Paras Savla's Blog

2016-07-29T03:42:00.002-07:00

Evaded Tax on `Penny' Gains? Face the Music

Mumbai: Sachin Dave & Maulik Vyas

I-T to send notices to 1k individuals, also target promoters of such cos

[News Story published in Economic Times Mumbai Edition on 29 July 2016 on page 17 - In the Story Paras Savla was quoted]

The income-tax department is planning to send notices to about 1,000 individuals who may not have paid tax on money earned through trade in penny stocks, people aware of the matter said. Penny stocks are shares with value not exceeding a few rupees.

This follows an analysis done by the revenue department and the Central Board of Direct Taxes (CBDT) earlier this year of transactions in penny stocks on the country's bourses. The analysis was based on data obtained through the capital markets regulator, the Securities and Exchange Board of India (Sebi), and from some investigation agencies like the Investigation Directorate and Enforcement Directorate.

“While manipulation of penny stocks is an offence and Sebi may have penalised investors caught doing that, these investors may not have paid tax on such transactions,“ one of the persons cited earlier said. “Also, there were some investors who may not have come under the scrutiny at that time.“

The revenue department's notice to such individuals will give them time until September to declare undisclosed income under the income declaration scheme (IDS). Tax officials will go after those who do not fall in line, the person quoted earlier said, adding that the revenue department is also planning to send notices to promoters and senior executives of penny stock companies who may have benefited from such transactions.

“While Sebi had come down hard on some of the penny stock manipulations done by some investors, tax payers who have evaded income tax may be asked to declare their undisclosed income under the current IDS,“ said Paras Savla, Partner, KPB & Associates, a tax consultancy "Failure to declare money would lead to reopening of assessment after after September. On confirmation of addition, they may face concealment penalty at the rate of 200% on tax evaded.“

Industry trackers said the government is keen on making the IDS a success. Officials in the income tax department say the scheme as not had “much success“ as not many people are coming forward to declare their unaccounted income and wealth.

“This is a step by the govern ment in line with its aim of cracking down on the source of black money . The government has been urging people to come forward and declare undisclosed income wealth by paying a onetime tax at the rate of 45% and to put the matter to rest once and for all,“ said Sanjay Sanghvi, partner, Khaitan & Co, a law firm.

In March this year, the CBDT had issued a circular regarding manipulation in penny stocks.It had pointed out that some investors had artificially raised prices of some penny stocks in order to book profits or claim losses. The manipulation was done on some stocks traded on the Calcutta Stock Exchange.Officials said similar manipulations may have happened on other stock exchanges too.

Tax officials are also looking at business transactions of some small companies. There is a suspicion that some companies may have converted black money to white for investors for a small fee.

http://epaperbeta.timesofindia.com/Article.aspx?eid=31818&articlexml=Evaded-Tax-on-Penny-Gains-Face-the-Music-29072016017013

Shattering 10 frequently believed tax-filing myths

2016-07-27T05:54:00.002-07:00

Shattering 10 frequently believed tax-filing myths

In the Story views of Paras Savla, Chartered Accountant has been quoted by the writer

In spite of paying taxes and making investments to save taxes, one can be denied the benefit if they aren’t reflected in income tax returns or returns filed remain invalid.

Thousands of new taxpayers would be brought under the tax-filing ambit due to the rampant tracking initiatives of the Income Tax Department and there are hardly a few days left to file your tax returns within the deadline of July 31, 2017. But in the scramble to meet the deadline, don’t forget the essentials to file the tax returns for the assessment year 2016-17 (pertaining to income earned in the financial year 2015-16).

Note that everyone whose total income during the previous year – without claiming exemption – exceeds the threshold limit currently pegged at Rs 2.5 lakh (Rs 3 lakh for senior citizens) needs to file a return of income.

The first step in ensuring correct returns is to keep a tab on recent changes to the tax-filing rules.

-- Anyone who has a refund to claim and whose total income exceeds Rs 5 lakh (except super senior citizens) will necessarily have to e-file tax returns.

-- Under-construction property buyers are now allowed to claim a deduction of interest of upto Rs 2 lakh if the project is completed within five years (earlier, it was three years). Further delays reduce tax deduction to Rs 30,000.

-- Another change on the immovable property front is that the date of agreement fixing the amount during transfer would be considered to compute capital gains and not the date of registration, if payment has been made through non-cash modes.

-- To claim exempt agricultural income, you need to mention expenditure incurred too.

-- To claim capital gains tax exemption using Capital Gains Account Scheme, one would need to submit details such as previous year of transfer, exemption section, amount utilised out of capital gains schemes, year in which you purchased new assets, balance amount unutilised.

I use last year’s form

The rules on who can use which form are revised by the Income Tax Department based on the need to distinguish categories and information requirements. For instance, tax payers who have salary income and own more than one house property need to use a new form ITR 2A starting last year and not ITR 2.

This apart, your income earned last year may be different than that earned in 2014-15, so fill the correct form. “ITR -1 is not applicable if the agricultural income is in excess of Rs 5,000. In such case, ITR-2 is required to be filed by the taxpayer,” says Suresh Surana, founder of RSM Astute Consulting Group.

I can skip verifying Form 26 AS

Though taxes are deducted by employers and banks for interest, one must verify whether they are reflected in the Annual Account Statement or Form 26 AS before filing returns. Mismatches are the single largest cause of incorrect tax computation. “This year onward the assessing officer has been given the right to make suo moto adjustments to returns before assessment if some income is seen in Form 26 AS, but not declared in the return,” points out chartered accountant Paras Savla, stressing on the need to check Form 26 AS.

Tax cut, don’t mention

Individuals mistakenly believe that the income where taxes have already been deducted such as bank fixed deposit interest, EPF withdrawal before five years, etc. need not be reported as tax has been cut. But the calculations need to be based on your tax bracket as the TDS deduction rate might be different from your slab rate – 10/20/30%.

All interest up to Rs 10,000 exempt

The new exemption of up to Rs 10,000 on savings bank account interest is mistakenly understood to encompass FD interest too. However, one has to add the interest amount from fixed deposit to his/her own income and pay the applicable tax. Also, co-operative bank FDs and RDs too are liable for TDS deduction and one shouldn’t forget them.

I need not mention exempt income

There are incomes on which tax isn’t applicable such as stock dividends below Rs 10 lakh, savings bank interest below Rs 10,000, profits from shares held for more than one year and agricultural income. Though you don’t need to pay tax, you can’t ignore them. “There is a separate Schedule Exempt Income (EI) in the return of income wherein a taxpayer is required to report the details of exempt income,” adds Surana.

I can enter capital gains in any column

Exempt long-term capital gains should not be entered in capital gains section. Under short-term capital gains (STCG) many users confuse between STCG under section 111A and STCG others. As a result, the amount is entered against one another. This should be avoided as the resultant would be doubling of income from capital gains.

Spouse pays joint Home loan EMI, I claim

Joint owners of a house should claim tax benefits as per their share of the house. Co-owners who haven’t been paying the EMI cannot claim the interest and principal deduction. Similarly, rental income too should be shared in the proportion of ownership as the total income would shoot up if both mention the gross rental income.

Didn’t submit proofs, can’t claim

You can claim deductions even if you haven’t submitted proofs to the employer, but have invested the amount or made the relevant expense during the financial year. But it is quintessential to fill the specific schedules especially for 80 G, 80 IA and 80IB to claim the deduction, even if not submitted to the employer.

I need to mention one bank account

You need to fill not just one bank account detail for refunds, but fill in details of all bank accounts that you hold accept dormant accounts (inoperative for 3 years). “A taxpayer failed to disclose other bank account details. Later, when I-T officers found transactions through AIR (annual information returns), notice was issued and the taxpayer went through unnecessary hassle,” recollects Savla.

Check and cross-check personal details, especially bank account numbers. “There are taxpayers who often omit the initial zeros mentioned in their bank account number, which could lead to refunds being credited to erroneous accounts,” says Savla.

Task over after submitting returns

Many make the mistake of forgetting all about returns once submitted. But, returns aren’t considered valid untill they’re verified electronically using your mobile or email (only those earning below Rs 5 lakh), net banking account, ATM, demat account or the AADHAR No. or submitting a physically signed acknowledgement to the Bangalore CPC of Income Tax Department.

One can escape many hassles by giving the returns a careful read before submission and checking for these errors. However, if you realise that you have submitted an erroneous return, you have the option to revise it till March 31, 2018 or the completion of your return assessment, whichever is earlier.

“Disclose all income as the penalty provisions have changed and can stretch up to 200% of the tax evaded. The assessing officer has no power to reduce the penalty,” warns Savla.

But avoid using links in emails from fraudulent email IDs such asincometaxindia.gov.india@gmail.com or incometax.gov@yahoo.com to file returns. “Taxpayers are cautioned that they should not respond to such phishing mails and avoid downloading any attachment, which may contain a virus or malicious software,” CBDT has notified.

[Story contributed by KHYATI DHARAMSI | published in DNA Mumbai Edition ofTue, 26 Jul 2016-10:24am , on page 13]. It can be read at http://www.dnaindia.com/money/report-ten-tax-filing-myths-shattered-2238228

MAT on FII, FPI and Foreign Company in India

2015-08-24T08:32:00.000-07:00

After Vodafone, another point tax officers have gone overboard is levy of Minimum Alternative Tax (MAT) on Foreign Companies / Foreign Portfolio Investors (FPI) / Foreign Institutional Investors (FII). Issue arisen due to revenue favourable ruling of Authority of Advance Ruling (AAR) in case of Castleton Investment wherein AAR has suggested levy of MAT on foreign Company. However in another three rulings - Timken, Fidelity and Royal Bank of Canada, AAR has ruled against revenue and in favour of tax payer. As per the provisions of Income-tax Act ruling of AAR is binding on the person who has sought it and not on any other person. Further Hon'ble Apex Court in way back in 1973 in case of Vegetable Products Ltd. has held that when two reasonable constructions of a taxing provision are possible, the construction which favours the assessee must be adopted. Hence the view taken by the tax authorities merely on the basis of the AAR ruling favouring Revenue is extremely aggressive. Considering the intention of provisions and language of the Section 115JB, levy of MAT on FPI, FII and foreign Companies seems incorrect interpretation. However one need to consider the amendment to the Section 115JB(2) made by Finance Act 2012.

Finance Minister has brought amendment in the Income-tax Act that not MAT on FPI w.e.f. April 1, 2015. While moving the amendment he pointed that in order to rationalise the MAT provisions for FIIs, profits corresponding to their income from capital gains on transactions in securities which are liable to tax at a lower rate, shall not be subject to MAT. However he refrained from granting benefits for the past year. Post proposing this amendment, Stock Market reacted negatively. This led to series of clarifications by the Finance Minister as well as Minster of State for Finance. They have clarified that in case foreign investors are coming through treaty nations, they can avail of benefits from under tax treaties and it may not be subjected to MAT. Further in order to provide stable tax regime Government also set up A P Shah Panel.

During last week of July 2015 committee has delivered report to the Government. Government is yet to make the report public. From the press reports it is understood that the A P Shah Committee has recommended granting relief to such investors on MAT levy prior to April 1, 2015 and the government is favourably considering the committee’s recommendation. During the hearing in respect of Special Leave Petition filed by Castleton Investment in Supreme Court, Revenue sought time till September 29, 2015 to reply.

It is pertinent to note that majority of the MAT dispute cases are related to foreign companies and with respect to FPI. From the press report it is also understood that the revenue department did a faux pas by excluding foreign companies from the terms of references for the A P Shah panel. In case Government only exempt FPI or FII from MAT for prior years too, issue would not be put to rest for levy MAT on foreign companies. However, stock market which has tumbled to today may have good news for rejoice in case Government resolving MAT favourably for FII / FPI.

Compliance Cost

2013-05-27T01:18:00.001-07:00

Host of tax and regulatory laws are applicable for carrying on a business in India. Everyone makes a level best efforts to comply these laws. However everyone would have bitter experience with law implementing agencies for one or other reasons.

List of tax & regulatory laws are very large. For simplicity we can categorise these laws in 3 classes:

Laws applicable to the form of organisation and nature of business e.g. Companies Act, LLP Act, Partnership Act, IRDA, SEBI, RBI, BRA etc.
Laws related to employees, environment in which organisation exists e.g. Employers Liability Act, Payment of bonus Act, Payment of Gratuity Act, Payment of Wages Act, Maharashtra Labour Welfare Act, The Bombay Shop & Establishment Act, Industrial Employment Act, PF Act, ESIC Act, Maternity Benefit Act Child Labour Act, Bonded labour Act, Equal Remuneration Act, Pollution laws, MSME Act etc.
Tax laws: (i) Direct tax which includes Income-tax, Wealth-tax, Income-tax also has various sub-sets like TDS, TCS, International tax. (ii) Indirect Tax includes CST, MVAT, Excise, Customs, Service-tax, LBT, Octroi etc.

Complying with various tax and regulatory laws requires understanding of the provisions of each Acts, their implication on business and maintenance of certain records, registers, filing of regular returns etc. Business need incurred cost performing various tasks associated with complying government regulation cost may involve in-house or through employing professional or both. In-house compliance teams have limitation due to unavailability of the trained manpower and emergence of new compliance requirements. To illustrate on emergence of new compliance requirement, post filing TDS returns TDS certificates are required to be issued to the parties. Generation of TDS with respect to Salaries has two stages. Stage one generate certificate using the tax department’s portal for some aspect and for certain other aspects details to be generated using certain manual process. This certainly doubles the time and process. For the current financial year along with the filing of return online various reports are required to be filed online along with return of income.

However in order to gain comfort with respect to level of compliance of relevant laws, diligence exercise need be carried at regular interval.

2013-03-27T04:04:00.000-07:00

Receipt of buy-back of shares

Current provision:

Receipt on buyback of shares is subject to tax under the head Profits & Gains of Business or Profession or Capital Gains.

Propose Amendment:

It is proposed to provide that any income arising to a shareholder, on account of buyback of shares of an unlisted company on which tax is paid under section 115QA, would be exempt.

Applicability:

Amendment applies from 1-4-2014

Implication:

As per new Chapter XII-DA – Special Provision Relating to Tax on Distributed Income of Domestic Company for Buy-back of Shares, income arising out of buyback of shares of unlisted company is subject to special rate of tax under section 115QA on similar lines as dividend distribution tax. In order to avoid double taxation, it is provided that no tax would be paid by recipient when such income is subject to distribution tax. However, proposed provisions try to nullify treaty benefits on account of capital gains. Authority of Advance Ruling in Armstrong World Industries Mauritius Multiconsult Ltd., In re[1], considering the provision of India-Mauritius DTAA, has held that capital gain from buy-back of shares is not taxable in India.

Authority of Advance Ruling in RST In re[2], held that if a shareholder receives any consideration from any company for purchase of its own shares, Section 46A, special provisions would be applicable and it would prevail over the general provision of section 45 of the Act. It also held that provisions of section 47 overrides section 45 and not 46A. however no consequential amendment has been proposed under section 46A.

Income on buy back would be exempt only if buy back is subject to compliance of Section 77A of the Companies Act, 1956. In case provision of Section 77A are not complied, distribution on buyback would not be subject to tax under section 115QA and consequently not exempt under new provisions. However in case a scenario issue may arise whether such proceed would be treated as dividend and provisions of Section 115-O triggered? If so, whether, company would be liable to pay DDT @ 16.995% instead of 22.6600% and income in the hands of shareholders would be exempt under section 10(34)?

New exemption would also create various other issues. Investors would not be allowed deduction of any expenditure incurred or cost of improvement with respect to shares. In case of loss is incurred by the investor, loss may not be allowed for set off or carry forward. Issue may also arise whether credit of the tax so paid would be allowed to the non-resident in his country as per the provisions of DTAA? Further moot question may be raised whether such distribution of income can be subject to charge under Income-tax Act, 1961?

(Extracts from the article published in the Chambers Journal March 2013)

[1] [2012] 24 taxmann.com 213 (AAR - New Delhi)

[2] [2012] 19 taxmann.com 215 (AAR – New Delhi)

2013-03-22T04:40:00.000-07:00

Keyman Insurance policy - Taxability proposed changes

Current provision:

Sub-clause (d) to clause (10D) of Section 10 provided that any sum received under keyman life insurance policy would not be entitled for the exemption under section 10(10D). There was anomaly whether receipt of life insurance policy would be exempt or chargeable to tax in case such keyman life insurance policy is assigned to the keyman. However Delhi High Court in case of Rajan Nanda[1] has held that once there is assignment of keyman life insurance policy by a company / employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy and such person in whose favour insurance policy is assigned at the time of maturity can claim exemption u/s 10(10D).

Proposed amendment:

It is proposed to amend the Explanation providing that keyman insurance policy on assignment to keyman, with or without consideration, would continue to remain key insurance and accordingly, any receipt from it would not be exempt.

Applicability:

Amendment applies from 1-4-2014

Implication:

Any receipt on keyman life insurance policy post its assignment (with or without consideration) to the employee / keyman would be now chargeable to tax. Further receipt would be taxable even if amount is received by the family members on the death of keyman.

Though this amendment is prospective, it may have retrospective effect in the sense that it applies to existing policies too. Amended provisions would apply in respect of any keyman insurance policy whether taken before or after 1/4/2013. It would even apply to those life insurance policies which has assigned before 1/4/2013 and whose maturity falls on or after 1/4/2013.

Issue would arise as under which head sums would be taxable? Whether such maturity proceeds would be taxable as salaries or business income or capital gain or income from other sources? Whether whole maturity proceeds would be taxable or maturity proceeds less consideration on transfer, if any, would be taxable. Whether any benefit in respect of premium paid by assignor would be available or not? Can assignee claim indexation benefit on consideration paid by him or paid by the assignor? What would be the implications if assignee is not the employee? Specific provision to rest above issues needs to be introduced. Otherwise change in tax treatment would invite undrawn litigation.

(extracts from the article published in the Chamber's Journal March 2013)

[1] CIT vs. Rajan Nanda [2012] 18 taxmann.com 98 (Delhi)

The Fiscal Responsibility and Budget Management

2012-08-27T01:14:00.000-07:00

The Fiscal Responsibility and Budget Management Act, 2003 (FRBM) was enacted by the Parliament of India to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget. The main purpose was to eliminate revenue deficit. In the presentation Indian and international history behind introducing FRBM Act and some of its provisions has been analysed.
http://slidesha.re/NB6zGc

Disputes in the Film Industry and role of Competition Commission

2012-07-10T09:47:00.001-07:00

1.0 Background

1.1 Film industry in order to have discipline had set up self-disciplinary association or agencies. First of all the name of the film was to be registered with one of the association. Such registration protects two films having the same name are not released at the same time. Secondly whenever a producer entered into an agreement with a distributor for a certain zone, this was also registered by an association. Publicity of this fact was given through various publications such as Trade Guide etc. This is being done with the idea that a producer does not sell the same movie to another distributor in the same area and in this manner obtain further finance. Sometimes when the film being produced involved large amount of finance and the distributor could not finance the production another distributor was appointed for the zone or two distributors would form a joint venture to finance the film. In every zone where the distributor operated, the exhibitors and the distributors formed associations to regulate the entire business of film exhibition and distribution.

1.2 The associations were either societies or companies under Section 25 of the Companies Act. These associations or companies formulated bye-laws and they worked as dispute resolution agencies for disputes between the exhibitors, between the producers and the distributors/exhibitors and between the distributors and the exhibitors. These associations regulated the business in the way that once a producer / distributor had agreed to give the business of exhibition to an exhibitor, the producer/ distributor could not then give the rights to another exhibitor. In this manner, the pecuniary interests of the exhibitors were protected. Similarly, when there were similar disputes between the producers and the distributors/exhibitors, these associations protected the interest of their members. All the producers / distributors had to become members of the association by paying a nominal fee before a film could be released in that zone / area. They also had to register the films with the zonal associations so that the names of the producer / distributor / exhibitors were known.

1.3 These associations has no statutory backing but were created for the regulation of the entire industry and they had evolved over a period of time. Any regulator in order to effective has to have penal powers. As no statutory authority available to the Associations, they exercised the power of boycott. These associations took upon themselves the power to levy penalty which were nothing but the failure to honour contractual obligations. Failure to pay the penalty resulted in boycott by the associations and their members.

1.4 Now with the advent of new technology, migration of the Indian community to different countries and due to various other reasons the demand for Indian films extended in various countries. This provides opportunity to the producers sell world rights, DTH and satellite rights, internet rights etc of the film. All this expanded the earnings of the producers. But at the same time shelf life of a film are reduced. The new technology also led to an increase in piracy and reduction in the earnings of the producers. The period for the exploitation of films got reduced as far as the exhibitors were concerned. This reduced the earning of the exhibitors. Another factor which came up was the arrival of multiplexes where multiple screens were used for screening films in a more congenial atmosphere. Multiplexes also received various direct & indirect tax concessions. These factors and the rising property prices all over India led to closure of many single screen exhibitors all over India. All these factors gave rise to disputes within the industry.

2.0 Whether practices of Self-regulatory Association are anti-competative?

2.1 Self-regulatory associations of distributors and exhibitors asks the producers-distributors

· to compulsorily register their films before release

· force members to abide with the rules,

· directs members not to deal with the non-members,

· prescribes long holdback period for satellite, DTH and other rights in respect of exhibition of films and

· Imposes bans, penalties and giving a call of boycott against those who violate the rules and regulations of the associations.

2.2 The producers has pointed that under the garb of a trade Association, these associations has become a vehicle for collusive conduct for persons and enterprises engaged in identical business of distribution and exhibition of films. Its members have adopted a coercive mechanism for ensuring the enforcement and compliance of anti-competitive agreements amongst themselves.

2.3 Commission in the case of Eros International Media Limited[1] observed that it is true that the activities of an association including keeping association members informed of trade developments, improving the quality of products, and working together at improving trade and industry laws, had benefited their members. It also played a significant role in encouraging and enforcing codes of ethics. But the rules and regulations, acts and conduct of the associations are not making markets perform efficiently and create restrictions on free and fair competition. Accordingly it held that various practices of the association as anti-competitive and directed the associations to cease and desist from the following practices:

a) The associations should not compel any producer, distributor or exhibitors to become its members as a pre-condition for exhibition of their film in the territories under their control and modify their rules accordingly,

b) The associations should not keep any clause in rules and regulations which makes any discrimination between regional and non- regional films and impose conditions which are discriminatory against non- regional films

c) The rules of restrictions on the number of screens on the basis of language or the manner in which a particular film is to be exhibited should be done away with.

d) Associations should not put any condition regarding release of films through other media like, CD, Satellite etc. these should be left to the concerned parties.

e) The condition of compulsory registration of films as a precondition for the release of any film and various existing rules of association should be dispensed with.

3.0 Whether collective bargaining by the association with Multiplex is anti-competitive?

3.1 Over the period of time there is integration of the business of film production and distribution. The film production units are turning into corporate entities and several film production companies are venturing and diversifying into the film distribution business. The distribution game is changing, may small distributors have been marginalized. Producers are also dealing directly with major multiplex companies for distribution deals, while other cinemas, which are largely single-screen theatres, are handled by individual distributors.

3.2 The conflict has arisen between the producers/distributors and the members of the FICCI-Multiplex Association of India on revenue sharing ratio. Generally the revenue sharing ratio is negotiated between individual producer and individual multiplex operator film by film. United Producers/ Distributors Forum (UPDF) has issued notice on March 27, 2009 to all producers & distributes, whether its member or otherwise, for not to release any new film to the members of the FICCI-Multiplex Association of India. Notice also contained a warning given to the respective members that in case of failure to comply with the instruction given in the notice, it would lead to life time suspension/ strict disciplinary action etc. against the concerned member.

3.3 Accordingly during the period of April 4, 2009 to June 12, 2009 no films were released by producers / distributors on account of their concerted action of not releasing films to the multiplexes. This created pressure on the multiplexes forcing them to enter into a compromise. The new agreements, under the new revenue sharing arrangement, were signed on June 9, 2009, with some producers/distributors.

3.4 FICCI-Multiplex Association of India has informed Competition Commission of India that the members of the UPDF who are controlling almost 100% of the market for production and distribution of Hindi pictures in multiplexes in India (relevant market) are acting in concert to fix prices and also limiting/controlling supply by refusing to release Hindi films for exhibition in multiplexes.

3.5 Competition Commission in its order[2] observed that the producers/distributors with their collective market power attempted to ensure that multiplex owners did not get the business of film exhibition till they agreed to the proposal of enhanced revenue share. The plea of collective bargaining by the producers/distributors on the grounds of greater public or consumer interest, was also negated by the commission. It also observed that the new negotiated revenue sharing arrangement has given substantial enhanced revenue sharing to the producers / distributors which are permanent in nature and ultimately, this burden was passed on to the ultimate consumers who are final multiplex cinema goers for watching the films, i.e., ‘the common man’. Accordingly UPDF was directed to refrain from indulging in such anti-competitive practices in future and are further directed to file an undertaking to this effect.

4.0 Is there any cartelisation by various channels to have commercial break at same time?

4.1 The Consumer Unity & Trust Society (CUTS)[3], a non-profit consumer advocacy group, has prepared a preliminary investigation report on television channels. It tries to establish co-relation, how each channel has been going in for advertising breaks around the same time. The CUTS is planning to present this report to the Competition Commission of India. Competition Commission may launch an investigation against major television channels to find out if they have abused their dominance or formed cartels against consumer interest in programming advertising slots. Hence the TV channels may be probed for scheduling advertising slots during programs in such a way that viewers are denied their right to choose by switching channels and are forced to watch ads.

Article Published in the CTC's IT Review - July '12 Issue

[1] Case No 52 & 56 of 2010, Order dated 16-2-2012

[2] FICCI – Multiplex Association of India v/s United Producers/Distributors Forum, Case of 1 of 2009, Order Dt 25-05-2011

[3] Source Hindustan Times Mumbai Edition dated May 18 2012

Capital Reduction & Buy Back of Shares

2012-05-13T08:32:00.000-07:00

1.1 Capital reduction and buyback of shares are one of the techniques of corporate restructuring. It leads to return of financial slack and also amounts to liquidating future dividend in the hand of shareholders. Broadly excluding certain exception both of the techniques try to achieve same objectives.

1.2 Capital reduction and buyback of shares have following objectives:

a) To reorganisation of capital structure of the company

b) To distribution of cash to shareholder. This being not a regular exercise it does not raises expectation of the shareholder for higher future dividend.

c) To optimise own funds and mange EPS & ROE

d) To squeeze out minority shareholders

e) To increase promoter-holding

f) To support share-price during period of temporary weakness

g) To prevent unwelcome takeover bids

Further capital reduction tool is also used for internal restructuring especially when company has huge book looses.

1.3 However under both these techniques there are different tax consequences in the hands of shareholders. Let us analyse one by one:

more .....

Alternate Minimum Tax - Impact of proposals of Finance Bill 2012

2012-05-13T08:04:00.000-07:00

Traditionally income-tax levies Minimum Alternate Tax on company who discloses profits but after considering incentives and higher rate of depreciation has no or lower taxable income. Last year for the first time similar provisions were extended to non-corporate tax payer i.e. LLPs. In order to hoard erosion of tax base and widen tax base vis-à-vis profit linked deductions, Finance Bill 2012 proposed to levy AMT on all individual and non-corporate tax assesse, who has claimed deduction under any section from 80H to 80RRB (excluding 80P) and u/s 10AA. Series of amendments are proposed vide various clauses of the Bill.

Clause 48 of the Bill proposed to replace Section 115JC. Brief contents are as under:

· A. Sub-section (1) starts with notwithstanding words

o It intends to compares normal tax on person other company with AMT.

o If normal tax is lower than AMT, adjusted total income shall be deemed to be total income of person other corporate

o Adjusted total income would be subject to tax at 18 ½ per cent.

B. Sub-section (2) lays the method of calculating adjusted total income, which is sum of

o total income (without considering provision of AMT)

o income based deductions claimed any section under chapter VI-A Part C ie from section 80H to 80RRB and

o deduction claimed u/s 10AA ie units established in Special Economic Zones

C. Sub-section (3) requires such person other corporate to obtain report in prescribed form, from accountant,

o Accountant is required to certify computation of adjusted total income and AMT is as per the provisions of the Act.

o Report is required to be obtained on or before due date of filing of return u/s 139(1).

Clause 51 proposes to introduce new section 115JEE, giving exemption from applicability of AMT. It provides that provision of AMT shall not apply to individual or a Hindu undivided family or an association of persons or a body of individuals, whether incorporated or not, or an artificial juridical person, if the adjusted total income of such person does not exceed Rs 20 lakh.

Further various other clauses have been introduced for consequential amendment in various other section as under:

a. Clauses 47 – proposes to amend chapter XII-BA heading from “Special provisions relating to certain Limited Liability Partnerships” to “Special provisions relating to PERSONS OTHER THAN A COMPANY”

b. Clause 49 – proposes to amend S. 115JD to provide tax credit for alternate minimum tax to persons other than a company

c. Clause 50 – proposes to amend S. 115JE to provide that all other provisions of the Act shall apply to such person other than a company.

d. Clause 57 – proposes to amend various clauses of S. 140A relating to payment of self-assessment tax.

e. Clauses 82, 83 & 84 – proposes to amend sections 234A, 234B & 234C. It provides that AMT credit u/s 115JD shall be reduced from tax on total income determined as per the provisions of Act, for the purposes of determining interest u/s 234A – late filing of return of income, u/s 234B interest for default in payment of advance tax & u/s 234C deferment of advance tax.

AMT v/s MAT

AMT differs from MAT on various counts; some of them are as under:

S. No.	Particulars	MAT	AMT
1	Applies to	Companies	Persons other than Companies
2	Trigger point	Having book-profit	Claiming specified deductions
3	Computation mode	Book-profit is adjusted with specified adjustment	Total income is increased by specified deduction
4	Preparation of profit & loss Accounts	Companies are required to prepare profit & loss account as per the provision of Schedule VI	No such legal requirement
5	Allowance of depreciation	Depreciation is to be calculated at the rate specified under Schedule XIII of Companies Act	Depreciation is to be calculated at the rate specified under rule 5 of Income-tax rules.
6	Treatment of brought forward losses & depreciation	Lower of brought forward losses or depreciation as per books is allowed to be deducted from book-profit	Both brought forward loss and well as brought forward depreciation (determined as per income-tax provisions), to be deducted before carrying specified adjustment to total income
7	Long term capital gains exempt u/s 10(38)	MAT is applicable	AMT is not applicable

Illustration

Provisions of the amended chapter can be better under stood with the help of following example:

X co has entered into Joint venture for carrying certain infrastructure projects eligible for profit based incentive u/s 80IA.

A) Computation of Income under normal provision of Act

Particulars	20x3	20x4	20x5
Gross Total income	19	1100	1400
Deduction u/s 80-IA	15	500	400
Total income	4	600	1000
Tax @ 30%	1.2	180	300
E. Cess @ 3%	0.036	5	9
Total Tax	1.236	185	309

B) Computation of Adjusted total Income

Particulars	20x3	20x4	20x5
Total Income	4	600	1000
Add: Deduction under Chapter VIA-C (from 80H to 80RRB) & 10AA	15	500	400
Adjusted total Income	19	1100	1400
Alternate Minimum Tax @ 18½ %	0*	204	259
Education Cess @ 3%		6	8
Total	0	210	267

C) Computation of tax

Particulars	20x3	20x4	20x5
Normal Tax (a)	1.236	180	300
Alternate Minimum Tax (b)	NA	204	259
Taxed at Normal Rate (NR) or AMT	NR*	AMT	NR
Higher of (a) or (b)	1.236	204	300
Tax Due (including Education Cess)	1.236	210	309
Less Tax credit utilised	NIL	NIL	24
Tax Payable	1.236	210	284

* Since adjusted total income is less than Rs 20 lakh AMT is not applicable

D) Computation of tax credit

Particulars	20x3	20x4	20x5
Tax credit brought forward & available for utilisation	NIL	NIL	24
Maximum amount upto which AMT credit can be availed Normal tax (–) AMT excluding Education Cess			41
			(300-259)
Tax Credit can be availed limited to actual credit	NIL	NIL	24
Tax credit allowed to be carried forward	NIL	24	NIL
		(204-180)	(24-24)

Proposed introduction of AMT will fasten higher rate of tax on any assesee who earns income which is subject to special lower rate of tax ie less than 18½ %, even though such income is not entitled for specified deduction. Further individual, HUF, and at times AOP & BOI are charged to slab rate of tax. AMT would take away benefit of slab rates. To illustrate,

Particulars	Scenario 1	Scenario 2
Gross Total Income	19,99,900	20,00,100
Deduction u/s 80IA	15,00,000	15,00,000
Total Income	04,99,900	05,00,100
Adjusted Total Income	19,99,900	20,00,100
Tax on Normal Rate	29,990	30,030
AMT	NIL	3,70,119
Tax liability without considering deduction u/s 80IA		4,30,030

In the above example it may be observed that under scenario 2 increase of income by Rs 200, assesse is subject to increase tax by Rs 3,40,089 and benefit of slab rate is lost. In such scenario it is suggested to introduce marginal relief and income subject to special lower rate of tax eg short term capital gains on listed securities etc., should also be excluded while computing Adjusted Total Income.

Initially Government has provided various tax breaks to encourage certain industries in specified areas or certain type of industries, which is to be availed in specified number of years. Hence, questions may arise whether specified industries have been matured well before expected time or where India has achieved target industrialisation? Further is it fair to provide exemption on one hand and withdraw it on other hand?

(Extracts from the article published in Income Tax Review April 2012 Issue)

Dividend Distribution Tax - Impact of proposals proposed by Finance Bill 2012

2012-05-13T07:22:00.001-07:00

Additional tax, Dividend Distribution Tax (DDT) @ 16.995% u/s 115-O is being charged on every domestic company distributing dividend. Finance Act 2008 has introduced w.r.e.f. 1-4-2008 sub-section (1A) to mitigate cascading effect of DDT on dividend received by domestic company during the financial year, subject to fulfilment of conditions as under:

Such dividend is received from its subsidiary;
The subsidiary has paid DDT; and
The domestic company is not a subsidiary of any other company.

Currently DDT is mitigated only up to one level subsidiary. Clause 53 of the Finance Bill proposes to delete third condition w.e.f. 1-7-2012. With the deletion of third condition every domestic company (even if it is subsidiary of any other company) can claim reduction of dividend received from its subsidiary. This is explained in following chart:

(Click image to see in larger size)
Proposed amendment would remove cascading effect of DDT on multiple layered companies in a group i.e. in the given example Sco2 can claim reduction on fulfilment of two prescribe conditions. Further in case there are more layers/companies between Hco & Sco2, each of such companies would be entitled of reduction of dividend distributed by its subsidiary. However it is pertinent to note that Companies Bill 2011 clause 186 restricts investments in companies only up to two layers.

Relief is available only in respect of dividend received (not receivable) and distributed in same financial year. Term financial year not defined in the Act. As per S. 2(21) of the General Clauses Act, 1897 ‘financial year’ means year commencing from 1^st April.

Issue may arise in case dividend is distributed earlier and dividend from subsidiary is received latter but within same financial year. To illustrate, Hco distributes dividend on 30-08-12 and it received dividend from Sco on 30-09-12. Due date of payment of DDT by Hco would 14-09-12. Considering the provisions Hco should be entitle for reduction of dividend received from Sco, even though it has declared and paid dividend prior to receipt from its subsidiary. In such scenario whether Hco can hold payment of DDT beyond due date or if DDT is paid on or before due date can it claim refund of DDT? In case DDT is not paid by Hco, whether it would be a company in default u/s 115Q and liable for payment of interest u/s 115P? If yes, then up to which date and on gross or net amount of dividend? These issues may be mitigated to larger extent in case specific provisions for refund of DDT are provided u/s 237.

Further schedule DDT of ITR 6 does not have specific entry calling details of dividend received from subsidiary. Hence it should be appropriately modified to capture details of dividend distributed and DDT paid by the subsidiary. In absence of this it may happen that demand for short payment of DDT may be raised while processing of returns at CPC.

(Extracts from the article published in Income Tax Review April '12 issue)

Minimum Alternate Tax - Impact of proposals of Finance Bill '12

2012-05-13T07:13:00.002-07:00

S. 115JB creates a legal fiction regarding the total income of the assessees which are Companies and the book profit of the Company is deemed to be total income of the assessee in the specified circumstances. It also provides that every assessee, being a company shall for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. Currently various companies engaged in business of banking or insurance are required to prepare their accounts in the form and manner as laid down by the applicable respective banking or insurance laws. Erstwhile S. 115J specifically excluded Electricity Company within its ambit. However no such exclusion has been specially provided u/s 115JB. Hence issue arisen whether provision of minimum alternative tax are applicable to banking and insurance companies. In the series of decisions it was held that the under the applicable banking or electricity Act these companies are required to maintain their accounts in a different form than the one contemplated under section 115JB(2) ie Parts II and III of Schedule VI to the Companies Act, 1956. It was also observed that no obligating was casted on these companies to prepare another profit and loss account as prescribed under section 115JB(2) for the purpose of the Income-tax Act. Accordingly it was finally held that provisions of MAT are not applicable to Banking and Electricity companies. [Ref Kerala State Electricity Board v. DCIT [2011] 196 Taxman 1 (Ker), Union Bank of India v. ACIT [2012] 49 SOT 32 (Mum.), Maharashtra State Electricity Board v. JCIT [2002] 82 ITD 422 (Mum.)]

In order to nullify these decisions clause 46(i) of the Finance Bill proposes to replace sub-section (1) w.e.f. 1-4-2013. It is now provided that –

a. Every company, governed by special Acts and not required to prepare accounts as per the provisions of S.211(2) of Companies Act, 1956 shall prepare its profit and loss account as per the provisions of the Act governing such company;

b. Every other company for the purposes of S. 115JB, shall prepare its profit and loss account as per the Part II of Schedule VI to the Companies Act, 1956
and such profit & loss account shall be considered as basis for computing the book profit u/s 115JB.

Proposed amendment would be applicable only with respect to those companies who are company and are exempted from preparation of profit & loss account as per the provisions Schedule VI of Companies Act, 1956. Post amendment, these categories of companies would fall within the ambit of MAT. In case entities not incorporated under Companies Act but are treated as company for the purposes of income-tax may still continue to remain outside the ambit of MAT. This position may also hold good even for foreign company.

Considering the omission of part III in revised the Schedule VI of the Companies Act, 1956 reference to part III has also been omitted in the replaced sub-section (1). However this may create certain anomaly for the companies during AY 2012-13, since revised Schedule VI is applicable to the companies having financial year beginning on or after 1-4-2011, whereas replaced provisions referring revised Schedule VI is applicable from previous year 2012-13. [Considering representation appropriate amendments has been made on this point at the time of passing Finance Bill '12 in the parliament]

(extracts from the article on Finance Bill 2012 published in Income Tax Review April 2012 Issue)

Re-development of buildings – Tax Aspects

2011-08-12T04:54:00.000-07:00

1.1 With increase in population and people migrating from rural areas, demand for urban housing is increasing and urban area is running out of land. It is estimated that there are more than 52,000 slums in India, with more than 8 million dwelling units. Out these 17,000 slums with more than 3 million dwelling units belongs to Maharashtra.

1.2 In view the fact that land cannot be created; supply of land for new construction would be from:

a) Redevelopment of old buildings,

b) Development of slums.

c) ‘Supply from old mills and salt pans’ - in cities like Mumbai

However environmental disquiet has held the plans for developing salt pans. Hence currently redevelopment of chawls, dilapidated building, some crumbling co-operative societies and slums would drive the market.

1.3 Redevelopment of old structures involves various complicated and peculiar regulatory and tax issues. Important parties to the redevelopment scheme are:

i) Land owners / society;

ii) Tenants / flat owners / dwellers / society members;

iii) Developers

iv) Various Governmental agencies.

However for the purpose of taxation we are concern with tax issues that may surround first three parties only. Tax implication on developers are specifically not dealt herewith since all the expenses incurred by the developer would be in the ordinary course of business and no specific tax issues arises merely on undertaking redevelopment. Though there are various industry specific issues which arises on all types of construction. During the course of re-development of society, society and / or members are in receipt of sum in one or the other form.

More.....

TDS on salary paid to expatiates in their home country by the foreign employer

2011-03-22T01:16:00.000-07:00

Supreme Court in this decision has disposed of 104 cases (amongst them were Eli Lilly & Co. (India) (P) Ltd., Ericsson Communication (P) Ltd., Mitsui & Company Ltd. pertaining to the applicability of TDS on salary paid to expatiates in their home country by the foreign employer.

Facts of the case:
Eli Lilly & Co. (India) (P) Ltd.

Eli Lilly Inc. Netherland (Foreign Company) had a Joint Venture with Ranbaxy Ltd., in the form of Eli Lilly & Co. (India) (P) Ltd. (Indian Company). Foreign Company has seconded four expatriates to Indian Company. Expats continue to be on roll of foreign company and received salary from Indian company in India as well as from foreign company in home country. These expats did not perform any services for the foreign company and total remuneration (in India & in foreign) was paid only on account of services rendered in India. TDS u/s 192 was deducted only on that part of the salary paid in India by the Indian company. However expats have paid taxes due on home salary by way of advance tax or self-assessment tax.

The Assessing Officer held that Indian company as ‘assessee-in-default’ u/s 201 for failure to deduct tax at source on foreign / home salary paid by foreign company outside India and levied interest u/s 201(1A).
Ericsson Communication (P) Ltd.

Similarly in this case too Swedish Company has paid ‘child education payment’ to its expatriate employees in Sweeden on which no TDS was deducted by the Indian Company.
Mitsui & Company Ltd.

Mitsui & Company Ltd. (Foreign Head Office) had a project & liaison office in India. Foreign Head Office has deputed some of its employees to project & liaison office in India. As per the terms of deputation expats also received retention / continuation salary paid by the foreign Head Office in home country. TDS was deducted only on that part of salary which was paid by project & liaison office. However after consultation with CBDT, project & liaison office has agreed to pay tax & interest on retention continuation salary with the understanding that there will not be any penalty proceedings.
However the Assessing Officer has levied penalty u/s 271C against project and liaison office in India for alleged default of Foreign Head Office
Lower appellate authorities has held in favour of the assessees that assessee (Indian Counter part) were not under statutory obligation to deduct tax at source u/s 192 on Home Salary paid by Foreign Company and consequently they are also not ‘assessee-in-default’ u/s 201(1) and where department has levied penalty u/s 271C, penalty was deleted. Against all these 104 cases department was in appeal before Supreme Court.
Issue before Supreme Court
 Whether TDS provisions are applicable in respect of payments, which are chargeable under the head ‘Salaries’, made by the foreign company in home country, to expatriates who render services in India?

 While answering above, the Court has also analysed following:

a) Whether TDS provisions which are in the nature of machinery provisions are independent of charging provisions?

b) Scope of ‘Salary’ u/s 192(1)?

c) Scope of section 201(1) treating assessee-in-default and section 201(1A) levy of interest?

d) Scope of section 271C r.w.s. 273B for levy of penalty on non-deduction of tax at source?
Argument of Revenue

 S. 192, imposes an obligation for deducting tax on any person responsible for paying any income chargeable under the head “Salary”. The expression ‘any person’ would include any person, responsible for making salary payment to an employee, whether the employee is in India or outside India or whether payment is made in India or outside India. The only requirement for triggering TDS provisions is that employee is paid for rendering services in India and accordingly such salary is exigible to Indian income-tax.

 S. 192, imposes a joint and several obligation on all the persons who are responsible for paying any income chargeable under the head ‘Salary’ to an assessee employee in India.

 Alternatively, it was also argued that in view of amendment to S. 9(1)(ii), the obligation of Indian employer is co-extensively with the foreign employer (who is directly paying the foreign account of the expatriate employee outside India) as long as the salary income of such an employee arises or accrues in India or is in respect of ‘services rendered in India’.

 With respect to penalty, assesses plea of bona fide misunderstanding of law does not withstand the test of ‘reasonable cause’ so as to delete penalty.

Argument of Assessee

 The obligation to deduct tax at source is on the person responsible for paying salary. Accordingly, deduction of tax at source is qua the amounts actually paid by the employer or paid on his behalf or on his account.

 The payment of salary by the foreign company was not on behalf of or on account of Indian employer.

 The obligation to deduct tax at source does not extend in respect to salaries paid by any other person, which is not on account of or on behalf of such employer, even though such salaries may have nexus with the service of the employee with that employer and may be assessable to tax in India in the hand of employee.

 In respect of consecutive and concurrent employment, unless employee furnishes details of such employment, TDS is required to be deducted without considering salary paid by another employer.

 The TDS provisions are in nature of machinery provisions to enable easy collection and recovery of tax and are independent of charging provisions. Charging provision are applicable to receiver of income and TDS (machinery) provisions are applicable to payer of income.

 The obligation to deduct tax at source is on deductor, which is independent of the assessment of income in the hands of the expatriate employee.

 TDS provisions have no extra-territorial operation. There is no provisions in the income-tax Act providing TDS provisions applicable to payments made abroad by a person located outside India.

 Employees have discharged tax liability on home salary either by way of advance tax or self assessment tax and has also filed return of income. Accordingly even if assessee is treated as assessee-in-default, the tax cannot be recovered again from the assessee since employee has paid the tax.

 Indian employers were under bona fide impression that it was not required to deduct at source and such bona fide belief constitutes ‘reasonable cause’ for non levey of penalty.
Held

 The scheme of the TDS provisions applies not only to the amounts paid, which bears the character of ‘income’ such as salaries, dividend, interest on securities etc. but also apply to gross sums, the whole of which may not be income or profits in the hands of the recipient, such as payment to contractors and sub-contractors. The purpose of TDS provisions is to see that the sum which is chargeable u/s 4 for levy and collection on income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to non-resident.

 If the payments of the home salary paid abroad by the Foreign Company to the expatriate has any connection or nexus with rendition of services in India then such payment would constitute income which is deemed to accrue or arise to employee in India as salary earned in India in view of S. 9(1)(ii).

 S. 9(1) integrates the charging sections, the computation provisions as well as machinery provisions.

 Income-tax Act has extra-territorial operation in respect of subject matters and the subjects which is permissible under Article 245 of the Constitution and the provisions are enforceable within the Area where Act extends through the machinery provided under it.

 Salary TDS provisions is a stand alone section amongst other TDS provisions (Chapter XVII-B), which has to be read with section 9(1)(ii).

 Supreme Court concluded that-

o In generality it cannot be said that the TDS provisions are in nature of machinery provisions to enable collection and recovery of tax and are independent of the charging provisions.

o Home Salary payments made by the foreign company in foreign currency abroad can be held to be ‘deemed to accrue or arise in India’ depending upon the facts in each case.

 On facts, it was held that home salary / special allowance payment made by the foreign company abroad is for rendition of services in India and no work was found to have been performed for the foreign company, would to subject to TDS u/s 192(1) r.w.s. 9(1)(ii).
Scope of S. 201(1) & S. 201(1A)

 Provision of S. 201(1) treating assessee-in-default and payment of interest u/s 201(1A) are independent to each other. Object of s. 201 is to recover that tax and incase of short deduction of tax, recover the shortfall. Interest u/s 201(1A) is compensatory measure for withholding tax which ought to have gone to the exchequer. The levy of interest is mandatory and absence of liability for tax will not dilute the default.

 Interest u/s 201(1A) r.w.s. 201(1) can only be levied when a person is declared as an assessee-in-default.

 Interest is levied for the period of default, which is period between the date of deductibility and date of actual payment of tax.

 In case tax is directly paid by the employee (who is principally liable to pay tax) Indian company would be liable to pay interest from the date of deductibility of tax to the date of actual payment by concern expatriate employees.
Scope of S. 271C r.w.s. 273B

 Penalty u/s 271C which, is equal to the amount of tax, is leviable if any person fails to deduct the whole or any part of the tax as required by the provisions of Chapter XVIIB.

 S. 273B provided that no penalty can be levied on the person for failure to deduct tax at source if such person proves that there was a reasonable cause for the failure.

 Court cancelled the levy of penalty on following counts:

o Non-deduction of tax at source took place on account of controversial addition. The concept of aggregation or consolidation of the entire income chargeable under the head ‘salary’ being exigible to deduction of tax at source u/s 192 was a nascent issue and this was never considered by the Supreme Court.

o Assessee has not claimed deduction u/s 40(a)(iii) while computing income from business and hence paid higher corporate tax and in some cases the expatriate employees had directly paid tax on such home salary.

o Deductor has been bona fide belief that they were under no obligation to deduct tax at source on such home salary.
Conclusion

 Supreme Court widens the scope of the withholding of taxes from salary. Accordingly withholding provision u/s 192 are triggered in respect of the amounts which are exigible under the head ‘Salaries’ irrespective to place of payment. In other words all Indian companies who has deputes from foreign sister / associate company will have to deduct the tax on global salary, which relates to services rendered in India, during their deputation in India.

 In view of this decision every foreign company who has deputed their employees in India, would be required to reassess their fact pattern so as to determine there withholding tax liability in India.

 However said judgment will not have applicability in case of non deduction of tax at source other than salary since Supreme Court has categorically elucidate that this judgement is confined strictly to the question of deductibility of tax from the ‘income chargeable under the head salaries u/s 192(1)

PS: Analysis published in CTC's IT Review

Income-tax Decisions

2011-01-17T20:59:00.000-08:00

Vinod Kumar Jain vs. CIT (2010) 46 DTR 253
S. 2(14), 2(29A), 2(42A) : The assessee was allotted the flat on 27/02/1982 by issuance of an allotment letter and he had been making instalment payments in terms thereof. However, the specific number of flat was allotted to the assessee and possession was delivered on 15/05/1986. It was held that the right of the assessee prior to 15-5-1986 was a right in the property and it cannot be held that prior to the said date the assessee was not holding the flat. Thus the gain arising out of sale of flat, allotted to assessee vide allotment letter dated 27/02/1982 and sold on 6/01/1989 is a long term capital gain even though possession was granted on 15/05/1986.

CIT vs. Salitho Ores Limited (2010) 46 DTR (Bom) 377
S. 37(1) : The assessee is the best judge in the matter of commercial expediency. Assessee incurs expenditure in pursuit of a business opportunity. But sometimes judgement as to the existence of a business opportunity turns sour. Expenditure incurred for pursuit of the business or exploitation of business opportunity cannot be denied by tax authorities on the ground that the decision was imprudent. Accordingly it was held that lease rent of 4 dozers is allowed as deduction even if 3 out of 4 dozers were not used at all.

CIT vs. Glaxosmithkline Asia (P) Ltd (2010) 47 DTR (SC) 65
Sec. 40(A)(2): In the case of domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily will be revenue neutral in nature, except in two circumstances having tax arbitrage—
[i] If one of the related Companies is loss making and the other is profit making and profit is shifted to the loss making concern; and
[ii] If there are different rates for two related units [on account of different status, area based incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of tax arbitrage. For example, sale of goods or services from non-SEZ area [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will have less profit taxable and non-taxable division will have a higher profit exemption.

All these complications arise in cases where fair market value is required to be assigned to the transactions between related parties in terms of Section 40A(2). In order to reduce litigation, we are of the view that certain provisions of the Act, like Section 40A(2) and Section 80IA(10), need to be amended empowering the Assessing Officer to make adjustments to the income declared by the assessee having regard to the fair market value of the transactions between the related parties. The Assessing Officer may thereafter apply any of the generally accepted methods of determination of arm’s length price, including the methods provided under Transfer Pricing Regulations.

The Court further suggestions the law should be amended to make it compulsory for the taxpayer to maintain Books of Accounts and other documents on the lines prescribed under Rule 10D

CIT vs. Vijay Kumar Goel (2010) 235 CTR (Chattisgarh) 516
Sec. 40(A)(3) read with Rule 6DD(d)(iv): Payment made through bankers cheque/ pay order / CDR, are bills of exchange and payments made through these instruments cannot be disallowed u/s 40A(3) read with Rule 6DD(d)(iv).

CIT vs. Maruti Employees Co-Op Hous. Soc. Limited (2010) 235 CTR (P&H) 407
57(iii) : Interest was derived on deposits made by the members as to so requiring the assessee to discharge the liability of maintaining their house. As a matter of executing the obligations of the deposits made, the assesse was incurring expenses. Accordingly expenses incurred towards maintenance of houses by the assessee were allowed as a deduction against such income.

CIT vs. Smt Alka Bhonsale (2010) 46 DTR (Bom) 253
Sec. 94 : Mutual fund unit striping - the conditions prescribed in clause (a),(b) and (c) of sub-section (7) of Section 94 are intended to be cumulative in nature.

Sakthi Textile Limited vs. JCIT (2010) 46 DTR (Mad) 191
Sec. 147 , 148 AY: 1991-92, 1992-93, 1993-94 : Having entertained an writ petition, if the same is dismissed after several years on the ground of availability of alternative remedy it would not be in the interest of justice.

CIT vs. Bhagwati Steels (2010) 47 DTR (P&H) 75
S. 194C: On the facts of case it was held that where whole of the distribution agreement was considered as transaction of goods per se, it cannot be segregated for the purpose of payment of expenses viz. freight charges and accordingly amount of freight charged separately in the invoice cannot be held liable for deduction of tax at source u/s 194C

Brij Lal vs. CIT [2010] 194 Taxman 566 (SC)
Settlement Commission: Provisions dealing with a regular assessment, self assessment and levy & computation of interest for default in payment of advance tax, etc are engrafted under chapter XIXA pertaining to settlement of cases. Interest u/s 234B is levied up to the date of order u/s 245D(1) and not upto the date of order u/s 245D(4). The Settlement Commission cannot reopen its concluded proceedings by invoking S. 154 so as to levy interest u/s 234B particularly in view of S. 245-I

Tribunal

Inter Gold (I)(P) Ltd vs. JCIT 2010 47 DTR (Mumbai) (Tribunal) 150
S. 4, 28(i): If the receipt is to make good actual or prospective loss in a particular trading transaction or set of transactions, it is a revenue receipt liable to tax. Any receipt towards loss of source income is capital receipt. Loss on source of income does not necessarily mean that it must absolutely extinguish. If the source of income has been severely beaten thereby causing serious damage to the income earning apparatus itself, it will also be construed as the loss of source of income. So if goodwill of the business is damaged and later on some compensation is awarded in lieu of that, it will also fall in the same category of loss of source of income. It is imperative that the receipt should be in fact towards the loss of goodwill in general and no part of it should relate to make good loss of a particular trading transaction or set of transactions.

Zylog Systems Limited vs. ITO - ITA No. 1138 & 1141/Mds/2007 Order dt 2-11-2010 (Chennai Sp. Bench)
S. 10A, AY 2003-04: The appellant receiving the export proceeds in foreign exchange abroad (as per the guidelines of RBI) within due dates and utilizing the same for the purpose of business is considered as deemed receipts in India. Accordingly such receipts cannot be excluded from the exports proceeds while computing deduction u/s 10B.

DCIT vs. Shree Laxmi Tractors 2010-TIOL-572-ITAT-BANG
S.40A(3): Assessee granting discount from actual sale price of tractor to a customer at the time of purchase is cannot be categorised as a expenditure. It is merely an deduction from sale price and there is no actual cash payment. Hence disount is not liable for disallowance u/s 40A(3)

DCIT vs. SMK Shares & Stock Broking P. Ltd ITA No. 799/Mum./2009 ‘E’ Bench, Mumbai Order dt. 24/11/2010
S.45 A.Y. 2005-06 : The assessee, a broker, disclosed gains on sale of shares as a short-term capital gains and long-term capital gains. During the assessment proceeding AO treated short term gain as business income on the ground that there was large volume and frequency of transaction. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognised this fact by taxing these transactions under the head “Short Term Capital Gains”. If the Assessing Officer’s reasoning is accepted, then it would be against the legislative intent itself. It was held that if the modus operandi of the assessee remained the same in regard to other shares purchased during the year, then the assessee’s claim could not be negated only on the basis of frequency of the transaction.

Godrej Agrovet Ltd. vs. ACIT, ITA 1629/M/09 ‘G’ Bench, Mumbai Order Dt 17-09-2010
S. 14A AY 2005-06 : In view of decision of Godrej Boyce Mfg. Co. Ltd. 328 ITR 81 (Bom), Rule 8D is applicable only prospectively i.e. from A.Y. 2008-09. Where the investment in shares was made out of own funds & not out of borrowed funds, relying on decision of CIT vs. Hero Cycles Ltd 323 ITR 518 (P&H) it was held that disallowance of interest u/s 14A is not sustainable. Further disallowance out of common administrative expenses was restricted to 2% of the total exempt income.

Sulzer India Ltd vs. JCIT AIT-2010-503-ITAT- I.T.A. No.2944/MUM/2007 (Mum Sp. Bench)
S.41(1)(a): Difference between the discounted value paid towards the future sales tax liability cannot be termed as remission/ cessation of liability because the Sate Government has neither waived any of the liability nor tax payer has enjoyed any benefit S.41(1) (a)

DCIT vs. Mayavati (2010) 42 SOT 59 (Del)
Sec. 56(2)(v) : In absence of any quid pro quo and any duties or obligations on the part of the assessee to render any services political or otherwise, gifts could not be held to be received from exercise of vocation of politics. However gifts upto and above specified amount i.e. 25000 to be considered u/s 56(2)(v).

DCM Engineering Ltd vs. ACIT (201) 46 DTR (Del) (Trib) 505
Sec. 115JB : In order to determine book profits liable for MAT, profit as per the Profit and Loss A/c for the relevant previous year is to reduced by an amounts, lower of brought forward loss or unabsorbed depreciation as per books of accounts and not by the business loss or depreciation as per tax audit report. Further no adjustment can be made on account of provision of gratuity and leave encashment arrived as per actuarial valuation

JSW Steel Limited vs. ACIT 2010 133 TTJ 742 (Bom)
Sec115JB : Debenture Redemption Reserve created even though is created towards ascertained liability is on capital account. Accordingly same cannot be deductible while computing Book Profits.

N.G. Roa vs. DCIT (2010) 133 TTJ (Del.) 797
Sec. 271(1)(c) : By no stretch of imagination an making an incorrect claim tantamount to furnishing of inaccurate particulars. The claim of HRA in respect of 2 accommodations by furnishing all particulars in the return is a case of a claim of exemption made by the assessee, which in the eyes of the department is a claim not sustainable in the law is not subject to levy of concealment penalty.

(Published in WIRC December 2010 News Letter; CA. Paras K. Savla, CA. Lalchand Chaudhary )

Talk by Shri Deepak Parekh Chairman HDFC and Shri Yashwant Sinha, MP, Chairman Standing Committee of Finance & Former Finance Minister

2011-01-12T06:13:00.000-08:00

Tax has a significant effect on actions of the people, which determines the economic growth of the Country. The Chamber of Tax Consultants and D.M.Harish Foundation organised 3rd D.M. Harish Memorial lecture on the topic of “Economic Growth, Equity and Taxation” addressed by Hon’ble Shri Yashwant Sinha, MP, Chairman of Parliament’s Standing Committee on Finance. Shri Deepak Parekh, Chairman HDFC was the Guest Speaker who spoke on the subject “Governance”

While delivering the Guest Speech, Shri Deepak Parekh, placed emphasis on the Education and systematic efforts to be made to fix corruption in the economy. He emphasised need to have in place mission 2020 on Governance with immediate focus on governance at National, local and, corporate and self levels. E-Governance should be encourage which would reduce corruption and increase transparency in system. In coming days large number of people would live in urban India. Persons like City Manager can be appointed to manage the City. In the days to come hand of the professionals would be full due to introduction of DTC, GST, IFRS, and new Companies Bill.

Shri Yashwant Sinha lauded the efforts of The Chamber of Tax Consultants for representations, since it is not a institution of vested interest. He mentioned that this will help for better tax policy and administration. Growth without equity is like a jungle and growth with equity is garden. Growth should be an inclusive growth. What is required in current period is better quality of living of the people but within predetermined time frame. He compared ideal tax policy with the quote from Raghuvams by Kalidasa. Wherein learned poet mentions “King receives taxes from his subjects only for the promotion of their welfare; for the sun sucks up water simply to give it back a thousand-fold (in the shape of rain)”.

Upcoming proposed tax legislations viz DTC,GST are path breaking legislation in the years to come. He also promised that his committee (Standing Committee on Finance) would take every effort to ensure that DTC law is better law then what is currently presented before the Parliament and which would withstand the test of time for next atleast half a decade. To over come the weakness in present form of DTC representation from the institution like Chamber has a greater weight than others, since it is neutral body. On the functioning of the parliamentary committees his view was that it in need of time to move from opaqueness to openness.

Eight tax saving secrets you should know

2011-01-03T00:12:00.000-08:00

The Income Tax Act 1961 is a voluminous piece of legislation. Taxmann Publications’ latest edition of the Act runs into 1,125 pages. It’s enough to intimidate even the most diligent law student and tax expert, leave alone ordinary taxpayers. But hidden away in the 300-odd sections and 14 schedules are clauses that can benefit ordinary taxpayers-provided they know how to claim those benefit.

ET Wealth spoke to a range of tax experts to glean information on little-known tax benefits you may be entitled to. Here are eight deductions that can help you save tax over and above the tax saving investments you make during the year.

Some of my comments has been captured in this write up published in The Economic Times Wealth January 3, 2011 Page 2, 3 & 4. Link to the article : http://economictimes.indiatimes.com/articleshow/7201334.cms

Can you defer the payment of Capital Gains Tax on sale of immovable property?

2011-01-02T21:15:00.000-08:00

Capital Gains Tax Planning on conversion of capital asset into stock in trade

In view of decision of Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT [2003] 129 TAXMAN 497 (BOM.) difficulty is faced by the property owners who sell there property for development / redevelopment, where payment is staggered over number of years, but tax on such sale is required to be paid in the year of transfer itself, even though he has not received ay consideration. Difficulty is further exaggerated where consideration is in kind eg in the form of constructed flats/shops.

Tax Idea:
The Section 45(2) provide in case capital asset is converted into stock in trade it would be considered as transfer on the date of such conversion but the actual chargeability to tax would arises only when the stock-n-trade (erstwhile capital asset) is sold. The value of consideration is taken to be market value of the asset on date of the conversion.

Accordingly in case a property owner converts capital assets into stock in trade, his tax liability shall be deferred to future date. This provision is applicable to all assets, movable or immovable, considering the huge appreciation of properties it assumes a special importance in regard to immovable properties.

(This was originally Published in CVO News & Views December 2010 issue)

Disallowance of expenditure on account of non-compliance with TDS provisions*

2010-11-13T06:27:00.000-08:00

While computing profits and gains of business or profession, S. 40(a)(ia) restricts / disallows deduction of certain specified sums/expenditure paid to the resident, in case provisions of Chapter XVII-B (TDS) are not complied.

Legislative history
2004 Amendment
 In order to augment compliance of TDS provision, S.40(a)(ia) was introduced by Finance (No.2) Act, 2004 w.e.f. 1-4-2005 i.e. from AY 2005-06. It provided that any interest, commission or brokerage, fees for professional services or fees for technical services, contract charges payable to any resident person would not be allowed as deducted while computing profits and gains of business or profession of assessee if tax required to be deducted on these payment under Chapter XVII-B is either not deducted or after deduction has not paid. Further deduction would be allowed during the financial year in which tax is deducted or tax has been deposited.

2006 Amendment
 Taxation (Amendment) Act, 2006 w.r.e.f. 1-4-2006 has added “rent and royalty” to the list of specified expenditure.

2008 Amendment
 In view of the said provision, failure to pay the tax deducted at source, whole of the expenditure is disallowed which is otherwise allowable.
 To mitigate hardship caused to the assessee, Finance Act 2008 has amended said section retrospectively from 1-4-2004 i.e. AY 2005-06. It granted relief in respect of the expenditure pertaining to the month of March (last month of financial year) by allowing additional time for depositing TDS on such payment till due date of filing return of income u/s 139(1) ie 31st July (non corporate assessee not liable for audit) and 30th September (corporate and other assessee liable for audit).
 This additional period has been allowed only for the purposes of escaping disallowance of expenditure. Additional period does not extends the time limit of payment of TDS. Though expenditure is not disallowed in case tax is deposited late but within additional allowed time, other penal provisions would continue to apply.

2010 amendment
Amendment made in 2008 is further sought to be relaxed by the Finance Act 2010 by substituting the earlier proviso. It states that now disallowance of any specified expenditure (liable for TDS) under section 40(a)(ia) would be attracted only if, tax is not deducted or after deduction not paid, on or before, due date of filing return of income u/s 139(1).

It is also provided that in respect of such expenditure where tax has been deducted in subsequent year or deducted tax has been paid on or after due date of filing return of income, deduction would be allowed in the previous year in which tax has been deducted or paid. This amendment is applicable retrospectively from 1-4-2010 ie AY 2010-11. Thus, this amendment brings the provisions of this section in line with S. 43B.

Impact of the Amendment
Amendment would provide immense relief to the assessee’s who are unable to deposit tax deducted at source within the specified time limit. They would be entitle for additional time up till due date of filing of return of income to deposit the tax deducted at source in order to escape disallowance of expenditure. With this amendment gives away the distinction for allowance of expenditure for first 11 months and last month of the previous year. However it may be noted that such a asseesee may not escape other penal consequences for late deduction and late payment.

Can amendment apply from AY 2005-06?
It is interesting to note that earlier, in order to mitigate the hardship caused to taxpayer, amendment in 2008 was made effective retrospectively from AY 2005-06 where as current relaxation is made effective from the AY 2010-11. The law to be applied in income tax assessments is the law in force in the assessment year unless otherwise provided expressly or by necessary implication . The circumstances under which the amendment is brought in existence and the consequences of the amendment will have to be taken care of while deciding the issue as to whether the amendment is clarificatory or substantive in nature and, whether it will have retrospective effect or not .

Supreme Court in Zile Singh v. State of Haryana and Ors. (2004 (8) SCC 1) relying on the Principles of Statutory Interpretation by Justice G.P. Singh, Statute Law by Craies has observed that - it is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant:
(i) general scope and purview of the statute;
(ii) the remedy sought to be applied;
(iii) the former state of the law; and
(iv) what it was the legislature contemplated.

Further Supreme Court in CIT V. J.H. Gotla,(1985) 156 I.T.R. 323 has observed that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction.

Recently Supreme Court in certain cases had read the amendment retrospective even though such amendment were not made retrospectively, refer CIT v Gold Coin Health Foods P. Ltd (2008) 304 ITR 308 (SC)and CIT Vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC). Further relieance can also be placed on Supreme Court decision in Allied Motors (P.) Ltd. v CIT [1997] 224 ITR 677 (SC).

There cannot be two views that proposed amendment is sought to provide relief to the taxpayer. Though amendment is stated to be effective from 1-4-2010, considering, judicial proceedings, it may be possible to argue that said amendment to be operative from 1-4-2005.

* Originally this article was published in the Chamber of Tax Consultants popular monthly journal ‘Income Tax Review’ March 2010 issue on "Finance Bill 2010"
Recently similar view has been held in Kanubhai Ramjibhai vs. ITO [2011] 10 taxmann.com 25 (Ahd. - ITAT)/ [2011] 135 TTJ 364 (Ahd)

Not following the decision of higher appellant authority amounts to contempt of Court

2010-08-17T02:29:00.001-07:00

I am sure everyone who is associated with the tax practice would have some time confrontation with the tax officer with respect to the allowance of the certain claims in line with judicial precedence. Tax authority usually states that we are not following said respective judgement, since it is not acceptable by the tax department.

There is a DOCTRINE OF STARE DECIS, which means “abide by the former precedents”. The doctrine stare decisis is one of policy grounded on theory that security and certainty require that accepted and established legal principle, under which rights may accrue, be recognised and followed, though later found to be not legally sound, but whether a previous holding of the Court shall be adhered to, modified, or overruled is within the Court's discretion under the circumstances of case before it. Ref Peirce Leslie & Co. v. Commissioner of Income-tax 86 Taxman 554 (Mad.)

The ITO would be bound by a decision of the Supreme Court as also by that of the High Court within whose jurisdiction he is, irrespective of the pendency of any appeal or special leave application against that judgment. He would equally be bound by a decision of another High Court on the point, because not to do so would cause grave prejudice to the assessee. Ref Siemens India Ltd. v. K. Subramanian, ITO 13 Taxman 146 (Bom)

Recently an writ petition came before Bombay High Court (Garware Polyester Ltd & Ars v The Sate of Maharashtra & Ors Writ Petition No 1085 of 2010 order dated 1-7-2010) where in tax assessing officer (Dy. Commissioner, Large Tax Unit) while passing assessment recorded that the judgment of High Court is not accepted by the sales tax department and legal proceeding is initiated against the said judgment. High court observed that in the event where order of High Court is not stayed, refusal to follow and implement the judgment of High Court by the tax assessing officer prima facie amounts to contempt of court.

The judge may impose fines and or jail upon any person committing contempt of court. The judge will make use of warnings in most any situation that may lead to a person being charged with contempt. It is relatively rare that a person is charged for contempt without first receiving at least one warning from the judge.

However now the issue may arise what would be would be the remedy available with the tax payer when placed with similar issue? Whether to file a writ or to follow normal appeal procedure? Filing of writ is always a costly affair both in terms of money & time. But still at times, in order to inculcate the judicial discipline amongst the tax officers’ payers would be required to exercise writ jurisdiction.

Post decision in case of Dharmendra Textile is levy of Penalty u/s 271(1)(c) Automatic?

2010-07-15T05:58:00.000-07:00

1.1 In fiscal Statutes, the import of the words – “tax”, “interest”, “penalty”, etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty — which is penal in character .

1.2 It is implicit in the word “concealed” that there has been a deliberate act on the part of the assessee. The meaning of the word “concealment” as found in Shorter Oxford English Dictionary, 3rd Edition, Volume I, is as follows :- “In law, the intentional suppression of truth or fact known, to the injury or prejudice of another.” The word “concealment”” inherently carried with it the element of mens rea. Mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income unless and until there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon. In order that a penalty under Section 271(1)(c) may be imposed, it has to be proved that the assessee has consciously made the concealment or furnished inaccurate particulars of his income. The omission of the word “deliberate”, thus, may or may not be of much significance but what is material is its application. Section 271 (1) (c) remains a penal statute. Rule of Ingredients of imposing penalty remains the same. The purpose of the Legislature that it is meant to be deterrent to tax evasion is evidenced by the increase in the quantum of penalty, from 20 per cent under the 1922 Act to 300 per cent in 1985 .

1.3 In Webster's Dictionary, "inaccurate" has been defined as: "not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript."

It signifies a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing of inaccurate particulars. The term 'inaccurate particulars' is not defined.

1.4 'Concealment of income' and 'furnishing of inaccurate particulars' are different. Both concealment and furnishing inaccurate particulars refer to 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. Although it may not be very accurate or apt but suppressio veri would amount to concealment, suggestio falsi would amount to furnishing of inaccurate particulars.

1.5 It is now a well-settled principle of law that more stringent the law, more strict construction thereof would be necessary. Even when the burden is required to be discharged by an assessee, it would not be as heavy as the prosecution . A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is different from the penalty for a crime .

2.1 Recently controversy has been arisen after the decision of Supreme Court in case of Dharmendra Textile . The Court observed that it is settled law that penalty under section 271(1)(c) is a civil liability and the revenue is not required to prove willful concealment. Revenue has started interpreting the decisions that penalty u/s 271(1)(c) is automatic and in every case of non payment of duty (tax) would lead to levy of penalty.

2.2 In view of the said decision revenue started believing that entire income which remained undisclosed, “with or without” any conscious act of the assessee, was liable to penal action. Further, the concept of law, with regard to levy of penalty has drastically changed in view of the said judgment, in as much as, now penalty can be levied even when an assessee claims deduction or exemption by disclosing the correct particulars of its income. Accordingly revenue started levy of penalty virtually in each and every case where there is disallowance of any claim whether it is an expenditure or any deduction irrespective of the fact that assessee had bona fied belief or genuine mistake.

2.3 Such an attempt had lead tremendous hardship to the various assessee. In light of this background let us understand whether now levy of penalty is automatic or still it depends upon facts and circumstances of each?

2.4 It is to be remembered that, in the case Dharmendra Textile, issue before the court was the penalty under section 11A of Central excise and rules thereunder and it primarily was not dealing with concealment penalty under income-tax. The said judgement is under a different legislative enactment need to bore in mind before considering its application under Income-tax.

2.5 Concealment of particulars of income, or furnishing incorrect particulars of income, should not be confused with, an unacceptable plea for exemption of tax – liability. They are two distinct and separate.

2.6 Each and every addition made in the assessment cannot automatically lead to levy of penalty for concealment of income. A case for imposition of penalty has to be examined in terms of the provisions of Explanation 1 to section 271(1)(c). Further, it is a settled legal position that penalty proceedings are different from assessment proceedings. The finding given in the assessment though is a good evidence but the same is not conclusive in penalty proceedings. It is, therefore, necessary to re-appreciate and reconsider the matter so as to find out as to whether the addition made in the quantum proceedings actually represents the concealment on the part of the assessee as envisaged in sec. 271(1 )(c) of the Act and whether it is a fit case to impose the penalty by invoking the said provisions. Explanation 1 to sect ion 271(1) (c) in respect of any fact relating to the computation of total income states that the amount added or disallowed in computing the total income of an assessee shall be deemed to be the income in respect of which particulars have been concealed. This deeming provision for concealment is not absolute one. The presumption under the explanation 1 is rebut table and not conclusive. The assessee can submit the explanation as the onus shifts on to the assessee to prove that he has not concealed the particulars of the income.

2.7 It is well established that so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under Section 271(1)(c) of the Act, even if the claim made by him is not sustainable in law, provided that he either substantiates the explanation offered by him or the explanation, even if not substantiated, is found to be bonafide. If the explanation is neither substantiated nor shown to be bonafide, explanation 1 to Section 271(1)(c) would come in to play and the assessee will be liable to for the prescribed penalty. It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bonafide .

3.1 Recently Supreme Court again in UOI vs. Rajasthan Spinning & Weaving Mills has elucidate its intention in the Dharmendra Textile as under:

“In our view the reason assigned by the Tribunal to strike down the levy of penalty against the assessees is as misconceived as the interpretation of Dharamendra Textile is misconstrued by the Revenue. In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non – payment or short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam, J.) was a party to the decision in Dharamendra Textile and we see no reason to understand or read that decision in that manner. From the above, we fail to see how the decision in Dharamendra Textile can be said to hold that section 11AC would apply to every case of non – payment or short payment of duty regardless of the conditions expressly mentioned in the section for its application. There is another very strong reason for holding that Dharamendra Textile could not have interpreted section 11AC in the manner as suggested because in that case that was not even the stand of the revenue. The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of section 11A. That is what Dharamendra Textile decides. It must, however, be made clear that what is stated above in regard to the decision in Dharamendra Textile is only in so far as section 11AC is concerned. We make no observations (as a matter of fact there is no occasion for it!) with regard to the several other statutory provisions that came up for consideration in that decision.” (emphasis supplied)

3.2 High Court of Punjab & Haryana In Siddhartha Enterprises has held that the judgment of the Hon’ble Supreme Court in Dharmendra Textile cannot be read as laying down that in every case where particulars of income are inaccurate, penalty must follow. What has been laid down is that qualitative difference between criminal liability under section 276C and penalty under section 271(1)(c) had to be kept in mind and approach adopted to the trial of a criminal case need not be adopted while considering the levy of penalty. Even so, concept of penalty has not undergone change by virtue of the said judgment. Penalty is imposed only when there is some element of deliberate default and not a mere mistake.

3.3 Court in case of Haryana Warehousing has observed that revenue’s thought process that the concept of levy of penalty has undergone drastic change with the decision in case Dharmendra Textile and in every case where there is addition of income to returned income, penalty is levied, in not tenable. Further if revenues view is accepted then the assessee who canvasses a claim on the basis of its (assessee' s) interpretation of the law, would be liable to penal action, in case, the Revenue finds that the claim raised by the assessee is not acceptable. Such a determination would place curbs on the rights of an assessee to raise claims it believes to be genuine under the law. It further observed that said decision has not placed any fetters on the rights of the assessee to raise genuine claims in its return.

3.4 Recently Mumbai ITAT in case of ITO v. Parikh Investment & Development P. Ltd. ITA No. 4760/Mum/2009 order dtd 7-5-2010 has reiterated the observations of a recent judgment of the Hon’ble Apex Court in CIT vs. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158(SC) as under :

“.....In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In Commissioner of Income tax, Delhi vs. Atul Mohan Bindal [2009] 9 SCC 589, where this Court was considering the same provision, the Court observed that the Assessing Officer has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This Court referred to another decision of this Court in Union of India vs. Dharamendra Textile Processors [2008] 13 SCC 369, as also, the decision in Union of India vs. Rajasthan Spg. & Wvg. Mills [2009] 13 SCC 448 and reiterated in para 13 that (page 13 of 317 ITR):

13. It goes without saying that for applicability of Section 271(1)(c), conditions stated therein must exist.” Their Lordships, after considering various decisions including Dilip N. Shroff vs. JCIT (2007) 291 ITR 519(SC) and Union of India vs. Dharamendra Textile Processors (2008) 306 ITR 277(SC) have observed and held (page 158 headnotes) as under :

“A glance at the provisions of section 271(1)(c) of the Income- tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word “particulars” used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous. Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.”

Tribunal subsequently held as under:

“Respectfully following the above decision of Hon’ble Apex Court and keeping in view that it is not the case of the revenue that the assessee has not filed complete particulars of his income or it is not the case of bonafide belief or the explanation offered by the assessee was found to be false or untrue, we are of the view that making a wrong claim is not at par with concealment or giving of inaccurate information, which may call for levy of penalty u/s. 271(1)(c) of the Act. This view also finds support from the recent decisions in CIT vs. Sidhartha Enterprises (2010) 322 ITR 80 (P&H) and CIT vs. Shahabad Co-op. Sugar Mills Ltd. (2010) 322 ITR 73(P&H). Accordingly we are inclined to uphold the order of the ld. CIT(A) in deleting the penalty imposed by the AO. The ground taken by the revenue is therefore, rejected.” (Emphasis Supplied)

3.5 An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi – criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute .

Even after the decision of Dharmendra Textiles, levy of concealment penalty is not automatic even in case where additions have been confirmed by appellate authorities. In order to levy penalty the assessing officer is yet required to give finding based on some contradictory evidence to disprove that explanation offered by the assessee false.

Fradulant refund mails

2009-10-23T08:39:00.000-07:00

Recently various emails are being received by various persons, which are pretended to be send by Indian or US Tax Authority for grant of refund of excess tax paid. Clarifications has been by both of these tax authorities, that they do not send such emails. Hence due care need to be exercise before devulging any personal & sensitive information pursuant to receipt of such mails.