4 lesser known income tax proposals of Budget 2022 that taxpayers may find problematic

The Budget has proposed certain clarificatory amendments to tighten income tax regulations and these will have an overriding effect over several judicial pronouncements. While the income tax department has thus made its stand clear, this may complicate matters for those taxpayers who may have claimed benefits under the judicial pronouncements in previous financial years. Here are four proposals announced in Budget 2022 to tighten various income tax provisions.

Section 14A of the Income-tax Act, 1961 provides that no deduction shall be allowed in respect of expenditure in relation to tax-exempt income. Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income has accrued, arisen or received by the assessee during a financial year. Some courts have argued that if there is no exempt income during a year, no disallowance can be done.

In order to make the intention of the legislation clear, the Budget proposed to clarify that Section 14A shall apply and be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the financial year and the expenditure has been incurred in relation to such exempt income. Amendment would apply from FY 2021-22 onwards. This would mean that at the time of filing ITR for FY 2021-22 (last date for which is July 31 for individuals/HUFs not having business income, unless extended), individuals/HUFs will not be able to claim this deduction.

Taxpayers such as companies claim deduction under section 43B on account of conversion of interest payable on an existing loan into a debenture on the ground that such conversion is a constructive discharge of interest liability and, therefore, amount to actual payment which has been upheld by several Courts.

As per the Budget proposal, such interpretation is against the intent of legislation. Conversion of the outstanding interest liability into debentures does not amount to an actual payment under section 43B and cannot be claimed as deduction. This new rule comes into effect FY 2022-23 onwards.

Certain taxpayers (e.g. pharmaceutical companies) have been claiming deductions on expenditure incurred in offering certain benefits or perquisite to a person (e.g. a doctor) which are not allowed. These benefits include meeting the person's expenditure related to travel, hospitality, conference etc. In these cases, acceptance of such benefit or perquisite by such person is in violation of a law or rule or regulation or guidelines, as the case may be, governing the conduct of such person.

In order to free the intention from any misinterpretation, the Budget has proposed to clarify that expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law, shall not be allowed under Section 37 of the I-T Act.

Some Courts have held that education cess is an allowable expenditure and such decisions are against the intention of legislature.

It has thus been proposed by Budget 2022 to include an Explanation retrospectively since April 1, 2005 in the I-T Act itself to clarify that the term "tax" includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. This amendment would lead to significant additions in the hands of taxpayers who have already claimed education cess as allowable expenditure based on judicial pronouncements.