business shall in case his total sales, turnover or gross receipts, as the case may be, in business exceeds Forty Lakh rupees in any previous year, get his accounts audited by a Chartered Accountant

Sec 2 (13) defines 'Business' to include any trade, commerce or manufactures or any adventrue in the nature of trade, Commerce or manufacture. This is an inclusive definition and not an exhaustive one. Business involves some activity which is carried on by devoting time, attention and labour with a motive to make profits as held in Bharat Development Private Ltd. Vs. CIT, 133 ITR 470 (Del). The Apex court has also occasion to discuss the term business as:

".... the word business is one of the wide import and it means activity carried on continuously and systematically by a person by application of labour or skill with a view to earn income. The expression Business does not necessarily mean trade or manufacture only" [Barendra Prasad Roy Vs ITO (1981) 129 ITR 295 (SC) ].

According to Rule 6 G of Income Tax Rules, 1962, read with section 44 AB, the tax audit report should be either in Form 3CA, in case of a person who carries on business and who is required to get his accounts audited under any other law; or Form 3CB, in case of a person who carries on business and who is not required to get his accounts audited under any other law. The accounts of most of such authorities are required to be audited by Comptroller & Auditor General of India (herein after referred as CAG). However, if the prescribed CAG Audit is only Proprietary Audit and does not culminate into Audit Report as to whether the audited statement of accounts gives true and fair view, the tax audit report has to be furnished in Form 3CB as prescribed under Income Tax Rules.

Income Tax Return: Section 139(1) of Income Ta Act, 1961, provides that every person other than a company, if his total income exceeded the maximum amount (Rupees Fifty Thousand for Assessment Year 2003-04), which is not chargeable to income tax, shall on or before the due date, furnish a return of his income during the previous year in the prescribed form as may be prescribed.

Return Form: Rule 12 of Income Tax Rules, 1962, prescribes the Return Forms for various categories os assessee' as follows:

(a) In case of Companies (except Section 25 companies) FORM NO.1

(b) In case of an assessee (other than company) having Business income FORM No.2

(c) Incase of an assessee (other than company) having no Business income FORM No.3

(d) In case of trust / Section 25 companies claiminig exemption Under section 11 FORM No. 3A

The Annual Income Tax Return of such entities has to be filed in FORM No. 2 i.e. prescribed for assessee other than company, having business income.

"Due Date" for filing Return: As per Explanation 2 to Section 139 (1), the date for filing Income Tax Return in case of an assessee whose accounts are required to be audited under Income Tax Act, 1961, or under any ohter law, is the 31st day of October of relevant Assessment Year. Therefore, such entities has to file the Income Tax Return by 31st day of October of the Assessment Year. The default in filling return of Income on due date will attract penal interest under Section 234A and penalty u/s 271F of the Income Tax Act.

Depreciation: According to Section 32 of the Income Tax Act, 1961, deduction from income will be allowed in respect of derpeciation of Fixed Assets comprising of buildings, machinery, plant or furniture or other tangible assets and used for the purpose of business, in case of any block of assets, such percentage as prescribed in Rules 5(1A) of Income Tax Rules, 1962, on the written down value. Since, income Tax Rules, 1962, on the written down value. Since, income of such authorities were exempt from tax, such authorities may be neither computing nor claiming depreciation allowance in earlier years. Therefore the key issue in computing the amount of depreciation allowance available for the first year covering the period 1-4-2002 to 31-03-2003, will be determination of written down value of the Fixed Assets as on 1-4-2002. Section 43(6) defines the 'Written down value' to mean (a) in case of assets acquired in the previous year, the actual cost the assesse. (b) in case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed. As regards, "depreviation actually" the Supremet Court of India has held that depreciation actually means depreciation actualy taken into account or granted and given effect to and it cannot be stretched to mean "notionally allowed" or merely allowable on a national basis. (Madeva Updendra Sinai 98 ITR 208 (SC).

Advance Tax : For the assessment year 2003-04, the first installment of advance tax will be due on 15th September 2002. The first step in computation of advance tax is estimation of current income i.e. total income chargeable to tax for the Assessment Year 2003-04 immediately following the Financial Year 2002-03 for which advance tax liability is to be computed. The estimated current income may be calculated on the basis of either opening trial balance of accounts on double entry system, as 1-4-2002 after adjusting according to the budget and plan for the current financial year 2002-03 or in the absence of opening trial balance as on 1-4-2002 on the basis of Statement of Affairs as on 1-4-2001 and as on 1-4-2002 after adjusting for capital account transactions (like Govt. grants, loans, borrowings, capital expenditure etc.)

Books of Accounts & Method of Accounting: As discussed above, most of such authorities are following single entry system of accounting. Due to shortcomings of Single Entry Accounting system such authorities should make the transition to accrual basis of accounting which is better & principally sound system of accounting.

Further, such authorities have to ensure that proper books of accounts are maintained and financial accounts are drawn, as envisaged in section 44AA of the Income Tax Act, 1961. The mandatory provision for the maintenance of accounts is to enable the assessing officer to compute correct total income. It is important to note that failure to maintain proper books of accounts attracts penalty under Section 271A.

Section 145 (1) contemplates that profit and loss of business shall be computed in accordance with cash or mercantile basis of accounting consistently being followed by the assessee. It is also important to maintain accounts on double entry basis, since there is enabling provision in Section 145 (3) which gives power to Assessing Officer to challenge the correctness and completeness of accounts of assessee and reject books of accounts and the Assessing officer may make best judgement assessment, in the manner provide in Section 144, Therefore, in view of inherent defects in Single Entry System of Accounting and to enable the correct computation of the taxable income, it is advisiable to maintain accounts on double entry.

The legislature has also made a change in the Income Tax Act, which is worth mentioing here. A new subclause, shall be substituted in clause (a) of sub-section (2) of section 80G by the Finance Act, 2002, w.e.f. 1-4-2003 this new sub-clause states that deduction will be allowed to assesses making donations to any authority referred to in erstwhile clause (20A) of Section 10.

Conversion of Accounts : Many entities referred into the erstwhile Section 10 (20A) of the Income Tax Act, 1961 are maintaining their accounts on single entry system of accounting and cash basis system. Under this basis of accounting only cashbook and personal accounts are maintained. Transactions are recorded when the related cash receipts or cash payments take place. The maintenance of accounts on such basis, have several inherent deficiencies such as:

1. Non-recording of both aspects of transaction, therefore, at the end of the year, this could results in Misappropriation, fraud and carelessness.
   
   

2. Correct Income & Exoenditure account could not be prepared.
   
   

3. In the absence of correct real accounts, it would be very difficult to understand the state of affairs & manner in which the capital is employed in the form of assets & liabilities
   
   

4. In view of above & in the absence of any Management Information System, no effective Governance or monitoring over the usage and execution of schemes and resources is possible.

Applicability of Accounting Standards issued by the Institute of Chartered Accountants of India: Explained earlier, such authorities shall be required to get their accounted audited as stipulated u/s 44 AB of the Income Tax Act. In this regard, it may be noted that the Council of the Institute of Chartered Accountants of India has issued on Announcement titled 'Mandatory Application of Accounting Standards in respect of Tax Audit under Section 44AB of the Income Tax Act 1961' (published in the 'The Chartered Accountant', August 1994). In the Announcement, the Council has clarified that the mandatory accounting standards also apply in respect of financial statements audited under section 44 AB of the Income Tax Act, 1961. Accordingly, as per the Announcement, members of the Institute should examinie compliance with the mandatory accounting standards when conducting audit.