SCOPE OF "PROVISO'

A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the Section and is required to be read into the Section to give the Section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the Section as a whole. [(Allied Motors, 1997 -TMI - 5575 – (SUPREME Court)].

The law with regard to provisos is well-settled and well-understood. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment and ordinarily, a proviso is not interpreted as stating a general rule. [Shah Bhojraj Kuverji Oil Mills & Ginning Factory v. Subhash Chandra Jograj Sinha, AIR 1961 (SC) 1596].

Any clause (say, in an agreement or statute) which begins with the words `provided that' is called `proviso'. The provisios are generally not used but are resorted to provide conditions on riders to the main provisions. The proviso qualifies the generality of the main section or clause by inserting an exception and take out as it was, from the main clause, a part of it which, but for the proviso would fall within the main clause. It is a foreign text to the main text of the clause or section. Its function is to carve out an exception or exclusion to the main provision which otherwise would have been in the main section. It is important that a proviso must be construed harmoniously with the main statute so as to give effect to legislative objective. It should not render itself otiose or in effective or to render substantive provision, redundant (Sales Tax Commissioner v. B.G. Patel AIR 1995 SC 865. Supreme Court in Balachanara Anantrao Rakvi v. Ramchandra Tukaram (2001) 8 SCC 616 held that the correct way to understand a proviso would be to read it in the context of main provision and not in isolation.

A proviso must be limited to subject matter of the main clause and should be, prima facie, read and considered in relation to the principal matter of clause to which it is a proviso. It is not a separate or independent clause and it cannot be divorced from the main clause.

A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction. [Dwarka Prasad v. Dwarka Das Saraf 1976 (1) SCR 277: 1976 (1) SCC 128: AIR 1975 SC 1758: 1975 (1) All LR 516].

The provisos are often added not as exceptions or qualifications to the main enactment but as saving clauses, in which cases they will not be construed as controlled by the section. [Shah Bhojraj Kuverji Oil Mills and Ginning Factory v. Subhash Chandra Yograj Sinha AIR 1961 SC 159: 64 Bom LR 407].

Ordinarily proviso is an exception to the main provision but in exceptional cases a proviso can be a substantive provision itself. [Ishveralal Thakorelal Almaula v. Motibhai Nagibhai 1966 (1) SCR 367: AIR 1966 SC 459: 68 Bom LR 645: 1966 Mah LJ 1049; Commissioner of Commercial Taxes, Board of Revenue, Madras v. Ramkishan Shrikishan Jhaver 1968 (1) SCR 148: AIR 1968 SC 59: 1968 Mad LW (Cri.) 25.

= = = = = = = = =


By: Dr. Sanjiv Agarwal

.

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LEGALLY SPEAKING [Real property]

LEGALLY SPEAKING

GAJANAN KHERGAMKER

CHECK FOR ENCUMBRANCES AND SNAGS, WHILE OPTING FOR A RESALE HOME

I am a first-time buyer, opting for a resale home. However, I am unclear about the documents that need to be in place. I do not want to be caught up in a legal tangle. Is there any checklist of documents, to ensure that no issues arise later?

Aparna Mohite

The prerequisites, vis-à-vis legal documents, for a resale home are more or less similar to that of a new home. Nevertheless, the buyer needs to verify a few more issues. The buyer needs to check whether the property has been mortgaged, to any financial institution or body and if all previous arrears are settled, in full.

Very often, home owners opt for larger homes, in locations other than their prevailing home. Although a resale home may not have the kind of amenities available in newer housing projects, the price that the potential home buyer pays for the resale home is a lot lesser than a new property. However, the buyer needs to be cautious and check whether the amenities that the seller has mentioned actually exist. For example, the seller may offer parking space, which may turn out to be an encroachment on public area.

While opting for a resale home, buyers also need to check the home's condition, right from the walls, to the flooring. Preferably, seek the help of an architect, who should draw out an estimate of repair costs, which could be considered before making any final payments to the seller. Also, there have been numerous cases where home owners have sold properties to unassuming buyers, who are left squabbling over ownership rights with contesting family members. Hence, prospective buyers should thoroughly check whether the present owner has a legal right to sell the house and whether all previous dues have been settled and that the title is clear of any issue that may arise later.

In case, the house is part of a housing society, it is important for the resale to be reflected in the records of the housing society, with appropriate changes in ownership name, to register a valid resale. The resale is said to be completely endorsed, when the maintenance bills begin arriving in the name of the buyer. Once the issues relating to title and condition of the home are properly settled, the purchase of a resale home could well be a worthwhile transaction, considering that the price could be substantially lower, as compared to a new property.

Types of frauds by promoters or companies.

Types of frauds by promoters or companies
Posted in Company Law Type: News on June 29, 2011

Methods or types of frauds by promoters or companies:

During the course of investigation by SFIO over the years, different types of frauds/fraudulent activities have been unearthed. Some of the types of frauds are illustrated below:

(a) Project Financing:

In one of the cases investigated by SFIO, it was noticed that an Indian company imported second hand plant and machinery from its parent company at a very high price. This over valued plant and machinery was used to obtain higher term loans from funding institutions. The loan amount thus obtained was transferred to parent company as payment liability against such plant and machinery. It was also noticed that the Indian company had received different invoices for majority of its machinery for submission to different Government agencies.

(b) Frauds during operations:

In one of the cases investigated by SFIO, it was noticed that an Indian company raised bills showing trading of diamonds among its various group companies in circular manner viz company "A" selling to "B", then "B" selling to "C" and again "C" selling back to "A". Thus, in this process, no goods were transferred and only sale and purchase bills were raised. These bills were discounted with banks and the company received huge amount of rupees as advance from banks against such bills. Initially the company complied in repayment of amount specified in the discounted bills after prescribed period. However, after sometimes, payment was stopped and main promoter of the company who was controlling all the affairs of the company fled the country and the company stopped functioning resulting into huge amount of bank funds becoming NPA.
In some cases investigated by SFIO, huge payments were shown to have been made to petty suppliers of steel items or to group companies during the period of construction of project by recording of supply of materials made by these entities. All these supplies were reflected in the books of account as work-in-progress, which was not verifiable, and during the course of investigation, these petty suppliers were found either nonexistent or not traceable. Group companies were also found to be either woundup or non-operational with no director of those companies being traceable. Funds transferred to these entities showing supply of material were found to have been taken out in cash by rotating through certain accounts or showing payments for certain non-verifiable expenses.

(c) Falsification of Financial Statements:

In some cases investigated by SFIO, it was found that, by following two accounting years, company was showing losses or very nominal profit in the Profit & Loss account filed to the Income tax department. However, huge profit was being shown in the Profit & Loss accounts filed with stock exchanges, ROC etc. The different amount of profits in the two sets of Profit & Loss Account for the same year was shown by resorting to valuation of stock at inflated value in the Profit & Loss Account that was filed with ROC, Stock exchanges following the accounting year other than financial year. In few cases, sales having heavy profit margin were recorded in those months, which were included in the accounting year followed for preparing the Profit & Loss Account filed with ROC and used for the purposes of investors or other stakeholders.

Source: MCA

Bundle of case law

IT : Where pursuant to an agreement a US company, which had a global central purchasing unit (CPU) in USA allowed access to use of CPU to assessee and assessee made payment to said non-resident company on account of link charges, since manner in which services were provided could not be easily ascertained matter was to be remanded to lower authorities for deciding as to whether payment amounted to `royalty' or `fees for technical services' in order to bring it to tax in India - [2011] 11 taxmann.com 225 (Mum. - ITAT)

IT : By way of amendment made in section 43(5) with effect from 1-4-2006 legislature did not intend to take away brought forward losses of dealing in derivatives or make them ineligible for being set off against profits of same business in subsequent years - [2011] 11taxmann.com 231 (Mum. - ITAT)

IT : Assessing Officer after making enquiries has taken a permissible view on a issue while passing assessment order and if on same facts Commissioner has a different opinion, revisionary proceedings under section 263 cannot be initiated by him - [2011] 11 taxmann.com 230 (Ahd. - ITAT)

IT : Where financial data of three comparable companies were not before Assessing Officer/TPO at time of making assessment and they were not examined on their merit, it was considered fit and proper to restore matter regarding determination of arm's length price of international transactions entered into by assessee with AE to the file of Assessing Officer/TPO for fresh adjudication - [2011] 11taxmann.com 232 (Delhi - ITAT)

IT : Mere making of a claim by assessee in its return based upon ruling of AAR which it had subsequently revised voluntary as per latter ruling of AAR would not amount to concealment of income on part of assessee warranting levy of penalty under section 271(1)(c) - [2011] 11taxmann.com 226 (Mum. - ITAT)

IT : Section 44BB would be applicable to a non-resident-company who entered into turnkey basis contracts with ONGC even though it had bifurcated contract price into two segments one relating to supply of services and other relating to supply of spares - [2011] 11taxmann.com 229 (Delhi - ITAT)

IT : Where no opportunity was provided to assessee by way of issuing show cause notice prior to making order under section 92CA(3), matter was to be remanded back to file of Assessing Officer to comply with provisions of law and provide adequate and meaningful opportunity of being heard on issues and then decide matter afresh in accordance with law - [2011] 11 taxmann.com 228 (Delhi - ITAT)

IT : Where assessee-society advanced rupees five lakhs to one of its members allegedly for improvement and expansion of her building which accommodated school being run by assessee, but there was no evidence that amount had been utilized for purpose it had been lent, assessee was denied exemption under section 11 - [2011] 11 taxmann.com 234 (Patna)

IT : Where Commissioner noticed vital flaws in order of assessment entirely attributable to extremely dishonest and defiant approach of assessee, he was justified in setting aside assessment order by invoking powers under section 263 - [2011] 11 taxmann.com 237 (Patna)

IT : For initiating penalty proceedings under section 271(1)(c) recording of satisfaction about concealment of assessee's income is not necessary to be recorded in specific terms and words - [2011] 11 taxmann.com 236 (Cal.)

IT : Income from sale of scrap generated in course of extraction of rubber latex from trees, which is purely an agricultural operation, cannot be brought to Central Income-tax by applying rule 7A of Income-tax Rules - [2011] 11 taxmann.com 239 (Ker.)

IT : Grant of exemption to assessee-trust under section 11 would not effect assessee's right of claming depreciation - [2011] 11taxmann.com 242 (Punj. & Har.)

IT : Tax of non-resident recipient borne by Indian payer is nothing but deemed income of non-resident and same would not fall within definition of tax on income for disallowance under section 40(a)(ii) - [2011] 11 taxmann.com 268 (Mum. - ITAT)

: Notional interest on interest free security cannot be taken as determinative factor to arrive at fair rent - [2011] 11 taxmann.com 265 (Mum. - ITAT)

IT : Production of television and radio programmes for purpose of telecasting and broadcasting through assessee's own network or through network hired by it did not constitute advancement of any object of general public utility within meaning of section 2(15) - [2011] 11 taxmann.com 240 (Ker.)
2011-TIOL-387-HC-AHM-IT

Vinodbhai Arvindbhai Patel Proprietor Shakti Construction Vs ITO (Dated: May 3, 2011)

Income tax – Sections 147, 148, 149, 150 – Whether when assessment is framed as per remand order of the Tribunal, re-assessment can be initiated even after completion of six years from the end of the assessment. - Assessee's appeal allowed: GUJARAT HIGH COURT;

2011-TIOL-369-ITAT-COCHIN + depreciation story

Dy.DIT, Ernakulam Vs Adi Sankara Trust (Dated: June 16, 2011)

Income Tax - Sections 11, 12A, 32(1) - Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets as application of money, the further claim of depreciation on the same assets would amount to double benefits. - Revenue's appeal allowed : COCHIN ITAT;

2011-TIOL-368-ITAT-MUM

The Tata Power Co Ltd Vs Addl.CIT, Mumbai (Dated: May 31, 2011)

Income Tax - Sections 54EC, 72, 74 - Whether when assessee has long-term capital gains, the stage of setting off of long-term capital loss comes only after grant of exemption u/s 54EC. - Revenue's appeal allowed: MUMBAI ITAT;

2011-TIOL-367-ITAT-CHD

M/s Vodafone Essar Ltd Vs Addl.CIIT, Chandigarh (Dated: April 7, 2011)

Income Tax - Sections 14A, 40(a)(ia), 80IA, 115JB, 143(3), 144C(13), 194C, 195, 220(6), 226(3) - Whether when Sec 80IA benefits are debatable, the Tribunal is right in granting conditional stay of high-pitch demand raised - Whether, to do justice to the cause of Revenue, Tribunal is right in directing the assessee to pledge its investments in subsidiaries as security with the AO for the balance demand. - Case disposed of: CHANDIGARH ITAT;

2011-TIOL-366-ITAT-MAD

M/s Rane Brake Lining Ltd Vs ITO, Chennai (Dated: April 21, 2011)

Income tax – Sections 14A, 80HHC, 80IB – Whether disallowance can be made u/s 14A for the interest on borrowed fund even if it is explained that the funds utilised for investments are not borrowed funds – Whether 90% of the rent recovered as sublet is to be excluded from the profit eligible for deduction u/s 80HHC while computing the deduction – Whether the deduction u/s 80HHC is to be allowed after reducing the deduction u/s 80IB. - Assessee's appeal partly allowed : CHENNAI ITAT;



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ISSUES CONCERNING TAX TREATY WITH MAURITIUS

ISSUES CONCERNING TAX TREATY WITH MAURITIUS

T.N. PANDEY

EX-CHAIRMAN CBDT

In the span of merely few months, many irons have been put by the Government in the fire because of various pressures to check black money, tax avoidance and evasion. These, inter-alia, relate to Direct Tax Avoidance Agreements (DTAA for short), where the exercises relate to revision of existing DTAAs, entering into new ones and negotiations for new series of exchange of information agreements. Such exercises are part of broader strategy of checking corruption, black money and tax evasion. Almost every day there is mention about these in media either from the Government's side or from other forums.

** ** **

DTAA with Mauritius [`M' for short]

2. This agreement based on UN Model Convention, with certain departures, was notified on 6th December, 1983 and has been the most controversial agreement concerning Direct Taxes, benefiting `M' substantially as a consequence of which, Foreign Direct Investment (FDI) and portfolio investments in companies (nearly 40 & 50 percent of total inflow) are being routed through this island country. `M' has become a big centre for treaty shopping, leading to tax escapement/evasion/avoidance. The agreement is on usual lines based on UN Model, but deviating from it in some vital respects.

Tax on capital gains

3. In the DTAA with `M', the main irritant for India is tax on capital gains. The DTAA spares investors, resident in `M' from capital gain tax on the sale of shares of Indian companies. This is because the tax treaty provides that capital gains arising from sale of such shares by `M' residents would be taxed only in that country and since it does not tax capital gains, the tax becomes zero. Because of this, persons from third countries do treaty shopping, routing their investments through `M' to escape tax. `M' has no large companies and persons of its own origin, who can invest in big way in India and get the treaty benefit. A study needs to be done to support the view that `M' has become merely a centre (conduit) for saving tax to other countries at India's cost.

** ** **

Besides the capital gains, negotiations are necessary in regard to furnishing of information concerning tax matters of interest to India, assistance in investigation of tax delinquency/frauds, bank details, assistance in recovery and other allied matters.

Actually, it would be appropriate to have a consolidated approach – not single out `M' only for treaty reforms and have negotiations with other countries also like Cyprus, Singapore, Netherlands, etc. To have uniform approach, instead of having separate JWGs, it would be more useful to have a single body for negotiations from India's side – a commission or a committee, specially constituted for this purpose. Further, provisions in the DTC, like GAAR, need to be incorporated/strengthened in such a way that India can be in a bargaining position – not under pressure of losing foreign investments routed through countries like `M'. India now is in a position to attract FDI/FII on its own strength. The uncertainty need to be set at rest expeditiously.
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THE PROVISIONS OF SECTION 206AA(1) OF I. T. ACT, 1961 ARE ULTRA VIRES THE CONSTITUTION

THE PROVISIONS OF SECTION 206AA(1) OF I. T. ACT, 1961 ARE ULTRA VIRES THE CONSTITUTION-BEING DISCRIMINATORY

In order to strengthen permanent account number (PAN) mechanism, the Finance (No.2) Act, 2009 inserted section 206AA in the Income-tax Act, 1961 which came into effect from 01-04-2010. This section makes certain provisions relating to collection and recovery of tax to enforce certain requirements in relation to PAN. Sub-section (1) of the newly inserted section prescribes certain punitive rates to be imposed in case a deductee (i.e., a person from whose income tax is deducted at source) who fails to furnish his PAN to the deductor (i.e., to the person deducting such TDS). In this article, the author illustrates by giving examples that the quantum of penalty and/or the penal consequence is not equal in case of the various defaulting deductee and so, on the grounds of discrimination, the provisions of section 206AA(1) are ultra vires the Constitution.

Introduction

Section 206AA of the Income-tax Act, 1961 was introduced by the Finance (No. 2) Act, 2009 and it came into effect from 1-4-2010. This section makes certain provisions relating to collection and recovery of tax to enforce certain requirements in relation to permanent account number (PAN). This section has come into force with effect from 1-4-2010 and it is reproduced below for ready reference:

"206AA. [Requirement to furnish Permanent Account Number. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—

(i) at the rate specified in the relevant provision of this Act; or

(ii) at the rate or rates in force; or

(iii) at the rate of twenty per cent.

(2) No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid unless the person furnishes his Permanent Account Number in such declaration.

(3) In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in accordance with the provisions of sub-section (1).

(4) No certificate under section 197 shall be granted unless the application made under that section contains the Permanent Account Number of the applicant.

(5) The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.

(6) Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the provisions of sub-section (1) shall apply accordingly.]"

The Legislative Intent behind introducing the section

The purpose behind introducing section 206AA(1) has been stated in the Memorandum explaining the provision of the Finance (No. 2) Bill, 2009 as under :

"d. Improving compliance with provisions of quoting PAN through the TDS regime. - Statutory provisions mandating quoting of Permanent Account Number (PAN) of deductees in Tax Deduction at Source (TDS) statements exist since 2001 duly backed by penal provisions. The process of allotment of PAN has been streamlined so that over 75 lakh PANs are being allotted every year. Publicity campaigns for quoting PAN are being run since the last three years. The average time of allotment of PAN has come down to 10 calendar days. Therefore, non-availability of PAN has ceased to be an impediment. In a number of cases, the non-quoting of PAN's by deductees is creating problems in the processing of return of income and in granting credit for tax deducted at source, leading to delays in issue of refunds."

In order to strengthen the PAN mechanism, it is proposed to make amendments in the Income-tax Act to provide that any person whose receipts are subject to deduction of tax at source i.e., the deductee, shall mandatorily furnish his PAN to the deductor, failing which the deductor shall deduct tax at source at higher of the following rates

(i) the rate prescribed in the Act;

(ii) at the rate in force, i.e., the rate mentioned in the Finance Act; or at the rate of 20%.

Provisions Explained

From above, it is clear that the object of section 206AA(1) is to (a) ensure compliance with the PAN mechanism; (b) address problems associated with non-quoting (and not non-obtaining) of PAN, like processing of returns, claiming credit for TDS and granting of refund; and (c) ensure that the assessees do not give reasons like non-issuance of PAN as a reason for not furnishing it, keeping in mind that the PAN allotment machinery has been fully strengthened and streamlined.

** **
**

The sub-section (1) of section 206AA requires any person (hereinafter referred to as the 'deductee'), receiving any sum, income or amount which is liable to tax deduction at source (TDS in short), to furnish his PAN to the person responsible to deduct tax at source (hereinafter referred to as the 'deductor'). In case the deductee fails to furnish his PAN, the deductor is liable to deduct tax on the sum, income or amount ('income' in short) payable to the deductee, at a rate which is higher of:

(i) the rate specified in the Act;

(ii) the rate or rates in force; or

(iii) 20%.

The Provisions are discriminatory

It is clear from the aforesaid sub-section that it prescribes a rate of TDS by way of a punitive measure in case of default by a deductee in furnishing his PAN to the deductor. In cases where the rate specified in the Act and/or the rate/rates in force is less than 20%, the rate of TDS otherwise applicable would be enhanced up to 20% as a punitive measure. But where the rate specified in the Act and/or the rate or rates in force is more than 20%, this sub-section will be of no consequence and as such higher rates would not be further enhanced. In this way, all the defaulting deductees do not bear the same consequences. Given below are some examples in respect of same:

l Example 1

The sub-section discriminates between (a) the defaulting deductees in whose cases the rates of TDS are more than 20%; and (b) those in whose cases the rates of TDS are less. The defaulting deductees in whose case the rates of TDS are more than 20% there is no penal consequence and they are subjected to same rate of TDS in spite of section 206AA. There is no rationale for such a discriminatory treatment and, for this reason, the provisions of this sub-section are ultra vires the Constitution.

l Example 2

In following cases, rates of TDS in case of non-residents are lower than 20% :

Sl. No. Nature of payment Rate of TDS (exc: surcharge, cess, etc.)
1 Section 194LB – Payment by way of interest by infrastructure debt fund 5%
2 Section 195 – Income by way of long-term gains referred to in section 115E 10%
3 Section 195 – Income by way of short-term gains under section 111A 15%
4 Section 195 – Royalty where the agreement is made on or after June 1, 2005 10%
5 Section 195 – Fee for technical services where the agreement is made on or after June 1, 2005 10%
6 Section 196B – Income from Units 10%
7 Section 196C – Income from foreign currency bonds or GDR 10%

Apart from above, it is also observed that wherever the rates are lower than 20%, the same are sought to be enhanced to 20%. In this way, among various defaulting deductees, for the same nature of offence, someone is subject to higher penalty than the other. For example, in cases where rate of TDS is 5%, it is increased by four times and where it is 10%, it is twice the normal rate of TDS. Thus, for similar offences, the quantum of penalty in the shape of punitive rate is not equal in case of all the defaulting deductees and for this reason also, the provision of sub-section (1) is discriminatory and ultra vires the Constitution.

** **
**

It may be observed that wherever the rates are lower than 20%, the same are sought to be enhanced to 20%. In this way, among various defaulting deductees, for the same nature of offence, someone is subject to higher penalty than the other. For example, in cases where rate of TDS is 1%, it is increased by twenty times and where it is 10%, it is twice the normal rate of TDS. Thus, for similar offences, the quantum of penalty in the shape of punitive rate is not equal in case of all the defaulting deductees and, for this reason also, the provisions of sub-section (1) are discriminatory and ultra vires the Constitution.

Income Tax- of NRIs...

Most of the NRIs (Non Resident Indian) enjoy tax free income in India, but what if you want to come back to your country for permanent residency? According to tax laws governed by Govt. Of India, you are supposed to pay the taxes as per as NRIs rule. As India is member of double taxation treaty, under which you can enjoy the credit for tax that you have already paid in your resident country or you may be exempted from paying tax or reduced tax liability.

Here the some rules for NRIs, as NRI need to pay income tax for income he/she earned in India. It’s only valid if you earn any income in India otherwise as such no taxation system. You are entitled to pay tax, if you earned directly or indirectly in India.
You’re entitled to pay taxes under following circumstances:
• Trading Income• Property/Plot/House Income• Income from any family assets • Salary earned in India for services in overseas• Extra Bonus paid by any Indian company • In the form of Interest rates paid by NRI to government, bank,• Fees under industrial duty

Federal Income Tax
Reserve Bank of India Policies encourages NRIs to invest more in their motherland and to have foreign exchange direct flowing into the country; as it comes under NRE taxation provision.

There are mainly 2 ways that a NRI can make income. Initially via rental income from his property which gets deposited to his NRE account. As NRE bank accounts are on a repatriation basis, you can make transfer your earnings abroad anytime. All NRIs can be benefited from income tax exemption on NRE accounts. Though, income held in NRO accounts is made taxable. As all these investments are made from NRE accounts only, having income tax exception will persuade them to make more investments. You can invest through shares, insurance, mutual funds, debentures and other depositional plans. Insurance policy is another way to enjoy tax exemption.

As procedures are same as for regular citizen, NRIs are required to file Return of Income (ROI), provided your yearly income in any financial year is more than the exemption limit of 1Lac INR. You can also fill the Form 2A if your income is less than Rs. Two lakh, where you’ren’t in any business or job or you haven’t carried forward your losses. By chance your income is above Rs. Two lakh, then same “SARAL” form procedure is valid for NRIs.

The next important point dealing with this topic. In case you want to take benefit from double taxation treaty, then you need to submit the Residency Certificate issued by the income tax department of your country of residence. Submit this Residential certificate to NRI India’s Bank Saving account. From then onwards, the bank will directly apply the new rate of TDS on your savings.

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MISUSE OF RTI ACT??

MISUSE OF RTI ACT

Report about cases of frivolous and vexatious use of the Right to Information Act, 2005 have come to the notice of the Government. As a result of implementation of the Right to Information Act, a number of applications for information and appeals are being received by public authorities. It has increased the work of the officers who have been designated as Public Information Officer, Appellate Authority and Other officers whose help is sought by the Public Information Officer in dealing with the RTI applications and appeals. The work is being managed within the existing human resources. Offices are being encouraged to put as much information as possible in the public domain so that the number of applications asking for information get reduced. This information was given by the Minister of State in the Ministry of Personnel, Public Grievances ; Pensions, Shri Prithviraj Chavan in written reply to a question in Lok Sabha – www.pib.nic.in

ANALYSIS OF FOREIGN CONTRIBUTION (REGULATION) ACT, 2010 & RULES 2011

ANALYSIS OF FOREIGN CONTRIBUTION (REGULATION) ACT, 2010 & RULES 2011
 

INTRODUCTION

1.1 The Foreign Contribution (Regulation) Act, 2010 and The Foreign Contribution (Regulation) Rules, 2011 have been enacted w.e.f. 1-5-2011. The old FCR Act and Rule, 1976 have been repealed. In this issue, we are discussing the major changes and the impact thereof.

THE SCOPE OF FCRA EXPANDED

2.1 The new FCRA, 2010 has a much broader applicability; it is applicable to individuals, Hindu Undivided Family (HUF), Association and a section 25 company. In the old Act, the term 'person' was not defined and generally the Act referred to the term 'Association'. However, now it is very clear that FCRA applies to the above category of persons.

DOES FCRA APPLY TO COMMERCIAL OR BUSINESS ORGANISATIONS

3.1 Movement of foreign funds in the normal course of commerce and business is outside the purview of FCRA. Therefore, business organisations are not covered by FCRA 2010 also. However, the provision of Foreign Exchange Management Act, 1999, which is a financial legislation, would be applicable.

WHAT IS FOREIGN CONTRIBUTION

4.1 Foreign Contribution includes all kind of transfers from foreign sources. The new act retains the older definition which includes any kind of transfer, delivery or donation of currency, article or securities. The notable change in the new act is that Foreign Contribution does not include commercial receipts. In other words, an NGO can receive consultancy or other commercial receipt from foreign sources even without having FC registrations. FC registered NGOs should receive such receipt in their domestic account and the commercial receipt are not required to be reported to the FCRA department.

PANCHAYAT HAS BEEN DEFINED AS LEGISLATURE

5.1 'Panchayat' has been included under the definition of 'Legislature' under section 2(1)(k). The implication of this change is that a member of a Panchayat cannot receive any foreign contribution. Secondly, NGOs who are working closely with Panchayat will have to be careful and ensure that their activities are not interpreted as of political nature.

FC FROM RELATIVES OR SCHOLARSHIP, STIPEND ETC.

6.1 The term 'Relative' has been defined for the first time giving it the same meaning as under section 2(41) of the Companies Act, 1956.

6.2 No permission is required to obtain foreign contribution from a relative under section 4 which is a relaxation. However, rule 6 provides that any gift from relatives above Rs. 1,00,000 in one year shall be intimated to the FCRA department in Form FC-1. Therefore, the rules seems to be in contravention of the Act.

6.3 Similarily scholarship, stipend etc. received from foreign sources are excluded under section 4. This again is a relaxation over the old Act.

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TRANSFER OF FUNDS TO FC REGISTERED ORGANISATIONS

8.1 The Act prohibits transfer of funds to any other organisation unless the recipient organisation also possesses FC registration. However, there is some confusing requirement under Rule 24(2) which requires filing of Form 10 for prior permission even for transfer to registered FC organisations. This issue has been clarified by the FCRA department in writing. It has been clarified that there is no need for obtaining prior approval for transfer of FC funds to organisations which are having FC registration.

TRANSFER OF FUNDS TO UNREGISTERED ORGANISATIONS

9.1 The old Act prohibited transfer of funds to any other organisation unless the recipient organisation also possesses FC registration. However, the new Act allows of FC funds to even unregistered organisation.

9.2 Section 7 of FCRA, 2010 provides that foreign contribution can also be transferred non FC organisation with prior approval. Rule 23(4) provides that an organisation may apply in Form FC-10 for transfer of FC funds to unregistered organisations. Such transfer could be made to multiple recipients through one prior approval. However, the total amount of transfer to unregistered organisations shall not exceed 10% of the total foreign contribution received. Further, a recommendation from the District Magistrate have to be obtained. The aforesaid rule has practically defeated the purpose of this amendment as prior permission was in any case available to all organisations. Further, suppose a donor organisation wants to transfer funds to various districts, then certificate from District Magistrate would have to be obtained serparately for each district. In other words, the purpose of this new provision will not be achieved and the small CBOs and registered SHGs will continue to be deprived of FC funds.

ADMINISTRATIVE EXPENSES

10.1 Under the new FCRA, 2010 there is a new provision which prohibits administrative expenses beyond 50%. The definition of administrative expenses includes various expenses such as rent, vehicles etc. which can also be incurred for programme purposes.

10.2 This amendment may cause hardship in interpreting the Rule 5 constituted in this regard. The definition of Administrative Expenditure briefly is as under :

- Remuneration and other expenditure to Board Members and Trustees

- Remuneration and other expenditure to persons managing activity

- Expenses at the office of the NGO

- Cost of accounting and administration

- Expenses towards running and maintenance of vehicle

- Cost of writing and filing reports

- Legal and professional charges

- Rent and repairs to premises

10.3 The Rule further provides that the following salaries shall not be considered as administrative in nature :

- Salaries of personnel engaged in training or for collection or analysis of field data of an association primarily engaged in research or training (1st proviso)

- Expenses related to activities for example salaries to doctors of hospital, salaries to teachers of school etc. (2nd proviso)

10.4 From the above definition of administrative expenses the followings issues need greater clarity :

- All kinds of vehicle expenditure has been considered as administrative in nature. However, the last proviso provides that expenses for furtherance of activity shall be excluded. Therefore, it should be expected that all programme related vehicle expenses and other expenditures are excluded from calculation of administrative expenses.

- The Rule includes the salaries of persons engaged in management of activity and at the same time the proviso as discussed above also applies. Therefore, it is expected that all direct programme salaries shall be excluded.

- In case of network organisations, the programme is implemented through partner organisations. In such cases, it is not clear how the admn. expenditure of the mother NGO shall be determined. It is expected that the programme expenses incurred by the subsequent organisation will be considered as a part of programme expenses of the mother NGO as well.

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POWERS FOR REJECTING AN APPLICATION

12.1 The FCRA, 2010 has provided considerable powers to the authorities for rejecting an application for prior permission or registration. Under section 12, various strict conditions have been provided which include that the applicant should not have been prosecuted or convicted for indulging in activities aimed at conversion or creating communal tension. It may be noted that the word `prosecuted' has been used which implies that even if there is a Court proceeding pending, then also FCRA registration could be denied.

SUSPENSION OF REGISTRATION CERTIFICATE

13.1 Section 13 of the new Act allows the power to suspend the registration pending cancellation of certificate, for a period upto 180 days. During suspension the organisation cannot receive any foreign funds without prior approval. However, such organisation can utilise the existing foreign funds to the extent of 25%, that to with prior approval from FCRA department. Before suspending any organisation, the FCRA department shall record the reasons in writing. One very important issue under this section is the absence of any provision for an opportunity of being heard, before suspension which seems to be very harsh and unfair.

CANCELLATION OF REGISTRATION CERTIFICATE

14.1 Under section 14, the Central Government may cancel the registration certificate for various reasons. However, no certificate shall be cancelled unless reasonable opportunity of being heard is provided. The reasons for cancelling the certificate are :

(i) Providing false information

(ii) Violating the terms and conditions like filing of return, etc.

(iii) Violating the Act or the Rules

(iv) Acting against public interest

(v) No reasonable activity for 2 years.

14.2 Once a registration certificate is cancelled, such person shall not be eligible for registration or prior permission for the next 3 years from the date of cancellation.

14.3 The term "reasonable activity" has not been defined. It may so happen that an NGO may have activity from local sources. Therefore, it is expected that reasonable activity whether from FC or local sources should be there for retaining FC registration.

FOREIGN COMPANY & FOREIGN SOURCE

15.1 The old FCRA, 1976 considered Indian companies, where more than 50% of equity is held by foreigners, as foreign source. For example : companies like ICICI Bank, Infosys etc. were foreign source and donations cannot be accepted from them without FCRA registration. Unfortunately this provision has been retained in the new FCRA, 2010, though the stated intent of the Government was to exclude such companies. This provision could be a drafting error as the FCRA, 2010 has defined a foreign company under clause (g) of section 2, which does not include Indian Companies. This clause is apparently inserted to exclude Indian companies having more than 50% of Foreign equity holding. However section 2(j) which defines the term `foreign source' includes an Indian company under the category of foreign source if more than 50% of its equity is held by foreigners.

15.2 This provision shall create problem in flow of funds from such organisations to various genuine NGOs as only FC registered NGOs can accept such contributions.

BUSINESS/CONSULTANCY INCOME OF AN NGO

16.1 As discussed earlier, the new Act excludes consultancy or commercial receipts from the purview of foreign contribution. This amendment was very necessary but it comes with a lot of potent controversies and trouble for the NGOs. As per the new provisions, any fee or cost against business, trade or commerce shall not be considered as foreign contribution. In other words, such receipts can be treated as local income. However the problem is that this provision is in contradiction with the amended section 2(15) of the Income-tax Act which prohibits trade or business related receipts beyond Rs.25 lakh. Therefore, NGOs should be careful in treating consultancy income and other receipts as local income even though it is now permissible under the proposed Act.

PERSONS SPECIFICALLY DEBARRED FROM RECEIVING FOREIGN CONTRIBUTION

17.1 Section 3 of FCRA, 2010 specifies that the following persons cannot receive foreign contribution:

(a) candidate for election.

(b) correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper.

(c) Judge, Government servant or employee of any corporation.

(d) member of any legislature

(e) political party or office-bearer thereof.

(f) Organisation of a political nature.

(g) Association or company engaged in broadcast of audio or visual news.

(h) Correspondent, columnist etc. related with the company refered in clause (g).

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RENEWAL OF REGISTRATION EVERY 5 YEARS

18.1 The FCRA, 2010 provides for renewal of registration of NGOs every 5 years. However, the Act has provided relief to all the existing NGOs for the first 5 years from the date of enactment. In other words, all existing NGOs have to renew their registration at the end of the period of 5 years from the date of enactment of FCRA, 2010. This implies that the renewal of all the existing NGOs will become due on 1st May, 2016.

18.2 Rule 12 provides the procedure for renewal application. All NGOs have to apply in Form FC-5 six months before the due date. Therefore, all the existing NGOs have to file their FC-5 for renewal before 1st November, 2015. The Rule further provides that NGOs implementing multi year projects shall be eligible to apply for renewal twelve months before the date of expiry of the certificate of registration.

18.3 In case an NGO fails to apply for renewal within the due date, its registration shall become invalid. However, the department may condone the delay if satisfactory reasons for not submitting the renewal application are provided. Such delay should not be for more than 4 months after the expiry of the original certificate of registration.

POWER TO PROHIBIT SOURCES FROM WHICH FC CAN BE ACCEPTED

19.1 The Act provides power to the Central Government under section 11(3)(iv) to notify such source(s) from which foreign contribution shall be accepted with prior permission only. It implies that the Central Govt. may notify specific donors or countries from which foreign funds could not be received or shall be received with prior permission only.

MULTIPLE BANK ACCOUNT

20.1 Section 17 of FCRA, 2010 provides that multiple bank accounts can be opened for the purposes of utilisation provided only one bank account is maintained for receiving foreign contribution. This amendment provides a great reilef to all the NGOs which were struggling under the arbitrary disallowance of multiple bank accounts under FCRA, 1976.

20.2 Under Rule 9 it is provided that the NGOs may open one or more bank accounts for the purpose of utilisation. However, in all such cases an intimation in plain paper should be sent to the FCRA department within 15 days of the opening of such account.

DISPOSAL OF FIXED ASSETS ON DISSOLUTION

21.1 Section 22 of the FCRA, 2010 provides that, in case of dissolution, the Central Govt. shall have the power to determine the process of disposal of FC assets. The Central Govt. may specify the manner and procedure in which such asset shall be disposed of.

SPECULATIVE ACTIVITIES

22.1 Rule 4 specifies the circumstances under which an investment could be treated as speculative in nature.

22.2 Rule 4(1)(a) prohibits investment in shares & stocks even through mutual fund. This provision is in conflict with section 11(5) of the Income-tax Act which provides investment in certain stock linked mutual funds.

22.3 Rule 4(1)(b) prohibits investment in high return schemes or in land if it is not directly linked to the declared aims and objectives of organisation. This provision may create needless controversies as it will be very difficult to make distinction between investment in land in relation to the objectives and otherwise. Infact, NGOs cannot invest anything beyond the objectives. All investments have to be towards fulfilment of the long term objectives.

DISCLOSURE OF INFORMATION IF RECEIPTS EXCEED Rs. ONE CRORE

23.1 Rule 12 provides that if the contributions received during the year exceed Rs. one crore, then the organisation has to keep in the public domain all data of receipts and utilisation during the year and also in the subsequent year. The rule also states that the Central Government will also upload such summary data through its website.

23.2 The manner of disclosure or meaning of `public domain' has not been explained. It seems that all such organisations are required to have their own website where such data should be uploaded.

CUSTODY OF FUNDS AND ASSETS IN THE EVENT OF CANCELLATION

24.1 Rule 14 provides the procedure regarding the custody of foreign funds and assets in the event of cancellation of registration.

24.2 In case of available bank balances, the respective banking authority will become the custodian till the Central Government issues further directions.

24.3 If funds have been transferred to another NGO after cancellation, then the funds in the bank account of such NGO will also go to the custody of the banking authority.

24.4 All other assets of the organisation whose certificate has been cancelled or has become defunct shall go to the interim custody of the District Magistrate or any other authority which the Central Government may direct. This provision seems unfair, because the direction for repossession of asset should only be issued when all appellate remedies are exhausted.

REPORTING BY BANKS

25.1 Rule 15 provides that the bank should report to the FCRA department within 30 days under two circumstances :

(i) if any foreign contribution is received without registration or prior permission,

(ii) if foreign contribution is receive in excess of Rs. one crore during a period of 30 days, this rule will apply to all FC funds received through valid registration or prior permission.

FILING OF RETURN & METHOD OF ACCOUNTING

26.1 Rule 16 provides that the annual return accompanied by Income and Expenditure statement, Receipt and Payment Account and Balance Sheet shall be submitted by 31st of December. The law regarding filing of returns remains, more or less unchanged. However, the notable changes are as under :

- The return shall be filed in Form FC-6 and not FC-3

- For the first time, FC rules are asking for submission of income and expenditure account

- A copy of bank statement certified by the bank has to be submitted

- A nil return is required to be filed if there is no activity

26.2 The FCRA, 2010 and the Rules thereof do not specify any method of accounting. Section 19 of the FCRA, 2010 just provides that accounts with regard to FC receipt and utilisation should be maintained. In the past, it was assumed that FCRA required cash basis of reporting (if not accounting). However, with the new requirement of filing Income and Expenditure account raises the question whether accrual basis of accounting is also permissible. On a plain reading of section 19 of FCRA, 2010, Rule 16 and Form FC-6, it seems that the requirement is to report FC funds received and utilised during the year. In other words, the receipt of funds shall be on cash basis only but there is no direction regarding utilisation on payment basis only. FCRA, 2010 does not seem to be prescribing any fixed method of accounting. Any method of accounting may be followed by the organisation but the receipt of FC funds should be reported on cash basis only. It seems due to the inclusion of Income and Expenditure account, the utilisation will be permissible on accrual basis also if the organisation consistently follows accrual basis of accounting. However, the proposed Direct Tax Code (DTC) prescribes cash basis of computation only.

WHICH RETURN SHOULD BE FILED FOR THE CURRENT YEAR

27.1 The new Rules provide that the annual return shall be filed in Form FC-6. However it is not clear which form shall be used for filing of return for the year 2010-11, as the act became effective from 1st May, 2011. To our understanding all return should be filed in the new form FC-6.

ADDITIONAL REQUIREMENT OF FILING FORM FC-7

28.1 All NGOs are required to file Form FC-7 alongwith a certificate for Chartered Accountant, if they receive contribution in kind. In the old act, there was no such requirement for filing a separate return for foreign contribution received in kind. It may be noted that old Form FC-3 and the new Form FC-6 both have a column for contribution received in kind. Therefore, it was not necessary to have an additional requirement of filing Form FC-7. However, as it stands, FC-7 has to filed in case of receipt of contribution in kind.

PRESERVATION OF ACCOUNTING RECORDS FOR 6 YEARS

29.1 The Rule 17(7) provides that accounting statements shall be preserved for 6 years. This is a very welcome change. Earlier it was seen that the NGOs were asked to provide books and records for past 10-15 years which was practically not possible. This rule will provide a lot of relief to the existing NGOs.

COMPOUNDING OF OFFENCE

30.1 Section 41 read with Rule 21 provides that the Ministry of Home Affairs may compound any offence punishable under the FCR Act. When an offence is compounded, then such organisation is not prosecuted. This is also a positive change which will help in avoiding needless legal cases.

EXTRA ORDINARY ISSUE ******The right to privacy

EXTRA ORDINARY ISSUE

Pritish Nandy

Idon't use a Blackberry. My son and daughters do. I use the world's most boring phone, the one which has been left miles behind in the smartphone race. Once a much admired brand, Nokia now looks like a left behind. The Blackberry and the iPhone have won the popularity stakes. So why don't I use them instead?

My reasons are ridiculous. One: I find touch phones a bit sick. I love touching food and eating it with my fingers. I love touching beautiful women. But to caress a phone to make it respond to me is a bit unnerving at my age. I guess I'm plain old fashioned. I can't snog a robot, pet a tamagotchi or shag an iPad. My romances begin and end only with real people of the opposite sex. As for the Blackberry, I find it as exciting as Queen Latifah on steroids. It's simply much too much for me to handle. Plus, I like phones with great designs and the Blackberry doesn't quite fit that bill. It's dowdy, boring, unimaginative.

But why am I discussing phones here? No, it's not about phones stupid. It's about technology. The Blackberry uses a technology that allows you and me to talk to each other, share our little secrets, crack silly jokes, strike the odd deal, and say all those wonderfully inconsequential things to our friends and lovers that we don't want others to hear or know about. Our Constitution entitles us to this privacy. This is your and my right as Indian citizens. For years now, the Government has been trying every trick in the trade to eavesdrop on our conversations and often does so without us ever knowing. Even Cabinet Ministers and senior Opposition leaders have their phone chats listened in on. Why would they spare us? This means any petty Government official who has a bone to pick with you, whether it's for parking your car in front of his house or because his wife once smiled at you at a party and said hello, can instantly target you as a security risk or an anti-national.

The amount of raw data one must wade through to catch criminals through phone conversations or messaging is impossible to handle in a country as vast and talkative as ours where millions of people are constantly chatting away on their handsets in many languages, many dialects by voice, sms, emails, chat service and social networking sites. So if the intent is to catch criminals at random — terrorists, tax evaders, bribe takers — this is no way to do it. One can spend an entire lifetime listening to sick jokes, porn chats, astrological predictions, sales talk and couples squabbling without getting one piece of authentic, credible, actionable information that can nail a wrongdoer. In any case, intercepted phone chats are not exactly evidence that courts like to hear.

So what's the purpose of such snooping? What's this paranoia that drives us to pursue the dubious examples of Saudi Arabia and UAE (Bahrain too, one hears) to lean on RIM, the company that makes the Blackberry, to open up their security codes to Government scrutiny so that snooping becomes possible? Is it the argument of the State that the privacy of millions of Indian citizens should be made subservient to what it sees as national interest, which in this case is the right to snoop on everyone so that security concerns of the State are addressed? To my knowledge, no terrorist has ever been caught with a Blackberry. They use sat phones. And even if the Blackberry is banned or its encryption codes forced open by the Government by arm twisting RIM, there will be Skype and many more internet phone systems still open to criminals. By the time the Government gets down to banning those, new technologies will emerge. Terrorists and criminals are clever people. They are always one step ahead of the law.

So why ban the Blackberry? It will only hurt people like you and I who will now be sharing our private conversations with eager, State-hired eavesdroppers. What they will make out of such conversations we don't know. But what we do know are two things. One: The word privacy will vanish from our lexicon with every State agency listening on to everything we say and do. Two: More and more innocent people will be harassed by these agencies in their constant attempt to justify their snooping. Witch hunts will increase. Journalists, RTI activists, whistle blowers will be pre-empted, blackmailed, possibly even set up for a kill if they know too much. Is this is the kind of nation we want India to be, in the name of national security?
If RIM refuses to cave in, even I will switch over to the Blackberry to show my support for the cause of free speech, aesthetics be damned. Right now, the Blackberry has come to represent my right to privacy and I am not going to give it up so easily. Nor should you.

Views expressed by columnists in Bombay Times are their own, and not that of the paper .

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Dear Friends : The emails are schedule to be posted in the blog and will sent to the group on various dates and time fixed. Instead of sending it on one day it is spread on various dates. 

regards. R R Makwana

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Scrutiny, submission by Assessee

In action on part of assessee can be costly in assessment and penalty proceedings- learning from recent ruling.

Duties of assessee:

It can be said that duties of an assessee include inter alia furnishing a correct return of tax base say income or other subject matter of taxation as the case may be. To furnish related documents and to make his explanations as required under law by filing relevant reports and statements or as may be required by the Assessing Authority for ascertaining tax base (say income) and tax payable (say income-tax). The assessee is required to prove genuineness of his transactions and reliability of his accounts and other statements relied on by him.

Evidence to be produced:

The assessee is also required to produce evidence about his claims of income, exempted income, allowable expenditure, assets and liabilities and various claims made by him to seek relief and to determine income properly as per law.

In respect of liabilities in nature of current liabilities or loan liability and some receipts which are claimed as not taxable, assessee is required to produce reasonable evidence and basis on which he had preferred his claims.

When the AO asks for any evidence, assessee must provide reasonable evidence so that at least it can be said that he has discharged his onus. For example, in case of liabilities he must give particulars of creditors ( name , address, PAN , purpose and nature of liability etc.) to discharge initial burden or onus. In fact the assessee in his own interest must make full efforts to produce latest confirmations, and new address etc. If the AO has asked to produce creditors, he must make sincere efforts to produce them and must also inform the AO about his efforts and results. Even if his own efforts does not yield result and the creditor is not willing to come forward, then assessee can request the AO to issue notices to creditors for their appearance etc.

If the assessee does not discharge his preliminary responsibility of furnishing relevant details and evidence, he may be burdened with additions and tax thereon as well as penalty for concealing particulars of income.

Evidence Act:

In this regard section 106 of Indian Evidence Act is also relevant and has been applied by court in a recent ruling. The said provision with high lights reads as follows:

106. Burden of proving fact specially within knowledge - When any fact is specially within the knowledge of any person, the burden of proving that fact is upon him.

Illustrations

(a) When a person does an act with some intention other than that which the character and circumstances of the act suggest, the burden of proving that intention is upon him.

(b) A is charged with traveling on a railway without a ticket. The burden of proving that he had ticket is on him.

On reading of the above provision we find that when a fact is specially within knowledge of any person, the burden of proving that fact is upon him. Thus, when a fact is especially in knowledge of assessee, it is on him to prove the fact. Therefore, accounting entries and adjustments made by assessee are considered as fact within his knowledge, therefore assessee is required to prove the facts. If he fails to prove the facts, adverse inference can be drawn against him.

However, in this regard, it is necessary to consider all other aspects related with a transaction. If a transaction took place long ago, and there is no continuity of dealing with party concerned, the assessee can only give the last known address of concerned party. However, there must be at least that much effort to establish facts as they prevailed on the day of transaction. If there is no action by the assessee to prove facts, then authorities can definitely draw adverse conclusions. In view of author, production of third parties cannot be considered as fact in special knowledge of assessee, and therefore, this provision should not be applied in that regard. With respect, author feels that the Tribunal and High Court In the case of M/s. Aggarwal Financers, were not correct in applying this provision, merely because assessee could not produce the creditors before the AO.

Recent case before Punjab and Haryana High Court:

In case of M/s. Aggarwal Financers, Ladwa Vs. CIT 2011 -TMI - 203225 decided on 19 April 2011 a matter of penalty levied for concealment of income which was confirmed by the ITAT, came for consideration on appeal of assessee. The honorable High Court considered the provisions Sections 68 and 271(1)(c) of the Income-tax Act and section 106 of the Evidence Act .

In this case the Tribunal has recorded a finding that in spited of repeated opportunities the assessee failed to establish the nature, source and creditworthiness of liabilities shown by assessee.

Court held that on a harmonious construction of Section 106 of the Evidence Act and Section 68 of the Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the credit worthiness of his credit - The burden is on the assessee to prove the genuineness of the transaction - In the present appeal, since in spite of various opportunities provided to the assessee, the creditors could not be produced, therefore, it can be said that the assessee attempted to conceal the particulars by furnishing inaccurate particulars .

The court further held that the addition made on this account would not automatically justify the imposition of penalty, under Section 271(1)(c) of the Act, no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that it does, However, in the present appeal, since the assessee has not explained cash credits, therefore, the penalty has been rightly levied. The impugned order of the ITAT was thus upheld and the appeal of assessee was dismissed.

Questions before the High Court:

The following substantial questions of law were claimed for determination of the High Court ( with highlights provided by author):

"(i) Whether in the facts and circumstances of the present case the action of the authorities below, in passing the penalty order under Section 271(1)(c) of the Act thereby holding the concealment of income, when all the cash credits were duly explained by the appellant assessee, is legally sustainable in the eyes of law?

(ii) Whether under the facts and circumstances of the present case the action of the authorities below in imposing penalty even when the onus was discharged by the appellant assessee in toto is legally sustainable in the eyes of law?

(iii) Whether under the facts and circumstances of the present case the action of the authorities below in imposing penalty for concealment of income, merely on the basis of presumptions, is legally sustainable in the eyes of law?

(iv) Whether under the facts and circumstances of the present case the action of the authorities below in passing orders (Annexure A-1 to A-3) even when the genuineness of the transactions were fully explained by the appellant assessee, therefore, discharging its onus, is legally sustainable in the eyes of law?

(v) Whether under the facts and circumstances of the present case the action of the authorities below in passing the impugned orders (Annexure A-1 to A-3) are legally sustainable in the eyes of law?

Comments of author:

A reading of above questions, particularly highlighted portions suggest that the assessee has claimed to have discharged his onus by furnishing explanations and evidence about cash credits and that tax authorities have applied some presumptions. However, there is no challenge of facts as found by Tribunal as wrong or perverse.

The assessee must have challenged the facts as recorded by Tribunal as wrong and perverse. Without that, the facts as found by the Tribunal have to be considered as final.

Facts as noticed by the High Court:

the assessee filed its return of income for the assessment year 1998-99, on 31.10.1998, declaring income of Rs. 6,889/-.

The assessing officer, however, made assessment under Section 148 of the Act.

Certain short-comings and deficiencies were detected by the assessing officer in the return filed.

The AO noticed that the deposits made by the creditors of the assessee as shown in the books of account were not genuine.

No confirmation and verification had been furnished by the assessee.

The AO made an addition of Rs. 1,97,000/-.

The AO also disallowed 1/4th of the actual expenses of Rs. 67,767/- he added a sum of Rs. 16,942/-.

Pursuant to the additions and disallowances notice under Section 274 read with Section 271(1)(c) of the Act was issued. The assessing officer, vide order dated 24.12.2004, held that there was concealment of income by the assessee and accordingly imposed a penalty of Rs. 68,949/-

Appeals against the imposition of penalty carried by the assessee before the CIT(A) and the Tribunal both were dismissed. Thus CIT(A) and Tribunal had concurrently held that there was concealment of income and assessee was liable to penalty.

Observations and order of the High Court:

High Court heard learned counsel for the parties and have perused the record.

The Tribunal while upholding the findings of CIT(A) and the assessing officer, imposing penalty had recorded as under ( highlights added by author for analysis):

"We are aware that the penalty is not imposable if there is no conscious breach of law as was held by the Hon'ble Apex Court in the case of Hindustan Steel Ltd. Vs. State of Orissa 1969 -TMI - 39958 – (SUPREME Court) and at the same time, for imposition of penalty, the conduct of the assessee must be conscious. Hon'ble Gujarat High Court in the case of AM Shah & Co. vs. CIT (108 Taxman 137) (Guj.) even went to the extent that the concealment/ inaccuration occurring up to final stage must be considered. Even otherwise, a harmonious construction of Section 106 of the Evidence Act and Section 68 of the Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the credit worthiness of his credit. The burden is on the assessee to prove the genuineness of the transaction. In the present appeal, since in spite of various opportunities provided to the assessee, the creditors could not be produced, therefore, it can be said that the assessee attempted to conceal the particulars by furnishing inaccurate particulars. We are aware that the addition made on this account would not automatically justify the imposition of penalty, under Section 271(1)(c) of the Act, no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that it does. In the present appeal, since the assessee has not explained cash credits, therefore, we are of the view that the penalty has been rightly levied. The impugned order is upheld. Consequently, this appeal is also dismissed."

High Court's ruling:

The Tribunal on appreciation of material had affirmed the orders of the authorities below and arrived at the conclusion that there was concealment of income on the part of the assessee.

The penalty under Section 271(1)(c) of the Act had, thus, been rightly levied.

Nothing could be shown that the findings recorded by the authorities below were perverse or erroneous in any manner.

In view of the above, no substantial question of law arises and the appeal is dismissed.

Observation of author:

The Tribunal has recorded facts as follows:

That in spite of various opportunities provided to the assessee, the creditors could not be produced, therefore, it can be said that the assessee attempted to conceal the particulars by furnishing inaccurate particulars.

that the assessee has not explained cash credits.

It seems that Tribunal in its order has not at all recorded facts about what evidences were produced by assessee, whether assessee furnished names, address, PAN, confirmations etc. is not recorded.

Apparently the Tribunal has come to conclusions of concealment only because the assessee could not produce creditors. In view of the author either the counsels of assessee did not provide any evidence before authorities or the approach of the Tribunal was not fully correct. Production of creditor may not always be within control of the assessee.

If assessee based on his information and record is able to prima facie establish the nature and source of credit then primary onus of assessee stands discharged. For production of creditors the tax authorities are empowered to issue notices, there is no finding about issuance of notices by assessee or the AO to the creditors to produce creditors before AO.

In this case the assessee should have challenged findings of Tribunal as incomplete, incorrect and perverse and should have produced some evidence in this regard before the High Court. In absence of the same the high Court took the findings of Tribunal as final and confirmed penalty by holding that there is no substantial question of law.

With due respect the author also differ from the views of the High Court. This is because, the Tribunals finding is based only on one factor that is failure of assessee to produce creditors.

Failure to produce third party- not hit by S.106 of Evidence Act:

As noted earlier as per section 106 of the Evidence Act - When any fact is specially within the knowledge of any person, the burden of proving that fact is upon him.

Now the question comes is whether production of a third party before the AO can be considered as covered by this provisions. In view of the author, to produce a third party is not covered by this provision. It cannot be considered as `specially within the knowledge of assessee…. , therefore, with due respect, author feels that the Tribunal has not applied this provision correctly in the facts and circumstances of the case.

Learning from this case:

The assessee should have furnished whatever evidence he had about creditors – even old confirmations, evidence of receipt of money like money receipt issued by assessee, evidence of payment of interest and receipt of creditor, clearing of cheques received and paid etc.

The assessee could have issued notices to the creditors and requested them to present evidence before his AO.

If creditors did not respond, the assessee could have requested the AO to issue notices to creditors.

Assessee could have given reasons for his inability to produce creditors and produce evidence available with him.

The assessee should have made petition before Tribunal to make a reference of evidence produced before lower authorities and Tribunal. Non recording of such facts should have been challenged before High Court also. Not challenging the facts found by Tribunal was apparently a serious mistake.

The assessee must have made out a case of discharge of primary onus for explanation of the nature and source of money. Before the High Court also any evidence was not produced. That is why the High Court has recorded that "nothing could be shown that the findings recorded by the authorities below were perverse or erroneous in any manner".

The assessee must have challenged findings of Tribunal as perverse and should have made out case about reasonable evidence available.

The assessee must have claimed that in the facts and circumstances of the case Section 106 of the Indian Evidence act was not applicable.

By: C.A. DEV KUMAR KOTHARI .

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Section 40(b), Quantification of remuneration,

Quantification of remuneration, whether necessary in partnership deed
 
In Asstt. CIT v. Suman Construction (2009) 27 (II) ITCL 329 (Pune 'A'-Trib) the assessing officer had noticed that the assessee had claimed salary to partners of Rs. 2,20,000. However, in his opinion as per the partnership deed filed along with the return in the past assessment year, there was no specification of this salary payable to the partners. According to assessing officer, there was neither the quantification of the salary payable to the partners nor it was prescribed the manner in which such quantification would be done. By referring CBDT Circular No. 739, dated 25-3-1996 the assessing officer said that the provisions of payment of salary have been made clear and since there was no specified quantification therefore, assessee was not entitled for claim of deduction under section 40(b) of the Act regarding salary to partners.

It was held that by Finance Act, 1992 with effect from 1-4-1993 an insertion was made in section 40 vide clause (b) which prescribes that in the case of a firm assessable as such any payment of remuneration to any partners who is a working partner, if not authorized by the terms of the partnership deed shall not be entitled for deduction in computing the income chargeable under the head "Profits and gains of business or profession". This section also contains sub-clause (v) which prescribes that any payment of remuneration to any partner who is a working partner who is authorized by and is in accordance with the terms of the partnership deed, then the amount of such payment of partnership should not exceed the aggregate amount as prescribed in this sub-clause. Meaning thereby that section 40, clause (b), sub-clause (ii) and another sub-clause (v) prescribes that a deduction in the case of a firm can be allowed in respect of salary or remuneration to working partners if it is duly authorized by the terms of a partnership deed, however, to the extent of prescribed limit as has also been prescribed in the statute. Therefore, on plain reading of this section, it is understood that the section does not make it mandatory to quantify the amount of salary in one of the clauses of the partnership deed because of the main reason that the monetary limit or ceiling is otherwise prescribed in the statute itself.

The statute has used the term "authorize" and not used the term "quantify". On the other hand, the AO had made the disallowance mainly because of the reason that the amount of salary was not quantified in the clause of the partnership deed and in support he had relied upon CBDT Circular No. 739, dated 25-3-1996. Since the statute has used the term "authorize", therefore, the CBDT had no jurisdiction to substitute the term "authorize" by the term "quantify". While interpreting the clause of a statute there is no scope for importing into the statute some other words which are not there. Such an interpretation, if any, made by any of the authority would amount to an amendment in the statute which is a prerogative of the legislative body, i.e., Hon'ble Members of the Parliament. Even if there be a situation of casus omissus even then the defect can be cured only by a proper legislation and not by any interpretation. There appears no justification to deviate from the general principles of interpretation according to which the intention of the legislature is to be interpreted from the terms used or the words contained in a statute. It is not permissible to add words into a taxing provisions which are not there or exclude words which are there. So, the words contained in a provision must be given a natural meaning as commonly understood in legal parlance.

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WRITING A WILL

WRITING A WILL

Gajanan Khergamker


According to the provisions of law, Hindus, Jains, Sikhs, Christians, Jews and Parsis should make their will in writing. However, if the people belonging to these religions are members of the armed forces employed in an expedition or engaged in actual warfare or mariners at sea, then, they are allowed to make an oral will. Oral wills made in such circumstances are known as privileged wills. Otherwise, only Muslims are allowed to make oral wills, as their personal laws permit them to do so. However, if a Muslim makes a will in writing, such a will would not be void.
There is no particular format, for a will to be legal. To avoid confusion of any sort, it is always better to keep the language of the will as simple as possible. It should be kept free of technical words, so that the language is easily understandable and leaves no room for any misinterpretation. A will should be worded in such a way that the intention of the testator (the person making the will) is clear. A benefit bestowed under a will is called a bequest. A will or bequest that does not express a definite intent is void, due to uncertainty.
Under the Indian Stamp Act, it is not necessary to execute a will on stamp paper. So, a will can be made on any plain paper, which for practical purposes, should be of a durable kind. A will does not need to be typed. It can be hand-written by the testator, with a ball-point pen or a fountain pen. A hand-written will is known as a holograph will. While no one can deny the legality of a hand-written will, it is always better to leave plenty of empty margin space on both sides of the paper, while typing a will. This is because there is always a chance that the testator's handwriting could be illegible and could cause unnecessary confusion.

ASPECT THEORY & INTERPRETATION OF TAX

ASPECT THEORY ; INTERPRETATION OF TAX
By: Dr. Sanjiv Agarwal :

Any subject which is one aspect and one purpose fall within particular legislature may in another aspect and for another purpose fall within another legislative power. They might be overlapping, but that should be in law. Same transaction may involve two or more taxable events in its different aspects, but the fact that there is overlapping does not detract from the distinctiveness of aspects [Shilpa Color Lab v. CCE, Calicut 2006 -TMI - 1022 – (CESTAT,BANGALORE)].

Entry 60 of list II states that "taxes as professions, trade, callings and employment." Entry 60 is a taxing entry. It is not a general entry. Tax on professions etc. has to be read as a levy on professions, trade, callings, etc, as such. Therefore, entry 60 which refers to professions cannot be extended to include services. This is what is called as an "aspect theory" [All India Federation of Tax Practitioners v. Union of India 2007 -TMI - 1556 – (Supreme Court)]

In Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes 2008 -TMI - 2576 – (Supreme Court of India) it was held that while interpretating tax statutes involving applicability of Article 246 of Constitution of India read with Seventh Schedule thereof, court should take various theories including `aspect theory' while interpreting such statutes.

Extracts from judgment in Subh Timb Steels Ltd v Union of India (2010) 20 STR 737; (2010) 29 STT 479 ( P & H)

15. Aspect theory has been subject-matter of several decisions. In Federation of Hotel & Restaurant Assn. of India v. Union of India 1989 -TMI - 40104 – (SUPREME Court), the levy considered was expenditure tax under Central law with reference to the conten­tion that the same was in substance tax on luxury under Entry 62 of List II. Stand of the Central Government was that expenditure aspect was different from luxury aspect and expenditure aspect could be held to be excluded from the luxury aspect. The plea was upheld. It was observed :­-

"26.... Wherever legislative powers are distributed between theUnionand the States, situations may arise where the two legislative fields might apparently overlap. It is the duty of the courts, however difficult it may be, to ascertain to what degree and to what extent, the authority to deal with matters falling within these classes of subjects exists in each Legislature and to define, in the particular case before them, the limits of the respective powers. It could not have been the intention that a conflict should exist; and, in order to prevent such a result the two provisions must be read together, and the language of one interpreted, and, where necessary modified by that of the other.

27. The Judicial Committee in Prafulla Kumar Mukherjee v. Bank of Commerce AIR 1947 PC 60, referred to with approval the following observations of Sir Maurice Gwyer 'C.J.' in Subrahmanyan Chettiar case:

"It must inevitably happen from time to time that legislation, though purporting to deal with a subject in one list, touches also on a subject in another list, and the different provisions of the enactment may be so closely intertwined that blind observance to a strictly verbal interpretation would result in a large number of statutes being declared invalid because the Legislature enacting them may appear to have legislated in a forbidden sphere. Hence the rule which has been evolved by the Judicial Committee, whereby the impugned statute is examined to ascertain its 'pith and substance', or its 'true nature and character', for the purpose of determining whether it is legislation with respect to matters in this list or in that."

28. This necessitates as an "essential of federal Government the role of an impartial body, independent of general and regional Governments", to decide upon the meaning of division of powers. The court is this body.

29. The position in the present case assumes a slightly different complexion. It is not any part of the petitioners' case that expenditure tax is one of the taxes within the States' power or that it is a forbidden field for the Union Parliament. On the contrary, it is not disputed that a law imposing "expenditure tax" is well within the legislative competence of Union Parliament under Article 248 read with Entry 97 of List I. But the specific contention is that the particular impost under the impugned law, having regard to its nature and incidents, is really not an "expenditure tax". at all as it does not accord with the economists' notion of such a tax. That is one limb of the argument. The other is that the law is, in pith and substance, really one imposing a tax on luxuries or on the price paid for the sale of goods. The crucial questions, therefore, are whether the economists' concept of such a tax qualifies and conditions the legislative power and, more importantly, whether "expenditure" laid out on what may be assumed to be "luxuries. or on the purchase of goods admits of being isolated and identified as a distinct aspect susceptible of recognition as a distinct field of tax legislation.

30. In Lefroy's Canada's Federal System the learned Author referring to the "aspects of legislation" under sections 91 and 92 of the Canadian Constitution ie. British North America Act, 1867 observes that "one of the most interesting and important principles which have been evolved by judicial decisions in connection with the distribution of for one purpose fall within the power of a particular Legislature may in another aspect and for another purpose fall within another legislative power". Learned Author says:

"... that by 'aspect' must be understood the aspect or point of view of the legislator in legislating the object, purpose, and scope of the legislation that the word is used subjectively of the legislator, rather than objectively of the matter legislated upon."

In Union Colliery Co. ot British Columbia v. Bryden 1899 AC 580, Lord Haldane said:

"It is remarkable the way this Board has reconciled the provisions of section 91 and section 92, by recognizing that the subjects which fall within section 91 in one aspect, may, under another aspect, fall under section 92."

31. Indeed, the law "with respect to" a subject might incidentally "affect" another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects. Lord Simonds in Govemor-General-in-Council v. Province otl Madras AIR 1945 PC 98 in the context of concepts of Duties of Excise and Tax on Sale of Goods said:

"... The two taxes, the one levied on a manufacturer in respect of his goods, the other on a vendor in respect of, his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separated and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale…"

32. Referring to the "aspect" doctrine Laskin's Canadian Constitutional Law states:

"The 'aspect' doctrine bears some resemblance to those just noted but, unlike I them, deals not with what the 'matter' is but with what it 'comes within',... (p. 115)

"….it applies where some of the constitutive elements about whose combination \ the statute is concerned (that is, they are its 'matter'), are a kind most often met with in connection with one class of subjects and others are of a kind mostly dealt with in connection with another. As in the case of a pocket gadget compactly assembling knife blade, screwdriver, fishscaler, nailfile, etc., a description of it must mention everything but in characterizing it the particular use proposed to be made of it detenpines what it is. (p. 116)

I pause to comment on certain correlations of operative incompatibility and the 'aspect' doctrine. Both grapple with the issues arising from the composite nature of a statute, one as regards the preclusory impact of federal law on provincial measures bearing on constituents of federally regulated conduct, the other to identify what parts of the whole making up a 'matter' bring it within a class of subjects………" (p. 117).

16. By way of instance of different aspects of the same matter, illustration was also given of tax on property under the State law and tax on income under the Central law.

.38. Indeed, as an instance of different aspects of the same matter, being the topic of legislation under different legislative powers, reference may be made to the annual letting value of a property in the occupation of a person for his own residence being, in one aspect, the measure for levy of property tax under State law and in another aspect constitute the notional or presumed income for the purpose of income tax".

[(Also see Tata Sky Ltd v State of Punjab (CWP No 10992 of 2010 dated 25.10.2010)].

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Dear Friends : The emails are schedule to be posted in the blog and will sent to the group on carious dates and time fixed. Instead of sending it on one day it is spread on various dates. 

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