Is It Fair? Archives

IS IT FAIR TO PUNISH TAXPAYERS FOR A FAULTY GSTN?

BACKGROUND

When the GST (Goods and Services
Tax) law was introduced in India in 2017, sufficient time was not given to
taxpayers, professionals, technical teams and the country as a whole to
understand it. Adapting to something new takes its own time to understand and
implement at the ground level; GST has been no exception to this thumb rule.
Every new reform will require an initial learning experience and will also face
some resistance; clearly, the government could have managed its implementation
better had it given sufficient time to build the GSTN portal.

Earlier, taxpayers were so
disappointed with VAT compliances and multiple State taxes that they adopted a
welcoming approach to GST and were willing to embrace it wholeheartedly. The
government had spoken so much about it and boosted it so much that there was a
hope in the taxpayers that the new law would be easy to understand and
implement and that the return-filing process would be smooth. However, the
frequent changes in the GST law has led to delays in technical implementation
at the GSTN portal which has made it cumbersome to comply with and resulted in
the wasting of thousands of person-hours of both taxpayers and professionals.

In this article, we have
highlighted some of the technical problems faced by taxpayers in compliance due
to bugs and errors in the GSTN portal; although it has been about 31 months
since its introduction, the GSTN portal has not been functioning very well.

ISSUES
AT HAND

Taxpayers cannot be expected to
have enough technical knowledge of the GSTN portal and the concept behind it.
Still, since it has now become a law, or kanoon, both taxpayers and professionals
are making valiant attempts to carry on business and adhere to the compliances
in accordance with the law.

Registering on the GSTN portal is
a lengthy and time-consuming process. It is a very stringent procedure and
requires too many details and specific formats for uploading documents; so is
the case with various other forms and returns. The businessman is being forced
to spend more hours fulfilling compliances, accumulating various data points,
most of which could have been avoided, rather than focusing on his business and
growth prospects. This is followed by a continuous process of filing
back-to-back returns either monthly or quarterly, as applicable, instead of a
single return having all the details. Moreover, there are no revision / amendment
facilities for the returns filed.

Limitless updates and
notifications have now become the norm
and there is no clarity; instead, things are becoming more complicated
and cumbersome, thanks to the Advance Ruling Authority. The constant updates,
notifications, etc. have become a nightmare and any single unintentional missed
update of notification results in penalty and interest. Frequent changes and
revisions in the GST rates have led to uncertainty for both businessmen and
government. Further, the new Input Tax Credit (ITC) rule limiting ITC from 20%
to 10%, and managing all the calculations has become difficult for SMEs and
also for large corporates. Besides, there is a severe lack of natural
justice as the burden to prove the purchase details is placed on the
purchasers instead of punishing the defaulting sellers. The increase of
government tax revenue by curbing the working capital has thereby created
unfair business practices and pressure of paying tax on honest taxpayers; and this
might have even led to an increase in the black economy because many small
businesses have started to do business in cash, not to avoid GST but to avoid
compliance because of the torturous procedures of GST.

The GSTN portal is faulty and
weak and no repair has been done thanks to which both taxpayers and
professionals are facing problems. There is a lack of clarity and knowledge
with the technical support team. The helpline numbers have turned out to be
helpless. There is so much pressure on the GSTN portal that it is always down
or under maintenance. In spite of the faulty system, it is the taxpayer who has
to bear the burden of paying late fees even if payment is done within
the due date but there were system issues while filing the returns. The faulty
and delayed release of forms and utilities without proper testing has added
further to the existing problems. There are many bugs and tech issues in
various forms and returns, creating hurdles in filing the returns within the
due date. Extensions given by the government can be a temporary solution;
however, it will not help unless the system is upgraded to optimum capacity to
handle taxpayers’ logins. Despite all these facts, government continues to
levy penalty and interest for late filing of returns, in spite of knowing
that very often the GSTN portal is out of service.

Separate due dates for filing of
returns and payment of tax should be taken into consideration. Further, extreme
importance is given to set-off of tax instead of considering the date of
deposit of tax as the date of payment. Very few resources are available to deal
with the plethora of problems. Solutions to problems are offered quite late and
are not effective enough to deal with those problems. Moreover, the opinions
of ground-level experts are neglected and more trust is placed on the
bureaucracy.

THE QUESTION IS – IS IT FAIR?

Is it fair for the taxpayers to
shift their focus from business to adhering to innumerable compliances? The new
ITC rule which has added to the unfairness and its working has worsened things
even further. Is it right for purchasers to be burdened and punished for
defaulting sellers? Let’s understand this with an illustration.

Mr. A has a business selling
goods and pays GST on the same. He purchases goods from Mr. B and these goods
are eligible for claiming of ITC. But Mr. B defaults in making GST payments to
the government and filing his returns, which results in non-reflection of the
transaction on Mr. A’s GSTR2A. Mr. A has
honestly paid his share of tax to the government but is unable to claim his
rightful share due to the default by Mr. B. Is this fair to Mr. A?

Similarly, with the new ITC rule
it has become practically impossible to do the workings and track the entries
of those that are reflecting in GSTR2A on a month-on-month basis. If a dealer
is filing monthly returns of GSTR3B and quarterly returns of GTSR1, the entire
working capital is curbed and the taxpayer is at times paying taxes from his
savings instead of his business because entries are not reflecting in GSTR2A.

Is it fair for professionals to
have so many continuous updates and notifications with so much ambiguity?

PROBLEMS (AND SOLUTIONS) WITH THE GSTN
PORTAL

(i) Rectification and revision of all GST returns to be made available,
say once a quarter;

(ii) Increasing the capacity of the portal from the existing 1.5 lakh
to 50 lakhs (in line with the Income Tax Portal) to handle the login for one
crore taxpayers;

(iii) Ensure effective functioning of the helpdesk and helpline numbers
and also provide training to the assigned staff, thus providing immediate and
effective solutions to grievances;

(iv) Immediate solutions of glitches and drawbacks on the GSTN portal
within ten days;

(v) Waiver of late fees, especially when the fees are levied due to
the faults and failures of the GSTN system;

(vi) Refund of late fees paid earlier by those whose deadlines and due
dates were later extended;

(vii) Simple procedures and format of filing GST returns; 50% of data
sought in various tables of annual returns forms are unnecessary and can be
avoided for smoother filing;

(viii) Separate due dates for payment of tax and filing of returns so that
downloading system reports like GSTR2A and reconciliation become easier;

(ix) Scrap the GSTR3B form and take the summary of sales and purchase
from both purchasers’ and sellers’ quarterly returns instead of bill-wise
summary;

(x) Provide a solution to the illogical sections of 16(4) and 36(4)
of the IGST;

(xi) Date of tax deposit to be considered as the payment date;

(xii) System testing and checking prior to the release of any new form
or process;

(xiii) Waive late fees until the GST portal turns smooth and efficient;

(xiv) Single return to be introduced consisting of all the details of receipts
and supply;

(xv) Amendments and notifications without ambiguity;

(xvi) ITC rules to be amended in an effective manner, thus making it fair
to practice business for taxpayers and shifting the burden on to defaulting
sellers;

(xvii) Furnish and publish telephone and email ids that are working and
reachable of officers concerned on the website;

(xviii) Self-adjustments of balances in cash ledger and electronic credit
ledger across multiple GSTNs of a single legal entity;

(xix) GSTR3B filing for earlier period without late fees;

(xx) E-Act – there are so many changes, there should be a mandatory
updated legal position, Act, Rules, Notifications all incorporated at one
place. We do have such daily updated laws under the Companies Act, 2013;

(xxi) Bringing out amendments only once a month (with reasonable
exceptions) like a master circular rather than uncontrolled rolling out of
changes.

CONCLUSION

Even today, GSTN portal is not
glitch-free; it would still be a bumpy ride for taxpayers and professionals who
are dealing with it; Infosys Chairman Nandan Nilekani has promised to solve all
technical issues by July, 2020. However, by that time the new forms are
expected to be live (by October, 2020) with new challenges.

The demand
from taxpayers and professionals is very simple and can be met if there is
willingness on the part of the government to act fast rather than acting only
when the problems are highlighted by professionals and taxpayers.

The
government would do well to work upon making the frameworks and the GSTN portal
more user-friendly; the present situation and scope of GST leads to varied
interpretations, thereby resulting in possible litigations in the GST regime in
the near future. With the new forms deadline deferred by the government, we
hope the forms are made live with proper testing and feedback from all
stakeholders.

IS IT FAIR?

The
question remains, is it fair to punish taxpayers for a faulty GSTN?

shailesh.kwebmaker

IS IT FAIR TO TREAT RCM SUPPLIES AS EXEMPT?

HISTORY OF RCM IN INDIA

Reverse
Charge Mechanism or RCM is not a new concept in the Indirect Tax arena. It was
first introduced in India in 1997 on services provided by Goods Transport
Agency and Clearing and Forwarding Agent. Even the erstwhile Sales Tax and VAT
Laws in some states had a tax similar to RCM, the purchase tax wherein the
buyer or recipient of goods had to pay tax on purchase of specified goods; for
example, Maharashtra levied a purchase tax on cotton. The current GST regime
has only taken this forward, bringing in some more categories of goods and
services under the net of RCM.

India
is not the only country with RCM provisions; most of the developing and developed
nations have RCM provisions including EU VAT, Australia, Singapore, etc. The
underlying reason for introducing RCM in India was to map the unorganised
sector and shift the compliance liability regarding the same to the organised
recipients. It was believed that this would lead to increase in tax revenue
and make administration of the small unorganised sector easy.

From
an economy’s perspective, RCM is a robust check mechanism to ensure that all
supplies are taxed and there is minimal evasion. However, the concept has
certain flaws and repercussions that need to be dealt with.

RCM UNDER GST

RCM
under GST is governed by sections 9(3) and 9(4) of the CGST Act, 2017 which
essentially lay down the following:

(a) 9(3): Supply of specified categories of notified
goods and / or services attract GST under RCM where the recipient is liable to
pay tax on such goods and / or services;

(b)
9(4): Supply made by an unregistered person to a registered person, wherein the
registered recipient shall be liable to pay tax.

Further,
Notification No. 13/2017-CT (Rate) dated 28^th June, 2017 notifies
the categories of supplies which shall attract GST under RCM u/s 9(3) of the
CGST Act, 2017. Considering that under the RCM provisions the recipient pays
tax instead of the supplier, the recipient is eligible to avail Input Tax
Credit (ITC) of the tax so paid. However, as per section 17(3) of the CGST Act,
2017 the value of exempt supply shall include reverse charge supplies and
therefore ITC on the inputs and / or input services used for making such
reverse charge supplies is not available. Accordingly, the ITC pertaining to
such supplies stands unutilised and blocked.

While
the recipient certainly bears the brunt of the compliance burden on RCM
supplies, he remains financially unaffected as the tax paid can be availed as
credit (subject to his taxable and exempted supplies). However, this provision
proves to be prejudicial against the supplier who is unable to avail ITC
pertaining to inputs or input services used for supplying RCM supplies and also
leads to double taxation.

Moreover, if such supplier is engaged only in a
single business (i.e., RCM supplies), the entire ITC paid becomes a cost to
him. Let us understand this with the help of a numeric example as given below:

Sr. No.	Particulars	Under normal or forward charge mechanism	Under reverse charge mechanism
1	Value of inputs and / or input services used by the supplier	100	100
2	GST paid on 1 above @ 18%	18	18
3	Value addition made @ 30%	30	30
4	Cost of production (COP)	130	130
5	Profit @ 30% of COP	39	39
6	Selling price	169	169
7	GST on selling price @ 18%	30.42	30.42 (paid by recipient)
8	ITC available for set-off	18	–
9	Net GST paid by the supplier	12.42	18
10	ITC available to recipient	30.42	30.42

Sr. No.

Particulars

Under normal or
forward charge mechanism

Under reverse charge
mechanism

Value of inputs and / or input services used by the supplier

100

GST paid on 1 above @ 18%

Value addition made @ 30%

Cost of production (COP)

130

Profit @ 30% of COP

Selling price

169

GST on selling price @ 18%

30.42

30.42 (paid by recipient)

ITC available for set-off

–

Net GST paid by the supplier

12.42

ITC available to recipient

30.42

In the above example, it is evident
that although the recipient in both cases is eligible to avail the same ITC, it
is the supplier who faces iniquitous treatment.

Under GST, there are exempt,
zero-rated, taxable and non-GST supplies. For supplies that are either taxable
or zero-rated, ITC is available to the supplier. However, for exempt and
non-GST supplies such as essential items, reverse charge supplies, petroleum,
alcohol, etc., the suppliers suffer as they pay GST on the inward side but fail
to avail the set-off of the same as their outward supplies are not taxed. When
GST was being rolled out, the GST Council had received several representations
from sectors such as pharma, poultry, education, etc. to examine the problem of
accumulated ITC on account of exempt supplies. However, the problem remains
unaddressed till now as far as RCM is concerned.

During the Covid-19 outbreak, the
Supreme Court dismissed various pleas which had sought exemption from GST for masks, ventilators, PPE kits and other Covid-19-related equipment
on the premise that granting exemption to these would result in blocked ITC,
thereby increasing the manufacturing cost and occasioning a higher price for
consumers.

The
Council has in the past taken steps to address the issue of inverted duty
structure. However, the businesses which deal in exempted supplies are still
reeling from the impact of accumulated credits. The Council needs to deliberate
on the probable solutions to the above-mentioned concerns. The immediate
actions could include:

(i) Taking stock of items which are
exempt supplies, including the RCM supplies;

(ii) Evaluating the inward supplies used by such suppliers;

(iii) Exempting the inward supplies for the entire
chain of suppliers if feasible, or providing a mechanism of refunds to such
suppliers;

(iv) If not feasible, then
classifying the outward supplies as zero-rated supplies so that ITC is
available to the suppliers;

(v) An
option can be provided to the RCM sellers: whether to be classified as an RCM
supplier or not. This will give an alternative to sellers to evaluate the
trade-off between the cost of compliance and credit lost. Suppliers with
substantial credit can avail the ITC and carry out the compliances themselves
as against the small suppliers who would not like to get into the compliance
hassle. Similarly, this can be indicated in the tax invoice so as to inform the
buyer about whether or not to levy GST under RCM on the basis of the option
chosen by the supplier.

CONCLUSION

Is it fair for the RCM
suppliers to endure the unwarranted loss of credit for the simple reason that
their products or services, viz. sponsorship services, legal services, security
services, GTA services, cashew nuts, silk yarn, raw cotton, etc. are covered by
the said mechanism?

As discussed above, RCM is a tax
concept meant for the small and unorganised sector. Therefore, shouldn’t the
government be extra vigilant about any financial hardships being caused to
these small traders and businesses by the tax mechanism? Every business incurs
certain non-avoidable expenses including rent, audit fees, housekeeping,
business promotion, etc. All these input services are exigible to GST and constitute a large chunk of the
expenditure in the supplier’s profit and loss account. The GST pertaining to these expenses not being allowed as ITC
gives rise to superfluous adversities.

One of the most prominent objectives of GST was to eliminate
cascading effect and double taxation. While the government has, to a large
extent, been able to meet this objective, it remains to be seen whether the RCM
suppliers will also experience the benevolence of the Good and Simple Tax soon
enough!

Wise men say that the root of victory is in consultation with the wise.

— (Valmiki Raamaayan 6.6.5)

shailesh.kwebmaker

IS IT FAIR TO EXPAND THE SCOPE OF SBO UNDER THE SECTION THROUGH SBO RULES, 2018?

BACKGROUND

Section 90
was enacted by the Companies Act, 2013. It was recast totally by the
Companies (Amendment) Act, 2017. The amended section was made effective from 13^th
June 2018. MCA has further notified Companies (Significant Beneficial Owners)
Rules, 20l8 on 13^th June 2018. These rules (herein after referred as
SBO) cast various responsibilities on the Companies, Shareholders (for that
matter members too) and beneficial owners in shares.

PROBLEM

Section
90(1) of the Companies Act, 2013 (as amended), provides that declaration is to
be filed by every Individual, who acting alone or together, or through
one or more persons or trust, including a trust and persons resident outside
India, holds beneficial interests, of not less than twenty-five per cent or
such other percentage as may be prescribed, in shares of a company or the
right to exercise, or the actual exercising of significant influence or control
as defined in clause (27) of section 2, over the company shall make a
declaration to the company. The Central Government may however, prescribe
class/es of persons who shall not be required to make declaration. (delegated
legislation).

However,
explanation appended below the applicable rules (The Companies (Significant
Beneficial Owners) Rules, 2018) clearly exceeds an authority granted to the
rule makers because through an explanation what is sought to be done is expansion
of the scope of Significant Beneficial Owner so as to bring even persons other
than individuals within the scope.

UNFAIRNESS

1. The Companies (Amendment) Bill, 2016 contained
provisions which proposed to delegate the Central Government the power to
prescribe, by way of rules, the details with regard to – certain time-limits,
contents and manner of issuing/filing of certain forms including abridged
forms, amount of fees to be paid and other similar items of subordinated
legislation. A Memorandum Regarding Delegated Legislation (MRDL) explaining
such delegation is attached to the Companies (Amendment) Bill, 2016.

The
relevant extract of the Memorandum (so far as it relates to SBO is reproduced hereunder):

Clause 22,
inter alia, empowered Central Government to prescribe u/s. 90 of the
Act—

……

(d) Other
details which may be included in the register of interest declared by
individual in s/s. (2),

…………

2. Thus above delegation presupposes that rules
framed will include

class or classes of
persons which shall not be required to make a declaration

Present
rules do not contain any such provision as to which persons shall not make the
declaration.

3. Besides next requirement w.r.t., to rules also
presupposes that declaration is to be given by an individual where as
present rules have cast a responsibility on various entities including
Company, Firm and Trust.

4. Rule 2(1) (e) of The Companies (Significant
Beneficial Owners) Rules, 2018 reads as under:

(e)
“significant beneficial owner” means an individual referred to in
sub-section (1) of section 90 (holding ultimate beneficial interest of not less
than ten per cent) read with sub-section (10) of section 89, but whose name is
not entered in the register of members of a company as the holder of such
shares, and the term ‘significant beneficial ownership’ shall be construed
accordingly

5. However, explanation appended below above
mentioned rule clearly exceeds an authority granted to the rule makers because
through this explanation what is sought to be done is expansion of the scope of
Significant Beneficial Owner so as to bring even persons other than
individuals within the scope. The said explanation reads as under:

Explanation
l. – For the purpose of this clause, the significant beneficial ownership, in
case of persons other than individuals or natural persons, shall be determined
as under:

The explanation thereafter covers Company, Firm and Trust.

This
clearly exceeds the rule making powers of the subordinate legislation.

6. Let us now see briefly what subordinate
legislation is and what principles are required to be observed by subordinate/
delegated legislation:

The need
and importance of subordinate legislation has been underlined by the Supreme
Court in the Gwalior Rayon Mills Mfg. (Wing.) Co. Ltd. vs. Asstt.
Commissioner of Sales Tax and Others** thus:

……….

Nature of subordinate legislation

‘Subordinateness’,
in subordinate legislation is not merely suggestive of the level of the
authority making it but also of the nature of the legislation itself. Delegated
legislation under such delegated powers is ancillary and cannot, by its very
nature, replace or modify the parent law nor can it lay down details akin to
substantive law. There are instances where pieces of subordinate legislation
which tended to replace or modify the provisions of the basic law or attempted
to lay down new law by themselves had been struck down as ultra vires.[1]

7. It is a well settled principle
that a rule, regulation or bylaw must not be ultra vires, that is to
say, if a power exists by statute to make rules, regulations, bylaws, forms,
etc., that power must be exercised strictly in accordance with the provisions
of the statute which confers the power, for a rule, etc., if ultra vires,
will be held incapable of being enforced.

CONCLUSION FROM THE ABOVE

Let us now
revert to the provision of section 90(1) which clearly provided that
declaration is to be filed by an Individual.

The word
‘individual’ makes it clear that the section cannot apply unless the holder of
shares or significant influence/control is a natural person (human being) and
not an artificial person such as a company or firm or trust as is envisaged in
the explanation to Rule 2(e) of SBO.

The term
individual is not defined in Companies Act, 2013 but the term is defined in
various dictionaries and definition of Individual by Merriam- Webster defines Individual as “a
particular being or thing as distinguished from a class, species, or
collection”

Even
definition of Person u/s. 2(31) of Income Tax Act, 1961 reads as under:

“person”
includes- (i) an individual, ………..

Thus,
individual is a subset of a person and has narrow meaning as compared to Person
which includes other incorporated and non incorporated entities.

SOLUTION

The
explanation in Rule 2(e) , which is contradictory to the provisions of the
section 90(1) of the Companies Act, 2013 has cast an onerous responsibility on
entities such as Companies, Firms and Trusts to make a declaration under SBO
even though the parent section did not put such responsibility and as such is prima
facie ultra vires.

It is therefore essential that
either parent section is amended or Rule is in synchronisation to the section.

[1] The Committee on Subordinate Legislation of Rajya Sabha.

shailesh.kwebmaker

IS IT FAIR TO DENY BENEFIT OF TAX DEDUCTED AT SOURCE (TDS) IN ABSENCE OF SUCH TDS IN FORM 26AS

BACKGROUND

Section 199(1) of the Income Tax Act 1961 permits
claim of Tax Deduction at Source (TDS) when such payment is made to credit of
the Central Government. However, instances have come to the notice of several
persons including tax authorities that in spite of the fact that

deductor has deducted tax at source and payment
thereof is not made to the credit of Central Government ( Consequently this
will not reflect in the TDS return of the deductor and as such will not further
reflect in 26AS of the deductee)

deductor has deducted tax at source and payment
thereof made to the credit of Central Government but such deductor has
defaulted in filing TDS Return ( Consequently this will not reflect in 26AS
of the deductee)

PROBLEM

Presently in either of the situations mentioned in
the preceding paragraph, deductee is denied benefit of TDS since in either case
such TDS does not reflect in 26AS of the deductee. With the electronic filing
of Income tax Returns being mandatory in respect of most of the assessees, deductee
( Assessee filing Return of Income) does not get credit of such TDS when return
of Income is processed by CPC . This results in

Either reduction in Refund Claimed in the
Return of Income

or results in a demand when Return was filed claiming
no refund.

UNFAIRNESS

1. Reduction
in the refund claimed or resulting demand, consequent upon non- granting of
credit of TDS (either not paid / return of TDS not filed) is unfair for the
deductee because such demand remains as outstanding demand on the CPC Website
and such demands get adjusted with future refunds due to the assessee
(Deductee).

2. In a
situation where Tax is deducted but not deposited, section 205 of the Income
Tax Act, 1961 comes to the rescue of the deductee. The said section reads as
under :

Head Note of the Section: Bar against direct demand on
assessee.

205. Where tax is deductible at the source under
[the foregoing provisions of this Chapter], the assessee shall not be called
upon to pay the tax himself to the extent to which tax has been deducted from
that income.

3. If we
paraphrase the above mentioned section, we can note that following ingredients
will emerge namely:

Tax is deductible from the deductee

Such Tax is deducted from the income

Assessee shall not be called upon to pay the
tax himself to the extent of such tax deduction

4. To
reiterate the rights of the Assessee in such situations, CBDT has issued
directions to the field officers vide reference number 275/29/2014-IT-(B) dated
01-06-2015. The relevant extracts are reproduced here:

Grievances have been received by the Board
from many taxpayers that in their cases the deductor has deducted tax at source
from payments made to them in accordance with the provisions of Chapter-XVII of
the Income-tax Act, 1961 (hereafter ‘the Act’) but has failed to deposit the
same into the Government account leading to denial of credit of such deduction
of tax to these taxpayers and consequent raising of demand.

As per section 199 of the Act credit of Tax
Deducted at Source is given to the person only if it is paid to the Central
Government Account. However, as per section 205 of the Act, the assessee shall
not be called upon to pay the tax to the extent the tax has been deducted from
his income where the tax is deductible at source under the provisions of
Chapter- XVII. Thus, the Act puts a bar on direct demand against the assessee
in such cases and the demand on account of tax credit mismatch cannot be
enforced coercively.

5. It
appears that above mentioned instruction was not observed by the field officers
(Reasons well known) and hence CBDT again has issued an office
memorandum on 11-03-2016 (OFFICE MEMORANDUM F.NO.275/29/2014-IT (B), DATED
11-3-2016). Relevant Extracts of the said Memorandum reads as under :

Vide letter of even number dated
1-6-2015, the Board had issued directions to the field officers that in case of
an assessee whose tax has been deducted at source but not deposited to the
Government’s account by the deductor, the deductee assessee shall not be called
upon to pay the demand to the extent tax has been deducted from his income. It
was further specified that section 205 of the Income-tax Act, 1961 puts a bar
on direct demand against the assessee in such cases and the demand on account
of tax credit mismatch in such situations cannot be enforced coercively.

However, instances have come to the notice of
the Board that these directions are not being strictly followed by the field
officers.

In view of the above, the Board hereby reiterates
the instructions contained in its letter dated 1-6-2015 and directs the
assessing officers not to enforce demands created on account of mismatch of
credit due to non-payment of TDS amount to the credit of the Government by the
deductor. These instructions may be brought to the notice of all assessing
officers in your Region for compliance.

CONCLUSION FROM
THE ABOVE

Thus, one will note from the above two
clarifications from CBDT that demand arising out of the situation of Tax
Deducted and not deposited, demand cannot be enforced from the assessee.

However, till date, the issue of TDS
being deducted, not deposited with central government by the deductor and
deductee ( Assessee) claiming such TDS and consequent refund in the return of
Income, is still not addressed by CBDT in spite of the fact that above
instruction/ office memorandum has been released .

SOLUTION

In the light of above, relevant rules should
authorise assessee to

Ask CPC to Block such demand from further
adjustment on the website and for the purpose a specific option be permitted to
be included in case of mismatch of TDS such as “TDS Mismatch since TDS
Deducted but not deposited by the deductor”

Assessee is permitted to send a proof of Tax
Deduction by the deductor (If Available) as a response to outstanding tax (TDS)
demand.

Besides relevant Rules should provide for a
proof of deduction to be submitted to the deductee on a Quarterly basis which
will substantiate a claim of the deductee that TDS is deducted since
entire hypothesis of the section 205 is based on the fact that “Tax is deducted”.
This is essential since deductor is an agent of Income Tax Department and as
such there is a privity between Tax department and the deductor which is
unfortunately lacking between deductor and deductee.

Lastly a deductee may be permitted
to lodge an online query when such deduction is not reflecting as a credit in
26AS against such deductors. A deductee will have to at least obtain a PAN and
TAN of the persons he deals with to lodge such queries.

shailesh.kwebmaker

Is it Fair to have a Lopsided Tribunal Under GST?

Background

Section 112 of the Central
Goods and Services Tax Act, 2017 (“CGST Act”) provides for an appeal to
the GST Appellate Tribunal. This Tribunal sits as the second Appellate
authority in the appellate mechanism, the first appeal being to the
Commissioner (Appeals).

Problem

Much water has flown under the bridge since
the first constitutional challenges were mounted against the rampant
tribunalisation in the country. The Supreme Court has dealt with such
tribunalisation on many occasions and cautioned against legislative devices to
tinker with the independence of the judiciary. However, the CGST Act not only
ignores these warnings, but goes on to push the envelope further than any
Government has attempted till date.

Unfairness

(1) Section 109(3), (4) and (9) of the CGST
Act mandates that the National Bench, Regional Bench, State Bench and the Area
Bench of the Appellate Tribunal be manned by one Judicial Member and two
Technical Members.

Now, the qualifications for the technical
members in section 110(1)(c) and (d) show that they will be invariably drawn
from the Departmental cadre. A 2:1 ratio of Judicial and Technical Members on
each bench will irredeemably tilt the Tribunal in the Government’s favour and
compromise independence of the Tribunal. In Union of India vs. R. Gandhi
(2010) 11 SCC 1, the Supreme Court has categorically held that the
number of Technical Members on a bench cannot exceed the Judicial Members. The
Madras High Court has denounced a similar provision in the Administrative
Tribunals Act as an attempt to reduce the sole judicial member to a “decorative
piece” [S. Manoharan vs. Dy. Registrar (2015) 2 LW 343 (DB)]. It
is surprising that the Government wishes to foist the same injustice all over
again despite the position in law being well settled in this regard.

(2) The term of office of Judicial Members
u/s. 110(9) and (10) is 3 years, whereas the term of office of Technical
Members u/s. 110(11) is 5 years. Apart from such discrimination being outright
unconstitutional, it sends out a discouraging message to the public at large
that the Government will remain blessed with a compliant Tribunal for a long
time. Furthermore, coupled with clauses like those relating to reappointment
(which is also a subject completely within the control of Government), such
provisions are potent enough to create apprehensions in minds of the Judicial
Members about the manner in which these Judicial Members are to set about their
judicial functions.

It is submitted, in any case, the Judicial
Members would be projected as an inferior class to the outside world at large.
Furthermore, experience has shown that it is difficult to find Judicial Members
than Technical Members and that both Central and State Governments sit over
Tribunal vacancies for a very long time. Giving shorter tenures to Judicial Members
will only bring about frequent vacancies of Judicial Members in comparison with
Technical Members.

This may bring about repeated scenarios where
there is no option but to allow two Technical Members or even one Technical
Member to constitute a Bench for lack of adequate Judicial Members as provided
for in section 110(10). Litigants will have no option but to put up with such a
Bench since section 110(14) protects proceedings of the Tribunal from being
assailed on the ground of existence of any vacancy or defect in the
constitution of the Tribunal.

(3) Section 110(1)(b)(iii) allows a member
from the Indian Legal Services to be appointed as a Judicial Member, which is
impermissible under our Constitution [Union of India vs. R. Gandhi (2010)
11 SCC 1]. A similar clause in the RERA legislation was struck down
recently by the Bombay High Court in Neelkamal Realtors vs. Union of
India [(2018) 1 AIR Bom R 558] relying on R. Gandhi’s case.
It is against surprising that such a settled position of law is being ignored
to somehow create a compliant Tribunal.

(4) The qualifications for Technical Members
in section 110(1)(c) and (d) do not require the Technical Members to have any
experience in dealing with appellate work. In fact, even investigation officers
who have never handled any appeal will qualify to be appointed as Technical
Members under such a clause, as has been the unhappy experience of Sales Tax
Tribunals in some States like Maharashtra. Namit Sharma vs. Union of
India [(2013) 1 SCC 745] has clearly laid down that Technical Members
must not only possess legal qualifications, but also have a judicial bend of
mind. The Bombay High Court has recently, in case of the Maharashtra Sales Tax
Tribunal, held that a “judicially trained mind”, as required in Namit
Sharma, means long experience with quasi-judicial disputes and that the
mere status as a Deputy Commissioner for three years cannot suffice [Sales
Tax Tribunal Bar Association vs. State of Maharashtra – Judgment dated 28/29
September, 2017 in WP 2069/2015].

(5) Section 110(d) allows the State Government
to notify any rank of State Commissioners for appointment as Technical Member
(State). The criteria of qualifications pertains to the Constitutional
requirement of independence of the Members and must be dealt with by Parliament
itself. By allowing the Government control over deciding of qualifications, the
Legislature is allowing the Government to exert unholy influence over the
composition of the Tribunal.

(6) While sections 110(2) and (4) recognise
the primacy of the Chief Justice of India and the Chief Justices of the High
Court in appointment of Judicial Members, however the selection of the
Technical Members has been left to a Selection Committee whose composition is
undefined in the Act. Firstly, the Selection Committee deals with the sensitive
aspect of selection of Technical Members. The composition of this committee
should not have been left to the good senses of the rule-making authority, the
Legislature must deal with such aspects, being an essential legislative
function. Secondly, there is no guarantee that the members of the Selection
Committee themselves will be judicially trained. Why should bureaucrats have
control of the Selection Committee?

(7) The clause for reappointment of Members
creates a conflict of interest. A similar clause was struck down by the Supreme
Court in the National Tax Tribunal case for its mischievous potential to tinker
with the independence of the members [Madras Bar Association vs. Union of
India (2014) 10 SCC 1]. Yet we see the same clause in GST law all over
again. Reappointment clauses are notorious in nature and create a sense of
insecurity in minds of Tribunal members.

(8) Similarly, salary, allowances and terms
and conditions of service cannot be left to the rule-making authority. These
are substantial mattes which affect independence of judiciary and should have
been dealt with by Parliament itself. Furthermore, the rule-making authority,
that is the State and Central Governments, will be the litigants in every case
before the Tribunal. They cannot be allowed to hold any power over Members’
salaries and allowances.

Solution

Each of the concerns raised above arise
ultimately from settled jurisprudence and past experience. There is no solution
except curing the faults in the statutory mechanism. In time, the Courts will
reiterate their earlier judgments and strike down these offending clauses. But
given the pace at which justice comes in India, the people will suffer in the
interim.

Conclusion

Is it really fair to have
such provisions? We are not talking here about some new model of
tribunalisation which is yet untested in
Courts. There is ample jurisprudence on all the aspects mentioned above. Why is
it then that the people must suffer the same woes that the Courts have rescued
them from earlier? It is not simple a question of independence of judiciary:
one is forced to think about the unfairness in legislative power being
exercised in such an arbitrary manner to steamroll the rights of people to fair
adjudication of disputes.

shailesh.kwebmaker

Background: Gst Returns For Small And Medium Enterprises

The GST law requires that:

i) Every person, supplying
taxable goods and/or services, to take registration if his aggregate turnover
of all supplies of goods and services (including tax free and exempt supplies)
exceeds the prescribed limit during a financial year;

ii) All those persons who were
registered under the earlier laws (Excise, Service Tax and State Vat, etc.)
to take registration w.e.f. 1^st July 2017;

iii) Every person so registered,
must report invoice wise details of all sales and purchases every month to the
Central and State Government authorities through various prescribed forms by
the due dates so prescribed and pay the taxes accordingly, every month.

The procedural aspects of filing return and
payment of taxes may be summarised, in brief, as follows:-

(Ref: sections 37, 38 and 39 of CGST Act and
Rules 59, 60 and 61 of CGST Rules)

The provisions, contained in above referred
sections and Rules, require every ‘registered person’ to file monthly returns
in three stages by three different dates every month. While monthly details of
invoice wise outward supplies have to be submitted and filed (in GSTR-1) by the
10^th day of the succeeding month, invoice wise details of inward
supplies to be filed (in GSTR-2) between 11^th day and 15^th
day of the succeeding month, and the final calculation of liability to be filed
(in GSTR-3) between 16^th day and 20^th day of the
succeeding month. There are two more forms namely GSTR-2A and GSTR-1A. While
information in GSTR-2A is provided by the GST portal to all registered dealers,
GSTR-1A is to be submitted by the suppliers in certain circumstances. In
addition thereto, those who are doing business of providing e-commerce
facility, those who are liable to deduct TDS or TCS and those who are Input
Service Distributors, have to file separate monthly returns (in prescribed
forms) in respect of those specified activities. All these forms have to be
submitted and filed every month, by all such registered persons (other than
those who have opted for composition scheme) by different due dates within that
overall limited period of 20 days. And the dates so prescribed (i.e. by and
between) have to be followed strictly. In case of failure, there are provisions
for levying Late Fees and penalties, etc., if any of these returns are
not filed within that prescribed date/s of filing, as well as levy of interest
for delayed payment, if any.

Representation to Government and
Assurance:-

Considering such a cumbersome procedure of
filing returns, almost all trade associations, from all over India, requested
the Government that such a procedure is impracticable and needs to change. It
was also represented that it would be almost impossible for small and medium
enterprises to comply with the requirements in such a manner. Various
suggestions were presented before the authorities concerned to simplify the
procedure. Two major suggestions may be noted here as follows:-

1. The three different forms i.e. GSTR-1, GSTR-2 and GSTR-3, which are
prescribed to be submitted on three different dates, should be combined together.
Thus, all that information which is required for the purpose can be submitted
in one return only. There is no need of three different forms for this purpose.

2. The requirement of filing monthly returns should be made applicable
to large tax payers only (those big dealers/registered persons who are having
large turnover of more than certain prescribed limit). All others should be
asked to file quarterly return (as was the procedure under the earlier laws).

Further;

3. It was specifically represented
that small and medium enterprises (SMEs) should be asked to file one quarterly
return (instead of three returns a month).

4. It was also represented to look
into the tax collection data, available with the Department, which may reveal
that 80 to 90 % of revenue is contributed by 10 to 20 % of total tax payers.
Thus, remaining more than 80% of tax payers contribute just 10 to 20 % of total
revenue to the Government. But, these 80% tax payers (most of them falling in
the category of small and medium enterprises) play a most important role in the
entire chain of production and distribution of goods and services throughout
the country. Their concerns need to be addressed appropriately. The procedure,
which may be applicable to large and very large tax payers, cannot be made
applicable to small tax payers, particularly those falling in SME category.

The Prime Minister, the Finance Minister and
the Revenue Secretary of the Government of India, who met representatives of
various SMEs, at various occasions post implementation, personally appreciated
the importance of role played by SMEs, acknowledged the practical difficulties
of stringent compliances and assured to mitigate the hardship faced by them. In
fact, the Prime Minister, in the first week of October at a public rally, made
a big announcement that we have provided big relief to Small and Medium
Enterprises (chhote and majhole udyog). It
was impressed upon that the SMEs will now file only one return every three
months instead of three returns a month to be filed by other taxable persons.

However, the GST Department issued a
press release stating that all those tax payers whose annual turnover is up to
1.5 crore will file quarterly returns instead of monthly returns (although no
notification was issued to that effect).

Problem and Unfairness: Who are SMEs?

Our Government, specifically almost all our
ministers, time and again have said that we take due care of our small and
medium business enterprises as the SMEs play an important role in our economy.
There is a separate ministry in the Government to look after the welfare of
Micro, Small and Medium Enterprises. And, if we look at the definition of SMEs
as provided in Micro, Small & Medium Enterprises Development (MSMED) Act,
2006, Small and Medium Enterprises are classified in two Classes i.e. (1) Manufacturing
Enterprises and (2) Service Enterprises.

Small Enterprises (in the manufacturing
sector) are defined as those who have investment of more than Rs. 25 lakh but
does not exceed Five crore rupees. And in the service sector, the investment
limits have been kept at minimum Rs. 10 lakh and maximum Two crore rupees.

Medium Enterprises (in the manufacturing sector) need to have
investment of more than Five crore rupees, but not exceeding Ten crore rupees,
while for the service sector, this limit is rupees Two crore and Five crore.

Although the above definitions are based upon
investment in business (plant & machinery, equipments, etc.), there
is no turnover criteria prescribed under the MSMED Act, but one can expect that
the same can be worked out by applying Investment to expected Turnover ratio
(which may be considered as between 1:5 and 1:10). Thus, expected turnover of
SMEs may fall between 10 crore to 100 crore rupees.

Based upon the ground realities and assurance
given by the Prime Minister, the SMEs were expecting that Government will
provide relief at least to all those dealers, whose annual turnover is up to 50
crore rupees. As the trade and industry was not asking for any monetary aid,
there was no loss of revenue to Government, it was just asking for simplified
procedure of statutory compliance, the SMEs were sure that their Government
will certainly take care to mitigate their hardship, but it looks like that the
Departmental authorities have some different view. From the developments so
far, it looks like that according to GST Department, the SMEs should not have
turnover of more than Rs. 1.5 crore per annum.

And if that is not the intention, then it
would be necessary to clarify the issue in larger public interest. Either the
definition of SMEs under MSMED Act needs to change or the mindset of those who
are responsible for designing and approving procedural aspects of GST
compliances.

Is It Fair?

The question arises, is it fair to ask a
businessman to invest Rs. 2 crore to Rs. 10 crore in a business which will have
turnover of just Rs. 1.5 crore per annum?. _

shailesh.kwebmaker

Is it Fair to thrust the avoidable burden of compliance under the GST?

Background:
On 1^st of July 2017, the Goods and Services Tax legislation (‘GST’)
was ushered in with pomp and fanfare. Enamoured by the hue created around the
switchover, businesses and tax consultants eagerly welcomed the ‘Good and
Simple Tax’.

In the run up to the
switchover, the Government maintained, confirmed and reiterated that the
Government and the GSTN was ready. That life (compliance) under GST will be
simple and that the GSTN is well equipped and ready to handle the loads of data
that was sought to be uploaded by taxpayers every month through the GSTR-1, 2
and 3 return forms.

Unfairness@Groundzero: Within
weeks from the switchover, grim reality of the preparedness of the Government
and the GSTN began to emerge and the simplicity of the ‘Good and Simple tax’
started to unfold. The Government announced
that the date for filing GSTR-1 (return for outward supplies made) for
the months of July and August 2017 was being extended and in the interim tax
payers would be expected to file a ‘summary’ return in form GSTR-3B. In effect,
the assessee was required to file a return for the aforesaid period twice i.e.
first in summary Form3B and subsequently in Form GSTR1/2/3 giving full details.
Assurances were given that this was a one-time measure and will not extend
beyond August 2017.

When the assessee started
uploading the GSTR 3Bs for the month of July, the Government and the GSTN had
to face harsh reality that: they had underestimated the issue, but the assessee
had to bear the brunt of outages and the snags in data upload, even for
uploading summary data. In a knee jerk reaction, the Government extended the
time limit for filing the return by a ‘few days’. History was repeated while
filing the GSTR-3B for the month of August and the GSTR-1 for the month of
July.

By mid-September, the
Government realised that the patchy solutions approach was adding to the
assessees woes. Faced with the possibility of non-compliance en masse,
the Government announced that a Committee would be formed to address the issues
and in the meanwhile, filing of GSTR-3B would be extended upto the month of
December.

Is it fair?

Is it Fair to thrust upon
Taxpayers a huge new compliance regime? In spite of being aware of the lack of
preparedness, can the Government throw caution to wind in implementation of
GST? Is it fair to be unrelenting on the issue of extending the due dates for a
reasonable period or waiving the fee for filing returns late and hold the tax
payer at a gun point, threatening to penalise for defaults which were not
entirely due to their inaction?

Ergo, desperate tax payers
and tax professionals (who help to facilitate compliance) have had to
thanklessly and fruitlessly expend time and resources to ensure that the
returns are uploaded. In doing so, they have had to forsake personal life not
to mention peace of mind, among other things.

Is it fair for our
Government to adopt such an unrelenting approach, completely belying its own
assurances that in the initial period the Government will adopt a soft approach
and give time to the taxpayers! In addition, is it fair to drain the taxpayers
with a half-baked and untested compliance system?

Last but not the least, is it
fair of the Government to fix the due dates of an untested new law, without
pondering about clash of other due dates where there is no time for the
assessee /tax consultants to effectively comply with anything but a simple tax
law?

Way forward

The Government needs to look at the whole
process with open eyes. To ensure that the system and processes on the GSTN are
truly ready and functional for various types of taxpayers / filings for
which thorough testing of the modules has to be done. Post this, announce due
dates to ensure that compliances can be done realistically.

Also, the Government should build an
interface between the GSTN and the tax payers, which is systematic and time
bound. This will ensure that small and recurring issues are dealt with
efficiently and in early stages, the larger, and more burning issues get
escalated to the relevant persons for early resolution.

The Government needs to understand that the
GST implementation will be effective only if all the stakeholders, instead of
adopting the current ‘silo’ approach, adopt an ‘eco-system’ approach and they
appreciate that their relationship inter se is symbiotic. _

shailesh.kwebmaker

[Sections 43CA, 50C and 56 of Income Tax Act, 1961 (“the Act”)] – need for some amendments

The menace of Black Money stashed abroad as well as in India is both an external and internal threat as this could be used to finance militancy. It is also unhealthy for the Indian economy as taxes are avoided – which increases the burden on the honest tax payer. Time and again, efforts have been made to unearth black money either by way of strict enforcement or by way of amnesty schemes or voluntary disclosure schemes.

It is an open secret that a major portion of `black money’ gets parked in the real estate sector. Towards this end, the various State Acts (Stamp Acts) and the Central Law –The Income-tax Act have tried to curb this malpractice e.g. the Income- tax Act contained provisions for obtaining tax clearance certificates before sale of immovable properties, thereby providing for a mechanism for preemptive purchase of undervalued properties by the Central Government. However, it is an admitted fact that these mechanisms failed and therefore have either been omitted by the Government or struck down by the Apex Court (e.g. Section 52 was read down by the Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO (1981) 7 Taxman 13). Similarly, Chapter XXC of the Act also proved ineffective.

State Governments have also joined hands in these efforts by amending their respective Stamp Acts to provide for levy of stamp duty on higher of the prescribed ‘ready reckoner value’ and apparent consideration. The Central Government also introduced section 50C in the Income -tax Act w.e.f. 1-4-2003, section 43CA w.e.f. 1-4-2014 and amended section 56(2)(vii) w.e.f. 1-4-2014. Though such provisions are a welcome step in indirectly curbing the flow of black money in real estate transactions, sometimes some unintended and unfair consequences follow. A few such instances are listed below:

The ‘ready reckoner value’ fixed by State Governments for an under construction property and a ready possession property is the same. When it is an open secret that in the real estate market there is an undesirable flow of black money, it is also equally true that the property rates vary according to the stages of construction. If a person is booking a flat today in the year 2015 in a big project, where possession is likely to be received in the year 2020 (though the builder might have intended it to be in the year 2018), the rates would be substantially different from the rates of a ready possession property. Further, in many cases, the builder offers the properties even at much lower rates in the pre-booking stage, to finance the construction. It is openly advertised in newspapers etc. for discounts in pre-booking stage. But the ‘ready reckoner value’ does not provide for any concession for such under construction properties.

In many cases, people have some existing rights in the properties and there is some pending litigation in the Courts. We are all aware of the speed of disposing of litigations in India. In a few such cases, parties agree for out-of-court settlement and decide a consideration substantially lower than the current market value, for obvious reasons.

In some cases, the Court itself decides the consideration to be paid by one litigant to the other, which is substantially lower than the market value.

Recently, I came across a few cases, where a builder has asked for extra consideration for the extra area (balcony) due to change in DC Regulations. Though such area was actually not an ‘extra area’, as the balcony was already there in the original plan but due to change in DC Regulations, it is now to be included in the carpet area. The actual consideration for such so called extra area when compared with the current ‘ready reckoner value’, is bound to be lower. There is a separate supplementary agreement executed and registered after the change in DC Regulations.

Therefore, even the saving clause of sub-section(3) of section 43CA or proviso to Section 56(2)(vii) may not help. (i.e. existence of an agreement of a prior date).

In all the above cases, there are genuine hardships to both the buyers and sellers because of the application of section 43CA and 56(2)(vii). It is accepted that there are safeguards in-built in these sections to refer the valuation to the departmental valuation officer, wherever assessee claims that the ‘ready reckoner value’ is higher than the market value, but the ‘effectiveness’ of such reference is known to all. From a common man’s perspective, when the agreement is executed, it gets reported through AIR to the Income Tax department and the case is taken up for scrutiny in almost all cases of difference between the actual consideration and the ‘ready reckoner value’. In genuine cases, at higher appellate levels, justice may be obtained with a time consuming and costly litigation. However, at the first assessment stage, getting a relief even in genuine cases is a herculean task.

Legislation with a sound objective is always welcome but is it fair to have a rigid, mechanical and rather oversimplified approach in its implementation?

Suggestion:
An appropriate discounting factor be introduced for valuation of incomplete construction based on the stage of construction. So also, exceptions be provided in situations like decisions of a court. Moreover, exceptions provided in Sections 43CA and 56(2) are missing in Section 50C. The provision should be amended to include the same.

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shailesh.kwebmaker

IS IT FAIR TO CHARGE LATE FEES U/S. 234 E FOR DELAY IN FILING RETURN FOR TDS U/S. 194 IA?

Introduction
Readers are aware that the Finance Act, 2012 introduced section 234E in the Income-tax Act, 1961 with effect from 01/07/2012. It requires payment of a late fee of Rs. 200/- per day for delay in submission of TDS returns. This is in addition to the interest payable on belated payment of TDS. Although, the late fee is restricted to the amount of TDS, it is very unfair. In fact, it has become a nightmare to small tax-deductors. The Hon’ble Bombay High court has upheld its constitutional validity of the provision in the case of Mr. Rashmikant Kundalia and another vs. Union of India and others (Writ Petition No.771 of 2014)

Unfairness
Section 194 IA was inserted by the Finance Act, 2013 w.e.f. 01/06/2013. It requires any person, being a transferee, responsible for paying to a resident transferor any sum by way of consideration exceeding Rs.50 lakh to deduct 1% as income tax thereon.

For any other type of TDS viz. u/s. 192, 194C, 194J etc. (collectively referred as other TDS) one need to have TAN but for the purpose of TDS u/s. 194IA, it is to be paid on PAN of deductor.

In case of other TDS, payment of TDS is to be made on or beforethe 7th of next month and TDS returns are to be filed at least 15 days after the end of the quarter. Therefore, there is a breathing time between payment of tax and filing of TDS return.

However, in case of 194IA, there is no separate return as such. The return is embedded in the challan itself. And there lies the problem.

As all are aware, the late fee u/s. 234 E has created havoc across the board. The Hon’ble Bombay High Court has upheld the constitutional validity of the section. Many deductors were not aware of this draconian fee applicable to TDS u/s. 194 IA.

In case of the other TDS, if the payment is delayed by, say a month, but before the due date of filing return, he will be liable to pay only the interest but not the late fee once the TDS return is filed in time.

However, if there is a delay in payment of TDS u/s. 194 IA, one has to pay interest as well as late fee u/s. 234E. Thus, the levy of late fees become automatic and results in double jeopardy.

It may be noted that instances for average individual paying for an immovable property maybe once or twice in his lifetime. The provision of TDS u/s. 194 IA is applicable to every transaction exceeding Rs. 50 lakh irrespective of the fact whether deductor is educated or uneducated, salaried or pensioner, housewife or senior citizen. It is improper to expect everyone to be well aware of the stringent provisions and deadlines just because the consideration exceeds Rs. 50 lakh.

Rather, it is pertinent to note that individuals and HUFs whose turnover of previous year has not exceeded the limit prescribed u/s. 44AB are exempt from the TDS provisions u/s. 194C, 194 J, 194 I, etc. There is no sound logic in thrusting such onerous burden u/s. 194IA on a layperson.

Suggestion
Ideally, section 234E itself deserves to be omitted from the Act. There was already a penalty of Rs. 100/- per day in terms of section 272A which in itself is on higher side. In any case, late fee should not be levied on individuals and HUFs in respect of delay in complying with section 194IA.

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shailesh.kwebmaker

Is It Fair to ignore prepaid taxes for penalty u/s. 271(1)(c) on escaped income?

Synopsis
Penalty under section 271(1)(c)
has been a bone of contention between tax payers and Income-tax
Department. In this Article, the author has tried to bring out an
anomaly wherein a person who has not furnished a return of Income at all
may receive a more favorable treatment than someone who has actually
furnished a return but has failed to include a particular income
therein. He has explained this with a simple and lucid live example.

Introduction
Penalty
u/s. 271(1)(c) of the Income-tax Act, 1961 is for concealment of
particulars of income or furnishing inaccurate particulars of income.
The Income-tax Department treats the relevant income as ‘concealed’ or
‘escaping assessment’. For brevity, it will be referred to as ‘escaped
income’ in this article. Penalty is equivalent to 100% to 300% of the
‘tax sought to be avoided.’

Relevant provision
Explanation 4 to section 271(1)(c) defines the expression ‘Amount of Tax Sought to be Avoided’ (ATSA) as follows:

“(a)
in any case where the amount of income in respect of which particulars
have been concealed or inaccurate particulars have been furnished has
the effect of reducing the loss declared in the return or converting
that loss into income, means the tax that would have been chargeable on
the income in respect of which particulars have been concealed or
inaccurate particulars have been furnished had such income been the
total income;

(b) in any case to which Explanation 3 applies,
means the tax on the total income assessed [as reduced by the amount of
advance tax, tax deducted at source, tax collected at source and
self-assessment tax paid before the issue of notice u/s. 148];

(c)
in any other case, means the difference between the tax on the total
income assessed and the tax that would have been chargeable had such
total income been reduced by the amount of income in respect of which
particulars have been concealed or inaccurate particulars have been
furnished.”

Clause (a) deals with a situation of loss vis-à-vis escaped income.

Clause
(b) is relevant for this article – It refers to Explanation 3 which
deals with a situation where no return has been filed.

Explanation 3 —
“Where
any person fails, without reasonable cause, to furnish within the
period specified in sub-section. (1) of section 153 a return of his
income which he is required to furnish u/s. 139 in respect of any
assessment year commencing on or after the 1st day of April, 1989, and
until the expiry of the period aforesaid, no notice has been issued to
him under Clause (i) of sub-section (1) of section 142 or section 148
and the Assessing Officer or the Commissioner (Appeals) is satisfied
that in respect of such assessment year such person has taxable income,
then such person shall, for the purposes of Clause (c) of this s/s., be
deemed to have concealed the particulars of his income in respect of
such assessment year, notwithstanding that such person furnishes a
return of his income at any time after the expiry of the period
aforesaid in pursuance of a notice u/s. 148.”

The unfairness
In
terms of Explanation 3 – where the assessee has not filed or furnished
the IT return and any escaped income is detected then the prepaid taxes
like TDS, advance tax, tax collected at source and self assessment tax
are to be deducted from the tax on the total income for the purposes of
calculating ATSA. This is logical and fair. However, Clause (b) does not
deal with a situation where the return was duly furnished but a
particular item remained to be included in the income. This is a more
common situation particularly if the income is in the nature of only
accrual and not actually received. Sometimes there could be TDS on the
said escaped income which also remains to be claimed. It is grossly
unjust and unfair not to consider this TDS while calculating ATSA on
escaped income.

It is a different story if such inadvertent
escapement is accepted by the income tax department as non concealment.
Otherwise, it leads to an anomaly that a person who has not furnished a
return at all receives more favourable treatment than the one who
actually furnishes the return but fails to include a particular item.

Needless
to state that the particulars in Form 26AS are not necessarily complete
and reliable. Otherwise, an assessee would get a hint that some income
has remained to be included.

Live Example
An
individual’s services were transferred from Company A to Company B
within the same group. Company A credited ESOPs to his demat account and
duly deducted tax on the perquisite value. Since, it was only a
notional income, it did not occur to the assessee to obtain salary
certificate from Company A, hence purely out of oversight and ignorance,
the income remained to be included. It was revealed in the course of
assessment from Form 26AS. Therefore, although full tax @ 30% was
deducted on the perquisite value – escaped income – the definition of
ATSA does not permit the deduction of this TDS for penalty u/s.
271(1)(c).

Suggestion
The scope of Clause (b) of
Explanation 4 should be enlarged so as to cover both the situations
namely non furnishing of return as well as non inclusion of particular
income in the return filed.

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Is It Fair Not To Exclude Personal Payments By Individuals/Hindu Undivided Families (for Any of Its Members) from TDS?

Introduction:

Provisions of Tax
Deduction at Source (TDS) contained in Chapter XVII-A of Income-tax Act,
1961 (“the Act”) impose a heavy burden on tax payers, especially
businessmen. Readers are aware of highly damaging consequences of
defaults in respect of contraventions of these provisions – viz. section
201, 40(a)(i), 40a(ia), 271-C, 272A, 276 B and so on. Having regard to
the complications in implementation and the harsh consequences of
default, law-makers in their wisdom have generally kept the common man
viz. individuals and Hindu Undivided Families (HUF) out of the
obligation to deduct tax. However, under certain circumstances, even
individuals and HUF’s are required to comply with these provisions.
These situations are:-

(a) payments of salaries

(b) payment to non-residents ; and

(c) if the individual/HUF’s business or profession was subject to tax audit u/s. 44AB under turnover criterion.

The unfairness:

Obligation
in respect of payment to non-residents is to some extent reasonable
since it entails the outflow of money from the country.

The Act
in certain sections also provides exception so that an individual/HUF,
though otherwise liable to deduct tax is not required to do so on
payments for personal purposes. Thus, s/s. (4) of section 194.C (payment
to contractors) exempts payments made exclusively for personal purpose.
(e.g., repairs/painting of the businessman’s residential house). So
also, the 3rd proviso to s/s. (1) of section 194.J (payments to
professionals) grants similar exemption. Hence, payments to lawyers,
architects, doctors for personal purposes by businessman will not
attract TDS provisions.

As against this, no such exemption is provided in respect of the following payments:-

Section 192 – Salaries (say salary payable to personal attendant for a patient/disabled person)

Section 194A- Interest other than interest on securities (say interest on housing loan taken from friends, relatives, etc.).

Section 194H- Commission or brokerage (say brokerage on sale/purchase of house/car/other assets) Section

194I – Rent for residential house, or rent for personal car/other assets.

There
appears to be no logical reason for such discrimination. Due to such
inconsistencies, the study and implementation of law also becomes
difficult.

Suggestion:

Similar exceptions should be provided in aforesaid sections as well.

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Is it fair?

Introduction:

Members of our profession are being increasingly subjected to disciplinary cases for misconduct. The complainants are often not aware of the grave consequences on the member concerned; or sometimes they knowingly do so to harass the CA with an ulterior motive to exert pressure on a rival party. CA being a soft target is often victimised. Our Council is realising this; but is helpless due to the system.

It is observed that many a time, an altogether stranger to the dispute files a case and makes the life of our member miserable.

Consequences of a complaint:

For items specified in First Schedule to our CA Act, the prescribed punishments are any one or more of – (a) reprimand, (b) fine upto Rs. 1 lakh and (c) suspension of membership for a period up to 3 months.

For items in Second Schedule, any one or more of – (a) reprimand, (b) Fine upto Rs. 5 lakhs and (c) suspension for any length of time, including forever.

However, it is to be noted that the process of disposal of complaint is likely to cause more stress than these prescribed consequences.

Firstly, it takes at least 3 years from initiation of complaint to its disposal (if not contested in appeal). One has to carry the sword hanging on one’s head. It is a great mental agony. It involves expenditure – on paper work, counsel’s fees, traveling (at times to Delhi) to the place of hearing and so on. Most importantly, if one is held prima facie guilty, one is deprived of bank audits, Government audits ( C & AG), etc. This is a great monetary loss.

After all, it is a stigma on one’s professional career.

Locus Standi: For information of the readers, I wish to clarify the distinction between the items of First and Second Schedule. First Schedule contains offences within the members’ community while Second Schedule contains items affecting the outsiders. The latter is considered more serious.

The proceedings are considered as quasi criminal proceedings. Any person can file a complaint. If complaint is not validly made, the Disciplinary Directorate can initiate suo moto action based on ‘information’.

I have come across many cases where the complainant was strictly not concerned with the type of misconduct alleged. Particularly, in First Schedule, the items affect the rights of other members.

For example:
In one case, a company did not appoint its first auditor in the board meeting. (Section 224 (5) of Companies Act, 1956) It was advised to appoint auditor in EGM – section 224 (5)(b). They issued appointment letter which unfortunately did not mention them to be the first auditors. It was implied and understood. Auditors filed form 23 B to ROC. Later on there was a dispute between two groups of management. The Indian group, both the directors being CAs, fabricated the records so as to ‘create’ one more auditor before the EGM! They closed the accounts out of the way – contrary to a different accounting year stated in articles, and filed a frivolous complaint that the auditors (innocent, appointed in EGM) did not communicate with previous auditor! And the alleged ‘previous auditor’ did not even turn up during the proceedings. Complainants admitted that they had manipulated the records. The proceedings stretched over a period of 5 years and a very senior, reputed firm was the victim.

In the second case, there was a change-over in management. The old management, proved to be unscrupulous, created an ‘auditor’ in similar manner and filed similar complaint. The new auditor (genuine) communicated with previous auditor on record (he who signed last audit, and who according to the new management was the previous auditor). The innocent new auditor had no clue whatsoever to indicate the existence of any such ‘previous auditor’.

The third case is more serious. There was a split in management. Two brothers who were directors separated from each other. The outgoing auditor supplied information to an outside lawyer. He was staying in Rajasthan while the company had all its operations in Mumbai. The outsider was not a shareholder, director, employee, supplier, customer and had no connection with the company at all! He filed a case of negligence (Schedule 2) against the auditor ‘claiming himself to be a responsible citizen’ of our country. He found a few minor arithmetic errors in stock valuation sheets which contained hundreds of items (in 12 sheets). Those were human, inadvertent errors, having no material impact. Again the proceedings stretched over 5 years!

During the hearing, he never appeared and it transpired that he was a professional blackmailer.

Conclusion:
Unfortunately, the normal principle of a complainant coming with clean hands is not followed in disciplinary proceedings. Council claims to be concerned (rightly so) only with the members’ conduct and not that of an outsider. Therefore, complaints even from a criminal who is behind bars are entertained. So also, for First Schedule cases, like previous auditors communication, non-payment of undisputed fees, solicitors, advertisement, sharing with non-members, charging fees on percentage basis, etc. a stranger is no way concerned. When previous auditor is not complaining, how is a stranger concerned? This results in lot of burden on Disciplinary Directorate and on the respective committees of the Council as well.

It is suggested that locus standi, materiality and the like concepts be given due weightage in the proceedings.

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IS IT FAIR FOR THE BUREAUCRATS TO INDULGE IN WASTEFUL FORMALITIES?

Introduction
All of us understand the importance of rules and procedures. However, unfortunately the bureaucrats fail to appreciate the very purpose of such rules and procedures. This is not to say that the rules may be bypassed or not complied with. Here is an instance as to how the approach of a government’s office defeats the very purpose of a prescribed formality.

The unfair instance
Recently an application was made to the Director, Software Technology Park of India (STPI), Navi Mumbai under the Right to Information Act, 2005 for obtaining certain information about their status under the Industrial (Development & Regulation) Act, 1951. A similar kind of confirmation was already given by STPI in three other cases. The present application was made since it was insisted upon by the tax authorities. This in itself is another problem.

Court fee stamps worth Rs.10 were affixed to the application
After about 15 days, a letter was received from STPI, New Delhi that the payment of fees by way of court fee stamp was not acceptable. They insisted on payment by cash/DD/postal order.

It was then verified from their website that the fee could be paid only by DD or by postal order. There is no mention of cash. The following questions immediately arise:

(a) they could have easily pointed out such deficiency (if at all it is so) at the time of accepting the application itself.

(b) There is no consistency between what is written in the letter and what appears on the website — in respect of cash payment.

(d) The amusing thing is that the bank charges for the DD of Rs.10 were Rs.30. Further, even the STPI authorities sent the same from New Delhi by speed-post, which was again a waste of money.

Incidental
On the same subject, in the context of section of 10B of the Income-tax Act, 1961, there is an Instruction no. 2/2009 of CBDT, dated March 09, 2009 that an approval granted by Director of Industries (STPI) if ratified by the Board of Approval (BOA) is valid. While clarifying this point, STPI office confirmed that the approval granted by them need not be ratified by BOA.

However, in the letter from STPI there was a typographical error. Instead of the word ‘ratified’ it was typed as ‘rectified’. The concerned CIT (Appeals) insisted on a separate confirmation from STPI regarding this obvious typographical error.

The wasteful aspect of this exercise is selfevident.

Conclusion
(1) The authorities should be made aware of the purpose and spirit of the rules.
(2) They should be trained to do a cost benefit of analysis.
(3) They should be made aware that their adamant attitude in waste of national resources.
(4) There should be clarity and consistency at all levels.

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IS IT FAIR TO EXTEND PRESUMPTIVE TAXATION TO ALL BUSINESSES ?

In a developing country like India, even after sixty years of independence a majority of the population still lives below poverty line. In their day-to-day life, they have to struggle for subsistence. Besides leading an impoverished life, a large number of people are illiterate. Till date, many of them cannot even write their own name. In this situation, the various constitutionally valid laws are nothing but “kale akshar bhains barabar” and cannot be comprehended by the people. In spite of this, it is binding on them to follow such unknown statutes. Any contravention, whether intentional or not, attracts harsh penalties.

Considering this situation, the law of the land is sought to be kept simplified to a certain extent. Every law provides some relief to the illiterate and poor class of entrepreneurs, helping them to abide by the law without being subjected to its complexity.

In the Income-tax Act, 1961, there are sections such as section 44AD/AF/AE/B/BB, etc. which are commonly known as Presumptive Tax Provisions. They mainly cover a certain class of entrepreneurs such as contractors in civil construction, small retailers, transporters, etc. The main intention of these provisions is to tax businesses on a certain percentage of their turnover or receipts. This percentage specified is normally an industrywise approved profitability norm. The relief provided by these sections is in the form of non-maintenance of books of accounts and no further verifications or questioning through cumbersome scrutiny procedures. In short, the taxpayers enjoy’s his peace of mind. However, a provision of compulsory Tax Audit u/s 44AB needs to be complied with, if the profit declared by such specified business organisation is below the prescribed percentage. This provision is aimed at preventing misuse of the relief provided by the Act. In my sixteen years of practice, I have seen many genuine cases where the actual profit earned is below the specified percentage, but due to the threat of harassment through scrutiny procedures, businessmen have adopted the prescribed percentage and have declared higher profits and paid tax on the unreal income. I have also come across a few cases wherein the lack of awareness of law has led to non-conduct of audit and consequently payment of penalty due to noncompliance.

A similar situation may be faced by many in the near future, due to modification in the sections relating to presumptive tax i.e., sections 44AD/AE etc. becoming effective from A.Y. 2011-12. Due to the amendments, section 44AD is now applicable not only to contractors in civil construction businesses but also to all ‘eligible’ business organisations. The definition of ‘eligible business’ as given in the section includes all business organisations run by individuals, HUFs and firms. Therefore, these modifications have a very widespread impact. Further, it is also rather unfair that the rate of 8% net profit has been prescribed across the board, irrespective of the nature of assessess. A majority of such businessman would be small retail traders. For them the rate hitherto was only 5%. The net profit is now suddenly perceived to be 8%! Further, it might so happen that cost of compliance may even exceed the tax liability and on the top of it, the fear of scrutiny!

The positive side is that all small businessmen having a turnover or gross receipts below Rs.60 lakh can seek shelter u/s. 44AD and after declaring 8% profit, can get rid of complicated accounting and audit requirements and threatening scrutiny proceedings. However, on the flipside, due to the effect of the modified section 44AB, all such eligible businesses declaring a profit below 8% will have to maintain their books of account and get them duly audited, besides filing their return of income. Earlier a small organisation having turnover below Rs.40 lakh and not belonging to a specified class under presumptive tax sections, was completely out of the purview of section 44AB and the audit of such organisations was not mandatory under the provisions of the Act.

To make the law fair — percentage of profit should be trade/industry or businesswise based on survey of reasonable sample of the business, rather than ad hoc percentage of 8%. However, if 8% is based on survey carried on by the CBDT, then in the interest of fairness and transparency, the same needs to be disclosed.

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Is it fair to apply section 314 of the Companies Act, 1956 to private limited companies?

Background

Section 314 of the Companies Act, 1956 (‘the Act’) deals with situations where either the director or any of his relative or any person mentioned in section 314 holds ‘office or place of profit’.

Meaning

As per s.s (3) of section 314, any office or place shall be deemed to be an ‘office or place of profit’:

In case of director

If the director obtains from the company anything by way of remuneration over and above remuneration to which he is entitled as such director, whether as salary, fees, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.

In case of any other individual or body corporate

If the individual or that body corporate obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisite, the right to occupy free of rent any premises as a place of residence, or otherwise.

Conditions

As per s.s (1) of section 314, except with the consent of the company accorded by a special resolution:

(a) No director of a company shall hold office or place of profit, and

(b) (i) No partner or relative of such direc tor,

(ii) no firm in which such director, or a relative of such director is a partner

(iii) no private company of which such director is a director or member, and

(iv) no director or manager of such a private company shall hold office or place of profit carrying a total monthly remuneration as prescribed (Rs. 250,000 per month).

One may interpret that because of the word ‘such’ used above, the relative or partner or firm or private company as mentioned above would attract the provisions of section 314(1) only when the concerned director is already holding office or place of profit. Where the director himself does not fall within the ambit of section 314, the relative/firm/private company as mentioned above need not satisfy the condition of special resolution even though he/it may be holding office or place of profit.

However, s.s 314(1B) starts with a non-obstante clause which states that notwithstanding anything contained in s.s (1), where the relative/partner/firm/ private company holds any office or place of profit carrying monthly remuneration more than the sum prescribed (Rs.250,000 p.m. from April 2011), then the company shall be required to obtain prior approval of the Central Government and pass a special resolution for such an appointment.

Hence, it deduces that where the remuneration exceeds the prescribed limit i.e., Rs.250,000 per month, the approval of the Central Government and special resolution will be required even when the concerned director does not hold place of profit.

The above requirement applies to private limited companies also. This implies that even small private limited companies which are nothing but family-managed businesses would be required to comply with this section. This article attempts to bring out the unfairness in applying section 314 particularly the condition of obtaining the Central Government approval in case of private limited companies.

The underlying object of this section is to prohibit a director from misusing its influential position in the company. Hence, section 314 puts certain checks like special resolution by the company and approval of the Central Government. Naturally, it follows that such checks particularly, getting approval of the Central Government would be more apt when interest of public at large is involved.

However, there are many small private limited companies with family members as shareholders and occupying important positions. Normally, these companies do not have outside persons as shareholders. Hence, their internal affairs would not affect the interest of general public. In such scenario, applying to the Central Government does not make much of sense. Again, getting the Central Government approval would prove to be a task in itself in terms of time and efforts involved.

Moreover, many of these small private limited companies are not liable to furnish Compliance Certificate to the Registrar of Companies. They do not have a dedicated company secretary to point out company law compliances. There is every possibility that requirements of section 314 may go unnoticed. Again the threshold limit of Rs.250,000 has been raised in April 2011 only. Previously, the limit was only Rs.50,000. This steep rise in the limit itself implies how irrational the earlier limit was.

Further, it is pertinent to note that section 40A(2) of the Income-tax Act, 1961 already seeks to provide some control over excessive or unreasonable remuneration. However, in case of this provision also, there is an element of unfairness in its implementation. Interestingly, there are decisions to say that where the payment is actually made and where the payee has incorporated such payment in its/ his income and paid taxes thereon, disallowance u/s.40A(2) cannot be made [see CIT v. Udaipur Distillery Company Ltd., (Raj.) (316 ITR 426) and Modi Revlon (P) Ltd. v. ACIT, (Del.) {2 ITR (Trib.) 632}].

Suggestions

In all fairness, it would be in interest of all the parties involved to exempt private limited companies from rigours of section 314. Seeking of prior Central Government approval may be made mandatory only for public companies and private companies which are subsidiaries of public companies.

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Is it fair to Initiate Recovery Proceedings When Tax is Already Deducted?

The Income-tax Act, 1961 (‘the Act’) provides for two modes of collection and recovery of income taxes under Chapter XVII.

One and major mode of collection of tax preferred by the Department is through Tax Deduction at Source — TDS. The other mode is to collect taxes directly from the assessee — this is used where tax deduction is not provided for or TDS is not enough to meet the tax liability — advance tax and other modes of collection prescribed in Chapter XVII. In the recent years the Income Tax Department has pursued vigorously the TDS mode of collection of taxes by extending the areas of Tax Deducted at Source — refer section 192 to section 206 of the Act.

Section 205 grants protection to the deductee assessee. This is a logical step on having adopted ‘Tax Deducted at Source’ mechanism. The section reads as under:

“205. Bar against direct demand on assessee. — Where tax is deductible at the source under (the foregoing provisions of this Chapter), the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.”

The Plain reading of this section makes it clear that whenever and wherever tax is deductible under the provisions of this Chapter and where the tax has been so deducted, no direct demand can be raised on the deductee. This implies that to the extent of TDS, demand cannot be raised on the deductee. For raising demand on the deductor a suitable provision has been inserted in section 201 of the Act. Under this provision whenever there is a default in deducting either the whole tax or part of the tax the deductor is deemed to be an ‘assessee in default’.

Thus there are self-contained foolproof provisions in the Act to protect the deductee under Chapter XVII.

The Act provides for filing of returns of income by individuals, trusts and businesses wherein the assessee has to provide detailed information regarding the name and address of the deductor, along with the TAN of the deductor and the amount of tax deducted at source based on the certificate issued by the deductor in Form 16A. Under the previous rules these certificates were to be attached with the return of income. However, in the present era of computerisation, the tax credits can be viewed under Form 26AS online. These returns of income are also affirmed by the assessee by verification provided in the form of return of income. Thus he is held responsible for claims of tax credits he is making.

After the deductee has filed the return and complied with all the formalities, no demand can be raised against the assessee for the amount of Tax Deducted at Source.

Reality

Having made such a foolproof scheme, in reality the income-tax authorities all over the country are blatantly practising something which is not provided under the Act. This was revealed in the two decisions of the Bombay High Court. The first decision is reported in (2007) 293 ITR 539 (Bom.) in the case of ACIT v. Yashpal Sahani.

In this case the assessee was a salaried employee and the tax deducted at source by his employer was not paid to the Government. Hence even Form No. 16 was not issued to the employee. At the time of assessment the employee produced all the proofs including salary slips to prove that ‘tax was deducted’. The Assessing Officer without paying any attention to the legal provisions u/s. 205 referred above, raised a demand on the employee and even issued order for attaching employee’s bank account. The employee-assessee even wrote letters to Income-tax Officer, TDS circle of the employer to initiate necessary proceedings against the employer. The employee challenged the action of Assessing Officer of attaching his bank account. The Court rightly held that the action of the Assessing Officer was not as per law and even if the credit of the TDS is not available to the petitioner-assessee for want of TDS certificate, the fact that the tax has been deducted at source from salary income of the petitioner would be sufficient to hold that u/s.205 of the Act, the Revenue cannot recover the TDS amount with interest from the employee. While dealing with this judgment the Court also referred and relied upon decisions reported in 242 ITR 638 (Gauhati) and 278 ITR 206 (Kar.).

Without paying any heed to such crucial decisions the Department continues its unlawful actions against thousands of assessees, mostly salaried. As a result, assessees having salary income continue to receive intimations under the section 143(1) with demands calculated along with interest and have to file rectification applications either themselves or through their chartered accountants or lawyers or ITP’s. As is the practice, the Department does not act on these rectification applications and keep on sending illegal demand notices to the employee-assessees, irrespective of the fact that there is bar against raising direct demand on the employee. Unfortunately, at times the professionals involved also do not point out the provisions of section 205. This unlawful practice continues unabated leading to harassment of the assessee and results in corruption. This author has not seen any indirect demand on the employer deductor raised by the Income-tax Department under such circumstances. However, the employees are made to dance to the tune of recovery officers and at times suffer at the half-baked computer system of the Department.

Very recently the matter again came up before the Bombay High Court in writ petition No. 6861 of 2011. The Court vide its order clearly held that the intimation demand is not correct and hence set aside the same.

Although procedural, section 205 grants protection to the employee (deductee) whose tax is fully deducted but unfortunately they are still made to visit incometax offices for no fault of theirs and in blatant violation of the legal provisions. The irony is that even the newly created CPC Bangalore has continued this unlawful practice.

This author has drawn the attention of the regulator i.e., the CBDT to stop this harassment. This step will be in the interest of the Department because of its avowed objective of being ‘assessee friendly’.

In all fairness the author advocates and expects the CBDT to issue proper instructions urgently to its officers to:

desist from attaching assets of the deductee.

take action against the deductor.

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Is It Fair to Prohibit the Law Students from Pursuing any Other Studies?

Clause 6 of Rules of the Legal Education – 2008 of Bar Council of India is reproduced below.

“6. Prohibition to register for two regular courses of study.

No student shall be allowed to simultaneously register for a law degree program with any other graduation or post graduation or certificate course run by the same or any other University or an Institute for academic or professional learning excepting in the integrated degree program of the same institution. Provided that any short period part time certificate course on language, computer science or computer application of an Institute or any course run by a Centre for Distance Learning of a University however, shall be excepted.”

As per the above clause, a Law student cannot pursue any other academic/professional course. Many students of C.A./C.W.A/C.S. course intending to pursue Law course simultaneously as an additional or necessary supplementary qualification are adversely affected by the above rule.

It is submitted that the said restriction is harsh/ unreasonable and unfair for the following reasons.

i) There is already a restriction on pursuing more than one University course. Thus, effectively the above restriction remains applicable only to the courses of the Institutes.

ii) The expression “Institute” is not defined in the Rules.

Thus, the prohibition is a sweeping one. Some Institutes are statutory. Some are either run or recognised by the various administrative Ministries of Central/State Governments. Some others are purely private. The examples, other than of ICAI/ICWA/ICSI, are of Insurance Institute of India and Indian Institute of Bankers. These Institutes are running the academic courses which are mostly pursued by insurance and bank employees.

iii) The above restriction appears to be proceeding on the premises that Law course is pursued only for the practice in Law. The fact is that the same is pursued by majority as an additional or necessary supplementary qualification.

iv) A student of three years Law course can be in the full time employment, but cannot pursue other courses as above.

v) Even if a person is qualified for practice in more than one discipline, he/she can practice only in one discipline. It is therefore unreasonable to put restriction at the qualifying stage.

vi) In the case of any course, after completing the tuition period, one may be required to only appear for exams for completing the course for a long period. It is not clarified during what period a Law student can be said to be pursuing other courses.

vii) While a University student, whether for graduate or post graduate studies in other branches can simultaneously pursue a non-University course, a student of Law course, which is essentially a University course, cannot do so.

viii) There is an uncertainty about completing any particular course. By curtailing the options, the career prospects of a student gets adversely affected.

The inbuilt exemption to distant learning courses is quite logical. But it is applicable only to a University. It is a different thing that it may come into the clutches of a University’s own rules. However, if the said that exemption to distant learning education is extended to the Institutes also, the situation can be substantially salvaged. The issue is highlighted for the attention of various Institutes, academicians and prominent professionals for their consideration and pursuing it further, if and as may be deemed appropriate.

At the most, if at all the prohibition is to be applied, it should be restricted to the five year course and not for the three year course of LLB. Further, depriving the law students from acquiring indepth knowledge of accountancy, costing, corporate laws etc. would eventually be to their own detriment. In the present day world, multi-disciplinary knowledge is not only desirable, but essential. …………..

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IS IT FAIR TO ISSUE CERTIFICATES U/S. 197 WITH UNNECESSARY CONDITIONS?

Introduction

There are many non-resident Indians having long term capital assets, particularly residential house properties in India. After the sale of such assets, many of them further propose to reinvest requisite amounts either in house property or in eligible bonds to avail benefits of section 54/54EC/54F of the Income tax Act, 1961 (‘the Act’) . Since it is a transaction with a nonresident, the issue of withholding tax arises. Ideally, since the assessee seller is going to reinvest in eligible assets u/s 54/54EC/54F, no tax should arise. However, the buyer (being the payer of the sale consideration) would be under an obligation to deduct tax for payment being made to a non resident in terms of section 195 of the Act.

In such cases, most of the non-residents opt to apply under section 197 for NIL/lower deduction certificates. An affidavit that requisite amounts would be invested in eligible assets u/s 54/54EC/54F is also submitted alongwith other documents (like sale deed, proof of being a non-resident, computation of capital gains etc.). On the basis of the same, it can be fairly decided that the buyer need not deduct any tax or deduct tax at lower rate. It has been observed that it is a normal practice within the Department to issue such certificate but with a direction to the buyer to issue a cheque of requisite amount directly in favour of REC/NHAI Bonds or Capital Gains Account Scheme (‘CGAS’).

The unfairness:

The facility of obtaining NIL/lower deduction certificates in case of non-residents is to make matters easier for them and not to subject them to unnecessary conditions. Such directions frustrate the very purpose of applying for NIL withholding certificate. C.N.Vaze Chartered Accountant is it fair? The fact that the assessee is submitting an affidavit should be sufficient proof that he wishes to comply with the necessary provisions.

Further, where it is proposed to reinvest in house property, the direction of issuing cheques directly in favour of CGAS account is not fair as the assessee has got time upto due date of filing return of income and may like to deposit his funds in fixed deposit for the time being, to reap the benefit of higher interest rates. In an extreme illustration, sale may be effected in the month of April so that the seller has an option of making investment within six months (for section 54EC of the Act) and upto 30th September of the following year (for CGAS Scheme) as the case may be. This option is unduly curtailed by such conditions.

In many of the cases, it may really put the assessee (i.e. the non-resident seller) and the buyer in a dilemma where part payment is to be made by the bank (being housing loan obtained by the buyer) directly to the seller and part payment is made by the buyer himself. Further, it may also give rise to serious practical problems if the payment is deferred/ made in instalments. At the most, the assessee may be directed to submit the proof of such investment before the due date of filing return. Needless to state that since all documentary evidences are on record, the tax department always has power and access to catch hold of the concerned persons, if they commit any default.

Conclusion:

Such direct instruction to the buyer to issue a cheque of requisite amount directly in favour of REC/NHAI Bonds or CGAS Account would be encroaching upon assessee’s right to plan his investments. This also brings us to the question as to whether the assessing officer has the power to issue such directions to the payer.

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Is It Fair to Levy stt on Traders?

Stock Exchanges play a very important role in the economy of a country – helping to raise capital for businesses, mobilising savings for investment, creating investment opportunities, assisting the government to raise funds for various development projects, etc. It is aptly said “the stock exchange is the barometer of the economy”.

For the proper and efficient functioning of the stock exchanges, apart from investors, various other types of players like speculators, jobbers, traders, hedgers and arbitrageurs, etc. are not only necessary but obligatory. They are referred to as market participants and each of them plays a specific role in the stock market. While speculators and jobbers provide liquidity as well as volume to the market, hedgers provide depth to the market. Traders help in volume and price discovery whereas arbitrageurs fine-tune prices by correcting price abnormalities. Investors usually invest and hold shares for a comparatively longer period of time.

Currently, the stock market is in a pathetic situation. Markets have become stagnant and trade in a narrow range. Sometimes, on getting news of some event, the market becomes highly volatile and individual stocks show very erratic movements which is due to the lack of depth in the market. The stagnancy in the market is the result of lack of many of market participants like traders, jobbers as well as speculators, who have either deserted the market or are unwilling to initiate trades due to excessive transaction costs. Even arbitrageurs are finding it difficult to use any opportunity, since the costs of transaction are greater than the arbitrage difference. The combined effect of all these is that the investors, especially small investors, are unable to get proper prices to buy/sell their investments, which in turn has resulted in increased impact costs for them.

Earlier, when the transaction costs were not so high, there was room for every market participant to function in the market and trade without restraint of prohibitive costs. However, with the introduction of the Securities Transaction Tax (STT), the costs have escalated to such a level that it has become difficult for the market participants to survive. They desist from entering into transactions due to entry level tax (STT, which is levied at the time of transaction) and thus, overall market liquidity, volume and depth have been impacted adversely.

It was announced in the budget speech that the STT is introduced to avoid the differential tax treatment meted out to capital gains. So, only those investors (actually, bigheads like promoters, FIIs, etc.) whose income from share transactions is taxed as “Capital Gains” are benefited by the imposition of STT with favourable tax treatment whereas, a majority of the market participants like speculators, jobbers, traders, hedgers, arbitrageurs who have income from share transactions which is taxable as “Business Income”, under the head “Profits and Gains of Business or Profession” are left high and dry without any tax benefit on such income, despite the transactions entered into by them also bear the charge of STT.

Let us understand the above with the help of an example, when two identical transactions in shares are executed – one by an investor and another by other market participant, say, a jobber. At first stage, both of them will be charged STT on the transactions executed. However, the income of the investor from that transaction will be exempt from tax thereafter, whereas, the income of the jobber will be taxed again at regular rates. Thus, the market participants have been subjected to double taxation and meted out a stepmotherly treatment under the STT regime. If the favourable treatment is granted only to “Capital Gains” income, then only those transactions pertaining to the income taxable under the head “Capital Gains” should have been subjected to the STT and all other transactions should have been exempted from the STT. Doing otherwise not only impacts the market participants adversely, but also violates “principle of natural justice” and “law of equity”.

Although initially, some relief was granted in the form of tax rebate, the same was discontinued without assigning any reasons whatsoever. Ultimately, the new scheme of taxation on securities transactions has miserably failed to bring win-win situation for all. It has only helped the FIIs, promoters and to an extent, a small class of investors at the cost of all other market participants, who are also equally important for the functioning of the stock market. Slowly and steadily, market participants are drifting away from the stock market which in the long run, has impaired the proper functioning of the stock markets.

To remedy the situation and help the market participants survive, it is suggested to grant proper tax treatment to the market participants, keeping in view the legal principles of natural justice and equity. This can be achieved by segregating the stock market transactions into “taxable transactions” and “exempt transactions” based on whether the order is a “client type/Institution ID” or “Trd category” (i.e trading category). Alternatively, the rebate allowed earlier u/s. 88 E may be restored.

This will ensure that there is no undue high trading costs to the market participants.

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shailesh.kwebmaker

IS IT FAIR TO LEVY MAT

The economics behind direct taxation is twofold:

i. Collection of revenue for the State in a manner to reduce the inequality in the distribution of wealth, and

ii. Using it as a fiscal tool for channelisation of the economy into desired sectors.

The first objective is achieved by enacting the Direct Taxes Laws and empowering the State to alter the tax rates annually while preparing the Budget for the ensuing financial year. The second objective is achieved by providing various tax incentives in the form of tax holiday (deduction or exemption), accelerated depreciation, etc. Needless to mention that various tax incentives provided by the Income-tax Act, 1961 (‘the Act’) have contributed to a large extent in the development of the Indian economy to bring it to its present state.

The above two objectives are conflicting with each other, in a way. Hence a proper balance has to be maintained between the two. But this is often lost sight of by the law-makers.

A typical example is levy of Minimum Alternate Tax (MAT) on book profits of companies. MAT was introduced for the first time in India u/s.115J by the Finance Act, 1987 and later removed, reintroduced and amended from time to time. This article is intended to raise a basic question whether levy of MAT is at all justified in the light of the second objective stated above.

The advocates of MAT basically give the argument that corporates should not be allowed to have two faces — one for the shareholders and the other for the State. In simple words, when they have huge profits in books of account but no or lesser ‘total income’ under ‘the Act’, they should pay MAT. But then, how did the corporates have no or lesser ‘total income’ under ‘the Act’? It was only because of tax incentives given by the State. For example, a company engaged in development of infrastructure facility is allowed a 100% deduction of profits derived from such business for a period of 10 consecutive years out of a total period of 20 years. Now assuming that it is the sole business of the company, its ‘total income’ under ‘the Act’ shall be nil (subject of course to the enormous litigation on the word ‘derived from’) but will have a positive book profits, on which it has to pay MAT @ 18%. It indirectly implies that deduction allowed u/s.80IA becomes only 40%. This result could have been achieved by simply amending section 80IA and restricting the deduction to 40% (Tax on 60% of the profits @ 30% is nothing but MAT of 18% on 100% profits). The same situation can be visualised in several other tax incentives like:

i. Deduction u/s.80IB to u/s.80IE
ii. Deduction u/s.10A, u/s.10B & u/s.10AA
iii. Additional depreciation @ 20% for new machineries (for manufacturers)
iv. Allowance of capital cost u/s.35AD for eligible business (obviously in books, these exp. will be capitalised giving rise to huge difference between book profits and total income)
v. Weighted deduction of 175% or 200% for R&D
vi. LTCG u/s.10(38) [when it is said that exemption u/s.10(38) is in lien of STT, where comes the need for MAT on such LTCG for corporates, as if they don’t pay STT?]
vii. Exemption u/s.54EC or u/s.54D or u/s.54G or u/s.54GA.
viii. Subsequent deduction u/s.40(a)(ia) or u/s.43B because of late compliance.

If the above situations are to be taxed anyway, then those sections themselves can be amended or deleted. No doubt, MAT credit is allowed to be carried forward u/s.115JAA; but its utilisation in future is subject to many contingencies and restrictions and we accountants are well aware of the time value of money.

We must debate on the question whether it is justified to levy MAT on book profits especially on tax incentives like 10AA or 80IA, etc.? I believe, it is a violation of the principle of ‘Promissory Estoppel’ ! ! !

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shailesh.kwebmaker

IS IT FAIR TO INVOKE PROSECUTION PROCEEDINGS SO RAMPANTLY?

Introduction
All of us are aware that under the tax laws, any default or contravention of the provisions attract various types of consequences such as interest, penalty, fee (new section 234E), disallowance and even prosecution. Prosecution implies a criminal offence and may invite punishment of rigorous imprisonment. It is expected that while administering any law, the authorities should use discretion and a sense of proportion. The penal consequence should not be disproportional to the nature of default or offence. This is an elementary principle of jurisprudence. However, of late, there are notices issued rampantly invoking prosecution in terms of section 276B of the Income-tax Act, 1961 (‘the Act’) even for delays in payment of tax deducted at source. This article proposes to bring out the unfair part of administering this provision.

Text of section 276 B
It is worthwhile examining the wording of the relevant provision closely. The text is as follows:

276B. Failure to pay tax to the credit of Central Government under Chapter XIID or XVIB

“If a person fails to pay to the credit of the Central Government,

(a) the tax deducted at source by him as required by or under the provisions of Chapter XVII B; or

(b) the tax payable by him, as required by or under,

(i) s/s (2) of section 115 – O; or

(ii) the second proviso to section 194B,

he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.”

Views:
Firstly, the very heading suggests that there should be a failure to pay the tax. Secondly, the placement of clause (a) in the section, makes it clear that it pertains to the tax deducted as per the provisions of Chapter XVII B – and not the ‘payment as per provisions of Chapter XVII B. Thus, failure to pay is on a different footing. Put differently, payment need not be within the time specified in that Chapter.

In short, the section contemplates total failure and not mere delay. As against this, even if the tax is already paid with interest, the notices for prosecution are being issued. The notices also mention the fact of prior payment! This then, is clearly against the wording and spirit of the provision.

It is pertinent to note that CBDT has issued instruction no. 1335 of CBDT, dated 28-5-1980 to the effect that prosecution should not normally be proposed when the amounts involved are not substantial and the amount in default has also been deposited in the meantime to the credit of the Government.

The Hon’ble Punjab and Haryana High Court, taking cognizance of this instruction, has already struck down the prosecution in the case of Bee Gee Motors & Tractors v ITO (1996) 218 ITR 155.

It is necessary to compare the text of section 276B with provisions of section 40(a)(ia). Section 40(a) (ia) contemplates a time limit for the payment of tax as well; and not merely the deduction as per Chapter XVII B. For mere delay, there are already adequate provisions viz. section 40(a) (ia) disallowance; 201(1A) – interest, 271 C and 221 – penalty. Thus, section 276B clearly applies to total failure and not a mere delay.

Incidentally, even under Service Tax, the Central Board of Excise & Customs has issued a circular no. 14/2011 dated 12.05.2011 stating that, “provisions relating to prosecution are to be exercised with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched merely on matters of technicalities. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The sanctioning authority should record detailed reasons for its decision to sanction or not to sanction prosecution, on file.” In its introductory paragraphs, it also mentions the purpose of prosecution stating that, “While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations” It is all the more unfair that in certain jurisdiction, the limit fixed for prosecution is as low as Rs. 25,000/-.

Conclusion:
The harassment by Revenue Authorities has become a rule of the day. Notices contrary to the express provisions of law, spirit behind the law and in disregard of the CBDT instructions are clearly unfair and objectionable. A suitable clarification from CBDT will help avoiding redundant paper work and botheration.

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shailesh.kwebmaker

Is It Fair to Compel an Auditor of a Co-operative Society to File an FIR?

Introduction:

All readers will unanimously agree that the duties and responsibilities of audit profession have grown multifold in recent years. While ‘independence’ of an auditor has always remained a myth, – the obligations are literally endless! We have yet to familiarise ourselves with the additional burdens imposed by the new Companies Act. In the meanwhile, the new Maharashtra Co-operative Societies Act (2013) has added one more illogical provision. Now, it expressly requires an auditor to file a First Information Report (FIR) to the Police Authorities. A question naturally arises as to whether it is fair!

Statutory Provisions: In the Amended Act, in section 81, s/s. (5B), the following provisos have been added:-

‘Provided that, where the auditor has come to a conclusion in his audit report that any person is guilty of any offence relating to the accounts or any other offences, he shall file a specific report to the Registrar with a period of fifteen days from the date of submission of his audit report. The auditor concerned shall, after obtaining written permission of the Registrar, file a First Information Report of the offence. The auditor, who fails to file First Information Report, shall be liable for disqualification and his name shall be liable to be removed from the panel of auditors and he shall also be liable to any other action as the Registrar may think fit:

Provided further that, when it is brought to the notice of the Registrar that, the auditor has failed to initiate action as specified above, the Registrar shall cause a First Information Report to be filed by a person authorised by him in that behalf: Provided also that, on conclusion of his audit, if the auditor finds that there are apparent instances of financial irregularities resulting into losses to the society caused by any member of the committee or officers of the society or by any other person, then he shall prepare a Special Report and submit the same to the Registrar alongwith his audit report. Failure to file such Special Report, would amount to negligence in the duties of the auditor and he shall be liable for disqualification for appointment as an auditor or any other action, as the Registrar may think fit.”

Comment:

The scope of the Provision is too wide. What exactly is meant by the term ‘offence relating to accounts’ or ‘any other offences?

The word ‘offence’ is not defined in the Act. Even misbehaviour is an offence; smoking at a public place also is an offence!

As far as I know, initially, it was intended to cover only the frauds.

However, if in a co-operative bank, there is an internal fraud of a petty amount, it is detected and money is recovered, concerned staff is dismissed or punitive action taken, whether still an FIR is to be filed? What if the management is justifiably not willing to do so? Ultimately, it affects the goodwill of the Bank.

There could be internal ‘offences’ where a customer or outside party is not affected. Then what is the propriety of filing an FIR? What purpose will it serve? On the contrary, it may hamper the image of an organisation.
The most unfair part is – why compel an auditor to file an FIR?

The above provision is irrational and needs to be reconsidered on the following grounds: (the following points are narrated by the committee of co-operative societies – Maharashtra (committee of WIRC of ICAI) Role of Auditor is different from that of the investigator. His responsibility is to express an opinion on the financial statements prepared by the management and produced before the auditors

• He is only expected to express an opinion whether financial statements exhibit true & fair view of the state of affairs as on the balance sheet date as well as profit or loss for the period under audit.

• The auditor has to report the fraud, if any detected during the course of audit, to the management or regulators. It is the duty of the management or the regulators to take appropriate action thereon.

• Under none of the Acts where audit is statutorily prescribed, the auditors are required to file FIR after coming across any fraud during the course of audit.

• As the Chartered Accountant’s role is limited to expression of an opinion on the state of affairs, wherever such fraud cases are noticed actions in regard to the same are to be taken by the concerned regulators like Registrar of Companies, SEBI, RBI, Commissioner of sales tax etc.

• Even in case of findings by C & AG or audits conducted by Chartered Accountants u/s 619 of the Companies Act, 1956 for C & AG such actions are taken by the concerned department.

Another lacuna in the amendment Act is, it has been provided that auditor should file a specific report with the registrar within a period of 15 days of submission of report. The auditor concerned shall after obtaining written permission from the Registrar, file an FIR of the offence. Here it is pertinent to note that there is no time limit specified for the Registrar to give the permission in writing.

The auditor who fails to submit the special report to the Registrar or file an FIR shall be liable for disqualification and his name shall be removed from the panel and he shall also be liable for any action as the Registrar may think fit.

Suggestions: A suitable amendment should be made or clarification be issued relieving the auditors from this obligation of filing an FIR.

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Nirav Shah

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Category: Is It Fair?

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