Month: August

Intended or not, an influence, or a dis-proportionate bearing
of supplementary factors on the process of legal adjudication could result in a
deviation from the set precedents of judicial thought. One such concept
discussed here is Morality, as understood in common parlance. The other
is the legal premise of Estoppel.

Equity, an offspring of morality, is described as the quality
of being fair, impartial, and equal. Equity is a system of law, a body of legal
doctrines and rules developed to enlarge, supplement, or override a narrow rigid
system of law. The roots of morality and the allied concepts of ethics and
equity, in the Indian context, may be traced to the timeless principle of
Dharma. For brevity sake, all these noble, lofty concepts are hereinafter
sometimes collectively referred to under the banner of ‘Morality’.

Morality on one hand and law on the other may or may not have
commonalities at a given point of time; but there are certainly perceptible
differences. While the purpose of both is to achieve an orderly society based on
equitable discrimination, there are significant differences in the nature,
scope, extent and administration of the two. Most importantly, all illegal
activities may not qualify as immoral; all immoral activities are not per se
illegal. To quote an example, the Supreme Court, in the case of Gherulal
Parakh v. Mahadeodas Maiya and Others, (AIR 1959 SC 781), observed that the
moral prohibitions in Hindu Law texts against gambling were not only not legally
enforced, but were allowed to fall into desuetude.

Morality, for instance the concept of Dharma, is on one hand
eternal, being fixed and sacrosanct in its basic principles; at the same time,
in its application at a point of time or under a set of circumstances, it is
evolving, inclusive and flexible, considering Kala (time), Desha (place) and
Sandarbha (situation). Evolution and change are attributes applicable to law
also. In the words of Roscoe Pound, a scholar, teacher, reformer, and Dean of
Harvard Law School, “The law must be stable, but it must not stand still“.
Pound strove to link law and society through his ‘sociological jurisprudence’
and to improve the administration of the judicial system and was viewed as a
radical thinker for arguing that the law is not static and must adapt to the
needs of society.

The Indian Constitution incorporates in its preamble,
justice, liberty and equality. The Directive Principles of State Policy
are guidelines for creating a social order characterised by social, economic,
and political justice, liberty, equality, and fraternity as enunciated in the
Constitution’s preamble. Article 37 of the Constitution declares that these
principles shall not be enforceable by any court, but are nevertheless
fundamental in the governance of the country and it shall be the duty of the
state to apply these principles in making laws, so as to establish a just
society in the country. The Directive Principles of State Policy are
guidelines to the Central and State governments of India, to be kept in mind
while framing laws and policies. Thus, it may be said that the Indian
Constitution and the legislations, statutes and enactments thereunder
extensively embrace and comprehensively encompass within their folds, the
principles of Dharma, morality, ethics, equity and fair play, and if a residue
remains, it is intentional. Be it so, law, once codified by the Legislature is
presumed to inherently take care of these cherished principles without requiring
further additions.

If a statutory provision is open to more than one
interpretation, the Court has to choose that interpretation which represents the
true intention of the Legislature. Constitution entrusts the judiciary with
great power to declare the limits of the Legislature and Executive; Courts can
invalidate laws that run counter to the constitutional provisions. However,
morality is neither primary nor decisive here.

The reader is bound to conclusively answer in the negative,
or rather, question the necessity of raising this issue, when the answer is well
settled and accepted. There is certainly no need to give citations or other
references to substantiate that as far as an act or omission is within the four
corners of established law, it is immaterial whether the same confines itself to
morality or not. However, simple as it may seem, there are notable instances
when morality seems to deceptively taint a decision as to legality or otherwise.
This may primarily be attributable to an appreciable and well-founded respect
for morality which unintentionally but unfortunately blurs the decision-making
process while determining legality.

It may not be incorrect to say that Estoppel conceptually
derives its existence from the myriad labyrinths of morality, at least
partially. Estoppel is a legal rule that prevents somebody from stating or
claiming a position inconsistent with the position previously stated or held
out, especially when the earlier representation has been relied upon by others.
As per the Stroud’s Judicial Dictionary of Words and Phrases, the word ‘Estoppe’
comes of a French word estoupe, from which comes the English word
stopped, and it is called an estoppel, or conclusion. Summarising a host of
decisions, the Stroud’s Dictionary says, regarding estoppel by conduct or
representation, that the essential factors giving rise to an estoppel are :

While estoppel is no doubt an offspring of English law, which
was adopted by Indian law, innumerable instances can be found in ancient Dharma
in Indian scriptures which extol the virtues of estoppel, especially when
self-imposed. The popular acceptable disposition seems to be that once a
position or stand is taken, the person so doing is bound thereby and shall ‘at
any cost’, act and continue all future actions in accordance with such position
or stand.

What if the primary position, which is sought to be adhered to following the rule of estoppel, is itself based on, or is alleged to be, or is a result of, an illegal act? Adherence to estoppel in such a case could mean negation of legality. In all fairness, the bar of estoppel cannot be claimed, alleged or raised by a counter party or respondent who has himself committed illegal acts, or could be genuinely alleged to have done so. Whether such allegation of illegality is genuine or not is to be determined on the facts and circumstances of each case. Simply stated, people living in glass houses should not throw stones at others.

Recent  Court  rulings:

What if a party to a contract claiming the contract to be illegal on specific grounds, is barred by the Court from doing so, on a reasoning presumably -” based on an alliance of morality and estoppel?

Consider the recent ruling of the Bombay High Court in [CICI Bank Ltd. v. Sundaram Multi Pap Ltd., (Company Petition No. 248 of 2008). Firstly, in ascertaining whether an agreement in question was binding in spite of it not being signed by one party thereto, the Court has held that the absence of the signature is not significant, since the said agreement has not been disputed by the other party and has been acted upon by both parties. Thus, it may be rightly inferred that by not disputing the agreement and by acting thereunder, the other party has ‘held out’ a position and is therefore estopped from questioning its existence now.

However, that being so, another defence by the respondent Company, was that the agreement in question is illegal, void, violative of its Articles of Association and not binding on it. The Court observed that prima acie, these contentions do not appear to be bonafide or substantial, in spite of being well aware that the Company had already filed separate suit(s) in this regard which were pending. More importantly, such observation was arrived at, not by subjecting the agreement to the tests of legality, but on the following grounds:

a) Resolution to generally execute agreements was passed by the Company

b) Agreement is signed by the authorised officer of the Company

c) The Company paid certain amounts and issued a cheque to the other party, and the other party also made a payment to the Company by crediting its bank account.

Further, the Court also directed the respondent Company to deposit the amount demanded from it by the petitioner.

Take another recent decision of the Madras High Court in Rajshree Sugars and Chemicals Ltd. v. Axis Bank Ltd. Mr. Justice V. Ramasubramanian, in his judgment, observed that the plaintiff claiming an agreement to be null, void, illegal or voidable had no qualms about the deal at the time of deriving a benefit or income therefrom, and compared the plaintiff to a horse which would open its mouth for food but close it for bridle.

By receiving certain benefits under an agreement or a contract, has the recipient party ‘held out’ that the same is legally binding? Even if he has so held out, does the same validate the agreement or contract merely by estoppel? Stating that such recipient, having enjoyed benefits, is morally bound to perform his obligation under the agreement or contract, can it be said that the same is legally binding? Is legality to be determined here with reference to the statute book, case laws, investigation and evaluation, or by merely looking into estoppel, morality, or the actions of the parties like passing generic resolutions or making payments purportedly in mistake of law?

Even applying  the rules  of morality  and estoppel, the consistent  principle  as laid  down  in various decisions  of Courts  appears  to be that the Rule of Estoppel would  apply when  a bona fide party to the agreement  or contract  has been  misled  by the position  held  out by the other.  In the decisions  discussed hereinabove,  it cannot in any manner be said that the party  receiving  benefit  under  such agreement  or contract  in question  has misled  the opposite  party  in any  manner.  Moreover,   receipt  of benefit is a subsequent  event post entering  into the agreemer;t  or contract,  whereas  the agreement  or contract is being questioned  as being void ab initio, that is, from its very inception, without reference to such subsequent event.

To add to our inference, the Indian Contract Act, 1872 could be pressed into service. S. 65 of the said Act deals with the obligation of a person who has received advantage under a void agreement or a contract that becomes void. It simply states that when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage thereunder is bound to restore it, or to make compensation for it, to the person from whom he received it. This Section, which is based on equitable doctrine, provides for the restitution of any benefit received under a void agreement or contract. What if a counter is raised, that S. 65 would apply where the agreement is ‘discovered to be void’ or where the contract ‘becomes void’ and not to an agreement which is void from inception? The Supreme Court, in the case of Tarsem Singh v. Sukhminder Singh, (AIR 1998 SC 1400) has categorically held that this argument cannot be allowed to prevail. Further, S. 30 of the Specific Relief Act, 1941, states that on adjudging the rescission of a contract, the Court may require the party to whom such relief is granted to restore, so far as. may be, any benefit which he may have received from the other party and to make any compensation to him which justice may require.

Thus, to conclude, it is respectfully submitted that the legality or otherwise of an agreement or contract cannot be determined merely because a receipt of benefit thereunder, by default, binds the party to stick to morality and promissory estoppel.

All that is required of such party is to return all benefits received. The relevant yardsticks to determine the fundamental issue as to the validity of an agreement or a contract would be to apply the requirements of S. 10 of the Indian Contract Act – free consent, competence, lawful consideration and law-ful object. And of course, since the specific always overrides the general, such agreement or contract is to be cumulatively validated under all specific enactments, rules, regulations, guidelines or the like as may be applicable to it.

Traditional perception about an accountant in business
parlance is something like spectacles on tired eyes, wearing white colored dhoti
and kurta, book of accounts traditionally known as Bahikhatas (red cloth-bounded
books) in hands. In traditional business houses and economy, Accountants were
regarded as the most authenticated and powerful persons of the organisation.
These traditional accountants, popularly known as ‘Muneem’ now seem to be the
saga of old era. However, there is not much change in the perception for an
accountant in an organisation. Even today, an accountant is perceived as a
person with minimum mental flexibility with risk-averse attitude. They are less
exposed to outside world, leading to deficiency in behavioural skill.

Currently companies are required to pay MAT tax if the tax
payable under normal provisions of the Act is lower than 10% (15% w.e.f. A.Y.
2010-11) of the book profit as defined u/s.115JB of the Act. An issue which
arises is whether an assessee liable to MAT should pay interest u/s.234B and
u/s.234C for shortfall in payment of advance tax.

Recently the Bombay High Court in the case of Snowcem India
Ltd. (313 ITR 170) had an opportunity to consider this issue in the context of
S. 115JA of the Act. The Court held that S. 115JA is same or similar to S. 115J
of the Act. It further held that since the Karnataka High Court’s decision in
Kwality Biscuits Ltd. was affirmed by the Supreme Court by dismissing the
appeals, it was binding on them. Accordingly, the Bombay High Court allowed the
appeal in favour of the assessee.

It may be noted that the Bombay High Court in Snowcem has
held that the terminology in S. 115JA is the same or similar as that contained
in S. 115J. Attention is invited to the fact that the wordings in S. 115JA(4)
and S. 115JB(5) which provide that ‘save as otherwise provided in this Section
all other provisions of this Act would be applicable’ were not present in the
earlier S. 115J of the Act. Also the Finance Act in the years when S. 115J was
applicable did not provide for payment of advance tax on income chargeable
u/s.115J of the Act as is currently provided. This distinction is explained as
follows :

It appears that the provisions of S. 115JA(4) were not
considered by the High Court leading to the conclusion that the terminology is
the same.

This issue was earlier addressed by the Karnataka High Court
in the case of Kwality Biscuits Ltd., 243 ITR 519 in the context of S. 115J of
the Act. The Karnataka High Court considering the contention of the assessee
held that for the purpose of assessing tax u/s.115J, firstly, the profit as
computed under the Income-tax Act has to be prepared, thereafter the book profit
as contemplated by the provisions of S. 115J are to be determined and then the
tax is to be levied. The liability of the assessee for payment of tax u/s.115J
arises if the total income as computed under the provisions of the Act is less
than 30% of its book profits. The Court then observed that since the entire
exercise of computing the income or that of book profit could be only at the end
of the financial year, the provisions of S. 207, S. 208, S. 209 or S. 210 cannot
be made applicable, until and unless the accounts are audited and the balance
sheet is prepared as even the assessee may not know whether the provision of S.
115J would be applicable or not. Accordingly, the Court held that interest could
not be charged u/s.234B and u/s.234C of the Income-tax Act. The judgment of the
Karnataka High Court was contested by way of SLP to Supreme Court which passed
an order dismissing the appeals (284 ITR 434).

It may be mentioned here that the Bombay High Court in Kotak Mahindra Finance Ltd. (265 ITR 119) had taken the view that even in a case covered by S. 115J the provisions of S. 234B and S. 234C were attracted. While deciding the issue the learned Bench of the Court negated the contention as raised on behalf of the assessee that provisions of S. 234B and S. 234C are not attracted in cases falling u/ s.115J as book profits were determinable after the end of the financial year. The Court held that the difficulty faced by the assessee in the matter of computation cannot defeat the liability for payment of advance tax and that u/ s.207 of the Income-tax Act, advance tax is payable during any financial year in respect of the ‘current income’. The Court held that the words ‘current income’ refer to computation of total income under the provisions of the Income-tax Act including S. 115J. The Court further observed that u/s.207 of the Income-tax Act the words ‘total income’ have been equated to the expression ‘current income’. The Court held that the interest leviable u/ s.234B and u/ s.234C is compensatory in nature and it has no element of penalty. Therefore, if there is non-payment or short payment of tax on the current income, then the assessee has to pay interest as the income has accrued to the assessee for the previous year. The distinction sought to be made in respect of companies falling u/s.115J was not accepted. While holding so, the learned Bench observed that the view being taken is supported by the judgment of the Gauhati High Court in the case of Assam Bengal Carriers Ltd. v. CIT, (1999) (239 ITR 862) as also the judgment of the Madhya Pradesh High Court in the case of Itarsi Oils and Flours (P) Ltd. v. ClT, (2001) (250 ITR 686). The Court further held that they disagreed with the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. v. ClT, (2000) (243 ITR 519).

Legislative history of MAT:

Let us look at the legislative history of the Sections and how it has been amended from time to time.

Initially S. 115J was inserted by the Finance Act, 1987 as per which tax at the regular rates on 30% of the book profit was levied if the same was found to be more than the total income computed under the Act. S. 115J(1) provided that where the total income computed under the Act is found to be less than 30 per cent of the book profit the total income of the assessee, shall be deemed to be an amount equivalent to 30% of such book profit. Thus, the concept of ‘deemed total income’ emerged. The liability to pay MAT would arise only on the determination of book profits which by necessary implication could be determined only after the accounts are audited as held in Kwality Biscuits case. S. 115J ceased to be effective from the A.Y. 1991-92.

The scheme of MAT, however, was revived effective from A.Y. 1997-98 by insertion of a new charging S. 115JA and under the said provision where the total income computed under the provisions of the Act was found to be less than 30% of the book profit, the total income chargeable to tax would be deemed to be an amount equivalent to 30% of the book profit. S. 115JA operated up to and including
 
A.Y. 2000-01 when it gave way for another charg-ing S. 115JBeffective from A.Y. 2001-02. It was different from its predecessor in one respect in not seeking to deem any total income but providing for tax payable to be deemed at 7.5% of such book profit. S. 115JB was amended by the Finance Act, 2002 with retrospective effect from 1-4-2001 substituting for the words ‘the tax payable for the relevant previous year shall be deemed to be seven and one-half percent of such book profit’ the words ‘such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 7.5%’. The main difference between the provision as introduced initially and later amended is that the former provided for an obligation to pay tax at 7.5% of the book profit without deeming the book profit to be total income.

S. 115JB as it stands    now  is as follows:

1) Notwithstanding anything contained in any other provision of this Act, where in the case of – an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after 1-4-2007 is less than 10% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 10%.”

2) Every assessee, being a company, shall, for the – purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts 11and III of Sched ule VI to the Companies Act, 1956 (1 of 1956).

…………………
…………………

5) Save as otherwise provided in this section, all other provisions of this Act shall apply to ev-ery assessee, being a company, mentioned in this section.”

CBDT Circular No. 13/2001 was issued on 9-11-2001 clarifying that all companies are liable for payment of advance tax under the new MAT pro-visions of S. 115JB of the Act. It is abundantly made clear in the said Circular that the new provisions of S. 115JB as introduced by the Finance Act, 2000 are a self-contained Code. Ss.(l) lays down the manner in which income-tax payable is to be computed.

Ss.(2) provides for computation of ‘book profit’. Ss.(5) specifies that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company mentioned in that section. The Circular clarifies that except for substitution of tax payable and the manner of computation of book profits, all the provisions relating to charge, definitions, recoveries, payment, assessment, etc., would apply in respect of the provisions of this Section.

The Circular further goes on to explain the scheme of the Income-tax Act. S. 4 of the Act charges to tax the income at any rate or rates which may be prescribed by the Finance Act every year. S. 207 deals with liability for payment of advance tax and S. 209 deals with its computation based on the rates in force for the financial year, as are contained in the Finance Act. The first proviso to S. 2(8) of the Finance Act, 2001 provides that tax would be payable by way of advance tax in respect of income charge-able u/s.115JB as introduced by Finance Act, 2000. The Circular clarifies that consequently the provisions of S. 234B and S. 234C for interest on default in payment of advance tax and deferment of advance tax would also be applicable.

This was the view  taken  by  the  Karnataka   High Court in the case of Jindal Thermal  Power  Co. Ltd. 286 ITR 182 in the context of S. 115JB. This view has also been taken by the Mumbai  Tribunal  in Madaus Pharmaceuticals  P. Ltd. 24 SOT 180 following  Karnataka High Court in Jindal Thermal Power Co. Ltd.

It may be appropriate to mention that the Mumbai Tribunal in Deepak Fertilizer and Petrochemicals Corporation [304 ITR (AT) 167], the Cochin Tribunal in Escapade Resorts P. Ltd. (13 SOT 300) and the Bangalore Tribunal in IBM India Ltd. [290 ITR (AT) 183] have in the context of S. 115JA taken a view in favour of the assessee following the principle laid down by the Supreme Court in Kwality Biscuits Ltd.

Ahmedabad Special Bench in Ashima  Syntex Ltd. :

However, attention is invited to the Ahmedabad Special Bench decision in the case of Ashima Syntex Ltd. 310 ITR (AT) 1. The Special Bench has held that the aforesaid decision in the case of Kwality Biscuits Ltd. was not rendered in the context of the provisions of S. 115JA of the Act. The Special Bench has analysed various decisions in detail. It has stated that for the purpose of payment of advance tax, all the assesses including companies, are required to make an estimate of their current income. Even before the introduction of the provisions of S. 115J of the Act, companies had been estimating their total income after providing deductions admissible under the Act. In fact, all the assesses who maintain books of account have to undertake this exercise for the purpose of payment of advance tax. If a profit and loss account can be drawn up on estimate basis for the purpose of the Income-tax Act, it is not understood as to why a similar profit and loss account on estimate basis under the Companies Act cannot be drawn up. If the explanation of the companies that the profits u/s.115JA of the Act can only be determined after the close of the year were to be accepted, then no assessee who maintains regular books of account would be liable to pay advance tax as in those cases also, income can only be determined after the close of the books of account at the end of the year. The provisions of S. 207 to S. 209 of the Act do not exclude the income determined u/s.115JA of the Act from the purview of current income on which advance tax is payable. Similarly, there is no scope for considering the hardship of the assessee as the levy is automatic and does not require any opportunity to be given to the assessee. S. 4 of the Act envisages charge to tax the income at any rate or rates which may be prescribed by the Finance Act every year and S. 207 deals with liability for payment of advance tax and S. 209 deals with its computation based on the rates in force for the financial year, as are contained in the relevant Finance Act.

Accordingly the Special Bench has held that all other provisions of the Act including provisions relating to payment of advance tax are applicable even when income is computed u/s.115JA of the Act.

Conclusion:

It may be concluded that subsequent to incorporation in the Finance Act of the requirement for payment of advance tax by companies falling u/s.115JB, there can be no doubt in the matter. Considering the difference in the language of S. 115J and S. 115JA/ S. 115JB,provisions of the Finance Act and the view taken by Ahmedabad Special Bench and the Karnataka High Court, MAT companies would be liable to pay advance tax u/s.115JB. If they don’t do so they may land up paying heavy interest u/ s.234B and u/s.234C which is not tax deductible.

In the budget for 2010 both the Central and State Governments
have made certain amendments to levy tax on sale of immovable property under
construction, to enhance their revenue and to overcome certain judicial
pronouncements. An attempt is made to discuss the implications of the above
amendments on the real estate transactions. This article does not discuss the
legal validity of the amendments brought about by the Central and State
Governments, but explains the same assuming that the amendments are
constitutionally valid.

By the Finance Act, 2010 the Government has amended the
definition of Commercial or Industrial Construction Service [S. 65 (25b) read
with S. 65 (105) (zzq)] and construction of Residential Complex [S. 65 (30a)
read with S. 65 (zzzh)].

The scope of these categories is expanded to cover sale of
flats/units under construction. Builders/developers are now liable to
service tax if any payment towards sale consideration is received before the
grant of completion certificate by the competent authorities for such
flats/units. This amendment overrides the Gauhati High Court’s decision in the
case of Magus Construction Private Limited v. UOI, (2008 11 STR 225).

Therefore, if a builder/developer receives the entire sale
consideration for flats/units after the issue of completion certificate, the
same is not liable to service tax.

There is an abetement of 75% of the sale value. Thus, tax
will be levied on 25% of the sale value of flat at the rate of 10.3%. For
example, if the agreement value of a flat sold under construction is
Rs.50,00,000, then service tax @ 10.3% is payable on Rs.12,50,000, which works
out to 1,28,750. Thus, there will be an additional burden of 2.6% on the
agreement value of the flat. The amendment will be effective from the date to be
notified by the Central Government.

The Maharashtra Government in the State budget has also
introduced a new composition scheme on sale of under construction property along
with land or interest in land @ 1% of the agreement value. The scheme is
effective from 1st April, 2010 but the Notification in respect of the same about
the manner in which the tax is to collected by the builder/developer has not yet
come. There is no set-off for inputs.

It may be noted that already a composition scheme @ 5% is in
operation, which is effective from 20th June, 2006 i.e., the date on
which the transfer of property under construction was brought within the ambit
of VAT.

It may further be noted that the levy of tax on property
under construction itself is challenged by the Maharashtra Chamber of Housing
Industry (MCHI), an association of builders by a writ petition in the Bombay
High Court (being Tax writ petition No. 2022 of 2007). The main issue
involved in the writ petition is the competency of the State Legislature to
enact the definition of Works Contract in the manner which suggests its
applicability to the builders/developers, in addition to the contractors.
The definition talks about transfer of property in goods in the execution of
works contract including the building, construction, . . . . . The Government is
competent to levy tax on construction (sale of goods involved in construction).
Article 366 read with Article 246 (2) of the Constitution has authorised it to
do so. But power to levy tax on building; i.e., sale of flats is
unimaginable. It appears that prima facie the High Court is convinced
about this position and ordered interim relief for the members of the
Association. The High Court has directed that the members of the MCHI should not
be treated as ‘dealers’ liable to tax under the MVAT Act, 2002 in respect of
sale of flats on ownership basis under the Maharashtra Ownership Flats Act, 1963
(MOFA Act), provided such members of MCHI submit the data and documents as
mentioned in the Court order. Thus, such members of MCHI have been absolved from
registration and also from assessments till the disposal of the petition.
However, the developers who are not members of the Association are not protected
by the Court order.

It seems that to divert the attention of the public from the
Court matter, the Government has introduced a new composition scheme @ 1% on the
agreement value of the transfer of flat/unit under construction without
providing any deduction for land, etc.

There is an impression in the mind of people that this is a
new amendment and only under construction flats/units sold after 1st April, 2010
are chargeable to VAT @ 1%. This is not so, the amendment regarding tax on
flat/unit under construction is effective from 20th June, 2006. In this
budget the Government has come out with a new composition scheme of 1% of
agreement value without any deduction for land against earlier composition
scheme of 5%.

Though the new composition scheme is effective for the
flat/units registered on or after 1st April, 2010, the Notification in respect
of the same has not been issued. In the absence of the Notification the builders
are in a dilemma as to how and in what manner the tax is to be collected as the
full sale price is not collected at the time of executing agreement for
flat/unit which is under construction.

Thus in the hands of purchaser the overall cost of the
flat/unit may increase by about 3.6% of the agreement value by way of service
tax and VAT. In the given example of Rs.50,00,000 value of flat, the additional
cost by way of service tax will be Rs.1,28,750 and by way of VAT will be Rs.
50,000 making it a total of Rs.1,78,750.

It is pertinent to note that the above cost can be avoided if a ready flat
is purchased after the builder obtains completion certificate.

‘Corporate Governance’ — these words have been hitting the
headlines of financial magazines for quite some years, particularly post Enron,
and in India they have once again triggered debates post Satyam scam. Satyam
— this word would no longer be used as an adjective to signify the attribute of
truthfulness, but will now be used as a noun to signify systemic failure in
history of Indian corporate governance system. Satyam story holds within it,
legion of myriad hidden lessons for a spectrum of bodies, from directors to
investors and from auditors to regulators.

A lot has been and will be written and discoursed on the
concept of corporate governance and its raison d’être. This article
discusses one of such aspects. In the first part, it highlights the portent of
Adam Smith and tries to prove how Adam Smith had prescient of the inherent flaw
in the model — ‘Corporation’. The second part advocates a prescription
for good governance practice.

Corporations today are based on, ‘Agency Theory’ (a
branch of organisational behaviour) wherein the owners of funds (alias
principals) invest their money in a company that is managed by altogether
different group of people called directors and managers (alias agents);
this agency relationship between the shareholders and directors is based on the
premise of trust; shareholders lend their money to directors under trust that
the latter shall deploy the money in a manner that would maximise shareholders’
interests.

Agency Theory is defined by Chartered Institute of Management
Accountants as — ‘Hypothesis that attempts to explain elements of
organisational behaviour through an understanding of the relationships between
principals (shareholders) and agents (directors and managers). A conflict may
exist between the actions undertaken by agents in furtherance of their own self
interest and those required to promote the interest of principals.’

Some of the instances wherein a conflict can exist between
owners and managers can be :

Adam Smith, known as father of economics, was highly cynical
and pessimistic about the success of corporation as a model of creating wealth
and pursuing economic growth. The entire idea of dilution of ownership, whereby
the owner and manager of funds are two different groups/persons, was not at all
invidious to Smith. Smith had prescience of the inherent and institutional flaw
in the model of corporations. He wrote in his book ‘The Wealth of Nations’
(abbreviated name for ‘An Inquiry into the Nature and Causes of the
Wealth of Nations’) :

This statement of Smith came in 1776, almost 200 years after
incorporation of East India Company in 1600 — the Company that ruled India and
which was the first company to hold democratic general meeting of shareholders
and was later on accused of mis-management aimed at generating personal gain (in
violation of the ‘agency theory’).

Smith believed so strongly in the power of self interest and
the conflicts it generates, that he was extremely pessimistic about the ability
of the joint stock company to survive in any but the simplest of activities
where management’s behavior could be easily monitored.

Smith had strong surmise about the sustainability of a corporation without it being granted a state monopoly. Only activities where this model can work, according to Smith, were those that were easily monitored; Smith implicates this when he says in his words – “which all the operations are capable of being reduced to what is called a routine, or to such a uniformity of method as admits of little or no variation”.

Smith was well aware of the benefits of corporations, including their ability to concentrate large amounts of money into capital-intensive undertakings. But he thought and believed that:

These agency costs viz. negligence, profusion and conflict of interest, are today reflected in the form of corporate debacles, be it Enron, World-corn or Satyam. It is sad, but the fact is that Smith has been proven right hitherto specifically in last decade if one is to go purely on regression analysis.

Smith’s prophecy that ‘negligence and profusion must always prevail’ made 200 years before, still holds good today. The irony is: it is only now when we realise the unfathomable truth in his profound statement.

To conclude: Enron brought a sea change in our perspective towards corporate governance; it had its own lessons to teach and so would Satyam. Stringent and vigilant controls would be instituted by regulatory bodies, in the form of codes, rules, audits, and peer reviews; investigations will be carried out, special committees will be appointed, white papers will be issued and; significant amount of research would be done in investigating why this happened, how this happened, could it have been prevented or at least predicted, what to do to prevent its re-occurrence, who should be held responsible, how should they be punished, etcetera. How-ever, the fact is and as Smith aptly wrote, this model of corporation possesses an inherent flaw and this would time and again be reflected in the form of more Enrons and Satyams. These are bound to take place in future, irrespective of checks and balances because of the inherent greed and conflict of interest.

Prescription for good governance practice:

In the midst of academic debate as to what constitutes good governance practices, below are a few canons that inter alia form the basis for good governance. These are simple principles and values taken from different sources of management theory that have been practised at different times in history. Co-incidentally, these canons also happen to be in order of vowels of English literature (AEIOU) and therefore, one may also term them as vowels of good governance practice.

1. Altruism:
Etymologically, altruism origins from the word alter, which is the latin word for other. An altruist is a person who works for the benefit of others and who is more concerned with welfare of others. Likewise, the board and management need to practise altruism, whereby their actions are directed in maximising interest of shareholders and other stakeholders, instead of their own.

2. Egalitarianism:
Egalitarianism is a principle or belief that all the people are equal and deserve equal rights and opportunities. Relating it to ‘governance practice’, it basically means that board should adopt a stakeholder approach, rather than a shareholders’ approach in performing its actions.

Lately, although stakeholder approach has been adopted by academia, it has not been reflected in governance practice in real life. In fact, in Germany the legal system itself mandates explicitly that firms do not have a sole duty to pursue the interest of shareholders and that other stakeholders also need to be represented on the board. The Germans have the system of co-determination, in which employees and shareholders in large corporations share an equal number of seats on the supervisory board of the company, so that the interests of both are taken into account. Japan and France have also adopted stakeholders’ approach in governance of companies. This is not the case in other developed countries like US and UK. Even in India, the directors on board represent and are accountable to shareholders. However, several reports now advocate a ‘Stakeholder’ approach and advocate the three P approach to governance.

3. Integrity and independence:
Integrity is the attribute of having moral principles; being straightforward and honest. It means being ethical in discharging one’s duty. In terms of governance, it primarily means being transparent in disclosing information to shareholders and other stakeholders.

Independence stands for the strength of an individual to adopt an unbiased view on the matters, undaunted by any favour or frown. Relating it to governance practice it means the board must be independent in its actions whereby it should not be subordinated by the wishes or directions of management. This particular attribute of governance is one of the imperative corner stones of good governance practice.

4. Oracle:
Oracle is basically a noun, rather than an adjective. It means having a vision and an ability to foresee future. In terms of governance practice it means that the board needs to have vision and provide strategy to management for execution. One of the important roles of a board is to set objectives – objectives that translate long-term vision of the board, which is in the interest of stakeholders.

5. Utilitarianism:
Utilitarianism is a doctrine that emphasises that actions are right if they are useful or for the benefit of a majority; it emphasises: greatest happiness of greatest number. This is one of the most precious attributes that one can gain from Indian epics, both Ramayana and Mahabharata. This attribute also augments the canon of egalitarianism.

The board while dealing with different interests of different stakeholder groups cannot satisfy all the interests of all the stakeholders at the same time. There are bound to be conflicts between interests of different stakeholders. For instance – shareholders may often question the expenditure on corporate social responsibility as it ultimately impacts their dividend. The board is often confronted with such a dilemma wherein interest of two or more stakeholders conflict. It is at this point where the board needs to exercise the canon of utilitarianism i.e., it must act in a manner that provides greatest benefit to greatest number.

1. Introduction :

Even though marriages are made in heaven, divorces take place
on earth, and as death and taxes are inevitable, the question arises about
taxability of alimony in the hands of the receiver.

There are various laws that govern the quantum of maintenance
awarded by the Court. An application for maintenance can be filed in India by
Hindus under the Hindu Adoption and Maintenance Act, and under the Hindu
Marriage Act. People belonging to other religions are governed by their personal
laws. However, irrespective of one’s caste, creed or religion, any person can
file an application for maintenance, u/s.125 of the Criminal Procedure Code.
Besides the wife and husband, the parents and children of the respondent, can
also vice versa claim maintenance under this particular Section.

Both tax administrators as well as tax professionals —
Chartered Accountants, Advocates and other experts — are often so pre-occupied
with their day-to-day concerns that they sometimes have little time to study the
environment in which they are functioning. The present article seeks to provide
some information in respect of the latter.

Certain trends in collection of direct taxes in recent times
reflect an important change in the macro-economic environment in which we all
function and deserve some thought. The good news first : One feature of the
pattern of revenue in recent times is the much heavier reliance now placed by
the Central Government on direct taxes — personal income-tax and corporate tax —
to meet its revenue yields. The current composition of revenue is now much more
reflective of the revenue composition of a developed country. This is in marked
contrast to the situation which prevailed in the country about 12 to 13 years
ago. During the year 1995-96, direct taxes accounted only for 30.2% of the
revenues of the Central Government. The current figure for 2007-08 is 48.8%.
During the year 1995-96, customs and central excise duties were the mainstay of
the central finance — accounting for 32.1% and 36.1%, respectively, of the
revenue receipts. In the year 2007-08,
these figures declined to 18% and 23.8%, respectively.