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Category: Miscellanea

Certainty of justice can deter rapists more than the severity of punishment

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The three-member committee, led by former Chief Justice J S Verma, that is to suggest amendments on laws dealing with sexual assault, must listen to and take on board suggestions from women’s and civil society groups too, not just from political parties. The shock and anger about the gang rape in New Delhi, and the victim’s death, must not translate into a misplaced overemphasis on harshness of laws. Rather, as the measure to institute fast-track courts to death with rapes and crimes against women highlights, the stress should be on enforcing the swiftness and inevitability of justice.

It is a moot point whether the severity of punishment has, and can, act as a deterrent against any crime if that punishment is deferred indefinitely. And given the debacles, stigma and inherent biases victims of rapes face in India, it is necessary to first ensure things like unfailing registration of complaints, and then a speedy investigation and conviction of the perpetrators. The abysmally low conviction rate on rapes is testimony to the fact that these drawbacks in the justice delivery system are most responsible for many perpetrators walking away scot free — even as most rape cases are never even reported because of stigma, pressures and plain coercion. The certainty of the law catching up, and swiftly, is what can deter such crimes more than the spectre of being hanged to death, for example.

While being commensurate with the severity of a crime, the law also needs to encompass all forms of molestation and sexual assault against women. The law, the justice delivery mechanisms, must be geared to protect, encourage and aid the victim in seeking and getting that justice, not further traumatise her, as is the case now. Care must also be taken that rape laws aren’t misused by, for example, parents who seek to control and punish their offspring for relationships they don’t approve of. In the broader perspective, rape is a crime of patriarchy; eliminating the various forms of the latter will be a wider, perhaps slower process. But the law can make a beginning; and its framing, now, must be a genuinely consultative process.

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Asking for trouble – Bank licences to industrial houses are a serious error

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India has not issued a new bank licence since 2004. There is a persuasive case to be made that India’s banking sector needs to be more open; but aspects of the recent decision to award more licences are, none the less, disquieting. Well-informed voices from across the spectrum of opinion have, in the past few days, been raised against the proposal to allow large business conglomerates to set up banks if they have a “successful track record” – judged, presumably, by the licensing authority – and a minimum capital of Rs 500 crore. The head of the Prime Minister’s Economic Advisory Council, C Rangarajan, has urged the Reserve Bank of India ( RBI) to start by issuing licences to “non-corporate businesses” first, and to look elsewhere only if there are no such qualified applicants.

The left-leaning Columbia University economics professor and Nobel laureate Joseph Stiglitz said in an interview that it would be “very risky” to allow companies to own banks. It was not allowed in the US, he added, and correctly so; the conflicts of interest that it would open up were “sufficiently great” and regulators would “not be able to circumscribe them easily — or at all”. And the right-leaning economist Percy Mistry has also said allowing industrial houses to run banks would leave “massive scope for malfeasance”. Japan, he pointed out, is one country where banks and industries are enmeshed with each other, and it is still to emerge from a twodecade- old financial crisis.

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Crackdown on Shell Firms, Benami Directors – Onus for verification to be on CAs

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In a massive clean-up exercise to address the ageold problem of shell companies and directors with questionable credentials, the ministry of corporate affairs (MCA) has tightened the rules governing the registration of addresses and appointment of directors. The exercise has been set off through a series of notifications amending key rules.

The ministry has amended Form 18, the standard filing for details of the registered office or any change in it. Under the new form, the onus will be on the chartered accountant (CA), cost accountant or company secretary (CS) to physically verify the filing and check the existence of a firm.

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Harvard and the Kumbh Mela

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An estimated 10 million people bathed in the Ganga on Monday, the first day of the ongoing Maha Kumbh Mela at Allahabad. It is billed as the biggest single religious gathering in the world.

Behind the massive show of religious devotion is a quiet secular machine that services the millions who pour into Allahabad for the Kumbh Melas. The details are mind boggling. The crowd on the main days is large enough to be visible from space satellites. Some 25,000 tonnes of foodgrains are sent to feed the pilgrims. About 700,000 tents are erected to house the visitors. Pipes have to be laid so that clean drinking water is available. A temporary super-specialty hospital has been built for anybody who falls seriously sick. Thirty-one police stations and 41 police check-posts have come up to maintain law and order. Massive television screens flash information about missing people. Thirty-six fire stations will get into the act in case there is a conflagration.

The entire effort is so unique that it has attracted the attention of Harvard University. Six of its departments are collaborating to understand the Kumbh Mela phenomenon: the Faculty of Arts and Sciences, Harvard Divinity School, Harvard Graduate School of Design, Harvard Business School, Harvard Medical School and the Harvard School of Public Health.

The South Asia Institute at Harvard notes on its website: “A temporary city is created every 12 years in Allahabad to house the Kumbh Mela’s many pilgrims. This city is laid out on a grid, constructed and deconstructed within a matter of weeks; within the grid, multiple aspects of contemporary urbanism come to fruition, including spatial zoning, an electricity grid, food and water distribution, physical infrastructure construction, mass vaccinations, public gathering spaces, and night-time social events.”

The megacity that magically pops up at Allahabad during the Kumbh Mela is as large as New York, London and Paris combined. The sheer scale of the effort shows that the Indian state machinery, usually a creaking mess, can be galvanized into action when there is the will to do something.

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Unlocking India’s potential – We can transform the country, eradicating poverty and unemployment, if we make the right moves

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The United States of the early to mid-1900s has some striking parallels with the India of today. It was around this time that America began its journey towards becoming the world’s largest economy.

The biggest factors that propelled the growth and transformation of the US were technology, natural resources, manufacturing and private enterprise; a few men who dreamt big helped create the modern America.

All the five men were also great philanthropists who donated most of their wealth for the larger benefit of society. These were used to set up large universities, hospitals, museums, art and culture centres, libraries and charities. The universities also contributed as powerful research centres and acted as think tanks in areas of technology, material and space research, liberal arts and political science. Moreover, they helped develop political, business and other leaders. These created large employment opportunities and also spawned entrepreneurship.

America’s growth journey has some lessons for India. Both are large vibrant democracies with abundant natural resources. While America benefited from a large flow of immigrants in search of the American dream, India has a large population in the working age group. More importantly, like the US, India has people with entrepreneurial spirit who can visualise a new India and unleash its potential.

Five drivers – private enterprise, exploration of natural resources, development of manufacturing, tourism and simplification of regulatory and approval processes can be key to developing India as an all-round superpower.

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Indian franchisees pay too much royalty to their foreign HQs

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The annual royalty that McDonald’s Indian franchisee will pay to the US-headquartered fast-food company is all set to go up from three per cent of net sales now to eight per cent by 2020. Ever since the government liberalised the royalty rules in 2010, there has been a sharp increase in payouts to foreign collaborators. An analysis by this newspaper of 75 companies listed on the Bombay Stock Exchange shows that royalty payments more than trebled between 2007-08 and 2011-12, though sales grew 80 per cent and net profit a little over 30 %. Proxy advisory firm Institutional Investors Advisory Services says that while the money remitted by the top three royalty-paying companies – Maruti Suzuki, ABB and Nestle India – jumped over three times from Rs 784 crore in 2007-08 to Rs 2,495 crore in 2011-12, their collective revenue increased only 1.8 times. It said four companies had paid no dividends in the last five years, though they had paid Rs 385 crore in royalty to their overseas partners. And, in one case, the Indian company had to fork out royalty to its Japanese promoter, though it had reported a loss for the year. Recently, ACC-Ambuja Cements had to cut the royalty payment to parent Holcim from two per cent of net sales to one per cent after the independent directors on the company’s board objected to the high payout.

There are at least three issues here. One, high royalty is iniquitous to minority shareholders. It is like a super dividend to the foreign shareholder. It reduces the net profit, and therefore causes the valuation of the Indian venture to fall. Also, since royalty is a commercial arrangement, minority shareholders have no say in it. They are seldom told the reason why it has been changed. Shareholder activists have, therefore, started demanding that royalty payments ought to be decided in the annual general meeting of shareholders, and any change must be cleared by 75 % of the shareholders. Two, the negotiations for royalty are often between the foreign promoter and the managers it has put in place. These managers have no incentive to drive a hard bargain; if they do, they could simply lose their jobs. It is, in that sense, a negotiation between non-equals. That’s perhaps the reason why multinational corporations have been able to extract favourable royalty terms from their Indian ventures. Three, royalty makes the government lose out on tax revenue.

The government ought to see the overall impact of its liberalised royalty regime, and then take corrective action. Royalty is paid for the use of the foreign partner’s technology, trademark or brand name. The government must scrutinise how real the technology transfer is and if the brand name of the foreign partner is indeed helping the Indian company charge a premium in the marketplace. Royalty has been a bone of contention between Indian business leaders and their overseas partners for a while. Several collaborations have fallen apart because of squabbles over royalty.

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Taxation, not litigation – Penalise tax dept for orders struck down by courts.

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Tax reform need not focus merely on tax slabs and the nature of the laws governing taxation. It can, indeed it must, also look at the decision-making processes and the incentives governing those in charge of tax assessment. One good indication of the maladministration at work in this branch of the government is the overall number of tax orders that are eventually taken to be adjudicated to the tax appellate tribunals, and thenceforth to the high courts and the Supreme Court. Sukumar Mukhopadhyay, writing in his column in this newspaper earlier in the week, has quoted numbers that the minister of state for finance told Parliament in a written reply to a question. Over the past four years, the revenue department’s success rate at the tribunal level varied between 10 and 20 per cent. In other words, over 80 per cent of the revenue department’s claims were thrown out by the tribunal. The tax officials did a little better at the high court level, winning around 30 per cent of the time; but at the Supreme Court, they did much worse, losing about 90 per cent of their cases. (emphasis supplied)

These numbers make clear that India’s tax administration is frequently pressing taxpayers to pay money that is not required under law, and which will not stand up to judicial scrutiny or review. Yet recovery norms are being tightened, often forcing taxpayers to pay arbitrarily demanded amounts in a month, even while a stay application is being disposed of in the courts. This penalises taxpayers for legal delays, allowing the government to take their money and sit on it even when it is unjustified in law — and given the dilatory nature of legal proceedings, for many it will seem like it has vanished forever. More, appeal is nearautomatic even if the government loses at one level; taxpayers are forced to fight cases all the way up the judicial ladder. And once they win their case, companies litigating for indirect taxes frequently discover that the government refuses to refund the money anyway, claiming it would unjustly enrich the companies’ coffers, when the company was merely indirectly collecting taxes from consumers of their products for the government.

Reform of this dysfunctional process is overdue. The judiciary, of course, must move to speed up tax cases and the tax department should initiate efforts to bring down the number of legally untenable orders its appellate officers are handing out. This can, perhaps, happen through direct penalties being levied on officers who hand out a disproportionate number of subsequently overturned orders. But, as importantly, the tradition of automatic appeal and confiscation of money in the interim needs to end — which will in and of itself alter the incentives for the revenue department. There are many ways to do this. One possibility is that, if the tax department wishes to appeal once it has lost at a particular judicial level, it should pay a punitive interest rate on the money it holds.

The government has discovered that broadening the tax net is not easy. The reason that there continues to be widespread evasion and distrust is rooted in the unreformed and red-tapist nature of the tax administration. The time has come to change that, and ensuring that delayed justice does not incentivise arbitrary confiscation is a good place to start.

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An Analysis of Poverty

Scarcity is not just a physical constraint. It is also a mindset. When scarcity captures our attention, it changes how we think — whether it is at the level of milliseconds, hours, or days and weeks. By staying top of mind,     it    affects what we notice, how we weigh our choices, how we deliberate and, ultimately, what we decide and how we behave…

Because we are preoccupied by scarcity, because our minds constantly return to it, we have less mind to give to the rest of life. This is more than a metaphor. We can directly measure mental capacity or, as we call it, bandwidth…

We can measure executive control, a key resource that affects how impulsively we behave. And we find that scarcity reduces all these components of bandwidth — it makes us less insightful, less forward-thinking, less controlled. And the effects are large. Being poor, for example, reduces a person’s cognitive capacity more than going one full night without sleep. It is not that the poor have less bandwidth as individuals. Rather, it is that the experience of poverty reduces anyone’s bandwidth.

When we think of the poor, we naturally think of a shortage of money. When we think of the busy, or the lonely, we think of a shortage of time, or of friends. But our results suggest that scarcity of all varieties also leads to a shortage of bandwidth. And     because     bandwidth affects all aspects of behaviour, this shortage has consequences.

(Source: Extracts from “Scarcity: Why Having too Little Means so Much” by Sendhil Mullainathan   in the Economic Times dated 06.11.2013)

Fictione Legis

‘Fictio’ in old Roman Law was a term of pleading and signified a false averment on the part of the plaintiff which the defendant was not allowed to traverse e.g. an averment that the plaintiff was a Roman citizen, when he was a foreigner, if the object was to give jurisdiction over him [Maine’s Anc. Law Ch. II]. The term, meaning ‘fiction’, therefore, came to be used for those things that have no real essence in their own body but are so accepted in law for a special purpose. In the words of Viscount Dunedin in CfT v. Bombay Trust Corporation, AIR 1930 PC 54, “Where a person is deemed to be something, the only meaning possible is that whereas he is not in reality that something, the Act of Parliament requires him to be treated as if he were”.

2. Fictions in law are created for definite purposes to result in a situation which would not otherwise have resulted and to treat an imaginary state of affairs as real. It is introduced for necessity, generally to avoid inequity caused by mischief made possible under general provisions and concepts of law. In tax laws the object is mainly ‘to prevent mischief arising out of circumvention of normal legal provisions resulting in tax avoidance while remaining within the confines of the law, as also to remove unintended consequences. The introduction of legal fictions thus introduces equity in legislation which is expressed in the maxim, “In fictione legis acquitas exist it” i.e. the legal fiction is consistent with equity. Beyond the purpose for which they are created legal fictions must injure no one as expressed in the maxim ‘fictio legis neminem ladit’.

3. The English law has always abounded in fictions, so are taxation laws in India. The unrestricted operation of treating the imaginary as real has the potentiality of upsetting the whole scheme of legislation and the basic fundamentals of law causing injury to untargeted subjects and areas and thus violating equity. Courts have, therefore, in keeping with the maxim, been cautioning against extending them beyond their legitimate field. The Apex court has repeatedly observed that legal fictions are created only for a definite purpose. They are limited to the purposes for which they are created and should not be extended beyond their legitimate field. [CfT v. Elphinstone Spg. & Wvg. Mills Co. Ltd., 40 ITR 124].

4. In CfT v. Amarchand N. Shroff, 48 ITR 59, the court was to interpret the fiction contained in S. 24B(1) of 1922 Act making a legal representative an assessee in respect of the income which the deceased would have earned had he not died. Attempt was made to extend the fiction to post-death income as well. The court disapproved extending the fiction, the legitimates purpose of which was to tax income earned upto the year in which death took place. As a result, the 1961 Act made a specific provision in S. 168 to cover income upto the date of complete distribution of assets.

5. Commenting on Rule 8 of the Income-tax Rules which apportions the business income of the growers and manufacturers of tea, between agricultural and business income in the context of deduction u/s.80 HHC, the Calcutta High Court in Warren Tea Ltd v. UOf, 236 ITR 492 held that the applicability of the fiction is limited to computation of taxable income from business by apportioning the total business income computed after all deductions and, accordingly, held that since the stage of grant of deduction u/s.80HHC would be at the time before applying Rule 8 and not after apportionment is made, the Rule cannot be extended to computation of deduction u/s.80HHC. On that basis it struck down the CBDT Circular No. 600 dated May 23, 1991.

6. Fictions are suppositions and, unless it is clearly and expressly provided, it is not permissible to impose a supposition on a supposition of law. In Executors and Trustees of Sir Cawasji Jehangir v. CFT, 35 ITR 537, the Bombay High Court was to consider the scope of the jictio juris’ in S. 23A of the 1922 Act under which the undistributed income of the company, as computed in accordance with that provision, was deemed to have been distributed as dividend amongst the shareholders and included in their total income as such. The issue arose that if such income of the company constituted partly of capital gains, should the dividend which is deemed as distributed also be apportioned between capital gains and dividend in the hands of the shareholder. While accepting  that  full effect has to ‘fictio juris’ the court ruled out sub-joining or tacking a fiction upon fiction and observed that there is nothing even remotely suggesting the assessee to identify himself with the company or to assert an equivalence between his income and the income of the company. The argument, if accepted, would amount to imposing supposition upon the supposition of law.

7. Within its legitimate area of application, the fictione legis has to have its full effect. The question of chargeability of interest u/s.234B and u/s.234C came for consideration before the Gauhati High Court in Assam Bengal Carriers Ltd v. CIT, 239 ITR 862. Brushing aside all the arguments based on the impracticability of estimation of income before the book profit is arrived at, the Court directed full effect to be given to the fiction contained in the provision with its obvious fall out. Observing that, where fall out of the fiction leads to an obvious inference, there can be no half way house, the court held S. 234B & S. 234C applicable even in case where income is determined u/s.115JB. They quoted with approval the following observations of Lord Asquith in East End Dwellings Co. Ltd v. Finsbury Borough Council, (1951) 2 All ER 587 (HL) which was also relied upon by the Bombay High Court in the case of Executors and Trustees of Sir Cawasji Jehangir (supra).

“If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real, the conse-quences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it”.

The Supreme Court, however, in CIT v. Kwality Biscuits Ltd., 284 ITR 434 disapproved the judgment of the Gauhati High Court on a different ground of the impracticability of arriving at the total income before arriving at the ‘book profit’.

8. In a recent judgement delivered by the Special Bench of the Ahmedabad Tribunal in Assistant Commissioner of Income-tax v. Goldmine Shares and Finance P. Ldt 302 ITR (AT) 208, the Tribunal  considered the fiction contained in S. 80IA(5) which bids one to treat the eligible business as the only source of income of an undertaking. Applying the observations of Lord Asquith (supra), the Tribunal took note of the consequences and incidents flowing from it and held that the profit from the eligible business for the purpose of deduction u/s.80IA has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years.

9. Fictions are generally by way of deeming provisions where imaginary or unreal state of affairs is deemed to exist in the presence of certain facts. Income-tax Act abounds in deemed provisions in which, all are not restricted to imaginary state only. Deemed provisions are sometimes used to give an artificial construction to a word or phrase that would otherwise not prevail. A clear example is to be found in the provisions of S. 2(22)(e) of the Act deeming advances to specified persons as dividend to shareholders. The Act defines ‘Income’ in an inclusive manner including receipts of the nature which would not otherwise be taken as such. They are also used to put beyond doubt a particular construction that might otherwise be capable of different interpretation. One may refer to the provisions of S. 9 which deems certain income as accruing or arising in India to keep them outside the pale of uncertainly. We have fiction in S. 45(3) and S. 45(4) to avoid unintended situation legalised by courts decisions and S. 115 JB to partly neutralise the impact of various tax incentives and thus introduce horizontal equity. All these provisions involve some digression from the normal provisions and the concepts in tax law. The peculiar sense in which the provision is employed has to be judged in the light of the scheme of the section and the context in which deeming is made.

10. Fictions in law, therefore, give completeness to the scheme of law and the intention of the legislature.

RBI governor issues warning on loan waivers

Reserve Bank of  India governor  Raghuram  Rajan has cautioned finance secretaries of state governments against debt waiver schemes as banks are already starved of capital. the warning came during a conference of the    state finance secretaries.

In the meeting, Rajan said that the debt waiver schemes announced by state governments have an adverse impact     on the financial health of banks. He added     that the banking sector’s capital needs have gone up due to enhanced prudential requirements and rise in bad loans due to the slowdown in the economy.

The RBI governor highlighted the challenges faced by the country last year in tackling the serious issues relating to    current    account    deficit    (CAD),    growth    slowdown, fiscal consolidation    and inflation management and steps taken to restore confidence in the macro economy of the country.    

He referred to the decline in financial savings and consequential challenges to debt management when growth and private sector credit would pick up.

Earlier,  RBI deputy governor  harun Khan focused on channelising financial savings with the formal financial    system — like bank deposits,     equity, fixed income    securities    and insurance products — for    efficient    financial    intermediation.  he stressed that more concerted and coordinated measures would be needed by the state government along with the national regulators to prevent flow     of  peoples’ savings     into unauthorized,     illegal     and unviable schemes by dubious entities.

Besides     Rajan, SEBI Chairman U. K. Sinha also addressed the conference. Sinha said that  recent changes in the SEBI Act enable it to control unauthorised deposit schemes.  he sought cooperation of the state governments in this initiative by conducting concerted investor awareness programmes and imparting training  to the officials. He suggested that States should enact depositors’ investor protection act and strengthen  the enforcement mechanism. he further sought co-operation of the State Governments in curbing “dabba trading.”

(Source: Times of India dated 26-08-2014)

Arvind Kejriwal, A Messiah Against Crony Capitalists.

“Society does not go down because of the activities of the criminals but because of the inactivities of the good people”- Swami Vivekananda

In a country which was used to the traditional parties coming back to power again and again with no intention to change the status quo, Aam Aadmi Party’ s (AAP) ascent to power in Delhi was a breathe of fresh air.

This is almost the first time in the history of this country an infant political party formed with the sole aim of providing clean and honest governance had captured the imagination of the people in such a short time. They ran an honest and clean campaign with full disclosure of their funding, which is, quite alien to the current political system in the country. They got enough seats but still not enough to form the government on their own.

The Congress party gave its support, without even it being sought for, as the mandate of the people became very clear. The main agenda of AAP was to bring in the Jan Lokpal Bill and the Swaraj Bill which is core to its agenda of clean and honest governance while empowering the citizens.

One needs to understand that AAP is not a traditional political party. AAP from day one made its intentions very clear that it is not going to play by the status-quo and would resort to unconventional means, if required, to achieve its goals. They were fearless to take on any system or individuals to prove their point. Some call it anarchy while many call it revolution.

There are divergent views on the constitutional powers of the Delhi assembly to pass Jan Lokpal bill without the consent of the Central Government. Without getting into the merits of such arguments, they are two things, which I think are important.

First, what is the use of the power if you can’t bring the change you want to bring in? AAP’s core agenda is to pass the Jan Lokpal Bill and Swaraj Bill in the Delhi Assembly. If the existing system does not allow them to pass such laws, for whatever reasons, without falling into the trap of the traditional status quoits compromises which the system demands, what is the use of such power?

Second, with the dependency on Congress and BJP being very high to pass the bill, waiting for some more time is not going to help. If both Congress and BJP wanted a strong Lokpal Bill as requested by Anna and his team including Arvind Kejriwal, they could have passed astrong Lokpal Bill in the Parliament itself. The diluted Lokpal Bill passed in the Parliament is a testimony to their intentions. Going to courts is not an option as the timelines are long.

One can hate him, ignore him or term him as an anarchist. But, majority will see him as a crusader who had questioned the current system and asked the most difficult questions which the mainstream parties are scared to ask. He will be seen as a messiah who had sacrificed the power just to fight against the crony capitalism and corruption in this country. His focus on providing clean governance where honest enterprises can do business and flourish, will resonate well with majority of the corporate that are honest.

By resigning, Arvind Kejriwal had clearly made Corruption, Clean governance and Crony capitalism (three “C”s) as the main issues for the 2014 parliamentary elections. It will clearly resonate well with larger sections of the electorate who are honest. I strongly believe that it is very important for the idea of AAP to succeed, as its failure will only take the Crony capitalism and Corruption to disproportionate levels.

(Source: Extract from an article by V. Balakrishnan in The Economic Times of India, dated 17-02-2014)