BOMBAY CHARTERED
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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 Forms1 to4 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 havebelied. 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,
Rajesh Kothari Pinakin Desai Niraj Bajaj Kishor Karia
President Chairman-Taxation Comt. President Chairman-Direct Taxation Comt.
Bombay Chartered Accountants’ Society Indian Merchants’ Chamber
1
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
1
Representation on New Income Tax Return Forms
1.00Introduction:
1.01Vide 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.
1.02In 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.
FormNo. / 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
2.00Preamble:
2.01The assessees to whom new return forms apply are generally either (i) salaried employees and pensioners; and (ii) small businessmen. These are 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.
3.00Structure / Design of Forms:
3.01Hitherto, 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”.
3.02As 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.
3.03Except 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.
4.00Certain 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.
4.1Illustrations 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;”
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.” [1]There 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 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 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.
4.2Illustrations 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, 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. [2]In 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?
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. [3]In 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).
5.00Applicability coverage of [Form ITR 4] :
5.01Form ITR 4 applies to an individual or HUF who derives income from proprietary business or profession.
5.02Form 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. 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.
6.00Ambiguities and Errors in the Formats and Contents of Return Forms
6.01There 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.
7.00Content of Forms :
7.01Each 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.
7.02Each 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 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.
7.03Similar 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.