Category: Editorial

Amidst all the excitement, two events have not received as much public attention from the public as they deserve. These are passing of the Mental Health Care Act, 2016 which in terms of a specific provision decriminalises an attempt to commit suicide. The second is the Supreme Court declining to permit a mother to terminate the pregnancy although the foetus had a severe abnormality. The woman had completed 27 weeks of pregnancy. The current Medical Termination of Pregnancy Act does not permit termination of pregnancy beyond 20 weeks. Seemingly unconnected events, but both relate to right to live which should include a right to die!

For long, activists have been pleading that, when a person attempts to take his own life, it is an extreme step. Such a person could either be mentally ill or under such severe stress that he/she does not feel it worthwhile to live. After having suffered the trauma of having taken such a step, to prosecute the person under the Indian Penal Code (IPC) was really inhuman to both the person concerned as well as his/her close relatives. Section 115 of the Mental Health Care Act presumes a state of severe mental stress in case of a person who makes an attempt to commit suicide, and prohibits any action under section 309 of the IPC. It is true that there would be unscrupulous elements who may try to take unwarranted advantage of such a provision. However, not to legislate due to the possible misuse by a few was incorrect and the government has taken a positive step. One hopes that apart from this welcome provision, the other sections of the Act are also put to good use so that mentally ill persons get medical attention that they deserve and are treated with dignity by the society.

As far as the second event is concerned, there needs to be a debate in public fora. Given the medical infrastructure that our country has, it is extremely difficult to detect a severe abnormality of a foetus, in the early stages of pregnancy. That being the case, if such an abnormality is detected late, there should be some remedy available to the unfortunate parents. I am deeply conscious of a large number of ethical, moral issues involved and there is really no definite answer to a number of questions that may arise. One can only imagine the predicament of the doctor if such a child with a severe abnormality is born alive. There should be a healthy public debate in regard to these situations and the condition of such a child, and the emotional trauma of the parents must receive due consideration.

Finally, there is the issue of euthanasia. Every day we witness, a number of persons who are terminally ill and the chances of their medical condition improving are virtually nil. In such a situation whether they should have the right to decline medical treatment is a very contentious issue. In this case as well there will be a number of ethical and moral issues involved. I am reminded of the case of the nurse – Aruna – who was sexually assaulted and thereafter lay comatose for nearly four decades. While one salutes the dedication of those nurses and doctors who took care of her for this entire period, one wonders what decision the patient would have taken if she had been in the mental state to take one. Today, the concept of a living will is gaining ground where a person while in possession of his mental faculties puts down in writing his decision should a medical condition of his being terminally ill arise.

There is no point in putting the onus on the judiciary in the situations contemplated above. Courts have to deal with the law as legislated. It is true that in situations like the medical condition of an unborn child, or a terminally ill patient one must tread with extreme care. When one is dealing with life, and yes death of a person the decision is irreversible. Therefore, there must be a continuous public debate on these aspects and one must move forward for reaching a consensus on an acceptable legislation. That much we owe to those who suffer in silence!

The exemption of charitable trusts is based on the rationale that these institutions supplement the activities of a welfare state. The revenue generated is utilised for benevolent objects. It is for this reason that the government foregoes tax revenue from such institutions. The tax provisions in regard to charitable institutions have undergone substantial changes over the last two decades. The provisions in the 1922 Act were extremely lenient. The current Income-tax Act has attempted to plug loopholes which were being misused by certain persons. Over the last few years, the provisions have become much stricter, so much so that one often felt that charity was given a step-motherly treatment. While it is true that, at times, charitable trusts have been used as vehicles of tax avoidance/tax evasion, the acts of a few unscrupulous should not result in burdening genuine trusts with huge tax liabilities. While some regulation is welcome, the inability of the tax officials to bring to book the drivers of such vehicles should not lead to the painting of all charitable trusts with the same brush. This is precisely what the proposals in the Finance Bill seek to do.

There are a number of provisions in the proposed Chapter XII-EB that are blatantly unfair. The tax on trusts liability could be triggered by the occurrence of certain specified events. Once any of such events occurs, the charitable institution would be saddled with a huge tax liability which if it is required to defray will result in its activities coming to a halt. As per the proposals in the Bill, such tax liability has to be discharged in a very short time, in the case of cancellation of registration within 14 days of the cancellation order being received. In such a situation if the trust is made to pay tax even before the order is tested by a judicial forum, it would be manifestly unjust.

Another aspect of the matter, is the impact of section 2(15), which often results in an adversarial action either by way of denial of the exemption u/s. 11 or by way of cancellation of registration u/s. 12AA. It must be appreciated that if the objects of the trust from the point of time that it obtained registration have remained unchanged, merely because the proviso to section 2(15) is attracted, there should not be an impact affecting the exemption of earlier years. In the proposal, as is mooted, such an entity would be taxed on its accreted income with disastrous consequences. In certain cases entities are required to modify their objects. One has witnessed many situations, where the registering authority on an application being made notifying it of the change in objects invokes the provisions of section 2(15) and rejects the application thereby cancelling the registration u/s. 12AA. Here again, requiring the charitable institution to pay tax without the action being tested by an appellate forum is grossly unfair.

The problem is compounded / accentuated by the definition of “accreted income”. Accreted income has been defined as “fair market value of total assets on the specified date as exceeding total liabilities”. A small illustration will highlight how unjust this provision is. If a charitable trust has acquired an office of 1,000 square feet, in 1975 for a sum of say Rs. 4 lakh, the same is being used for the objects of the trust. This today would be valued at Rs. 4 crore. According to the proposal, on the cancellation of the registration of such a trust it would be liable to pay tax on the market value which is a notional income which the trust has not earned and is never likely to earn. In most other situations where the concept of fair market value is used, the sale has taken place and it is only the consideration that is being substituted. In this case the proposal brings into play two fictions the first one assumes a sale and the second assumes it to be at market value. All this in the case of a charitable trust!

Another aspect of the matter is that these taxing provisions are, in a sense, retrospective. By taxing the net worth, that is excess of assets over the liabilities and that too at fair market value, the Finance Minister is proposing to tax accumulation of the past which may have arisen out of absolute genuine charitable activity. To illustrate, an NGO may have been pursuing its objectives lawfully over say three decades. In order to ensure continuation of activity it has accumulated unspent income. In a particular year there is a small infraction of section 13 like making an advance to an interested person or an investment not qualifying u/s. 11(5). In such a case if registration is cancelled it would be a gross violation of the principle of equity and fairness.

Another unfortunate aspect of the matter is that the charitable trust will have to pay tax within a short period of 14 days of the liability arising. The provisions do not contemplate keeping the matter in abeyance till an appeal is preferred and the issue tested. If the provisions are really to be complied with, the trust would have no option but to sell off its assets with tragic consequences. In states where there are Acts governing Charitable trusts (like Maharashtra), obtaining permission to sell assets in the form of immovable property also takes months.

I am at a loss to understand, as to how the same authorities, who on the day of the budget issued a very fair and beneficial circular directing stay of demand on payment of 15% of the tax dues till the first appeal is pending can even contemplate provisions as draconian as have been discussed in the earlier paragraphs.

On a reading of the provisions, it appears that the severe impact they will have on genuine charitable institutions seems to have escaped the attention of the FM. I hope that the representations from all quarters get the attention that they deserve so that the proposals are revisited, and the much awaited “acche din” arrive for charitable institutions.

The Finance Minister deserves to be congratulated on the introduction of the Bill. The siphoning off of funds and wealth created by evading taxes has been a disease our country suffered from even prior to the independence. In the postindependence era, the menace increased exponentially in a regime where tax rates were astronomically high, there was distrust between the taxpayer and the tax collector, and being wealthy was virtually a sin. By the time tax rates were rationalised, the disease had reached epidemic proportions, so that normal palliative medicine was of no use and a drastic surgery was necessary. The Bill which some view as harsh and irrational must be looked at in this background.

The estimates of illegal or “black” money which was kept in undisclosed accounts with foreign banks varied significantly. The CBI director stated in 2012 that the estimate was US dollars 500 billion. Finally, the judiciary stepped in and ordered the formation of a Special Investigation Team (SIT). It would be appropriate to note the anguish of the judges of the Supreme Court Justice B. Sudershan Reddy and Justice S.S. Nijjar who, while ordering the constitution of the SIT, remarked ”The issue of unaccounted money held by nationals and other legal entities in foreign banks is of primordial importance to the welfare of the citizens. The quantum of such monies may be rough indicators of the weakness of the state, in terms of both crime prevention and also of tax collection”. Finally, the government prodded by the Supreme Court has acted and the Bill has been introduced.

One may wonder as to why, if the source of ill-gotten wealth is in our country, the government should go after only that wealth that is lying in foreign countries. While undoubtedly the war against black money should continue in earnest on the domestic front, if one were to prioritise the efforts of the government in checking or mitigating this problem, beginning the battle against tax evasion with an attack on undisclosed foreign assets is probably justified. The first reason for this is purely economic. If income or assets on which tax has been evaded lie within the country, normally they circulate through distribution channels albeit unofficial. Therefore, if wealth resides in the country, it is more often than not distributed among different people though the distribution may be grossly unequal. Consequently, to an extent, such moneys gives a fillip to economic activity. On the other hand, once money is secreted abroad, it remains in a foreign economy with virtually no benefit to our country.

Secondly, if unaccounted wealth is within India the possibility or probability of it getting converted into disclosed wealth either voluntarily, or through detection is much stronger. Once black money is transported out of the country, the trail goes weak and then turns cold. In an attempt to detect such money, one may face a maze of legal issues and the success rate of such efforts is not encouraging.

Thirdly, such money often enters India, through a facade and is often hot money, leaving Indian shores at the slightest hint of economic turbulence. This affects a developing economy like ours. Finally, such wealth is often used by the underworld or terrorist organisations to wage an undeclared war on India. For all these reasons I believe that the Finance Minister has got his priorities right.
At first blush, the Bill seems to be fairly harsh. Perhaps, that is the intent. It seeks to tax the foreign undisclosed asset at the value in the year in which it comes to the notice of the assessing officer. If one aggregates the tax payable along with the penalty, an assessee would have to shell out 120%. While no one can defend a flagrant violation of the law, taxation on the basis of the value of the asset may result in a number of problems.

Further, there is no provision for stay of recovery of the tax and penalty, even though one may have filed an appeal against a manifestly erroneous demand. There are other glitches as well, which may possibly be ironed out in the course of the passage of the Bill becoming an Act. More importantly what needs to be addressed is the wantonly aggressive stand of the tax authorities in the recent times. While a person who evades taxes must undoubtedly be punished and should suffer, it is essential that an environment is created where compliance is rewarded, honesty is recognised and the treatment of a taxpayer is human. Those of my colleagues that were practising in the field are fully conscious of the tax terrorism that prevails. It is not sufficient only to say that the government wants a fair tax administration, action in that regard is necessary on the ground.

All in all, in its battle against black money, the government has taken the first step. Let us hope that this Bill is followed up with provisions to deter creation of ill-gotten wealth within the country. For the time being we can only say ” well begun is half done!”

The voters have three or four choices, the incumbent 10 year old coalition led by India’s oldest political party, which is challenged by a party whose face is perceived by some, to be that of a firm decision maker with a track record of development in his state while others see him as a force that will divide the nation, and the third choice is from a large number of regional outfits who have the interests of their respective States at heart. However, the most interesting is the fourth, a party who has been born out of a common man’s agitation against corruption, and claims to represent the “Aam Admi.” Another unique feature of this election is an option given to the voters to reject all candidates. I am hopeful that this election will strengthen our vibrant democracy. The only thing that is to be ensured is that all of us participate in this process and discharge our duty. This is the time to ink your finger and let it dry. What needs to rub off is your enthusiasm to vote and not the ink!

The second event is an attempt by the Apex Court to clean up the body that lords over India’s largest religion “cricket”. The court has given a lease of life to cricket’s most entertaining event, and has placed it in charge of a man who has always played with a straight bat. There are many who believe that the orders of the court transgress administrative rules and regulations. However, if these very same rules have been misused by those in charge, the Courts have very little choice. There may be many views on how the game should be played and how spectators should be entertained, but there can be no doubt that the game must be played honestly. Any person not doing so must face punishment. The players may earn as much as they can, but they must play the game with dignity and honour.

The third significant event is that of the notifications of 183 new sections of the Companies Act, 2013. They are to become effective from 1st April, 2014. The provisions and the draft rules substantially affect our profession. While many of us would believe that the responsibility cast is even more ominous than it was earlier, we will have to rise to the challenge. In the coming months, a lot will be written about these amendments.

The last but not the least important event is with respect to this Journal, our Society’s flagship. For 45 years this Journal has been a treasure of knowledge and has earned the respect of its readers. There are eminent professionals who have contributed to this Journal for decades, helping it to attain the stature that it enjoys. The Society has always kept pace with the times. It has recognised that the modes of communication have undergone a substantial change in the last decade. This generation reads newspapers on the net. When tax provisions have to be referred to, I instinctively reach for the Income-Tax Act, while my juniors reach for the mouse.

The decision to publish the BCAJ in the e-form, was taken during the time of my predecessor but the process took some time. The endeavour was that all the capabilities of the electronic medium should be utilised when the Journal is made available on the web. For this purpose, a dedicated website has been created. The issues of the past 10 years were uploaded on that website and a search facility was developed. The Journal website is www.bcajjournal.com .

From the month of April, the BCAJ will be available in e-form on the above website. To all the members of the Bombay Chartered Accountants’ society and the Journal subscribers the Journal will be available both in printed form as well as on the web. In order to give our readers across the globe who have not subscribed to the Journal or those who are only in netizens, a feel of the Journal, the access to the website will be available to all for one month from the publication of the April issue. The modalities will be announced on the Society’s website as well as the Journal website. Like all free things in life, this facility will be available for a limited time. From the month of May onwards, those who find our Journal valuable and I am sure many will, subscription will be available, details of which will be on both the sites referred to above.

Our endeavour is to maintain the highest standards of the journal and strive towards excellence. My appeal to all our readers whether subscribers or not, is to give us their feedback. We at the Society welcome it. So to all the Journal lovers, from the month of April, happy reading and happy viewing!

Mr. Pranab Mukherjee presented before Parliament on March 16 the Budget for the ensuing year and the Finance Bill, 2012. The Finance Bill proposed to amend retrospectively provisions of the Income Tax Act so as to make the transaction between Vodafone and Hutchison for transfer of business in India taxable in India and make Vodafone liable to deduct tax at source. Neither the Finance Bill nor the Budget speech of the Finance Minister makes a reference to the judgment of the Supreme Court, but the provisions are apparently to overturn the decision of the Apex Court in the case of Vodafone.

In effect what has happened is that the Government, having failed at the highest Court of the land in its attempt to tax the transaction, has changed the rule and the law. Can we call this the rule of law?

One is reminded of the decision of the Allahabad High Court setting aside the election of Mrs. Indira Gandhi on account of use of government machinery for her election campaign. The Government then changed the Constitution and validated the election overturning the judgement of the Allahabad High Court.

Many agree that where the whole business is in India and such business is transferred by sale of shares in a company incorporated outside India, by one non-resident to another non-resident, the transaction ought to be taxed in India. But this can be done only when there is such a provision in the Income Tax Act. When you try to tax by making retrospective changes in the law, the faith of taxpayers in India as well as foreign investors is shaken. The question asked is, `Is this the rule of law?’

This is even more pertinent so far as the amendment to section 195 proposing to make Vodafone liable to deduct tax at source is concerned. Vodafone has already acquired the shares and made the payment. The event when tax could have been deducted has already happened. The Supreme Court held that Vodafone was not required to deduct tax at source on the basis of law as it stood then. It is beyond logic to make amendment retrospectively and hold that Vodafone was liable to deduct tax. Is this the rule of law?

While the amendments dealing with Vodafone hogged the limelight, one must not forget that there are about 30 amendments proposing to change the law retrospectively. This is our rule of law!

Recent judgements of the Bombay High Court brought into focus the attempts of the Income Tax Department to recover the tax by coercive measures, throwing out all norms for considering application for stay of demand. All of us are aware of the letter written by the Chairman of the Central Board of Direct Taxes, which openly said that collection of revenue was the single most important criterion for judging the performance of the tax officers and for deciding their postings. Is this the rule of law?

The Finance Bill has proposed General Anti Avoidance Rule (GAAR). Many other countries have GAAR. Apart from the form in which it is coming, there is a genuine fear amongst taxpayers how these provisions will be implemented in the Indian context. The fear is not unfounded considering the transfer pricing assessments and the performance of the Dispute Resolution Panel in that arena. One wonders if the GAAR regime will completely override the rule of law.

It is not only in the field of taxation that the rule of law is given a go-by. Consider the case of terrorist Balwant Singh Rajoana who assassinated Mr. Beant Singh, the former Chief Minister of Punjab. Rajoana has been convicted and sentenced to death. He has not filed any petition for clemency before the President of India. The State of Punjab, which was the prosecutor, is today refusing to carry out the sentence purportedly in the interest of peace and communal harmony. No doubt, there are two views about the death penalty itself. But so long as capital punishment is on the statute book and a person is convicted and awarded the death penalty, the same needs to be implemented. The Government cannot refuse to carry out the sentence. That is not the rule of law. It does not send the right signal to terrorists.

In Uttar Pradesh, Akhilesh Yadav has taken over the reins as the Chief Minister. He won the elections on the promise of good governance. Ironically, he has inducted Raghuraj Pratap Singh alias Raja Bhaiya, a person who has been accused of many serious offences, as a minister – Minister of Jails! One wonders if this augers well for the rule of law?

While we talk about the Tax Department and politicians, we cannot ignore ethics in our own profession. We propose to bring to you articles on ethics and the Code of Ethics by which we are governed. The series will explore the subject and bring to you the nuances of the Code of Ethics and disciplinary proceedings. At least we professionals should follow the rule of law – in letter and spirit.

“I must be cruel only to be kind.” – Shakespeare in Hamlet quoted by Pranab
Mukherjee in the Budget speech.

Reports of radioactivity spreading into the environment are causing concern world over. Japan has asked importers not to impose any “unfair” import bans on its goods as a result of the nuclear accident that resulted from an earthquake and tsunami in the country on 11th March. Japan has tremendous capability of overcoming disasters. It is the only country in the world to have faced nuclear weapons attack.

The earthquake and the tsunami bring home one point very forcefully and that is the nature always has an upper hand. At times one feels that human beings consider themselves above the nature and overestimate their capabilities to impact the environment as compared to the nature and the process of evolution. I say this not only in connection with the capability of avoiding or overcoming the natural disasters but also in the context of the campaigns like ‘Save the Nature’ or `Save the Earth’.

Human beings are but only a small segment or part of the nature. We are not distinct or separate from the Nature. Can human beings really save the Nature, halt or even slow down the process of evolution. We talk about maintaining balance in ecosystem. But has there ever been balance in nature? Both in the Nature and market driven economy, there is never a state of equilibrium. It is only because there is imbalance that there is constant change.

The law of the Nature is `survival of the fittest’. Can we then really go against that law and stop the extinction of species that probably are destined to get extinct? When human population is rising is it not but natural that humans will look towards new places for settlement including the forests? At every stage of human development, humans had to ‘encroach’ on the territories of other species. This is also true with other living beings. Can we turn the clock back? Can we even think of farming without using chemical fertilisers? Today we can feed population of over 1 billion largely due to improved yield from the land achieved using fertilisers. Can the developed economies advice the developing economies to halt industrial progress, stop building cement plants because it causes climate change?

Possibly one way to look at the things is human beings are also part of the nature, what they do is due to their survival instinct that exists in all species. Yes, it may cause changes in the environment, climate; may have an impact on other species. But all that is part of the process of evolution. We have always heard the stories of there being deluge on the earth and that also is part of the process of evolution that earth goes through over a period of billions of years.

This thought may not gel with many. But it is a counterpoint that one needs to consider so we don’t go overboard with the campaigns of the environmentalist.

India is celebrating having won the semi-final of the World Cup against Pakistan. On the backdrop of the World Cup matches the Prime Ministers of Pakistan and India are meeting. Let us hope something positive comes out of the Indian initiative. It is in the mutual interest of Pakistan and India that both countries share good relations, there is peace between them, trade, cultural exchange flourishes between these two countries which not too long ago were one country.

Maybe one day in this part of the world also we will have a structure like European Union and it will be a force to reckon with in the global economy as well as on the political canvas of the world.

What does this phrase mean? For a layperson, it connotes that justice will be done – the guilty will be punished while a person who is not guilty will be not harassed and acquitted within a reasonable time. The law will treat all persons equally and equitably. Is this a utopian expectation?

When an ordinary person is accused of a wrongdoing, he is arrested immediately for investigation; for him getting bail becomes a nightmare; he or she has to spend days in jail. We saw this when two young girls were arrested for making a comment on the Facebook, we saw this when artists drew cartoons which were critical of the political system or politician. On the other hand, when MLAs allegedly thrashed a police officer within the precincts of the Legislative Assembly, one had to wait for the accused MLAs to surrender and the Home Minister declared that the CCTV footage is inconclusive. When politicians make a hate speech, the arrest has to wait till the enquiry is complete. So much for the law taking its own course!

Does the law take its own course? One wonders! In fact, often, the law does not have its own course at all. Law enforcing agencies and persons with political patronage can influence and drag the law on the course that they want or desire to suit their convenience. At times, law enforcing agencies are used by the government of the day to serve its political goals.

When somebody says that law will take its own course, possibly he or she actually means that after getting bail the law will be made to take a long winding course before reaching any logical conclusion, if at all it reaches any such conclusion. In fact, when a celebrity or a politician uses that phrase and expresses his great respect for and belief in the legal system in general and judiciary in particular, he actually expresses his ability to influence or delay the legal process; he believes in the proverb – ‘This too shall pass’. We have a film celebrity facing prosecution for hit-and-run accident and hunting of blackbucks. Both the cases are pending for over a decade while the celebrity is leading his normal life.

Recently, the Supreme Court gave its verdict in Mumbai Blasts case 20 years after the event occurred. Conviction of a large number of persons has been upheld. But the media focussed on only one celebrity convict. There is already a clamour for leniency and pardon for him on the ground that he has gone through mental torture all these years and that is a good enough punishment. A retired judge of the Supreme Court, the film fraternity and many others are pleading his case. We forget there are other convicts who have gone through similar agony, some of whom had unwittingly become part of the whole episode and the law took its own course in their case.

While often the law does not take the desired course, at times the law makers avoid enacting an effective law so that there is no question of law taking its own course. (We are still waiting for the law on Lokpal.) Then at times, the law makers enact the law that suits them and ensure what course the law should take. In the Income tax Act there are provisions (existing and proposed) to curb unaccounted money. If a person buys or sells immovable property or buys shares of unlisted company etc. at less than the prescribed value, the difference is charged to tax on the presumption that unaccounted money has exchanged hands. If a charitable trust receives anonymous donations, the trust is taxed on the premises that such donations are out of unaccounted money. In the Finance Bill, 2013 there is also a provision for disallowing deduction to the donor for cash donations made to political parties. But there is no provision to tax political parties for the anonymous donations received by them so long as the amount of each donation in the accounts does not exceed Rs. 20,000.

 According to a study conducted by the Association of Democratic Reform (working across the country for transparency in political and electoral system), a very substantial portion of the contributions collected as donations or `sale of coupons’ by political parties is in cash or anonymous. One has to only guess the source or nature of these funds. All such collections are exempt from income tax in the hands of political parties. Article 14 of the Constitution of India strikes at arbitrariness and ensures fairness and equality of treatment. But it also permits rational classification. And after all, political parties are a class by themselves!

Sanjeev Pandit
Editor