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REPRESENTATION

Bombay Chartered Accountants’ Society

7, Jolly Bhavan No. 2,

New Marine Lines, Mumbai-400020.

Tel. : 61377600 to 05 / Fax : 61377666
E-mail : bca@bcasonline.org;

Website : www.bcasonline.org

WebTV : www.bcasonline.tv

September 27, 2011

Shri Shobhit Jain
OSD (TRU)
Central Board of Excise and Customs (CBEC)
Government of India, North Block,
Parliamentary Street, New Delhi-110001.
Respected Sir,

Subject: Representation of our Views on the Concept Paper for
Public Debate Taxation of Services based on a Negative List of Services

We have seen with interest the Concept Paper for Public Debate and on behalf of the Bombay Chartered Accountants’ Society, and would like to humbly submit our representation on various aspects.

We hope that our representation will receive due consideration. We would be most willing to put forward our views in person should this be required. Thanking you,

We remain,

Yours truly,
For Bombay Chartered Accountants’ Society

Pradip K. Thanawala

President

Govind G. Goyal

Chairman,

Indirect Taxes & Allied Laws Committee

Representation of our Views on the Concept Paper for Public Debate Taxation of Services based on a Negative List of Services

1.0 Background Pursuant to the announcement made by the Honourable Finance Minister while presenting the Union Budget 2011, a concept paper on taxation of services based on negative list of services has been issued for public debate and views are solicited from all stakeholders before 30-9-2011. Accordingly, we present our views on the said concept paper.

2.0 Recommendations in brief The concept paper introduces the justification for the negative list on the grounds of administrative challenge, stability and comprehensiveness and proceeds to place certain questions for public debate and feedback. The questions placed and our summarised feedback on those questions is tabulated below:


3.0 The country should not adopt a negative list
The concept paper in paras 2, 3 and 4 highlights in detail the issues surrounding the positive and negative lists. While it does accept that the currently existing positive list has certain advantages in terms of definitiveness, it seeks to justify the introduction of the negative list by citing certain limitations of the current mechanism of positive list. We are of the view that most of the said limitations can be either removed even in positive list approach or are so inherent that they would exist even in the negative list approach. The following table explains the same :

On a perusal of the above table, it is evident that the reasons cited in favour of the transition appear to be more a mirage. The same issues can be addressed in the positive list or would likely to be continued in the negative list as well.

It may be noted that though the consolidated Excise Act was enacted in 1944, the residuary entry under Excise Law (converting the law from the negative list to positive list) was introduced only in 1975 i.e., more than 30 years after the introduction of the law. As compared to that time frame, the service tax law is merely 17 years old. Further, it is much easier to provide a comprehensive definition of ‘goods’ as compared to ‘services’. Therefore, the challenges of introducing a negative list in services can be compounded.

4.0    Even if it is felt that we need to adopt the negative list, the same should be adopted only at the time of GST and not earlier than that

The nation is on the verge of introducing a major indirect tax reform by introduction of comprehensive Goods and Service Tax (GST). The introduction of GST will obviate the need to classify transactions between goods and services to a great extent. Further, the Constitutional Amendments required for introducing GST will obviate many of the challenges faced currently in defining the scope of services. Therefore, it is felt that even if we need to adopt the negative list, the same should be adopted only at the time of GST and not earlier than that.

5.0    If the negative list is introduced prior to the introduction of the GST, the definition as recommended below should be adopted Service means any obligation undertaken by the assessee for a monetary consideration pursuant to a contract or agreement, whether written or not, (other than a contract or agreement for supply of goods, money or immoveable property) between two or more consenting parties and includes:

A.    right to use an immovable property;

B.    construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority;

C.    temporary transfer or permitting the use or enjoyment of any intellectual property right;

D.    obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

E.    service in relation to lease or hire of goods; and

F.    right to enter any premises

But excludes a supply —

A.    by an employee to an employer in the course of or in relation to the employment of the person;

B.    by a constitutional authority under the Indian Constitution or a member of an Indian Legislature or a local self-government in that capacity;

C.    that amounts to manufacture of excisable goods or is chargeable as part of the value of goods to a duty in terms of the provisions of Central Excise Act, 1944;

The above amended definition is preferable since the proposed definition states that service means ‘anything’. The word ‘anything’ does not convey any meaning. No statute defines the charging provision to be ‘anything’. There needs to be a certainty to what is proposed to be taxed. Anything conveys vagueness rather than certainty or definitiveness. Further, generally the term ‘thing’ is used for tangible products like book, CD, etc. However, a lecture delivered by a professor or song performed by a singer (some examples of services) cannot be said to be ‘things’ in general parlance. Therefore, in trying to define service as ‘anything’, the soul of service is missed out.

6.0 In addition to the negative list of services, another list of services eligible for zero rating should also be introduced
The concept paper includes a negative list of services. However, it does not include services which should be zero- rated. It is therefore important that another list consisting of zero-rated services (i.e. services which are not liable for tax on the output but at the same time eligible for input credit) should be included. The said list should include exports and supplies to SEZ units and developers.

Representation

fiogf49gjkf0d
21st October 2013
To,
The Chief Commissioner of lncome Tax (CCA),
Mumbai.
Dear Sir,
Re: Implementation of the CBDT lnstructions of July 2013 in relation to CPC Demands

Pursuant to the directions of the Delhi High Court in the case of Court on its Own Motion V Commissioner of lncome Tax, the Central Board of Direct Taxes (CBDT) had issued five instructions containing various directions to implement the directives of the court, instruction numbers 3,4,5,6 and 7 of 2013.

Under these instructions, assessing officers were directed to carry out the following in relation to CPC demands:

1. Give application number to the assessee for rectification applications when they are filed, and maintain a register of such applications online;
2. Dispose of applications for rectification within two months from the date that they are filed; 3. Serve unserved intimations where demands were raised by 31st August 2013;
4. Grant credit for mismatched credits on production of TDS certificate after verification of TDS payment;
5. Grant refunds by 31st August 2013, where refunds u/s.143(1) have been adjusted by CPC against demands of earlier years without following the procedure laid down u/s.245;
6. Grant interest u/s.244A where refunds are granted after rectification u/s.154 without excluding the period taken to file rectification application u/s.154.

Unfortunately, it has been noticed that, other than issue of notices u/s.245 by CPC proposing to adjust the refunds determined u/s.143(1), the other aspects of the instructions have by and large not been given effect to. Refunds wrongly adjusted are yet to be received by assessees. Unserved intimations with demands are yet pending service. Application Numbers are not being given to assessees at the time of filing rectification applications except in offices where ASK is operational, and are not being disposed of within two months.

One of the reasons noticed for pending rectifications is that in many cases, migration of PAN is pending from lncome Tax officers to Assistant commissioners. We understand that lncome Tax Officers are reluctant to transfer high tax paying cases to Assistant commissioners, where the assessments u/s.143(3) are actually being carried out and where rectifications are pending, as they would not get credit for advance tax paid by such taxpayers if they were to do so, and would then fall short of their tax collection targets.

We submit that proper follow up by Commissioners and Chief commissioners is essential, to see that all Such cases are disposed of and instructions scrupulously followed, as taxpayers are finding that while tax recoveries are being followed up on an emergency basis, refunds due are being totally ignored. Almost 2 months have elapsed since the deadline given by the CBDT.

We would request you to kindly look into the matter, and set up a proper monitoring mechanism to ensure that taxpayers are able to get the benefit of the CBDT instructions.

Thanking You,
Yours sincerely,
For Bombay Chartered Accountants’ Society
Naushad Panjwani                                                                                   Gautam Nayak
President                                                                                                 Chairman
                                                                                                               Taxation Committee

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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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Representation to the Hon’ble Finance Minister, Government of India by Bombay Chartered Accountants’ Society on Direct Taxes Code, 2009 — Revised Discussion Paper

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Representation

Foreword :

1. At the outset, we appreciate the initiative taken for
circulation of Revised Discussion Paper (RDP) revealing some of the conceptual
changes to be made in the proposals contained in the Direct Taxes Code, 2009 (DTC),
which is going to replace the current Income-tax Act, 1961 (I.T. Act). This
shows that the Government appears to have an open mind to address the genuine
concerns raised by the taxpayers and others in response to the proposals
contained in the DTC. We also believe that the same approach will continue till
the final DTC gets enacted and becomes the law of the land as the same will
reflect the Direct Taxes Policy of the Nation for a long time to come.

2. In the DTC, many conceptual changes have been proposed
with regard to tax system and its administration as compared to the I.T. Act.
Many of such proposals have been found highly objectionable/debatable. For this,
a detailed representation has been made by the BCAS, in which each chapter, in
most cases, has been divided into two parts, namely, (a) Structural changes
(where the policy/concept itself required reconsideration/change), and (b)
Changes suggested with regard to specific provisions contained in the DTC. The
RDP deals with only some of the conceptual changes to be made in the DTC in
certain areas. However, it is completely silent with regard to the concerns
raised at conceptual level in respect of many other areas of the DTC and for
which no mention is found in the RDP, such as : Taxation of Business Income, Tax
Deduction at Source (TDS), Branch Profit Tax, Wide Powers for Tax
Administration, etc. The taxpayers and the people at large are in dark with
regard to the approach of the Government in respect of the remaining areas which
are also equally of great concern to the taxpayers and others. We only hope that
the rational view will be taken in respect thereof while drafting the final
proposals to be incorporated in the Bill.

3. In the introduction part of the RDP, it is stated that
there are a number of other issues which have been raised in the public
feedback, which, though do not form the part of the RDP, will be considered
while finalising the Bill for introduction in the Parliament. We believe
that the suggestions with regard to the conceptual changes made in the remaining
areas of the DTC as well as the suggestions made with regard to the specific
provisions contained in the DTC in our earlier representation will be seriously
considered and will find positive response in the final proposals contained in
the Bill for introduction in the Parliament. Therefore, those suggestions
have not been reiterated in this representation.


4. We also take this opportunity to recognise some of the
welcome decisions taken by the Government which are stated in the RDP, such as:
continuance of provisions relating to Minimum Alternative Tax (MAT) based on
book profits, continuance of EEE for tax treatment of certain savings,
continuance of the currently available exemption in respect of retirement
benefits of the employees, realignment of house property tax to actual rent
basis, continuance of present system of levying wealth tax, etc. However, some
of the proposals contained in the RDP require reconsideration/modification as
they are likely to create genuine hardships to the taxpayers considering the
ground realities of the tax administration in the country. In this
representation, attempt has been made to point out such cases for
reconsideration of the decisions taken as mentioned in the RDP with the hope
that the same will get serious consideration and positive response before
introducing the Bill in the Parliament for enacting the DTC.

5. It would not be out of place to reiterate that in the
Indian context, proposal for continuance of discretionary and arbitrary General
Anti Avoidance Rules (GAAR) is highly undesirable even with some of the apparent
safeguards mentioned in the RDP. The continuance of such discretionary and
arbitrary powers may create an unmanageable situation in the times to come and
will also keep uncertainty and apprehension in the minds of taxpayers even with
regard to the genuine commercial decisions taken by them. In this context, we
need to recall the experience of provision empowering assessing officers to make
prima facie adjustments and consequent levy of additional tax u/s.143(1A) while
processing the Return of Income introduced from the A.Y. 1989-90 and the havoc
that the provision created for few years. Ultimately, the said provision had to
be withdrawn by the Finance Act, 1999. In the anxiety of catching few smart
assessees who may have abused some of the provisions of the Act, it would be
totally unjustified to introduce such unfettered arbitrary powers.

If at all such provisions are found essential for any reason,
the same should only be applied only to international transactions and that too
after providing substantial higher threshold for the same, so that the common
taxpayers do not suffer with regard to their normal commercial decisions.

In view of the above, it is earnestly requested that each of
the suggestions made in this representation needs serious consideration and
proper debate
with open mind before final decision is taken in the matter.

1. Chapter I — Minimum Alternate Tax — Gross Assets
vis-à-vis Book Profit :


1.1 One of the widely welcomed proposals in the RDP is that
of dropping the levy of a flat 2% tax on assets in favour of the present regime
to levy tax on book profits. We welcome this change and hope that the same
existing MAT provisions will get
reintroduced in DTC.

1.2 MAT is supposed to be collection of tax in advance on the
basis of book profit and not to deny the benefits to the taxpayer. With this
objective MAT credit was introduced. However, MAT credit is allowed to be
carried forward for ten assessment years immediately succeeding the assessment
year in which tax credit becomes allowable.

It is, therefore, suggested that under the DTC, the MAT
credit should be made available for indefinite period.

2. Chapter II — Tax Treatment of Savings — Exempt Exempt
Tax (EET) vis-à-vis Exempt Exempt Exempt (EEE) basis :


2.1 We welcome the continuation of the EEE method of taxation
for Government Provident Fund, Public Provident Fund and Recognised Provident
Funds and pension scheme administered by Pension Fund Regulatory and Development
Authority, Approved Pure Life Insurance Products and Annuity Scheme in the
proposed Direct Tax Code (DTC).

2.2 The Revised
Discussion Paper (RDP) contemplates continuation of the EEE method only for
specified categories of provident funds, pension schemes and pure life
insurance products. Consequently all other investments will fall in the EET
category. Para 3.1 of the RDP already provides that investments made prior to
the commencement of the DTC will continue to enjoy the EEE method for the
tenure of the financial instrument. It is suggested that all investments in
or subscriptions to any scheme made prior to 1st April 2011 (the proposed
commencement date of the DTC) should continue to be governed by the earlier EEE
method of taxation.

 

2.3 It is an
accepted fact that India is in need of substantial investment in
infrastructure. It is therefore suggested that investment in, or
contribution to, infrastructure schemes/funds (including subscription to
deposit of companies, bank deposits), should continue to enjoy the EEE method
of taxation under the DTC. The funds so collected should be used for meeting
the requirements of the funds for the Government for development of
infrastructure needs of the country.

 

2.4 The RDP
recognises that our country does not have in place a social security net for
senior citizens. In view thereof it is suggested that even after the DTC
comes into force, a withdrawal from any scheme which is otherwise covered by
the EET method, by a senior citizen should not be taxed i.e., it should enjoy
the EEE method. This will to some extent augment the social security for the
senior citizen.

 

3.         Chapter III — Taxation of Income from
Employment — Retirement Benefits and Perquisites :

 

Reintroduction
of Standard Deduction :

3.1 A salaried
employee incurs certain expenses wholly and exclusively for the performance of
office duties, which are not reimbursed by the employer. The employee is not
allowed any deduction for such expenses incurred. It is therefore suggested
that a standard deduction, as was provided earlier in the present Act, should
be reintroduced, so that the employee pays tax on his real income.

 

4.         Chapter IV — Taxation of Income from
House Property :

 

4.1 The policy
decision to tax income from house property only on the basis of actual rent and
not on any notional basis is a step in the right direction. This will avoid
litigation in future with regard to the determination of the amount of gross
rent for the purpose of taxation as currently, litigation is going on in large
number of cases with regard to determination of ‘annual value’ (which is the
current basis of taxation) for the purpose of taxation of income from house
property.

 

4.2 In the DTC,
it is provided that income from house property shall be the gross rent less
specified deduction. It is also proposed to reduce specified standard deduction
(for repairs, etc.) to 20% from 30% currently available under the I.T. Act.

 

It may be noted
that even the current deduction of 30% provided under the I.T. Act itself is
not adequate and is having a very adverse effect in large number of cases. This
is on account of the fact that apart from the repairs, in most cases, the
assessee has also to pay lease rent, insurance premium at a higher amount for
various valid reasons. Further, the society charges in the metros and most of
the larger cities, administrative and other statutory expenses incurred in case
of corporate entities, etc. are also very high. Apart from this there is also
no clarity as to deductibility of various taxes and cesses levied by the State
Governments, for which litigation is on under the I.T. Act.

 

In view of the
above, it is suggested that specified standard deduction should be retained at
least at the current level of 30% and specific provisions should be made for
deduction of all taxes/cesses paid to the State Governments in respect of house
property.

 

4.3 In the DTC,
it is provided that letting of machinery, plant, furniture or any other
facility, if inseparable from the letting of the house property, then the same
will be taxed under the head ‘Income from House Property’. In such cases, the
standard deduction of even 30% (assuming that the present proposal of 20% will
be increased to 30% as suggested above) will be totally inadequate. Therefore,
in such cases, adequate provisions should be made for allowance of depreciation
in respect of such other assets, which are let out with house property due to
its nature of being inseparable. Alternatively, the income in such cases should
be taxed under the head, ‘Income from Business’ and not under the head ‘Income
from House Property’.

 

5.         Chapter V — Taxation on Capital Gains :

 

5.1 At the
outset, it must be recognised that the scope of the Chapter relating to Capital
Gains has been substantially narrowed down in the Direct Taxes Code (DTC), as
the same applies only to Investment Assets. In the Income-tax Act, 1961 (I.T.
Act), the Chapter relating to Capital Gains covers every Capital Asset whether
related to business or not. Unfortunately, under the DTC, business-related
Capital Assets are excluded from the scope of this Chapter and hence, the
profit/loss on transfer of Business Capital Asset (BCA) is governed by the
Chapter relating to business income as per the proposal contained in the DTC.
This is totally unfair and unjust. This is the major issue which has not been
addressed and considered in the Revised Discussion Paper (RDP) as the same only
deals with the treatment of Capital Asset, being Investment Asset.

 

Therefore, it is
suggested that all capital assets including Business Capital Assets should be
governed by the provisions relating to Capital Gains and accordingly, the
Chapter relating to Capital Gains should be made applicable to all Capital
Assets on the lines of similar provisions contained in the present I.T. Act.

 

5.2 As against
the total exemption presently available to Long-Term Capital Gain arising on
transfer of listed equity shares (Equity Shares) or unit of equity-oriented
fund (Specified Units), it is now proposed to grant deduction at the specified
rates while computing such Capital Gain without any indexation. It is suggested
that in respect of Capital Gain/Loss arising on investments made in such assets
up to 31-3-2011, the present treatment of exemption should continue and
appropriate provision in that respect should be made in the DTC. This will
effectively continue the present position of total exemption with regard to old
Investments and that will also obviate huge transactions in the capital market
before the commencement of the DTC with a view to claim exemption before that
date and/or to increase cost for future. Such large-scale sales in the stock markets
will have a destabilising effect which ought to be avoided.

 

It is also
noticed that in case of such Equity Shares or Specified Units, there is no
provision for option to substitute cost of acquisition by fair market value as
on 1-4-2000. There is no reason not to make such provision as in the case of
other capital assets. Therefore, alternatively, option to substitute the cost
of acquisition by fair market value as on 1-4-2000 should be provided to the
taxpayer.

 

5.3 In the RDP,
it is also proposed that in case of such loss, the same also will be scaled
down in the similar manner. It is totally unfair to scale down such long-term
loss in the similar manner as in the case of such capital gain. The deduction
at the prescribed percentage is necessary while computing gains as a large
portion of such gain may be on account of inflation. However, if the assessee
suffers a loss in such investments, then he will be hit twice, firstly on
account of financial loss and secondly, on account of scaling down of loss for
the purpose of taxation.

 

In view of the
above, it is suggested that in case of such long-term capital loss, the same
should not be scaled down as proposed, but provision should be made to enhance
the cost of acquisition by making appropriate indexation provision.

 

5.4 It is also
proposed not to introduce any Capital Gain Savings Scheme under the DTC. This
is totally unfair and unjust. The assessee must have an opportunity to claim
exemption from the long-term capital gain by making investment in such scheme,
which may be framed on lines of present S. 54EC of the I.T. Act with one
change, that is, there should not be any limit on the amount of investment
which can be made in the scheme. Till the year 2007, there was no limit for
such investments under the I.T. Act. In fact, the amount available out of such
investments can be used for the purpose of meeting the requirements of funds
for various infrastructure projects.

 

Therefore, it is
suggested that appropriate provision for the Capital Gain Savings Scheme on the
lines of present S. 54EC (without any ceiling on the amount of investment)
should be introduced in the DTC.

 

5.5 In the RDP,
it is proposed that the Securities Transaction Tax (STT) will be calibrated
based on the revised taxation regime for capital gain as the STT is a tax on
specified transactions and not on income. This is totally unfair. The STT was
introduced by the Finance (No. 2) Act, 2004 and that was effectively in
consideration for the exemption granted to long-term capital gain and providing
concessional rate of tax for short-term capital gain in such cases at that
time. This is evident from the speech of the Hon. Finance Minister made at that
time while introducing the relevant Finance Bill, in which he has stated as
under (at para 111 of his speech) :

 

“Capital gains
tax is another vexed issue. When applied to capital market transactions, the
issue becomes more complex. Questions have been raised about the definitions of
long-term and short-term, and the differential tax treatment meted to the two
kinds of gains. There are no easy answers, but I have decided to make a
beginning by revamping taxes on securities transactions. Our founding fathers
had wisely included Entry 90 in the Union List in the Seventh Schedule of the
Constitution of India. Taking a cue from that Entry, I propose to abolish the
tax on long-term capital gains from securities transactions altogether.
Instead, I propose to levy a small tax on transactions in securities on stock
exchanges. . . . . . . ”

 

In view of the
reintroduction of tax on such capital gain, the STT should be abolished as the
basis on which it was introduced would no longer exist.

 

6.         Chapter VI — Taxation of Non-Profit
Organisations :

 

6.1 The law
relating to exemption of charitable and religious trust has now got fairly well
settled. It is, therefore, suggested that the existing basic scheme of
exemption of charitable and religious trusts contained in S. 11 to S. 13 of the
Income-tax Act, 1961, should be continued in the DTC.

 

6.2 The revised
discussion paper on the Direct Taxes Code (DTC) deals with public religious
institutions in para 3(b). If the trust/institution is wholly for public
religious purposes, it will be exempt subject to conditions (A) to (H)
mentioned therein. Sub-paragraph (c) also envisages exemption for partly
religious and partly charitable institution for which conditions are specified
as follows :

 

6.2.1 the
predetermined ratio between charitable and religious activities required to be
set out in the Trust Deed/Memorandum should not pose much difficulty for
societies or S. 25 companies, which can carry out the amendment through a
resolution. However, for trusts, the procedure for amending a trust deed
involves a long-drawn court procedure, taking more than 6 months. It is,
therefore, suggested that in case of trusts set up prior to 1-4-2011, the
predetermined ratio need not be set out in the trust deed, but can be
determined in a resolution of the Board of Trustees passed within one year of
commencement of the Direct Taxes Code.

 

6.2.2 The
requirement of separate books of account to be maintained for religious and
charitable activities will be too cumbersome, as most of the religious trusts
may be having limited resources. Further, the common expenses will have to be
split up between the two sets of books where there may be difference of opinion
by the AO. Hence it is better to have one set of books of account and financial
statements with separate ledger accounts for religious and charitable expenses.
If necessary, a requirement of additional statement of Income & Expenditure
Account in respect of charitable activities may be prescribed for such trusts.

 

6.3 Accumulation
for 3 years is not sufficient. A period of at least 5 years should be allowed
for accumulation. A trust wanting to fund a major project may not be in a
position to do so in 3 years. Further, the restriction on the amount of
accumulation would defeat the very purpose of accumulating funds for large
projects. There should be no limit on the amount of accumulation.

 

6.4 Permitting
only cash system of accounting on the ground of simplicity and easy
administration is not justified, as the mercantile system being followed by the
trust is not difficult, and trusts are used to the said system. The mercantile
system is the more accurate method of accounting whereas the cash system may
not show the true and correct position of the trust by deferring the income or
expenses. The concept of real income for NPOs is well settled and should not be
disturbed with an artificial concept of income. Both cash and mercantile
methods of accounting should be permitted for NPOs.

 

6.5 Only
specified outgoings are allowed as deduction. Therefore several outgoings may
not be allowed as a deduction. All outgoings should be allowed as a deduction.

 

6.6 Taxation of
NPOs on the net worth is extremely harsh and may result in double or even
triple taxation.

 

6.7 Trusts set
up prior to 1961 should continue to be treated as NPOs, even if they are for
the benefit of a particular caste.

 

6.8 There should
be provision for setting off deficit of one year against the income of
subsequent year(s).

 

6.9 Capital
gains on transfer of investment assets, being financial assets, are to be
computed under the head ‘Capital Gains’, and will not be exempt. The present
position of S. 11(1A) for taxation of gains on such asset as income and
exemption of such income as spent for charitable or religious activities if
reinvested, should not be altered. The term ‘Financial Asset’ needs to be
clearly defined.

 

6.10 Loss of
exemption if any property of the value of exceeding Rs.1,000 is diverted to the
specified persons u/s.13(3), is too harsh. The limit should be raised to at
least Rs. 10,000.

 

6.11 Limit for
applying for registration should be extended to 6 months from the end of the
relevant financial year. There should be provision for condonation of delay in
filing application for registration in genuine cases.

 

6.12 Any surplus
resulting from activities in the nature of trade or commerce will result in
denial of exemption for a trust advancing objects of general public utility. If
such activity is meant to feed charitable objects, there is no reason to deny
exemption.

 

7.         Chapter VII — Special Economic Zones —
Taxation of Existing Units :

 

7.1       It 
is  laudable  that 
the  provision  for 
the extension of the profit-linked deduction (for the unexpired period)
to the existing SEZ units has been brought in the revised DTC proposal. This is
certainly a welcome change.

 

However, it is
suggested that for the purpose of development and growth of exports, the
incentives should be made available for newly set up SEZ units also.

 

8.         Chapter VIII — Concept of residence in
the case of a company incorporated outside India :

 

Introduction of
the provisions of Controlled Foreign Corporation :

 

8.1 The
provisions of Controlled Foreign Corporation (CFC) are proposed to be
introduced to avoid deferral of tax of the passive income earned by a foreign
company which is controlled directly or indirectly by a resident in India and
where such income is not distributed to the shareholders.

 

8.2 Presently,
barring two tax treaties (i.e., Singapore and Mauritius) the underlying tax
credit is not available to the Indian MNCs for the dividends received from the
foreign subsidiaries. Also, India does not have Participation Exemption Regime.

 

8.3 Introduction
of CFC provisions will reduce international competitiveness of Indian MNCs.
Moreover, when transfer pricing regime is in place and ‘Place of Effective
Management’ is being introduced, it is premature to introduce CFC provisions
and it can be deferred for the time being.

 

8.4 Therefore,
it is suggested that the introduction of the CFC provisions at this stage seems
untimely and premature. Time may not be ripe for introduction of such
provisions in India as the Indian MNCs are still in their nascent stage of
going outbound.

 

9.         Chapter IX — Double Taxation Avoidance
Agreement (DTAA) vis-à-vis Domestic Law :

 

DTAA
vis-à-vis Domestic Law :

 

9.1 The
discussion paper proposes that in case of conflict, the Domestic Law or the
DTAA whichever is more beneficial to the taxpayer shall apply. It is also
proposed that DTAA will not have preferential status over the domestic law in
the following circumstances :

 

(i)         When GAAR is invoked

(ii)        When CFC provisions are invoked

(iii)       When Branch Profit Tax is levied

 

9.2 A unilateral
amendment of this nature in the domestic tax law leading to an override of the
existing treaties should be avoided. We suggest that this proposal be applied
in respect of only new treaties signed after the introduction of DTC.

 

9.3 If domestic
law is to be applied over the treaty, it should be done through the process of
Mutual Agreement Procedure to enable the non-resident to avail tax credit in
the residence country.

 

10.  Chapter X — Wealth Tax :

 

10.1 For giving
effect to exempted productive assets from wealth tax, the current definition of
assets u/s.2(ea) of the Wealth-tax Act, 1957 should be adopted.

 

10.2 Exemption
with respect to any one house or part of a house or a plot of land should be
made available irrespective of the date of its acquisition and/or construction.
It should not be restricted to those acquired or constructed before the 1st day
of April, 2000 as is proposed in the Direct Tax Code.

 

11.       Chapter XI — General Anti Avoidance Rule
:

 

11.1 The
discussion paper clarifies that very arrangement for tax mitigation would not
be classified as an ‘impermissible avoidance arrangement’.

 

11.2 An
arrangement would have to satisfy any one of the following conditions to
qualify as an ‘impermissible avoidance arrangement’ :

 

(i)         It is not at arm’s length;

(ii)        It represents misuse or abuse of the
provisions of the DTC;

(iii)       It lacks commercial substance;

(iv)       It is carried out in a manner not
normally employed for bona fide business purposes.

 

11.3 GAAR
creates a high degree of subjectivity in the application of tax laws and unless
it is approached with extreme caution, it may lead to several unintended
consequences. GAAR provisions would continue to allow the tax authorities to
override the tax treaty provisions. GAAR provisions in its current form would
have an impact on several cross-border investments and M&A structures.

 

11.4 The
Proposed GAAR is so wide in its scope and has far-reaching implications that it
is going to affect ordinary, everyday business transactions. It will introduce
uncertainty in even normal business transactions. Though, the purpose of the
GAAR is to serve as a deterrent to impermissible tax avoidance/ evasion
transactions, but its introduction in the present form will have an adverse
impact on the business of the honest taxpayer. Therefore, in our view, it would
not be appropriate to introduce GAAR in its current form.

 

11.5 If at all,
GAAR provisions need to be introduced, we suggest as under :

 

11.5.1 At least,
GAAR provisions should apply only to international transactions and not to the
domestic transactions in any circumstances. Presently, the Department has
enough power to unearth domestic transactions of the resident taxpayer under
domestic law and take penal action.

 

11.5.2 A
threshold limit of substantially higher transaction value should be set for
which GAAR provisions could be applied.

 

11.5.3 Whenever
the question involved is of determining the beneficial owner, the GAAR
provisions should provide that the treaty of the country of the beneficial
owner so determined would apply. This is with a view to clarify that the treaty
benefits would not be denied totally.

 

11.5.4 The Code
should provide for establishment of a GAAR Authority similar to the Authority
of Advance Rulings, comprising experts to invoke these Rules and deal with the
consequences under the Rules. A process such as that prescribed for the AAR
rulings must be prescribed for the administration of GAAR to achieve the stated
objectives of the Code: reduction of litigation, transparency, fairness of
administration of tax, certainty and voluntary compliance.

 

11.5.5 The
factor of ‘transaction not at an arms length’ is already addressed by the
Transfer Pricing provisions and hence should be deleted vis-à-vis GAAR
provisions.

 

11.5.6 The term
‘commercial substance’ should be objectively defined to specifically mean as a
transaction which is backed by a reasonably strong commercial reason.

 

11.5.7 The
factor of ‘misuse or abuse of the provisions of the DTC’ and the term ‘bona
fide business purpose’ is subjective and should be deleted.

Jai India

Light Elements

As soon as the UPA Government won the ‘confidence vote’
(manufactured or otherwise, God knows) our prince of Delhi, Rahul Gandhi flew by
a chopper to meet Kalawati and Shashikala, poor women in Vidarbha in Maharashtra,
whose poverty was exposed by the prince very vividly to move the stone-hearted
(that is what the prince presumes) MPs to support the controversial nuclear deal
with the supercop America, consequently, to save the Government.


Kalawati and Shashikala were busy with their chores. Our
prince was very enthusiastic and excited as the chopper was hovering over the
village of Kalawati and Shashikala. He was trying to locate them through his
binoculars in the farms below. Eventually the prince could spot the honourable
ladies not through binoculars, but when the chopper landed. The prince greeted
Kalawati and Shashikala with folded hands (it should be the other way round).
But the prince was in a hurry. Reluctantly, Kalawati and Shashikala just looked
at the prince.

“You didn’t recognise me. I am Rahul Gandhi from Delhi” said
the prince dusting his Ray Ban goggles. Dynastic young MPs from the Congress
party and its allies (note we are in ‘coalition era’, so allies) accompanying
the prince Rahul shouted in chorus ‘Rahulji Zindabad’, ‘Rahulji Aage Badho, Hum
Tumhare Sath Hai’. With this slogan-shouting, the tiny village came to life. The
otherwise jobless villagers thronged to where the prince had located Kalawati
and Shashikala, first to have a close look of the ‘chopper’ and then for a
cursory glimpse of a would-be Prime Minister of India.

“Silence, Silence” one of the young MPs screamed with full
steam in his lungs.

“Ladies and Gentlemen !”

“Why are you leaving out the children ?” a query came from
the crowd.

“Ok, Ok Ladies, Gentlemen and Children, including children on
the waists of their mothers — now I hope you would be happy. Rahulji is back
with you after winning ‘confidence vote’ to inform and interact with you about
the nuclear energy deal”. As he ended his mini introductory speech, somebody
from the crowd queried,

“Who is this Rahul ? I mean Rahul Mahajan or Rahul Gandhi ?”

“Oh my God ! my dear uncle I mean, Rahuljiiiii Gandhijiiiiii . . .  . .”

There was big laughter. As the noise died down, the prince
Rahul took charge of the gullible mob of villagers and started his speech :

“As an Indian (why Indian ?) I stand before you. My dear
countrymen, trust me, we won the motion of confidence moved by our (what do you
mean by our Prime Minister ?) Prime Minister Manmohan Singh just a few hours
ago. I am here to convey to you how ‘nuclear deal’ with the USA is the only
solution to eradicate ‘your’ poverty, I mean poverty in this country. When I met
Kalawati and Shashikala from your village before the Parliamentary Session
convened for the confidence motion, I heard their plight, their children cannot
study at night due to power shortage in this area. I realised that nuclear
energy is the only solution to remove the poverty in this country. You will ask
me, how ? With nuclear energy there will be rapid industrial growth. India will
be the industrial hub of the world. It will create millions of jobs. Then there
will be no poverty in the country. Therefore my dear countrymen, nuclear energy
is the only solution to remove poverty from this country. I am sure after long
long years, at least 20 to 30 years, we will have full-fledged nuclear energy in
the country if we now strike a deal with America. Consequently, sons of Kalawati
and Shashikala will get jobs.

My dear countrymen, one more thing I would like to tell you,
we should not worry about how the world will impact us. We should impact the
world. We should train ourselves to dream of things that never were there and
ask why not, then only we will become a super power in the world of tomorrow.
Say, Jai India, Jai India, Jai India !”

All young MPs and villagers recited the new slogan coined by
the prince of modern India with a bit of confusion, some were saying ‘Jai Hind’
and some were saying ‘Jai India’. What a speech indeed ! It appeared that
majority of villagers were more confused than convinced by the speech of the
prince.

All the young MPs including the prince felt thirsty. Of late
they realised that they were under the scorching sun of Vidarbha where monsoon
plays hide and seek. When they thronged the chopper to grab a water bottle, alas
the villagers had either consumed or taken away all the crates of water bottles.
The prince was very furious. He asked to check the whereabouts of the pilot. The
pilot was smoking in a relaxed mood behind the tree just a stone’s throw away
from the chopper. Somebody shouted his name. Hurriedly the pilot took a last
drag and spun the butt. He appeared before the prince. The prince started to
berate the pilot left, right and centre. An old villager in his 70s came forward
and intervened,

“My son why are you so angry with the pilot ? Cool down, this
area has been suffering from water shortage since your great grandfather was
Prime Minister of this country. People in this village are thirsty as well as
hungry. They may have consumed the water bottles. For them a drop of water is
more important than one megawatt of electricity created with the help of nuclear
energy. Apart from your great grandpa, neither your grandma, nor your father
could remove the poverty from this country. My son, poverty is our ancestral
property. You talked about future of this country after 20 to 30 years, but what
about those intervening period of 20 to 30 years, poverty will grow in geometric
progression. So my son, don’t try to cook a ‘khichadi’ [nuclear energy, rapid
industrialisation, jobs to millions, no poverty ?] of Birbal under the fire of
‘nuclear energy’ for us.”

“You talked about impacting the world, mind you, with empty stomachs and dry throats of millions, living without shelter, you cannot impact the world. It is easier said than done (in the Parliament of India) to impact the world.”

My son, your great grandfather discovered ancient India and wrote a book ‘Discovery of India’. Now it is for you to ‘Rediscover’ India after independence and don’t write a book, it is not enough now, but ‘write off’ the poverty in this country. Jai Hind.”

There was a loud applause. Spontaneously all of them shouted “Jai Hind, Jai Hind, Jai Hind.”

The prince of New Delhi with his head down to the ground slowly walked towards ‘East’ where the chopper was parked.

With due respect to the ‘Faculty’

Light Elements

With the advent of mandatory CPE hours there is mushroom
growth of faculties in the country. Thanks to the Institute of Chartered
Accountants of India. Well, faculties are growing from grassroot to local, state
and national levels. In the past the organisers would be facing the problem of
audience. But now due to mandatory CPE hours there is no shortage of audience,
morning, afternoon, evening, I mean at any point of time. Really, CPE hours has
made magical impact on the professional fraternity. We have ‘back-to-the-school’
kind of feeling. No ‘bunking’ of CPE hours.


Introduction of faculty — one of the organisers does this job
with a smiling face and turning his head incessantly towards the faculty to
check his beaming face, who is adjusting himself in the chair and whispering in
the ear of the next to him. He begins “Ladies and gentleman, today’s faculty,
none other than bla bla bla, . . . . all of us know him very well, he doesn’t
need introduction . . . .”, but still he continues for next 5 to 10 minutes or
more [testing your patience] . . . . faculty’s record-breaking academic career,
then comes his professional and social contributions in terms of books he
authored, lectures at various forums he delivered, chairmanship, membership,
directorship he held in various prominent organisations, companies, cooperative
banks, cooperative societies [excluding the housing society where he lives]
public trusts, NGOs of local, state, national or international repute, his
career as visiting faculty . . . . , his extra curricular activities like
mountaineering, cycling, singing, dancing, yoga, his love for birds and animals
[once in fact I heard the faculty having purchased a ‘race horse’] so on so
forth . . . . eventually asking the faculty to take charge of the proceedings
[perhaps having realised that he is encroaching upon the time allotted to the
faculty of the day], he ends the introduction. Thank God ! Indeed the audience
breathes a sigh of relief.

At the end of the introduction there is a loud applause till
the faculty reaches the podium. Then come corrections by the faculty in his ‘bio
data’ rehearsed by the overenthusiastic curtain-raiser. It brings cheers in the
auditorium.

Generally our national game ‘cricket’ comes handy for the
faculty to begin with. For example, if there are two lectures in succession and
the faculty happens to deliver the first lecture, he invariably compares himself
with ‘opening batsman’ [most of the time Sachin Tendulkar or Sunil Gavaskar] or
compares his lecture as ‘first inning’. Sometimes the faculty being an ardent
fan of cricket keeps on referring cricketing terms like one day, test match,
20-twenty, slog overs, bouncers, googly, silly point, etc. during the course of
his lecture. However, ironically the audience experiences the fatigue of a test
match ended in ‘draw’ at the end of the lecture.

Some faculties are not techno-savvy and some are
techno-savvy, they resort to PowerPoint presentation. What they do is simply go
on explaining contents of image after image on the screen with the help of a
laptop on the podium. [it may sound harsh to read . . . . it is just like
‘copying’ from book in the examination]. Tight rope walk for the audience, to
read the contents of the image on the screen as well as digest what the faculty
is explaining in his most clumsy language, further to note down the citation
thrown by the faculty ‘out of his pocket’ as a special bonus. [Note that you
need to activate your physical ‘faculties’ like hearing, seeing, reasoning and
writing at a time to absorb what the ‘faculty’ is conveying.] It is a regular
practice of asking for ‘once more’ to the citation referred by the faculty on
the lines of ‘once more’ to filmy song in the orchestra. I wonder what they do
with the citation so noted down on the chit of the paper back home.

More often than not when the learned faculty is explaining
the ‘judicial view or trend’ in the country, he refers decisions of various High
Courts and the Supreme Court, obviously on the same ‘issue’ (note that any Court
is referred and addressed as ‘Honorable Court’ without fail even while
ridiculing the ‘decision’ of such Court) right from Kashmir to Kanyakumari one
after another, that too with chronological antecedents spanning from British
rule to Mahatma Gandhi Rule (at present we are under “Mahatma Gandhi Rule) I
mean pre- and post-Independence. It reminds me of Hanuman jumping from one
palace to another palace in the kingdom of Ravana in his effort to douse his
tail on fire. Eventually Hanuman burns the entire Lanka of Ravana. So does the
faculty, I mean the audience experiences a total ‘washout’.

At the end of the lecture there is ‘Sawal-Jabab’, I mean
question-answer session. It is like ‘dare show’ either for the faculty or for
the audience depending upon the nature of subject dealt with by the faculty. If
the subject is a general subject like capital gain, business expenditure,
depreciation or MAT, etc. the question-answer session turns out to be ‘dare
show’ for the faculty, because most of the questions are hypothetical one
sprouting from ‘instant imagination’ of the members of the audience. On the
contrary, if the subject is a ‘special’ subject like transfer pricing,
derivative transaction, or cross-border transactions, any accounting standard,
etc., the question-answer session ‘if at all’ takes place [more particularly in
mofussil area] it is ‘dare show’ for the audience. This ‘dare show’ bares the
importance of CPE hours in a true sense, look at the quality of queries raised.

Handling of question-answer session is a skilled job for the
faculty. Well, normally he wants to wind it up quickly, so at the outset, he
declares “Due to time constraint I would not be able to answer all questions”.
What few questions he answers he answers in ‘Yes’ and ‘No’ style. For some
questions he complains about illegibility of handwriting of the queriest, so
those questions remain unanswered. Looking at some questions he is shrewd enough
to declare that “I have replied this question in my lecture, I think the
queriest was sleeping or was not in the hall”. Next few questions he prefers to
reply in writing, obviously replies would be sent to the organisers in couple of
weeks. Sometimes the faculty cross-questions the queriest to answer, so that the
queriest gets embarrassed, consequently the original question dissolves in the
air. Mischievous queries are left out deliberately in consultation with the
organiser sitting next to the faculty.

Know your A.O.

LIGHT ELEMENTS

‘Know your judge before you know law’ it sounds very simple.
Obviously, it has direct relevance to legal proceedings. It deals with the
mindset of the person in the chair of judge. My friend Herambha Shastri once
elaborated this adage when we were deliberating an income-tax case. Let me share
with you Herambha’s interesting musings over this issue.

‘First we should make an ‘amendment’ to this maxim for the
purpose of proceedings under the income tax law as ‘Know your Assessing Officer
before you know Income-tax law’. You know the facts. You know the law. You know
the case law. But alas! If you don’t know the AO, then you suffer.

How do you know the AO? For that matter first you should
imagine and be in the AO’s shoes. Given the discretionary powers under the
Income Tax Act, think how you can exercise those powers ‘irrationally and
illogically’. It is said that ‘facts come first and law comes next’. But mind
you, under the income-tax proceedings the discretionary powers of the AO come
first, facts come next and then the law follows (if at all, by the time you
reach the Appellate stage).

Never show that you know the income-tax law more than the AO,
since there is ‘a deeming fiction’, though unwritten, that the AO is always
well-versed with the law he implements. His knowledge about case laws is
state-of-the-art as if he has delivered all those judgments. So please don’t
flaunt your knowledge of law and the case law. This is all about what you should
have in mind before you enter the AO’s office.

The moment you knock the door to enter the cabin be careful
about observing the protocol established in the British era (say, ‘May I come in
Sir, I am so sorry to bother you’ etc. ). A slight mistake may vitiate the
atmosphere and hence the proceedings even before they begin.

Having entered the cabin, don’t occupy the chair till the AO
asks you to sit. Normally, he lets you in but will not attend to you till you
feel awkward and uneasy. You keep looking around aimlessly. What you find is a
medium-size dusty framed photograph of Mahatma Gandhi on the wall, then a
calendar, obviously given by one of the taxpayers (maybe wanting to impress the
AO), a shelf stacked with files and papers full of dust, a steel cupboard with
topped with bundles of some more files in red cloth, a ceiling fan rattling over
the head of the AO along with humming of the air-conditioner and old books on
Income-tax Act and Rules, and ready reckoners which appears never to have been
touched.

Give the AO sufficient time to complete his conversation on
the phone if he happens to be on the line with the higher-ups or some friend.
Don’t stretch your hand for a shake-hand for your introduction. Unfortunately,
this British cutom is somewhat despised in the Income-tax Department. I don’t
know why? When the AO finishes his conversation or his work on hand, he will
stare at you and wave at you with his hand indicating you to sit (as if he is
very considerate to you). When you settle in the chair, don’t bother to
introduce yourself, that is of no consequence till it is time to sign the order
sheet. Only indicate the assessee’s name.

The AO would then become active and start the search for the
file on the ‘hit list’. Normally, he finds it instantly in that mess if he wants
to. I wonder how? But unfortunately he can never locate the copy of the notice
sent by him. His assistant also fails in that pursuit. This is the first
opportunity to begin co-operating with the Department, don’t lose it, so take
out the copy of the notice from your file and hand it over to the AO but be
placid. The AO would just chuckle.

Consider the AO as a dormant volcano. Sometimes he would
place in your hand a printed questionnaire or dictate questions orally depending
upon the stakes (obviously government’s stake) involved in and his homework of
the case. Normally, he starts his ‘homework’ after your submissions. Thereafter,
you start feeling the ‘heat’ of his discretionary powers till your position
becomes vulnerable and non-negotiable. You become paranoid about what would be
the AO’s perspective. If the AO is a direct recruit he will be more stern,
studious and innovative about the compliance of tax laws. If he is promoted as
an AO from within the Department he will be more concerned about procedural
matters. If he is on the verge of retirement he will be lenient and
understanding, compared to a younger AO. A lady AO will, probably, be more
professional.

Here my friend Herambha stopped his elaboration. But he made
a very subtle remark, ‘Keep in mind, there is no penalty for ‘concealment of
satisfaction’ by the AO under the income-tax law’. May be CPE programmes should
have a course in psychology as well.

levitra

Some thoughts on working late

LIGHT ELEMENTS

The President of the Society had in his column in the March
2010 issue of the BCA Journal, brought the attention of readers to some of the
rare qualities of CA Aditya Puri (the Managing Director of HDFC Bank who had
recently won a prestigious award), particularly his time management skills which
help him to leave his office every day at 5.30 p.m. The President had requested
readers to apply their thought on that aspect, considering the fact that
Chartered Accountants — both in practice and in employment — are generally prone
to working late. Taking the cue, the author tries in a lighter vein to analyse
the culture of working late which has now spread to almost all sectors of
commercial activity in the country.

Globalisation has brought many things to India, and working
late is one among them. Not that we Indians are not used to late working hours.
We do work late when need arises. What is new is the culture of regularly and
compulsively working into the late hours of night. Those working in today’s
so-called sunrise sectors are always seen working well past sunset. For them
apparently the sun only rises, it never sets.

Some are sceptical — and sometimes even a bit suspicious — of
people working late. Probably they carry such thoughts out of their past
experiences. When there are different views on the virtues and weaknesses (not
necessarily vices !) of working late, it will be good examining the different
aspects of late working.

The common impression that a person working late — or an
organisation that encourages employees working late — conveys is that they are
so busy and overloaded with work that they cannot complete their work without
putting in longer hours. But on closer scrutiny one often finds that this is not
true. Organisations which follow the modern (read American) management-style
employ less people than what is required, so that they can pay higher
remuneration to employees without increasing their total wage bill. As a result,
their limited number of employees are forced to slog it out. It is with this
aspect in mind that management schools train their students to study and work in
sleep-deprived environment without losing their senses. Most business
enterprises are not bothered by studies that show that deprivation of sleep
adversely affects the productivity of employees.

Even in the modern business organisation where the office is
always open late into the night, and all employees are present, it is
questionable whether everyone is actually working. When employees working in
frontline IT companies say that everyday they work from 8 a.m. to 11 p.m. and so
on, one is naturally a bit curious. If one asks an employee, in confidence, what
exactly is the work that is done late into the night one can expect a reply
somewhat like this : “I actually work for 3 or 4 hours maximum. The rest of the
time I am awaiting my senior’s instruction to start working with him. My senior
is always doing something unrelated to work, and mostly roaming around.
Everyday, right from morning, I ask him at intervals of a couple of hours ‘Shall
we start ?’, but every time he replies, ‘No, wait’. Finally, by 8 p.m. or so, he
asks me to join him, and we start working. No wonder we will reach somewhere
only by 11 p.m.” This is found to be the case with many people working in the
so-called emerging businesses. The blogs of employees in the Internet too
confirm this.

Even if it is not the policy of an organisation to make every
employee regularly work overtime, employees do sit up late for different
reasons. The obvious reason is to impress the bosses. But there are less obvious
reasons too.

For some habitual late workers — whether employed or
self-employed — their work-place is not their ‘second home’ but ‘first home’
itself. These unfortunate guys do not get peace of mind in their homes for some
reason, and so they remain in offices as long as possible to minimise time spent
at home. What they do at their offices in the after-hours is anyone’s guess —
chatting with friends on or off phone or net, partying (with or without booze),
reading and sending out unnecessary emails, browsing the net or taking a nap. If
possible, they encourage lot of visitors to their offices after office-hours,
thus converting the office into some kind of a club. Some carry the idea of
‘home’ to such an extent that they actually have a bed too in their offices. In
such cases, the public cannot be blamed for suspecting something.

The accounting profession is famous for continuing to work
after everyone else has gone home. But accountants working late are sometimes
viewed with suspicion too. There is the story of a chief accountant in an
organisation who was working well past midnight everyday. The accounts were,
however, very much in arrears. The late sitting was also justification for the
accountant to come late — by late afternoon — everyday. He thus reached the
office when everyone was preparing to leave, and he was working all alone
(presumably) all through night. When there was a change of management, he was
told to follow regular working hours, and an inquiry was made into the accounts
being maintained by him. As skeletons started falling from every cupboard, the
chief accountant was fired.

To be fair to those working late, all of them must not be
equated with the accountant in the above story. Not everyone is doing illegal or
unnecessary things — or entertaining themselves — while burning midnight oil.
One of the reasons is that not everyone is competent enough to handle different
types of work during normal working hours. Many bank managers, for instance,
cannot gather the mental concentration required to scrutinise loan applications
or monitor their non-performing parties during normal hours when they are
attending to customers. They therefore sit up late to do those jobs. Such
employees deserve sympathy, not scorn.

Some others overburden themselves, as they do not delegate
work. For many in this category, the problem is that they do not trust any of
their subordinates. For some others, it is a way of making themselves
indispensable. They follow the age old maxim : ‘Keep things pending, so that the
pending will keep you’.

At the other extreme there are those who do not trust themselves but trust their juniors completely. They delegate all their work and go about doing practically nothing. They will, nevertheless, be present in office until everyone leaves so that their enviable style of working will always remain a best kept secret. How do they kill their abundantly surplus time?? They devise all sorts of ingenious methods. Presiding over or participating in endless meetings is a time-tested trick. Meetings are now referred to as training sessions, presentations, seminars, workshops and so on. Whatever the nomenclature, they serve the purpose of the wandering late worker by consuming his surplus time. The worst part of these workshops is that they take away a lot of time of the productive employees too. Sometimes, to keep the subordinates engaged, the inefficient senior makes them do dummy projects without saying so, or ask them to submit several lengthy reports on work already done.

In today’s IT-enabled environment, working late within one’s office is not always necessary. For the Chief Executive and other senior executives, there is no such thing as ‘working hours’ as they have to be available on call on a 24/7 basis. In the case of the lower-rung executive too, he can work from home or anywhere else — while on the move too. Even team assignments can now be carried out by persons sitting at different places. That being the environment now, regularly working late in one’s seat in office has become practically unnecessary. Not surprisingly, a few organisations have started discouraging late working — disabling computer servers, ordering closure of offices and switching off of mains at a specific time to push out die-hard late sitters.

Having thought of some of the aspects of late working one can only warn both individuals who work late, and organisations that encourage employees working late, to determine whether the late working is really necessary, productive and economical. If it is not, then trying to merely create an image through late working will not be rewarding in the long run.

Simplification of Tax Laws and the Lion’s Den

Light Elements

Once upon a time, the Indian Finance Minister lost his way
and found himself in a dense jungle just before presenting the union budget in
parliament. Perhaps, while mulling over how to boost tax collection, one way or
the other, he lost his way. Anyway, he kept strolling through the jungle,
holding the draft finance Bill and New Tax Code in his arms. Suddenly he
realized somebody was following him. He looked back over his shoulder. Oh, it
was a jackal– the most cunning animal of the jungle; the protagonist of most
Aesop’s fables we’ve heard during our childhood. Both the minister and the
jackal stopped short of each other. It was the jackal who broke the silence,
leading the conversation. “Hey! Hello Finmin, how are you?” “Fine”, answered the
Finmin with a heavy tone.

After swapping information as to the general state of affairs
in their respective personal lives (I mean—how are you? how is your health? How
is your family?, etc, the jackal fired an impromptu salvo which made the Finmin
shudder. “How is the economy?”he asked. “Oh, better than other developing
countries,” mumbled the Finmin. “But not up to the mark?” questioned the jackal.
“You know there is recession in the world and we are not an exception,” retorted
the Finmin, looking at the ground (rather ground realities maybe). “I heard the
prices of essential goods such as food grains and vegetables are on the rise
with every passing day, after your party assumed power at the centre, making the
aam aadmi’s life miserable,” was the next salvo fired by the jackal.

The Finmin shifted awkwardly in a clumsy attempt to avoid the
jackal’s penetrating eyes. He seemed to be struggling to find a convincing
enough answer. Looking at him fumbling, the jackal promptly changed the subject
and started discussing other matters like growing terrorism, global warming,
decline in population of wild animals, population explosion, falling moral
standards, etc. Having exhausted all topics of mutual interest, it was the
jackal’s turn to fidget. So he decided to march onwards on his original mission
to meet the King of the jungle. “So it was nice seeing you Finmin. Take care of
the economy and have a nice budget session in parliament. It’s time for me to
leave now,” said the jackal. As he walked ahead, he heard the Finmin call out, “Jackalbhai,
jackalbhai, just a moment”. So he retraced his steps hurriedly. “What’s the
matter, Finmin?”, he asked. “Actually, me and my predecessors have been obsessed
with one issue,” said the Finmin. “What is it?”, asked the jackal. “How to boost
tax collection,” finally the Finmin blurted out.

“Oh, a most interesting issue. Once upon a time, the king of
our jungle, I mean, the Lion, was facing a similar kind of problem. One day, I
called on the king in his den located at a high altitude, at his request.
Somehow I managed to get there after several bruises on my body. I fumbled a
number of times on the rocks on the way to the den. It was quite a bumpy path to
tread. When I climbed half way, I even thought of postponing the visit to some
other day and as soon as I turned back, I heard the Lion roar. I climbed back. I
felt like riding on the high tide when eventually I reached the den. The king
asked me to enter his den. It was difficult entering the den and the den wasn’t
big enough to accommodate more than two or three persons. Well, the king
narrated his problem. He had become old and he was starving. Old age meant he
could not hunt as frequently as he used to earlier. Not a single animal, big or
small, had appeared in his area since quite some time. He asked me how to get to
the prey.

I thought for a while and then came up with the solution,
which was based on my own experience of reaching the den. I first told the king
that he should change the location of his den, making it neither too high nor
too low. I meant his den should be located ideally so that he could keep a watch
on possible prey without being seen. Around the den, there should be sufficient
flat land on which grass can grow. The opening of the den should be wide enough
plus it should be sufficiently deep inside so that if an animal enters
reluctantly, the king can capture him effortlessly.

I explained to the king the reasoning behind this arrangement
of the den. If the den was located at a reasonable height from the ground, one
might be tempted to venture there. Green grass, being a favorite fodder for
small animals, it would attract them into his den.

He understood my strategy, “simple and easy access with some
attraction keeping the prey engaged for a while so that he could attack the prey
easily”. The king thanked me from the bottom of his heart. Thereafter, he
changed the location of his den as suggested by me and started living retired
life comfortably.

“So Finmin, the moral of the story is that you should evolve
simple tax compliance procedures, particularly about tax collection matters.
Your existing procedures are like the erstwhile den of the king. So, you have
been starving for tax collection…”

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Odd man in

Light Elements

One should not have any objection to the politician, [I mean
minister, mayor, sarpanch (why not ?), leader of the opposition either ex or
existing or any other political personality] being invited for inaugurating a
conference wherein professionals deliberate upon some aspects of ‘legislation’
made by them. Of course they represent ‘us’, the people of this country.
Ironically, more often than not their standing in the public life is a cause of
concern for the intellectuals. Normally, they assume any crowd be it
intellectual or non-intellectual as their potential vote bank. Most of the time
they try to score out their political opponents through their speeches. They are
always in election mood. But the organisers have different perspective. They
feel that the conference should be inaugurated at the auspicious hands of that
political figure.

While giving a brief profile of the owner of the auspicious
hands, sometimes the overenthusiastic organiser makes us feel ‘unlucky’ by
disclosing the fact that he, I mean that political figure, had the ambition of
becoming CA, but alas he is a mayor, minister or somebody politically worth at
the given point of time . Here the organiser gains loud “laugh” [not applause]
in the auditorium. But the organiser does not stop here. He begins ‘sheroshayari’
in Hindi, the national language, to appease the political figure. I think the
trait of appeasement runs through the blood of Indians.

For them it is prestigious to get the conference inaugurated
at the ‘auspicious’ hands of a ‘political figure’. Fine enough up to this stage,
but when the organisers dare the audience to listen to the speech through the
‘auspicious’ mouth of the political figure, it’s a nightmare.

Recently I happened to be a participant in a conference held
in the metro city, where I heard this speech of the political figure. I
reproduce some funny statements made by him after thanking the dozens of
dignitaries on the dais :

“So this conference is organised by so and so (name of the
city) chartered accountants’ ‘firm’ (the conference was organised by the
branch of the Institute). The firm has done very good job for the benefit of
all coming from different parts of the country. [in fact audience consisted of
local members of the Institute and faculty were from the different parts of
the country right from Delhi to Kanyakumari] This conference is held at the
right time to know how to deal with global recession [I was floored, since the
faculty were supposed to deal with Income Tax law which has no connection with
global recession]. Chartered accountants render great service to the society.
They help us to file our return of income under income tax. They guide us how
to borrow from the banks. They are the backbone of Indian economy. They are
agents of the Government of India. I promise to give any help to them. I wish
them great success and great future. I once again thank the organisers for
inviting me to inaugurate this conference. (note that this statement was made
intermittently throughout the speech) . . . . .”


Peculiarity of Indian politicians is that they never
attend any function without ‘slogan shouting squad’, I mean supporters because
of fear of ‘protesters’. Normally they attend the function as late as they
could. Nowadays there is a display of high security exercise by the police
department, like sniffer dogs, security check from toe to head, police personnel
holding sten-guns, cavalcade of cars topped with red lights. If you ask what
threat you would perceive from professionals like us, you are scoffed at by
saying, “We are helpless, it’s routine security matters”.

At the end of the day you have to accept the ‘odd man in’.

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Vote for nothing ?

Light Elements

Herambh Shastri (name imaginary) a qualified chartered
accountant has a neighbour called Kushabhau. Among many other things, generally
you cannot decide who your neighbour would be. Reason for this statement,
Kushabhau in his fifties is a school drop-out, works in a factory, and who
happens to be a neighbour of CA Herambh Shastri. Kushabhau though illiterate is
an ardent believer in casting his vote in elections, be it Lok Sabha, Vidhan
Sabha, Corporation or housing society elections, I mean any election. On the
contrary Herambh Shastri is very allergic to voting. On the day of voting he
prefers to go on a pleasure trip. In recently concluded Lok Sabha elections
Kushabhau succeeded to persuade Herambh to cast his vote. How did it happen ?
Herambh being a qualified person, Kushabhau used to address him as ‘Sir’.

“Sir, why don’t you cast your vote ?” asked Kushabhau.

    “What is the use of it, it goes to dogs”, Herambh responded.

    “You mean elected representatives are dogs ?” Kushabhau.

    “What else are they ? they fight for power to rule like dogs fight for piece of bread”, said Herambh with angry overtone.

    “Sir, without elected representatives we cannot have a government”, Kushabhau’s simple point of view.

    “Kushabhau, look at the past records of candidates contesting elections, either they are corrupt or criminals”, Herambh.

    “I fully agree with you. Out of 540 members of the Parliament, a few of them may have criminal or corrupt records but that does not mean you boycott voting. I firmly believe and you would also agree with me, keeping in view the recent trend in our country that tainted politician gets exposed over a period of time automatically through public protest, print and electronic media and finally judicial system even if he is or was the Prime Minister of this country,” said Kushabhau.

    “Okay Kushabhau, I accept your view about individuals but the way the political parties conduct themselves is quite disgusting. They scramble for power. Most of the time they resort to unethical practices of horse-trading, defections, blackmailing, coalitions of political convenience or anything which is beyond the imagination of you and me just to grab the power”.

    “Sir, you are right the political parties fight to grab the power to rule this country. But they still believe in ‘democratic elections’ to acquire that power unlike Maoist or Naxalities or militant groups operating in some countries. So we are fortunate enough to have ‘government’ elected by the people for the people and of the people. Further, what else can you expect in this country with ‘diversity’ in electorate in terms of caste, creed, colour, so many states, haves and have-nots, rich and poor, literate and illiterate. Plus so called leaders are mushrooming in every layer of society trying to create their own vote banks. Still we manage to hold elections and get the government since our independence in 1947, three cheers to the Election Commission and Indian democracy ! In recent times this diversity is growing by leaps and bounds. No one gets clear majority. Majority is being hacked by regional parties with regional interest. Thus decision to caste vote to a particular candidate or political party is being influenced by diverse considerations. But unlike you they at least exercise their franchise to vote, whoever may be the candidate, or political party, whatever may be the record of the candidate or party. That’s the essence of democracy. You get the ‘government’ may be of coalition of political parties fighting to grab the power as you said. Sir, think of the country without ‘government’. We will be like Palestine, ‘a state without government’ and struggling for its existence. You know their leader Yassar Arafat was called ‘a statesman without state’. We are fortunate enough to have a government elected by the people. You should say thanks to those electorate who cast their vote and give you and me a government to protect and maintain the sovereignty of this country in the world, though it may not be of your choice.”

Sir, can’t you spare just half an hour to cast your vote and
then go on your pleasure trip ? It is the only thing you and I can do for our
country.”

Herambh Shastri shook his head nervously and put his hand on
the shoulder of Kushabhau and vowed.

“Kushabhau I will cast my vote tomorrow along with you and then both of us
will go on the pleasure trip, OK, Jai Hind”.

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S. 80IB and the parrot

Light Elements

It so happened, the learned faculty having explained the
niceties on the wall, off the wall between the lines and the sidelines as to the
provisions of S. 80IB(10) dealing with 100% deduction of the profits derived
from the housing project, the learned faculty vehemently emphasised that in
order to avail the deduction, the builder must obtain ‘completion certificate’
from the local authority, and to make his point of view bearable, he cited
precedents of honorable courts as usual. The faculty was about to leave the
podium.


“Excuse me Sir, “confused members of audience about
completion certificate stood up one after another.

‘Yes’ the faculty turned back to the podium with a creased
face. He was very shrewd and declared that he was anticipating queries from the
audience on ‘requirement of obtaining completion certificate from the local
authority’.

“My dear friends, feel free to raise your questions, I will
hear all your questions first, then I will reply at the end.”

A cascade of questions burst in the auditorium, some
practical, some theoretical, some hypothetical, I mean depending upon the IQ
level of the member.

“Sir, what if the project is completed 100% and all units are
sold, but the builder could not obtain the completion certificate from the local
authority within the time limit ?”

“Sir, it appears that the legislative intention is not to
promote housing industry, but to encourage compliance under housing development
laws of the local authority. If completion certificate is mandatory, how do you
react to this ?”

“Sir, what if the builder has received the entire sale
price of all units in the project, but could not obtain completion certificate
from the local authority ?”

“Sir, whether deduction u/s.80IB(10) is qua ‘profit’ derived
from the housing project or qua ‘completion certificate’ of the housing project
from the local authority ?”

“Sir, what if the builder obtains ‘provisional’ completion
for the housing project on hand whether he is eligible to claim deduction
u/s.80IB(10) ?”

“Sir, what if the builder succeeds to obtain part completion
from the local authority within the time limit, whether he can claim the
proportionate deduction ?”

“Sir, deduction u/s.80IB(10) being benevolent provision, is
there a possibility that the Court will take lenient view relaxing the rigor of
obtaining the completion certificate from local authority ?”

“Sir, what if the builder proves with documentary evidence
that he has complied with all statutory formalities for obtaining “completion
certificate” from the local authority, but he fails to obtain completion
certificate within time limit but obtains it within a few days after a deadline,
whether he is eligible to claim deduction u/s.80IB(10) ?”

Having heard all these questions one by one, the learned
faculty began to reply :

“Friends, I hope all of us are aware of a story told by our
grandmother or grandfather in our childhood. I am going to refresh your memory
about that story. It is about a cruel magician who captures a beautiful princess
who was in love with a prince. The prince fights with the magician to free the
princess. But he could not kill the magician, for simple reason that the
magician had stored his ‘soul’ in a parrot beyond seven seas. If the prince
could kill that parrot, the magician would die instantaneously. And the prince
kills the parrot beyond the seven seas and the magician dies. Thus he liberates
his princess from the custody of the magician. So my dear friends, if you wish
to have ‘princess’ I mean 100% deduction u/s.80IB(10), you must capture the
‘parrot’, I mean completion certificate from the local authority.”

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Astrologer’s day

Light Element

That day CA Herambha Shastri (name imaginary) met me not with
‘Income Tax Ready Reckoner’ (Bhagwad Gita or Bible of majority of professionals)
but books on ‘astrology’. I thought Herambha in his fifties unable to cope with
too much ‘technicalities’ in the profession, I mean e-return, e-tds, e-payment,
etc., might be thinking of a diversion. Anyway, we greeted each other.

“How are you Herambha ?” asked I, looking at the ‘books’ in
his armpit.

“Very fine !” replied Herambha.

Before I posed the next question, Herambha began to smile.

” What happened my dear friend ?” asked I.

” I suspect you are going to ask about these books” said
Herambha.

“That’s true” said I.

“Believe me there is very close connection between income-tax
practice and astrology” — Herambha.

“Something amazing, tell me how ?” I exclaimed.

“How ! My dear friend, at times, our clients pose questions
which could be answered only with the help of astrology. I can cite innumerable
questions of that kind. I hope you have time, listen.

“When will I get my refund order ?” most favourite question
of the salaried class.

“Whether search or survey can be conducted on me ?” question
by a person having done everything to dodge taxes.

“Whether my case will be selected for scrutiny ?” question by
a person complying provisions of tax laws partially or wholly, but camouflaging
irregularities.

“Whether in coming budget the threshold limit will be
increased ?” question by a person always showing his income below threshold
limit.

“What if I show bogus income in my wife’s name to take
advantage of the threshold limit for female assessee. Will it be checked or
detected ?” a question by a romantic assessee.

“Will it be detected if I purchase any property out of
Maharashtra ?” question by an assessee having national network.

“What questions the Assessing Officer will raise in
connection with my scrutiny ?” first timer of scrutiny assessment.

“Whether the Assessing Officer will accept our submission ?”
assessee facing scrutiny.

“How much expenditure the Assessing Officer will disallow ?”

“What irregularities the AO will detect in my case ?”

“How much the AO will demand ?”

“Can we win in the appeal ?”

“When will the order be passed ?”

“When will I get PAN number or TAN number ?”

“Can there be amendment as to so and so Section ?”

You see, there are many more questions apart from the ones I
just listed. You may also be facing them in your practice, all hypothetical or
requiring ‘detection’ by the Income-tax Department, and mostly dependent on the
vagaries and exercise of discretionary powers of the AO, at times rubbish, which
our clients pose to us, we have no favorable answers within legal framework at
all; still we somehow answer or avoid them, not up to the mark. Finally the
clients having heard those unsavory answers from you, they open their general
knowledge, obviously about the working of the Income-tax Department :

“So and so person got his refund order within one month;”

“so and so person never caught by the Income-tax Department,
who is a non-filer or stop-filer;”

“so and so person showing his income in his wife’s name but
no enquiry for last twenty years;”

“so and so paper or TV channel says that threshold limit will
be increased;”

“so and so person shows bogus expenses not detected during
the course of scrutiny;”

so on and so forth . . . . . . You are floored flat.

My dear friend, eventually your client wants you to ‘predict’
whether a particular situation will arise in his case or not. So I called those
questions as ‘Star’ questions, since their answers, I mean predictions depend
upon the ‘stars’ of the client himself. Such prediction is possible only with
the help of astrology. I observed most of the clients believe in their destiny.
So my dear friend, I embarked upon studying ‘astrology’. Mind you, for that
matter I am going to ask my clients to furnish horoscopes along with tax
details,” Herambha concluded his long and erudite explanation.

At the spur of the moment, I saluted my dear friend CA Herambha Shastri for
his ingenuity.

levitra

Alibaba Aur Chalis Chor

Light Elements

It is said that the scam largest in terms of magnitude is
unknown and still to happen. Why ? You can’t put limit to the human greed. Don’t
forget this gospel truth. In the recent past we heard about 2 G Spectrum scam,
the largest ever in the Indian economy which suggests that Indian economy is
growing by leaps and bounds. No problem. Then we had the CWG scam which showed
that it is just ‘a sport’ for people in power to indulge in corruption. People
out of power, media, public interest litigants and RTI activists, who should now
be recognised as ‘the Fifth Estate’ in the Indian democracy, act as ‘the
whistle-blowers’ for the people. Having heard about the magnitude and
high-profile persons involved in scams, our ears flood with spicy news and
piquant rumours of premature investigation results by various agencies right
from JPC, CAG, CBI to local police in an effort to bring the perpetrators of
scams to the justice. With the passage of time we all forget about those scams,
because we get instantly engrossed in fresh scams.

Be that as may be. Once I was deliberating these issues with
my friend Herambha Shastri a genius in his own right. As everyone does, he
condemned the corruption. However, he was more critical about bringing the
perpetrators of scams to justice. Why ? According to him the process of justice
was a mockery of justice itself. To prove his point of view he told me a very
interesting story.

Once upon a time, there was a gang of forty thieves headed by
Alibaba. All those forty thieves were loyal to Alibaba and to each other. Their
honesty and integrity was impeccable. It is said that people in the underworld
always operate and interact in ‘good faith’, since they have no written laws.
They would burgle houses indiscriminately at the wee hours, whatever they would
rob, would be contributed to the common kitty with Alibaba. Thereafter, Alibaba
would do its distribution according to the risk taken by each thief in burglary
operations. This practice went on for years together. They could not be
apprehended by the soldiers of the King.

One night Alibaba decided to target Radhanagari, the capital
city of the kingdom. They burgled a house and looted jewellery and valuable
articles. One of the thieves snatched a gold necklace from the lady of the
house. The lady shouted loudly. Some thieves overheard her shouting in the
commotion. In the hustle and bustle the thief’s mask slipped and he was face to
face with the lady. She saw his face clearly. The thief gave her an angry look.
Quickly the thief covered his face with mask and disappeared in the darkness of
the night, of course, with the gold necklace.

After this successful burglary the thieves returned to their
den. The next day the chief, Alibaba asked all the thieves to surrender the
booty on the table. The thief who had snatched the gold necklace decided not to
give the necklace. So he put few currency notes he had stolen on the table, but
not the necklace.

As Alibaba was observing the loot somebody whispered, what
about the gold necklace ? The whisper echoed in the den. Yes, somebody stole the
necklace, but it’s not being seen on the table. What happened to it ? The thief
who stole it also whispered the same doubt. Very cunning move indeed ! No one
could doubt him. Alibaba raised his voice, “Silence, silence, what’s the
matter ?” Dead silence fell in the den.

The cunning thief moved forward and declared, “Sardar, we
know somebody stole a gold necklace, but has not surrendered it”.

“Who is that traitor ?” Alibaba roared. Everyone was
squinting at each other with the million-dollar question in mind “Are you the
traitor ?” No one yielded. How to figure out the culprit ?

Alibaba was in deep thought. He hit on a very simple
solution. He ordered the cunning thief, as luck would have it, to revisit the
house they burgled the previous night and bring the lady to identify the
culprit.

The cunning thief after a couple of nights revisited the
house and kidnapped the lady and fled into the forest. Midway he halted his
horse, dismounted with the lady and removed his mask. The lady recognised him
immediately; he was the thief who had snatched her gold necklace. The lady was
scared and trembling. The thief said “I know, you saw me that night. You will be
asked to identify, who stole your gold necklace, but you will not identify me.
If you do identify me I warn you — I will slaughter your young son. Don’t even
glance at me when we reach the den”.

The lady was in utter confusion. It was a nightmare for her.
Still she gathered courage and asked the thief, “If your sardar threatens my
life if I fail to tell the truth, then what should I do ?”

The cunning thief thought over for a while and said, “In that
case you tell him that you could not see the face of the thief as it was covered
with the mask. We all cover our faces with masks during burglary. So you don’t
need to tell the truth and then I will not kill your son. But if you tell the
truth, Alibaba will not return the gold necklace, but you will lose your son. So
better not tell the truth. Is that clear to you ?”

Herambha Shastri stopped his narrative here. Looking at me curiously he said,
“I don’t need to tell the end of the story. But, think for yourself, who is
doing the justice in the story, think of what is being justified, think how the
culprit controls the process of justice, how the witness is being treated, and
how truth is sabotaged. That is why I say the whole process of justice itself is
a mockery of justice in the present scenario.”

levitra

Representation on Finance Bill, 2008 — Indirect Tax Executive Summary

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Representation

Representation

Mr. P. Chidambaram Date 24th March 2008

The Hon’ble Finance Minister

Government of India

North Block, Secretariat, New Delhi-110001.

Dear Sir,


Subject : Suggestions on the proposal in the

Finance Bill, 2008, relating to Direct Taxes


We have seen with interest the fifth consecutive budget
presented by your Honour on behalf of the United Progressive Alliance (UPA)
Government in the Parliament on 29th February 2008 and appreciate your concern
for challenges faced by the country and your efforts to accelerate economic
growth of agriculture sector, industry, infrastructure and exports.

There are certain provisions in the Finance Bill relating
to Income Tax and Wealth Tax, which may need your kind attention, since they
need to be modified or deleted. Some of the present proposals may be prone to
be inequitable and/or may only increase litigation, without real addition to
the net revenue to the Government.

Our suggestions on various topics for rationalisation of
law, rectification of certain anomalies and correction of drafting errors, are
given in the enclosed representation relating to Direct taxes.

We hope that our representation will receive due
consideration. Should a need to explain the recommendation be felt, please let
us know and we shall be more than happy to explain them to you personally.

Thanking you,

We remain,

Yours truly,

For Bombay Chartered Accountants’ Society

Rajesh Kothari Pinakin Desai Rajesh Shah

President Chairman Co-Chairman


Taxation Committee

Mr. P. Chidambaram Date 24th March 2008

The Hon’ble Finance Minister

Government of India

North Block, Secretariat, New Delhi-110001.

Dear Sir,


Subject : Suggestions on the proposal in the

Finance Bill, 2008, relating to Indirect Taxes


We have seen with interest the fifth consecutive budget
presented by your Honour on behalf of the United Progressive Alliance (UPA)
Government in the Parliament on 29th February, 2008 and appreciate your
concern for challenges faced by the country and your efforts to accelerate
economic growth of agriculture sector, industry, infrastructure and exports.

There are certain provisions in the Finance Bill relating
to Indirect Taxes, which may need your kind attention since they need to be
modified or deleted. Some of the present proposals may be prone to be
inequitable and/or may only increase litigation, without real addition to the
net revenue to the Government.

Our suggestions on various topics for rationalisation of
law, rectification of certain anomalies and correction of drafting errors, are
given in the enclosed representation relating to Indirect Taxes.

We hope that our representation will receive due
consideration.

Thanking you,

We remain,

Yours truly,

For Bombay Chartered Accountants’ Society

Rajesh Kothari Pranay Marfatia Govind Goyal

President Chairman Co-Chairman


Indirect Taxes and Allied Laws Committee

Representation

Direct Tax Executive summary

1. Rates of tax :

l
It is suggested that there should be back-up provision for marginal relief to
individuals having income up to Rs.3 lakh including short-term capital gain, who
may end up paying tax @15% on short-term capital gain.

l
It is also suggested that STT which has been paid at the time of purchase of
security should be considered to be the cost of security in computing the
chargeable capital gain.

2. Charitable Trust — S. 2(15) :

l
It is suggested that the amendment should make it clear that the proposed
amendment covers an activity in the nature of trade, commerce or business, which
is ‘for profit’, such that the mere circumstance of receipt of membership fee or
cost recoupment without any profit-making design is not interpreted as an
objectionable activity. The reflection of the words ‘for profit’ as part of the
definition will not only bring out the legislative intent more clearly, but will
also make the definition sound akin to the definition as we had till the year
1992, so that the ratio of judgment of the Supreme Court in the case of Surat
Art Silk is available to the tax-paying community as guideline.

l
It should be clarified that the income of public religious trust is not covered
by the amendment.

Suggestions on Discussion Paper on ‘Issue of Shares for Concideration other than Cash’

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Representation


Bombay Chartered Accountants’ Society


Discussion Paper issued by DIPP on

‘ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH’

Representation by

BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY

1. Background :


1.1 FEMA classifies transactions into two kinds — Current
Account Transactions and Capital Account Transactions.

1.2 Issue of shares by an Indian company to a non-resident is
classified as a Capital Account Transaction.

1.3 At present, FEMA permits non-cash consideration for issue
of shares by way of :


(i) a permissible Current Account Transaction (e.g., in
lieu of ‘royalty’); or

(ii) a permissible Capital Account Transaction (e.g.,
conversion of shares/securities, ECB, etc.).


2. Non-cash consideration — need of the
hour :


2.1 Two-way cash remittances involve the following financial
and non-financial costs :




v Transaction charges levied by the bank.



v With increased volatility in exchange rates, hedging costs are required to
be borne to mitigate the exchange fluctuation risk.


v Opportunity cost and
period cost arising from time delay in two-way remittance of the same
amount.




2.2 Hence, non-cash consideration is the need of the hour.

3. Premise of Representation :


This representation is based on the following premise.

3.1 No discrimination :


No discrimination should arise merely because the shares are
issued for non-cash consideration.

For instance, generally, a Current Account Transaction is not
required to be valued. Hence, such requirement should not be stipulated merely
because shares are issued for non-cash consideration.

3.2 Intangibles/Extraordinary Payments :


Proper valuation of intangibles/extraordinary payments may
pose substantial challenge, particularly at the regulatory end. Hence, non-cash
consideration by way of intangibles/extraordinary payments may be deferred till
acceptable norms for valuation of intangibles/extraordinary payments are
evolved.

3.3 Checks and Balances :


Proper system of adequate checks and balances should be
instituted to ensure against misuse. The system should ensure that where :




v income tax, customs duty, R & D Cess, etc. are payable, they are duly paid
before the shares are issued; and


v KYC norms or any such
compliances that are required to be done to protect against money laundering
possibilities, are properly done and supervised/recorded by the relevant
regulatory authorise.




4. Representation on Issues posed by DIPP :


4.1 S. 4.1(a) :


Does the issue of shares for considerations other than cash
represent a valid and unaddressed business need ? Should the Government amend
the FDI policy to address this need ? Will adoption of such an approach dilute
the objective of FDI policy by decelerating the flow of physical capital into
the country ?

Issue of shares for non-cash consideration is a business need
particularly because two-way cash remittances involve avoidable transaction
costs. Hence, FDI policy may be appropriately amended.

The objective of FDI policy should be to encourage
investments but not necessarily only by inflow of physical capital. The total
FDI can always be ascertained with proper reporting mechanism and adequate
checks and balances.

4.2 S. 4.1(b) :


Should the Government consider categories not covered under
extant policy for the issue of shares against considerations other than cash ?
Should such consideration be limited to the cases mentioned in S. 3 above or
should other categories also be added ? What regulatory safeguards should be
prescribed for each such case/category ?

To begin with, the categories mentioned in S. 3 should be
considered, and based on the experience as well as the perceived need, other
categories may be added.

The regulatory safeguard should ensure that the statutory
obligations (income tax, customs duty, R & D Cess, etc.) are fulfilled.

4.3 S. 4.1(c) :


Where allotment of shares for considerations other than cash
is permitted, should the Government be concerned with the valuation of shares ?
Should objective valuation of services/goods received as consideration for the
issue of shares be the prime concern in such cases and should it form the basis
for amendments to the FDI policy ? What are the guidelines that should be
adopted for listed/non-listed companies in such cases ? Can concerns relating to
valuation be effectively addressed elsewhere ?

Valuation norms as regards the shares should be the same,
irrespective of whether the shares are being issued for cash consideration or
for non-cash consideration.

Objective valuation of services/goods should be the concern
of the regulatory authority that normally deals with it. For instance, valuation
of imported goods is dealt with by Customs. Hence, that should be the authority
and FDI policy should provide for reliance on the valuation accepted by Customs.
As regards services, presently, no valuation norms are stipulated for
remittance. Hence, similarly, in case of issue of shares in lieu of services, no
norms for valuation of services should be applied.

Similarly, valuation norms for shares should be uniformly
followed, irrespective of whether the shares are issued for cash consideration
or for non-cash consideration.

4.4 S. 4.1(d) :


Should issue of shares to set off payment in the current
account/intangibles/one-time extraordinary payments be permitted ? Should the
broad
principle be adopted that whenever money has been received in India or value has
been received in India in lieu of money and valuation protocols are in place,
issue of shares may be permitted, with prior Government approval ?

As proper valuation of intangibles/extraordinary payments could pose challenge, non-cash consideration by way of intangibles/extraordinary payments may be deferred till acceptable norms for valuation of intangibles/extraordinary payments are evolved.

4.5 S. 4.1(e):
Is there a possibility that the issue of shares for non-cash considerations listed in S. 3 above could be misused, especially in the context of money laundering? If so, what steps should be taken to address such a contingency?

Proper system of adequate checks and balances should be instituted to ensure that where:

  • income tax, customs duty, R & D Cess, etc. are payable, they are duly paid before the shares are issued; and

  • KYC norms or any such compliances are required to be done to protect against money laundering possibilities, these are properly done and supervised/recorded by the relevant regulatory authorise.

Suggestions on the draft Point of Taxation (for services provided or received in India) Rules, 2010

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Representation

4th
November, 2010


To,

The Chairman,
Central Board of Excise & Customs,
Department of Revenue,
Ministry of Finance & Company Affairs,
North Block,
New Delhi-110001.

Dear
Sir,


Subject
: Suggestions on the draft Point of Taxation (for services provided or received
in India) Rules, 2010



The Bombay Chartered Accountants’ Society (BCAS) is a voluntary organisation established on 6th July 1949. BCAS has about 8,000 members from all over the country at present and is a principle-centred and learning-oriented organisation promoting quality service and excellence in the profession of Chartered Accountancy and is a catalyst for bringing out better and more effective Government policies & laws and for clean and efficient administration and governance. We make representations regularly on Direct and Indirect Taxes.

Please find attached suggestions on the draft Point of Taxation (for services provided or received in India) Rules, 2010 (‘Rules’).

Thanking you,

Yours truly,

For Bombay Chartered Accountants’ Society

Mayur B. Nayak    
President 

Govind G. Goyal
Chairman Indirect Taxes & Allied Laws Committee

Encl : Suggestions

Bombay Chartered Accountants’
Society

Suggestions on the draft
Point of Taxation (for services provided or received in India) Rules, 2010
(‘Rules’)

Rules to be restricted only
for the purpose of ascertaining the date for determination of rate of service
tax and not for altering the time for payment of service tax from the present
receipt basis to accrual/invoice basis/receipt whichever is earlier.

1. The Point of Taxation
(for Services Provided or Received in India) Rules, 2010 (‘Rules’) are sought to
be issued in exercise of the powers conferred on the Government of India u/s.
94(2)(hhh) of the Chapter V of Finance Act, 1994 (hereinafter referred to as the
‘Act’), which is the law governing service tax.

2. The purposes of the draft
rules as stated in the preamble are :

    (i) To introduce clarity and certainty as to the date from which a new service would become payable

    (ii) To provide for the above in the context of continuous supply of services

    (iii) To link the liability to pay tax to provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is the earliest

    (iv) To bring the service tax law in line with Central Excise Laws and VAT laws; and

    (v) To smoothen transition to GST.

3. However, an important
point to be noted is that the Point of Taxation (for Services Provided or
Received in India) Rules, 2010 are sought to be issued pursuant to S. 94(2)(hhh)
which is dealing with ‘the date for determination of rate of service tax and the
place of provision of taxable services’. Hence in the present context, the Rules
must confine themselves primarily to prescribing the date for determination of
the rate of service tax whenever there are changes in the rate of service tax.

It cannot legally entrench
into other areas such as linking the liability to pay tax to provision of
service, raising of the invoice or receipt of payment for service provided or to
be provided, whichever is earliest or imposition of service tax on new services.
These areas would be outside the legal scope of S. 94(2)(hhh) of the Act.

4. Secondly, the charge of
service tax is on the value of ‘taxable services’. S. 65(105) defines ‘taxable
service’ as ‘any service provided or to be provided’ to ‘any person’, ‘client’,
‘customer’, etc. Thus, S. 65(105) which defines ‘taxable services’ covers — (a)
services ‘provided’; and (b) services agreed ‘to be provided’ within the ambit
of service tax. The intention is to collect tax when advance payments are
received for services to be provided. Thus, service tax would be payable even on
advances received. Thus, the taxable events would be two :

(a) a service provided;
and

(b) a service agreed to be
provided.

‘Taxable event’ with regard to services ‘provided’ is identified by the time of provision of the service and with regard to services ‘to be provided’ is identified by time of payment towards value of service to be provided. This has a significant bearing on the rate of tax. Thus where there has been a provision of services but no monies towards the value of services have been received, the rate of tax prevailing at the time of provision of services would apply. Similarly, in cases where monies have been received towards the value of services but the services are yet to be provided, the rate of tax prevailing at the time of receipt of payment towards the value of services would apply. These propositions are implicit in the law [S. 65(105), S. 66 & S. 67] and the Service Tax Rules, 1994 (Rule 6). The Rules sought to be notified must not alter these provisions but must make them explicit. Thus the relevant date for the purpose of determination of rate of tax would be the ‘date of provision of service’ or ‘the date of receipt of money, whichever is earlier. This is the present understanding.

5.    Thirdly, it would be better not to disturb the existing arrangement of paying service tax when monies for taxable services provided or to be provided are received. The changeover from the present dispensation which allows payment of tax on receipt of the payment (including advances) to a system where tax is paid to the Central Govern-ment on provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is earliest would involve several issues :

(i)    Changes in the Act to provide for the taxable event at the time of supply as in the UK. VAT law.

(ii)    Change in Rule 6 of the Service Tax Rules, 1994.

(iii)    Changes in Cenvat Credit Rules,2004 which allow credit of input services only when they are paid.

(iv)    Further, there are no provisions relating to bad debt adjustment or reduction in the invoices in case monies are not received or monies are received less as compared to the invoice amount. Hence the service providers would have to pay tax even on monies not received. Thus, the service provider would be out of pocket if they have to pay service tax on invoices issued but the monies for the service are not received.

(v)    The payment of tax upon issue of invoices without having received the payment would mean that the tax would have to be financed by internal accruals or borrowings which in most cases would be difficult for service providers.

(vi)    The provision of service is quite different compared to sale/manufacture of a product. Firstly, services are intangible unlike goods where the sale/clearance of a product is verifiable physically by delivery challans, transport documents, etc. In case of services the delivery of a service cannot be verified. Out of the three events — (i) provision of services; (ii) issue of invoice and (iii) receipt of payment, the last event viz., receipt of payment is historically and factually verifiable by the Department with a greater degree of certainty. Secondly, the service provider may not have a lien on the service unlike in case of goods.

There are no documents of title to services which can be put through the bank and hence the recoverability is suspect. The rights of an unpaid seller of goods are well guarded and recognised in law as against the rights of an unpaid service provider. Hence it may not be correct to equate goods and services. Thirdly, in case of Central Excise law and VAT law, the tax is not payable on advances. Thus, the purpose of the Rules viz., to bring the service tax law in line with Excise law and VAT law is not achieved nor is it necessary.

(vii)    Further there will be several issues when there is a transition from payment of service tax on receipt basis to/payment of service tax on provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is earliest. There would be several system and software issues. This needs to be avoided.

In this regard, it has to be appreciated that the payment of service tax on receipt of money towards provision of services was in vogue since 1998 and has worked quite well mainly due to its simplicity and more importantly, since it provides a more factually verifiable basis for the Department to collect service tax.

6.    In view of the above, it is submitted that the Rules must confine themselves only to provide for the date for determination of rate of service tax.

7.    Accordingly, a suggested draft of the Rules centred around carrying out the objective viz. prescribing the date for determination of rate of service tax is attached herewith marked Annexure A. Basically, the suggested draft revolves around an important maxim that the rate of service tax would be the ‘date of provision of service or receipt of payment of money for services, whichever is earlier’.

Other suggestions:

8.    In Rule 6 of the draft Rules, it has been provided that where the payment has been made before the date of introduction of service tax on a service, no tax shall be payable to the extent of payment received. In our view, this provision must be made by way of an exemption notification and cannot find place in the proposed Rules.

9.    A closely related issue is with regard to determination of value where invoiced amount is in foreign currency. In such cases, the Service tax (Determination of Value) Rules, 2006 must be amended to provide that the rate of exchange applicable shall be the rate prevailing on the ‘date of provision of service or receipt of payment of money for services, whichever is earlier’.

Draft of Service Tax (Determination of the Rate of Tax) Rules, 2010
 
In exercise of the powers conferred by clause (hhh)    of Ss.(2) of S. 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:

Short-title and commencement:

1.    (1) These Rules shall be called the Service Tax (Determination of the rate of tax) Rules, 2010.

(2) They shall come into force on the date of their publication in the Official Gazette.

 

Definitions:

2.    In these Rules, unless the context otherwise requires:

(a)    ‘Act’ means the Finance Act, 1994 (32 of 1994);

(b)    ‘continuous supply of service’ means any service which is provided, or to be provided, under a contract, for a period exceeding one year and for a consideration the whole or part of which is determined periodically and includes any service which the Central Government, by a Notification, prescribes to be a continuous supply of service, whether or not subject to any condition;

(c)    ‘Invoice’ shall have the meaning assigned to it in Rule 4A of the Service Tax Rules, 1994 and shall include any bill or challan as prescribed therein;

(d)    Words and expressions not defined in these Rules but defined in the Act or the Rules made thereunder shall have the meanings, in-sofar as maybe, assigned to them in the Act or the Rules made thereunder.

Date for determining the rate of service tax:

3.    For the purposes of ascertaining the date for determining the rate of service tax, the following provisions shall apply, namely:

(a)    where the service has been provided and no payment has been received, the rate of service tax shall be the rate prevailing on the date when the services are provided and if for any reason date of provision of services is not determinable, the date of receipt of money towards the service provided or to be provided shall be date for determining the rate of service tax.

(b)    If, before the provision of service, the service provider receives a payment in respect of the service to be provided, the rate of service tax shall be the rate prevailing on the date of payment to the extent covered by the payment.

Explanation: An interest-free refundable deposit shall not be considered as a ‘receipt of payment in respect of the service to be provided’. However, if the terms of the contract provide that such interest-free refundable deposit is adjustable against the consideration payable by the service receiver, then the date of adjustment shall be considered as the date of receipt of payment.

Continuous supply of service:

4.    In case of continuous supply of services, where the whole or part of the value is determined or payable periodically or from time to time, the rate of service tax shall be the rate prevailing at the following times:

(i)    If the date of payment is prescribed in the contract, the date on which the payment is liable to be made by the service receiver, irrespective of whether or not any invoice has been raised or any payment received by the service provider;

(ii)    If the payment is to be made on the completion of an event, the time of completion of that event;

(iii)    If the date of payment is not prescribed in the contract, each time when the service provider receives the payment, or issues an invoice, whichever is earlier.

Provided that the clauses (i) to (iii) shall be applied sequentially for the purposes of this rule.

Explanation: Where service tax is payable as a service recipient the date of issue of invoice has to be understood as date of receipt of invoice by the service recipient.

Associated enterprises:

5.    The rate of tax in respect of transactions between associated enterprises shall be the rate prevailing on the date on which the payment has been made, or the date of debit or credit in books of accounts, or issuance of invoice, whichever is earlier.

Explanation: Where service tax is payable as a service recipient the date of ‘issuance of invoice’ has to be understood as date of receipt of invoice by the service recipient.

Royalties and similar payments:

6.    In respect of royalties and similar payments, where the whole amount of the consideration for the provision of service was not ascertainable at the time when the service was performed, and subsequently the use or the benefit of this service by a person other than the supplier gives rise to any payment of consideration, the rate of service tax shall be the rate prevailing:

(i)    each time that a payment in respect of such use or the benefit is received by the provider; or

(ii)    an invoice is issued by the provider, whichever is earlier.

BCAS/MBN/40    November 9, 2010

To
The Concerned Officer,
Foreign Investment Promotion Board (FIPB),
Government of India,
New Delhi-110001

Dear Sir,

Subject : Submission of Representation on Issue of Shares for Consideration other than Cash

We are pleased to submit our considered represen-tation on the aspects of Foreign Direct Investments with regard to Issue of shares for Consideration other than Cash.

We hope that the same would be useful and would find your favour.

Please feel free to contact us for any further clarification or explanation in the matter.

We shall be pleased to assist you in framing a pragmatic policy on Foreign Direct Investment.

Thanking you,

Yours faithfully,

Mayur B. Nayak
President

Comments and Suggestions by Bcas to Accounting Standards Board of ICAI on Exposure Drafts

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Representation

Reference :

Calculation of EPS : Weighted average number of treasury shares
held.

Comments :

In India, publishing of standalone financial statements is
required. At present, publishing of consolidated financial statements is
required only for listed companies. In this context clarification is required
that treasury shares held by subsidiaries are not required to be adjusted in
working of weighted average number of shares for standalone financial
statements.

Reference :

Para 26 and 27(b) — example 4, calculation of basic EPS for
the year 2001.

Comments :

Regarding rights issue, clarification is required on the
treatment to be given to the effects of the rights issue in working out diluted
EPS.

Reference :

Para 45, 46, 47 and 63.

Comments :

Clarification is required to calculate Average Market Price
(AMP) based on simple or weighted average.

Reference :

Appendix B : Example 1.

Comments :

In India, dividend on preference shares is liable to
dividend distribution tax. In our view, for calculation of profit available
for equity shareholders, such distribution tax also needs to be deducted in
addition to dividend on pReference : shares. The same needs to be incorporated
in the illustration.

Reference :

Appendix B : Example 7.

Appendix B : Example 7 Note (e) of Diluted EPS.

Comments :.


Contingently issuable shares : Example explains that in
the working of basic EPS, earnings contingency for which shares are to be issued
at the year-end need not be considered in working out basic EPS for each quarter
of that year. The question arises whether the same treatment is required even if
there is substantial certainty of achieving the required earnings. Similarly, in
case of diluted EPS sum of EPS for all the quarters do not total to the EPS of
full year. An explanation for the same is required.

Note (e) mentions that anti-dilution rules do not apply
because the loss during the third quarter is attributable to a loss from
discontinued operations. It is not clear as to why anti-dilution rule is not
applicable in such circumstances. We believe that even if the rule is made
applicable, diluted EPS for quarter 3 will remain the same.

Reference :

Appendix B : Example 8.

Comments :

In the example, convertible bonds carry interest rate of 6%
against prevailing market rate of 9%. It seems that the issuing entity has
option to settle principal amount in cash. In such circumstances, question may
arise as to why lower rate for bond will be acceptable to the investors ?
Clarification is required in the context of breaking up components of liability
and equity in convertible bond. (as per related provisions of AS 31).

Reference :

Appendix D dealing with difference between the revised draft
and existing AS 20.

Comments :

The Appendix does not specify the following
additional differences :

(a) Para A16 deals with treatment to be given in
calculation of diluted EPS for partly paid shares. This has not been dealt
with in existing AS 20.

For the last sentence of Para A16 i.e., ‘the
number of shares included in diluted earnings per share is the difference
between the number of shares subscribed and the number of shares assumed to be
purchased’, clarification is required whether it is applicable only if
partly paid shares are not entitled to participate in dividend or otherwise ?

(b) Paragraph 64 is different from paragraph 44 of the
existing AS 20. It does not provide for restatement of EPS for changes in
accounting policies.

Paragraph 64 of the draft contains the following :

‘In addition, basic and diluted earnings per share of all
periods presented shall be adjusted for the effects of errors and adjustments
resulting from changes in accounting policies accounted for retrospectively.’

Comments on ED of Ind-AS 41

(Corresponding to IFRS 1)

‘First-Time Adoption of Indian Accounting Standards’

Reference :

Example in Para 8.

Comments :

Para 8 requires an entity not to apply different versions of
Ind-ASs which were effective at earlier dates. However, it (entity) can apply
new Ind-AS that is not mandatory if early application is permitted.
Concession on similar lines is also provided under IFRS. This requirement of
Para 8 is also indicated in the example to the said Para, under the heading
‘Application of requirements’, which reads as under :


“If a new Ind-AS is not yet mandatory but permits early
application, entity A is permitted, but not required, to apply that Ind-AS in
its first financial statements.”


This requirement as specified in the example is restricted
only to an entity which applies Ind-ASs effective for financial year/periods
ending on March 31, 2012, but does not present
comparative information. However, the said requirement should also apply to an
entity which decides to present comparative information in those financial
statements for one year. Not considering the aforesaid requirement for the other
entities seems inadvertent.

In view of the foregoing, it is necessary that the aforesaid
Para (given in bold herein) either should be moved at the end of the example or
a new para with the same wordings be added at the end of the example.

Reference :

Appendix D — Para D5 and D6 on Deemed Cost.

Comments :

Para D5, allows an entity to measure an item of property,
plant and equipment (PPE) at the date of transition to Ind-ASs at its fair value
and use the same as its deemed cost.

Para D6 allows a first-time adopter to use a previous GAAP revaluation of an item of PPE at, or before, the date of transition to Ind-ASs as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to: (a) fair value; or cost or depreciated cost in accordance with Ind-ASs, adjusted to reflect, for example, changes in a general or specific price index.

It is not clear whether the fair value referred to in (a) has a Reference: to the fair value as on the date of transition or on the date of revaluation.

It may be appreciated that the revaluation carried out on an earlier date may not broadly be comparable to the fair value on the date of transition (which would be later than the date of the revaluation) and in that case, such concession to use the previous GAAP revaluation may not have any practical utility. Clarification is desired that on which date ‘the fair value’ in (a) should be comparable Is it at the date of transition or the date of the revaluation? It may be known that almost in all cases, the revaluation carried out at an earlier date, may not be broadly comparable with the fair value on the date of the transition.

Comments on ED ON AS 14 (revised) (corresponding to IFRS 3) ‘Business Combinations’

Reference:

Paragraph B56 of the Application Guidance.

Comments:

In the ED, the word ‘award’ has been replaced by ‘transaction’, (refer para 30, para 52 of the ED).

Various Representations

 August 18, 2009

Shri Pranab Mukherjee
Hon’ble Union Finance Minister
Government of India
North Block, Room No. 134
New Delhi-110001.

Respected Sir,

    Re : Extension of time period up to 31st October 2009 for submission of comments on the Direct Tax Code

    We would like to congratulate you on presenting the Direct Tax Code, well within the 45-day period that the UPA Government had promised.

    We appreciate the efforts of all contributors in the preparation and presentation of the same and also appreciate the Government’s decision for inviting suggestions from the public.

    The Direct Tax Code is of great interest not only to tax professionals and accountants, but also to a common man and we request that the time period for submission of comments be extended up to 31st October 2009 so as to give appropriate time to all to give their best input.

    The months of August and September being extremely busy for tax professionals and corporates, in view of the finalising of accounts and filing of tax audits and returns, the above request of extension is being made for.

    Thanking you,

    Sincerely yours,
    Ameet Patel,                    Kishor Karia                 Rajesh Shah
    President,                           Chairman,                   Co-chairman,
                                        Taxation Committee     Taxation Committee
   
       

CC :

(1) Shri S. S. Palanimanickan, Hon’ble Union Minister of State for Finance.

(2) Shri S. S. N. Moorthy, Chairman, CBDT.

(3) Shri Rahul Gandhi, Gen. Secretary, Indian National Congress.

    August 3, 2009

To,

The Chairman
Central Board of Direct Taxes,
North Block, New Delhi

Respected Sir,

    Subject : Representation on the procedure followed in disposal of applications u/s.197 of the Income-tax Act, 1961

        S. 197 of the Income-tax Act, 1961 (the Act) deals with applications for deduction of tax deducted at source (TDS) at a lower rate. Recently, while obtaining such certificates, a large number of assessees have faced certain difficulty on account of a different interpretation by the Assessing Officers (AOs) and thereby denying the issuance of such certificates even if the assessee is otherwise rightfully eligible to get the same. S. 197 is meant for avoiding hardship to the assessee in cases where he has no tax liability or his tax liability is much less.

    We narrate the facts hereunder :

    Issue :

    S. 197 of the Act provides for grant of certificate for lower rate or nil rate of TDS. Upon an application being made, the AO is empowered to issue a certificate of lower rate or nil rate in the manner provided in Rule 28AA of the Income Tax Rules, 1962 (the Rules).

    Normally, the AOs work out lower rate or nil rate, as the case may be, prescribed under Rule 28AA(1) of the Rules, which inter alia pitches the word ‘average rate of tax’.

    Till recently, the AOs used to work out the average rate of tax on the gross amount received by the applicant as it is this amount on which tax is deducted. To explain with a simple illustration :

    • Amount received towards rent say Rs.100

    • TDS rate applicable 22.66%

    • Deduction for interest paid say Rs.20

    • The approximate tax liability would work out as under :

           
Accordingly, on the gross receipt, the rate would work out to 16.995%.

It was usual practice to grant certificate u/s.197 of the Act at such rate as ultimately that represents the actual liability for tax cf the applicant.

Recently, the Central Board of Direct Taxes (the CBDT) has issued a clarification’, upon the same being sought by the Chief Commissioner of Income Tax, Chandigarh, regarding interpretation of the term ‘average rate of tax’ paid by the assessee in the last three years as mentioned in sub-clause (ii) of Rule 28AA of the Rules.

The CBDT viewed that the ‘average rate of tax’ should be considered as explicitly defined in S. 2(10) of the Act to mean the rate arrived at by dividing the amount of income-tax calculated on the total income, by such income. As no other interpretation of the term ‘average rate of tax’ is possible, the CBDT directed that the ‘average rate of tax’ should be taken with regard to total income rather than gross receipts disclosed by the assessee in the earlier years.

In the above illustration, the income works out to Rs.50 and the tax works out to 16.995. Applying the said clarification, the average rate of tax works out as under:

This is nothing but the tax rate applicable to corporate assesse on his/its taxable income. Applying this rate to the gross receipts results in a higher deduction than the actual liability of the assessee leading him/ it to apply for a certificate u/s.197 of the Act.

Background :

The relevant S. 197 of the Act is reproduced hereunder, for the sake of brevity:

“………

197. (1) Subject to rules made under  sub-section (2A), where, in the case of any income of any person or sum payable to any person, income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of Sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-1, 194J, 194K, 194LA and 195, the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate.

2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.

(2A) The Board may, having regard to the convenience of assessees and the interests of revenue, by Notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate u/ss.(l) and’the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.

3) [***]

………….”

S. 197 of the Act provides for the power to the AO to give a certificate of nil deduction or deduction at a lower rate, so as to avoid excessive deduction of tax at source.

In other words, S. 197 of the Act empowers AOs to grant certificate to the persons in receipt of income on which tax is required to be deducted at source; provided that the estimated total income justifies the lower rate or nil rate of tax. Presently, such certificate can be sought on incomes derived by way of salaries, interest on securities, other interest, payment to contractors or sub-contractors, commission or brokerages, rent, fees for professional or technical services, income in respect of certain units, and compensation on acquisition of certain immoveable property.

The lower rate or nil rate, if it is to be applied, shall be in respect of the aforesaid income only. This fact is evident from the terminology of section which covers income in respect of which tax is required to be deducted at source.

The mechanism for giving effect to the power granted to AOs u/s.197 of the Act is specified in Rule 28AA of the Rules, which reads as under:
“…………..

Certificate of no deduction of tax or deduction at lower rates from income other than dividends:

28AA. (1) The Assessing Officer, on an application made by a person under sub-rule (1) of Rule 28, may issue a certificate in accordance with the provisions of Ss.(l) of S. 197 for deduction of tax at source at the rate or rates calculated in the manner specified below:

    i) at such average rate of tax as determined by the total tax payable on estimated income, as reduced by the sum of advance tax already paid and tax already deducted at source, as a percentage of the payment referred to in S. 197 for which the application under sub-rule (1) of Rule 28 has been made; or

    ii) at the average of the average rates of tax paid by the assessee in the last three years, whichever is higher.

2) The certificate shall be valid for the assessment year to be specified in the certificate, unless it is cancelled by him at any time before the expiry of the specified period. An application for a fresh certificate may be made, if required, after the expiry of the period of validity of the earlier certificate.

(3) The certificate shall be valid only for the person named therein.

(4) The certificate shall be issued direct to the person responsible for paying the income under advice to the applicant.

 (5) [* * *].

……..”

This rule inter alia specifies the manner of calculating and arriving at nil rate or lower rate. It specifies that this rate should be higher of:

  •     average rate of tax arrived by the net total tax payable (after considering advance tax already paid and tax already deducted at source) on estimated income as a percentage of payments referred to in S. 197; or

  •     last 3 years’  average  of average  rate of tax.

The aforesaid CBDT’s letter has interpreted the average of average rate of tax of last 3 years.

Impact :

If one is to give effect to the aforesaid clarification, it may give rise to some anomalies and/ or predicaments, as explained hereunder, with the result that the assessees will be saddled in the administrative turmoil.

The maximum rate of income-tax would be 30%, in any case.

If one were to apply for lower rate or nil rate for particular income, then applying the definition of average rate of tax, as clarified, under Rule 28AA(1), the resultant rate of tax, for specified income on which lower TDS is applied, would always be at 30%, in case of corporate asses sees which is higher than the rate at which TDS on different income is to be effected.

This figure is the effect of being the higher of resultant rate arrived under sub-clause (i) or sub-clause (ii) to Rule 28AA(1). The reason being that

  • Under sub-clause (i), the. rate can be applied within the range from 0% up to 20% (being maximum rate prescribed for the income on which tax is required to be deducted at source);

  • Under sub-clause (ii), the average of average rate of tax for last 3 years would work out to 30%, in case of corporate assessees, even if there is a small portion of income

The rate derived under sub-clause (ii) would always be higher than the rate derived under sub-clause (i) and hence the whole process of seeking lower rate uls.197 becomes redundant. Effectively, all Companies/Firms etc., where income is taxable at flat rate will, in most cases, never be eligible for issue of such certificate even though undisputedly their tax liability is much lower or Nil.

Only covers assessees incurring or having  loss:

The Rule 28AA gives desired results to loss-making companies, as the tax payable in such case would be zero. However, this rule becomes redundant for assessees having higher turnover but lower profits as aforesaid. Therefore, in all such cases, funds of the asses sees will get unjustifiably blocked and they will have to claim re-funds.

This will also hinder assessees working on smaller margins, which will shrink their working capital due to unintended blockage of funds into Government treasury. With the present situation of slow down in the economy, this has become added problem for the business community. We believe that this can never be the intention of the CBDT.

Undue interest burden on the Government

As the assessees would claim refund of the excess TDS as aforesaid, such refunds would also result into interest entitlement which will be an unnecessary burden on the Government treasury.

Further, S. 197(2A) speaks about ‘convenience of assessees’ and ‘interests of the revenue’. Interests of the Revenue cannot be harmed since the AO is expected to take into account the estimated income-tax and the advance tax/TDS already paid. However, the assessees will surely be inconvenienced if the interpretation of the CBDT is allowed to be carried through.

Corrective measure:

As a corrective measure, it is suggested that the average rate of tax may be calculated taking into consideration the total gross receipts/turnover (that is liable for TDS) to the tax payable instead of total income. This mechanism will ensure that the legislative intent will be given effect and with the issuance of requisite certificate on that basis, undue hardship of the assessees will be removed. Moreover, in any case, as higher of sub-clause (i) or subclause (ii) is to be taken the lower rate of TDS that may be granted will never be less than the tax payable by the assessee (after considering advance tax and TDS already deducted). Since there is no loss to the revenue, a harmonious and mearingful interpretation is required to be given to the provisions.

The above view is also endorsed by the Chief Commissioner of Income-tax, Chandigarh through his request letter? for interpretation of Rule 28AA of the Rules.

In view of the above, there is urgent need to issue clarification on above basis and we have to request your Honour to kindly take necessary steps for the issue of much needed clarification.

Since large number of genuine assessees has been affected and the TDS is deducted on an ongoing basis, an early resolution of the matter would help to solve the genuine problem faced by them.

Thanking    you,

Sincerely  yours,

Ameet Patel,    Kishor Karia    Rajesh Shah

President,        Chairman,                  Co-chairman,

                 Taxation  Committee       Taxation  Committee

Representation in respect of Procedure for Registration of Digital Signature and uploading of Income-tax Returns using Digital Signature

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Representation

Representation

3rd September, 2010

To,

Chairman,

Central Board of Direct
Taxes,

Government of India,

North Block, Vijay Chowk,

New Delhi-110001.

Dear Sir,


Subject
: Representation in respect of
Procedure for Registration of Digital Signature and uploading of Income-tax
Returns using Digital Signature


We refer to the amendment to
Rule 12 of the Income-tax Rules, 1962 (the Rules) which has made it mandatory
for all companies filing ITR-6 to digitally sign the I-T return for A.Y. 2010-11
and the Note regarding changes in the Procedure for Registration of Digital
Signature and uploading of Income-tax Returns using Digital Signature (The
Changed Procedure Note).

The Changed Procedure :

A. Para C of the Changed
Procedure Note recognises that in the following scenarios, taxpayers may find it
difficult to register the DSC as per the existing procedure as mentioned in the
aforesaid Note :

1. “Non-resident companies
where the Directors are foreign nationals.

2. Companies where the I-T
return is being filed for the first time.

3. Companies where the
Managing Director has changed and other Directors are either unavailable or
also have changed.

In all such cases it is
difficult to verify the identity of the person and his relationship with the
Entity for which he is the authorised signatory. With a view to make
registration simpler in such cases, the procedure has been changed to enable
registration of a DSC where the PAN is also provided in the DSC as per the
latest Interoperability guidelines issued by the Chief Controller of
Certifying Authorities. Such DSCs with encrypted value of PAN are now
available in the market.”

B. Para D of the Changed
Procedure Note prescribes the changes in the process of Registration of DSC on
the e-filing website. In this scenario, the Authorised Signatory has been given
the following options :

1. To select the existing
procedure to register the DSC, in case the scenarios mentioned in sub-para 1,
2, or 3 in para C of the Note, as reproduced above, are not applicable; or

2. “To select the new
procedure as given below :

(a) The Authorised
Signatory must use a fresh DSC having encrypted value of his PAN, as issued
by Certifying Authorities with effect from 1-8-2010.

(b) Enter Authorised
Signatory’s PAN number while registering the DSC. The same person must also
enter the same PAN in the Verification portion of the I-T Return which he is
signing in his capacity as Director/ Partner/Karta/Authorised Signatory.

(c) If the Authorised
Signatory’s PAN number matches the encrypted value of the PAN present in the
DSC — then the DSC will be registered after selecting the appropriate type
of DSC (.pfx or USB token) and clicking on ‘Select Your .pfx File
Certificate’.

(d) In case an
Individual is registering his DSC for submitting own ITR (ITRs 1-4 case)
then his PAN as per his login should match the encrypted PAN contained in
the DSC — then the DSC will be registered after selecting the appropriate
type of DSC (.pfx or USB token) and clicking on ‘Select Your .PFX File
Certificate’.

(e) Now, the I-T Return
for the Self/Company/Firm/Entity PAN can be signed using this registered
DSC.”



The implications of the Changed
Procedure :

C. As mentioned in para
B.2.a above, as per the new procedure, the Authorised Signatory must use a fresh
DSC having encrypted value of his PAN.

D. The relevant portion of
the Rule 114C of the Rules provides as under :



“Class or classes of
persons to whom provisions of S. 139A shall not apply 114C.
(1) The provisions of S. 139A shall not apply to following class or
classes of persons, namely :

(a)

(b) the non-residents
referred to in clause (30) of S. 2;”


E. Accordingly, as per the
explicit provisions of Rule 114C(1)(b), provisions of S. 139A do not apply in
case of non-residents.

F. However, in order to sign
the return with Digital Signature and upload the Return of Income in Form ITR-6,
the non-resident directors of the foreign companies would be compelled to obtain
the PAN in India and after obtaining the PAN would have to obtain a fresh DSC
having encrypted value of their PAN and then only they would be able to
digitally sign and upload the Returns of Income in Form ITR-6 for the A.Y.
2010-11.

G. Thus, effectively, in
case of non-residents, though the Rules do not require them to have a PAN in
India, the same has been made mandatory indirectly by the Changed Procedure
Note, particularly in case of foreign companies.

Practical difficulties :

H. It is irrational and
unlawful to insist upon a large number of directors of foreign companies to have
PAN in order to enable them to obtain DSCs having encrypted value of their PAN,
in order to enable them to sign the return of income of their companies.

    I. Most of the Directors signing the Returns of Income of the Companies, would have no connec-tion with India and also have no income at all in India and yet they would be forced to obtain the PAN in India, merely for the purposes of signing the Return of Income of the companies of which they are directors.

    J. The documentary requirements and procedure for obtaining PAN, particularly the requirement of Consularisation of the proof of identity and proof of address in case of foreign citizens which takes a lot of time, cost and effort, would cause undue hardship and anguish among many non-resident directors and foreign companies, particularly in view of the fact that PAN is NOT required as per the explicit provision contained in Rule 114C.

    K. We understand that the Consularisation process in many cases takes about a month’s time. In that event it would be very difficult or nearly impossible for many directors of foreign companies to obtain their PAN before 30-9-2010 and then to obtain their DSCs having the encrypted value of their PAN. This would result into unnecessary and unavoidable delay in filing the Returns of the foreign companies, due for filing on or before 30-9-2010 for ITAY 2010-11. Further in case of loss return, the company may lose the benefit of carry forward of loss if the return is not filed in time.

    L. Answer to Q 5 of the FAQs attached with the aforesaid Changed Procedure Note, provides that the Power of Attorney (PoA) holder is authorised to sign ITR of foreign company as per S. 140 of Income-tax Act, 1961. The PoA holder can register his DSC having encrypted value of his PAN against the foreign company PAN as per the new procedure.

    M. However, it is to be noted that in most cases the foreign companies are NOT comfortable or at ease, for various commercial and business consid-erations, to give PoA to third parties for signing the Return of Income with their digital signature. Conversely, an Indian resident may be unwilling to act as an authorised signatory of a foreign company and step into the shoes of such an assessee.

    N. Further, practically, most of the private limited companies (which form a bulk of the thousands of companies that file tax returns in India) have been filing their e-returns for past few years without DSC. For all such companies, it would now be mandatory to obtain a PAN-encrypted DSC. The time available for such a large number of companies to do this is very short and this is likely to cause a serious problem in smooth filing of returns in the month of September.

Our request?:

    P. In view of the above mentioned practical difficulties, we request you to amend the rules and make the digital signing of the Returns OPTIONAL particularly in case of non-resident/foreign companies.

    O. Alternatively, the entire process of signing the Return Form ITR-6 with digital signature should be made simple i.e., without PAN and the requirement of obtain DSCs having encrypted value of their PAN, should be done away with.
 

Q. We sincerely hope that you would consider the above and issue a public clarification by way of a Notification/Circular and/or make necessary amendments in the rules. It is further requested that a copy of the said Notification/Circular be sent to the Bombay Chartered Accountants’ Society.

Considering the urgency of the matter and in view of the very limited time available to enable companies and their signatories to comply with the new procedure, an early response in the matter would be greatly appreciated.

Thanking you,

Yours faithfully,

For Bombay Chartered Accountants’ Society

Mayur Nayak                  Kishor Karia
President                         Chairman
                                  Taxation Committee

COMMENTS ON EXPOSURE DRAFT OF SCH. XIV OF COMPANIES ACT, 1956

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Representation

COMMENTS ON EXPOSURE DRAFT OF SCH. XIV OF COMPANIES ACT, 1956

19th October, 2010

To,

The Secretary, Accounting Standard Board
The Institute of Chartered Accountants of India
ICAI Bhawan
Post Box No. 7100, Indraprastha Marg, New Delhi-110002.

Dear Sir,






  • Subject : Comments to the Exposure Draft of Schedule
    XIV to the Companies Act, 1956



    •  

    1. The current Schedule XIV
    prescribes minimum depreciation rate to be charged by all the companies. It
    covers different type of assets and residual category and prescribes
    depreciation rate for the same. It also prescribes extra shift depreciation and
    also rate for ‘continuous process plant’. Since the minimum depreciation rates
    were prescribed, companies also had an option to charge higher rate of
    depreciation than prescribed. It also has relevance in calculation of managerial
    remuneration u/s. 350 and distribution of dividend u/s.205 of the Companies Act,
    1956.

    2. The proposed Schedule XIV
    prescribes indicative useful life of various assets. Since the same is
    indicative, it means that applying the said useful life is not mandatory and
    company may choose a different useful life, either lower or higher than what is
    indicated in the proposed Schedule.

    3. For working out depreciation
    rate, two elements are required viz. useful life and residual value. In the
    Schedule, indicative useful life is given, but in the absence of indication of
    residual value, it will not give desired result of providing guidance to
    companies which do not want to technically assess applicable depreciation rate.
    It is suggested that guidance on indicative residual value is also required, if
    at all the proposed Schedule XIV is to form part of the statute.

    4. A question also arises as to
    whether technical assessment by each company is required for ascertaining useful
    life of assets or a company can simply adopt the useful life as given in the
    Schedule. It is important to provide guidance for the same.

    5. AS-10 (revised) ‘Property
    Plant and Equipment’ requires separate identification of major components of
    each asset and it requires to be separately depreciated. It is difficult to
    envisage applicability of the proposed Schedule XIV to each component. In our
    view, there is no point in indicating useful life of asset without indicating
    useful life of major component of the asset. It is likely to create confusion
    rather than resolving the issue. It is better left to the management of
    respective companies to ascertain useful life of assets and their components.

    6. In the proposed Schedule XIV
    indicative life is also prescribed for mobile phones, library books and other
    similar items. In our view, in most cases such items are not treated as assets
    but charged to the Profit and Loss account. Providing an indicative life for
    such assets would force many companies to treat such items as assets, which may
    not be really required.

    7. Part B of proposed Schedule
    prescribes that for the purpose of S. 350 of the Companies Act, 1956, the useful
    life of any specific asset may be provided by the Regulatory Authority or by the
    Government. It is not clear to us whether or not technical assessment of useful
    life is required in case the useful life of any specific asset is specified by
    the Government. Is it mandatory to go by useful life prescribed by the
    Government even for providing depreciation in books ? If that is the case, it
    may override provisions of AS-10. A clarification may be required on this issue.

    In conclusion, we are of the
    view that the
    proposed Schedule XIV giving indicative useful life of assets would in addition
    to going against the spirit of AS-10 (revised) would also lead to unnecessary
    complications in applying AS-10 (revised).

    It is therefore suggested that
    the proposed Schedule XIV may be dispensed with.

    Thanking you,

    Yours sincerely

    Mayur B. Nayak
    President, BCAS    		 Himanshu V. Kishnadwala
    Accounting & Auditing Committee, BCAS
       

    SUGGESTION REGARDING INCREASE IN RETIREMENT AGE OF HIGH COURT
    JUDGES

    6th October, 2010

    To,

    Smt. Jayanthi Natarajan
    Chairperson,
    Parliamentary Standing Committee on Personnel, Public Grievance, Law and
    Justice,
    201, 2nd Floor, Parliament House Annexe,
    New Delhi-110001.






    Subject : Suggestions on the Constitution (One
    Hundred and Fourteenth Amendment) Bill, 2010 — Increase of Retirement
    Age lime of the High Court Judges from 62 years to 65 years.






    Madam,

    The Bombay Chartered Accountants’ Society (BCAS) is a
    voluntary organisation established on 6th July 1949. BCAS has about 8,000
    members from all over the country at present and is a principle-centred and
    learning-oriented organisation promoting quality service and excellence in the
    profession of Chartered Accountancy and is a catalyst for bringing out better
    and more effective Government policies & laws and for clean & efficient
    administration and governance. We make representations regularly on Direct and
    Indirect Taxes.

    Madam, we believe that due to longevity or increase in life expectancy the age limit which requires to be increased in all judicial and quasijudicial bodies/institutions from present age limit of 62 years to 65 years.

    At present the Judges of the Apex Court retire at the age of 65, whereas the Judges of the High Courts retire at the age of 62. Most of the Judges of the Apex Court after retirement render service to the nation by chairing various forums, like Authority for Advance Rulings till the age of 68 years. Similarly, the Judges of the High Courts also serve as Chairman, President or Members of various quasijudicial forums, like Administrative Tribunals, Customs Excise and Service Tax Appellate Tribunal, SEBI Tribunal, etc., where the age limit is 65. When the Judges can render service as Chairman of various judicial forums and render the judicial service which they were rendering earlier on the bench, there is strong reason to increase the age limit of retirement from 62 years to 65 years.

    Madam, if the Government can retain the services of such experienced Judges for another three years, it will be a great service to the nation and the pendency of cases before High Courts can be reduced.

    In India many professionals join the judiciary with the intention of serving the nation and not with the intention of getting a permanent job in the Government. A fresh law graduate when he joins a multinational gets emoluments more than that of a sitting Judge of a High Court, who may have put in more than 20 years of practice in law. Experience of a Judge and his knowledge is an asset to the justice delivery system; hence it is in the interest of the nation to raise the age limit of retirement of Judges to 65 years.

    Madam, the sanctioned strength of the Judges of the 21 High Courts is 895. Hence, it cannot be viewed as a vast opportunity in the employment sector, yet retention of less than 895 persons will have multiplier effect on justice delivery system. In the United States there is no age of retirement for Federal Judges. They are tenured posts. If a Federal Judge feels that by reason of old age he cannot function, he will receive the last-drawn salary as pension for the rest of his life. In the U.K. and Canada, Judges retire at the age of 75. In Australia, Judges of the Federal Court and Supreme Court retire at the age of 70. Similarly, in Japan Judges of the High Court retire at the age of 65.

    We therefore, strongly support for the proposal to amend clause (3) of Article 224 of the Constitution

    by substituting the words ‘sixty-five years’ for the words ‘sixty-two years’.

    Thanking you,

    Yours sincerely

    Mayur B. Nayak

    Kishor B. Karia

     

    President

    Chairman, Taxation Committee

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Representation on Compounding Amounts

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    Representation

    Bombay Chartered
    Accountants’ Society
    7, Jolly Bhavan No. 2, New Marine Lines,
    Churchgate, Mumbai-400020.

    The Chamber of Tax
    Consultants
    3, Rewa Chambers, Ground Floor, 31,
    New Marine Lines, Mumbai-400020.
       

    Honourable
    Governor,
    Reserve Bank of India.
    Dr. D. Subbarao, Central Office,
    Mumbai-400001.

    Date : 5th October, 2009

    Respected Sir,

    Representation on Compounding Amounts
     
    We, the above mentioned professional Institutions submit following joint representation for your kind consideration and necessary action. Kindly grant an interview where we can have a dialogue to understand and explain the views of both sides.

    Let us submit in the beginning that we have the highest regards for RBI as one of the finest institutions in India, an institution which has saved Indian economy from the Asian & the Global crises in 1997 & 2008-09; and granted a stability to Indian economy. Rest of the world is still craving for stability.

    Present grievance is about Compounding Process which we believe, is an aberration and something that can be sorted out by mutual discussions.

    Executive summary

        Grievance :

        Compounding Authority of RBI is charging high amounts — millions of rupees as ‘Compounding Sum’ for procedural & technical violations of FEMA (Paragraph 4 on pages 4 & 5). Focus of our present representation is on high amounts  charged for compounding. Everything else is in support of this one submission.

        In this representation we are focusing on innocent procedural mistakes on the part of investors etc. We are not representing people who violate the law deliberately for financial gains.

        We have submitted 1 to 10 issues (ten paragraphs) and given (a) to (d) — four illustrations in the detailed submissions.

        Reliefs requested :

        We make humble requests for the removal of anomalies in the Compounding Process. Reliefs are explained in details in the relevant paragraphs after explaining the grievance. The same are stated below in brief.

        Transitional reliefs :

            1. Please give an amnesty for all procedural and ignorant violations of FEMA occurred so far (till the date of RBI announcement) provided the concerned people file necessary forms by 31st March, 2010.

            2. Please give wide publicity to the provisions of FEMA and the need for compliance. Bank officers and professionals also need to understand the provisions in the same manner as RBI requires. We are prepared to hold joint conferences in different parts of India; write articles in our journals and inform profession as well as the investors. Even Indian embassies abroad can be intimated about procedures for NRI and Foreign investments.

        Long term requests :

        3. Compounding process is a process of mercy where the applicant comes to RBI with folded hands and confesses his mistakes. This may be treated on compassionate grounds rather than in a strict legal manner as in the case of penalties. The applicants may be given an opportunity to rectify their mistakes. (Paragraphs 4, 5 and 6 on pages 4 to 6)

        For procedural violations, Compounding Sum may not be more than Rs.2,00,000.

        4. Procedure for Post Facto Approvals and Condonation without penalties may be reintroduced in appropriate cases. (Paragraph 3 on page 3.)

        5. Compounding sums may please be levied commensurate to the gravity of the offence and not to the amount of investment. (Paragraph 4 on pages 4 and 5.)

        6. Please provide relief by removing anomalies in the Compounding Procedures. (Paragraphs 5 to 8, pages 5 to 7.)

        7. No action may please be taken by RBI, five years after a procedural violation occurred. Reasonable time limit should be provided for penal action. (Paragraph 9 on page 7.)

        8. We humbly submit that proper Appellate and Review/Rectification Process should be provided for Compounding matters. Until an Appellate/review procedure is provided, Compounding Amounts should be restrained. (Paragraph 10 on page 7.)

        Summary completed

        Representation in details

        1. Compounding amounts :

            Compounding process was introduced to provide

            people a chance to regularise their FEMA violations by payment of token penalty. In the beginning, the process was found to be satisfactorily working. However for the past two years, the Compounding Authority under Foreign Exchange Department has been imposing very high ‘Compounding Sums’ even in cases of procedural violations which cannot be called ‘wilful, malafide or fraudulent’.

        2. Penalty when justified :

    If a law exists on the statute books, primarily it has to be complied with. Hence, we do acknowledge that penalty and deterrent action are necessary where non-compliance with law can have serious consequences. However, some part of the law is procedural. In such cases, stiff penalties for procedural lapses may be out of place.

    3.  Purpose of compounding:

    Harsh penalties are meant only when the person continues offences after being put on notice. At RBI, a business transaction is considered as a series of transactions. Hence RBI can say that first two steps in the series are ignored and for the third onwards, Compounding Sum is charged.

    For illustration, an NRI has given a rupee loan to his resident brother in India. The loan is for five years. This is a violation of FEMA provisions. Both the brothers are ignorant of FEMA provisions. Loan amounts are given as and when funds are required and repaid as and when funds are not required. RBI considers this as several offences. However, for the parties concerned, this is only one violation of one brother giving a loan to another brother. This may be treated as one violation and compounding process may be taken up accordingly. Ideally, such transactions should not be punished. Mere warning to avoid repetition in future would be adequate.

    For the past several decades, and even under the strict FERA, RBI has, in appropriate cases, granted Post Facto Approvals and Condonations. Now, under FEMA, it seems, RBI has taken a view that it cannot condone any violation and it cannot give any post facto approval. This is directly contrary to the trend of liberalisation so strongly followed by RBI and Finance Ministry.

    We submit     that this position may be reviewed. this penalty to recover ‘unjust profits’ that the in-Let RBI lay down the policy. Wherever RBI considers it appropriate, the condonation and post facto approval policy should be reintroduced.

    4. Amount    of penalty    and  investment:

    A penalty has to be primarily commensurate with the type and intensity of the offence concerned; not with the amount involved. In the case of Compounding, this principle is even more relevant. Compounding Authority’s linking of Compounding Amounts with investment amounts is unjustified. Further, the Authority presumes likely profits earned by violation, ignores the fact that no profits have been earned; and then imposes high Compounding Amounts.

    Illustration of one Compounding Order: In one case, an OCB invested in India rupees 8.5 crores (approximately) with the prior approval of FIPB. The aCB wanted to set up a power plant in Chhatisgarh. There was a condition of local participation up to 40%. For four years they ran from pillar to post for several Government permissions. Neither they got Government permission nor could they find a local investor. Ultimately, they were frustrated and gave up the project. Hence they transferred the funds to a sister company where the aCB already had some investments. The Company delayed in filing intimation. The Company could not allot shares to aCB as it could not locate a local investor which was a pre-condition of FIPB approval. In the meanwhile, RBI issued Circular No. 20 dated 14-12-2007 prohibiting allotment of shares beyond 180 days of receipt of funds.

    For these offences, RBI imposed a Compounding sum of more than Rs.3 crores ! Company admits the violations of non-intimation, non-filing of forms; and step down investment. Still, such a stiff penalty for all procedural violations where there is no foreign exchange loss and nothing illegal or immoral! ! !

    Although Indian Investing Company earns a meager sum of Rs. Five lakhs at the time of liquidation of downstream investments, RBI presumed ‘opportunity cost of funding’ that it ‘saved’ by violation of the law and imposed this penalty to recover ‘unjust profits’ that the investor had made! ! !

    The applicant believed that if he did not pay up the Compounding Amount, the file would go to Enforcement Directorate. Purely out of fear, the Indian Company paid up full amount.

    This is a serious case of injustice.     (i) For such technical violations, imposing a penalty of Rs.3 crores is injustice. (ii) When a party voluntarily submits full information and confesses his mistakes; this confession cannot be given to En-forcement Directorate. If RBI considers appropriate, it can always intimate ED that the person has not filed FC – GPR form and made a step down investment without permission (or whatever may be the violation). Then leave it to ED to take its own course. (c) Another illustration: An NRI has invested funds in India. He divides the investment into equity and non-convertible debentures. Party is unaware that in India, under FEMA, non-convertible debentures are not permitted.

    Applicant has admitted that there is an unintended violation of FEMA provisions. RBI calculates some gains made by the Company and charges a Compounding Sum in millions of rupees based on the imagined gains. Our submission is, it is the investor’s own funds and own company. Where is the question of his making any gains from himself! Such calculations are contrary to natural justice. Ideally, RBI should give an opportunity to the Indian Company and the investor to change the debentures into compulsorily convertible debentures. If the parties comply with the law, serve a notice and leave them; or levy a token penalty.

    5. Purpose  of the Forms-important statistics:

    Many cases where Compounding Amounts have . been charged pertain to non-filing of form FC – GPR by the investors. We understand that these forms give investment data based on which RBI formulates its policies. If the forms are not filed in time, the policy decisions are affected.

    We agree with the importance of filing of all necessary forms. However, under the current circumstances, (with our Foreign exchange reserves being more than $ 280 billions) RBI may decide an amount which really does not matter. For example, an investment of $ 1,00,000 by an NRI under automatic route. Does it really affect RBI policy matters! If not; a violation of this kind may either be pardoned totally or the Compounding Amount may be restricted to an upper limit of Rs.2,00,000 (or such other limit as may be considered appropriate by RBI).

    These are illustrations. We submit that in all cases of inconsequential procedural violations or apparent ignorance of law that do not affect the flow or intended direction of foreign exchange, the parties should be given an opportunity to rectify their mistakes. Compounding process is primarily to set the matter right; to deter future violations and not to punish the investors.

    6. International ways  of investment:

    When an authority assumes power to impose penalties, it may be aware of the manner of international investments. Following summary of an order by Compounding Authority shows that the authority ignored the manner of international investment activity. Order dated 6th January, 2009.

    d) Summary  of illustration:   “An NRI couple husband and wife promoted a company in India and personally became the shareholders. They also floated a wholly owned company in Mauritius. The Indian company decided to take an ECB. It is permitted on ‘automatic basis’ from the shareholder. However, instead of taking loan from the individual shareholders, the Indian company took the ECB of USD 2.3 millions from the Mauritian company which was owned by the same individuals.”

    “This is a perfectly normal behaviour in the international investment market. For the NRIs, investment in personal name or through their own offshore company is the same. Still, RBI objected to it on technical ground that the Mauritius Company is not the shareholder/ collaborator. Parties concerned apologised and assigned the ECB from Mauritian company to the shareholders. (Facts are summarised here. Full details can be given if required.) Compounding Authority did not accept the apology, ignored the substance of the investment and imposed a Compounding Sum of Rs.45 lakhs.”
     
    This amounts to ignoring the substance of the matter and imposing punishment on technical grounds for an offence which does no harm to anyone. It is RBI’s prerogative to insist that the shareholder should be exactly the same and not substantially the same. However, if a legitimate party is prepared to amend the situation, what purpose is served by imposing high Compounding Sums and refusing the party any amendments ! We repeat our submission that the investors should be given opportunity to rectify their procedural mistakes.

    7. Compounding Orders should close the issue:

    At present, when a compounding order is passed, the matter is not automatically resolved. For example, a Company had not filed FC-GPR form in time. For the compounding application, the Company would have submitted all the details. Assume that RBI compounds the offence for a sum and the party pays the sum. Does it mean that the investment is taken on record and the Company does not have to file any further form! The party still has to go to the relevant office of RBI and seek permission.

    We humbly request that the Compounding order itself should further state that the forms are taken on record and the concerned party can continue its business normally; or as directed by RBI in its order. Let there be one complete order instead of making the party go from one office to another and waiting for final clearances.

    8. Time  limit for payment:

    When a Compounding Sum of Rs.3 crores is charged and the party is expected to pay the same in 15 days, it is harsh. Probably, the law provided for 15 days time considering that the Compounding Sum will be token amounts.

    We submit that where a Compounding sum of more than Rs.2,00, 000 is charged, reasonable time should be allowed to the party. Necessary amendments in rules and law may be moved.

    9. Time limit for commencing penal procedure:

    Almost all regulatory laws provide for a time limit beyond which, penal procedures cannot be commenced. Once the limit is crossed, past violations cannot be called up for scrutiny and cannot be penalised. No time limit was provided under FERA. However, under FEMA, under the current circumstances, it would be fair to provide definite time limit. Beyond the time limit, a person who has committed FEMA violations may not be called up for explanations.

    We submit that a time limit of five years should be provided for procedural violations under FEMA. RBI may please consider an appropriate time limit and announce the same.

    10. Rectification and  appellate procedures:

    Compounding Authority is a semi-judicial authority. It may function according to the principles of natural justice. It is an accepted judicial principle that – ‘anyone can make errors’. If a Compounding order is erroneous, it needs revision or rectification. No such procedure is provided so far.

    It is probable that while one authority may take one view, another authority may have another view. For penal decisions, appellate procedures are a necessity of democratic justice. Internal review of RBI actions without an opportunity for hearing to the aggrieved party is not a transparent process of justice.

    With the best of our efforts, so far, we have not been able to convince the Compounding Authority that (i) charging millions; and (ii) linking penalty with the amount of investment under Compounding Procedures – is injustice. Probably, only an Appellate Authority can provide justice.

    We humbly submit that proper appellate as well as rectification procedures should be provided. However, if it is decided that the Compounding Amounts may be less than Rs.2,00,000 for all procedural and ignorant violations; then no appellate procedures are necessary. Though, even then, rectification opportunities may be provided for.

    In conclusion     we very humbly submit that Compounding Process may be more just and fair; less harsh on innocent violations. Appellate and Rectification procedures may please be provided.

    For the past violations of procedural nature, an Amnesty may be granted if the concerned persons file necessary forms within the prescribed time.

    We understand that some liberalisations may not be within the jurisdiction of RBI to make. Whatever can be done and is acceptable to RBI may be liberalised at an early date. For the rest, procedures may be started to request appropriate authorities to amend the law.
     
    We humbly reuest  you  to kidly  grant  us an appointment for discussion.

    Wit best regards,

    For Bombay Chartered Accountants’ Society
    Mr. Ameet Patel | President

    For The Chamber of Tax Consultants
    Mr. K. Gopal | President

    Representation on Compounding under FEMA

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    Representation

    Bombay Chartered Accountants’ Society
    7, Jolly Bhavan No. 2, New Marine Lines,
    Churchgate, Mumbai-400020.

    The Chamber of Tax Consultants
    3, Rewa Chambers, Ground Floor, 31,
    New Marine Lines, Mumbai-400020.

    Date : 23rd February, 2010

    To

    Chief General Manager,

    Foreign Exchange Department,

    Reserve Bank of India, Central Office,

    Mumbai-400001.

    Dear Sir,


    Re : Joint Representation on Compounding under FEMA


    First of all we thank you for giving us a personal hearing on
    this subject. Considering the issues
    discussed at the hearing, we have had discussions within our organisations.
    Final drafting has taken some time. We are sorry for the delay.

    We now submit as under :

    1. Amnesty Scheme :


    1.1 An Amnesty Scheme exclusively under FEMA may be announced
    with effect from 1st April, 2010. It may remain open till 30th September, 2010.
    In our opinion, this scheme will not violate Government’s undertaking to the
    Honourable Supreme Court regarding future Amnesty Schemes.

    1.2 We may divide the FEMA lapses & violations in following
    categories :


    Amnesty Scheme to cover bona fide
    cases in following situations :


    (i) Procedural Lapses e.g.,
    Forms/declarations have not been filed in time or filed late. Other than the
    above, the transactions per se are permitted; or would be permitted if
    an application had been made.

    (ii) Innocent Lapses — especially where there is no
    loss of foreign exchange, or where the loss is minimal. (e.g., an NRI
    has given a loan to his brother/friend.)

    Amnesty Scheme NOT to cover :


    (iii) Serious violations where transactions are not
    permitted per se. (e.g., ECB funds used in stock market.)

    (iv) S. 3 Violations like Smuggling, Hawala, etc. S. 8
    violations like — Indian residents keeping funds abroad in violation of FEMA.

    The Amnesty Scheme should be for all lapses covered under the
    first two categories. (The above will need more elaboration. We can provide the
    same.) A scheme which may be declared may carry detailed lists to avoid
    ambiguity. The scheme may not cover violations listed under paragraphs (iii) and
    (iv) above. Our entire representation does not cover these exclusions.

    1.3 Wide publicity may be given and the scheme may be
    explained by a series of conferences and lectures throughout the country.

    More details of the scheme are given in Annexure 1.

    After 30th September, 2010 a lenient scheme may be adopted
    for compounding. This is discussed below.

    2. Small offences :


    2.1 A threshold-amount of small offences may be determined.
    All lapses below the threshold may be ignored as far as compounding/penalty
    procedures are concerned. For example, a limit of U.S. $ 20,000 or Indian rupees
    ten lakhs per person per year may be fixed. These amounts may be considered
    insignificant, not liable to any penal proceedings. For comparison, under the
    Income-tax Act, all amounts earned by a person below Rs.1,50,000 per year are
    totally exempt from Income-tax. The person is not liable to tax at all. This
    leaves 96% of Indians outside tax discipline.

    A blanket exemption may be abused. However, RBI will always
    have the power to issue appropriate instructions under FEMA. RBI may refer a
    case to the Enforcement Directorate whereever it finds a deliberate abuse of any
    reliefs.

    2.2 At present, while computing the amount of offence, series
    of transactions are totalled up. For example, in case of an impermissible loan
    by an NRI to a resident friend/relative, all receipts and payments during the
    period are added and counted as several lapses. In fairness, the loan should be
    considered as one violation. Peak amount outstanding during a period may be
    considered as the amount of lapse.

    3. Technical lapses :


    Amounts above the threshold may be considered leniently if
    they are technical lapses i.e., covered under the first two categories
    listed in paragraph 1.2. Some illustrations of technical offences are considered
    below and in Annexure 2.

    4. NRI investment :


    NRIs were specifically permitted around the year 1982 by the
    then Finance Minister Mr. Pranab Mukherjee to invest in India through OCBs.
    Around 1992, the scheme was further liberalised by the then finance minister Dr.
    Manmohan Singh. Then because one Indian share-broker committed frauds through
    Mauritius OCBs, in 2003 all NRIs were prohibited investment through OCBs. An
    arbitrary step where innocent NRIs have been punished.

    Unfortunately, NRIs still keep investing in India through
    their own trusts or offshore companies. These are lapses, not violations. These
    investments are not crimes. They should be dealt with leniently and regularised
    with token compounding sums.

    5. Compounding sums :


    5.1 FEMA is not a revenue law. Compounding process is to
    deter people from repeating FEMA lapses; and to save them from Enforcement
    Directorate’s procedures. RBI may not be tough with common men and may not link
    the amount of compounding sums with presumed gains made by the investors. The
    compounding sum may be linked to the gravity of the offence concerned and
    intention of the parties. It should not have any relationship with the amount of
    investment or gains.

    There have been cases where the Compounding Authority has
    presumed gains where the investor has made no gains. This is arbitrary and
    unjust.

    5.2 S. 13 of FEMA is an indication of the amount of
    compounding sum that the law-makers intended. In most cases, the compounding sum
    may not exceed Rs.2,00,000. If the matter is found to be far more serious, the
    Compounding Authority may specify the reasons in the Compounding Order and then
    charge a higher amount.

    5.3 Time for paying compounding sum should be 3 months. The
    current time of 15 days is too short.

    6. FIPB and RBI :


    6.1 In case of FDI in real estate development, there is a difference of opinion between RBI and FIPB. Investors who would have taken FIPB ap-proval; or gone under automatic route as permitted by the Industrial Policy would naturally follow FIPB view. They should not be considered as violators of FEMA. Some day the difference would be resolved. Once the final policy is announced, investors should follow the policy. Until then all investments made and properties held should be permitted. Even after the announcement, past investments should not be disturbed.

    6.2 At present, certain areas under FEMA are administered by FIPB and certain areas by RBI. In case of a violation of Industrial Policy, the investor has to go for regularisation to FIPB and for compounding to RBI. Dual procedures for one single offence is against natural justice. For all matters administered by FIPB, the regularisation and compounding powers should vest with FIPB. Since the Compounding Rules do not grant authority to FIPB for compound-ing, let FIPB give post facto approvals.

        Accused person’s views?:

    7.1 Difference of opinion between two honest and knowledgeable persons is normal. Difference between FIPB and RBI is a strong illustration. Similarly, there can be differences between the RBI/ FIPB and a professional or an investor. When there is an honest difference of opinion in interpretation of law, no penalty may be levied.

    7.2 Currently, the person making a compounding application has to admit the offence. This is unfair. A person should be allowed to represent his views.

    It is normal that a person may not admit to the violation, but to buy peace, he is willing to pay the compounding sum. If the person is forced to admit a violation without an opportunity to defend himself, it will defeat the principle of natural justice.

    An applicant may not agree with Compounding Authority’s order and may not pay the compounding sum. Transferring all papers submitted by him including evidences and confession to the Enforcement Directorate would amount to gross injustice.

    7.3    Legal representation?:

    Under FERA, people were regularly represented by professionals — chartered accountants and lawyers. Legally, even under FEMA, people have a right to be represented by professionals. In practice however, for almost ten years, RBI officers flatly and strongly refuse professionals’ representations.

    Legal representation should be allowed for all matters including compounding.

        Appellate process?:

    If the applicant does not agree with the Compounding Order, he should get an opportunity to appeal. This is necessary as there can be differences of opinions between RBI and the businessman. These can be resolved only by an independent Appellate Authority.

    We suggest that the Executive Director, FEMA should constitute first Appellate Authority. Appropriate authority (more senior to the RBI Director) in the Fi-nance Ministry may constitute final Appellate Authority within the Government. Further appeal may lie in the appropriate Court of Law.

        A speaking Order?:

    In order that the person can appeal, the compounding order should be a ‘speaking order’. i.e., the order should give full reasons for arriving at a particular decision. For example, “considering the circumstances, I am of the view that penalty should be Rs.?.?.?.?.?.”, may not be sufficient.

    The order may state the specific circumstances that guided the Compounding Authority to come to a particular view. The order may also state the interpretation of the accused which is not accepted by the Compounding Officer. Reasons may be given.

        Compounding and post facto approval?:
    The compounding order should mean that the trans-action has been approved. There should be no need for taking any further approval.

    Alternatively, where an approval is required, both the compounding process and post facto approval should be given simultaneously. The time for such a process may be increased from 6 months to 9 months.

        Authorised Dealers (ADs)?:

    Authorised Dealers (ADs) are the major stumbling block in FEMA compliance. RBI insists on all forms being filed through ADs. But the ADs are neither interested, nor competent to understand and implement FEMA.

    Please introduce the procedure of E-Filing of all forms and even compounding applications and Amnesty applications. Where necessary, the Authorised Dealers’ report may be called for separately.

        Other FEMA issues?:

    We submit that there are several rules which cause avoidable difficulties to the concerned persons. If the rules are made clearer, it will help in reducing the lapses and violations. These issues are separate from the Compounding rules. Hence we are not submitting anything on the FEMA rules in this representation.
    We request you to allow us to submit separate representation for FEMA rules. We can first discuss the modalities before we submit the same.

    We wish to once again thank you for allowing us to represent before you. We will be glad to discuss the matter personally. We request you to kindly grant us an appointment for discussion.

    Thanking you,

    Yours faithfully,

    For Bombay Chartered Accountants’ Society    
    Vice-President    
    Mayur Nayak
        
    For The Chamber of Tax Consultants
    President
    Gopal Kandarpa

    Withdrawal of registration u/s. 12-A of the Income Tax Act, 1961

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    Representation

    Representation

    February 8, 2010

    The Chairman

    Central Board of Direct Taxes

    Department of Revenue

    Ministry of Finance

    Government of India

    North Block

    Delhi-110 001

    Dear Sir,

    Sub:
    Withdrawal of registration
    u/s. 12-A of the Income Tax Act, 1961

    Brief Background:
    Section 11 of the Income Tax Act 1961 (Act) grants exemption in respect of
    income applied by any person, (normally a trust or an institution) for any
    charitable or religious purpose. In order to avail of an exemption u/s. 11, such
    a trust or institution is required to be registered u/s. 12A of the Act. Such an
    application is to be made within a period of one year from the date of creation
    of the trust or establishment of the institution and the exemption would be
    available in respect of the year in which such an application for registration
    was made.

    Up to 1st June 2007, the registering authority, which is
    either the Commissioner or Director of Income Tax (Exemptions) had a power to
    condone the delay in making such an application. Finance Act 2007 has withdrawn
    that power from the date aforesaid.

    Section 12AA of the Act prescribes the procedure for
    registration, under which, the registering authority is required to be satisfied
    about the genuineness of activities of the trust or institution. The section was
    inserted from 1.04.1997.

    The registration procedure is prescribed by rule 17A and the
    form in which the application is to be furnished is Form 10A. Form 10A, contains
    an undertaking by the applicant as follows:

    "I undertake to communicate forth with any alteration in the
    terms of the trust or in the rules governing the institution made at any time
    hereafter."

    However neither the governing sections nor the rules contain
    any similar condition or the consequence of the non-furnishing of such a change.

    Withdrawal of 12A registration in case of change in objects

    As stated aforesaid, the governing sections and the rules are
    silent about the intimation in change of objects / rules being given to the
    registering authority. Prior to 1997, even the certificate issued in response to
    the application did not contain any such condition.

    We have been informed by our members that the assessing
    officers are now calling for details of any change in objects and rules and in
    case of such a change and the absence of intimation thereof to the registering
    authority, proceeding to deny exemption under section 11. The view being taken
    is that on such a change occurring and the same not being intimated to the
    registering authority, the registration is treated as withdrawn.

    For this we understand that reliance is being placed on the
    following three decisions.

    Allahabad Agricultural Institute & Another Vs. Union of India
    291 ITR 116 (All)

    Sakthi Charities
    Vs CIT 182 ITR
    483 (Mad)

    Sakthi Charities
    149 ITR 624 (Mad)

    We now understand that, such a stand is being taken by the
    registering authority in Mumbai i.e. Director of Income Tax (Exemptions). In
    some cases, a communication is being sent that the registration is treated as
    withdrawn while in some cases, show cause notices are being issued with similar
    result.

    Without going into the rationale of these decisions, merits
    thereof, and the peculiar facts on the basis of which they have been rendered,
    we submit that the stand taken by the Department will cause untold hardship.

    It must be borne in mind that many registrations under
    section 12A are more than three decades old and without any specific provision
    or rule, it is virtually impossible that trustees or persons in management of
    these charitable institutions would have been aware of the existence of such an
    undertaking which was given at the time of application. This must be viewed in
    light of the fact that most charitable institutions are run by persons working
    on an honorary basis, and they rarely have professional help on a regular basis.
    In any event, even those professionals would not be aware of the undertakings,
    particularly when there is no express provision.

    If the assessing officers deny exemption under section 11,
    based on the interpretation aforesaid (many have already completed that
    process), genuine charitable trusts / institutions will face huge tax arrears,
    and the work of charity will suffer substantially. Moreover, even if these
    trusts apply for registration again, such a registration will, be available only
    from the year in which the application is made (the power of condonation having
    been withdrawn)

    We appreciate that it is necessary to ensure that the
    exemption is granted to only deserving institutions. It is also accepted that
    institutions claiming these exemptions must submit themselves to the scrutiny of
    the registering authority, in case of change in objects. However, relying on a
    technical interpretation to deny an exemption of this nature should be avoided.

    We therefore feel that-

    a) In case of change in objects being noticed, the trust /
    institution be issued a show cause notice.

    b) The trust be asked to explain the rationale behind the
    change and if the objects are still charitable, the registration be continued.

    c) If the objects are not charitable then the registration be
    withdrawn by a specific order, so that the remedy of appeal is available to the
    trust / institution by way of an appeal to the tribunal.

    d) During the time that the proceedings in which the impact
    of the change is being verified by the D.I.(Exemptions) / Commissioner, the
    assessing authority be restrained from assuming / presuming that the 12A
    registration is cancelled.

    e) This fact of 12A registration being conditional, and the
    fact of change of objects being required to be intimated to the registering
    authority be given widest publicity

    f) A suitable amendment be recommended in the Act, so that in
    future, the trusts are suitably forewarned.

    We hope quick action is taken in this regard so that genuine
    trusts do not suffer on account of technical lapses. If any assistance is
    required from the Bombay Chartered Accountants Society, we will be glad to
    provide the same.

    Yours faithfully,

    E-payment of taxes

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    Representation


    April 9, 2008

    To,

    Mr. P. Chidambaram

    The Hon’ble Finance Minister, Government of India,

    North Block, Vijay Chowk, New Delhi-110001.



    Ref : BCAS Representations on E-payment of Taxes


        The CBDT has vide Notification no. 34/2008, dated 13th March, 2008 introduced new Rule 125 making it mandatory for all corporates and other assessees obliged to get their accounts tax audited u/s. 44AB of the Income-tax Act, 1961 to pay taxes electronically with effect from 1st April, 2008.

        The effort of the Tax Department in moving towards paperless system of tax payment and compliance by assessees as well as delivery of services to assessees by the Tax Department by harnessing Information Technology is well appreciated. BCAS has always been supportive of such measures. However, we would like to bring to your notice certain transitional difficulties encountered in e-payment of taxes by the assessees for which a clarificatory Circular from the Department would go a long way in allaying apprehensions of taxpayers.

        Firstly, though the new Rule permits electronic payment of taxes, either by availing net banking facility or by use of debit/credit card, the mechanism of payment by debit/credit card is not yet operational. Neither the Income-tax Department’s website, nor NSDL’s website presently offers the facility of making tax payment by using debit/credit card. For assessees like small companies not liable to tax audit or professionals or individuals/partnership firms having medium range turnover (say, Rs.40 lakhs to Rs.1 crore), use of debit/credit card is a cheaper and efficient option, since the directors and/or partners of such assessees would be already holding debit/credit cards.

        Secondly, a taxpayer has to necessarily open an account with one of the 26 banks which have been authorised to accept e-payment of taxes, if they are presently banking with other banks. This increases administrative cost for the taxpayers.

    Thirdly, the payment gateways of several banks offering net
    banking facility for tax payment have not yet fully stabilised. There are
    several technical difficulties faced by the assessees while using the net
    banking facility whereby online requests for tax payments are not getting
    processed. For example, user id and password allotted by the bank is not
    accepted, since the bank’s database is not updated, requests for higher limits
    for payments by authorised users are not processed immediately by banks, time
    lag in communicating user ids and password by the banks for security purpose,
    etc, etc. Since it is critical for taxpayers to pay their taxes on time,
    particularly taxes deducted at source, to avoid adverse consequences like
    interest, penalty and disallowance of expenses u/s.40(a)(ia), many assessees
    have preferred to pay taxes under the conventional method through cash/cheque
    payment though technically they were under obligation to make payment by e-mode
    as per Rule 125. It is learnt that banks are also accepting such payments.

    It is, therefore, prayed that having regard to difficulties
    faced in transitional period, it may be clarified that there will be no adverse
    consequences for taxpayers who have paid taxes by cash/cheque though obliged as
    per Rule 125 to make payment by e-mode for a period of at least six months from
    1st April, 2008. Further, it is also requested that the facility of e-payment
    may be extended to other banks also or alternatively other banks may be allowed
    to open payment gateways for their customers to enable them to deposit tax with
    one of the 26 authorised banks.

    Thanking you,

    We remain,

    Yours truly,

    Rajesh Kothari Pinakin Desai Rajesh S. Shah

    President Chairman Co-chairman

    Taxation Committee

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    Representation in respect of Returns processed u/s.143(1) of the Income-tax Act, particularly at Mumbai.

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    Representation

    To
    The Chairman
    Central Board of Direct Taxes
    Department of Revenue, Ministry of Finance
    Government of India, North Block
    Delhi-110001

    Dear Sir,


    Subject : Representation in respect of Returns
    processed u/s.143(1) of the Income-tax Act, particularly at Mumbai.

    We refer to the returns being processed by the income-tax
    authorities u/s.143(1) of the Income-tax Act, 1961.

    In this regard, we appreciate the steps taken by the Hon’ble
    Finance Minister and the Department in trying to ensure that the returns are
    speedily processed and the refunds are issued to assessees in a reasonable time
    of their filing the returns.

    Errors in the intimations :

    However, the intimations recently issued u/s.143(1) of the
    Income-tax Act, 1961 to various assessees contain many errors causing great
    hardship to the assessees. Some of the common errors are listed below :

    • Credit for
      self-assessment tax, advance-tax and tax deducted at source has been not
      granted/short-granted.


    • Interest u/s.234C is
      charged in case of salaried employees even though no advance tax is payable by
      them or the advance tax payable by them is below the threshold limit of
      Rs.5,000. Additionally, many assessees have received intimations demanding a
      sum of Rs.1,200 towards deferment of tax payment u/s.234C.


    • Interest u/s.234C is
      charged even in case where the income is below taxable limit.


    • Interest u/s.234C is
      calculated before giving credit for taxes deducted at source.


    • Capital gains are taxed
      twice, once on special rates and again as part of the Total Income on normal
      rates.


    • Tax on short-term capital
      gains is calculated at normal rates instead of special rates prescribed.


    • Deduction u/s.80C and
      other sections of Chapter VI-A are not considered.


    • Income under one head of
      income is considered as income under another head or repeated under another
      head of income.


    • Tax demand is not rounded
      off. Even though the law states that taxes payable have to be rounded off to
      the nearest multiple of ten, demands are being raised for Re.1, Rs.3, etc.


    • In many cases, the due
      date for filing the return of income by assessees getting remuneration from a
      partnership firm as a partner of the firm and liable to tax audit, is taken as
      31 July instead of 30 September and consequently, interest u/s.234A is charged
      for late filing of the return of income.


    • The credit for dividend
      distribution tax paid is not granted resulting in huge tax demands.



    Practical difficulties





    • Filing of
      rectification applications :



    Due to the various errors, the assessees are under a burden
    to prepare and submit an application u/s.154 of the Act for rectification of
    the intimation issued to them so as to avoid making unnecessary tax payments.

    Further, past experience of processing applications filed
    u/s.154 by the Income-tax Department is not encouraging. Though the law states
    that the applications filed u/s.154 have to be disposed of within six months
    from the end of the month in which the applications are received, very few
    orders u/s.154 are passed by the income-tax authorities within the time
    prescribed and majority of the orders are not passed even after a considerable
    period of time. It is very painful for the assessees to get an order u/s.154
    passed by the income-tax authorities. Even after rigorous follow-up at the tax
    offices, the orders u/s.154 are not passed in many cases.

    Further, with the commencement of processing of returns for
    assessment year 2009-10, the refunds if any may get adjusted against the
    wrongful demand raised in processing the returns of assessment year 2008-09.





    • Entries in the
      income-tax return form :



    As per Explanation (a)(i) to S. 143(1) of the Act, an
    incorrect claim apparent from any information in the return shall be an item
    which is inconsistent with another entry of the same or some other item in the
    return of income. In this regard, we would like to bring to your kind
    attention that the new income-tax forms issued for filing of the returns do
    not allow attachment of any documents/evidence for claim of taxes paid and
    deductions claimed. Thus, the returns filed will have only entries in the
    return of taxes paid and deductions claimed and no supporting documents will
    be available with the income-tax authorities while processing the returns of
    income. Accordingly, the claim for advance tax paid, self-assessment tax paid,
    taxes deducted/collected at source will be shown only at one place in the new
    forms and accordingly, there cannot be any inconsistency and thus, denial of
    credit in this regard is bad in law.


    • Place of filing the rectification applications :



    (a) Further, in few cases, the intimation states that an
    application u/s.154 is to be made to the Centralised Processing Centre at
    Bangalore, which has only a Post Box Number. The postal authorities do not
    accept registered post to a post box number and thus the assessees have no
    knowledge as to when the application is received by the income-tax
    authorities.

    (b)     In Mumbai, the Salary Section have started accepting the applications u/s.154 of the Act, however, considering the errors in number of cases, it would take lot of time to accept the application u/s.154 and dispose of the same. There are number of small assessees who are not very conversant with the process as well as the working of the Department. In such cases, a suo moto action by the Department would be advisable.

    Our request:

    a) We understand that the errors mentioned above are due to software error in the computer programme. Accordingly, we request your good-self to kindly:

       b)  direct the income-tax authorities to suo moto pass an order u/s.154 of the Act after rectifying the errors mentioned above or in the alternative, to reprocess all the returns and issue a fresh intimation after rectifying the errors.

       c)  We request you to issue a Notification/Circular in this regard stating that all such intimations issued during the said period will be treated as null and void and that fresh intimations would be issued.

    If such reprocessing is done, the whole exercise of writing letters by a large number of assessees to the Income-tax Department for rectification could be avoided and huge burden of receiving letters from the assessees and then dealing with the same can be dispensed with. It will also create goodwill in the minds of the general public.

    Accordingly, we would really appreciate if a Circular/Notification is issued in this regard and fresh intimations are issued or orders u/s.154 of the Act are suo moto passed by the income-tax authorities rectifying the mistakes in the intimations issued.

    Hope you would consider the above and issue a public clarification by way of a Notification/Circular and let all the recipients of such notices know what they are supposed to do. It is further requested that a copy of the said Notification be sent to the Bombay Chartered Accountants’ Society.

    Thanking You,

    Yours faithfully

    For Bombay Chartered Accountants’ Society

    Mayur Nayak           Kishor Karia                    Rajesh Shah
    Vice-President    Chairman, Taxation     Co-chairman, Taxation Committee
                                  Committee

    Representation on FDI in Limited Liabilities Partnership

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    Representation

    BCAS/MBN/38
    4th November, 2010


    To,

    The Concerned Officer,



    Foreign Investment Promotion Board (FIPB),



    Department of Economic Affairs,



    Ministry of Finance,



    Government of India,



    North Block, New Delhi-110001.

    Sir,

    Subject :
    Submission of Representation on Limited Liabilities Partnership

    We are pleased to submit our
    considered representation on the aspects of Foreign Direct Investments into
    Limited Liability Partnerships.

    We hope that the same would be
    useful and would find your favour.

    Please feel free to contact us
    for any further clarification or explanation in the matter.

    We shall be pleased to assist
    you in involving a pragmatic policy on Foreign Direct Investment in Limited
    Liability Partnerships.

    Thanking you,

    Yours
    faithfully,

     

     

    Mayur B. Nayak



    President

    Bombay Chartered Accountants’
    Society

    Views and suggestions in respect
    of Discussion Paper on Foreign Direct Investment in Limited Liability
    Partnerships

    Preface :

    One of the major factor in
    favour of LLP structure in the Indian context for foreign entities is the lack
    of any easy exit route under the provisions of the Companies Act, 1956 in the
    event of the joint venture not working out to the expectation of the parties.

    On the basis of our interactions
    with a number of foreign entities, we are of the view that LLPs as a structure
    has a great potential to facilitate FDI and foreign joint ventures in India in a
    number of areas.

    Accordingly, our view is that we
    should approach the question of permitting FDI in LLPs with positive frame of
    mind albeit with adequate safeguards to take care of concerns and issues
    highlighted in the discussion paper arising out of peculiarity of this form of
    business entity.


    Our views & suggestions in
    respect of issues for consideration given in para 6.00 of the Discussion Paper :

    (a) Should FDI be permitted in LLP at all ? Can it be argued that given its limited attractiveness for large investments, allowing FDI in LLP will not significantly accelerate FDI into the country while disproportionately increasing the regulatory burden ? Does the present uncertainty on how this business model will proceed as well its yet un-established case law, magnify these concerns?
    (i) LLP is internationally a very often used business structure due to its lower cost, greater flexibility in operations, better control over management, limited liability and easy exit route.

    In view of recessionary conditions in major economies of the world other than India & China, India is being looked upon as a very important investment destination. Accordingly, it is strongly suggested that FDI should be permitted in LLPs (a structure familiar to major investors outside India) as it would be a great facilitator of bringing in FDI in India.

    (ii) In our considered view, the regulatory concerns expressed in the discussion paper are not insurmountable. With incorporation of adequate safeguards in the FDI policy relating to LLPs, permitting FDI in LLPs would not disproportionately increase the regulatory burden. The regulatory concerns could be addressed with minimal and well considered modifications in the existing regulatory provisions.

        (a)

        (b)
        (iii) The LLP Act, 2008 is similar to the UK & Singapore LLP statutes which are successfully in operation for more than a decade. In addition, the provisions of LLP Act, 2008 which have been framed after considerable thought and debate by an expert committee, take care of the various concerns expressed in the discussion paper.

         

        (a)

        (b)

        (c)

        (iv) Therefore, in our view, there is strong basis to assume that with adequate safeguards built into the FDI policy the LLP business model would successfully proceed to achieve its desired objectives.

        (v) The LLP form of business structure is extremely popular, time tested and oft-used structure in various developed countries of the world. Concerns about the absence of judicial precedents are, thus, unfounded.

    (b) What should be the definition of ‘person resident in India’ ? The definition provided in the LLP Act or the definition provided in FEMA ?

    (i) The definition of ‘person resident in India’ in the FDI policy is important from the point of view of control of the LLPs. Since we are concerned with FDI in LLPs, it is felt that the definition of ‘person resident in India’ provided in the LLP Act would be more relevant.

    (ii)    Furthermore, the definition of ‘person resident in India’ given in the LLP Act does not contain the exceptions given in S. 2(v)(B) of the Foreign Exchange Management Act, 1999 (FEMA) whereby a person who comes to and stays in India, in either case for carrying on in India a business or vocation in India, is considered to be a person in resident in India, irrespective of his no. of days stay in India in the previous year. As per the definition in the LLP Act, a person who comes to India for doing business in India or for taking up employment in India would not immediately become a person resident in India. From a ‘Control’ perspective, the LLP would still need a person resident in India to be one of the ‘designated partners’ until the non-resident becomes a person resident in India as per the definition given in the LLP Act.

    (c)    Given the complexity of some of the issues raised in S. 5, would it be preferable to adopt a calibrated approach to the induction of FDI in LLPs? Initially, should FDI in LLP be restricted to sectors without caps, conditionalities or entry route restrictions? Should FDI be allowed up to 100% in these sectors or should there necessarily be an Indian partner? Should such approval be confined to the Government Route?

    (i)    In our view, with incorporation of adequate regulatory safeguards [refer our comments on (g) below], majority of the issues raised in S. 5 of the discussion paper can be properly addressed. Thus, there may not be a need to have a calibrated approach to the induction of FDI in LLPs. However, in order to gain the implementation experience and problems faced in the process of implementation, initially, FDI in LLP could be restricted to all those sectors which do not have caps, conditionalities or entry route restrictions.

    (ii)    As per the provisions of S. 7(1) of the LLP Act (as mentioned in para 5.4.5 of the Discussion paper) every LLP shall have at least two designated partners who are individuals and at least one of them shall be a ‘person resident in India’. Since this a primary requirement mentioned in the LLP Act, an Indian Partner will be required. The FDI policy on investment in LLPs may specify that compliance with this requirement is necessary even if 100% investment is permitted under the FDI policy.

    (iii)    FDI in LLPs should not be confined to the Government Route. On the contrary it should be under Automatic Route. The policy should be exception-based. As long as the prescribed criteria are met, investment must be under the Automatic Route. Where, however, there are deviations, than prior approval from FIPB must be prescribed.

    (d)    Should LLP be mandated not to make downstream investment and should foreign-owned or controlled Indian companies be barred from investing downstream in LLP ? Should investment by FII/ FVCI or ECB be prohibited for LLP?

    (i)    In view of the issues raised and concerns expressed in respect of ownership and control of LLPs, initially LLPs should not be permitted to make downstream investments and FDI should be allowed in operating LLPs only.

    (ii)    In respect of investment by FII/FVCI, the same policy as is applicable for FDI in Indian companies should be adopted. The same norms of ECB policy as is presently applicable in case of corporates should be made applicable to ECBs for LLPs. If any additional funds are required, the partner(s) must bring in the same by way of capital contribution.

    (e)    Following the Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations 2000, should it be mandated that foreign participation in the capital structure of LLP should be on a percentage basis, received only by way of cash consideration by inward remittances through normal banking channels, or by debit to the NRE/FCNR account of the person concerned maintained by an authorised dealer? Should it be mandated that foreign investments in LLP engaged in agricultural/plantation activity or real estate are prohibited?

    (i)    In view of the issues involved in determining FDI in LLP in accordance with the capital sharing percentage of the foreign investors, foreign participation in the capital structure of LLPs should be determined with reference to the profit sharing percentage i.e., right to the share of profits of the LLP.

    (ii)    Foreign participation in the capital structure of LLP should be initially received only by way of cash consideration by inward remittances through normal banking channels, or by debit to the NRE/FCNR account of the person concerned maintained by an authorised dealer. However, the policy should be reviewed in the light of final policy view taken in respect of discussion paper on issue of shares for consideration other than cash.

    (iii)    It should be mandated that foreign investments in LLPs engaged in agricultural/plantation activity or real estate are prohibited since these activities are prohibited under the existing FDI policy in case of FDI in Indian companies. The same rules should apply to FDI in LLPs so as to provide for a level playing field and to avoid misuse.

    (f)    Should FDI policy treat LLP akin to companies? In such a case, how should the issues relating to ownership, valuation, control, downstream investment and non-cash contributions, raised in S. 5 above, be addressed ? Should this be only through the Government Route?

    (i)    An LLP is a hybrid entity. It incorporates the features of both a company as well as a traditional partnership. It would not be advisable to treat them akin to companies for all purposes.

    (ii)    Ownership of an LLP be determined on the basis of the profit-sharing ratio between the partners.

    (iii)    Valuation be undertaken on the basis of DCF method, as is presently prescribed under FDI policy.

    (iv)    Control be determined by looking at the LLP agreement between the partners to determine the roles, rights and duties of each partner viz-à-viz the LLP and the other partners.

    (v)    An LLP should not be permitted to undertake downstream investments.

    (vi)    After the initial experience, a certain amount of flexibility could be given to the partners to bring in non-cash contribution and to determine the value of the non-cash consideration. This is so because non-cash contributions will have a customs duty/service tax as well as income-tax implications.

    (vii)    The policy should be exception-based. As long as the prescribed criteria are met, investment must be under the Automatic Route. Where, however, there are deviations, than prior approval from FIPB must be prescribed.

    (g)    Will treating LLP akin to companies under FDI policy demand the stipulation of certain features of the LLP agreement? Should this include unambiguous specification of profit/loss-sharing percentage; clear specification of the power to appoint Designated Partners; congruence of legal and economic ownership; timely notification of changes including conversion from and to companies/partnerships? Should it be mandated that LLP cannot have corporate bodies other than companies registered under the Companies Act as partners? Is inclusion and coverage of such issues in FDI policy warranted? Would the consequent increase in the regulatory burden be justified?

    (i)Treating the LLPs in certain aspect akin to companies, may require the stipulation of certain features in the LLP agreement.

    (ii)    Some of the stipulations in respect of unambiguous specification of profit/loss-sharing percentage; clear specification of the power to appoint Designated Partners; congruence of legal and economic ownership; timely notification of changes including conversion from and to companies/partnerships, are statutorily required to be incorporated in the LLP agreement as per the existing provisions of the LLP Act. If any additional stipulations are required, the same can be prescribed in respect of LLP agreement and/or also by way of yearly reporting (as is presently applicable to companies) so as to obtain adequate and appropriate information.

    (iii)    All types of entities should be permitted to invest in LLPs under the FDI policy. This will ensure that a large number of investors can invest in LLPs and give a fillip to FDI investment by accelerating capital flows.

    (iv)    FDI policy should be appropriately amended so as to permit investment in LLPs by foreign nationals as well as foreign LLP/LLC/companies, etc. and inclusion and coverage of such issues in FDI policy is certainly warranted.

    (v)    Any additional regulatory burden will be justified provided the regulations are drafted in manner that will reduce the transaction cost, provide transparency, are easy to implement and result in increase in FDI.

    (h)    What   additional   regulatory   safeguards are required to enfold LLP into the FDI policy? Are amendments to any existing regulations required? Should the responsibility for periodic monitoring of compliance with FDI stipulations be allotted to a particular agency?

    (i)    Certain additional regulatory safeguards, which in view are required are as under:

    (a)    Compulsory audit of the LLPs having FDI, by Chartered Accountants on the same lines and manner, as mandated under the Companies Act, 1956. This would ensure that LLP as a structure is not misused and reliability of the accounts and other information is ensured.

    (b)    LLPs desirous of having FDI, should have ‘Fixed’ and ‘Floating’ capital accounts in its capital structure. FDI should be allowed ONLY in the Fixed Capital which should be linked to the profit-sharing ratio and which should not be permitted to be withdrawn except in the same circumstances and manner in which buy back of the shares of the companies are provided.

    (c)    In order to prevent the probable misuse of LLP structure (which allows capital contribution and withdrawal) for free flow of funds by the non-resident partners thus by passing the ECB norms presently prescribed for companies, it is suggested that even the floating capital should have a lock in period of 3 years except that the income/profit share should be allowed to be repatriated freely.

    (d)    Reporting requirement — A Form similar to Form FC-GPR both at the time of introduction of capital as well as at the end of the year, should be introduced in the FDI policy.

    (e)    Prohibition on downstream investments by the LLPs having FDI.

    (ii)    Appropriate amendments to FDI policy will be required. Also new Form(s) will have to be prescribed or existing Form FC-GPR will have to be appropriately modified.

    (iii)    Since RBI is presently monitoring FDI as well as ODI, it would be appropriate for it to also monitor FDI in LLPs as well, since it is part of the overall FDI policy itself.

    Delay in granting refund for the Asst. Year 2007-08

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    Representation


    11th December 2008

    Hon. Shri Hardayal Singh

    Ombudsman

    Mumbai

    Dear Sir,


    Subject : Delay in granting refund for the Asst. Year
    2007-08



    The Returns of Income for the above Assessment Year have been
    furnished by the assessees by 31-7-2007 and 31-10-2007 as per the applicable due
    dates of furnishing Returns of Income under S. 139(1) in their cases. As per the
    Government policy, such Returns of Income should be processed u/s.143(1) and the
    refund, if any, due to the assessees should be granted within a period of four
    to six months.

    We understand that the task of processing such returns and
    granting refund for the above Assessment Year has got delayed for one reason or
    the other. In fact, this factual position is borne out in Instruction No. 12 of
    2008, dated 5-9-2008. We understand from our members that even till date large
    number of cases involving refunds have remained pending for processing, with the
    result that the assessees have still not received their refunds for the
    Assessment Year 2007-08.

    In the present circumstances of global economic slowdown and
    liquidity crisis, the assessees would have expected at least to receive their
    refunds, so that their hardships in the business get mitigated to that extent.
    Therefore, it is utmost necessary that such refunds should be cleared at the
    earliest, which will also provide some liquidity to the assessees in these days
    of crisis.

    In view of the above, we have to request your honour to
    kindly use your good offices and take-up the matter with the CBDT for resolving
    the issue of granting refunds, so that there is no further delay in receipt of
    such refunds.




    Thanking you,

    Yours faithfully




    Anil Sathe  Kishor Karia
    		 Mahendra Sanghvi  Pradip Shah
    President
    		Chairman, President
    		Chairman,
    (BCAS) Taxation Committee (BCAS)
    		 (CTC) Law & Representation
    Committee (CTC)

     

     

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    Undue hardship faced by assesses in filing signed acknowledgement (i.e. ITR-V) of the Return of Income in view of directions contained in the Circular issued by the Central Board of Direct Taxes (‘CBDT’) – Circular No. 03/2009 dated 21.05.2009

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    Representation

    30th December 2009

    The Chairman
    Central Board of Direct Taxes
    Department of Revenue
    Ministry of Finance
    Government of India
    North Block
    Delhi-110 001

    Dear Sir,


    Sub:
    Undue hardship faced by
    assesses in filing signed acknowledgement (i.e. ITR-V) of the Return of Income
    in view of directions contained in the Circular issued by the Central Board of
    Direct Taxes (‘CBDT’) – Circular No. 03/2009 dated 21.05.2009

    We refer to the CBDT Circular No. 03/2009 dated 21.05.2009 (‘CBDT
    Circular’) in connection with the filing of returns of income for assessment
    year 2009 2010. We appreciate the efforts made by CBDT with regard to e-filing
    of the returns of income.

    Background

    An assessee is required to file its return of income on or
    before the due date mentioned in section 139(1) of the Income-tax Act, 1961
    (‘Act’).

    From AY 2006-07, certain assessees are mandatorily required
    to upload the return of income electronically. In case the return is furnished
    with digital signature, the date of uploading the return electronically as
    mentioned in ITR-V is treated as the date of filing of the return of income. In
    case the return is not uploaded with digital signature, the acknowledgement form
    of the return of income, i.e., ITR-V is required to be signed by the assessee
    manually and then furnished to the Income-tax Department within a certain time
    limit.

    Prior to the existing CBDT Circular, an assessee was required
    to file the ITR-V post uploading its return on the income-tax website, with the
    respective Assessing Officer (‘AO’) within 15 days of filing the return
    electronically. This enabled assessees to get an acknowledgement from the
    Department for having furnished ITR-V with the concerned Officer having
    jurisdiction.

    A number of claims such as carry forward and set of losses
    and allowances, claim of deduction under Chapter VI-A of the Act and various
    other benefits depend very much upon filing of the return on or before due date
    mentioned under section 139 of the Act. Any failure on the part of the assessee
    to file the return of income on or before the due date will lead to disallowance
    of claims mentioned above.

    The assessee is concerned primarily with proof of filing the
    return of income with the Department. The acknowledgement bearing the stamp of
    income-tax office is very much preserved and used by the assessees for various
    purposes including compliances under the Act; obtaining bank loan; obtaining
    visa/ passport; registration with various government authorities, etc.

    As per the existing CBDT Circular, from assessment year
    2009-10, the ITR-V duly signed by the assessee has to be furnished by
    ordinary post
    to “the Income-tax Department, Centralised Processing Centre, Post Box No.1,
    Electronic City Post Office, Bangalore – 560 100, Karnataka” within 60 days of
    uploading the return or 30 September, whichever is later.


    Hardships and practical difficulties

    The position has been drastically changed and made difficult
    after the issue of the above CBDT Circular. Those assessees furnishing the
    returns without digital signature are facing and are also likely to continue to
    face unintended difficulties and hardships for the following reasons:

    The assessee does not have in his possession any
    acknowledgement as the ITR-V is to be sent by only Ordinary Post.
    Unfortunately, no other
    mode of sending the same is feasible under the new system and hence, the
    assessees will have to rely only on the efficiency of the postal department.



    Further, the assessee gets to know about the fact and date of
    receipt of such ITR-V by the CPC at Bangalore only when he receives the
    intimation by e-mail to that effect from the CPC and till then, uncertainty
    continues (for minimum 3 to 4 weeks) and the assessee is
    effectively helpless
    to do anything in that regard.


    Also, the assessee will be at the
    mercy of Postal Department
    (India)     over which neither the CBDT nor
    the assessee has any control.

    Further, any failure or delay on the part of the Postal
    Department may lead to the return of income not being filed before the due date
    and consequentially lead to disallowance of claims made by the assessee. The
    onus that is likely to be cast on the assessee is going to be of a serious
    nature over which the assessee has no control whatsoever.

    If such ITR-V does not reach the CPC at Bangalore within the
    specified period of 60 days, the ROI electronically transmitted by the assessee
    will become automatically invalid. Since the return will be deemed to have not
    been furnished at all in case the duly signed ITR-V is, for some reason or
    other, not delivered to CPC within the due date, besides other consequences, the
    assessee will be saddled with liability for payment of interest under sections
    234A and 234B and levy of penalty under section 271(1)(c) of the Act.

    Accordingly, assessees will have to face undue hardships
    without any fault on their part, since they would have no proof that they had
    sent the ITR-V to the specified address well within the time limit of 60 days.
    Apart from this, it is not fair to expect every assessee in the country from
    different places to send such ITR-V to Bangalore by post.

    It has also been experienced this year that several assesses
    who had sent the ITR-V immediately after uploading their returns but had not got
    any intimation about receipt sent the same again and in some cases this was done
    twice or thrice after which they received the intimation that their form had
    reached Bangalore. It is quite natural that in their anxiety, assessees who have
    no proof or intimation of their form being received would tend to send the same
    repeatedly. It is also not fair to place extra burden the already over burdened
    postal department.

    On the other hand there are several assesses who after
    sending the ITR-V felt they had completely complied with the law and did not
    send the same again. How can they escape the consequences of not furnishing a
    valid return if the same for any reason has not reached the given address, since
    they have no proof whatsoever of sending the ITR-V as it was mandated to be sent
    by Ordinary Post.

    Prayer

    In light of the above, we humbly request that taxpayers be permitted to furnish such ITR-V at their respective places in the office of the Assessing Officer or at any centralized place in the local income-tax office from where, the De-partment can thereafter forward the same to CPC at Bangalore. This will also enable the assessee to get proper acknowledgement with regard to the date on which such ITR-V is submitted so that there remains no ambiguity about the date of their furnishing the same and the consequent date of furnishing the return of income.

    Further, we are informed that for the assessment year 2009-10, many assesses who have uploaded their returns without digital signature within the prescribed time but have not yet received intimation of their ITR-V having reached Bangalore and having been processed ought to be allowed to file their ITR-V with their respective Assessing Officers till 31st January, 2010.

    It is, therefore, humbly submitted that CBDT may kindly consider the request and modify the regulations.

    We shall be pleased to provide any information or clarification that your goodself may need in respect of the above.

    Thanking you,       
    Yours faithfully,       
           
    CC:

    (1) Shri  S.S.  Palanimanickan,    Hon.Union Minister of State for Finance.   


    Ameet Patel    Kishor Karia    Rajesh Shah

    President     Chairman,    Co-chairman,

                       Taxation    Taxation

                        Committee    Committee

    (2)    Shri Pranab Mukherjee, Hon’ble Union Finance Minister.   
           
    (3)    Shri Rahul Gandhi, Gen.Secretary, Indian National Congress.   


    Representation on Compounding Procedures and Sums

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    Representation

    Representation


    Bombay Chartered Accountants’ Society
    7, Jolly Bhavan No. 2, New Marine Lines,
    Churchgate, Mumbai-400020.

    The Chamber of Tax Consultants
    3, Rewa Chambers, Ground Floor,
    31, New Marine Lines, Mumbai-400020.
       

    Honourable Governor,
    Reserve Bank of India.
    Dr. D. Subbarao, Central Office,
    Mumbai-400001.

     

    Date
    : 27th October, 2009

    Respected Sir,

    Re : Our Meeting on 21st October 2009 with CGM.Compounding
    Procedures and Sums.



    This is to sincerely thank you for the patient hearing granted
    by Shri Salim Gangadharan, Chief General Manager on 21st October 2009. We had
    a free and frank exchange of views.


    We appreciate the opportunity granted to us to suggest and
    submit proposal to alleviate hardships and at the same time achieve RBI’s
    objectives.

    We will prepare a proposal for compounding policies and
    procedures including amnesty proposal. Two cases of injustice to the
    applicants have been discussed. More than the events, the policy approaches
    which have caused injustice need to be identified and reviewed.

    We will also submit our proposals on some of the Master
    Circulars, cases of difference between Government view and RBI view; and
    related matters.

    With warm regards,

    Yours sincerely,

    For Bombay Chartered
    Accountants’ Society
    Mr. Ameet Patel
    President
    For The Chamber of Tax Consultants
    Mr. K. Gopal
    President


    Copies with compliments to :
    Deputy Governor, Chief General Manager, and Chief General Manager MRO.


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    Appeal by Income-tax Act, 1961

    LIGHT ELEMENTS

    Dear Pranabda (Finance
    Minister),

    Recently you tabled Direct
    Tax Code (popularly known as DTC which reminds me of DDT used for killing
    mosquitoes) in the Parliament in August, 2010 when inflation was raining cats
    and dogs outside. What a great achievement ! You’ve been the Finance Minister a
    number of times. Your predecessors (like P. Chidambaram, the most innovative
    Finance Minister we’ve ever had) and you have tinkered me, amended me,
    simplified (?) me by adding or deleting sections, sub-sections, clauses,
    sub-clauses, explanations, using all the alphabets and roman numbers available
    on earth and what not through the finance bills and ordinances one after
    another. Still you’re unhappy with me. I’ve been in service of the nation since
    1961, nearly 50 years. I could have celebrated my golden jubilee in 2011. But
    alas ! You’re trying to evict me from the Indian economy for no worthwhile
    reasons in sight. That’s what I hear from economists (excluding our Prime
    Minister Dr. Manmohan Singh), tax experts, chartered accountants,
    industrialists, even laymen, etc. Believe me, I have everything you want. But
    you’re deliberately ignoring it since you are a man of words. You want to leave
    a mark on the annals of Indian economy. So it’s nothing but a prestige issue. I
    wonder, is it not possible for you to achieve your avowed objective of
    simplification through me, though your predecessors and you’ve kept simplifying
    me for years together. Do you think with the introduction of my ‘step’ law, I
    mean DTC, everything will be simple and easy ? Had it been so, why did you
    revise the DTC before its birth ? My dear Pranabda, from my experience since
    1961, I can say that income-tax law in India can never be simple, it’ll continue
    to be complicated, be it me or DTC. Even you’ll agree with me, at least in
    private if not openly. Look, the term ‘simplification’ is very illusory, it is
    like a mirage. With the passage of time something that’s simple today becomes
    complicated tomorrow. Moreover, on the one hand you talk about simplification
    and on the other hand you introduce stringent anti-tax avoidance provisions to
    make the life of taxpayers miserable and at the mercy of tax authorities with
    powers to suspect (read as discretionary powers). Is it a way to simplify
    income-tax law ? In fact, I’ve been more abused by tax authorities than by
    taxpayers of this country.


    Regarding withdrawal of various exemptions — a number of exemptions have been
    phased out in the past. In fact, I am burdened with the number of redundant
    sections, sub-sections, clauses, sub-clauses, and explanations for years now. I
    didn’t utter a word.

    My
    dear Pranabda, eventually what you want is ‘tax’ on income. I heard that with
    the introduction of DTC, revenue will go down substantially due to changes in
    slabs in the initial years of DTC. Is it worth it ? When taxpayers are ready to
    pay, why are you losing this revenue ? Your political party is voted to power by
    ‘aam adami’ and not by taxpayers. You must be aware that your party needs
    official money for welfare schemes of the ‘aam adami’ to get re-elected and
    govern this country. I urge you to let me continue. You’re committing a blunder.
    People have already started criticising the DTC as my ‘clone’ or as old wine in
    a new bottle and what not. I feel very sad.

    So
    my dear Pranabda, I earnestly request you to let me continue to serve this
    country of millions. I’m capable of generating enough revenue for the
    government. I won’t spare any tax dodger, be it a politician of your party or
    opposition. You can make me as simple as you please. Give more discretionary
    powers to tax authorities so that they can directly withdraw tax from the
    taxpayer’s bank account apart from raids and surveys. I’m sure that I have
    enough power to deal with economic offenders. If you find me inadequate on this
    front, make me more stringent by introducing death penalty to economic
    offenders. I don’t mind. Introduce ‘daily advance tax’ like a piggy collection
    for corporate tax-payers, forget about MAT. Keep on reversing the decisions of
    the Supreme Court and lower courts shielding the taxpayers by amending me from
    time to time, I don’t mind.


    Lastly let me celebrate the golden jubilee of my existence – 2011.

    Jai Hind !

    Yours faithfully,

    Income-tax Act, 1961

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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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    Addition to value of closing stock and MAT

    1.0 Facts of the case :

        1.1 The following is the Profit and Loss account of ABC Ltd. for the year ended 31st March, 2006.

    The company values its stock at lower of the cost or the net realisable value (NRV). The NRV in this case was lower than the cost.

    1.2 The company filed the return of income for A.Y. 2006-07 as under:

    1.3 The Profit and Loss account of the company for EY, 2006-07 relevant to A.Y. 2007-08 was as under:
    1.4 The company declared income in its return for A.Y. 2007-08 as under:
    1.5 Since there was no tax payable under the normal computation of income and since there was book profit as worked out u/s.115JB of the Act, the company paid MAT for A.Y. 2007-08 on the book profit of Rs.0.25 cr.

    1.6 Thereafter, the AO completed assessment for A.Y. 2006-07 by adding Rs.0.25 cr. to the value of the closing stock on the ground that the company should have valued its stock at cost instead of at an amount being the lower of the cost or the NRV. Since the final tax still was nil the company did not opt to file an appeal. The assessed loss stood at Rs.0.25 cr. in place of the returned loss of Rs.0.50 cr.

    1.7 The AO accepted the return for A.Y. 2007-08. Believing that the adjustment to the value of the closing stock would have a bearing on the taxable income of the succeeding year, the assessee contended in an application made u/ s.154 of the Act for A.Y. 2007-08 that the value of the opening stock should be adjusted by the amount of the adjustment made to the value of the closing of stock of the preceding year. It also contended that a similar adjustment should also be made to the book profit worked out u/s.115JB. According to the company, the revised book profit for A.Y. 2007-08 should appear as under:

    It claimed  refund  of MAT paid.

    1.8 The Aa rejected the application in so far as it concerned adjustment to the book profit, on the grounds that:

        i) the accounts of the assessee for the year relevant to AY. 2007-08 were prepared in accordance with the provisions of parts II and III of Schedule VI to the Companies Act, 1956; and

        ii) therefore, he had no power to make any adjustment to the book profit, as was held by the Honourable Supreme Court in Apollo Tyres Ltd. v. ClT, (2002) 255 ITR 273 and ClT v. Comnet Systems & Services Ltd., (2008) 305 ITR 409.

    1.9 The company seeks your advice on whether an appeal should be filed against the stand of the AO.

    2.0  Advice:

    2.1 The company is advised to prefer an appeal for the reasons to be stated hereafter.

    2.2 It is true that in the cases referred to by the AO, the SC held that the AO does not have power to make adjustment to the book profit other than the adjustments permitted in the provisions relating to MAT. The SC, however, did not say that no adjustment can ever be made by the AO to the book profit. The AO is empowered to make the permitted adjustments. Let us, therefore see the nature of the adjustment made by the AO in the form of addition to the value of closing stock for AY. 2006-07, and whether the adjustment sought by the assessee is a permitted one.

    2.2.1 The assessee valued the closing stock at the lower of the cost or the NRV. Therefore, when the assessee found the NRV of the stock to be lower than the cost for AY. 2006-07, it scaled down the value of stock as at 31st March, 2006 in the books. Thus, the assessee effectively created a provision for eventual loss that might be incurred at the time of realisation of stock. When the AO did not allow the reduction in the value of stock for AY. 2006-07, what he was effectively doing was that he was disallowing the provision for loss, and he was permitted to make such adjustment to the ‘book profit’ for AY. 2006-07. (I leave aside for the present the ratio of decisions that hold that a provision in recognition of reduction in value of an asset is not it was not challenged in appeal). However, since the total book loss for A.Y. 2006-07 at Rs.0.50 cr. exceeded the disallowance of Rs.O.25cr., there was a negative ‘book profit’ after the said adjustment and there was no liability for AY. 2006-07 u/s.115JB of the Act.

    2.2.2 It must be noted that though the Aa disallowed the hidden provision for loss in A.Y. 2006-07, the assessee had not made any corresponding changes in its books in the succeeding year. As a result, the assessee continued to carry the hidden provision in the books. In the next year relevant to AY. 2007-08, the profit and loss account of the assessee can be restated as under:

    Based on the above, the assessee has the right to exclude the credit of Rs.0.25 cr. from the book profit since that figure represents provision recalled which was not allowed while computing the book profit for AY. 2006-07. S. 115JB, in clause (i) of Explanation (1) to S. 115JB, read with Proviso thereto, permits exclusion from the book profit of the amount withdrawn from reserve or provision (excluding a reserve created before 1-4-1997, otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss ac-count. The only issue that can survive is: whether the provision recalled at Rs.0.25 cr. as shown in the restated profit and loss account is an amount credited to the profit and loss account and thereby forming part of the book profit and therefore meriting exclusion from the book profit, for one may remember that this amount was not originally credited in the account and it appeared only in the rested profit and loss account. The author is of the view that though this amount did not appear in credit in the original profit and loss account, it was nevertheless de facto credited in the profit and loss account as is shown in the restated profit and loss account which is the same as the original profit and loss account except that it differs in presentation. It is submitted that the substance of a transaction rather than its presentation should decide taxability or otherwise.

    2.2.3.1 There is one more aspect to be considered also. The assessee has prepared accounts for both the years following accounting standards in general and AS-2 relating to valuation of inventory in particular. Therefore, a question can arise whether there was any mistake committed by the AO in the next year as far as the working u/s.115JB is concerned. If there was no mistake, no rectification will lie u/s.154 of the Act.

    2.2.3.2 In my view, it is true that AS-2 has been followed by the assessee for valuing inventory and therefore there is no mistake in the accounts which could be the subject matter of rectification u/s.154 of the Act. However, the AO, in my view, cannot take two different stands in two years in respect of one and the same issue. The AO holds the view for AY. 2006-07 that there is an uncalled for provision for loss in respect of closing stock, which should not be allowed. Here, for AY. 2006-07, I concede to the AO the right to make adjustment to the book profit of that year without providing justification to his right. However, as shown above, the book profit still would be a negative figure after such addition and the addition would have had no effect on the final tax. Now, when the AO comes to A.Y. 2007-08, he cannot hold the’ view that the addition to the closing stock for AY. 2006-07,which is also the opening stock for AY. 2007-08, did not represent addition on account of an uncalled for provision. If he could have made adjustment to the book profit for AY. 2006-07 on account of the addition, he should make adjustment to the book profit for AY. 2007-08. In other words, it is expected that the AO keeps his stand consistent for both the years.

    3.0 Thus, in view of the above, the assessee is not liable to MAT for AY. 2007-08. MAT paid by it should be refunded.

    Author’s Note:
    There can be other angles to the issue. For example, it is a question whether the booking of reduction in value of stock in this case was a provision for a loss or was recognition of an actual loss. If it is a provision, the amended S. 115JB now may not permit reduction of the book profit by such amount, whereas if it is recognition of an actual loss, the provisions may permit reduction of the book profit. The issue discussed here also shows that it is advisable, in case the NRV of an inventory is less than the cost, that a separate provision is made by debiting the profit and loss account instead of reducing the closing value of the inventory in the trading account and recall such provision to the trading account in the next year and repeat the process every year. Thus, in case such a provision is disallowed u/s.115JB, its recall next year cannot form part of the book profit.

    TDS and S. 40(a)(ia) of the Income-tax Act, 1961

    1.0 Facts :

        1.1 ABC Ltd. credits on 1st October, 2009 the account of Mr. X, a resident, with Rs.55,000 being commission on sales payable to him. ABC Ltd. deducts tax at source @ 5% being oblivious of the actual rate applicable. This results in a short deduction of tax of Rs.2,750.

        1.2 ABC Ltd. also credits on the same day the account of Mr. Y, a resident, with Rs.55,000 being commission on sales payable to him. The company deducts tax at source @ 15%. This results in an excess deduction of tax of Rs.2,750.

        1.3 The company has made accounting entries in accordance with the above facts, and cleared the accounts of Mr. X and Mr. Y before 31st December, 2009. Thus, the balances in these accounts are reduced to nil. It is believed that in neither account any further credit will arise till 31st March, 2010.

        1.4 The company uploads its quarterly TDS statement with the above information.

        1.5 When the CFO of the company is informed that commission paid to Mr. X is likely to be disallowed u/s.40(a)(ia) on account of short deduction of tax thereon, he argues that there is no overall short deduction when payments to Mr. X and Mr. Y are considered together.

        1.6 The company seeks your opinion about the allowability of deduction in respect of commission paid to Mr. X. The company also seeks your views on whether the company is liable to pay interest u/s.201 in respect of this short deduction of tax.

    2.0 Opinion :

        2.1 Let us first see how S. 40(a)(ia) when read with the substantive part S. 194A would work. For a better comprehension, substantive parts of S. 40(a)(ia) and S. 194A are reproduced below :

        40(a)(ia) : “any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid”.

        194A : “(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

        2.1.1 The following features of S. 40(a)(ia) when r.w. the substantive part of S. 194A stand out in order that the provisions of S. 40(a)(ia) may apply.

        (i) Tax on interest is deductible in respect of every credit or payment of interest if the amount of credit or payment exceeds or is likely to exceed the specified amount in a financial year. Thus, the liability is fastened to credit or payment, as the case may be.

        (ii) Tax on specified incomes should be deductible under Chapter XVII-B.

        (iii) Such tax should not have been deducted;

        or

        (iii) after deduction, such tax should not have been paid before the specified dates.

        2.1.2 It is admitted that tax in this case is deductible since income is a specified income and that the full tax has not been deducted. Further, when taxes deducted from payments made to Mr. X and Mr. Y are taken together, there is no shortfall.

        2.2 The following issues arise out of the facts and the queries :

        (i) Whether full tax at source should be deducted and paid on a specified income in order that no disallowance u/s.40(a)(ia) may be made.

        (ii) Whether some tax deduced at source and paid to the Treasury on a specified income can make S. 40(a)(ia) inapplicable making thereby the entire underlying income eligible for deduction.

        (iii) Is it possible that the amount of disallowance u/s.40(a)(ia) is restricted to the amount which bears to the amount of expenditure the same proportion as the amount of tax not deducted bears to the amount of full tax ? In other words, can the amount of disallowance be decided by the formula :
       

        (iv) Whether an excess tax deduction in one case can be adjusted against shortfall arising in another case so as to avoid disallowance u/s.40(a)(ia) and interest.

        2.2.1.1 As regards the first issue, a view can be taken that a small shortfall may make the entire underlying expenditure disallowable u/s.40(a)(ia). The reason for holding this view is that S. 40(a)(ia) applies when a tax in respect of a specified income is deductible and such tax has been either not deducted or not paid. Therefore, in this case, Rs.5,500 was the tax deductible from the payment made to Mr. X, and therefore, such tax should have been deducted and paid if one wants to avoid disallowance under these provisions. Since such tax was not deducted and paid, S. 40(a)(ia), prima facie, becomes applicable making the entire underlying expenditure disallowable.

    2.2.1.2 Another view can also be taken that if some as against the full tax is deducted from credits or payments of specified incomes, full allowance for the underlying expenditure should be made. The reason for holding this view is that, as seen above, S. 40(a)(ia) will primarily apply if there is a tax deductible in respect of a specified income and such tax has not been deducted, meaning thereby, that full of such tax should not have been deducted. In other words, in order that this case may fall in S. 40(a)(ia), the amount not deducted should be Rs.S,SOO,no more and no less. In case a part deduction of tax has been made, as in the case of payment to Mr. X, no disallowance u/s.40(a)(ia) can be made.

    2.2.1.3 I must admit that the views expressed in paragraphs 2.2.1.1 and 2.2.1.2 are unreasonable and outrageously extreme. A person, who deducts some tax from a specified income and another person who does not deduct any tax at all from a similar income, cannot be treated on par. If the views expressed in paragraph 2.2.1.1 are accepted, both these persons suffer full disallowance whereas the offence of the first person is certainly mitigated by the fact he has made some deduction of tax at source. For similar reasons, the views expressed in paragraph 2.2.1.2 can also not be accepted as these views put on par persons who have fully complied with the law, with persons who have shown no compliance at all. It would be absurd to say that two persons, one of whom has made the full payment of tax at source of Rs.5500 and the other person who has made no payment at all, will both enjoy full allowance of the underlying expenditure.

    2.2.2 Therefore, the better view is that disallowance of the expenditure is restricted to the amount which bears to the amount of expenditure the same prociate that any amount is mathematically a sum of several amounts and any amount can be broken up into several sub-amounts. For example, a thousand is also a summation of eight hundreds and two hundreds, and likewise. Thus, a view can be taken, when Rs.2,7S0 is deducted in the case of Mr.X, that the underlying expenditure in respect thereof is Rs.27,SOO. Viewed thus, there is full deduction of tax @ 10% from Rs.27,500. The remaining Rs.27,500 of the expenditure is the amount in respect of which the default has been committed. It is this last amount which will suffer disallowance.

    2.3.1 We shall now deal with issue No. 4 : whether excess deduction in one case can be adjusted against the shortfall arising on account of short deduction in anether case. In this particular case, since the information with excess and short deduction of tax has been uploaded, inter account adjustment between the two accounts is not possible unless this information is revised and reuploaded. The obligation on a person is to deduct proper tax in respect of an expenditure. Though expenditures incurred in favour of Mr. X and Mr. Y have a similar nature, they represent different expenditures, and there is admittedly a default committed in respect of payment made to Mr. X. Therefore, the excess deduction of tax in the case of payment to Mr. Y will not be available for adjustment against the shortfall of tax in the case of Mr. X.

    2.3.2 However, inter account adjustment between Mr. X and Mr. Y would have been possible before uploading the information in the quarterly statement by debiting Mr. X’s account in whose case short tax was deducted and crediting Mr. Y’s account in whose case an excess tax was deducted and thereby a net short payment of commission was made. The company would, thereafter, recover Rs.2,750 from Mr. X and pay it over to Mr. Y. Or else, if the company is unable to recover such amount from Mr. X, the company could write it off and claim it as a commercial loss. It should be remembered that such tax borne by the company is not ‘a tax levied on the profits or gains ,of any business or profession’, and therefore S. 40(a)(ii) operating as a disallowance of expenditure by way of income-tax, will not apply.

    Needless to say that if inter account adjustment is carried out between the accounts of Mr. X and Mr. Y, the TDS certificates should be issued accordingly.

    3.0 Conclusion:

    The amount to be disallowed in this case should be Rs. 27,500, that is, on a proportionate basis. No inter account adjustment is possible once the information is uploaded; unless the information is revised. TDS certificates should be issued in accordance with the information uploaded.

    Mens rea and penalty u/s.271(1)(c) of the Income-tax Act, 1961

    Case Study

    Case Study No. 1


    1.0 Facts of the case :



    1.1 Mr. Shivdasani, the assessee, filed his return of
    income for A.Y.2006-07 declaring an income of Rs.5,00,000. Mr. Shivdasani
    claimed a deduction u/s.35 in respect of a contribution of Rs.1,00,000 to an
    institution approved for the purpose of S.35. The institution has issued a
    receipt in acknowledgement of the contribution. The receipt bore the approval
    number.

    1.2 In the course of assessment, it is found that the
    institution to which the contribution was made was not approved for the
    purpose of S.35. The institution had forged the approval. The A.O. disallows
    the claim and initiates proceedings for imposing penalty under S.271(1)(c) for
    furnishing inaccurate particulars of income.

    1.3 Mr. Shivdasani replies to the show-cause notice issued
    for imposing penalty. One of the contentions of Mr. Shivdasani is that he
    genuinely believed that the institution was approved for the purpose of S.35,
    and that the claim was not mala fide.

    1.4 The A.O. nevertheless imposes penalty on the ground
    that the issue whether there was a bona fide belief or that the
    intention was not mala fide in making a claim for a deduction, was
    irrelevant particularly after the Honourable Supreme Court’s decision in the
    case of UoI vs. Dharmendra Textiles Processors, 306 ITR 277. According
    to the A.O. it is sufficient for imposing penalty that there results evasion
    of tax on account of a claim made in the return which claim is found untenable
    on assessment. The A.O. also highlights the fact that the assessee has
    accepted the disallowance by not preferring an appeal against the assessment
    order.

    1.5 The assessee prefers an appeal against the penalty
    order. Your views are solicited on the submissions to be made to the CIT(A) in
    connection with the appeal filed against the penalty order.

    2.0 Submissions :



    2.1 It is true that it is irrelevant in penalty proceedings
    under civil law whether there was guilty mind (mens rea) or not. In
    other words, it is not necessary to prove presence of mens rea in
    penalties imposable under civil law, more so after the decision of the SC in
    the case of Dharmendra Textiles Processors (supra). However, this
    decision should not be applied in a blanket manner to all penalty matters
    under the Income-tax Act, for the reasons, one, that the SC decision does not
    directly deal with a penalty imposable under S.271(1)(c), and two, the
    decision does not make S.273 B otiose. That is, an assessee can always explain
    the circumstances which led him to believe that his claim for a deduction was
    made bona fide. S.273 B requires an A.O. to consider the reply
    furnished by the assessee under S.273B, and it is only after the A.O. has come
    to the conclusion that there was no reasonable cause for the assessee to make
    the claim under S.35 that the A.O. can impose penalty. In this case, the
    appellant did have a receipt issued by the donee institution indicating that
    it was an approved institution under S.35, giving no reason to the assessee to
    suspect its genuineness. Thus, the appellant had reason to believe that his
    claim was legitimate.

    2.2 The case of the appellant is also not governable by
    Explanation 1 to S.271(1) to say that the assessee is deemed to have
    concealed the particulars of his income. The Explanation is reproduced here :

    Explanation 1 — Where in respect of any facts
    material to the computation of the total income of any person under this
    Act, —


    (A) such person fails to offer an explanation or offers
    an explanation which is found by the Assessing Officer or the Commissioner
    (Appeals) or the Commissioner to be false, or

    (B) such person offers an explanation which he is not
    able to substantiate and fails to prove that such explanation is bona
    fide     and that all the facts relating to the same and material to the
    computation of his total income have been disclosed by him,


    then, the amount added or disallowed in computing the
    total income of such person as a result thereof shall, for the purposes of
    clause (c) of this sub-section, be deemed to represent the income in respect
    of which particulars have been concealed.


    2.3 One can see that this is not a case where the appellant
    fails to offer an explanation. It is also not a case where the explanation as
    offered by the appellant is found to be false. It must be remembered that what
    is found to be false in this case is the ‘receipt’ issued by the donee
    institution, not the explanation of the appellant. Therefore clause (A) of
    Explanation 1 does not apply.

    The appellant has shown that his explanation is made
    bona fide     which he is substantiating with the receipt issued by the
    institution. It is also not a case where all the facts relating to the claim
    and material to the computation of income have not been disclosed. Therefore,
    clause (B) of Explanation 1 will also not apply. The A.O., therefore, cannot
    hold any income in respect of which particulars have been, or deemed to have
    been, concealed.

    2.5 In view of the above submissions, the penalty as
    imposed may be deleted.


    Case Study No. 2

    1.0 Facts of the case :


    1.1 Mr. Haridasani was a resident of Dubai for a number of years. Later, he moved to India and started business.

    1.2 For F.Y.2005-06, relevant to A.Y.2006-07, Mr. Haridasani had acquired the status of Resident and Ordinarily Resident. Since the business operations of Mr. Haridasani were low and since Mr. Haridasani had only the income from investments held abroad, he had not engaged services of any professional to assist him in preparation of his return of income.

    1.3 Mr. Haridasani declared only his Indian income in the return for A.Y.2006-07. He filed his full personal accounts with the return of income showing all his investments in India and abroad and also filed full extracts of bank accounts showing credit in respect of all income including income earned abroad. He had filed his earlier returns similarly in respect of the preceding years. The case for A.Y. 2006-07 was for the first time selected for scrutiny under 5.143. The A.O., on finding his income abroad, brought it to tax and imposed penalty for concealment of income. Mr. Haridasani had pleaded innocence and lack of familiarity with the Indian laws since he had stayed abroad for a number of years and also for the fact that he had not engaged any professional to advise him. His pleas were turned down and penalty for concealment of income was imposed. The A.a. also mentioned in”his penalty order that innocence, or lack of mens rea, was no longer available as a defence since the promulgation of the SC decision in the case of UoI. vs. Dharmendra Textiles Processors, 306 ITR 277. Mr. Haridasani had preferred an appeal against the order imposing penalty and seeks your advice in preparing arguments to be made before CIT(A).

    2.0 Submissions:

    2.1 The penalty in this case is imposed for the act of ‘concealment of income’ as opposed to the act of ‘furnishing inaccurate particulars of income’. The two acts, namely, of ‘concealment of income’ and of ‘furnishing inaccurate particulars of income’ are two different circumstances both leading to penalty under S.271(1)(c) — Please refer to eIT vs. Indian Metal & Ferro Alloys Ltd., 117 CTR (Ori) 378, which succinctly draws distinction between the two circumstances and explains what they mean. The following passage from the said decision is self explanatory.

    “The expressions ‘has concealed the particulars of income’ and ‘has furnished inaccurate particulars of income’ have not been defined either in Section 271(1)(c) or elsewhere in the Act. One thing is certain that these two circumstances are not identical in details although they may lead to the same effect, namely, keeping off a certain portion of income. The former is direct and the latter may be indirect in its execution. The word ‘conceal’ is derived from the Latin word ‘concolare’ which implies ‘to hide’. Webster’s New International Dictionary equates its meaning to ‘hide or withdraw from observation; to cover or keep from sight; to prevent the discovery of; to withhold knowledge of’. The offence of concealment is thus a direct attempt to hide an item of income or a portion thereof from the knowledge of the Income-tax authorities. In furnishing its return of income, an assessee is required to furnish particulars and accounts on which such returned income has been arrived at. These may be particulars as per its books of account if it has maintained them, or any other basis upon which it has arrived at the returned figure of income. Any inaccuracymade in such books of account or otherwise which results in keeping off or hiding a portion of its income is punishable as furnishing inaccurate particulars of its income.”

    2.2 Once the position is admitted that the circumstance leading to penalty is ‘concealment of income’, one must proceed to find out the applicability of the ratio of the SC decision in the case of UoI. vs. Dharmendra Textiles Processors, 306 ITR 277.

    2.3 It is true that the said decision does lay down the principle that the presence of mens rea need not be proved in civil matters before imposing penalty unlike in criminal matters. However, the said principle comes with a caveat. The caveat is that mens rea need not be proved only if the language of a provision imposing penalty does not require the presence of mens rea to be proved. In other words, if the language requires that a penalty cannot be imposed unless the assessee had a guilty mind before committing the act leading to the penalty, then the presence or absence of a guilty mind assumes importance. As per the decision in the case of Dharmendra Textiles Processors what is of paramount importance is the language of the provisions imposing penalty. The Honourable SC has also relied on the language of S.276C providing for prosecution in cases where a person wilfully attempts to evade tax, to make the point since this provision requires the element of mens rea to be proved before the person can be prosecuted because the language of the provision clearly requires so, the person cannot be prosecuted unless he had a guilty mind. Moreover, while deciding the case of Dharmendra Textiles Processors, the SC has approvingly quoted from its earlier decision in the case of Gujarat Travancore Agency vs. CIT, 177 ITR 455. According to the said decision which was rendered in the context of S.271(1)(a) of the Act, the SC confirmed penalty imposed under S.271(1)(a)where the appellant had no malafide in filing his return late because the Court did not find anything in the language of S.271(1)(a) which required the presence of mens rea to be established before a penalty could be imposed. Thus, what is important is not whether the presence of mens rea is essential or not before imposing penalty in civil matters, but the language of the particular provision under which the penalty is sought to be imposed.

    2.4 With the above back ground let us see whether the language of S.271(1)(c) requires the presence of mens rea when the penalty is sought to be imposed on the ground that the assessee has concealed the particulars of his income.

    2.5 The words used in these provisions are ‘the assessee has concealed … ‘. As per the standard dictionary the word ‘conceal’ in ordinary English means, ‘I. to hide; withdraw or remove from observation; cover or keep from sight: e.g., He concealed the gun under his coat. 2. to keep secret; to prevent or avoid disclosing or divulging: e.g., to conceal one’s identity by using a false name. In this regard, please also refer to the decision in CIT vs. Indian Metal & Ferro Alloys Ltd., 117 CTR (Ori.) 378 and particularly to the passage reproduced in paragraph 2.1 above which explains the meaning of the word ‘conceal’.

    2.6 One may appreciate that the idea of deliberateness is implicit in the word ‘conceal’. Concealment is not accidental or involuntary, it is planned and voluntary. The following observations of the Honourable SC made in the case of T. Ashok Pai vs. CIT, 292 ITR 11 still hold good:

    “concealment of income’ and ‘furnishing of inaccura te particulars’ carry different connotations. Concealment refers to a deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressio veri or suggestio falsi”.

    2.6 Therefore, it is submitted that if the charge on the assessee is of concealing particulars of his income, the assessee can rebut the charge by proving lack of mens rea. This construction of the provision is not inconsistent with the ratio of the Honourable SC’s decision in the case of Dharmendra Textiles Processors (supra) for the reason that the said decision also lays stress on the language of particular provision imposing penalty. The decision merely forbids the presumption of requirement of proving mens rea; it does not say that one should ignore such requirement if it is demanded by the very provision imposing penalty.

    2.7 In view of the submissions and the facts of the case, penalty should be deleted.

    Author’s Note:
    The stand taken in these case studies seems to be vindicated by the recent decision of the Supreme Court in the case of Uol vs. Rajasthan Spinning & Weaving Mills – Civil Appeal No. 2523 of 2009, where the Supreme Court has explained its decision in Dharmendra Textile Processor’s case.

    Amount of tax sought to be evaded

    1.0 Facts :

        1.1 ABC Pvt. Ltd. filed its return of income for A.Y. 2005-06 showing the following position :

    Statement of Loss to be carried forward u/s.72 of the Income-tax Act, 1961 (the Act) :
    1.2 On assessment, the AO disallowed certain expenses and the assessed income and the revised Statement of Loss stood as under :
    Revised Statement of Loss to be carried forward u/s.72 of the Act :
    1.2 The AO worked out penalty u/s.271(1)(c) of the Act as under :

    2.0 Assessee’s submission to the AO:

    2.1 The company contended that the final tax payable as per the return of income and as per the assessment order was nil, and therefore, there was no ‘amount of tax sought to be evaded’ as the phrase was explained in Explanation 4 to S. 271(1) of the Act. The AO did not accept the argument and referred to the amendment made to clause (a) of Ex-planation 4 to S. 271(1) of the Act by the Finance Act, 2002, with effect from A.Y. 2003-04. According to the AO, the aforementioned amendment had put paid to all arguments in such cases made on the basis of the ratio of ClT v. Priihipal Singh & Co., 249 ITR 670 (SC) and Virtual Soft Systems Ltd. v. ClT,289 ITR 83 (SC). Moreover, the AO held that the ratio of Virtual Soft had no application after the amendment of 2002, as was observed in that case also.

    2.2 The company tried to distinguish the facts in Virtual Soft’s case (supra) from its own facts by stating that in Virtual Soft the return was one of loss and the assessment was made at a reduced loss, whereas in its own case the return was one of nil income and the assessment was also one of nil income. Effectively, the company contended that as the term ‘the amount of tax sought to be evaded’ was explained in Explanation 4 to S. 271(1) of the Act there was no such amount. This argument was rejected.

    3.0 The assessee seeks your advice on the above aspect with a view to deciding on the advisability of going  in appeal.

    4.0 Opinion:

    4.1 Before embarking upon giving opinion, one must admit that the issue involved here has a long history. The matter relates to penalty, and therefore, in construing penal provisions, as the Honourable SC said in Virtual Soft (supra), the statute creating penalty is the first and last consideration and must be construed within the term and language of the particular statute.

    4.2 It is true that the ratio of Virtual Soft may not apply to cases post 1st April, 2003. However, what is necessary is to see whether the company’s case here solely rests on the ratio of Virtual Soft or it can stand on its own. The point involved in Virtual Soft is succinctly brought out by the Honourable SC in the following words at page 92 of the Report: “The point involved before the High Court was, as to whether penalty was leviable u/s.271(1)(c)(iii) read with Explanation 4 thereto which came on the statute book with effect from April 1,1976, in a case where the return filed was one of loss and the assessment made by the Assessing Officer was at a reduced amount of loss.”

    Thus, one may see that there was a loss declared in the return of income which was reduced on assessment. This fact is material for later part of this opinion.

    4.3 In order that penalty can be imposed u/s. 271(1)(c) of the Act, there must be an ‘amount of tax sought to be evaded’, because this amount forms the basis of quantum of penalty. If it is discovered in a given case that there is no such amount, or that such amount cannot be worked out, then one can say that though the substantive provisions may apply, the machinery provisions fail. If that is the case, one may infer that the substantive provisions are not intended to apply to a given case. Support for these propositions can be found in the Supreme Court decision in the case of Cl’T v. B. C. Srinivasa Setty, 128 ITR 294. In fact, this proposition is clearly accepted in Virtual Soft (supra) also.

    4.4 Therefore, it is necessary for us to find out whether there is any ‘amount of tax sought to be evaded’ in terms of the language of Explanation 4 to S. 271(1) of the Act. Let us examine the individual clauses of the said Explanation.
     
    4.4.1 Clause (a) of the said Explanation reads as under:

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

    4.4.1.1 As per this clause, it applies in a situation when the income alleged to be concealed has the effect of reducing the loss declared in the return of income or converting that loss into income. If this is not the case, one need not look beyond.

    4.4.1.2 In the present case, there was no loss declared in the return, as the return declared nil income. Therefore, the question of the concealed income reducing that loss declared in the return of income does not arise. One may, here, argue that the balance of the carried forward loss of Rs.90,00,000 was a loss declared in the return of income (such losses have to be stated in the form of return of income) and since this loss got reduced from Rs.90,00,000to Rs.85,00,000, the condition of ‘the concealed income reducing the loss declared in the return of income’ is fulfilled. The question is : Is it to the brought forward loss or to the current year’s loss that the reference is made in the first limb of clause (a) of Explanation 4 ? The second limb of the sentence, which reads as, “…. or converting that loss into income” holds the key to that question. The word ‘that’ used in the second limb of the sentence explains, or rather qualifies, the term ‘loss’ referred to in the first limb of the sentence. It says that the ‘loss’ referred to in clause (a) is such loss as is also capable of being converted into income. Viewed thus, one may agree that brought forward losses can be reduced, but in any assessment, they cannot be converted into income. Such losses, can at best, be reduced to nil. Therefore, one may further argue that the reference to the word ‘loss’ in this clause is to the loss of the current year which alone is capable of being converted into income on additions or disallowances made in the assessment. Since there is no loss in the current year (there is income of Rs.10,00,000 from business), clause (a) of Explanation 4 to S. 271(1) of the Act does not apply to the facts of the case.

    4.4.2 Clause (b) of Explanation 4 to S. 271(1)) of the Act, being applicable only in certain special cases of search and non-filing of returns, does not apply to the facts of this case.

    4.4.3 Let us examine the applicability of the residuary clause (c) of the said Explanation to the facts of this case. Clause (c) reads as under:

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

    4.4.3.1  In order to find out the quantum  of penalty under  this clause, one has to find out the difference between  the tax on the total  income  assessed  and the tax that would  have been chargeable  had such total income been reduced  by the amount  of income alleged  to be concealed  (Rs.5,00,000 in this case).

    4.4.3.2 The tax on the total income as returned and assessed, both, in this case, is nil, and as such, there is no difference between the two. Thus, no amount of penalty can be worked out under this clause.

    4.4.3.3 One may argue here that Rs.I0,00,000 and Rs.15,00,000 being the returned income and the assessed income from business, respectively, should be taken as ‘the total income’ and the difference between the notional tax on such total income, returned and assessed, should form the basis of quantum of penalty. In other words, what needs to be decided is: what is the meaning of ‘total Income’, the phrase used in clause (c) of Explanation 4 ? Does the term ‘total income’ here means the one as ar-rived at before setting off of brought forward losses or the one as arrived at after such set-off?

    4.4.3.4 The ‘total income’ has been defined in S. 2(45) of the Act as, ” ‘Total Income’ means the total amount of income referred to in S. 5 computed in the manner laid down in this Act”. S. 5 of the Act lays down the scope of total income, but S. 15 to S.  59 lay down  provisions  relating  to computation  of income under  various  heads.  The question  is : Is S. 72 dealing  with  carry forward  and set-off of business losses part of computational  machinery?  The issue is addressed by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT, 113 ITR 84.

    At page 97 of the Report, Tulzapurkar T., speaking for the Court, said “that it was not possible to accept the view that S. 72 had no bearing on, or was unconnected with, the computation of the total income of the assessee under the head.” Following the decision in Cambay Electric, the Gujarat High Court has adopted a similar reason in Monogram Mills Co. Ltd. v. CIT, 135 ITR 122. In other words, the correct figure of total income cannot be arrived at without working out the net result of computation under the head ‘Profits and gains of business or profession’ and income under this head cannot be determined without taking into account S. 72 of the Act. Similar views are also expressed by the Supreme Court in CIT v. Shirke Construction Equipment Ltd., 291 ITR 380.

    4.4.3.5 Therefore, it can be said that the term ‘total income’ used in clause (c) of Explanation 4 to S. 271(1) means the total income computed under the head ‘Profits and gains of business or profession’ taking into account the brought forward business losses. If this proposition is accepted, the total income, returned as well as assessed, in this case is nil, and the tax thereon is also nil. No amount of penalty can be worked out. It is true that the definition of the term ‘total income’ as contained in S. 2(45) is to not be followed if the context requires otherwise. However, it is submitted that there is nothing is clause (c) of Explanation 4 to S. 271(1) of the Act to suggest that the context requires a different meaning of the term ‘total income’, for any different meaning would be to stretch the language and, as the Supreme Court said in Virtual Soft (supra), it is not competent for the Court to stretch the meaning of an expression to carry out the intention of the Legislature.

    In view of the above, it is submitted that though concealment might be established in the case, it is not possible to quantity the amount of penalty. The machinery provisions fail. Therefore, penalty is not leviable.

    Author’s Note:

    The author only expresses his views. Readers may write in to discuss a different viewpoint since the matter discussed here is controversial and may require one to act with caution.

    Provision for Bad Debts — Explanation 1 to S. 115JB(2)

    CASE STUDY

    1.0 Facts :

    1.1 X Ltd. provides for doubtful debts of Rs.10 crores in its
    accounts for the year ended 31st March, 2010. The provision is based on a list
    of debtors likely to turn bad. The company has reason to form such belief. After
    making the provision, the company declares a ‘book profit’ of Rs.20 crores in
    its profit and loss account. It has assessed brought forward unabsorbed business
    losses of Rs.30 crores. Therefore, the company in its normal computation of
    income, after adding back the provision for doubtful debts, declares nil income.

    1.2 The question arises in computing the ‘book profit’
    u/s.115JB : whether adjustment is required in respect of Rs.10 crores being
    provision for doubtful debts. Your advice is sought in this regard.

    2.0 Opinion :

    2.1 Adjustments u/s.115JB to the book profits can be made if
    the profit and loss account is not in conformity with Schedule VI to the
    Companies Act, 1956, or such adjustments are necessitated by Explanation 1 to S.
    115JB of the Income-tax Act, 1961. Therefore, the issue basically requires
    consideration whether the debit entry in the income statement in respect of
    provision for doubtful debts is hit by any requirement of the said Schedule VI
    or by any clause of Explanation 1 to S. 115JB(2).

    2.2.1 As far as the requirements of Schedule VI are
    concerned, the profit and loss account is in conformity with the requirements of
    Schedule VI. No adjustment is required on this account.

    2.2.2 Let us turn to Explanation 1 to S. 115JB. There are two
    clauses which may possibly apply to the creation of a reserve in respect of
    doubtful debts. Clause (c) of the said Explanation reads as, “the amount or
    amounts set aside to provisions made for meeting liabilities, other than
    ascertained liabilities”. Thus, what is to be decided is whether such provision
    is in respect of a liability or not, and if it is in respect of a liability,
    whether the liability is an ascertained liability or not.

    2.2.3 The issue whether a provision for doubtful debts is for
    an ascertained liability or not has been setted by the Supreme Court in its
    decision in the case of CIT v. HCL Conmet Systems and Services Ltd., (2007) 292
    ITR 299. The Supreme Court held that the provision for doubtful debts and
    advances could not be regarded as a provision for a liability other than an
    ascertained liability. Thus, it is submitted that no adjustment is required in
    respect of provision for doubtful debts under clause (c) of Explanation 1 to S.
    115JB(2).

    2.3.1 We must now consider clause (i) of Explanation 1 S.
    115JB, introduced by the Finance (No. 2) Act, 2009, with retrospective effect
    from 1st April, 2001. The new clause (i) reads as, “the amount or amounts
    set aside     as provision for diminution in the value
    of any asset”.


    2.3.2.1 The crucial terms of clause (i) to be considered are
    : ‘amounts set aside’ and ‘diminution in the value of any asset’.

    2.3.2.2 Before we proceed further, let us understand the
    nature of provision for doubtful debts. The nature of provision for doubtful
    debts is that the provision is recognition of the fact that certain debts are
    unlikely to be recovered. The debts have not conclusively become bad. In
    accordance with the conservative principle of accountancy, a charge is soon made
    to the income statement in respect of the amounts of such debts without waiting
    for the debts to actually turn bad.

    2.3.2.3 Clause (i) speaks of amounts being set aside as
    provision. Therefore, one of the questions that we need to ask ourselves is :
    Are we setting aside any amount when we create a provision for a doubtful debt ?
    The answer is no. When we create a provision for a doubtful debt, we do not set
    apart or set aside any amount. An amount ‘set aside’ has the characteristic of
    becoming available at a later time when required to recoup loss occasioned by
    the eventuality. In fact, there is no such amount set aside when a provision for
    a doubtful debt is made that it may be required later or that it may be
    available. Such a provision is made in accounts to ascertain how much income
    should be available for distribution to the stakeholders. Strictly interpreting,
    when clause (i) speaks of amounts set aside, it may apply only to cases when an
    amount on the asset side of the balance sheet corresponding to the amount of the
    expected loss is earmarked for meeting an eventuality. We may remember that the
    theory of depreciation discusses creation of an earmarked fund as an asset
    corresponding in amount to the depreciation reserve, which can be used when the
    asset concerned requires replacement. A mere debit in the profit and loss
    statement may not amount to setting aside any amounts for a particular purpose.
    A debit creating a provision for doubtful debts is nothing more than recognition
    of the fact that certain debts may not be recovered. A provision of a revenue
    nature is created through a debit in the income statement, but every debit in
    the income statement is not creation of a provision. Many debits are in
    recognition of losses or are a charge under the matching principle. When a
    provision for doubtful debts is made no amount will be required to replenish
    these debts when they actually become bad and therefore no amount is set aside
    when such provision is made. Thus, we can say that there is no amount set aside
    when a provision for doubtful debts is made. Thus, the first limb of clause (i)
    of Explanation 1 to S. 115JB(2) does not apply.

    2.3.2.4 If the first limb of clause (i) fails as shown above, the whole clause (i) should fail. However, one may argue that the debit entry in the income statement creating the provision restricts the distributable profits and thereby it can be said that it sets aside an amount. Thus, according to the advocate of this argument, the first limb of clause(i)    may be applicable to creation of a provision for doubtful debts. I must say that there is merit in this argument. Therefore, it will be interesting to examine whether the second limb, namely, that there is ‘diminution in the value of any asset’ applies or not. One may note the dictionary meaning of the word ‘diminution’ which is “the act, fact or process of diminishing, lessening, reduction”. The word ‘diminish’ means ‘to make or cause to seem smaller, less, less important, etc.; lessen; reduce.’ The words ‘lessen’ and ‘reduction’ have more or less the same meaning. Thus, the word basically means diminishing, reduction or lessening, as against complete annihilation or destruction. One generally will not associate the word ‘diminution’ with complete destruction or annihilation. Depreciation in respect of fixed assets is a classic example of diminution in the value of fixed assets. Provision for doubtful debts does not stand on par with provision for depreciation. Provision for depreciation is recognition of gradual fall in the value of the underlying asset, whereas the provision for doubtful debts is recognition of possible loss of an entire asset. There is no diminution, as the term is understood, of value of the debts; there is imminent complete loss of the asset. However, it may be noted that if a debt is valued (as it is valued for securitisation purpose) at a value less than the book value and a provision is made for the possible loss, such provision may be hit by clause (i) subject to consideration whether any amount can be said to have been set aside.

    2.4 Conclusion:

    Clause (i) of Explanation 1 to S. 115JB(2) should not apply to a bona fide provision for doubtful debts as there is neither setting aside of an amount, nor is there any recognition of diminution in the value of an asset. It is another matter that there may be a likelihood of a complete loss of value but then it is not diminution in value, it is loss of value. A question may arise : to which situation then the said clause (i) of Explanation 1 to S. 115JB(2) will apply? It will apply to a situation where the underlying asset is in existence and there is a fall in value which is recognised through the profit and loss account and a fund to recoup such loss is simultaneously created.

    Note : The views are personal and expressed here to raise some arguments. The matter may be settled only through judicial intervention.
     

    Editor’s Note: The Delhi Tribunal in the case of DCM Shriram Consolidated Ltd. vs DCIT (2010) 39 SOT 203 (Del) has taken a view contrary to the view expressed by the author in this Article.

    Capital gains and S. 54EC of the Income-tax Act, 1961

    Case Study

    1.1
    Mr. Atul Shah sold his land in Ahmedabad in F.Y. 2007-08. Mr. Shah also sold his
    land in a small village in the same year. Mr. Shah earned a long-term capital
    gain (LTCG) on transfer of the Ahmedabad land and incurred a lonwg-term
    capital loss (LTCL) on transfer of the village land. Mr. Shah invested in
    eligible bonds as per section 54EC of the Income-tax Act, 1961 in order to save
    tax on LTCG. The working of the gain and the loss was done as follows :


    1.3    Thus, the AO effectively exhausted the long-term capital loss, leaving nothing to be carried forward. The assessee argued that before the loss could be set off against the gain, effect should be given to S. 54EC. The assessee also relied on the decision in the case of ICICI Ltd. v. Dy. CIT, 70 ITD 55 (Mum.). The assessee argued that S. 70 or S. 71 should be applied only after giving effect to S. 54EC. The AO rejected this argument and distinguished the ICICI Ltd. case by stating that S. 54E, which was involved in the ICICI case, was one of the Sections named in S. 45(1) as having an overriding effect. S. 54EC, as applied by the assessee in the present case, was not named in S. 45(1). This can be seen from the language of the Section which is as under?:

    “Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in S. 54, S. 54B, S. 54D, S. 54E, S. 54EA, S. 54EB, S. 54F, S. 54G and S. 54H, be chargeable to income-tax under the head ‘Capital gains’, and shall be deemed to be the income of the previous year in which the transfer took place.”

    Thus, according to the AO, since there is no reference made to S. 54EC in S. 45(1), S. 54EC cannot have an overriding effect unlike S. 54, S. 54F, et al., named in S. 45(1). The AO was of the view that the net result under the head ‘Income from Capital Gain’ should be first found out after application of S. 70 and if there is any LTCG found taxable thereafter, it is in respect of such gain that the exemption mentioned in S. 54EC should be granted. In the result, the AO denied carry forward of the LTCL.

    1.4    The assessee seeks your opinion.

    2.0    Opinion:

    2.1 It is true that S. 45(1) does not name S. 54EC like S. 54, S. 54F, et al. It is an admitted position that the Sections (S. 54, S. 54F, etc.) named in S. 45(1) have an overriding effect and capital gains u/s.45 have to be computed subject to those Sections. S. 45(1) does not name S. 54EC and, therefore, S. 45(1), apparently, is not subject to S. 54EC.

    2.2 However, it must be remembered that capital gain or loss has to be worked out in respect of each capital asset separately. A useful reference may be made here to support this proposition to the case of Jt. CIT v. Montgomery Engineering Markets Fund, 100 ITD 217. The Mumbai Bench of the Tribunal upheld the plea that each capital asset is a separate source of capital gain or loss. Similar view is also taken by the Mumbai ITAT in the case of ACIT v. Nemish S. Shah, 36 BCAJ, P. 645, No. 29, March 2004 issue where the Tribunal held that each share in a company is a separate capital asset. Thus, transfer of each asset constitutes a source of capital gain. Once this position is conceded, the law does not provide about the specific gain against which exemption granted in S. 54EC should be claimed. In other words, it is left to the assessee to decide against which long-term capital gain or gains he wants to claim exemption. The aggregation of long-term capital gains in respect of each asset will be done only after the process of computation of capital gain, including granting exemption in respect of each individual capital asset, is completed, and it is the residue from each source that will be aggregated to arrive at the total figure of capital gain chargeable under the head ‘Income from Capital Gain’. It must be stated here that S. 70(3) states that when the result of computation made u/s.48 to u/s.55 is a loss arising from the transfer of a long-term capital asset the assessee shall be entitled to have the loss set off against any other gain arising from the transfer of a long-term capital asset. However, this provision talks of intra-head adjustment and for the purpose of this section, each capital asset constitutes a separate source of gain (or loss). It is only after the gain from a source is worked out in accordance with the provisions of S. 48 to S. 55 that one has to proceed further.

    2.3 It is true that S. 45(1) does not explicitly mention S. 54EC as it mentions other Sections that have an overriding effect. Yet, one must not lose sight of the fact that S. 54EC grants exemption, and before the question of application of S. 70 and S. 71 would arise, net taxable capital gain from each source, i.e., transfer of each capital asset, should be worked out. Thus, omission of S. 54EC from being referred to in S. 45(1) is academic, without any significant effect as far as the present controversy is concerned.

    2.4 Further, if the AO’s interpretation is accepted, it may frustrate S. 54EC. For example, a LTCG may arise to an assessee on 1st April of a financial year. As per S. 54EC he should make investment in an eligible instrument within six months form the date of transfer. Accordingly, he makes the investment. Now, the assessee incurs a long-term capital loss, say, in the month of December, that is, after making the investment. As per the AO’s interpretation, the investment made may become redundant as the long-term capital loss may take care of the long-term capital gain. However, this is a little absurd, as the assessee cannot wait till December to know whether he will have to make investment in the eligible instrument or not. If he does, and there is no loss incurred in December, unlike in the present case, he will have missed the bus of making investment. Though this logic is not entirely watertight, yet, we must try to give the provisions a meaningful purpose by resorting to purposive interpretation. On such an approach being adopted and on consideration of all the relevant provisions, one can say that S. 54EC operates in respect of capi-tal gain arising on transfer of each individual long-term capital asset and once an eligible investment is made it operates effectively so as to exclude the underlying gain from being considered for any purpose of taxation.

    2.5 In ICICI Ltd.’s case (supra) the Tribunal interpreted S. 45(1) as being subservient to S. 54E. In order to make such interpretation, the Tribunal put weight on the language of S. 54E besides putting such weight on the language of S. 45(1) by ob-serving?: “In fact, the provision of S. 54E specifically states that, ‘the whole of such capital gain shall not be charged u/s.45’.” One may notice that S. 54EC also uses the same language. Thus, ICICI Ltd.’s case can be taken as an authority for the proposition that S. 54, S. 54F and other Sections referred to in S. 45(1) have an overriding effect on S. 45. But, the reverse may not necessarily be true. That is, the ICICI Ltd. case is not the authority for the proposition that if an exemption section is not mentioned is S. 45(1), it will not have an overriding effect.

    3.0 To conclude, one can say that the exemption sections have an overriding effect on the main computational provisions as far as the charging S. 45 is concerned.