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Category: Is It Fair?

Is it fair to administer any law in a ridiculous manner ? (Installation of a tea-coffee vending machine in office)

1. Introduction :

    As tax-practitioners, readers are familiar with the queer and incomprehensible manner in which the tax laws are administered. In the present article, I have for reference, an interesting news item that appeared in the press a few weeks ago. It is in the context of Mumbai Municipal Corporation Act, 1888.

2. Tea/coffee vending machine in office — Tea shop ?

    It happened like this. In a well-known elite office complex, there are several multi-storeyed buildings in which the offices of large reputed corporates are located. In one of the offices, there was a mishap due to some electrical problem while operating a tea-vending machine. Immediately, there was a survey by the vigilance squad of the municipality and they issued show-cause notices to all the corporate offices in the complex requiring them to explain as to why they did not obtain licence for carrying on Trade as ‘Tea & Coffee Shop’ under the Mumbai Municipal Corporation Act, 1888.

    As a sequel to the said notices, there was also an enthusiasm to issue prosecution notices. A few managing directors could not remain present before the Magistrate. Immediately, there were warrants against them.

    All this was indeed a big farce and it caused lot of panic and commotion among the managements of all these offices.

    About the nuisance value of the concerned officers, the less said the better.

3. Remedy :

    Two such affected companies moved the Bombay High Court in its Writ jurisdiction. Normally, the High Courts are not inclined to exercise their extra-ordinary jurisdiction in matters pending before lower judicial authorities. However, in the instant case, upon pointing out the patent illegality and the absurdity, the High Court was convinced about the need for exercising the extraordinary jurisdiction.

    In the course of arguments, the following facts were brought to their notice :

    (a) Such offices employed about 100 employees on an average.

    (b) There were controls on outsiders entering these offices.

    (c) Visitors are provided entry-passes and/or their names are entered in the register. Thus, no unauthorised person can enter the office.

    (d) It is very common and customary to provide tea-coffee to the members of the staff and such visitors. The question of selling such things to any outsiders or to passerby does not arise.

    It was argued that by no stretch of imagination, it could be said that these corporate offices were engaged in the ‘business of serving tea or coffee’.

    The High Court was then convinced about the merits. It also noted the fact that the municipal authorities could not prove that the tea was ‘sold for some consideration’. Therefore, it was held that this was not a business activity at all.

    The High Court expressed displeasure that summons were issued in such straight and trivial matters. The High Court is on record to say that the Magistrates should not act as mere ‘rubber stamps’ to issue summons by accepting everything that the prosecution alleges; but that they (magistrates) should satisfy themselves about the merits. The High Court then quashed the prosecution.

    Incidentally, it was revealed that many other affected companies bowed to the pressures of the administrative authorities, just to avoid litigation and botheration !

4. Conclusion :

    Administration and bureaucracy are capable of making a mockery of any law or any scheme of the Government. It requires courage to stand up against such attitude. Otherwise, the scenario will be indeed very gloomy. It is all the more required in our field of revenue administration. Are we too submissive ?

    (Refer Criminal Writ Petition No. 238/2009)

IS IT FAIR TO HAVE TAX COLLECTION TARGET FOR REVENUE AUTHORITIES?

December is normally a hectic season with most of us busy in completion of time-barring assessments. However, there seems to be no respite even thereafter due to the recovery proceedings.

With effect from 1st June 2006, the due date for time-barring assessment has been preponed from 24 months to 21 months from the end of the relevant assessment year. This has been done mainly to enable the Tax authorities to collect the demand in the same financial year in which the assessment is made.

The importance of timely tax collection needs no emphasis as without it the budgetary process will lose practicality.

Budget is an estimate for Government’s expenditure and earnings. The same would undergo a change depending upon the performance of the economy. Also tax, which is one of the important sources of revenue collection of the Government, is basically a charge on the profits, sales or production, etc. depending upon the nature of tax.

It is the duty of each individual, enterprise or entity to pay the right amount of tax. So also the Revenue authorities are legislatively empowered to demand the correct tax from the public by making assessments that can stand the scrutiny of judicial review.

Along with this judicial aspect, there is an administrative side of any Revenue department. Based on the budgeted receipts and expenditure, each revenue-earning department is given its target. These targets are normally given to assist government to facilitate its revenue collections. This also helps to seal revenue leakages in the system. Further, Revenue Officers are also motivated to work with alertness with a certain goal before them.

The problem starts when the Revenue authorities focus only on their targets. This creates confusion in the role of a Revenue authority. Instead of focussing on charging correct tax, they focus on collecting taxes to achieve their annual collection targets. In the whole process the aspect of legality gets lost.

The approach of meeting ‘collection targets’ results into the following types of undesired consequences :

    1. The assessees face ad hoc, fictitious disallowances in the assessments.

    2. This results into unwanted litigation and harassment of assessees.

    3. Many times the Assessing Officers admit that the disallowances will get struck down at appellate level, but they make the disallowance to meet the collection target.

    4. No refunds are granted to the assessees in the month of February and March.

    5. The Assessing Officers call up taxpayers during the first weeks of September, December and March to ascertain the quantum of advance tax.

    6. Assessments of TDS returns get focussed on collections rather than considering merits of the case.

    7. Even the first appellate authority i.e., Commissioners of Income-tax (Appeals) get driven by these targets and at times are reluctant to either fix the hearing or pass orders in March, especially if their order will result into granting immediate refund/relief.

    8. At times the Assessing Officers demand payment of tax as per the ‘demand’ even though there are apparent mistakes in the order and application for rectification is pending. They say that the mistake would be rectified in April and refunds would be granted.

    9. The pressure of collection also results into rejection of ‘stay of demand’ applications — even in cases where granting of stay is otherwise justified.

    10. The assessees at times are threatened with coercive steps, such as attachment of bank accounts and other assets.

There could be many other consequences which would result into hardships to the assessee due to ‘collection targets’. At times it has been observed that even in the Courts, the representatives of the Revenue Department unofficially admit that certain acts of the Assessing Officers are result of the ‘collection pressure’.

This attitude of the Revenue authorities could result into change in the mindset of honest tax-payers and in the process losing faith in the system.

In fact the targets given to the Revenue authorities should be to complete assessments, pass rectification orders and grant refunds, etc. Further, in the monthly/yearly evaluation, each officer should be evaluated not only on targets achieved by him, but also on the basis of orders passed by him, analysing as to how many orders have been subjected to appeal or revision by the Commissioner; or rectification. The additions made in the assessment order should be sustainable. Only correct tax collection would help the Government meet its budget. The additions/disallowances made should be monitored by the authorities, keeping in mind how these would stand the test of legality. The target of the Government should be to collect ‘tax judiciously’ in a simpler way instead of collecting ‘more’ tax coercively, a large part of which would ultimately get refunded subsequently. Collection of tax should not be a ‘cash flow’ objective of the Government.

To conclude, I would say :

Fixing of targets is good because targets motivate and encourage performance. However, fixing of unrealistic targets is against the taxpayer’s charter and vitiates the economic environment.

I am sure, my suggestion fits into the philosophy of ‘Kautilya’.

Is it fair to delay the issuance of profession tax certificates inordinately ?

Is It Fair

Introduction :


The Maharashtra State Tax on Professions, Trades, Callings &
Employments Act, 1975 requires every person carrying on a business or profession
to obtain an enrolment certificate and pay profession tax annually as per the
provisions of the said Act.

The said Act also requires every employer, paying more than
Rs.2500 p.m. as salary or wages to get himself registered under the act and pay
tax on salaries and wages paid by him to his employees. The profession tax can
be recovered from the salaries and wages of the employees.

The implementation of this Act has been very slow and even
today a large number of persons and employers have not been brought under the
tax net. Also in case of registered and enrolled persons, the recovery and
assessment of tax has not been followed up effectively by the Sales Tax
Department of Maharashtra.

Amnesty Scheme, 2007 :

In order to bring such un-enrolled and un-registered persons
under the tax net and offer an opportunity to such persons and also to recover a
large amount of outstanding profession tax, the Government of Maharashtra had
introduced an ‘Amnesty Scheme’ during the period September-October 2007. (The
scheme was further extended up to 31st October 2007). As per the scheme, the
un-enrolled and un-registered as well as registered and enrolled persons were
required to pay outstanding tax for previous five years along with interest and
penalty of 10% of the actual interest/penalty payable as per the provisions of
the Act.

People’s response :

In response to the scheme, a large number of persons and
employers had submitted their applications for enrolment and registration and
paid tax, interest and penalty as per the scheme. Even after the expiry of the
Amnesty Scheme, a huge number of applications for enrolment and registration are
received by sales tax department every day. Initially, the sales tax department
was issuing the enrolment/registration certificate to the applicant and
thereupon the person was required to pay tax along with applications for
availing Amnesty Scheme benefits. With the number of applications increasing,
the deparment issued verbal instructions to pay the tax based on the application
serial no. for which number of taxpayers had to struggle with banks for
acceptance of payments.

Sales Tax Department’s action :

Today after nearly 5 months of the last date of the Amnesty
Scheme, many of the applicants have not received their enrolment/registration
certificates.

The enrolled persons are required to deposit the profession
tax due by them for the financial year before 30th June every year. With this,
the tax for the year 2008-09 is due on 30th June 2008. The applicants, who are
yet to receive any communication from the sales tax departments, are clueless
about discharge of liability without the identification number which the
revenue-collecting banks insist on every challan for payment of tax.

Further, the un-registered persons are required to file
monthly, quarterly or annual returns based on their total liability during the
previous financial year. In the aforementioned situation, the registered
employers are not able to meet the statutory obligation of payment of tax and
filing of returns for want of registration no. for which they have been waiting
for last 5-6 months.

As regards the procedure for issuance of enrolment and
registration certificate, the applicants are required to submit necessary
documentary evidences with application and no further inquiry or scrutiny is
carried out by the sales tax authorities before issuing the certificates to the
applicants.

The people’s concern :

In view of this, the questions which arise are :

1. Is it fair on the part of the Sales Tax Department to
delay the issue of certificate to the applicants

2. Will the applicant be liable to pay interest and penalty
for delay in payment of tax or filing of return ?


Suggestions :

Registration certificates should be issued either on the
spot, or at least the numbers be made available ‘on-line’, so that the taxpayers
can download their respective certificates.

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IS IT FAIR TO DENY REGISTRATION U/S.12AA TO CHARITABLE TRUSTS ON FLIMSY GROUNDS ?

Is It Fair

Introduction :

Under the Income-tax Act, 1961 (the Act), charitable trusts
are eligible for exemption from tax liability in terms of section 10 and section
11 to section 13. One of the pre-conditions for section 11 to
section 13 is that it should obtain registration from the Commissioner of
Income-tax u/s.12AA. Of late, there is a tendency in the Income Tax Department
to create hurdles in availing any exemption or other tax reliefs. e.g.,
exemptions/deductions u/s.10A, u/s.10B, u/s.80IA, u/s.80IB, etc. Truly speaking,
registration u/s.12AA in itself does not grant exemption. It is only a basic
procedural requirement. Yet, it is experienced that obtaining the registration
has become a task in itself.



Grounds for rejection :


The objections being currently raised by the CITs are
difficult to comprehend, let alone justify. Some of the objections raised are
discussed below:

It is common that people settled in Mumbai, hailing from a
common village place have an affinity towards their native place. They may want
to set up a school or a hospital in that village. The source of funds is
obviously in cities like Mumbai. It is convenient to register and administer the
trust in Mumbai although the actual activity i.e., construction of
school/hospital, etc., is at a distant place.

The CIT’s objection is, how can be monitor the activity !
Needless to state that the Charity Commissioner has registered the trust with
the complete information on the record. Strictly speaking, the Charity
Commissioner is the regulating authority. How is the CIT concerned with
subsequent regulation/monitoring? Ultimately, the Department will always be in
a position to examine the accounts and records.

In this regard, reference can be drawn to the Karnataka High
Court decision in the case of DIT v. Garden City Education Trust, (191
Taxman 238) wherein it was held that at the time of granting registration, the
CIT is not concerned with the manner of application of funds. He is only required to examine the nature and objects of
the trust as deduced in the trust deed. The question of application of funds is
to be decided by the AO while granting exemption u/s.11.

Sometimes, the CIT refuses to register the trust unless there
is some activity! It is like a chicken and egg syndrome.

One of the objections was as to what is the evidence that it
is meant truly for the public ? i.e., how the activities are publicised ?

Another common question is how will the multiple objects of
the trust be achieved with a meagre initial corpus ! The explanation is quite
obvious. The institution first gets registered with a small amount. After it
obtains approval u/s.80G, only then the donations would flow in.

Possible reasons for negative attitude :


I visualise the following probable reasons :


(a) First and foremost, the typical bureaucratic attitude
is negative thinking.

(b) Ego or other interests.

(c) Revenue targets.

(d) Fear that good and positive attitude may be
misconstrued in the Department itself.

(e) Genuine experience about misuse of exemptions and
concessions. This gives rise to prejudices.

(f) Since the requirement of renewal of approval u/s.80G
has been done away with, extra caution while granting it for the first time.


Conclusion :


Instructions may be issued for a soft and liberal approach.
It may be noted that the Special Bench (Delhi) in the case of Bhagwad Swarup
Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust v. CIT, has
held that in a case where the CIT does not pass the order granting or refusing
registration of trust within the period laid down in section 12AA(2)
registration would be deemed to have been granted to the trust or institution
automatically on expiry of the period specified in section 12AA(2) of the Act.

Returns for first two to three years may be scrutinised to ensure that the
functioning is on a desired track.

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Is it fair to deny TDS credit on account of mismatch of data?

Is It Fair

Introduction:


The Income Tax Department is undergoing computerisation with
an undue haste and in the process creating chaotic situations for honest
taxpayers. Initially, with effect from 1st April, 2005 the transition from
manual to computerised system was planned with respect to TDS credit. The
Finance (No.2) Act, 2004 had amended the provisions to dispense with the
requirement of issuing TDS certificates by the deductors, the requirement of
submitting TDS certificates along with returns, and provide for the issuance of
Annual Tax Statement (Form 26AS), etc. Then, the implementation of these
proposals was postponed, the last postponement being made to 1st April, 2010 by
the Finance Act, 2008 — for the reason that the information technology
infrastructure of the Income-tax Department was not yet operational at the
national level. Therefore, at the time when the Finance Bill, 2008 was presented
before parliament, it was hoped that the department would be able to make its
information technology infrastructure ready by 1st April, 2010. However,
immediately thereafter, Rule 37BA was introduced with effect from 1st April,
2009 to provide that TDS credit shall be given on the basis of information
relating to deduction of tax furnished by the deductor. Therefore, it seems that
by virtue of some miracle what could not be achieved in spite of the combined
efforts of more than four years, has been achieved in just one year! The
implementation, therefore, has now been preponed by one year in an indirect
form.

The unfairness

In almost all the cases, while processing returns u/s.
143(1), for A.Y. 2007-08 & 2008-09, TDS credit has been denied either in part or
in full for the assumed reason that the information furnished by the assessee is
not matching with the information available with the department.

First of all, it needs to be examined whether the Assessing
Officer has a power to deny credit of TDS for such a reason, particularly for
A.Y. 2007-08 & 2008-09. Section 199, as it existed prior to its substitution by
the Finance Act 2008 with effect from 1st April 2008, provides for the credit of
TDS on the basis of production of the TDS certificate. Credit for TDS on the
basis of Annual Tax Statement in Form 26AS was only for the deduction of TDS
made on or after 1st April, 2008. Therefore, for A.Y. 2007-08 & 2008-09, TDS
credit should have been granted on the production of TDS certificates.

Although it was mandatory on the part of the assessee to
attach proof of TDS claim along with the return, as per provisions of
Explanation to Section 139(9), Rule 12(2) read with section 139C, has
specifically exempted assessees from submitting proof of TDS claimed along with
the return. However, it was required to be produced before the Assessing Officer
if demanded, as specifically spelt out in section 139C.

Therefore, if at all TDS credit was not matching with the
data available with the department, it was obligatory on the part of the
Assessing Officer to call for the proof of the TDS claim in the form of a TDS
certificate, and to allow the credit if the claim was found to be proper. This
view is further supported by Instruction No.6/2008, dated 18th June, 2008
whereby Assessing Officers were instructed that where the aggregate TDS claim
does not exceed Rs 5 lakh, and where the refund computed does not exceed Rs
25,000, the TDS claim of the taxpayer should be accepted at the time of
processing of returns; and in all remaining returns, the Assessing Officer shall
verify the TDS claim from the deductor or assessee, as the case may be, before
processing the return (Instruction was applicable for A.Y. 2007-08).

Without considering the legal position, the Assessing
Officers have resorted to denial of TDS credit wherever there was a mismatch and
that too even without explaining as to which TDS claim is not matching as per
their database!

The problem will be further aggravated for A.Y. 2009-10 and
subsequent years where the new section 199, read with Rule 37BA, will empower
Assessing Officers to deny credit wherever there is mismatch. Even without any
mistake on the part of the assessee, the credit will be denied — may be due to
some error on the part of the deductors in filing the relevant statements or on
the part of the banks in uploading the information on the challans.

There are many practical issues other than those caused by
the errors of the deductors or banks, which the department is not geared up yet
to tackle. For example, it has been experienced that the department has sent TDS
data verification report by email to the e-filer of the returns of A.Y. 2009-10
in which the credit has not been granted even on account of the differences in
Assessment Year, i.e., if the assessee has claimed the TDS credit pertaining to
an earlier Assessment Year on account of his cash system of accounting, the
difference has been reported to that extent in such reports sent by the
department. Therefore, in such cases, even without any mistake on the part of
any of the parties, the assessees have had to suffer only due to the technical
problems of the department.

As a result of denial of TDS credit, either the refund is not
granted to the assessee or the demand is raised with interest. In cases where
the demand has been raised due to such denial of TDS credit, the assessee can
take recourse to section 205 which provides that where tax is deductible at the
source, the assessee shall not be called upon to pay the tax himself to the
extent to which tax has been deducted. Therefore, at least in such cases where
the demand is arising due to the denial of TDS credit, the assessee should be
given an opportunity to prove that TDS has been deducted from his income. If it
is proved so by the assessee, the demand should not be enforced against the
assessee or refunds should not be adjusted against such demands automatically.

Conclusion

In a scenario where it has been accepted that the system is
not yet fully operational, and therefore, it has been made mandatory for the
deductor to issue TDS certificates till 31st March 2010, it is unfair to make
provisions at the same time to provide TDS credit merely on the basis of data
available in the system, ignoring TDS certificates. Necessary instructions
should be issued by CBDT to ensure that credit of TDS is given on production of
a certificate by the ‘Deductor’.

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Is it fair To infer ‘Concealment’ without giving opportunity to disclose ? [S. 271(1)(c) of Income-tax Act, 1961]

Is It Fair

1. Introduction :


Of late, there has been a storm over conflicting decisions of
the Apex Court on ‘mens rea’ as an essential element of penalty for
‘concealment of income or furnishing inaccurate particulars of income ? The two
conflicting decisions particularly under reference are

— Dilip Shroff’s case 291 ITR 519 and Dharmendra Textiles
case 306 ITR 227.


The January 2009 issue of BCAJ carries an article on the
judicial analysis of these decisions. The purpose of the present article is to
bring out certain practical aspects occasioned by the e-regime.

2. As readers are aware, the process of submission of returns
has undergone a structural change in the last couple of years. Firstly,
corporate and other large entities like firms with tax audit are required to
file an on-line return. One has to fill in only what is prescribed in the form.
There is no room to furnish any explanation.

Secondly, others who file paper returns, can submit only the
return-form without any enclosures; not even a statement of income.

Now, under Income Tax, there are innumerable issues which are
debatable; many claims which are arguable. Assessees may have bona fide
claims e.g., on S. 14A; 40(a)(ia) — rate of deduction; 50C, 2(22)(e) and
so on. One may want to make a claim by placing on record the relevant facts,
reasoning and case law, if any relied on to be transparent. But he is deprived
of this opportunity and is permitted to submit only the arithmetic calculation.
This is unfair. In this context all these decisions now need to be reconsidered.

3. ‘Mens rea’ — a viewpoint. Admittedly, words like
‘deliberately’ or ‘wilfully’ are missing before the expression — ‘concealed or
furnished.’ However, one view is that the expressions ‘concealed’, ‘furnished
inaccurate particulars’, and tax ‘sought to be evaded’ — essentially connote
some deliberate or conscious act. Thus, the concept of ‘mens rea’ is
embedded in these three expressions without there being a need for separate
words like ‘deliberate’ or ‘wilful’. So also, in the two recent decisions cited
earlier, there is an issue as to whether an ‘obiter dicta’ can prevail
over the ‘ratio’.

4. It is unfortunate that on the one hand, there is chaotic
ambiguity in the provisions of law; on the other hand, there is no opportunity
to disclose your viewpoint proactively. This is aggravated by the ill-motivated
administration. Further, conflicting judicial decisions also make the life of an
assessee difficult. In the environment an assessee could suffer about 68%
outgoing in terms of tax and penalty, apart from interest.

5. Is it then fair to :



  •  try to punish honest taxpayers ?



  • make all lawful remedies ill-affordable ?



  • force an assessee to yield to unlawful demands ?



To make the law fair :



  • penalty and interest should not be levied unless there exists ‘mens rea’.



  •  an assessee should have the opportunity of giving reasons for a claim for
    deduction or an expenditure.
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Is it fair to make it mandatory for holding companies to have net worth of Rs.2 crores and obtain registration as NBFC ?

IS IT FAIR

Introduction :

After liberalisation/globalisation, overall entre-preneurism
has been increased and lots of entrepreneurs are forming multiple entities doing
multiple businesses. In such situation, they also prefer to route all the
investments through one Holding Company. However, the Reserve Bank of India
(RBI) guidelines for Non-Banking Financial Companies (NBFC) can become a hurdle
for such companies.

RBI Norms about NBFC :

Pursuant to the provisions of S. 45-I(c) of the Reserve Bank
of India Act, 1934 (RBI Act, 1934), any company which carries on the business of
financial institution, i.e., carries on the business of financing, acquisition
of shares, stocks, bonds, debentures or other securities, shall be regarded as
an NBFC. Every such NBFC is required to satisfy the following requirements :

  • Registration with RBI


  • Net owned funds of Rs.2
    crores


As per the definition of ‘net owned funds’ provided in the
RBI Act, 1934, it shall be calculated in the following manner :

(a) the aggregate of the paid-up equity capital and free
reserves as disclosed in the latest balance sheet of the company after deducting
therefrom :

(i) accumulated balance of loss;

(ii) deferred revenue expenditure; and

(iii) other intangible assets; and





(b) further reduced by the amounts representing :

(1) investments of such company in shares of

(i) its subsidiaries;

(ii) companies in the same group;

(iii) all other non-banking financial companies; and





(2) the book value of debentures, bonds,  outstanding
loans and advances (including hire-purchase and lease finance) made to, and
deposits with

(i) subsidiaries of such company; and

(ii) companies in the same group,

to the extent such amount exceeds 10% of (a) above.

Thus, the definition of Net Owned Funds excludes
investments in subsidiaries, companies in the same group.


RBI has vide Press Release 1998-99/1269, dated 8-4-1999
announced that any company will be treated as an NBFC if its financial assets
are more than 50% of its total assets (netted off by intangible assets) and
income from financial assets are more than 50% of the gross income, as per
latest audited financials. If both these tests are satisfied, then such
company’s principal business shall be regarded as that of an NBFC and the
aforesaid requirements or RBI registration and Net Owned Funds shall be required
to be complied with.

Status of Holding Companies as an NBFC :

As mentioned in opening para, a number of entrepreneurs float
a company which will hold all their investments in subsidiaries or group
companies. Such a company is commonly called as ‘Holding Company’ of that Group.

Thus, any holding company having subsidiaries and whose
latest audited financial statements represent the position as stated in the
above Press Note shall be regarded as an NBFC and it needs to approach RBI for
registration. (Rather it cannot carry out this activity without obtaining
registration with RBI.)

However, while calculating its Net Owned Funds, the
investment made by such company in its subsidiaries/group companies shall be
deducted.

The financial position of many companies makes them go for
RBI registration just because of their investments in subsidiaries. But this
investment in subsidiaries shall not be counted for Net Owned Funds criteria.
Therefore, the companies have no choice, but to bring in additional funds to
meet the Net Owned Funds requirement and have them invested in
companies/entities which are not within the same group.


It is an unfair compulsion on the holding companies to make
the investments in non-group entities. (Here we are particularly considering the
entities which do not carry out any business on their own except the holding of
investments in subsidiaries/group companies.)

There are a few entities e.g., stock brokers, asset
management companies exempted from obtaining registration with RBI as an NBFC.
However there is no such exemption granted to holding companies which have been
formed with the primary objective to route all investments of a group through a
single entity.

Conclusion :

It is unfair to deduct the investment made in subsidiaries
and group companies while calculating the Net Owned Funds of a company AND
making it mandatory for them to obtain NBFC registration with RBI.

To make the position fair in respect of such companies, the
RBI Act, 1934 needs to be amended suitably to :

1. exempt investment companies which are holding shares in
subsidiaries and group companies from the requirement of registration with RBI
as NBFC; or

2. include the investments in subsidiaries and group
companies while calculating the Net Owned Funds of such companies

It can be made mandatory for such companies to raise net
owned fund up to Rs.2 crore, if such company wants to make any investment in
non-subsidiaries/non-group companies.

Further, these regulations should exempt companies which do not accept
deposit from public, from the requirement of registering with RBI. However, such
companies may be required to file the requisite returns with RBI.

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Is it fair to reckon the time for S. 54EC from the date of conversion u/s.2(47)(iv)

Is It Fair

1. Introduction :


Readers are aware that due to the inflationary tendencies,
huge capital gains result out of sale of capital assets, especially the
immovable properties. There are many practical difficulties and controversies —
such as distinction between capital gain vis-à-vis business income,
fund-flow problems with reference to investments and advance tax, cancellation
or major modification of deals, new house not getting ready within the
stipulated time and so on. Due credit should at the same time be given to the
law-makers as considerable reliefs have been provided in the Act in terms of
indexation, exemptions u/s.54, u/s.54F, u/s.54EC, etc. On the other hand, there
are dragons like S. 50, S. 50C. The purpose of this article is to bring out the
unfairness in provisions of S. 54EC, where despite a genuine intention and
attempt by the assessee, it is not feasible to avail of the benefit.

2. S. 54EC :


2.1 If long-term capital gains are invested in specified
infrastructure bonds within six months from the date of transfer, there is an
exemption to the extent of investment made. There are, occasionally,
difficulties on account of irregular and unpredictable timings of availability
of bonds. But then, the CBDT does allow suitable extensions, though quite late.

2.2 The maximum limit on investment is Rs.50 lakhs in one
financial year. There is an ambiguity as to whether Rs.50 lakhs each can be
invested in two different financial years for the same capital gain.

2.3 The important point is that the investment has to be made
within six months from the date of transfer. Now, S. 2(47), which defines
‘transfer’ includes clause (iv) — conversion of capital asset into stock in
trade, as contemplated in S. 45(2).

2.4 S. 45(2) is quite rational in providing that although the
transfer may have already taken place long ago, the tax is payable when such
converted asset is actually sold. This is equitable as it recognises the reality
that income cannot be generated from oneself — at the time of conversion — that
is — gain arises only on actual transfer and not on deemed transfer.

2.5 As against this, there is a Circular No. 560, dated
18-5-1990 — in the context of S. 54E (predecessor to S. 54EC) that the period
for investment should be counted from the date of conversion and not from the
date of actual sale. This is very unfair. It is quite inherent and obvious in
the scheme of S. 45(2) that in reality, no gains arise merely at the stage of
conversion. Particularly, in respect of immovable properties, there is a long
time-gap between the date of conversion and the date of actual sale of the
constructed units. Amounts involved are also quite sizeable. Thus, it is
impracticable to expect an assessee to make investment at that point of time.

2.6 This may be seen in the context of S. 45(5) which
contemplates practical situations in respect of compulsory acquisition of
properties by the Government. It states that whenever the compensation is
revised and enhanced in subsequent years, the gains will be taxable in the
respective year when revised compensation is actually received. It goes one step
further to state in Explanation (iii) that when such compensation is received by
the legal heir of the assessee or any other person, due to death of the assessee
or other reason, the amount will be taxed in the hands of the heir or such other
person.

2.7 There is a similar, equitable Circular that the amounts
received by the legal heirs from deposit under the capital gains accounts scheme
are not taxable in their hands. (Circular 743, dated 6-5-1996)

2.8 Interestingly, even u/s.54E, there was a Circular No.
349/F No. 207/8/82–IT (AII), dated 10-5-1983 — that if advances or earnest
moneys are received before the actual transfer, investment may be made within 6
months from the date of receipt (even if it is before the transfer).

2.9 Against this background, Circular No. 560 appears to be
illogical and unfair.

3. Suggestion :


It is presumed that since the substance of both the Sections
— viz. S. 54E and S. 54EC is the same, the Circular u/s.54E would be
applicable to S. 54EC as well. The suggestion is obvious. The period of six
months for S. 54EC should be counted from the date of actual sale as
contemplated in S. 45(2).

Equity can be achieved and litigation avoided by issuing a clarificatory
Circular or amending the law.

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Retrospective Tax Amendments — Rule of Law or Rule of Babus ?

IS IT FAIR

Heads I win and tails you lose ! ! ! This seems to be the
policy of our Tax Administration. There are 16  direct tax amendments in
the Finance Act, 2010 with retrospective effect, some of them coming into effect
from as far back as 1976. These amendments are aimed at overriding the judicial
pronouncements and undermining the judicial process in at least the taxation
matters. What’s worse is that this has been a disturbing trend for past many
years.

These are 150-odd retroactive amendments in direct taxes in
the past five years. With one stroke of the pen, they are reversing court
rulings. It gives tax authorities the powers to re-open cases that have been
concluded in favour of the taxpayer after long-drawn and costly litigation. Such
amendments are very unsettling. A taxpayer may have acted according to the
prevailing law, based on the language of the Act, Rules, etc. and his
interpretation of the same (which is ultimately upheld by the court) and has
made expansions or drawn up business plans. Such amendments only go to show that
the intention of the Government (in particular, of the tax policy-makers as well
as the tax administrators) is neither clearly spelt out in the Memorandum
explaining the provisions of the Finance Bills or in the Circulars explaining
the provisions of the various Finance Acts, nor proper and adequate care is
taken at the time of drafting the relevant Sections, Rules, and Circulars, etc.
This attitude is against the legitimate expectations of taxpayers regarding the
professed certainty, stability and predictability in the tax regime.

Retrospective amendments raise the following  issues for
debate and discussion :


1. Are our Revenue Officials and policy-makers ‘accountable’ to anyone ?

    2. Does anyone in the CBDT or the Finance Ministry or the Law Ministry track judicial decisions in tax matters right from the Appellate Tribunal stage ? Why do they wake up only when the Supreme Court/High Courts deliver favourable judgments in favour of the assessee.

    3. According to press reports, our legislators hardly discuss amendments to the Tax laws. Do these amendments represent the ‘Will’ of the administrators or the ‘Will’ of the people ? Do we have rule of Law or rule of Babus ?

    4. Do retrospective amendments represent disregard for judicial pronouncements ?

    Retrospective amendments send a clear message to the tax officials — do not worry about the courts; frame the tax assessments in accordance with your interpretation of the law and we will take care of judicial pronouncements by way of retrospective amendment.

    5. At times Circulars issued after the passing of Finance Bills, etc. are at variance with the language of the Section. This leads to avoidable litigation as the Tax officer is bound to follow the Circular.

    In the circumstances, it is suggested as follows :

    1. Adequate care should be taken at the time of drafting laws.

    2. Immediate action should be taken to amend the law when it is discovered that there is a possible interpretation, which is against the intention behind the enactment.

    3. If there are omissions/errors in drafting or if the intention of the Government is not clearly brought out in the laws drafted by the Government, which has led to prolonged litigation before the High Courts or the Supreme Court, law should be amended only ‘prospectively’. The power of the Parliament to make retrospective amendments should be used in the ‘rarest of the rare’ cases.





Courts might uphold the constitutional validity of a
retrospective amendment, but as late Shri N. A. Palkhivala said, time and again,
that what is legal is not necessarily ethical, just and fair.

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Is it fair for the tax administration to knowingly indulge in wasteful paper-work ?

Is It Fair

1. Introduction :


In recent years, all the Government Departments are
embarking upon massive computerisation. Use of technology is always welcome as
it is expected to enhance efficiency and transparency. In the Income-tax Act,
there are provisions that are progressively making on-line submission of tax
returns and TDS returns compulsory. The amendments in S. 203, S. 206C(4) and
other relevant provisions are on cards for past few years. The implementation
is being postponed obviously on the ground that the whole machinery is not yet
geared up. It is a dream to allow on-line credit of taxes deducted at source
as well as of other tax-payments. There can be no two opinions about the
sanctity of the purpose. However, there appears to be excessive enthusiasm in
implementing it in the processing of returns. This is causing tremendous
hardship to the assessees.

2. Chaotic processing u/s.143(1) :



2.1 For A.Y. 2007-08, thousands of assessees have been
receiving intimations u/s.143(1) almost invariably resulting into sizeable
amount of tax-demand. The common reason in all such cases is non-giving of the
credit for TDS, advance tax and self-assessment tax.

2.2 Corporate and a few non-corporate assessees have been
pushed into the regime of on-line submission of returns. So also, for those
who are permitted to file paper-returns, are not allowed to submit any
enclosures. All the information is to be filled in the return itself. There
are columns requiring details of TDS (such as TAN of deductor) other tax
payments (such as BSR code or CIN of the Bank). On the basis of this
information, the Department is expected to allow credit. The TDS certificates
and receipted challans remain with the assessees.

2.3 The on-line information available with the Department
almost never matches with the claims made by the assessees. There are several
reasons for such discrepancies — such as non-filing of e-TDS returns by
deductors, incorrect entries made by deductor, defaults committed by deductor,
errors committed by banks in transmitting the information, other technical
problems at NSDL or other monitoring agencies and so on. On none of these
factors, the assessee has any control. He only holds original certificates and
challans. Gradually, even this is sought to be discontinued.

2.4 The obvious result is that there are huge tax demands,
panic among individual taxpayers, applications and correspondence for
rectification, repeated follow-up with the Department and all those unhealthy
consequences which are too well-known. It may so happen that the bureaucrats
may even refuse to grant credit unless the details are seen on their ‘screen’.
They will make the assessees and their representatives run from pillar to
post, with a sword of tax-demand hanging on their heads.

2.5 Needless to state that for such services, no one will
be willing to pay fees to the concerned professional. It will be a colossal
waste of man-days of our staff, our professional time, stationery and
unrequired effort. A totally futile exercise. It is a great wastage of
resources, causing unbearable botheration to all concerned — including the
staff of the Department.


3. Suggestions :


Wherever there is a mismatch between the claim and the
on-line information, the Department can send a simple interview-memo or
communication, asking the assessees to furnish relevant documents. Apparently,
the limitation of time prescribed in S. 143(1) proviso — may be a hurdle. This
can be overcome by suitable administrative instructions or even by an
amendment. It is not to suggest that the progress towards computerisation
should be stalled. But efforts should continue with a little application of
mind and human touch and without causing harassment to the ‘tax-payer’.

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Is it fair to have inherent contradiction in the provisions so as to make waiver of penalty impossible ?

Is It Fair

1. Introduction :


The Income-tax Act, 1961 prescribes a variety of consequences
for default in complying with various requirements of the Act. The common
consequences are interest and penalties; and in extreme situations, prosecution
as well. The other consequences could be denial of exemptions or deductions,
denial of carry forward of losses, etc. It is now a fairly settled position that
interest is mandatory while penalty is discretionary. Unfortunately, the present
attitude of the administration is to levy penalty in a routine manner and seldom
use discretion in favour of the assessees — howsoever genuine the case may be.
Penalties are also perceived as a source of revenue — although its main
objective is to have a deterrent effect. Even the First Appellate authorities
are often reluctant to interfere. Invariably, one has to approach the Tribunals.
S. 273B provides some cushion to argue that there was reasonable cause behind
the default. In practice, however, it is hardly effective. The main penalty
which is the subject matter of this write-up is penalty u/s.271(1)(c)
vis-à-vis its waiver u/s.273A.

2. S. 271(1)(c) :


Concealment of income or inaccurate particulars :

2.1 Readers are aware that in terms of sub-clause (iii) of
Ss.(1) of S. 271(1), if there is concealment of Income or furnishing of
inaccurate particulars, as envisaged in clause (c) of S. 271(1), the penalty
imposable may be not less than, but not exceeding three times the tax sought to
be evaded. Apart from the harshness in terms of quantum, it is also a stigma on
the assessee’s tax records. Since, it is very serious, there is good amount of
litigation on this particular issue.

2.2 Disallowances u/s.40(a)(ia) or S. 43B are in most of the
cases merely in the nature of deferment of allowability. These disallowances can
hardly be called as ‘concealment’. Still, penalty provision of 271(1)(c) is
routinely invoked and penalty levied. This adds to the misery created by the
already illogical provision of S. 40(a)(ia).

3. S. 273A waiver or reduction of penalty :


3.1 Theoretically, S. 273A seeks to provide some remedy.
However, its wording is peculiar. The relevant provisions read as follows :

“S. 273A : Power to reduce or waive penalty, etc., in
certain cases:


(1) Notwithstanding anything contained in this Act, the
Commissioner may, in his discretion, whether on his own motion or otherwise
–

(ii) reduce or waive the amount of penalty imposed or
imposable on a person under clause (iii) of Ss.(1) of S. 271;


If he is satisfied that such person :

(b) in the case referred to in clause (ii), has, prior to
the detection by the Assessing Officer, of the concealment of particulars of
income or of the inaccuracy of particulars furnished in respect of such
income, voluntarily and in good faith, made full and true disclosure of such
particulars;

and also has, in the case referred to in clause (b),
co-operated in any enquiry relating to the assessment of his income and has
either paid or made satisfactory arrangements for the payment of any tax or
interest payable in consequence of an order passed under this Act in respect
of the relevant assessment year.


Explanation — For the purposes of this sub-section, a
person shall be deemed to have made full and true disclosure of his income
or of the particulars relating thereto in any case where the excess of
income assessed over the income returned is of such a nature as not to
attract the provisions of clause (c) of Ss.(1) of S. 271.”



3.2 Now, the question arises that if it is a pre-condition
that prior to the detection by the AO, the full particulars had been disclosed,
then in the first place, the penalty would not have been leviable at all. In
such case, it should be deleted as a matter of right to the assessee and it
would be a fit case to succeed in appeal. S. 273A is like a mercy petition where
the legal merit is not too strong. Question of mercy or waiver would arise only
where the penalty was legitimately leviable and the assessee has in fact
committed a default.

3.3 A safeguard is also provided in Ss.(3) to the Revenue
that such waiver can be granted only once in the lifetime of an assessee. It
cannot be resorted to again and again. Therefore, it is reasonable to expect
that the conditions should not be so rigid as to make the waiver almost
impossible. Thus, under the present law, even if a Commissioner wants to use his
discretion in favour of the assessee, it would be difficult for him to do so.

3.4 The situation is further aggravated by the recent
retrospective amendment introduced by the Finance Act, 2008. viz.
dispensing with the requirement of ‘satisfaction’ on the part of the Assessing
Officer before initiating the penalty proceedings. Refer Ss.(1B) of S. 271.

4. Suggestion :


The procedure and conditions for waiver should be made
liberal so as to make the law equitable. The present rigidity which, in fact, is
inherently self-contradictory should be removed.

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Double Standards applied by Income-Tax Department

S. 194-I of the Income-tax Act, 1961 (‘Act’) was amended to include rental payments for use of plant and machinery. After the amendment, the Department (TDS) officers were of the view that the transportation services from transport vendors fall under the purview of S. 194-I of the Act and not the S. 194C of the Act.

On this basis, various surveys were undertaken on numerous corporates by the Department and huge amounts of tax were recovered on the ground that TDS should have been deducted at 10% u/s.194-I instead of 2% u/s.194C.

This controversial issue was litigated by corporates in the Tribunal and Court, which ultimately provided relief to the taxpayers.

In order to find out what the Tax Department has done or is doing in a similar transaction, entered with the transport contractors, an application under the Right to Information Act, 2005 (‘RTI’) was made. The following information was asked in the application :

    1. Under which Section of the Act, does the Income-tax Department deduct tax while making payment to transport contractors for transportation services? Please provide your answer in respect of services received from transport contractor,

  •          Before 13th July 2006;

  •          On or after 13th July 2006 (that is after the amendment to S. 194-I of the Income-tax Act with effect from 13th July 2006).

    2. Could you please let me know the reasons in brief for deducting TDS under the relevant Sections of the Act?

In reply to the application, the Department accepted that, tax had been deducted at 2.06% u/s. 194C of the Act even after 13th July 2006 and not u/s.194-I.

This clearly shows even after the amendment, the Department was deducting tax at source at 2.06%, while on the other hand pressuring the corporate to deduct at an higher rate u/s.194-I (on identical type of services and agreements) so as to increase the tax collection.

Is such double standard adopted by the Department acceptable and fair?

Is it fair to the taxpayer, who is providing an honorary service of collecting taxes by deducting tax at source to the Government/tax-office?

The CBDT should issue a circular to stop this unfair practice of harassing taxpayers.

Is it fair to have such a cumbersome process for refund under MVAT Act, 2002

Is It Fair

The MVAT Act, 2002, as we all know, has been made effective
from 1-4-2005 after wide-ranging protests and demonstration by business
community. The benefits of Vat, as academically explained in many books &
literature, were mainly — removing the cascading effect of tax on taxes,
transparency in the administration, self assessment, phasing out of CST & Octroi,
taxpayer-friendly approach, etc.


It is the 4th year of MVAT in Maharashtra and the tax
practitioner community perhaps knows better – how far these objectives have been
achieved; especially on administrative front. This article examines some of the
hardships experienced by the taxpayers in the implementation of the new levy :

1. The Return forms under MVAT have been amended TWICE in a
short period of 3½ years. (The fundamental accounting presumption of
consistency does not apply to so-called user-friendly tax administration)

2. Even the Vat Audit Report (Form 704) has been amended.
The Amendment comes in the midst of financial year, which results into several
hardhips on the Dealer as the information asked in the Audit Form 704 was not
required to be provided in return forms. The dealer has to recompile the
information at the time of preparing Audit Report in Form 704.

3. There were several extensions to the filing of Vat Audit
report for the financial year 2005-2006 and 2006-2007. (The repeated extension
of due date of audit must be unique to the Indian Tax System.)

4. Certain information viz. cash purchases, cash
sales, Maharashtra sales, oms sales, etc. and asking the reason for change
with reference to the previous year seems irrelevant. What purpose is going to
be served by having such information, is beyond comprehension.

5. Refund : Since MVAT is a multi-stage system of
taxation; it gives rise to refunds in many situations, such as exporters,
resellers, etc. The MVAT Act does not allow carry forward of such refunds to
the subsequent financial year. However, till financial year 2006-07, such
carry forward was allowed under administrative Circular issued by the Sales
Tax Department. But this practice has been discontinued from Financial Year
2007-08 and a dealer has to compulsorily claim refund of excess set-off by
making an application in Form No. 501. Some of the difficulties and hardships
suffered by the dealers in such procedure are as below :

(a) The dealer has to pay the tax liability arising in
subsequent period from his own pocket, even though excess tax paid by him in
the earlier period is lying with Government in the form of this refund claim.

(b) There is no monetary compensation to the dealer in the
form of interest.

(c) The dealer has to furnish bank guarantee to obtain
refund. (optional)

(d) The dealer is required to furnish copies of challans
and returns even when the data is already available, since the returns are
already filed online.

(e) Details of purchases for the relevant period are to be
submitted in a specified format as well as on a CD. Compilation of data in the
specified format itself is a cumbersome task, as the software used by the
dealer might not be able to generate the data of purchases in the specified
format. This information is to be given in respect of all the purchases during
a given period, irrespective of the amount of refund. This sometimes becomes a
very difficult exercise for a dealer. e.g., if there is a refund claim
of Rs.10000 only, but the turnover of purchases is Rs.5 crores, the details of
all purchases have to be submitted, which is a time-consuming exercise.

(f) Recent Trade Circular No. 35T of 2008, dated 10th
October 2008 has devised a new scheme known as Voluntary Refund Scheme. Under
this scheme, refund claim will be restricted to those purchases whose
suppliers’ return filing is confirmed.

(g) It also specifies that the dealer may voluntarily
furnish the proof of filing return by suppliers.

(h) For the balance refund arising due to subsequent
confirmation of filing of return by the suppliers, the dealer has to make
another application. Thus for the default committed by the suppliers, the
dealer may be penalised in the form of late refund or even no refund.

(i) The newly registered Large Taxpayer Units are to be
processed on priority basis. Where does the small dealer go who has been
paying taxes ?


It is a known phenomenon that difficulties on administrative
fronts are the main causes of corruption and tax evasion. If the Government
really wants to make the administration transparent and taxpayer friendly, this
entire process of obtaining refund should be done away with. Refund should be
granted immediately on the basis of returns filed by the dealer (similar to the
process under the Income-tax Act), with selective scrutiny and stringent
penalties for false claim — like S. 271(1)(c) of the Income-tax Act, 1961.
Alternatively, the option of carry forward of excess set-off to subsequent
periods should be restored.

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Is it fair to bar a Company from buying back its shares, for delay in filing of annual returns with the Registrar ?

Is It Fair?

Power to buyback :

As we all know the Companies Amendment Act, 1999 inserted S.
77A in the Companies Act 1956 (hereinafter referred to as the ‘Act’) giving
power to the company to buy back its own shares. At the same time it also
inserted S. 77B restricting or prohibiting the buyback of shares by the company
in certain circumstances. Here we are referring S. 77B(2).

Prohibition for buyback in certain circumstances :

S. 77B(2) reads as follows :

No company shall directly or indirectly purchase its own
shares or other specified securities in case such company has not complied
with provisions of S. 159, S. 207 and S. 211.

S. 159, S. 207 and S. 211 of the Act :




We will analyse compliances under the above Sections one
by one.


  •   S. 159 requires a company to file annual return within 60 days from the
    day on which the annual general meeting is held. This Section also provides
    that it should be in the format specified in Part I of Schedule V.



  •   S. 207 requires a company to pay or post dividend warrants within 30 days
    from the date of declaration to all the shareholders entitled for it.



  •   S. 211 requires that every balance sheet of a company to give true and
    fair view of the state of affairs of the company at the end of the financial
    year and shall be in the form as specified in Part I of Schedule VI of the
    Act or as near as to or as may be approved by the Central Govt. Every profit
    and loss account shall give a true and fair view of the state of affairs of
    the company for the financial year and shall be in the format as specified
    in Part II of Schedule VI of the Act with few exceptions as stated in the
    Section. The Company shall comply with the accounting standards as
    prescribed under it.




Non-compliances u/s.159, u/s.207, u/s.211 of the Act :

If we go through above, we can analyse as follows :




  •   If the company fails to file annual return with Registrar of Companies
    (hereinafter referred to as ‘ROC’) within 60 days , it will be treated as
    non-compliance under that Section. It means even a single day delay would
    cause non-compliance u/s.159.



  •   If there is a small deviation in the format of the annual return from the
    format specified under Part I of Schedule V, filed by the Company with ROC,
    it will be considered as default u/s.159 of the Act.



  •   If the company makes a delay of 1 day in payment of dividend or
    dispatching dividend warrants to shareholders beyond 30 days from the date
    of declaration, it will be considered as default u/s.207 of the Act.



  •   In case of the following situations :

o The Company does not comply with the accounting
standards; or

o Balance sheet of the company does not give true and
fair view of its state of affairs; or

o Profit and loss account of the company does not give
true and fair view of its state of affairs; or

o Balance sheet and/or profit and loss account are not in
the format specified under Part I/II of Schedule VI or as near as
circumstances admit or as per Central Govt. direction, it will be considered
as default u/s.211 of the Act.


S. 77B(2) does not prescribe any time or period during which
the prohibition will prevail. Does this mean that if a default is committed,
say, for the year ended 31st March, 2001 and the company desires to buy back
shares in the year 2010 — it cannot buy back its shares. This leads to an absurd
situation.

Non-compliances u/s.159, u/s.207 and u/s.211 of the Act and
prohibition on buyback u/s.77B of the Act :

Any default under the Act is penalised under the same Section
or S. 629A of the Act. The penalty depends on the gravity of the compliances
provided under respective sections.

We may agree to it that defaults u/s.207 or u/s.211 of the
Act should be penalised as it may cause monetary loss to shareholders or
misleading the shareholders by not giving true and fair view of the state of
affairs of the company.

But can we agree that a single day default in filing annual
return of the company with ROC is a major default ?

Is it fair to prohibit a company from buying back its shares
because it has not filed its annual return within 60 days from the date of
annual general meeting and when it has paid penalty for it ?

To make the law fair, the law should be amended to
clarify that prohibition shall apply for a period of twelve (12) months from the
date of default and the necessary penal consequences have been suffered by the
company.

Further, if the company makes default in complying with any
of the provisions of S. 159, S. 207 and S. 211, it cannot buy back its shares in
its lifetime.

Once a default is committed under the above Sections, the company is not eligible to buy back its shares in the entire
lifetime of it.

S. 77B does not give any immunity to the company or does not
provide any time period after which the company can buy back its shares, say
after expiry of 5 years from the date of default.

Conclusion :

One should really look at the gravity of the defaults u/s.159, u/s.207 and u/s.211. Default u/s.207 i.e., non-payment of dividend within prescribed time limit and 211 i.e., non-disclosure of true and fair view in financial statements or not following accounting standards, etc. can be considered as material defaults. Defaults u/s.207 or u/s.211 may cause monetary loss to its shareholders/stakeholders.

But, if the company has failed to file its annual return within 60 days and causing delay of, say, one day is not so material default of S. 159 of the Act.

It is really not fair to put such restrictive clause u/s.77B of the Act prohibiting a company from buying back its shares for a single day delay in filing its annual return with ROC.

S. 77B of the Act needs alteration as it is really unfair to prohibit a company to buy back its shares for lifetime if it commits default u/s.159, 207 and 211 of the Act.

There are two options for alteration of S. 77B of the Act:

    a) Remove reference of S. 159 S. 77B (2) of the Act; or

    b) Specify, after expiry of certain period from the date of default u/s.159, u/s.207 and u/s.211 of the Act, the company can buy back its shares.

Is it fair to continue the provisions of S. 297 of the Companies Act, 1956 as they stand today ?

Is It Fair?

S. 297, S. 299 and S. 300 of the Companies Act, 1956
(hereinafter referred to as ‘the Act’) embody and codify the principles
regarding fiduciary duties of directors of a company. S. 299 of the Act enjoins
upon the directors a statutory duty to make disclosure of interest in the
contract or arrangement in which they are interested. S. 300 of the Act debars
interested directors in certain cases from being counted for the purpose of
quorum and voting. S. 297 of the Act provides for the consent of Board of
Directors of a company and in certain cases approval of the Central Government,
to certain contracts in which directors are interested.

We are attempting to throw light on two aspects of S. 297 of
the Act in this article :

(a) Is it fair to exclude foreign companies/bodies
corporate from the provisions of S. 297 of the Act ?

(b) Is it fair to keep exemption amount provided under the
proviso to S. 297(2)(b) to Rs 5,000 only ?

Parties u/s.297 of the Act :


We will first look at the parties which are covered u/s.297
of the Act. Ss.(1) of S. 297 specifies parties and types of contracts to which
the Section applies. The provisions of S. 297 applies, when out of two parties
to the contract, one is a company (say ‘A’) and other is any one of the
following :


(a) Any director of the company A;

(b) Any relative of the director of the company A;

(c) Any partnership firm in which the director of the
company A is a partner;

(d) Any partnership firm in which any relative of the
director of the company A is a partner;

(e) Any partner of the partnership firm in which the
director of the company A is a partner;

(f) Any partner of the partnership firm in which any
relative of the director of the company A is a partner;

(g) Any private limited company in which the director of
the company is a member;

(h) Any private limited company in which the director of
the company is a director.



Types of contracts to which this Section applies are as
follows :




(a) for the sale, purchase or supply of any goods,
material or services; or

(b) for underwriting the subscription of any shares in,
or debentures of, the company.


If we look at the above, we will come to know that the term
‘bodies corporate’ is not used in the parties covered U/ss.(1) of S. 297 of the
Act.

Transactions between foreign subsidiaries/joint venture with
entities abroad :


In the current scenario of the industry and due to
liberalisation of the Foreign Direct Investment Policy, many foreign entities
prefer India to expand their businesses.

Such foreign entities form subsidiaries or enter into joint
venture with Indian partners. These companies’ import/export/provide
goods/materials/services to their parent companies or group companies outside
India or vice versa.

They require technical support/consultancy from their parent
company or a joint venture partner in the initial stages or sometimes on a
regular basis. Such contracts/transactions between Indian company and a foreign
company fall under the purview of contracts mentioned u/s.297(1) of the Act.

Applicability of S. 297 of the Act in above case :


As foreign companies are bodies corporate, they are excluded
from the applicability of S. 297 of the Act. Hence, S. 297 does not apply to
such contracts or transactions between an Indian company and a Foreign Company
though directors are interested as stated under the Section. Further, no
approval of the Central Government is needed in such cases as the Section itself
is not applicable.

It means, any director of an Indian company who is director
or member of a foreign company with which the Indian company is
transacting/entering into a contract, need not obtain approval of the Board of
Directors and the Central Government.

Position of an Indian company transacting with an Indian
company :


If the above transactions would have been entered between two
Indian private limited companies covered under the parties to the contract, the
situation would have been reversed. It means where directors are interested as
stated in S. 297(1) of the Act entering into transactions falling under that
Section, approval of the Board of Directors and the Central Government in
certain cases would be required.

It means in case of two Indian companies where paid-up
capital exceeds the criteria laid down under the proviso to S. 297(1) approval
of the Central Government is required if :

(a) the transaction or contract is between the parties
covered u/s.297(1), and

(b) the transaction or contract is covered u/s. 297(1).

Is it fair to exclude foreign companies from the ambit of S.
297 when the same is applicable in the case of Indian companies ?

Now we will examine the exemption provided u/s.297(2)(b) of
the Act :

S. 297(2)(b) reads as follows :

(2) Nothing contained in clause (a) of Ss.(1) shall affect :

“(b) any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for sale, purchase or — supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business.

Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds Rs 5,000 in the aggregate in any year comprised in the period of the contract or contracts;”

The provisions of S. 297 of the Act are not applicable if the above conditions are fulfilled i.e.,

(a) the parties to the contract regularly trade or do business

(b)    the cost of such contract(s) does not exceed rupees five thousand in the aggregate in any year comprised in the period of contract(s).

The said Ss.(2) was substituted by the Amendment Act, 1960. This figure of Rs 5000 is unchanged since at least 1960 (50 years?!). In spite of so many amendments to the Act, surprisingly this proviso has not been amended. We know basic economics — value of a rupee is diminishing day by day. The inflation rate on many occasions is intwo digits. Is it not funny to keep such unrealistic figure in the exemption? Is there any possibility that a company in a year will trade or provide services restricting it to Rs 5000?

Conclusion:

S. 297 is not applicable to transactions or contracts entered by an Indian company with a foreign company. But it is applicable in case of two Indian companies. This is unfair towards Indian companies. To make the law fair:

(a)    the Section may be amended for treating both Indian as well as foreign companies at par; or
(b)    the term ‘body corporate’ can be inserted in the list of parties stated u/s.297(1) of the Act. The limit of Rs 5000 may be increased or eleminated alotgether.

Is it fair to deny exemption to charitable or religious trusts for using a part of its income for the benefit of specified persons of section 13?

Is It Fair

The Income Tax Act, 1961 (‘the Act’) provides exemption to
income of charitable or religious and other institutions under Section 11 of the
Act. This exemption is dependent on compliance with conditions prescribed in the
law. However, the exemption provisions are stringent and on non compliance, the
institution may altogether lose its exemption.

Section 13 of the Act prescribes situations under which
exemption can be denied. Section 13(1)(c) states that exemption under Section 11
shall be denied if any part of income or property of the trust or institution is
used or applied directly or indirectly for the benefit of persons referred to in
Section 13(3) of the Act (hereinafter referred to as specified persons).
Further, Section 13(2) lists down an inclusive list of instances where income or
property of the trust can be said to have been applied for the benefit of
specified persons. The persons referred in Section 13(3) are mainly the author
of the trust, any person who has made substantial contribution, trustee, etc. A
substantial donor is one who has donated Rs.50,000, not in a year but since the
inception of the trust.

However, Section 13(6), read with Section 12(2) of the Act
provides a little bit of relief in the sense that it states that incase a
charitable or religious trust or institution, running an educational or medical
institution or hospital, provides educational or medical facilities to persons
referred in Section 13(3) free of cost or at a concessional rate, the trust
shall not be denied exemption, but only the value of such benefit (in the form
of free or concessional services) shall be considered as income for the purposes
of Section 11. The
benefit of exemption under Section 11(1) shall not be available to such income
and such deemed income will be taxed at the maximum marginal rate under Section
164 (2) of the Act.

The net effect of the above provisions is that while a
charitable or religious trust running an educational or medical institution or a
hospital is allowed to enjoy the exemption even after providing free or
concessional services to certain specified persons, any other trust or
institution other than this is denied exemption merely because only some part of
its income or property is used or applied for the benefit of certain specified
persons.


Is it fair to deny
trusts or institutions (other than those running hospitals or educational
institutions) their entire exemption just because a part of their income or
assets are used for the benefit of certain specified persons?


Further, certain clauses of Section 13(2) and Section 13(3)
are rather impractical and difficult to follow. For instance clause (g) of
Section 13(2) mentions that where income or property of above Rs. 1000 is
diverted in favour of specified persons referred to in Section 13(3), the same
shall be deemed to be for the benefit of such persons, and thus the entire
exemption shall be denied. The ceiling of Rs. 1000 was introduced by the Finance
Act, 1972 when one thousand rupees could be considered to be a considerable
amount. However, no increment in this ceiling has been done so far. In recent
days, the amount of rupees one thousand has become so nominal that it becomes
almost impossible to get away from this provision. Again, the specified persons
mentioned in Section 13(3) include a person whose total contribution
upto
the end of previous year exceeds fifty thousand rupees. The word ‘upto’
indicates the aggregate of contributions made, including the contributions of
prior years. Thus, for a person who makes a contribution almost every year, it
shall not take much time for his aggregate contribution to exceed fifty thousand
rupees. Thereafter, any transaction, howsoever insignificant, with such person
shall be subjected to restriction of Section 13 of the Act.

This implies that anyone from the public at large can avail
benefits of the charitable or religious trust in the form of financial or other
help. However, any of the specified persons, even in genuine cases, cannot avail
the benefit of the trust. Further, any benefit in almost all circumstances is
bound to be more than rupees one thousand. It is understandable that it will be
taxed in the hands the trust. But does it really justify a total denial of
exemption?

Further, low limits as explained above, make it rather
difficult for the charitable trust or institution to work. In case of many
specified persons, the trust or institution may have to prepare a separate list
of such specified persons and transactions entered into with them. In case of
numerous transactions, it may also become difficult for the auditor to verify
and certify. Though, the basic intent behind the provisions of Section 13 is
noble — so as to ensure that the funds of the trust, meant to be for the benefit
of public the at large, are not spent on prohibited persons — the said
provisions are so strict that they seem to defeat the basic intent and purpose
of the Act which is to encourage charitable and religious trusts / institutions
and to make their working easier.

On the other hand, as mentioned earlier, a much more lenient
and rather logical treatment is given to charitable or religious trusts or
institutions running educational or medical facilities or hospitals. Section
13(6), read with section 12(2), states that when a charitable or religious trust
running educational or medical facilities or a hospital provides educational or
medical facilities to persons specified in Section 13(3) free of cost or at a
concessional rate, only the value of such benefit shall be considered as income
instead of denying the whole exemption. The irony is that the draft direct ‘tax
code’ contains the same provisions.To make the law fair, the author recommends
that the law be amended to:

1. Increase the limit of Rs. 50,000 for determining a
substantial donor;

2. The principle enshrined in Section 12(2) be extended to
any benefit derived by persons mentioned in Section 13(3) and transactions
covered in Section 13(b) of the Act;

3. The list of relatives be reduced to one generation.


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Is It Fair to deny exemption u/s.54/54F merely because the new house is in joint names ?

Is It Fair

Introduction :


It is an admitted fact that
after the disintegration of joint families, we are becoming more and more
individualistic. Nevertheless, even today, although in a nuclear form, the
family system is still surviving. The social and legal systems still recognise
the concepts of family members, close relatives and particularly, the sanctity
of relationship between husband
and wife.

Even today, the family and
especially men feel a psychological comfort by having a residential house in
their wife’s name or at least, add her as a joint holder. It is a different
matter that such holding by the wife is often used for so-called tax-planning,
in a crude manner.

Even the provisions of the
Benami Transactions (Prohibition) Act, 1988, protect the holding of property in
a spouse’s name [refer S. 3(2)]. The Income-tax Act also expressly protects
certain transactions from taxability (e.g., S. 56 — gift from relative) or
indirectly recognises the importance of close relations (in a negative way) in
terms of S. 64, S. 27, S. 40A(2), etc. Needless to state that in
‘jurisprudence’, ‘custom’ is regarded as a primary source of law.

Against this background, it
is a matter of grave concern that the Income Tax Department is now denying
exemption u/s.54/54F merely on grounds that the new house is purchased in joint
name with the spouse !

The unfairness :

In a typical case, the asset
sold is in the single name of the husband. He invests the sale proceeds in a
residential house and in the agreement to purchase, he adds his wife’s name as a
joint-purchaser.

The money flow of sale
proceeds and purchase price can easily be traced and established. The husband
shows the house in his balance sheet as his asset. He declares income from house
property, in his return of income only. No part of the house or income is
included in the return of wealth or income of the wife. Yet, the Income Tax
Department raises an objection that since a joint interest is created, the
condition that the ‘assessee should purchase a residential house’ is not
satisfied!

Not only this, but the
exemption is denied even for the purchase of a part of the house.

The relevant cases are
discussed in the succeeding paragraphs.

Case Law :

Readers may be aware that in
the past, the judiciary was very much favourable to assessees in this regard.
There are decisions that not only the joint name, but even purchase in the
exclusive name of the wife would also be eligible for exemption u/s.54 or
u/s.54F.

At the same time, the
extreme view that the purchase even in a stranger’s name would also be eligible
is difficult to digest. It is too legalistic an interpretation that the Section
merely says ‘purchases or constructs’; and is silent about the name in which it
should be acquired.

The Mumbai Tribunal has held
it against the assessee (case of ITO v. Shri Niranjan Singh Bajaj, ITA
No. 2040/Mum./2006). The Members have placed reliance on a Bombay High Court
decision in the case of Prakash s/o Timaji Dhanjode v. ITO, 312 ITR 40.

However, the facts in the
Bombay High Court decisions were materially different. There, an 86-year-old man
purchased the house in his major stepson’s name with an express intention of
giving the house to the son. This cannot be equated with a purchase of a house
in the joint name with wife. The reasons are obvious :

(i) In terms of S. 27(i),
the assessee (husband) alone is deemed to be the owner of the house.

(ii) The Department’s
objection that at the time of sale, wife’s signature will be required and she
will be entitled to a half share is also taken care of by S. 64. The capital
gains will be taxed in the hands of the husband only.

(iii) There are many other
judicial decisions granting exemption and approbating purchase in joint names.
And with respect, it can be seen that even the Bombay High Court decision (312
ITR 40) is also based on the particular facts of that case.

It would be unjust and
unfair to generalise the decision.

The Punjab & Haryana High
Court in the case of CIT v. Gurnam Singh, 327 ITR 278 has also taken a
favourable view recently.

In the following decisions
also, exemption has been allowed to the assessee for investment in the
sole/joint name with wife :

(1) CIT v. V. Natrajan,
287 ITR 271 (Mad.)

(2) ITO v. Smt. Saraswati
Ramanathan, 116 ITD 234 (Del.)

(3) JCIT v. Smt. Armeda K.
Bhaya, 95 ITD 313 (Mum.)

Suggestions :

In the context of S. 27, S.
64 and having regard to the social custom, and also considering the fact that
the Bombay High Court gave the decision in a different context, the exemption
u/s.54/54F should not be denied merely because the purchase is in joint name
with spouse. Law should be clarified or the CBDT should issue a Circular to
avoid unnecessary and avoidable litigation.

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Is it fair to give a discriminatory treatment to co-operative banks in respect of losses in amalgation ?

1. Introduction :

    Co-operative societies and co-operative banks have made invaluable contribution to the socio-economic development of our country, particularly in rural area. This form of organisation is typically suited for the not-so-educated masses of our country. Agriculture, sugar, dairy and even in the credit sector, the co-operative societies have performed well. These co-operative credit societies and banks are indispensable since commercial banks may not afford to cater to the tiny borrower. Admittedly, there are problems of lack of professionalism, political interventions, mismanagement and so on. But then the so-called urban corporate sector is also not immune to such menaces. Pandit Nehru had rightly said “Co-operation has failed, but co-operation must succeed.”

    In the economy, losses and sickness are quite common. S. 72A was inserted in the Income-tax Act, 1961 way back in the year 1977. It was welcomed and since then it has encouraged amalgamations by protecting unabsorbed losses and depreciation. Further, S. 72AA was inserted in the year 2005 to make special provision for banking companies in ‘certain cases’, although the banking companies had been very much covered in S. 72A. Against this background, I wish to highlight the provision of S. 72AB introduced in the year 2008 in respect of co-operative banks.

2. The unfairness :

    2.1 S. 72A provides that in the event of amalgamation of companies, the losses and unabsorbed depreciation of amalgamating company shall be treated as the losses and depreciation of the amalgamated company as if the same were the losses of the previous year in which the amalgamation took place. There is similar provision for banking companies in S. 72AA. The fresh carry forward begins from the year of amalgamation.

    2.2 However, S. 72AB grants a restrictive benefit. Here, the carry forward of losses and depreciation of the predecessor bank is allowed as if amalgamation had not taken place. Thus, unlike in the case of companies, the carry forward would get restricted only to the unexpired period out of the eight years permitted u/s.72.

    2.3 Further, Ss.(5) of S. 72AB states that the period commencing from the previous year and ending on the date immediately preceding date of business re-organisation and period from the date of business re-organisation to the end of previous year are to be considered as two previous years for the purpose of carry forward and set-off of loss and unabsorbed depreciation. No such provision appears in S. 72A or S. 72AA. The implication of this provision is that current year’s business loss up to the date of reorganisation cannot be set off by successor co-operative bank against income under other heads u/s.71. As against this, S. 72A and S. 72AA provide that the accumulated loss of predecessor is considered as current year’s loss of successor and hence benefit of S. 71 is available to successor in the year of succession even for the loss of the years prior to the year of succession. Thus, S. 72A and S. 72AA confer the benefit of S. 71 even to prior year’s loss, whereas S. 72 AB is taking away such benefit even for current year’s loss till the date of succession ! ! !

    2.4 It needs to be appreciated that by taking over the liabilities of the loss-making bank, the successor co-operative bank renders a great social service by giving comfort to thousands of small depositors. If commercial banks and companies get the benefits of merger, co-operative banks deserve it all the more.

    2.5 Hence, the law needs to be amended to bring the provisions for carry forwarded of loss and depreciation on par.

Is it fair to make the tax law so harsh even for small charitable trusts ?

1. Introduction :

    Taxation of charitable and religious trusts is becoming more and more complicated and at times too harsh. Ever since the present Income-tax Act was enacted in 1961, there has been some amendment or the other every year; avowedly to plug certain loopholes and to avoid misuse of the exemptions. No doubt, in the recent Finance Bill, 2009, there were a couple of liberal proposals such as allowing some threshold limit for S. 115BBC (anonymous donations); removal of requirement of renewal of certificate u/s.80G, etc. However, I would like to point out two of the existing provisions which are rather problematic and unfair. These are :

        (i) proviso to S. 2(15) — ‘charitable purpose’, and

        (ii) S. 272A(2)(e) — Penalty for belated filing of returns.

    In the past, I had written about the latter, in the context of trusts enjoying exemption u/s.10(23C) — exclusively educational and exclusively medical.

2. Let me explain the practical difficulties faced in respect of the said two provisions :

    2.1 Proviso to S. 2(15) :

    2.1.1 S. 2(15) defines the expression ‘charitable purpose’ to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The proviso inserted by Finance Act, 2008 qualifies the last limb — i.e., general public utility. The proviso reads as follows :

    ‘Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity’.

    2.1.2 Basically, this proviso was brought  to nullify the effect of the Gujarat High Court and Supreme Court decision in the case of Commissioner of Income-tax v. Gujarat Maritime Board, 289 ITR 139 (Gujarat HC), 295 ITR 561 (SC), respectively, where it was al-leged that under the garb of ‘Charitable Trust’, a clearly commercial activity was carried out. In the process, many small genuine charitable trusts who do something for generating the revenue are unduly hit.

    2.1.3 It is interesting to note that the Income-tax Act is not averse to a trust doing business. Ss.(4) and Ss.(4A) of S. 11 expressly make it permissible. The proviso then appears to be somewhat contradictory to this position of law.

    2.1.4 Last year, when this proviso was inserted, it was not clear as to its exact import and scope. However, two proposals in Finance Bill, 2009 give a message that the Government is very serious about the said proviso. The two proposals are :

    (a) amendment in S. 2(15) to include preservation of environment and preservation of monuments. The memorandum states that this amendment is specifically to protect these two activities from the effect of the proviso.

    (b) a clarification in S. 80G that even if a trust has lost 80G due to the proviso, the donor would get deduction u/s.80G if he has given the donation in good faith, on the belief that there is 80G deduction.

    2.1.5 Against this background, consider genuine cases like :

    (a) Old-age homes or women welfare association selling the products of the inmates.

    (b) Associations of physically or mentally challenged people (not necessarily poor) charging for their musical programmes.

    (c) Hobby centres.

    (d) Library.

    2.1.6 The only saving grace — or a limitation inbuilt in the proviso is that such activity should be in relation to ‘trade, commerce or business’. However, it gives good deal of nuisance value to the Administration.

    2.2 Penalty u/s.272A(2)(e) :

    2.2.1 It prescribes a penalty of Rs.100 per day for a delay in filing the returns U/ss.(4A) or (4C) of S. 139. S. 139(4A) requires any trust claiming exemption u/s.11 to file a return if the income before giving effect to S. 11 and S. 12 exceeds the maximum amount which is not chargeable to tax.

    2.2.2 Small trusts having total collection of just marginally exceeding the prescribed limits — and having a meager surplus (or even deficit) are subjected to such penalty.

    2.2.3 Interestingly, the penalty u/s.271F for other persons is just Rs.5000 and that too, if the return is filed after the end of the assessment year. Admittedly, the others are required to pay interest u/s.234A. However, by all standards, the penalty of Rs.100 per day is too much of a burden. Further, there is not much leniency in the Department in respect of even these small trusts.

3. Suggestions :

    Regarding proviso to S. 2(15), there should be more clarity. There should be a clear distinction between an ‘object’ vis-à-vis an ‘activity’. As regards penalty u/s.272A(2)(e), it should be on par with S. 271F, particularly in respect of small trusts. Small trusts may be defined suitably in a practical manner.

Is it fair to be extremely mechanical in implementing tax laws ?

Is It Fair

As we entered into the 21st Century, all government
departments gradually started shifting towards e-compliance of various laws. The
basic ideology of e-compliance is to be taxpayer-friendly and in the long run to
save time, money and effort which would otherwise be required in manual
compliance, during the process of shifting from manual compliance to
e-compliance, certain genuine difficulties are faced by both the taxpayers and
the professional community. This article basically examines some of such
hardships.


1. PAN : We all are aware of the failure of the Income
Tax Department in issuing PAN cards when the system was introduced a decade ago
— several assessees did not receive the PAN cards even after a lapse of a number
of years. In many instances, 2 PAN cards with different numbers were issued to
the same assessees. Ultimately, the Department outsourced the PAN work to UTI &
NSDL.

Though, it has expedited the process of issue of PAN cards,
it has its shortcomings too.

1.1 Recently, NSDL people are insisting that the proof of
assessee’s father’s name be submitted along with assessee’s name.

1.2 If the voter’s identity card of applicant bears his name
as Ashok Jain and in the next row it bears father’s name as Sanjay Jain; and if
the assessee desire his name on the PAN card to be ‘Ashok Sanjay Jain’, the
application is rejected on the ground that father’s name is not appearing along
with assessee’s name on the ‘voter’s identity card’.

1.3 In certain communities, the system of writing surname is
not prevalent. It becomes very difficult to obtain PAN card for taxpayers of
such communities.

1.4 The system accepts only 25 characters in the name of the
assessee. Now, if the name of the assessee is longer than 25 characters, it has
to suitably abbreviate it. For example, if the name of company is :
‘Vishwasaraiya Swaminathan Murlidharan Textile Processing Private Limited’.

The assessee will have no choice but to abbreviate its name
in the PAN application. The consequent problem is that it will have to put the
same abbreviated name in its e-return and e-TDS quarterly statements. Otherwise
those returns will show mismatch of PAN. There would also be a problem as the
full name may appear on TDS certificates.

1.5 In some communities, the name of the grandson is the same
as that of the grandfather. It also creates a problem in PAN application as it
appears like John Abraham (Son) & Abraham John (Father).

1.6 If the ration card is in the name of father and other
family members’ names are included in the list on the last page, then
surprisingly the ration card is not accepted as address proof for the family
members.

Is the Department implying that there should be separate
ration card for every member of the family.

All the above problems in applying for PAN are further
aggravated by the fact that the Department has gone faceless.

2. e-Return : e-Return has been made mandatory for all
company assessees and for Individuals, HUFs & Firms liable for tax audit. Some
of the problems faced are :

2.1 The maximum rate of dividend accepted by ITR -6 is 100%.
Can’t a company declare more than 100% dividend ?

2.2 The ceiling for deduction u/s.80D has been increased to
Rs.15,000 w.e.f. A.Y. 2008-09. But the ITRs still accept only Rs.10,000 as
maximum deduction u/s.80D.

3.1 e-Payment : e-Payment of taxes has also been made
mandatory for all corporate assessees and for non-corporate assesses subjected
to tax audit. In remote and mofussil areas, it may become extremely difficult,
especially for non-corporate assessees to pay taxes electronically. If e-payment
is a facility for taxpayers, what is the need for making it mandatory ? And if
an innocent individual taxpayer subjected to tax-audit makes payment of tax
manually, will he be denied credit for the taxes paid ? (It is learnt that
recently Service Tax Department has started levying penalty of Rs.5,000 on those
tax-payers who are liable to make e- payment but are paying taxes manually). Is
this fair ?

3.2 The dematerialisation of TDS Certificates, which was
first attempted by the government from A.Y. 2005-06. The implementation has been
postponed from time to time and by the Finance Act 2008 has been postponed
directly to A.Y. 2011-12. This postponement is due to lack of technological
infrastructure at Department’s end. The question is : Is it fair to make
technology mandatory for the tax-payer ? The taxpayer has no choice but to bow
down to these dictates. To be fair, the Department should introduce flexibility
in the system and avoid the existing mechanical approach it has.

Conclusion :

There could be many more such issues. Great hardship is faced
by many assessees and tax professionals. Readers are welcome to share their
experience and views so that a meaningful and effective representation can be
made.

The author has always believed that procedures should not be tax-friendly on
paper, but should really — that is in practice — be taxpayer-friendly.

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Is it fair to make audit of co-operative societies so vulnerable ?

Is It Fair

1 Introduction :

The audit-assurance function of the profession is facing a storm because of the Satyam episode. In this article I propose to bring out a few glaring issues dealing with the audit of co-operative societies and the patent unfairness in law, especially in view of a number of complaints filed by the ‘co-operative department’ with the Institute.

2 The reality :

Everybody is aware that in co-operative societies, there is virtually nothing mutual, but what exists is non-cooperation amongst the members and the managing committee. Politics, infighting, ego problems, indifference, indecision, friction and lack of harmony exist in almost every society — small or

big. Therefore, the auditor needs to be extra cautious.

In a housing co-operative society, there is no regular office, no proper record keeping and no competent accountant. Statutory requirements of keeping the registers and documents are very stringent. Fees prescribed for audit are Rs.3 per month per member. Thus, for a 12-member society, the annual audit fee for the onerous work and responsibility is Rs.432.

Even in a society with commercial activity — like consumer society or credit society, the management is often unprofessional, there is lack of competent staff and proper infrastructure.

I am informed that in co-op. credit societies at villages, which are expected to be functioning like a bank, the situation is precarious. There exists a shabby office, poor working environment, no infrastructure, employees who have not even completed school education, probably only one or two graduates — but not necessarily commerce graduates and above all the control is in the hands of local politicians with vested interests. There also exist time and other pressures on auditors.

The auditor dare not give a qualified report though he makes adverse comments. However, managements, quite often, are used to such comments as it does not have any penal impact on them. What finally matters to them is the audit classification. They request that if the class is downgraded — from B to C; or C to D; the society will be virtually closed down; hence downgrading is avoided. The auditor often thinks — or is made to think — that if he does

downgrading, innocent depositors will suffer ! Although certain norms are prescribed, he at times avoids downgrading though he makes comments.

It also at times happens that due to adverse remarks in the report, audit fees are not paid. On top of it, the co-operative department files a disciplinary case on the following grounds :

(a) Auditor may have mentioned 18 discrepancies, irregularities or shortcomings. The deptt. points out that he has not commented on 2 or 3 other discrepancies. Now, the report is so qualified that the number of shortcomings is of mere statistical importance.

(b) Difference of opining on grading — Auditors have retained B or C class; or have downgraded from B to C, while they should have classified the society as D. Frankly speaking, auditor should not be called upon to sit in judgment as regards classification. This should be the function of the department based on overall evaluation of the auditor’s report including the comments made as part of the report.
(c) The worst of all, — when there are frauds or serious irregularities, the auditor himself is required to file a police complaint. Hence, they allege that failure to lodge a police case is also a professional misconduct! It is understandable that the auditors are required to submit a special report to the Registrar; which the auditor does submit. But expecting him to approach police is unfair.

3. Reasons for unreasonable approach :

In earlier years, audit of co-operative societies was done by departmental staff only. There was no concept of appointing a CA. The law was framed keeping in view that audit function is performed by

Full texts of relevant Notifications, Circulars and Forms are available on the BCAS website : www.bcasonline.org

Is it fair for the Department to compel disproportionate inputs for small matters?

Is IT Fair

1. Introduction :


In the February issue of BCA journal, the Ombudsman appointed
for Income-tax matters has written a very nice article which candidly brings out
the limitations imposed on him.

It is a common feeling among taxpayers and professionals that
representations in any revenue department — particularly income tax, sales tax,
service tax — is a nightmare. It is one thing to rake up and make us fight for
important issues of interpretation and also of facts. It is a part of our life.
However, of late, it is experienced that even petty matters consume lot of time
and energy and require intervention at senior level. It often becomes very
irritating and the work suffers. The following are a few such instances.

2. Instances of irritants :


2.1 As mentioned by the Ld. Ombudsman, a simple thing like
giving appeals effect in thousands of VRS cases. It is a question of allowing
relief u/s.89(1) which is more or less a settled position. The same is the case
with giving appeal effect of ITAT orders in respect of exemption u/s.10(10C) of
RBI employees. It never happens automatically. For each and every case, one has
to follow up vigorously. Due to change of wards, jurisdictions and locations (Charni
Road to Bandra), the relevant records are never traceable. It is intriguing that
when something is recoverable from assesses, the record is immediately traced.
(!)

Most of the employees who have taken VRS may not be having
high incomes. They are scattered and not in a position to follow up with the
Income-tax Department. The refunds of subsequent years have been adjusted
against the so-called dues of VRS year — which in fact are non-existent due to
favourable Appellate orders.

Now, for giving appeal effect, they are asking for duplicate
returns, salary certificates and so on. This is only to create hurdles.

2.2 Submissions to ITAT :

Paper-books are required to be submitted one week prior to
the date of hearing. A set meant for the Departmental Representative (DR) is to
be filed at a different location. Even if there is one day’s delay, the staff
refuses to even accept the paper-book. Refusal to accept an inward
correspondence is highly incorrect. The DR may raise objection for delayed
submission and the Members may take a view in the matter. But how can they
refuse to accept the paper-book ?

Further, quite often, the Hon’ble Members direct us to place
on record some documents (e.g., some unreported judgments, etc.) usually
on the same day. Now, it is extremely difficult to ensure that it reaches the
relevant file. There is no acknowledgement. Acceptance with a covering letter is
flatly refused. Then, you are entirely at the mercy of the bench clerk.

The most disturbing feature is that even for submission of
appeal (Form 36), acknowledgement is not issued on the spot. There is a strange
system. The form is to be delivered in good faith. No acknowledgement is given
on your copy; nor even a token receipt is issued. A computerised receipt is to
be collected the next day.

Similarly, your written intimations of change of address are
never acted upon in spite of repeated follow-up. Further, when an adjournment is
sought, it is expected that some responsible person should actually be present
in the Court. The objective is understandable — firstly, to ascertain the
genuineness of reason and also to decide the next date with mutual convenience.
However, in may situations, it is genuinely not possible to remain present. At
least at the time of the first adjournment, when request is filed well in
advance, personal attendance should not be insisted upon.

Nowadays, notices of hearing are often received just 8 to 10
days in advance. How can one submit the paper-books 7 days in advance ?

2.3 Rubber stamp on TDS Certificates :

It is also strange that credit on TDS/TCS certificates is
denied for want of rubber stamp of the issuer. It is extremely cumbersome to
obtain such stamps since the certificates are already filed.

2.4 The returns under the MVAT Act, 2002 are to be submitted
at Mazgaon Office (unlike at decentralised offices at Bandra and Belapur under
the erstwhile BST Act). However, the Sales Tax Offices at Belapur and Bandra are
issuing notices to all the dealers to submit copies of all returns filed under
the MVAT Act, 2002 with effect from 1-4-2005 i.e., the date of
implementation of MVAT. In quite a few cases, even if the dealer is registered
under the MVAT Act just a few months back, the notices require the copies of
returns from April 2005. Notices/reminders to defaulting dealers is
understandable. But taking copies of all returns from the dealers to compile the
list of defaulters is in a way, amounting to shifting of departmental officer’s
duty on dealers and their consultants. Many dealers’ liability under the MVAT
Act being monthly, the dealers have to submit copies of around 30 returns filed
till September’ 2007.

2.5 Under the Income-tax Act, 1961, the assessees are
required to pay advance tax in the previous year itself in 3 or 4 installments
on 15th June, 15th Sep., 15th Dec and 15th March. However, there is one more
practical advance compliance of this advance tax provision. The Departmental
authorities frequently call the consultants on 13th or 14th of the month (i.e.,
a day or two prior to the due date) asking for the advance tax paid or proposed
to be paid by the assessees. Can’t the departmental authorities wait for 4 days
to let the data come from the bankers. Is this duty also cast on the
practitioners ? ? ?

Suggestions :



1. Let there be more co-ordination within the Government
Departments.

2. Let all the procedures be reviewed with sensitivity and
sensibility.

Is it fair for the draftsmen to draft provisions that lack clarity and assertion ?

Is It fair

1. Introduction :


Our legislative process involves various stages — viz.
introduction of the Bill, deliberations (if any) in the Parliament and then the
Bill with amendments, if any, which is passed is assented to by the Hon’ble
President. It is our experience that the Bill, on its introduction, is heatedly
debated upon among tax practitioners. How many of the suggestions resulting from
the debate reach the Finance Minister, and thereafter how much time the
Parliamentarians spend on it, are in the realm of conjecture. And finally, what
comes out as the ‘Act’ may be altogether at times contrary to what the FM states
on the floor of the House. Therefore, it is questionable as to what
extent the legislative intent really gets reflected in the provisions that
become law. In this article, I propose to draw the readers’ attention to some of
the provisions which become almost ineffective since they are worded in a vague
and un-assertive language.

2. Instances of vague wordings :


2.1 S. 50C Ss.(2) :


Without prejudice to the provisions of Ss.(1), where :

(a) the assessee claims before any AO that the value
adopted or assessed by the stamp valuation authority U/ss.(1) exceeds the fair
market value of the property as on the date of transfer;

(b) the value so adopted or assessed by the stamp valuation
authority U/ss.(1) has not been disputed in any appeal or revision or no
reference has been made before any other authority, Court or the High Court,

the Assessing Officer may refer the valuation of the
capital asset to a Valuation Officer and where any such reference is made, the
provisions of Ss.(2), (3), (4), (5) and (6) of S. 16A, clause (i) of Ss.(1)
and Ss.(6) and Ss.(7) of S. 23A, Ss.(5) of S. 24, S. 34AA, S. 35 and S. 37 of
the Wealth Tax Act, 1957 (27 of 1957), shall, with necessary modifications,
apply in relation to such reference as they apply in relation to a reference
made by the Assessing Officer under Ss.(1) of S. 16A of that Act.

Now, the ambiguities are :



  • The word used is ‘may’. That means there is no obligation on the AO ?



  • The apparent meaning is that AO can refer to DVO only at the instance of the
    assessee. But it is not so stated categorically; and the I.T. Department is
    referring the cases to DVO in an arbitrary manner.



2.2 S. 154(8) Rectification :



Ss.(8) of S. 154 provides that the authority shall pass an
order within a period of six months from the end of the month in which the
application is received by it :

(a) Making the amendment; or

(b) Refusing to allow the claim.


Now, it is not clear as to what happens if the authority does
not pass any order. And in almost all the cases this is the reality !

2.3 Ss.(2) of S. 12AA. It reads as follows :


Every order granting or refusing registration
under clause (b) of Ss.(1) shall be passed before the expiry of six months from
the end of the month in which the application was received under clause (a).

But it is silent as to the consequences of failure to pass
the order. However, the Bangalore Tribunal in Karnataka Golf Association v.
Deputy Director of Income Tax, (2004) 91 ITD 1 has held that if no order is
passed within the stipulated time, registration is deemed to have been granted.

2.4 Ss.(6A) of S. 250 :


It is reproduced below :

(6A) In every appeal, the Commissioner (Appeals), where it
is possible, may hear and decide such appeal within a period of one year from
the end of the financial year in which such appeal is filed before him under
Ss.(1) of S. 246A.


Conclusion :

It is not enough that an obligation is created on the
authorities. It should be coupled with a remedy in the hands of the assessee for
non-observance of the provisions on the part of the authorities.

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Is it fair that the Charity Commissioner’s office does not have a practice of updating the trusts’ records ?

Is It Fair

1. Introduction :


Various types of organisations are regulated by various
authorities established under the respective legislations. Each regulator’s
office has its own style of functioning. Trusts are governed basically under
two legislations — Indian Trusts Act, 1882 and Bombay Public Trusts Act, 1950
(BPT Act). The regulatory authority is the Charity Commissioner. So also, the
Registrar under the Societies Registration Act, 1860 is the same authority,
viz. Charity Commissioner. In Maharashtra, every society under the
Societies Registration Act is also required to get itself registered as a
trust. This write-up proposes to bring out a peculiar system in the Charity
Commissioner’s (CC) office which causes enormous hardship to the honest social
organisations.

2. The ‘unfair’ practice :


Readers are aware that in respect of other organisations
like companies, partnership firms, etc. the changes in the names, addresses,
etc. of directors, partners as the case may be, are intimated to the ROC/ROF
and in due course of time, the changes get updated in the records of those
regulators. In the CC’s office, even if you submit the changes, etc. in the
particulars of trustees; or any other information about the trust — such as
addresses, alterations in rules and regulations; there is no system or
practice of updating the records. At the same time, when there are occasions
where you need a specific permission from the CC’s office — e.g.,
alienation of immovable property; borrowings, etc. you are required to first
ensure that your record in their office is updated. Thus, if there is a change
in the trustees or managing committee and the changes are duly intimated to
the CC’s office; and if the new trustees approach the CC’s office, they are
not entertained at all, on the ground that their names do not appear in CC’s
records. There were instances where the trusts had to do the exercise for 10
to 35 years ! That is the reason why such permissions may take an inordinately
long time — may be even a couple of years ! It is indeed a herculean task,
often very difficult if not impossible !

3. Reasons :


The probable reasons for such a situation may be numerous :

3.1 Innumerable trusts : Although the formation
process is a little cumbersome and time consuming, the cost of formation is
very meagre. Many people are overenthusiastic in forming such trusts with high
dreams. The initial corpus may be even less than a thousand rupees. Hence,
there is a mushrooming growth. The CC’s office does not have adequate
infrastructure and manpower.

3.2 No filing fee : The intimations to the offices
of ROC & ROF are accompanied by a filing fee. Thus, the administrative cost of
updating the records is largely taken care of. In the CC’s office there is a
yearly contribution payable by every trust — at 2% of its receipts. It is a
separate issue as to how the enormous amount collected so far by the CC’s
office is utilised. The accumulation may be in the vicinity of a few hundred
crores of rupees.

3.3 No incentive to staff : Most of the persons
dealing with the CC’s office on behalf of the trusts are supposed to be
‘social workers’. Many of them may not have resources and willingness to spend
on paperwork, etc. The staff may not have motivation to render service.

4. Some thoughts :


4.1 A few of the states have taken a practical and sensible
decision not to regulate the charities at all. I am told, the Karnataka State
does not have any legislation parallel to our BPT Act.

4.2 Since the year 2000, all companies were required to
have a minimum paid-up capital — i.e., Rs. one lakh for private limited
and Rs. five lakhs for public limited companies. A similar requirement may be
brought in respect of the basic corpus.

4.3 A small filing fee may be introduced for registering
all the changes.

4.4 Weeding out process may be carried out on a mass scale.
The trusts who have not sent any communication to the CC’s office for past,
say, 10 years, may be de-registered.

4.5 There are many trusts which were registered 30 to 40
years ago and have been defunct for 10 to 15 years. The trustees may be
planning to revive the activities. The present system is a serious deterrent
for the well-intentioned trustees. An amnesty scheme may be introduced and
only the present position may be taken on record by prescribing some
procedures — like affidavits, indemnity bonds, etc.

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Is it fair to create ambiguity about service of notice u/s.143(2) ?

Is It Fair

1. Introduction :


In recent years, ‘scrutiny assessments’ have become a
nightmare for taxpayers as well as professionals. It is also seen that many of
the officers themselves are not very comfortable with the manner in which things
are administered or thrust on them. The starting point of the ‘scrutiny’ is the
service of notice u/s.143(2) of the Income-tax Act, 1961 (the Act). After the
introduction of Fringe Benefit Tax (FBT) by Finance Act, 2005, S. 115WE(2) also
contemplates an assessment similar to S. 143(3). Because of these two
assessments, a peculiar problem is faced. The same is discussed in the
succeeding paragraphs. This is all the more relevant, particularly when there
were two separate returns i.e., one for income and the other for FBT.
Even after introduction of combined form of return of income and FBT, it is
pertinent to note that there are two separate assessments for each.

2. Nature of problem :


2.1 A few assessees received notice u/s.115WE(2) for
assessment u/s.115WE for FBT. This was received within the prescribed time for
A.Y. 2006-07.

2.2 Further, due to e-filing of returns, the assessees also
received notices u/s.142(1) requiring them to furnish hard copies of accounts,
reports, TDS certificates and so on.

2.3 It may be pertinent to note that notice u/s. 142(1) is
common for both the assessments i.e., the assessment of income as well as
of fringe benefits.

2.4 Assessees confirm having received aforementioned notices;
but are sure that the cover did not contain any notice u/s.143(2).

2.5 These assessees received fresh notice u/s. 143(2) dated
much beyond the time permissible u/s.143(2). Strictly speaking, the notice is
out of time on the face of it.

2.6 Now, the dilemma arises. The acknowledge-ment is given
for the cover (envelope). There is no clarity as to its contents. If at all the
notice was served earlier u/s.143(2) along with the notice for FBT assessment,
there is no need for fresh notice u/s.143(2).


2.7 The Finance Act, 2008 has given considerable liberty to
the AOs to commit lapses —
E.g.,





— S. 282A : Notice need not be signed and only name
and designation is printed/stamped/ otherwise written is sufficient.

— S. 292BB : Where an assessee appeared in any
proceedings/co-operated in any inquiry, it shall be deemed that the notice has
been duly served and he shall be precluded from taking any objections in this
regard, after completion of assessment.


2.8 At the same time, one cannot really afford to take a
tough stand regarding non-service of notice. Everybody is aware of the nuisance
value resulting from such an action.

3. Conclusion :


There is already abundant litigation with regard to the
service of notice e.g., Notice accepted by a neighbour or a servant or a
person other than assessee. There are also issues of service of notice by
affixture. The dilemma being created by two separate assessments will add to
this litigation. Therefore, it is high time that the CBDT issues a Circular to
clarify the position.

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Short-Term Capital Gains on Shares Taxed at a Rate Higher Than Normal Slab Rate — Anomaly in S. 111A

S. 111A(1) and the proviso thereto, read as under :

Tax on short-term capital gains in certain cases.

111A. (1) Where the total income of an assessee includes any income chargeable under the head ‘Capital gains’, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity-oriented fund and —

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that Chapter, the tax payable by the assessee on the total income shall be the aggregate of —

(i) the amount of income-tax calculated on such short-term capital gains at the rate of fifteen per cent; and

(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee :

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of 15%.

        Short-term capital gains arising from transfer of equity shares is taxable u/s.111A @ 15%. The proviso to S. 111A(1) gives some relief to a resident individual or HUF in case such income of the assessee forms part of the income within the basic exemption limit.

        As per literal reading of the proviso to S. 111A(1), in such a case, that portion of such short-term capital gains which exceeds basic exemption limit, would be taxable @ 15%. In other words, such an assessee is entitled to claim basic exemption in respect of such short-term capital gains, but the excess of such income above the basic exemption limit is taxable @ 15%.

        The Finance Act, 2009 provides for a 10% tax slab on income between `1,60,000 to `3,00,000 for individuals (other than specified individuals) and HUFs for A.Y. 2010-11. Further, the Finance Act, 2010 provides for a 10% tax slab on income between `1,60,000 to `5,00,000 for individuals (other than specified individuals) and HUFs for A.Y. 2011-12.

        A literal reading of the proviso to S. 111A(1) would make such short-term capital gains arising to a resident individual/HUF falling within the income bracket of `1,60,000 to `3,00,000 (or `1,60,000 to `5,00,000, as the case may be) liable to tax @ 15%, whereas normal income (i.e., incomes other than such short-term capital gains) falling within such income brackets would be taxable @ 10%.

        It would be recalled that S. 111A was inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005, on restructuring of the provisions relating to taxation of capital gains on transfer of equity shares. This could never have been the intention of the law-makers to tax such short-term capital gains at a rate higher than the tax rate on other income falling within the above-mentioned slab.

        Therefore, there is a clear and patent anomaly which has crept in after increase in the rate of tax u/s.111A(1) from 10% to 15% by the Finance Act, 2008, coupled with significant restructuring of the tax slabs by the Finance Act, 2009 and 2010. This anomaly is likely to give rise to litigation. This anomaly is adversely impacting small taxpayers the most. To provide clarity to the assessees and the Assessing Officers, this anomaly requires to be corrected by way of an amendment to the law.

        Pending such an amendment, we would request CBDT to kindly issue a suitable Circular/Instruction granting relief to the taxpayers in such cases.

Is it fair to burden small companies and firms with surcharge on FBT ?

Is It Fair

1. Introduction :


Ordinarily, the Government resorts to surcharge on income-tax
for mobilising resources for tackling a particular situation — like natural
calamity, war, etc. It is intended to be a short-term measure. There is also an
implication of sharing the revenues with the states. However, in recent years,
the surcharge has almost come to stay for ever. It is further aggravated by the
education cess. Some solace is provided in terms of marginal reliefs; or some
threshold limits of income above which the surcharge becomes applicable.

2. Applicability of surcharge :


S. 2 of Finance Act, 2008 deals with the rates of income-tax.

Ss.(3) of S. 2 applies to persons covered under Chapter XII
or Chapter XIIA, Chapter XII H, S. 115JB; and so on. Clause (c) of 2nd proviso
to Ss.(3) states that in the case of every firm and domestic company, the
surcharge will be 10% of the income-tax where the total income exceeds one crore
rupees; whereas clause (a) of the same proviso makes surcharge applicable to
individuals, HUFs, AOPs, etc. when total income exceeds ten lakh rupees. This is
understandable.

However, the 4th proviso deals with surcharge on FBT. Here,
clause (a) states that in respect of AOP and BOI, surcharge on FBT is applicable
if the value of fringe benefits exceeds Rs.10 lakh. Thus, it is in line with
surcharge on normal income-tax. And when it comes to firms and domestic
companies, in terms of clause (b) of the 4th proviso, the surcharge on FBT will
apply to all such entities, irrespective of their total or the value of fringe
benefit.

There is a similar distinction in Ss.(9) as well.

3. Anomaly :


The 2nd proviso states that surcharge is applicable on the
normal income-tax where the income is chargeable to tax u/s.115A, 115AB,
. . . . . . . . . . . . . . . and u/s.115JB; or fringe benefits chargeable to
tax u/s.115WA.

It is not clear as to what is the relevance of including S.
115WA in the 2nd proviso, when the 4th proviso specifically deals with FBT.

Further, there is no reason why there should be a
discrimination in respect of FBT when the surcharge on normal tax applies only
to large companies having income exceeding Rs. one crore.

It is a fact that FBT is already a burden on the employer
firm or company. There is no justification as to why all firms and companies be
subjected to surcharge on FBT, irrespective of their income/value of fringe
benefits.

If it is viewed that FBT is basically in respect of the
benefits to the employees, it is common knowledge that majority of the employees
in majority of the organisations are most likely to have total income less than
Rs.10 lakhs.

Clause (a) of the 4th proviso gives the benefit of threshold
limit of FB value for AOPs and BOIs, but clause (b) deprives the firms and
domestic companies of this benefit.

4. Suggestions :


(a) The relevance of including S. 115WA in the second proviso
should be clarified, and

(b) Some threshold limit on FB be also prescribed for firms and domestic
companies in respect of levy of surcharge on FBT.

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