Volume 3, Issue 7


27th May, 2010


Tax Alert
Modifications to the Finance Bill, 2010

While replying to the debate on the Finance Bill 2010, the Finance Minister has announced certain modifications to the Finance Bill, 2010. These changes are announced after taking into account the representations received after the introduction of the Finance Bill, 2010. The same have since been incorporated into the Income-tax Act vide the Finance Act 2010. These amendments are briefly summarised hereunder:

1. New hospitals

Section 35 AD  provides for 100 per cent
A person engaged in building and operating a new hospital with at least 100 beds for patients is eligible to get deduction of 100% of the capital expenditure in the year in which the expenditure is incurred.

deduction for the capital expenditure in the year in which it is incurred, subject to certain conditions. This benefit is available to a person engaged in the setting up and operating a cold storage facility, warehousing facility for agricultural produce, building and operating a new hotel of 2‐star and above category, etc. The benefit of deduction under section 35AD has been extended to hospitals and certain housing projects.

Accordingly, a person engaged in building and operating a new hospital with at least 100 beds for patients is eligible to get deduction of 100% of the capital expenditure in the year in which the expenditure is incurred, subject to certain conditions. This benefit is not available for land, goodwill and financial instruments. This benefit can be claimed for any number of years.

Before this amendment, Section 80‐IB(11C) of the Income‐tax Act, 1961 provided for a deduction of 100% of profits and gains arising from operating and maintaining a hospital located anywhere in India, except for a specified area, having at least 100 beds for a period of 5 years. Hence, the change that has been introduced can be summarised as under:

  • The benefit of Section 35AD is available to a new hospital located anywhere in India whereas the benefit under section 80‐IB(11C) is not available to hospitals located in Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore, Ahmedabad, Faridabad, Gurgaon, Gautam Budh Nagar, Ghaziabad, Gandhinagar and Secunderabad.
  • Section 35AD provides accelerated deduction for capital expenditure whereas section 80-IB(11C) provides deduction for profit
  • There is no restriction in respect of the number of years for which the benefit under section 35AD can be claimed whereas the benefit under section 80-IB(11C) is restricted for 5 years.

It is pertinent to note that section 80-IB(11C) still exists and hence an assessee has an option to claim benefit either under section 35AD or section 80-IB(11C). The benefit under both the sections cannot be claimed simultaneously. Moreover, once the benefit under section 35AD is availed, the assessee cannot thereafter claim the benefit under section 80-IB(11C).

It is pertinent to note that section 35AD only provides for an accelerated depreciation in respect of capital expenditure. It is likely that section 80-IB(11C) may work out to be more beneficial because of the following reasons:

  • It provides deduction of the entire amount of profits earned without any ceiling limit whereas section 35AD restricts the benefit to the capital expenditure incurred
  • Section 80‐IB would hence given an assurance that the entire profit from the hospital project is exempt whereas under the provisions of section 35AD, should the profit earned exceed the capital expenditure incurred, the difference will be charged to tax.
  • Even in absence of section 35AD, the assessee is entitled to claim depreciation. Hence, section 35AD effectively results in only advancing the claim of depreciation

2. Housing projects

The benefit under section 35AD has also been extended to the business of developing and building a housing project under the scheme for slum redevelopment or rehabilitation framed by the Central Government or State Government, as the case may be, which is notified by the Central Board of Direct Taxes.

3. Limited Liability Partnership

The Finance Bill, 2010 had clarified certain aspects regarding conversion of a company into an LLP. It provided that any transfer of assets by a private company or an unlisted public company pursuant to its conversion into a Limited Liability Partnership (‘LLP’) will not attract capital gains, subject to certain conditions. However, the Bill did not clarify whether the transfer of shares of the company on its conversion to LLP will be subject to tax in the hands of the shareholder. It is now provided that such a transfer will not attract capital gains, subject to the same conditions as are applicable for transfer of assets by the company to the LLP.

Where the specified conditions are not complied with, the capital gains exempted earlier shall be chargeable to tax in the hands of the shareholder.

Further, where a person acquires the rights of a partner of an LLP by virtue of conversion of a private company or an unlisted public company into an LLP, the cost of acquisition of such rights shall be equal to the cost of acquisition of the shares held by him in the transferee company.

4. Modification in the limit of gratuity

The Parliament has recently passed the Payment of Gratuity (Amendment) Act, 2010 to enhance the maximum amount of gratuity that can be paid under the Payment of gratuity Act, 1972. Prior to this enactment, the maximum gratuity that could be paid to the employees covered under the Payment of Gratuity Act, 1972 was restricted to Rs. 3.5 lacs. This limit of Rs. 3.5 lacs has now been raised to Rs. 10 lacs. With this amendment, the employees in the private sector have been brought on par with Government employees who were granted hike by the Sixth Pay Commission.

It is pertinent to note that the above amendment applies only for those employees who are covered under the Payment of Gratuity Act, 1972. The employees who are not covered under the said Act will continue to enjoy the existing lower limit of Rs. 3.5 lacs. It is possible that the Government may issue a Notification in the Official Gazette enhancing the limit to Rs. 10 lacs for such employees.

Also, the increased limit would result in a drastic increase in the amount of provision for gratuity to be made in the books of account of the assessee. This increased provision will be allowed as a tax deductible expense only to the extent of the contribution made by the assessee to an approved gratuity fund or to the extent the gratuity actually becomes payable to the employees. The exemption provided in the Income‐tax Act in respect of gratuity received as per the Payment of Gratuity Act also gets automatically enhanced to Rs. 10 lacs.