The Hindu Business Line : Definitions get well-defined

Finance Bill, 2009 is notable for the novelty introduced in the Definition clause of the Income-Tax Act, 1961. Taxability of a receipt or allowance is determined on the basis of meaning given to the word in the Act itself.

The Finance Bill attempts to define several terms so as to lend clarity in the interpretation of the statutory provisions. ‘Charitable purpose’ includes relief of the poor, education and medical relief. Hereafter, it will also include preservation of environment, including watersheds, forests and wildlife, and preservation of monuments, places or objects of artistic/historic interest. The proviso to Section 2(15), barring activities for profit, will not be applicable to this sort of charity.

LLPs Brought into the Tax Net

Now that LLP Act has come into force, the Finance Bill takes the new entity into its scope. Section 2(23) redefines the term ‘firm’, ‘partner’ and ‘partnership’ so as to include the entities registered under the LLP Act, 2008. LLPs will obviously be taxed in the same way as partnership firms under the Indian Partnership Act, 1932.

Sweat Equity

Section 17(2) has been redrafted. Hereafter, value of any specified securities or sweat equity shares allotted by the employer free of cost or at concessional rate to the employee will be treated as perquisite and taxed.

Sweat equity shares are defined to mean equity shares issued to the employees or directors at a discount or free of cost for providing knowhow or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Valuation of the same will be at market rate on the date of exercise of option as reduced by the amount actually paid or recovered. ‘Option’ means a right, but not an obligation, granted to an employee to apply for the sweat equity shares at a predetermined price. The lacuna in the law on taxing sweat equity is now sought to be removed.

Manufacture

The Finance Bill has made a bold attempt to define manufacture. In the absence of the definition of the term ‘manufacture’ in the law, courts have been interpreting the same in a liberal way. Conversion of boulders into stones, natural latex into preserved latex, assembling trucks from imported parts, book publishing, conversion of plain glassware into decorative glassware, tobacco curing, making of beedies, processing of films, etc., were all held to constitute manufacturing activities by various courts.

The Bill gives a precise definition of the term ‘manufacture’. It means the change in a non-living physical object or article or thing, resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use. Or it should bring into existence a new and distinct object with a different chemical composition or integral structure.

There was no definition of the term ‘undertaking’ so far. In respect mineral oil and natural gas, even a single well in a block was considered an undertaking. If there are several wells in a block, each of those wells was considered an ‘undertaking’ by itself. The Finance Bill limits the scope of the definition of ‘undertaking’. A block of wells alone will constitute an undertaking.

Zero coupon bonds

There is a new benefit conferred on scheduled bank. Hitherto, ‘zero coupon bonds’ meant a bond issued by any infrastructure capital company or fund or public sector company on or after June 1, 2005. No payments or benefits are receivable in respect of such bond before maturity or redemption. The Central Government has to notify such bonds. The Finance Bill now enables scheduled banks also to issue ‘zero coupon bonds’.

The amendments in the definition clause should definitely go to improve the efficiency of the tax system by providing clarity in the application of the Act to field situations. But employee directors in receipt of sweat equity will feel the pinch.

(The author is a former Chief Commissioner of Income-Tax.)