TAX EVASION VIA SHELL COMPANIES

 

TAX EVASION VIA SHELL COMPANIESEnron showed the world the trick of hiding accounting losses in special purpose vehicles (SPV). Subsequent accounting standards have ensured that interests in SPVs are at least disclosed if not morphed into the accounts of the company that controls the SPV. It was not long before the ingenious conjured up ways of using SPVs as a tax planning vehicle. SPVs had an unlikely ally in double tax avoidance agreements (DTAA) which did their best to ensure that income from cross-border transactions are taxed only in one country. Difficulties arose in deciding which. The Authority for Advance Rulings (AAR) recently ruled on the tax impact on what they perceived to be a shell company created with the lone purpose of enabling an acquisition. Muriex Alliance (MA) and Groupe Industrial Marcel Dassault (GIMD) were two French companies that joined hands to create a subsidiary named "ShanH". MA got into a Share Purchase Agreement (SPA) to acquire the shares of Shantha Biotechnics Ltd, based out of India with ShanH being the permitted assignee. Share transactions were continued with GIMD acquiring 20 per cent of the shares from MA in ShanH. Soon, they found a partner to offload their stake in ShanH to a French multinational Sanofi. After the kerfuffle created by the Vodafone case, GIMD decided to play it safe and approached the AAR for a ruling on whether the sale of shares would be taxable in India or France. Normal logic coupled with the provisions of the DTAA would give an impression that the transaction would be taxable in France since all the companies involved were in France. They did not consider the fact that the underlying asset is an Indian company.

AAR RULING

The AAR summed up the issue at hand. A company in France, invests in acquiring shares in an Indian company. Ultimately it acquires a controlling interest. For this purpose, it creates a fully-owned subsidiary. The shares are taken in the name of the subsidiary. Subsequently, another company also comes in and acquires a part of the shares in the subsidiary. The only asset of the subsidiary is the shares in the Indian company. It has no other business. The two shareholders of the subsidiary then decide to sell the shares of the subsidiary to another company. By that process, what really passes is the underlying assets and the control of the Indian company. This transaction generates a profit. By repeating the process, the control over the Indian assets and business can pass from hand to hand without incurring any liability to tax in India, if the transaction is accepted at face value. It ruled that a DTAA has to be construed on its terms.

TRANSFER OF SHARES

A literal construction of paragraph 5 of the DTAA would lead to the position that the transfer of shares of ShanH, in this case, can be taxed only in France. The contention of the Revenue was that the situs of the underlying assets cannot be ignored and the underlying assets and controlling interest are that of a company incorporated in India and a resident of India. The AAR found that what is involved in this transaction, is an alienation of the assets and controlling interest of an Indian company. It will logically follow that the transactions gone through are part of a scheme for avoidance of tax and the scheme has to be ignored, that the gain from the transaction is taxable in India. A literal interpretation of the DTAA would show that it is not the alienation of the shares of an Indian company but a purposive construction of the said paragraph of the treaty that led the AAR to the conclusion that the capital gains arising out of the transaction is taxable in India. The essence of the transaction takes within its sweep, various rights including a change in the controlling interest of an Indian company having assets, business and income in India. The AAR concluded that the capital gains would be taxed in India, though the privileges of the DTAA would not be denied. The decision of the AAR will be a wake-up call to entities that use shell companies as investment vehicles. The age-old accounting rule of substance over form will come into play and one can no longer quote liberally from the ratio of the decisions of the Supreme Court in McDowell and Co Ltd and Azadi Bachao Andolan which blessed tax planning measures as long as they are within the four corners of the law. Entities interpreted both the tax planning measures and the four corners of the law very liberally. While it would be appropriate to interpret the former liberally, the latter has to be interpreted extremely rigidly. - www.thehindubusinessline.com

LtT & ST gains from PMS transactions taxable as business profits (ITAT Delhi)

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M/s. Radials International vs. ACIT (ITAT Delhi)

Long-term & short-term gains from PMS transactions taxable as business profits

The assessee offered LTCG & STCG on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head "investments" in the accounts and were made out of surplus funds. Delivery of the shares was taken. The AO & CIT (A) held that as the transactions by the PMS manager were frequent and the holding period was short, the LTCG & STCG were assessable as business profits. On appeal by the assessee, HELD dismissing the appeal:

In a Portfolio Management Scheme, the choice of securities and its period of holding is left to the portfolio manager and the assessee has no control. Only the portfolio manager can deal with the Demat account of the assessee. While, at the time of depositing the amount, the assessee will make entry in his books of account as investment in PMS, he is not aware of the transactions in the shares being entered into by the portfolio manager on his behalf as his agent. Since the assessee comes to know about the purchase and sale of shares under PMS after the expiry of the quarter, the accounting treatment in the books of the assessee in respect of shares purchased/sold by the portfolio manager under PMS cannot be entered in the books of the assessee. It is at the end of the year the shares available in the DEMAT account can be entered. Therefore, at the time of deposit of amount, the intention of the assessee was to maximize the profit. As the purchase and sale of shares under PMS is not in the control of the assessee at all, it cannot be said that the assessee had invested money under PMS with intention to hold shares as investment. The portfolio manager carried out trading in shares on behalf of his clients to maximize the profits. Therefore, it cannot be said that shares were held by the assessee as investment. The fact that the transactions were frequent and its volume was high indicated that the portfolio manager had done trading on behalf of the assessee. The fact that the shares remaining at the end of the year were shown under the head `investment' makes no difference. Even the LTCG is assessable as business profits and s. 10(38) exemption is not available. The fact that the AO took a contrary view in the preceding year is irrelevant. There is no difference between similar transactions carried out by an individual in shares and the transactions carried out by portfolio manager. There is, however, a difference between investment in a mutual fund and PMS.

Note: See the contrary view in Radha Birju Patel (Mum) ARA Trading & Investments (Pune). See also KRA Holding & Trading (Pune) & Homi K. Bhabha (Mum)

Related Judgements
ARA Trading & Investments Pvt Ltd vs. DCIT (ITAT Pune) On facts, as the assessee had engaged a portfolio manager to look after its' investments and all decisions to buy and sell were taken by the portfolio manager and not by the asessee, the assessee cannot be called a "dealer"
ITO vs. Radha Birju Patel (ITAT Mumbai) Transactions carried out via Portfolio Management Scheme are clearly in the nature of transactions meant for maximization of wealth rather encashing the profits on appreciation in value of shares. The very nature of Portfolio Management Scheme is such that the investments made by the assessee are protected and enhanced…
ACIT vs. Vinod K. Nevatia (ITAT Mumbai) Primarily, the intention with which an assessee starts his activity is the most important factor. If shares are purchased from own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of share over a period then…

S. 132: Cash seized in search has to be adjusted against Advance Tax (itat, rAJKOT)

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Ram S. Sarda vs. DCIT (ITAT Rajkot)

S. 132: Cash seized in search has to be adjusted against "Advance Tax"

Pursuant to a search u/s 132, cash was seized from the assessee and third parties and assessed as the assessee's income. Though the assessee requested that the said seized cash be treated as payment of "advance tax", the AO ignored the same and levied interest u/s 234A, 234B & 234C on the basis that advance tax had not been paid. On appeal, the CIT (A) relied on Central Provinces Manganese 160 ITR 961 (SC) and held that the ground was not maintainable. It was also held that cash seized from third parties could not be treated as the assessee's payment of advance tax. On appeal by the assessee, HELD allowing the appeal:

(i) S. 246 permits an appeal to be filed when the assessee "denies his liability to be assessed". The levy of interest u/s 234A to 234C is a part of the process of assessment. The expression "denies his liability to be assessed" does not mean a total denial of liability. Even a partial denial of the assessment i.e. of the liability to pay interest is covered and the appeal is maintainable (C. P Manganese 160 ITR 961 (SC) explained, Kanpur Coal Syndicate 53 ITR 225 (SC) & JK Synthetics 119 CTR 222 (SC) followed);

(ii) On merits, s. 132B (1) provides that the assets seized u/s 132 may be adjusted against the amount of any "existing liability" and the liability determined on completion of the assessment. The expression "existing liability" cannot be ascribed a restricted meaning. The liability to pay advance tax is an "existing liability" and so the cash seized ought to have been adjusted against that liability. The cash seized from third parties, having been assessed in the assessee's hands, retains the same character as cash seized from the assessee (Sudhakar Shetty 10 DTR (Mum) 173 followed).

Related Judgements
Atma Ram Properties Pvt Ltd vs. DCIT (Delhi High Court) S. 147: AO must specify what facts are failed to be disclosed. Lapse by AO no ground for reopening if primary facts disclosed In AY 2001-02, the AO assessed advances of Rs. 1.56 crores received from a group concern as "deemed dividend" u/s 2(22)(e). In appeal, the CIT…
Vineetkumar Raghavjibhai Bhalodia vs. ITO (ITAT Rajkot) S. 56(2)(v) exempts gifts from a "relative". Though the definition of the term "relative" does not specifically include a Hindu Undivided Family, a `HUF" constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these persons fall in…

tongue twister

 

English is a rich language in every sense of the term. Its already-staggering wealth of words is ever-expanding, thanks to the open arms with which it welcomes words from other languages. The official website of the Oxford English Dictionary tells us that the second edition of the 20-volume dictionary contains full entries for 171,476 words in current use, and 47,156 obsolete words.

Yet, there are occasions when one feels the language falls short of an apt word or phrase to describe a situation, person or emotion. Mercifully, other languages can fill this gap. Imagine someone says something to you that leaves you so outraged that you're at loss for words to return the compliment. Later, thinking about it, the words come to you but by then the moment is gone. English has no term to convey such slow-to-respond wit. French has. It's called l'esprit de l'escalier (literally, staircase wit).

Of course, one always has the option to forget and forgive. As they say in Gujarati, "Manav matra/bhool ne patra" (to err is human)... One could go a step further and turn the other cheek. We all know the word for that: Gandhigiri. However, two cheeks are all one has. So, would it not be fair to hit back the third time? Well, there is one language which has the ready word for such a policy. The word Ilunga comes from Tshiluba, a branch of Bantu language spoken in the Democratic Republic of Congo. Actually, after the third insult, the aggrieved person could be forgiven for thinking that the aggressor's face is backfeifengesicht - in German, that means 'a face badly in need of a fist'.

Talking of faces, there's a word in Arabic for resolving a dispute without any party losing face: tarradhin. It isn't the same as 'compromise' but a positive win-win for the two sides. Unfortunately, there's no dearth of bystanders who hate such outcomes. Not only because it robs them of a piece of precious schadenfreude - German for pleasure derived from the misfortune of others - but also because it may verily send them into deep missgunst (German word conveying the feeling of not liking it when something good happens to someone you don't like).

Indians can claim credit for the ultimate terminological jugaad called 'miskaal' ( missed call). But while miskaal says a lot without saying anything, for the exact sense in which we use it we have to turn to the Czech word prozvonit. This means calling a mobile phone and disconnecting after the first ring so that the other person calls back. Naturally, that saves the first caller the outgoing call charge.

The point is obvious. In the age of Twitter, the key word is not economy (of words) but freakonomy. We need words and phrases that can pack in a whole lot of quirky sense. In fact, wordsmiths would do well to coin new words for some situations and behaviours which are being reported frequently.

For example, we need a word for the newly revealed practice of claiming the full airfare despite travelling on a concessional ticket so as 'to use the surplus for the benefit of the poor and downtrodden'. Similarly, one commonly hears celebrities say by way of self-defence, 'I was quoted out of context'. Could we not find a single word for that? Ditto for someone doing a semi-nude scene because 'the story demanded it'. Or for inviting someone to one's wedding and hoping that he doesn't turn up.

Last but not least, we need a word for a frequently reported eventuality in India. It has to do with a high and mighty personality developing chest pain on being arrested for a crime, so much so that he requires immediate admission in a swanky hospital. How about creating a neat four-letter word for such a tragic circumstance?

HC(DEL) : No time limit prescribed for filing an application for compounding of an offense

Vikram Singh vs. UOI (Delhi High Court)

S. 279: As there is no time limit prescribed for filing an application for compounding of an offense, the CBDT is not entitled to reject an application on the ground of 'inordinate delay'. The CBDT has no jurisdiction to demand that the assessee pay a 'pre-deposit' as a pre-condition to considering the compounding application. The larger question as whether in the garb of a Circular the CBDT can prescribe the compounding fee in the absence of such fee being provided for either in the statute or prescribed under the rules is left open

The Court finds nothing in Section 279 of the Act or the Explanation thereunder to permit the CBDT to prescribe such an onerous and irrational procedure which runs contrary to the very object of Section 279 of the Act. The CBDT cannot arrogate to itself, on the strength of Section 279 of the Act or the Explanation thereunder, the power to insist on a ‘pre-deposit’ of sorts of the compounding fee even without considering the application for compounding. Indeed Mr Kaushik was unable to deny the possibility, even if theoretical, of the application for compounding being rejected despite the compounding fee being deposited in advance. If that is the understanding of para 11(v) of the above Circular by the Department, then certainly it is undoubtedly ultra vires Section 279 of the Act. The Court, accordingly, clarifies that the Department cannot on the strength of para 11(v) of the Circular dated 23rd December 2014 of the CBDT reject an application for compounding either on the ground of limitation or on the ground that such application was not accompanied by the compounding fee or that the compounding fee was not paid prior to the application being considered on merits

S. 37(1): Distinction between capital & revenue expenditure explained

 

Airport Authority of India vs. CIT (Delhi High Court Full Bench)

January, 04th 2012
S. 37(1): Distinction between capital & revenue expenditure explained

The assessee incurred expenditure on removal of encroachments and claimed the same as a revenue deduction on the ground that the expenditure was incurred in the normal course of the business. The AO, CIT (A) & Tribunal rejected the claim on the basis that the assessee had acquired an advantage of an enduring nature. The High Court (for an earlier year, Airport Authority of India vs. CIT 303 ITR 433) upheld the view of the authorities that the expenditure was capital in nature. For the present year, the issue was referred to the Full Bench. HELD by the Full Bench reversing the lower authorities:

The question that has to be considered is whether the expenditure is incurred for initiating the business or for removing an obstruction to facilitate an existing business. Expenditure incurred for running the business or working it, with a view to produce profits is in the nature of revenue expenditure. The aim and object of the expenditure determines its character and not the source and manner of its payment. The fact that the expenditure is once and for all is not conclusive. While expenditure for acquisition of a source of income would ordinarily be capital expenditure, expenditure which merely enables the profit making structure to work more efficiently would be in the nature of revenue expenditure. Expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. On facts, the land belonged to the assessee and the amount paid for removal of encroachers was not for acquisition of new assets. The payment was made to facilitate its smooth functioning of the business i.e. in relation to carrying on the business in a profitable manner (Airport Authority of India 303 ITR 433 (Del) reversed; Bikaner Gypsum vs. CIT 187 ITR 39 (SC) followed)

269SS 269 T

 

INCOME TAX APPELLATE TRIBUNAL , KOLKATA

Addl. C.I.T., R-V(C) -vs.- M/s. J.A. Land & Housing Development India Limited

INCOME TAX APPELLATE TRIBUNAL, KOLKATA
Addl. C.I.T., R-V(C) -vs.- M/s. J.A. Land & Housing Development India Limited
I.T.A No. 1116/Kol/2011 – Assessment Year : 2004-05
Addl. C.I.T., R-V(C) -vs- M/s. J.A.M. Chemical Works Limited
I.T.A Nos. 1117, 1118 & 1140/Kol/2011 – Assessment Years: 2005-06, 2006-07 & 2007-08
Date of Pronouncement: 02.01.2012

ORDER

PER BENCH

All the four appeals are by the Department for assessment years 2004-05, 2005-06, 2006- 07 & 2007-08 directed against the order of Ld. CIT(A)-III, Kolkata dated 23.06.2011. The first three appeals i.e. ITA Nos. 1116 to 1118/Kol/2011 are against deletion of penalty levied under section 271D and the last one also i.e. ITA No. 1140/Kol/2011 relates to penalty levied under section 271E. All the four appeals are heard together and disposed of by this common order for the sake of convenience.

2.Inspite of sufficient notice none appeared on behalf of the assessee. After hearing the Ld. Departmental Representative, we proceed to decide the appeals ex parte assessee by considering the statement of facts filed by the assessee before the 1st Appellate Authority. For the purpose of discussion, we will take ITA No.1116/Kol/2011 for assessment year 2004-05.

3.Assessing Officer levied penalty under section 271D for the assessment year 2004-05 in respect of M/s. J.A. Land & Housing Dev. India Limited and also in assessment years 2005-06 & 2006-07, as well as under section 271E of the Income Tax Act for the assessment year 2007-08 in the case of M/s. J.A.M. Chemical Works Limited. Assessing Officer was of the view that violation of Section 269SS which defines `loan or deposit' & Section 269T defines `loan or deposit' and the common word "loan" means lending a sum of money by one party to another upon agreement to repay. Hence, Assessing Officer was of the view that though in the Companies Act "deposit" does not include share application money which is given to a Company by an applicant for allotment of shares. The fact that under the given set of facts, according to Assessing Officer, the amount so deposited with the assessee-company in the name of share application money attracts Sections 269SS & 269T. In other words, these financial transactions should be through banking channels by abiding cash transactions. Therefore, Assessing Officer was of the view that assessee has violated Section 269SS in ITA Nos. 1116 to 1118/Kol/2011 and there is violation of Section 269T in respect of ITA No.1140/Kol/2011. He, therefore, levied penalty. On appeal to the Ld. CIT(A), Ld. CIT(A) found that I.T.A.T., Kolkata Benches, "C" Bench in ITA Nos. 141 & 142/Kol/2011 have decided the issue vide order dated 19.04.2011 by following the decision of Hon'ble Madras High Court in the case of CIT vs. Rugmini Ram Raghav Spinners (P) Ltd. [2008] 304 ITR 417 (Mad.) that the share application money and repayment thereof will not violate Sections 269SS & 269T of the Act which attracts levy of penalty under section 271D & 271E of the Act.

4.After considering the argument of Ld. Departmental Representative who relied decision of Hon'ble Jharkhand High Court in the case of Bhalotia Engineering Works (P) Ltd. vs. CIT [2005] 275 ITR 399 (Jharkhand). However, we are unable to agree with the contention of the Ld. Departmental Representative as the Tribunal has already decided the issue in other group concern cited (supra) by following the decision of Hon'ble Madras High Court in the case of Rugmini Ram Raghav Spinners (P) Ltd. (supra). Hence, we agree with the findings of Ld. CIT(A) rightly deleted the penalty levied under section 271D in assessment years 2004-05, 2005-06 & 2006-07 and in assessment year 2007-08 deleted the penalty under section 271E of the Act.

5. In the result, all the four appeals of the Department are dismissed.

Order pronounced in the open Court on 02.01.2011.

TRANSPORT OF GOODS THROUGH PIPELINE SERVICES

 

TRANSPORT OF GOODS THROUGH PIPELINE SERVICES

Service tax has been imposed on transport of goods through pipeline or other conduit services rendered to any person by any other person engaged in provision of such services by the Finance Act, 2005 with effect from 16th June, 2005. The gross amount charged to or total consideration received from any person in relation to transport of goods through pipeline services shall be chargeable to service tax.

Meaning of Transport of Goods through Pipeline or Other Conduit

The statutory provision of service tax does not define what is meant by transport of goods through pipeline or conduit.

With the levy of service tax on goods being transported through a pipeline or conduit, now only goods transportation by train is out of service tax net. Transportation of goods by air and by road are already covered. Transportation of goods through pipeline or conduit should meet the following tests:

(a) transportation of goods should take place.

(b) such transportation should be through a pipeline or other conduit.

(c) service must be provided by any person to another person.

Taxable Service

Section 65(105)(zzz) defines taxable service as under —

"any service provided or to be provided to any person, by any other person in relation to transport of goods other than water, through pipeline or other conduit".

To be covered under a taxable service, following conditions must be satisfied—

(a) transportation of goods should take place.

(b) goods transported should be through any pipeline or other conduit.

(c) transportation of water is excluded.

(d) transportation of goods should be on behalf of other person.

(e) service rendered should be for a consideration and not a free service.

It appears that what could be transported through pipeline or conduit are generally gases or liquids. Since water has been specifically excluded, all types of gases and fuels, other chemicals and liquids etc. shall be covered. Though milk is specifically exempt under road transportation, no specific exemption of milk exists in case of transportation through pipeline or conduit. Examples of goods may include petrol, diesel, other liquid fuel, Piped Natural Gas (PNG), Compressed Natural Gas (CNG), Liquefied Natural Gas (LNG) etc. It may be noted that service tax is not on goods sold through pipeline (like cooking gas) but is on transportation done or undertaken through a pipeline, on behalf of other person for a consideration. Pipelines or conduits are generally laid on or under the surface. Service provider could be any person including an individual.

The taxable service would not include transportation of water in tankers as water has been specifically excluded from its scope. However, if water is transported and freight is paid to goods transport agency say, in case of industrial water or otherwise, service tax shall be payable on such freight.

In Oil India Ltd v. CCE, Dibrugarh 2008 -TMI - 30942 - (CESTAT KOLKATA), where transportation of crude oil was done through pipeline and taxable service under (zzz) clause was brought into force w.e.f. 16.6.2005, taxation under any other category (clearing & forwarding service) or (business auxiliary service) prior to 16.6.2005 was held to be inconceivable.

Departmental Clarification

Circular No. B1/6/2005-TRU dated 27.7.2005 clarifies as under –

"Transport of goods through pipeline or other conduit [see sub-clause (zzz) of section 65(105) of the Finance Act, 1994]

Transportation of goods, other than water, through pipeline or conduit is generally employed to transport petroleum and other petroleum products, natural gas, LPG, chemicals, coal slurry and other similar products. Such transport services are liable to service tax under sub-clause (zzz) of section 65(105) of the Finance Act, 1994. Consideration for the said transportation service provided may be payable periodically or from time to time. The service provider is required to pay service tax as and when payment is received for the services provided or to be provided."

Person Liable

Any person (including individuals) providing transportation services by pipeline or conduit to any other person shall be liable to pay service tax and shall be treated as an assessee for service tax purposes.

By: Dr. Sanjiv Agarwal
Dated: - January 11, 2012

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RIGHT TO INFORMATION A FUNDAMENTAL RIGHT?

 RIGHT TO INFORMATION – A FUNDAMENTAL RIGHT?

Section 2(j) of the Right to Information Act defines the terms `Right to information' as the right to information accessible under this Act which is held by or under the control of any public authority and includes the right to-

Inspection of work, documents, records;
Taking notes, extracts, or certified copies of documents or records;
Taking certified samples of material;
Obtaining information in the form of diskettes, floppies, tapes, video cassettes or in any other electronic mode or through print outs where such information is stored in a computer or in any other devise.
Section 3 of the Act provides that subject to the provisions of this Act, all citizens shall have the right to information. It is to be discussed in this article whether such right is a fundamental right to the citizens.

Lord Action said on one of his speech that everything secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity. It is thus clear that a society which adopts openness as a value of overarching significance not only permits its citizens a wide range of freedom of expression, it also goes further actually opening up the deliberative process of the Government itself to the sunlight of public scrutiny.

Justice Frankfurter opined that the ultimate foundation of a free society is the binding tie of cohesive sentiment. Such a sentiment is fostered by all those agencies of the mind and spirit which may serve to gather up the traditions of a people, transmit them from generation to generation and thereby create that continuity of a treasured common life which constitutes a civilization.

The concept of active liberty, which is structured on free speech means sharing of a nation's sovereign authority among its people. Sovereignty involves the legitimacy of a governmental action. Sharing of sovereign authority suggests intimate correlation between the functioning of the Government and common man's knowledge of such functioning.

On the emerging concept of an `open government' the Constitution Bench of Supreme Court in `State of UP V. Raj Narain' – AIR 1975 SC 865 held that the people of this country have a right to know every public act, everything, that is done in a public way, by their public functionaries. They are entitled to know the particulars of every public transaction in all its bearing. The right to know, which is derived from the concept of freedom of speech, though not absolute, is a factor which should made on wary, when secrecy is claimed for transactions which can, at any rate, have no repercussion on public authority. To cover with veil of secrecy, the common routine business is not in the interest of the public. Such secrecy can seldom be legitimately desired.

In `S.P Gupta V. President of India' –AIR 1982 SC 149 the Supreme Court Constitution Bench held that the concept of an open government is the direct emanation from the right to know which seems to be implicit in the right of free speech and expression guaranteed under Article 19(1)(a). Therefore disclosure of information in regard to the functioning of Government must be the rule and secrecy an exception justified only where the strictest requirement of public interest so demands. The approach of the court must be to attenuate the area of secrecy as must as possible consistently with the requirement of public interest, bearing in mind all the time that disclosure also serves an important aspect of public interest.

From the above judgment it can be inferred that the right to information is basically founded on the right to know which is an intrinsic part of the fundamental right to free speech and expression guaranteed under Article 19(1)(a) of the Constitution.

In `Reliance Petrochemicals Limited V. Properties of Indian Express Newspapers Bombay (P) Limited' – (1988) 4 SCC 592 the Supreme Court held that the right to information is a fundamental right under Article 21 of the Constitution. It was further held that we must remember that the people at large have a right to know in order to able to take part in participatory development in the industrial life and democracy. Right to know is a basic right which citizens of a free country aspire in the broader horizon of the right to live in this age in our land under Article 21 of the Constitution. That right has reached new dimension and urgency. That right puts greater responsibility upon those who take upon themselves the responsibility to inform. In `Secretary, Ministry of Information and Broadcasting, Government of India V. Cricket Association of Bengal' – (1995) 2 SCC 161, the Supreme Court held that right to acquire information and to disseminate it is an intrinsic component of freedom of speech and expression.

In `People's Union for Civil Liberties V. Union of India' – (2004) 2 SCC 476 the Supreme Court held that right to information is a facet of the right to freedom of speech and expression as contained in Article 19(1)(a) of the Constitution of India. It was also held that right to information is definitely a fundamental right. In coming to the conclusion the Supreme Court traced the origin of the said right from the Universal Declaration of Human Rights, 1948 and also Article 19 of the International Covenant on Civil and similar enunciation or principle in the Declaration of European Convention for the Protection of Human Rights and found that the spirit of the Universal Declaration of 1948 is echoed in Article 19(1)(a) of the Constitution.

The preamble to the Right to Information Act shows that the Act was enacted to promote transparency and accountability in the working of every public authority in order to strengthen the core constitutional values of a democratic public. It is thus clear that the Parliament enacted the said Act keeping in mind the rights of an informed citizenry in which transparency of information is vital in curbing corruption and making the Government and its instrumentalities accountable. It is to harmonize the conflicting interests of Government to preserve the confidentiality of sensitive information with the right to citizens to know the functioning of the governmental process in such a way as to preserve the paramountcy of the democratic ideal.

The Supreme Court is also conscious that such a right is subject to reasonable restrictions under Article 19(2) of the Constitution. In `Dinesh Trivedi, M.P., V. Union of India' – (1997) 4 SCC 306 it was held that sunlight is the best disinfectant. But it is equally important to be alive to the dangers that lie ahead. It is important to realize that undue popular pressure brought to bear on decision makers in Government can have frightening side effects. If every action taken by the political executive functionary is transformed into a public controversy and made subject to an enquiry to soothe popular sentiments, it will undoubtedly have a chilling effect on the independence of the decision who may find it safer not to take any decision. It will paralyze the entire system and bring it to a grinding halt. So we have two conflicting situation almost enigmatic and the Court thought the answer is to maintain a fine balance which would safe public interest.

By: Mr. M. GOVINDARAJAN

DIVIDEND TAX A PEEK BEHIND THE SMOKE SCREEN

 

DIVIDEND TAX — A PEEK BEHIND THE SMOKE SCREEN

Why are dividends exempt from taxation?

According to the Companies Act, since dividends are technically a share in the profit received by the investor for investing share capital in the company, he should enjoy such income only from profits after taxes. Therefore, by the same logic, if the investor is asked to include dividend income as a part of his total individual income for taxation, it would amount to "taxing an already taxed income", or "double taxation". Thus, dividend income from domestic companies was made exempt from taxation. This is more or less a globally embraced concept. But are they REALLY? The other side of the smoke screen. However, this is just one side of the smoke screen. On the other side is the concept of dividend distribution tax (DDT). Section 115-O of the Income Tax Act states: "In addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends shall be charged to additional income-tax at the rate of 15 per cent." Thus, even though dividend is not taxable in the hands of the shareholder, it has not exactly escaped double taxation. While it's only fair that a company should be free to distribute its profits after income tax amongst its members, as per the provisions of Section 115-O, it cannot do so unless it has paid an additional tax called the Dividend Distribution Tax (DDT) at the rate of 15 per cent. Consequently, the net dividend distributed is less by that much. The DDT was introduced with the Finance Bill, 1997, and justified in the Memorandum to the Finance Bill, 2003, as: "It has been argued that it is easier to collect tax at a single point, i.e., from the company, rather than compel the company to compute the tax deductible in the hands of the shareholder." The double taxation effect that is caused by the DDT has not been clearly rationalised till date.

TRIPLE TAXATION?

Besides, the dividend received from non-domestic or foreign companies is taxable in the hand of the shareholder separately. With the unfortunate existence of DDT almost globally (known as just "Dividend Tax" in most countries), the recipients of dividends from foreign companies undergo a worse fate "triple taxation". First, the foreign company pays Income Tax or Revenue Tax on operating profits to the government of its country. Then it again pays Dividend Tax (same as Indian DDT) to its government. Finally, when the investor in India receives his "doubly taxed" dividend, he has to again pay Income Tax, as tax received from non-domestic companies is not exempt under the Income Tax Act. To add to this jarring irrationality, in some countries like China, while Chinese citizens in Mainland China are victim to the cruelty of a Dividend Tax as high as 50 per cent, Chinese citizens in Hong Kong completely escape tax liability!

SOMETHING TO LOOK INTO

Some other countries such as Canada and Australia have, however, worked out a tax credit system on dividend tax which can be studied and implemented, mutatis mutandis. Additionally, bilateral tax exemption agreements should be considered with stock exchanges such as London Stock Exchange or NYSE where there is a lot of mutual interest in terms of investments. – www.thehindubusinessline.com